How Can SMEs And Services Aid the Global Productivity Crisis?

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Here Greg Carter, CEO of Growth Street, delves deep into the challenges several industries worldwide have encountered in terms of productivity, offering some insight into how SMEs and services can help alleviate the crisis.

In April 2017 the IMF warned of an ongoing crisis in global productivity. Since 2008, the output of advanced economies is down by around 5% compared to trends prior to the crisis.[1] Reduced productivity can create issues for governments, businesses and consumers alike. At the same time, it could create unique opportunities for smaller businesses to make outsize impacts in all kinds of industries and sectors. How can SMEs help to engineer a recovery in global productivity?

Something important to think about here is the transition of many major economies (the list includes the UK, US and China) away from manufacturing and towards services. It could be said that smaller businesses are already taking advantage of this: indeed, institutions like the OECD have said that “in the services sector, small businesses have generally shown stronger productivity growth than large companies since the crisis”.[2]

Some believe the uncertain economic climate has also led to companies hoarding cash, anticipating an economic slowdown. This could disproportionately impact small businesses, who (according to the ICAEW) are keeping back double the amount of cash in reserve compared to larger competitors.[3] This has potentially serious consequences.

So why might a shift away from manufacturing be advantageous for SMEs? Manufacturing – historically the bedrock of powerful economies such as the US and Germany – is capital-intensive, particularly relative to services businesses. Significant investment in tangible assets – stuff you can kick – is often a requirement for young, growing manufacturing companies hoping to disrupt larger players. For SMEs working in the services industries, meanwhile, capital requirements can be much less intense. Growing market share and investing in growth may well be easier without costly hardware to maintain and look after.

I believe the biggest factor that can drive global productivity upwards in the months and years to come – particularly for smaller businesses – is increased adoption of technology-based services. The tools needed to set up and grow a global business are no longer accessible to only the big corporations. SaaS (software-as-a-service) technology is becoming a vital part of small businesses’ armouries: over the next three years, 78% of SMEs are planning to use more SaaS products than they do currently.[4]

Some companies providing services to small businesses have been able to create a global presence themselves. Alibaba, for example, launched an initiative earlier in 2017 to get a million US businesses exporting to China. Farfetch, which provides back-office and e-commerce infrastructure to small fashion retailers, is now established in around a dozen countries.

And companies not yet at the scale of Alibaba and Farfetch are still managing to make waves. Shipping is notoriously capital-intensive,[5] and it’s still affected by legacy technology systems.[6] But young services companies are proving that it’s possible for technology to make a real difference to productivity. Shipamax and ZenCargo aim to improve efficiency in areas like freight forwarding and ship booking, taking away the pain that comes with siloed data and legacy technology.

These businesses show the potential in increased adoption of tech-based services. Young, ambitious companies don’t have to be constrained by market size: despite their relatively small footprints, they can address issues in industries as massive as shipping thanks to their technological advantages. At the same time, they’re working towards improving the productivity of capital-intensive, asset-heavy industries that might suffer without this kind of innovation.

I believe that exports might lie at the heart of the productivity dilemma. As services businesses expand and mature, it’s natural that they might look to other territories to grow. Research supports this: FedEx’s SME Export Report shows that 63% of UK SMEs are exporting. Services and technology are at the heart of this: the same report shows that 81% of the SMEs that export generate revenue through e-commerce, for example.[7]

Importantly for enterprising SMEs, international trade agreements are beginning to pay more attention to services. This is a particular emphasis of CETA, the free-trade agreement between the European Union and Canada: according to the European Commission, “half of the EU’s economic growth from CETA is expected to come from more trade in services”.[8] When both parties recognise equivalent standards and regulations, this kind of international agreement should make it easier for businesses to expand the scope of their trading.

It seems as though the stage has been set for a productivity boom, aided by new legislation and innovation that’s placed more power than ever in the hands of SMEs. But this isn’t the end of the story. Small businesses have to battle banks that can be reluctant to lend: according to the National Audit Office, the ‘finance gap’ between the funds SMEs need and the funds they’re able to access could be as high as £39bn in 2017.[9]

We need a solution. My belief is that by taking advantage of alternative funding channels, small businesses can work alongside partners who are truly invested in their long-term success. Industry voices have argued that banks may not be best-placed to understand small businesses. Products designed to help growing, fast-changing businesses could provide a compelling answer to the inefficiencies of traditional lenders.

New lending models are only one part of a potential solution to increasing global productivity: giving growing businesses the freedom and structure to develop and innovate. Trade deals such as CETA, that recognise developing macroeconomic trends by expanding provisions for services, are a step in the right direction. But for SMEs to make a real difference on a global scale, they need access to the funds that could help them expand into new markets, hire more staff and invest in stock.

By closing the finance gap, we could begin to halt declining global productivity. I am energised by the rise of alternative financing options in recent years, and by the quality and ambition of the ambitious businesses Growth Street works with on a daily basis. There is much cause for optimism in the months and years ahead.

[1] Shawn Donnan, ‘Global productivity slowdown risks social turmoil, IMF warns’ (April 3rd 2017). https://www.ft.com/content/3e5b4822-1882-11e7-a53d-df09f373be87

[2] OECD, ‘Continued slowdown in productivity growth weighs down on living standards’ (May 18th 2017). http://www.oecd.org/newsroom/continued-slowdown-in-productivity-growth-weighs-down-on-living-standards.htm

[3] James Hurley, ‘Hoarding money costs companies the chance to grow and raise productivity’ (September 25th 2017). https://www.thetimes.co.uk/edition/business/hoarding-money-costs-companies-the-chance-to-grow-and-raise-productivity-w02snwbbl

[4] BetterBuys, ‘2016 Report on the State of SaaS’ (December 19th 2016). https://financesonline.com/2016-saas-industry-market-report-key-global-trends-growth-forecasts/

[5] Peter Sand, ‘The shipping industry turns to alternative finance’ (May 19th 2015). https://www.worldfinance.com/wealth-management/the-shipping-industry-turns-to-alternative-finance

[6] Patrick Burnson, ‘Some shipping sectors still slow to recognize advances in ocean cargo technology’ (June 22nd 2017). http://www.logisticsmgmt.com/article/some_shipping_sectors_still_slow_to_recognize_advances_in_ocean_cargo_techn

[7] Fedex, ‘SME Export Report (2017). http://images.fedex.com/images/emea/learn/sme-export-report/FedEx_Export_Report_Document_UK.pdf

[8] European Commission, ‘CETA explained: Creating new opportunities for your business’ (2017). http://ec.europa.eu/trade/policy/in-focus/ceta/ceta-explained/#service-markets

[9] House of Commons Business, Energy and Industrial Strategy Committee, ‘Access to finance: first report of session 2016-17’ (October 31st 2016). https://publications.parliament.uk/pa/cm201617/cmselect/cmbeis/84/84.pdf (p.5).

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