State of the South West 2008

South West Productivity Gap

2.62 Research was commissioned by the South West Regional Development Agency in order to understand fully the productivity gap between the region and the national average ⁴ . This research utilised restricted business level data from the Office for National Statistics allowing a more robust productivity analysis than generally possible.

2.63 The research estimated that a headline gap of approximately 30% existed between the South West and the UK's most productive region - London. Of the five productivity drivers, the research suggested it was important to support both high level and basic qualifications. Skills are, however, very mobile and regionally the need is to provide job opportunities that will attract and retain those with higher level skills. Low capital to labour ratios impacted negatively on the productivity rates of the region. The evidence pointed towards the benefit of innovation - both product and process based. It reported that the adoption of the innovation in terms of process, technique and work practices may be of more importance than leading edge R&D. The research into entrepreneurship reported a link between VAT registration and productivity growth. Increasing Foreign Direct Investment and exposure to international trade would increase rates of competition and potentially increase rates of productivity growth.

2.64 Other Influences - As well as the five productivity drivers, Boddy et al (op cit 2005) examined a number of other potential causes of the region's productivity gap including size of the workforce, industrial composition, regional price differences, time-distance and peripherality, agglomeration and scale effects.

2.65 Size of Industry - The Treasury estimated that up to 40% of the regional disparities in productivity could be accounted for by the size of the working population. The Boddy report concluded that for South West England this was not the case. The region's share of the working age population is relatively low but it has a higher than average rate of economic activity which largely cancels out the difference in workforce size. In addition any population bias was controlled for by standardising economic output by workforce rather than population. The South West's productivity rates were lower using a per job measure of productivity than a per population measure.

2.66 Industrial Composition - Different industrial groups show substantial differences in productivity rates. Therefore, regional industrial structures may explain differences in regional productivity. If the South West had a higher than average share of low productivity industries, and a lower than average share of high productivity industries, this could go some way to explaining the gap.

2.67 Boddy et al (op cit 2005) found that differences in industrial composition play only a minor role in explaining differences in SW regional productivity relative to the UK average.  Within the sub-regions of the South West, however, the industrial structure did affect differences in productivity. High-value added sectors, including finance and business services, were more important in the northern part of the region and lower value added sectors, such as tourism were more significant in the southern areas. For example, if Cornwall had the same industrial structure as the northern sub regions, its GVA would be 7% higher. Although industrial structure was marginal in explaining the regional productivity gap, the source of business ownership played a strong part in rates of productivity. Multi-national firms, and US firms in particular, were much more productive than indigenous firms.

2.68 Regional Price Differences - Regional price differentials may mean that the productivity gap is less important than the headlines indicate. If prices are lower in a region with lower productivity, then this may offset the impact on comparative wage rates and standards of living. Boddy et al (op cit 2005) concluded that, although the evidence was limited, price differentials do not account to any great degree for the gap between the South West and other regions.

2.69 Travel Time and Peripherality - Distance and travel time from major centres of population, employment, markets and business activity have been identified as a major determinant of productivity. The report concluded that the travel time to London and the next four largest conurbations in the United Kingdom explained nearly one third of the productivity gap between London and the South West, the largest effect of any single factor.

2.70 Agglomeration and Scale Effects - Proximity to large markets can bring scale economies through ease of access to labour, markets, suppliers and specialist services, as well as access to wider networks and collaborators. The remoteness of much of the SW region from major centres of population and lack of agglomeration outside of the Bristol city region was reported to be particularly significant. The econometric analysis reported that capital stock explains just under one third of the productivity gap, as does distance from London and the four largest English conurbations. The remaining element is explained by ownership structure, proportion of full time workers and the qualification rate of the workforce.

2.71 In 2006, the analysis of the SW productivity gap was updated and extended to identify the extent of, and the causes of, the intra regional productivity gap, with Bristol set as the sub-regional benchmark ⁵ . The productivity gap ranged from 0 in Wiltshire to 28% in Cornwall. The conclusions reached were similar to the regional analysis with intra regional productivity gaps reflecting differences in capital investment, organisational structure, skills, and time distance from large markets.