Productivity Drivers (Economy, State of the South West 2011)

The Productivity Gap

2.7.1 As mentioned above, productivity can be described as how much economic output is generated from a certain amount of input. It gives an indication of how efficiently the economy is using resources (most often labour input). Productivity improvement is important as it provides a surplus that can be re-invested into companies or paid out to workers or other stakeholders thereby raising economic prosperity.

2.7.2 The HM Treasury estimates that, based on the previous economic cycle (ending in 2006), the UK’s productivity performance has been strong with average annual growth of 2.4% since 1997. There has been continued progress in closing the productivity gap with France, Germany and the United States. The gap, however, remains substantial.

2.7.3 The Treasury has recognised five ‘drivers’ of productivity: investment, skills, innovation, enterprise and competitiveness. All nations and regions benefit unequally from these drivers due to market and co-ordination failures. As data becomes available, it is important to assess how the downturn affected these drivers and how this will impact on the long term trend rate of productivity growth. The ‘investment’ driver is, in theory, particularly vulnerable in times of recession due to a number of factors including weaker demand, increased risk and reduced credit flows - see Investment section below for detailed regional analysis.

2.7.4 Research commissioned by the South West Regional Development Agency suggests that there is a productivity gap (as measured by output per employee) of some 33% between the South West and London. Related to the five productivity drivers, which will be explored in more detail in the next section, a number of factors were identified to explain this gap:

2.7.5 Capital stock: The analysis suggests that differences in capital stock account for a significant part of the productivity gap. It is reported that if businesses in the region had the same capital stock per worker as London, productivity would be around 12% higher.

2.7.6 Industrial composition & business ownership: This was found to contribute only a small extent to the observed productivity differences. The intra-regional productivity differences observed in the region, however, can be partly attributed to the abundance of high-value added sectors in the north eastern parts of the region and, conversely, the high concentration of low value added sectors in the south western parts.

2.7.7 In addition, business ownership was found to have an influence, with the research concluding that multinationals (particularly US owned) were considerably more productive than indigenous firms.

2.7.8 Travel time and peripherality: Travel time to London and other key urban markets was found to have a strong effect on productivity levels. Again, this is more pronounced moving towards the south west of the region. Proximity to large concentrations of suppliers and specialist services, skilled labour, infrastructure and access to wider networks, creates agglomeration effects that yield productivity gains.
More recent research into agglomeration and spillover effects considering firm level productivity data, concluded there was a link between spillovers and relative productivity, even though these benefits may not spillover far into the hinterland of the region’s core urban areas What does firm level productivity data tell us about agglomeration and spillover effects?

2.7.9 The remainder of this chapter explores the South West economy in the context of the five productivity drivers.