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Can SMEs solve the productivity puzzle?

    Understanding the SME productivity puzzle

    Britain’s productivity continues to lag behind even as the economy continues its recovery. A report by New Policy Institute demonstrates the productivity puzzle vis-à-vis the size of businesses. Previously, firms of all sizes were gaining productivity, yet post recession, while large companies show signs of improvement, SMEs are stagnant or declining.

    This is worrying, particularly when read in conjunction with the following numbers. The number of SME employees, which is approximately 60% of the labour force, is increasing at a much faster rate than that of large firms. This implies a large section of the labour force is joining unproductive ventures, thus bringing down the economy’s average. Consequently, the labour force is learning less productive techniques, which can lead to negative ripple effects. 

    Despite the new excitement around entrepreneurship, research by Nesta found that 90% of productivity gains come from existing firms, not start-ups. This suggests that enabling existing SMEs to grow in size and efficiency needs to be the focus. However, for SMEs with the ambition to grow, there exist two key impediments: the lack of adequate finance and skills. 

    Encourage alternative sources of SME financing

    Currently, the first port of call for all SMEs are bank loans which constitute about 90% of SME financing. A few large banks hold a majority of this market and there is a lack of competition. Further, due to the growing risk aversion of banks, SME lending has considerably declined. With the introduction of the British Business Bank, the Government tried to reinvigorate the sector, yet the core issue of low competitiveness remains unsolved.

    Alternative financing channels like crowdsourcing and peer-to-peer lending can provide the much needed boost. Such platforms have seen massive growth in US with start-ups like Kickstarter having already raised $1.2 billion. Closer to home, these have been experiencing their fastest growth in the UK in comparison to EU counterparts. A recent study by UK Bond Network has shown that SMEs in the UK are willing to look into alternative financing, but often don’t due to the lack of information. Under the Small Business, Enterprise and Employment Act of 2015, the following has been proposed to solve the lack of access to information issue:

    • Designated banks will be required to share information on SMEs that they rejected to an online platform of alternative funding providers
    • On advise of the British Business Bank, government-designated private sector platforms will be set up as per certain criteria
    • The platforms will be required to protect SMEs information and give access to alternative funding options, generating profits in exchange of services

    Whilst these measures are expected to bring greater awareness of alternatives directly to those who have been rejected funding, policy must ensure that it is targeting a wide customer base while keeping complexity to the minimum. To this end, the following is recommended:

    • Under the current policy, alternative providers are promoted as the second best option after bank loans. However due to inherent advantages, they can substitute bank loans as the funding option of choice. Thus, the online platforms must be open to all and actively promoted in road shows and clinics. Alternative providers must actively improve their own visibility, which can also be incentivised by the government
    • While loan rejects have been identified as the key point of intervention, it has been observed that SMEs, whether seeking loans or not, most often obtain advice from accountants and other professionals. This can be another point of intervention to ensure a wide base of SMEs is captured. Therefore, there is a need to educate professional bodies on alternative options and the online platforms
    • The existence of multiple platforms can lead to confusion, thus substituting the lack of information with too much information. Further, private sector platforms can be costly or biased towards certain providers. To minimise complexity, there is a need to integrate information and link to existing, widely-used government channels like the British Business Bank.  Alternatively, a government-developed single platform, or taskforce of professional advisers can help navigate through the complexity

    Couple traditional financing with incubator & accelerator programmes

    In the traditional space, other than bank loans, there exists new initiatives like the ‘Help to Grow’ programme which provides cheap and flexible loans to small enterprises attempting to grow. Yet, the chances that these firms will grow effectively are slim as, beyond funding, SMEs also struggle with lack of managerial skills and business knowledge. Separately, the ‘Growth Accelerator’ programme is aimed at providing professional assistance to top SMEs looking to grow.  

    Coupling these programmes to develop a national incubator or accelerator programme that provides loans to a select group of high growth SMEs together with customised professional services can help ensure public resources are being well used. There are several examples of successful incubator programmes, particularly the Swedish National Incubator Programme which has seen revenue and employment growth of firms taking part. The European Commission’s FIWARE Acceleration Programme is another example. In UK, similar private sector programmes have been developing with London itself boasting of 12 incubators and 24 accelerators.

    While incubators or accelerators can involve varying degrees of support, global best practices include:

    • Selecting firms with high-growth ambition and potential; programmes can be focused on certain SME sectors like technology or export-oriented businesses
    • Providing customised managerial training and specialised knowledge that can have long-term benefits and guidance on developing strategic growth plans
    • Setting up incubators close to universities, research centres and business schools or establishing strong networks among these communities to allow knowledge and skills transfer

    The impact of successfully executing such programmes can be far-reaching, including greater revenue and driving job creation in SMEs. This will positively affect upstream and downstream supply chains. Fast-growing SMEs set great examples and often successfully mentor smaller firms. Finally, the alumni network created by such programmes help to build entrepreneurial networks and often create new business opportunities.

    A focus on growth and productivity is essential. To do that, the Government must seek to remove barriers for SMEs.

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