With the UK economy firmly in recovery, policy-makers are now shifting their attentions towards the question of whether it can be sustained over the longer term. One of the biggest challenges is low productivity growth, and the impact it has on wages. In an economy so reliant on consumption, any further squeeze on disposable incomes not only threatens to lower standards of living, but could ultimately undermine the recovery.
Central to the debate around how to increase the UK's productivity is how to best support our businesses to thrive and grow. Many small and medium-sized businesses (SMEs) are already playing their part. More SMEs are expanding and taking on more staff, and SME productivity has increased at twice the rate of productivity in large firms. So how can policy-makers support more small businesses to reach their potential?
1. Think cities. Any debate on how to support businesses to drive the recovery needs to focus on cities. Two thirds of new businesses locate in cities and four fifths of the increases in the number of SMEs took place in cities. Productivity (measured by output per worker) is 21 per cent higher in cities than in other areas. Cities are the hubs that connect businesses to markets, skilled workers and ideas.
2. Ensure every city provides the best environment for business. The success of an individual business is largely down to how it's managed and run. SMEs adopting high-growth strategies - investing in innovation, tailoring new products and services, and competing on quality rather than price - tend to be more profitable and create more jobs. But the likelihood of firms pursuing growth varies enormously across cities, from just over a third of SMEs in Chatham pursuing high growth strategies, to nearly two thirds of SMEs in Cambridge. And this is linked to a range of external factors, namely how well-connected a city is and whether it provides businesses with access to skilled workers. Focusing on these fundamental issues should be a priority for every city.
3. Make sure businesses can access the skills they need. Skills matter to businesses. The more graduates there are in a city, the more likely businesses are to grow. But it's not just about qualifications - more than twice as many SMEs in cities cited a lack of skills rather than a lack of qualifications as the main cause of their recruitment difficulties. National Government needs to work with cities to ensure courses are tailored to the needs of local businesses, as well as individuals, to ensure that they can access workers with the appropriate skills.
4. Invest in infrastructure. Over 40 per cent of businesses consider national and international transport links to be "absolutely essential". Broadband too is now a fundamental part of modern business infrastructure. Yet connections between some cities are notoriously poor (as highlighted by the Chancellor in his northern powerhouses speech), while in other cities, less than 50 per cent of postcodes have access to super-fast broadband. Underinvestment in the infrastructure that allows businesses to connect to opportunities will hold the economy back and reduce the sustainability of the recovery.
5. Make it easier for businesses to access finance and other forms of business support. The sheer number and complexity of business support initiatives means that businesses are often unaware of support available and, even if they are, they struggle to access it. And with banks repairing their balance sheets, SMEs in particular are still struggling to access the finance they need to support future growth. Cities should consider whether they can better 'match' businesses to finance and support though local hubs.
6. Enable cities to respond to challenges SMEs face. To make all of this happen in the most effective and efficient way, cities need to be given more control. A more radical approach to fiscal devolution allowing cities to better target interventions - and better support business - is not just in the interests of individual cities, but the country as a whole.
Centre for Cities' latest Small Business Outlook is available here.