Rethinking entrepreneurship and innovation: how the UK can close the ‘productivity gap’

Written by John Nassoori

August 08, 2023

5 minute read

Highlights from the latest event in Fujitsu's Nova series, examining the economic impact of innovation

A recent UK government report showed that innovation was estimated to have accounted for 51% of the country’s labour productivity growth between 2000 and 2008. It’s a statistic which encapsulates the importance of an ‘ideas’-driven economy, but also raises the question: how to we generate innovation?

The debating point was central to a recent panel discussion featuring Keith Dear (Managing Director of Fujitsu's Centre for Cognitive and Advanced Technologies), Marc Cowling (Professor of Economics and Productivity at Oxford Brookes Business School) and Paul Nightingale (Professor of Strategy at University of Sussex Business School).

Speaking at the event – part of Fujitsu’s Nova thought leadership series – Dear stressed the need to remember the broad scope of two terms critical to the UK’s productivity challenge: entrepreneurship and innovation.

“Innovation is as much about process innovation and business model innovation…I think it's important to understand we're not just talking about technology,” he said.

“When we're talking about 'innovation', it's not just 'new technologies': I think it will be the way in which we harness emerging technologies that will help close that productivity gap.

“I think it's right to think that entrepreneurship - in the sense of adopting business model process and technological innovation - is probably our best route to closing the gap. I think it's wrong to imagine that entrepreneurship just means SMEs and startups.”

Nightingale, who co-wrote a paper examining the breath of entrepreneurial activity within the UK, agreed that a more nuanced view of the subject will be critical to generating growth, advocating a stronger focus on technology-savvy, export-driven SMEs.

“I think there's a need to be realistic about small firms and entrepreneurship and avoids…overhyping them,” he said.

“High quality entrepreneurial firms that are innovative and export-driven are important: we could probably do with some more of those.

“But the vast majority of startups you see in the economy aren't like that and I think we need to distinguish between encouraging high quality entrepreneurship and then just kind of blanket entrepreneurship, where, often, you've got a lot of small, low productivity firms entering the market, generating a lot of jobs because they're desperate to grow, but don't survive very long.

“We need bigger startups with professional managers who’ve got good links with their customers, technology, a decent business model…and are international at birth - those are the firms that drive productivity and that is the change that we need to make.”

Nightingale also highlighted the need to develop strong SME-multinational partnerships, if larger firms wanted to unlock the type of supply chain innovation crucial to driving productivity growth.

“There's a real danger in policy of seeing small firms and entrepreneurship in isolation from large firms,” he said.

“The relationship between large firms and small firms is really key, to the extent that large firms invest a lot of money and a lot of equity in these very innovative firms.

“Innovating along the supply chain is such an important feature of how the world works: large firms see entrepreneurial small firms as part of their supply chain and have taken on…the kind of Japanese supply chain learning that came out of the ‘Machine that Changed the World’ study.”

If innovative SMEs are the answer, how can the UK better support these businesses? Cowling has touched upon finance accessibility issues in a previous paper, ‘Getting Left Behind? The localised consequences of exclusion from the credit market for UK SMEs’, whilst Nightingale believes there is a need to shakeup the country’s venture capital system, if domestic innovation is to be scaled up.

“I think we need to be sorting out our venture capital system in the UK, which also means Europe and increasingly globally, and find ways to grow these firms into really big, successful multinationals,” he said.

“There is this European question, ‘Where are our Google’s?’: we haven't got that bit of the economy to work anywhere near as well as it does in the US.

“I do think we've got additional problems now, with a collapse in our ability to support these firms as they go up the funding escalator and need more and more money, because pension funds have taken money out of the stock markets. That's a big, big problem now.”

The intensity of debates over startup funding is arguably mirrored in discussions about entrepreneurship policy. Cowling, who has worked closely with the UK government, highlighted the need for sustained change to public support for the sector.

“Entrepreneurship policy over the last 40 years has been innovative,” he said.

“They've tried stuff, changed stuff…built on some good stuff, ignored some good stuff as well, but that's part of the flux.”

The value of effectively backing entrepreneurship is clear. Dear, who leads Fujitsu’s Centre for Cognitive and Advanced Technologies, pointed to recent projections of the transformative productivity gains promised by technological advances such as large language models.

“We are going to see massive productivity increases - not just in the UK but globally - through the application of generative AI,” he said.

“Ethan Mollick's early experiments suggest 60-80% increases in productivity in some industries through the application of ChatGPT.

“Clearly, more rigor needs to be applied to see where that leads, how it diffuses and the extent to which it's sustainable, but I'd say that gives me the hope that this doesn't need to be a long, slow, gradual process, but could be quite a rapid one.

“But I think it needs the kind of smart strategy that helps companies to adopt these new technologies at scale: again, it's about process and business model innovation.

“If the UK can do that faster than others, it doesn't matter that the country didn't necessarily invent these technologies: I think we could see a really quite rapid improvement on those (productivity) metrics.”

Whether this will enable the UK to close the productivity gap with other G7 economies remains to be seen.

“I think within a generation you can fundamentally change your productivity trend,” said Cowling.

“I don't believe we’ll get a 60% increase in productivity – it’s never happened before – but doubling it (the current rate of productivity growth) or even reaching the 4% target would be a fantastic thing that would make the British population immensely wealthy compared to where we are now.”