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Business environment. Understanding business environment.
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Understanding business environment • A range of factors in the business environment affect productivity performance. This includes the types of businesses located here, though evidence suggests that the productivity performance of businesses within a sector will vary depending on location, so clearly other factors are at play. • These include the business ownership and culture, with internationally engaged firms tending to be more productive than others, and the proximity of other firms in the same or similar industries to enable the sharing of ideas and resources. • This section looks at our productivity performance, and some of the business environment factors influencing this.
Business performance has stabilised – but there is caution about the future The Leeds City Region Business Survey provides insight from businesses on the environment they are operating in. The 2019 survey found the net balance of businesses reporting improvements in their overall performance stabilised after a fall for the 2017 survey. However, businesses were more pessimistic about their future prospects, with the proportion expecting improvements in the next year falling from 2017, and substantially below the 2015 survey. The Leeds City Region Business Survey spoke to a representative sample of 2,000 businesses across Leeds City Region in January and February 2019 (note: this only covers Leeds City Region, and not the whole of North and West Yorkshire.) The net balances used here are calculated by subtracting the proportion of firms expecting a decline in a measure from the proportion expecting improvement.
Business investment has fallen since 2017 Levels of business investment have also fallen since 2017 – there were statistically significant falls in the proportion of businesses increasing investment across training, marketing and equipment. The only area to see an increase in investment was ICT infrastructure. This reflects findings from elsewhere that businesses have delayed investment decisions in light of Brexit-related uncertainty.
Businesses say Brexit is the main barrier to growth Brexit has risen to be the most frequently mentioned barrier to growth over the next three years – mentioned by 17% of businesses in 2019, compared to 5% in 2017. The proportion of businesses citing issues around access to finance, cash flow and over regulation have fallen since 2017.
Fewer businesses are seeking external finance In line with the data showing falling business investment, the proportion of businesses seeking external finance has fallen from 17% in 2015 to 13% in 2019. There have been marked falls across most areas for which businesses are seeking finance. The fall in requirements to fund cash flow could be seen positively and may indicate less strain on business accounts, though falls in most areas of investment support the fact that business investment overall is below recent levels.
The region struggles to attract venture capital investment Data from the British Venture Capital Association suggests that although Yorkshire & Humber has seen an increase in venture capital investment in 2017 compared to the previous year, investment levels remain low. The value of VC investment in Yorkshire increased by 69%, compared to 32% nationally between 2016 and 2017. However, levels of VC investment in the region are still relatively low. There were 44 VC investments with a total value of £485m in 2017, compared to 282 investments worth almost £5bn in London. The region attracted around 5% of VC investment, a little below its share of economic activity and also below levels seen in Scotland and the North West.
Why is GVA important? • GVA is a measure of the increase in value of the economy through the production of goods and services and is the best measure of economic output available at the local level. • GVA is a critical indicator of the health and performance of a local economy. Alongside other data on demographics and employment, it provides an indication of living standards and productivity. GVA growth can be driven by an expansion of the labour force, or by increases in productivity. • GVA is the critical output component used for calculating productivity, which is looked at in more detail in the following section.
GVA – headline trends Growth rates in most areas remain below the pre-2008 trend. Prior to the recession, most core city LEP areas were growing at a rate close to or in excess of the 4.9% averaged nationally between 2000 and 2008. The growth rate between 2009 and 2017 remains much lower nationally, at an average of 3.3% per year. Whilst this can partially be explained by the slow start to the recovery in 2009-11, growth from 2012-17 remains substantially below pre-recession levels in most areas.
