Foreign-owned manufacturers are twice as productive as British-owned

Posted on 24 Oct 2018 by The Manufacturer

Employees at foreign-owned manufacturing firms in Britain are twice as productive as those at domestic-owned manufacturers, according to new research.

Bad Management - UK Productivity Puzzle - View of a Businessman holding a Financial arrow going up and explosing at the end - image courtesy of Depositphotos.
Management and leadership are known to be important factors in determining productivity.

The report from EEF found that domestic-owned firms suffer from multiple problems including poor management practices, under-investment in capital and labour, and weaker access to finance.

All of which have contributed to UK productivity growth flatlining since the financial crisis a decade ago.

Titled Piecing together the Puzzle, it analyses numerous factors affecting domestic manufacturers’ productivity and recommends policies the government could introduce to overcome the so-called “productivity puzzle.”

The recommendations include reinstating the Regional Growth Fund, and funding training programmes for small businesses. It says the government should prioritise ‘tipping the balance in favour of investment now’ and developing “focused support for adopting better management practices.”

It also advocates using the Apprenticeship Levy framework to incentivise management training with an extra £30m in the levy pot to fund this. Firms would then be able to use their levy funds to train up to five managers.

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The government should also set up a Continuing Professional Development account scheme to encourage individuals to undergo management training.

“The research by EEF is a significant contribution to the public debate on productivity,” says Geraint Johnes, Professor of Economics at Lancaster University Management School.

It states that foreign-owned manufacturers operating in the UK are more likely to use internal finance, invest more in their own employees, and have higher management scores than domestic owned firms.

“Management and leadership are known to be important factors in determining productivity, and the quality of leadership is known to vary a lot across firms,” says Professor Johnes.

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Ending austerity could “help to create favourable conditions for firms to invest.”

The report also found that in 2015, UK-owned manufacturing firms were 48% as productive as foreign-owned firms based in the UK. The productivity gap in the UK also widened between 2008 and 2015.

In contrast, the gap in Germany between domestic and foreign-owned firms shrank considerably.

Johnes says the emphasis on foreign ownership should be treated with caution though: “We know that bigger firms, by and large, tend to be among the most productive. So, an out-and-out comparison of the performance of foreign-owned firms and domestically-owned firms could be misleading because it’s not a like-for-like comparison.”

He says the manufacturing industry is composed of “high-performing firms and stragglers.”  “There are likely to be some quick wins in improving the performance of the stragglers, but firms that are performing well also need to be pushing back the frontiers.”

The report says the productivity problem has been exacerbated by the Brexit vote because manufacturers have been reluctant to make new investments. A ‘no-deal’ Brexit it states will create “potential for further deterioration” in business investment which could only be filled by greater government support.

The Chancellor of the Exchequer Philip Hammond will deliver his budget on Monday 29 October. EEF has repeatedly called on him to focus on improving productivity and reforming the Apprenticeship Levy, arguing that the levy is a major factor behind the significant drop in apprenticeships.

David Spencer of Leeds Business School believes a commitment from the Chancellor to ending austerity would be a “step forward” and would “help to create favourable conditions for firms to invest.”

Professor Spencer agrees with the report’s words that manufacturers require certainty over the Brexit deal because the current ambiguity is hindering investment. “Until UK firms can see certainty over the future of the UK’s relationship with the EU then investment will be less than it might be,” he remarked.

The EEF report builds on the findings of its Unpacking the Puzzle report from May earlier this year which investigated UK manufacturers’ contribution to the productivity decline.

Click here to read The Manufacturer’s overview.

Reporting by Harry Wise