Startups founded during the recession could be the reason why Britain lags on productivity

Jake Cordell
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Research from Nesta suggests that start-ups are considerably less productive than older companies.
Research from Nesta suggests that startups are considerably less productive than older companies. Wonder why ... (Source: Getty)

Britain’s startups could be the missing piece of the “productivity puzzle” which has had economists and policymakers scratching their heads in recent years, according to new research by the innovation body Nesta.

Working with number crunchers at the National Institute of Economic and Social Research (NIESR), Nesta found that new firms - those founded since the recession - have been markedly less productive than their older counterparts, dragging overall productivity down by two per cent in the years coming out of the recession.

Read more: Could weak productivity be George Osborne's downfall?

“Although it is normal for newly established businesses to start out being relatively unproductive and improve over time,” Nesta pointed out, “the performance on average of the 2010-2013 cohort has been significantly worse than that of their predecessors”.

Levels of productivity across the G7

The number of new businesses popping up across the UK has surged in recent years. A total of 586,000 new firms were founded in 2014/15 - 29 per cent more than in 2011/12 - but Stian Westlake, executive director of policy and research at Nesta, said that “quality matters more than quantity”.

“What’s important now is that the government starts supporting the most productive new businesses in more targeted and dynamic ways,” he added.

Read more: Staff reveal where they are most productive (it might not be in the office)

Nesta wants an end to “blanket business support spending” which it fears could be propping up the least productive firms, and has called on the government to lead a review of red tape across the economy to make sure it is not stifling the most innovative and productive firms from growing.

The productivity rate is a measure of how much economic output is produced per hour of work. Britain has the second-worst rate in the G7, behind international rivals such as France, Germany and the United States.

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