Pre-and post-recession growth rates The North and West Yorkshire area has a combined GVA of £72.2bn in 2017. It is the largest City Region economy in the UK, and has output larger than 10 EU countries. In the years preceding the recession, North Yorkshire grew at an average of 4.9% per year, in line with the UK and slightly faster than West Yorkshire’s 4.6%. The area as a whole grew by an average of 4.7%. Since 2009, growth has been lower than the UK rate of 3.3%. North Yorkshire (2.5%) has grown a little more slowly than West Yorkshire (2.8%). The areas as a whole grew by an average of 2.7%. Only three districts in the area have seen GVA growth faster than the national average since 2009 – Ryedale (4.9%), Craven (3.6%) and Wakefield (3.5%).
GVA by sector Employment data enables a more detailed analysis of an area’s sectoral makeup, but looking at GVA by sector provides a sense of economic activity. Manufacturing accounts for more output in West and North Yorkshire than any other sector – 13.2% compared to 10.1% nationally. North Yorkshire has a particular strength in food & drink, accounting for 42% of manufacturing GVA in 2017 – almost three times the national average. West Yorkshire’s manufacturing output is more diverse, but it has a similar strength in textiles relative to national output. North Yorkshire also has higher accommodation & food output, whilst West Yorkshire has higher levels of information & comms and financial services.
GVA per head Looking at GVA per head can enable better comparison between areas of different sizes and also provides an indication of an area’s prosperity. However, GVA per head is not a measure of productivity – particularly as the population data will include a substantial number of people not working in the area and will not account for factors such as commuting flows and demographics. The West of England is the only core city LEP area with levels of GVA per head above the national average of £27,600. GVA per head in West and North Yorkshire is £23,100 – higher than either of the existing LEP areas but still 16% lower than the national average. GVA per head increased by 14.5% between 2012 and 2017. Most core city LEP areas saw increases of between 13-15% between 2012 and 2017, slightly below the UK-wide increase of 15.9%.
GVA per head – local areas Leeds is the only area of West and North Yorkshire with GVA per head above the national average. Its output per head is £29,626, 8% higher than the UK reflecting higher levels of in-commuting. York’s output per head is 92% of UK levels. Most other areas in the region have levels around 80% of the UK, though Bradford (68%) and Calderdale/Kirklees (70%) are below this.
GVA – key messages • The North and West Yorkshire economy is a £72.2bn economy. It is the largest City Region economy in the UK, and has output larger than 10 EU countries. • The area grew broadly in line with the national average up to 2008, but growth since then has lagged behind both pre-recession levels and national averages. This trend is true across most constituent parts of the region. • The area has a greater share of manufacturing output than national averages, driven by food & drink in North Yorkshire and by a number of subsectors in West Yorkshire but particularly textiles. • GVA per head is slightly higher in the West and North Yorkshire area than in either of the existing LEP areas, but remains 16% below UK levels.
Why is productivity important? • Productivity generally refers to how efficiently inputs (labour and capital) are used to produce outputs (goods and services). It is directly linked to living standards – increasing productivity increases firms’ ability to increase wages. Therefore, at the national level a country’s ability to improve its standard of living over time almost entirely dependent on productivity growth. • Productivity is also crucial in determining long-term growth rates of an economy. Stronger productivity growth leads to stronger Gross Domestic Product (GDP) growth. This, in turn, increases tax revenues and lowers government budget deficits. • ONS note that “economic output can only be increased by either increasing the amount of inputs or by raising productivity. Furthermore, changes in labour productivity are also related to changes in real wages. Increasing productivity is, therefore, an important aim for both national and local economies.” • Improving productivity is central to the HM Government’s Industrial Strategy, and the five foundations of the strategy are all focused on improving productivity performance. • This section deals with understanding productivity performance, with the rest of the document providing detail on the drivers of productivity
Productivity puzzle – stagnating national productivity growth UK productivity growth has not recovered from the onset of the economic crisis in 2008. Whilst some disruption to growth during a recession is expected, the length of this downturn is unusual and has been termed the “productivity puzzle”. Although productivity is now increasing, growth remains substantially below pre-recession trend. So whilst productivity is 1.6% above its pre-recession peak, it would have been 22.3% higher had it followed its pre-recession trajectory.
