The analysis of all the factors pointed us to a new one
As said, our new paper analysed a few different factors to try to explain the weak productivity growth experienced by the UK as whole as well as by the UK manufacturing sector. Those factors happened to be associated with a characteristic: foreign ownership.
Let’s see what the data tell us.
Manufacturing foreign owned companies scored better in terms of investment, size, management practices, and, as a consequence, in terms of higher productivity.
The positive scores are also broadly shared in all the manufacturing sub-sectors we analysed in our first work. The only exception is pharmaceuticals where UK owned companies are more productive than foreign ones.
Is this happening only in the UK?
No, it is clearly not happening just in the UK! Foreign owned companies tend to be very large international companies which tend to be super-competitive around the globe.
Indeed, as the graph shows, UK companies operating abroad are also more competitive than domestic European companies.
But a couple of things are quite peculiar
As said, foreign owned companies being more competitive than domestic ones is no news, however the gap between the two categories is deteriorating in the UK.
In the UK the productivity gap between foreign owned and domestic firms has widened since 2008 and looking at the data behind it, foreign companies continued to improve their productivity in a very solid way compared to the flat line experienced by domestic ones.
Is that not just because of size or composition?
The share of manufacturing foreign owned companies in the UK is the same as in Germany (2.8%), so composition does not appear to be reason behind the gap.
Size? Well, there is no doubt that multinationals are usually extremely big and we know that size matters a lot. However, size can’t be the only explanation. Indeed productivity per head of foreign companies is much higher than productivity of large companies (whole sample, foreign plus domestic). This difference is particularly pronounced in the UK and, as the graph shows, it goes together with the data for investment per person.
What’s behind that?
One of the key points of our research is the role of good management practices and we think that this is definitely a key factor behind the good performance in productivity terms of foreign owned companies. The recent ONS study of management and expectations recorded domestic firms scoring much worse than foreign companies (48 vs 66 in a scale between 0 and 100, where 100 is the “perfect” management practices).
Interestingly, domestic results are extremely spread out with companies scoring as much as, or better than, foreign companies and about 10% with a score close to the extreme bottom of the table. This characteristic was something already reported in Unpacking the puzzle thanks to the 2006 Bloom and Van Reenan paper on management and productivity.
What should be encouraged?
As pointed out on Monday, the final section is dedicated to our policy recommendations following the “change, influence, accept” rule and we already explored the “change” section where we highlighted what we think the next Budget should deliver to fix immediately the problems related to management and under-investment.
In the “influence” part we underline how foreign owned firms should be encouraged to work collaboratively with their supply chain to make sure that best practices are spread in the local economy and that domestic firms’ productivity growth follows the same path of non-domestic ones.
If you haven’t done it already, enjoy our 2 minutes video about the report.