Concerns about productivity

Tony Ward

December 11, 2017

Tony Ward (pictured) is chief executive of Home Funding

This week, as the UK’s low productivity was again at the heart of the debate over the country’s post-Brexit future, the finger of blame was levelled at two intriguing culprits: so-called zombie companies and family-owned businesses.

First, the zombies. A report last week from the Organisation of Economic Co-operation and Development (OECD) suggested that the UK is currently home to as many as 100,000 so called ‘zombie companies’, kept on life support by their banks.

According to the OECD, zombie companies are defined as being over 10-years-old and have ‘persistent problems meeting their interest payments’.

It said: “Zombie firms represent a drag on productivity growth as they congest markets and divert credit, investment and skills from flowing to more productive and successful firms and contribute to slowing down the diffusion of best practices and new technologies across our economies.”

Historically low interest rates also have been blamed for enabling struggling companies to limp on without being forced to restructure.

The OECD’s point is that Britain would be growing more quickly if it encouraged a clear-out of these firms, which are being kept on life support by their banks.

Creative destruction – allowing zombie firms to fail – is fundamental to a well-functioning economy as it drives resources to more productive companies and would achieve a 0.4% increase in productivity, it said.

The cull would run even more smoothly if the debt bias in the tax system was reduced. This allows interest to be tax deductible.

So much for the living-dead; on to the second of our two productivity pariahs: Britain’s family-owned businesses.

According to the Economist, a survey of the manufacturing industry by the Office for National Statistics showed that family-owned and  run companies are about 19% less productive than others.

While 18% of small and medium-sized firms export, only one-tenth of their family-owned counterparts firms do the same.

Family firms, the report claimed, are more risk averse and less likely to invest in R&D. They also focus on improving existing products rather than inventing new ones.

Poor management is another feature of family firms: Britain does not compare well with its EU counterparts.

Two-thirds of Germany’s economic powerhouse is family-owned but its firms are better run and more ambitious than their UK counterparts.

So, what’s to be done about family firms?

The Economist’s argument is that the UK supports some of these businesses; tweaks to financing rules could help British family companies do better.

Many finance their activities strictly through cashflow, rarely taking on debt. This helps them survive during the bad times but limits their ability to expand during better times.

But by doing this, are we just adding to the problem by assisting the continuation of zombie companies?

It’s a tricky one. I return to a suggestion I’ve made in the past: utilising the skills of highly productive firms and passing on their learnings to their less successful peers.

Of course, that’s just part to it. Equipping workers with the right skills and ensuring they keep up with digital developments is also essential.

Good productivity is fundamental for strong economic growth and a vital source of improved living standards and wages – just what the country needs at the moment.

If the price of productivity is to dispatch the many lumbering zombies and family fiascos, it’s a price worth paying.

Show Comments