Productivity puzzle – performance is below international comparators Whilst other advanced economies have experienced similarly low productivity growth since the recession, the problem is more acute in the UK. Only Italy has had lower productivity growth than the UK in the G7 since 2007, and Japan is the only G7 country with productivity levels below the UK in 2016.
Growth in low productivity sectors partly explains the puzzle A range of factors are thought be contributing to the productivity puzzle, including low levels of investment with businesses preferring to retain or recruit staff, banks’ willingness to lend to new businesses, and higher numbers of people working beyond retirement age. There also appears to have been a shift towards higher levels of activity in less productive sectors (the “allocation” component on the chart to the left demonstrates this). Non-manufacturing production has made the largest negative contribution to national productivity growth since 2008, along with financial services. Declining activity in mining and quarrying helps to partially explain this.
Productivity growth has lagged UK levels locally since 2004 Whilst UK productivity growth has been below trend since the recession, local productivity has persistently lagged behind UK levels. In 2008, output per hour in North and West Yorkshire stood at £25.83, around 90.2% of UK output. During the downturn this gap widened to 86% and it has remained similar ever since. As of 2017, output per hour in North and West Yorkshire had risen to £29.17, though is just 86.7% of UK levels. larger. • If productivity in North and West Yorkshire matched UK levels the economy would be £11.1bn larger.
All core city LEPs trail UK productivity levels No core city LEPs have productivity levels exceeding UK productivity in 2017. West of England has productivity close to UK levels, as does Greater Birmingham & Solihull after strong growth over the past five years. After Greater Birmingham, North and West Yorkshire has seen the fastest growth in the past five years among comparator areas, at 11.4% compared to UK growth of 11.1%.
Mixed productivity growth across the area Weaker productivity growth locally is more pronounced during the recession and immediately after. Between 2007-12, productivity increased by 2.8% in North and West Yorkshire, compared to 9.1% nationally. However, since 2012 growth has been marginally ahead of the 11.1% seen across the UK, at 11.4%. Whilst all constituent parts of the area follow a similar pattern, the scale of variation between areas is substantial. York saw productivity decline by 4% between 2007-12, but has seen the fastest growth of any area in North and West Yorkshire since 2012 (15.5%). Bradford (13.7%) and Wakefield (13.2%) have also outpaced UK growth since 2012.
Productivity is below UK levels in all parts of our region Although in absolute terms productivity is increasing in all parts of North and West Yorkshire, all areas have productivity levels below the UK average.
Productivity is below UK levels in all parts of our region Official data on productivity is not available at district level, but calculations of GVA per worker suggest productivity is highest in Selby and Leeds. Both districts have output per worker above £50k, though this is still some way below the comparable figure for England of £58,500. Most of the other districts have productivity levels of £47-49k, though output per worker is closer to £40k in Richmondshire, Ryedale, Scarborough and Craven. All districts in the area have seen productivity increase to some extent since 2015, with the exception of Ryedale where performance is relatively flat.
Productivity performance by sector varies Some production sectors had significantly higher productivity levels in North and West Yorkshire 2017, notably energy and utilities, mining and quarrying and water and waste. However, employment in these sectors is relatively low and therefore this data can fluctuate by year. Service sectors such as financial services, information and communications and professional services all have productivity levels below England levels.
The region has a “long tail” of underproductive firms A range of factors influence this relative productivity underperformance. ONS research suggests that West Yorkshire has a higher proportion of firms with relatively low productivity compared to the country as a whole, and London in particular. This creates a “long tail” of underproductive firms. This is true to varying extents in other regions, though in most cases a region’s industrial structure only plays a small role in determining productivity performance. Distribution of firm level productivity, West Yorkshire, UK and London
Innovation and R&D investment can boost productivity growth The national industrial strategy sets out the ambition for the UK to spend 2.4% of GDP on research & development. Currently, Yorkshire & Humber spends 1.4% of GVA on R&D – less than any other English region. This is explored in more detail in the “Ideas” section, but the below charts show the correlation between R&D spend and productivity, particularly when outlying regions are removed (right hand chart).
