Analysis of Productivity Growth in the United Kingdom

1. Introduction
The scope of this paper is to give a broad perspective of the return derived from
industrial and commercial productivity in the United Kingdom. A productivity trend is
identified in this paper and the sustainability of this trend is assessed. The productivity
of the United Kingdom is also compared with that of the United States in order to derive
country specific factors. Finally, attention is given to key implications that the factors
identified hold to investors and senior managers.

2. Returns Derived from Productivity

Industrial and commercial productivity can provide macro- and micro-returns. Macro-
returns are the returns that a whole country or community can derive. A key return
generated from productivity is that the country can be more competitive than other
countries on particular goods or services (Carayannis and Grigoroudis, 2014). This
stimulates foreign entities to invest in this country and also increases the ability of the
country to export goods and services that it is productive in. The second return derived
from higher industrial and commercial productivity is linked to the increase in the gross
domestic product. Gross domestic product can increase due to a number of factors,
such as new technology or more government spending (Williamson, 2014). Hariri (2017)
posits that productivity growth also provides stronger growth in the gross domestic
product. Gross domestic product can be defined as the quantity of goods and services
created in a country during a specified time frame (Williamson, 2014). When the gross
domestic product increases it leads to economic growth. Economic growth helps to
decrease the rate of unemployment and increase disposable income. Higher disposable
income positively affects the standard of living of the people because they can start
buying more luxury products (Cartwright, 2011). Moreover, it increases the revenue that
can be generated by organisations providing luxury goods and services. Harari (2017, p.
3) supports the above claim by stating that productivity is directly related to standard of
living and the ability of a country to enhance its standard of living during the years is
“entirely dependent on productivity growth”. However, higher disposable income, which
leads to better standard of living will have a negative impact on companies that produce
inferior products because customers will start preferring to acquire luxury substitute
goods and services.

Micro-returns reflect benefits that organisations can derive from better productivity.
Horngren et al. (2015) posit that productivity helps the organisation to improve its
profitability. This arises because an increase in productivity reflects more units produced
from the resources inputted in the production process. Thus, this aids in decreasing the
total cost per unit produced (Atrill and McLaney, 2009). Better profitability is also
beneficial for investors because it increases the ability of the firm to pay dividends
(McLaney, 2014). Moreover, it decreases the risk that the company becomes insolvent.
Thus, it helps to decrease the investment risk of ordinary shareholders.

Brexit is regarded as a key challenge to the productivity in the United Kingdom (Murphy
and Glennon, 2016). Membership with the European Union facilities United Kingdom
exports, which amount to around 45% (OECD, 2017). One of the key consequences of
Brexit is that it influences the investment decisions of organisations. A survey performed
by the Confederation of British Industry shows that 40% of the 357 organisations
researched are influenced by Brexit (Colson, 2017). 98% of these respondents said that
Brexit is negatively affecting their investment decisions. Thus, there is the risk that
organisations may go out of the United Kingdom and start residing in other countries
members of the European Union in order to continue benefitting from the free market.
Brexit can also decrease foreign investment, which aids in the introduction of new
technologies (Harari, 2017). Foreign investment and new technologies influence the
industrial and commercial productivity. Moreover, access to large markets permits local
organisations to “specialise and expand”, which aids in the attainment of economies of
scale (Harari, 2017, p. 16). Economies of scale take place when a rise in output
(productivity) is higher than the increase in input (Samuelson and Marks, 2012).
Therefore, Brexit significantly challenges the ability of the United Kingdom government
to maintain growth in the productivity level in the country. The key factor to the
sustainability of this trend is that the United Kingdom government negotiates
appropriate new trading agreements with countries members of the European Union.
This would stimulate organisations to remain in the United Kingdom, attract foreign
investment and facilitate specialisation of local firms.

Fig
ure 2 United Kingdom - Regional Productivity
Source: Harari, 2017, p. 7
Figure 2 indicates the regional productivity in the United Kingdom. The most productive
areas, which are exceeding the average productivity level of 2007 and 2015 are London
and the South East region. Thus, these regions are providing the highest productivity
returns, which were noted in the previous section. England and the East region meet the
average productivity level. However, the other regions especially Wales and Northern
Ireland are substantially below the average productivity level of 2007 and 2015.
Therefore, these regions are the key problems that are limiting productivity growth in
the United Kingdom.