According to EEF’s research, foreign owned companies are twice as productive as domestic owned firms. The UK is the only major country in Europe where the gap between foreign owned and domestic run companies is growing. This worrying statistic is hardly likely to be improved by raising the Brexit drawbridge and becoming more dependent on a UK-centric economy, argues Andy Pye.

The EEF, formerly the Engineering Employers' Federation, is a representative voice of UK manufacturing, which represents 20,000 companies of all sizes, from start-ups to multinationals, across engineering, manufacturing, technology and the wider industrial sector.

The EEF research highlights the UK’s weak productivity performance compared to major competitors and highlights five key factors which help explain the growing gap over the past decade: capital investment, use of labour, company size, source of revenues and management practices.

The findings are partially related to size, but they score even more highly on better management practice, with foreign owned companies scoring 40% higher than domestic companies in the ONS Management and Expectations Survey 2016. Foreign-owned companies also invest almost 9000 Euros per employee more than domestic firms. High performance management practices are less widespread in UK-owned companies

UK manufacturing productivity grew by 4.7% pa between 2000 and 2007, since then it has flat lined at less than 1% a year. Smaller domestic companies are bearing some of the scars from the financial crisis in 2008. They hardly Brexit disasters heaped upon existing problems.

According to the EEF, two thirds of companies now intend to hold off increasing investment in next two years (up from half last year), with just a third planning to do more, the lowest figure EEF has recorded on this data point in five years. One third of companies cited political uncertainty as the main reason for not increasing investment. This compares to a quarter after the EU referendum in 2016.

Britain’s manufacturers are calling for a major boost to investment in the forthcoming Budget as part of a wide-ranging effort to fire up the industrial strategy and tackle the UK’s long-standing productivity puzzle.

To help fix the investment and productivity gap, EEF is calling for the introduction of a number of measures including accelerated depreciation over the Annual Investment Allowance (AIA) threshold, the re-introduction of the Regional Growth Fund and a new mechanism which links investment in Apprentices to management training. There is also an urgent need to address rising energy costs in the UK.

Commenting, Stephen Phipson, EEF Chief Executive, said: “The UK’s recent productivity record, if it continues, will bear down on growth and improvements in living standards. Manufacturing can be part of the solution, but the factors contributing to the problem – company choices about investment and management capability, in particular – have been some time in the making and won’t be tackled with a silver bullet.

“There are huge competing priorities for this upcoming budget but starting to address the underlying factors holding back productivity need to rank near the top. The benefits of foreign investment and the potential to raise performance across small domestic companies can start to be tackled with support for investment and even more focus on the development of better management capability.”

EEF makes the following recommendations:

• Reintroduce the regional growth fund to match capital investment for manufacturers investing less than £200,000 in the previous year.
• Increase the rate of capital allowances on investment over the AIA threshold (£200,000) to 35%
• For every 4 Apprentices trained by firms using the Apprenticeship Levy companies should be able to use their levy funds to train between one and five managers. To encourage this Government should top up the levy pot by £30m which should be ring fenced for management training
• Restore the Total Carbon Price to its 2017 level to bring down electricity prices and help close the gap between prices in the UK and Western Europe.
• Fulfil the manifesto commitment to implement an energy efficiency scheme to boost decarbonisation
• Deploy the immigration skills charge where there are gaps in funding and commit to no increases in funding or extension of the charge
• Commit to developing a short time working scheme, similar to those already in existence elsewhere in Europe, that will retain and upskill employees in future economic downturns.

Piecing together the Puzzle – Getting UK manufacturing productivity growth back on trend