Higher skilled areas tend to be more productive Skill levels also correlate with productivity, with areas with more people educated to degree level (NVQ4+) seeing higher levels of productivity.
Benchmarking against European regions • Producing consistent international comparisons on measures such as productivity can be challenging. This analysis using Eurostat data minimises currency issues by using Purchasing Power Parities (PPPs), which essentially controls for different costs and price levels between countries though comparisons should still be treated with caution. • Productivity levels in the Inner London are substantially higher than anywhere else in Europe and 5 times the EU average, reflecting the high concentration of output in the City. This emphasises the area’s importance to UK performance, whilst also emphasising the relative underperformance of other parts of the UK.
Benchmarking against European regions The output per hour of West Yorkshire was 34.2PPP in 2014, whilst that of North Yorkshire was 34.7PPP. With the exception of the Western and Midland areas of Ireland, Chemnitz in Eastern Germany and the Aaland Islands in Finland, areas with similar productivity levels to this region tend to be located in southern Europe and include Umbria in Italy, where the major city is Perugia, Attiki (Athens) in Greece, and Andalucia (Seville) in Spain.
Benchmarking against European regions • Benchmarking carried out for Leeds City Region LEP in 2012 identified 15 European comparator areas for Leeds City Region. These areas were considered comparators for Leeds City Region based on their industrial structure and population. • Stockholm stands out as substantially more productive than any other area in this cohort. Other northern European comparators have productivity levels around 40-45PPP per hour. Local productivity levels are considerably below this, though still higher than the Southern European comparators of Lisbon and Naples.
Comparators have larger professional and digital sectors • The two most productive comparator areas – Stockholm and Helsinki – have substantially higher levels of employment in information & communications. The sector’s share of employment in these sectors is around 2.5 times higher than in West Yorkshire. • Most areas with higher productivity have a more prominent financial & professional services sector than West Yorkshire, with the sector’s share of employment around 15-40% higher in overseas areas with higher levels of productivity.
More productive areas tend to have more technology and innovation • The most productive comparator areas of Stockholm and Helsinki have substantially higher concentrations of high tech employment, as does Lyon to a lesser extent. This picture is not replicated in other areas, however. • R&D spend is substantially higher in most overseas areas in this analysis (though data is not available for French regions on this measure). Investment in R&D in West Yorkshire was 2-3 times lower than in Scandinavian and German cities analysed here.
Modelled approach to closing the productivity gap • Experian have produced GVA and employment forecasts by industry for the Yorkshire and Humber region under a high productivity growth scenario where the region achieves the same labour productivity levels as the UK by the end of the forecast period (2038). • The Northern Powerhouse Independent Economic Review (IER) identified substantial scope for productivity growth in four ‘Prime capabilities’ and supporting growth in three ‘Enabling’ capabilities. These formed the basis of Experian’s high productivity growth scenario. • For the region to achieve the same labour productivity levels as the UK by the end of the forecast period, productivity in the Yorkshire and the Humber region will have to increase by an average 2.3% per annum between 2018-38, which is 1% higher than the 1.3% long term trend growth for the region. • It should be noted that this is a hypothetical scenario, and the policy levers used to achieve it are not specified – it is however useful in demonstrating the scale of growth required.
Modelled approach to closing the productivity gap • To close the gap by 2038, advanced manufacturing would need to increase at a gradually accelerating rate, reaching a rate around 0.5% per annum faster than in the past two decades by the 2030s. Energy would follow a similar but slightly lower trajectory. • An acceleration in health innovation productivity growth is assumed, reflecting the assumption of stronger growth for the technology-driven segments in the UK. For digital, productivity is assumed to be boosted further by agglomeration effects and is assumed to be faster than the UK as a whole.
