Goldman Sachs and the British Business Bank have released a report which seeks to identify and encourage the ways in which internationalisation and innovation can act as key drivers for growth among SMEs – and in turn boost UK productivity.

The background to the report, entitled ‘Unlocking UK Productivity - Internationalisation and Innovation in SMEs’ comes from the fact that the UK currently faces a productivity challenge whereby its performance has weakened in comparison to the other G8 economies. Research demonstrates that small and medium-sized enterprises (SMEs) are a key under-tapped resource for addressing this challenge – especially when engaged in international and innovative activities.

The report makes the following observations;

› The UK has an opportunity to enhance its productivity: Whilst before 2008 productivity in the UK was on a strong upward trend, the UK’s productivity performance has since weakened compared to its international counterparts. Improving this has become a vital agenda for the UK government.

› SMEs have a key role to play in addressing this challenge: The SME contribution to the UK economy is significant – accounting for 60% of all private sector jobs and 47% of revenue. Boosting SME productivity growth can have a significant impact on UK productivity growth at large.

› The role of internationalisation and innovation in boosting SME productivity growth has been relatively underexplored, despite strong evidence of its positive impact: Whilst much attention has focused on structural factors such as access to capital, leadership and entrepreneurial capabilities and having the right talent, evidence strongly indicates that those businesses that engage in international activity and innovation are more likely to enhance firm performance – including productivity growth.

• It is estimated that between 9 and 12% of non-exporting firms within the UK could become exporters and just over half that do export could become persistent exporters. Together these two groups include more than 110,000 SMEs in the UK economy. If they are successfully encouraged to export or export persistently, an additional £1.15 billion Gross Value Added (GVA) could be added to the UK economy within the first year.

• Internationally active SMEs are three times more likely to introduce products or services that are new to their sector than those which are entirely domestic in orientation. Despite this positive relationship, however, only 1 in 5 SMEs are exporters.

› The limited engagement by SMEs in internationalisation and innovation can be explained, in part, by SMEs’ low growth ambition: UK SMEs are demonstrated to be less ‘growth- 7 inclined’ and ambitious than other G8 economies. The Global Entrepreneurship Monitor alone has pointed to a 17% growth aspiration in the UK among entrepreneurs vs 27% in the US.

In this context, the following recommendations are considered:

• The overall entrepreneurial ecosystem needs to be nurtured to encourage greater growth ambition among SMEs.
• The need to expand and increase appropriate forms of education to help build the UK’s entrepreneurial ecosystem: Practical and impactful business education for SMEs is fundamental in providing SMEs with the appetite to internationalise and innovate.
• Capital is a critical enabler for SMEs to internationalise and innovate: Solutions focus on initiatives that stimulate demand and support supply through debt and equity financing.

The full report is available online.