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Abstract:

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CEP Industrial Strategy Paper
Unlocking SME productivity: Review of recent evidence and implications for the UKs Industrial Strategy
Isabelle Roland
September 2018
Paper No' CEPIS05:
Full Paper (pdf)

Tags: industrial strategy; smes; productivity; growth; investment; financial constraints; management practices

Improving productivity is one of the main goals of the government’s Industrial Strategy. Since the UK is a nation of small and medium-sized enterprises (SMEs), the question arises whether SMEs have a role to play in industrial policy. SMEs are vital to the UK economy as employers, but it is far from obvious that as a group they are major contributors to economic growth. This paper reviews recent evidence on two obstacles to growth that SMEs face, namely access to finance and poor management practices, and evaluates the potential for policies to turn the UK’s SME population into a growth engine. Access to finance, especially long-term finance, remains a problem for innovating firms with the potential to grow. These are the firms that can drive long-term productivity growth. Therefore, interventions that target firms with higher growth potential are likely to be more efficient than general financial support policy for all SMEs. By contrast, policies that address poor managerial practices have the potential to increase aggregate productivity by targeting all types of SMEs, not just high-growth firms. The paper concludes with a series of policy recommendations.