Productivity - conclusions • Improving productivity performance is central to the national (and therefore local) industrial strategy. • Local productivity performance lags behind UK levels. All parts of our region are less productive than the national economy. • Although productivity growth in North & West Yorkshire has maintained pace with UK growth in recent years, the gap is not closing. • A range of factors contribute to the challenge – the region has lower levels of skills, innovation and infrastructure investment than more productive regions. • The area also has a higher proportion of businesses who are less productive than similar companies elsewhere. • A theoretical, modelled approach shows the level of improvement required to close the productivity gap over the next 20 years.
Business base – key headlines North and West Yorkshire is home to almost 137,000 businesses – more than any LEP area outside of the South East. The number of businesses in the area has been relatively static between 2017 and 2018, as is the case in most core city LEP areas. Over the past five years the business base has grown by 17.1%, slightly below the national growth of 19.3%. Greater Manchester, Greater Birmingham and Liverpool City Region seen higher rates of business growth over that period.
The region has a greater share of businesses in production sectors Retail accounts for more businesses in North and West Yorkshire than any other sector. Although this is true nationally, the sector is over-represented compared to its national share. The area also has an above average share of businesses in agriculture, construction and manufacturing, and relatively low share in information & communications and professional services.
Strong growth in logistics business base The number of businesses in logistics (transport & storage) has increased from 4,000 in 2013 to 6,700 in 2018. This is an increase of 69%, compared to a 49% increase nationally. Both the UK and our region have seen a substantial increase in businesses in the energy sector in recent years, though the number of businesses in the sector remains small in absolute terms (200 in North and West Yorkshire as of 2018).
North Yorkshire districts have a greater share of SMEs and micro-businesses The area has a slightly lower share of microbusinesses than the UK as a whole (82.9% of businesses are micros here, compared to 84.3% nationally). This is particularly true in York, Wakefield, Scarborough and Leeds, where 80-82% of firms are micros. Away from these areas, North Yorkshire districts tend to have more microbusinesses than other areas. The area has a slightly higher concentration of small firms with 10-49 employees. As would be expected, those same areas that have fewer micros have more small and mid-sized firms.
Business growth has been fastest in Leeds, Selby, Bradford and Wakefield Over the past five years, Leeds (+25.1%) and Selby (20.1%) have seen their business base grow at a faster pace than the UK as a whole, whilst Bradford and Wakefield have seen growth in line with UK levels around 19%. Other than Selby, the business base has been a little more stable in North Yorkshire districts since 2013, with Richmondshire, Ryedale and Scarborough seeing increases of around 7.5%. Selby has seen the strongest growth between 2017-18, though Kirklees, Bradford and Wakefield saw declines of 1-1.5%.
Average annual business births (2012-17) as a proportion of active enterprises In order to enable analysis of the change in these numbers the figures are shown as a proportion of the total enterprises within each district. Apart from Selby, West Yorkshire districts dominate in terms of the number business births as a proportion of total enterprises. North Yorkshire districts have relatively low proportions of business births.
Average annual business deaths (2012-17) as a proportion of active enterprises The picture regarding business deaths is a little more mixed although West Yorkshire districts have the four largest proportions of business deaths. Whilst North Yorkshire districts had the lower figures in terms of business births this is compensated for, somewhat, in terms of smaller proportions of business deaths.
Businesses created in 2012 – 5-year survival rates The survival rates of businesses created in 2012 paints a very different picture. North Yorkshire districts dominate in terms of the mid-term survival of new businesses. Ryedale is the best performing with 55% survival compared to Leeds with 42%.
Total of enterprise births and deaths for 2017 as a proportion of total enterprises The total of the births and deaths reflects the rates of business ‘churn’ across the districts. Whilst Selby has the greatest proportion of business births and deaths all the other North Yorkshire districts fall below the West & North Yorkshire average.
