Knowledge: Arlen Pettitt, the Chamber’s knowledge development manager, discusses how we can challenge regional disparities by encouraging home-grown businesses to focus on innovation, driving productivity growth and, where possible, exporting
North East England has a proud tradition as an exporting region, and a separate just as proud tradition as the driving force behind industrial progress with world-leading research and sector-defining innovation.
But, can these traditions combine to get more businesses ready to export and help improve regional productivity?
The North East had more than 4,000 exporting businesses in 2017, doing business worth nearly £13bn around the world. Around 60 per cent of that was with the EU, meaning exports worth more than £5bn went beyond Europe, where Asia and North America are the region’s biggest markets.
Trading internationally exposes a business to different cultures, different requirements and greater competition. It’s no surprise that this rubs off on them, with analysis of HMRC figures finding that businesses which declared as internationally trading in 2016 were 70 per cent more productive than non- traders.
The analysis concluded this boost in productivity was significantly higher for those trading outside the EU. This too is no surprise, as rising to the demands of global trade challenges businesses to be harder, leaner and more adaptable, requiring them to do more with the resources they have.
Here we come to the wider issue of productivity on a regional level.
The traditional measure of productivity is gross value added per hour worked – labour productivity – put simply, the quantity of what is produced per hour of labour.
In the North East, we’re middle of the pack as a UK region, 10.8 per cent below the UK average. As ever, London and the South East skew the picture, meaning every region besides them is below average. Nevertheless, our neighbours in the North West are 7.8 per cent below average and Scotland are just 2.5 per cent behind the UK as a whole.
This matters. If you boil it down to its essence, economic growth is just producing more stuff. You can achieve it in one of two ways – either you produce more for each labour hour input, or you add more labour hours.
Unless your workforce does longer shifts (and overtime can be expensive and see diminishing returns) the only way to add more hours is to add more people. With employment across the country at or near record highs, finding the right people to give you the additional capacity is difficult.
We’re seeing this play out right now.
The number one concern of Chamber members in the North East is staff costs, and staff shortages are always high on the list too – they struggle to find the right people, and when they do they’re worried about paying over the odds.
Good news if you’re an individual with in-demand skills who sees the salary they can command start to climb; bad news if you’re a business with tight margins; worse news if you’re a region trying to improve productivity juggling rising costs.
Breaking out of that cycle is vital to drive economic growth sustainably through productivity gains rather than additional hours worked.
The Bank of England has spoken about a new lower ‘speed limit’ for growth as one of the legacies of the financial crisis of a decade ago. This speed limit is the point at which constraints on the supply side of the economy cause prices to rise as demand rises and the economy grows – if you can’t produce enough to keep pace then prices go up. Those rising prices then taper off demand before it properly gets going – like driving with the handbrake on.
From a business perspective, the main legacy of the financial crisis was belt tightening. Investment in factories and facilities, in research and development, in training for staff, were all kept low and we also had a long period of low wage growth.
In the North East, intention to invest in plant or staff training remains low.
After more than a decade of this, it’s time for businesses to focus on what productivity can do for them; not as a vague concept measured on a regional or national level, but as a practical driver of progress and deliverer of value in their organisation.
That will require investment, and it will require support. There are some good programmes already in the region. The Digital Catapult North East and Tees Valley provides support to manufacturing businesses looking to use digital technology to change how they work.
CPI, the Centre for Process Innovation, worked on 185 projects in 2017/18 to help businesses bridge the all-important gap between innovation and commercialisation.
Centre for Cities, the think tank dedicated to the UK’s 63 largest cities, reinforced that link between exporting and productivity in research they did in 2017. But they rightly point out that it’s not just about volume of exports, it’s also about value and where it’s added.
The North East has its heritage in production and manufacturing and continues to be strong in these sectors to this day, but the related research and design jobs with the highest value add are often elsewhere.
We can challenge regional disparities – the oft-quoted North- South divide – by working to draw these higher value functions into the region and by encouraging homegrown businesses to focus on innovation and driving productivity growth.
The region’s other crowning glory, our exporting tradition, can provide the mechanism for doing so.
A focus on export readiness can help define a business plan and growth strategy, requiring a critical eye on resources and assets and how to walk the path which intellectual property specialists HGF call innovation to value.
North East businesses genuinely do sell tea to China and saunas to Scandinavia. They can do this by bringing unique insight, finding the right market and by having a high quality, competitive product.
They need support to do so though – that means government putting its weight behind skills, helping to share best practice, providing opportunities for collaboration and encouraging research institutions to work with businesses and turn new ideas into practical solutions.
Productivity is a challenge, the North-South divide is a challenge, and exporting around the world is a challenge. Ultimately, if we support the building blocks of each – innovation, value add, and market readiness – we can improve the business landscape for everyone.