Research Paper

What drives productivity growth behind the frontier? A mixed-methods investigation into UK SMEs.

Research Paper No 89

Associated Themes
  • Management and Leadership
  • Productivity and performance

International evidence suggests productivity growth is most rapid among ‘frontier’ firms, i.e. those in the top decile of the productivity distribution. Other studies have identified the marked difference in sectoral productivity growth in the UK over the last decade. Here, we consider the drivers of productivity growth in SMEs which are ‘behind the frontier’.
Looking at quantitative data on value added and turnover per employee growth in twelve 4-digit sectors (six in manufacturing and six in services) we find no consistent relationship between firms’ position in deciles of the productivity distribution and subsequent productivity growth.
We also find few significant differences between the observable characteristics of firms behind the frontier which experience rapid and slower productivity growth.
Behind the frontier, firm age, size, number of subsidiaries and investment are only weakly related to productivity growth, at least in the short-term. The lack of influence of these observable influences on productivity growth suggests the potential importance of other externally unobservable factors in shaping productivity growth. We explore these unobservables in in-depth interviews, highlighting a number of factors which characterise high productivity growth SMEs. These include: inspirational leadership, people management practices, strategic investments, data oriented operational management and product, market and tactical innovation.
Few of the factors are sector specific, and none operates in isolation.