Productivity of firms with foreign direct investment is 74% higher than indigenous UK firms

Productivity flat since 2008

The chancellor exposed the productivity conundrum facing the UK in the recent Budget – the solidly increasing labour productivity trend took a dive in the 2008 recession and has only just recovered to the same levels (see Figure 1 below).  If we had continued at the same pre-2008 trend, labour productivity would be 20% higher than today, and all other things being equal, workers could be paid 20% more.

UK Productivity 1994 to 2017

Without an increase in labour productivity, whilst we can squeeze a little more tax from the rich, and give the less well off more tax breaks, the fundamental problem is that UK Plc needs to be more productive – that is, produce more £ value added per hour worked.

Labour productivity is calculated by dividing the output produced by labour by the labour input. Output is calculated as gross value added (GVA), which is an estimate of the £ value added produced by an industry, and in aggregate for the UK as a whole. Labour inputs are measured in terms of actual numbers of jobs, or by number of hours worked.  When the press comment on productivity, its usually on a per hour worked basis, as this is the headline measure used by the Office of National Statistics.

Manufacturing labour productivity growth has outstripped services labour productivity growth

Looking a bit deeper into the statistics reveals that labour productivity in the services sector since 2009 has seen steady but very slow growth of approximately 0.6% per annum.  The manufacturing sector has been much more volatile but on average has increased about 1.1% per annum since 2009.

This puzzle of lack of labour productivity growth has challenged economists, especially in services, since many jobs have been affected in recent years by the explosion of productivity enhancing software.

As the Chancellor pointed out yesterday, hundreds of thousands of typing jobs have been removed with the enhancements in computer software.  Mailrooms have been decimated by the explosion of email.  Everyday office tasks like arranging meetings, completing expenses, posting a job vacancy – many of these are much less time consuming than they used to be.  Similarly, activities that involve the public sector like taxing your car, buying a TV licence, completing a tax return or applying for benefits have all been re-engineered to involve less paperwork and more single entry systems. Its incredible to think that this is not impacting productivity in a positive way.


Productivity Services vs Manufacturing

Source: Office for National Statistics

Foreign Direct Investment firms are more productive

Here’s where it gets interesting.  On 6th October 2017, the Office for National Statistics released a study of productivity for firms which result from, or engage in, foreign direct investment (FDI) as compared to indigenous UK firms.  Firms engaged in FDI account for 20% of the UK economy.  The results are startling. The productivity of the median FDI firm is £59k per worker, compared to only £28k per worker for indiginous firms.  Controlling for size and industry, the study concludes that productivity of FDI firms is 74% HIGHER than of non-FDI firms.   The table below, taken from this report, shows the massive disparity in both mean and median productivity on a £000 per worker basis.

The study goes on to note: “Firms which attract flows of investment from overseas corporations (inwards investment) are widely thought to benefit from increased investment, access to technology and expertise, as well as stronger management and organisational practices, while firms which undertake investment overseas (outwards investment) are thought to benefit from access to larger markets”

So whether there is cause as suggested above, or simply correlation, it seems that attracting more foreign direct investment into UK firms has to be positive for productivity, and supporting UK firms investing abroad is also positive. From a policy point of view, anything that reduces the attractiveness of the UK for inward investment, such as higher corporation tax, excessive red tape, challenges in hiring high quality labour and restrictive labour laws would be highly counterproductive to enhancing productivity – which is of course the only sustainable way to increase average pay levels.  Read the report here

Stronger management and organisational practices will help

As noted in the report, many FDI firms are exposed to management and organisational practices from other countries. One of the key things to consider at a micro level is whether leaders and managers in the UK are sufficiently focused on productivity.  In companies that I have run, I have always obsessed about trying to reduce wastage of labour hours.  One of my main concerns was trying to clarify what work was important and valuable to the business, and to motivate and energise staff to attack this work.  Any lack of clarity often results in enormous time wasting, for example working on initiatives that are later abandoned, or simply spending too much time in meetings discussing what needs to be done.

In the US tech sector for example, we now see the development of goal setting management process such as Objectives and Key Results (OKR), used by Google, Facebook, Intel, GE and others.

I continue to think that productivity can be substantially enhanced by really clear goal setting across an organisation, and open visibility about what the key leaders and team right across the business are working on. That way, work that is not productive, or not in line with the objectives set by the company, will be quickly halted before too much productivity is lost.  And there’s a good chance unproductive meetings will also be reduced.

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