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‘Digital Dividend’ Productivity Boost for UK’s Micro Firms

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The UK’s army of micro-businesses could boost the economy by £16.6bn with greater adoption of five key digital technologies shown to supercharge productivity.

The largest ever study of so-called micro-businesses – those employing between one and 9 staff – conducted by the Enterprise Research Centre is the first to put hard numbers on the effect digital adoption can have on productivity for the smallest firms.

The findings are significant because the 1.1m such companies, employing more than 4m people, have traditionally been seen as a drag on national productivity. ERC academics say the research could have far-reaching consequences for how policymakers and business support groups communicate the benefits of tech adoption to start-ups and established firms alike.

Doubling uptake of the five key digital technologies could see the Gross Value-Added (GVA) per worker of micro-businesses grow by £16.6bn, the researchers add.

Studying over 6,000 micro-businesses employing an average of four people and with a median turnover of £250,000, the research found that, after controlling for factors like sector, geographical location and firm age:

  • Use of cloud-based computing leads to an increase of 13.5% in sales per employee (a proxy for productivity) after three or more years;
  • Customer Relationship Management (CRM) software use adds 18.4% to sales per employee over three years;
  • e-commerce adds 7.5% to sales per employee over three years;
  • Web-based accounting software leads to an increase in sales per employee of 11.8% over three years; and,
  • Computer aided design (CAD) leads to a 7.1% increase in sales per employee.

Use of digital technologies has grown rapidly among UK micro-businesses in recent years, with firms using cloud computing growing from 9% in 2012 to 43% in 2018, and web-based accounting software growing from 15% to 42% over the same period.

Notably, however, the study found that around a quarter of UK micro-businesses currently make no use of digital technologies at all, while a further quarter use only one.

The study also found that being a home-based business was linked to having a turnover-per-employee around 21% higher, although this could simply reflect higher-value service firms being more likely to be home-based.

Conversely, family firms where the founder was still in charge were found to be 10% less productive than those where the founder had stepped aside, possibly due to founders being less open to change over the long term.

Around 60% of micro-businesses are family owned and managed and most regard freedom and flexibility as their key motivations. Most have no ambition to scale: 74% of respondents aim to ‘keep their business similar to how it operates now’, with a more ambitious minority of 22% aiming to build a ‘national or international business’, with this figure rising to 36% for London firms.

There is significant regional variation across the UK when it comes to innovation and exporting – two factors associated with higher productivity. In London, 47% of micro-businesses are exporters, compared to just 27% in the East Midlands (average = 33%). On innovation, the West Midlands is the strongest region, with 13% of firms there introducing new products or services, compared to fewer than 8% in Northern Ireland (average = 10.6%).

In 2017, there were 1.11m micro-businesses in the UK, employing around 4.09m people (17.6% of the private sector workforce) and generating £552bn in sales (14.7% of that by all UK firms).

Stephen Roper, Director of the Enterprise Research Centre, said:

“This study provides the first evidence of the value of digital adoption to micro-business productivity in the UK. There’s a clear ‘digital dividend’ for the productivity of our smallest firms from adopting certain technologies and these effects increase with the number used.

“Micro-businesses play an important role in all of our lives. They are our plumbers, our builders, our hairdressers and our mechanics. They are also our architects, designers, artisans, lawyers and accountants. By rooting business support and public information campaigns in the evidence, policymakers can help these firms to raise their productivity and have a major impact on the prosperity of UK plc.”