Firms’ increasing use of digital technologies during the COVID-19 pandemic has been widely highlighted. At the same time, evidence of the growing climate crisis also points to the need for firms to move towards more sustainable, low carbon ways of operating. The implications of these digital and net zero transitions for firms’ productivity upgrading are less often considered. Many UK SMEs, however, lag their international competitors in terms of productivity, and the new investment and innovation involved in net zero and digital transitions also create the potential for transforming productivity itself. This defines what we call the ‘Triple Transition’: net zero, digitalisation and productivity upgrading.
But what do we know about where UK firms are with each of these aspects of the Triple Transition?
Recent research by the British Business Bank suggests, for example, that UK SMEs account for around 43-53 per cent of business emissions, emphasising the importance of the net zero transition in SMEs. ERC research, and evidence from the British Business Bank survey, suggests that SMEs are engaged with the net zero transition, but the majority are at very early stages in their net zero journey. The drivers of change in terms of net zero are often intrinsic, linked to business leaders’ individual priorities, but are also linked to pressure from customers to make changes towards more sustainable products and services. Barriers to progress with the net zero transition for many firms include a lack of information about what works, and confidence that implementing net zero practices or innovations will deliver commercial and sustainable value.
Unlike net zero, we have strong evidence that the adoption of digital technologies in small firms can yield productivity benefits in the medium to long term. However, international comparative evidence suggests that the ‘absorptive capacity’ of UK SMEs- i.e., their ability to adopt new digital technologies – lags that in many other countries. As a result, levels of digital adoption in the UK are behind those in many competitor economies, with negative implications for productivity. A range of factors influence firms’ digital ‘readiness’, including awareness of new technologies, the returns to their adoption, and the ability to access information about new digital technologies through their networks. Barriers to adoption appear strongly stage dependent, with awareness and confidence factors strongly related to firms’ initial adoption of technologies, and resource limitations – particularly human resources – limiting effective implementation. Both may reduce the potential productivity benefits that SMEs are gaining from the digital transition.
Less well understood at the moment is the role of digital technologies in supporting the net zero transition, although some recent ERC research does suggest strong links between firms’ adoption of digital technologies and their progress with the net zero transition. Links between the net zero transition and productivity also remain uncertain. However, a recent ERC research paper suggests that the adoption of net zero practices can benefit firms in terms of growth, an alternative performance indicator to productivity.
Productivity upgrading in smaller companies appears primarily linked to other intangible factors. Ambitious leadership and people management seen critically important to productivity growth in SMEs. Innovation in products, processes and business models may also play an important role, although the links are complex and the benefits of new innovation often take time to realise. Management practices also play a critical role, with increasing importance attached to those practices which are data driven and linked to firms’ critical activities.
The notion of the Triple Transition emphasises the need to better understand how moves towards net zero and digitalisation, and the related investment and business model changes, can drive future productivity improvements. The Triple Transition also emphasises the interconnection between policy measures designed to improve firm performance. Increasing digital adoption may support the net zero transition and future productivity upgrading for example, and the adoption of more sustainable business practices may also make a significant contribution to future productivity improvement. Better understanding these linkages, and better enabling digital and net zero take up in small companies will play a critical role in addressing the UK’s productivity deficit.
Stephen Roper, Director, ERC
Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the
Enterprise Research Centre, its Funders or Advisory Group