Understanding the drivers of productivity: Enterprise and competition

This blog is the fourth in our new series on the drivers of productivity. The drivers of productivity include skills, capital investment, innovation, enterprise and competition, and land. This blog focuses on enterprise and competition, and complements the blogs on GVA and productivity published in summer 2024.

This series adds to our Understanding core concepts in local economic growth series, and is aimed primarily at those working in local and central government. The series provides deep-dives into various components of economic growth, and some key concepts to consider when thinking about local economic growth.

What are enterprise and competition?

Enterprise impacts productivity when it involves the seizing of new business opportunities by entrepreneurs, start-ups and existing businesses.

Economic competition is the process of rivalry between businesses in the market. It is a key mechanism that can drive efficiency, innovation, lower prices, and improved quality.

Why do we need to think about enterprise and competition?

Local productivity and demand for workers will reflect the productivity of local businesses in an area. Enterprise plays a crucial role in increasing productivity as businesses innovate, improve processes, and make better use of resources. For example, businesses improving their organisational strategy and operations can lead to higher productivity.

Competition can improve efficiency and outputs by pushing businesses to become more efficient, innovative, and productive. When businesses compete, they are motivated to produce more output with fewer inputs, improve quality, reduce waste, and better serve customers. This often leads to adoption of leaner processes, automation, and better management practices, increasing overall productivity in the economy. Competition can lead more productive businesses to grow and less productive businesses to shrink or close down. The dynamic effects of competition on the mix of firms can be as important as the effects on individual firms.

How can we improve enterprise and competition?

Improving enterprise and competition may require increasing start-ups, improving business survival rates, or increasing business growth and scale-up. Policymakers may want to target actions that encourage entrepreneurship, lower barriers for new businesses, support existing businesses to improve productivity, or ensure that markets remain open, fair, and dynamic. For example, initiatives that simplify regulations, licensing, and planning processes that make it hard for new businesses to enter, or that reduce start-up costs through grants, legal support, or tax relief for new businesses boost enterprise and competition. Competition is improved as businesses are encouraged to enter the market.

Local authorities have a number of policy levers that can help:

• Business advice programmes can target future entrepreneurs to help them start a business, or target businesses in potential high-growth sectors to be ready to scale up and seek investment.
• Access to finance programmes – Grants and loans increase the funding available and may reduce costs, encouraging new businesses to enter the market and established businesses to scale-up. Where there are national tax credit programmes or national funding schemes, local authorities can promote these to improve uptake.
• Invest promotion and export promotion agencies can create opportunities in new markets for new and established businesses.
• Raise awareness of national policy levers, such as tax relief, changes in market regulations, and exports policy.

What to consider when thinking about enterprise and competition?

• Enterprise and competition can be difficult to measure – Business birth, deaths and survival or business composition (i.e. SMEs vs large firms) are often used as proxies.
• Competition means there will be winners and losers – Inherent in the idea of competition is that some businesses will fail and some of the objectives of policy may pull in opposite directions (e.g. supporting existing businesses may reduce business dynamisms if it prevents start-ups). Interventions aimed at improving productivity should focus on removing obstacles to success, not propping up failing businesses.
• Consider the mix of businesses in the area – The appropriate focus of policy will partly depend on local context.The number and type of businesses (tradable vs non-tradable), business churn (birth and death rates) and business composition (start ups vs medium and large businesses) can impact productivity at the local level. Consider the dynamic in the sectors with more potential. A local economy that relies too heavily on a single economic sector (e.g., tourism or tech startups) is vulnerable to sector-specific shocks.
• Target enterprise support on tradable sectors – Business support to tradable sectors can be more effective and have a bigger effect on productivity than support to non-tradable sectors, as the latter is likely to produce displacement.
• Beware market saturation in non-tradable sectors– In saturated markets, too many non-tradable small businesses may drive down prices and profits to unsustainable levels – Excessive competition can cause a “race to the bottom” in wages, standards, or quality. Business may cut wages, worker protections, or environmental standards to stay competitive.
• Management and leadership are key for business productivity – Investing in training of leaders and more efficient practices and processes can boost productivity.

Where can I learn more about enterprise and competition?

• The Enterprise Research Centre has a series of reports and blogs on enterprise, competition and productivity.
• The Department of Business and Trade’s small business survey. The most recent survey was in 2024 and the reports are now available.
• Productivity and competition: a summary of the evidence, a report for the Competition and Markets Authority.
• Education and management practices, a paper by Anna Valero at CEP-LSE
• The business response to Covid-19: the CEP-CBI survey on technology adoption, a paper by Capucine Riom and Anna Valero at CEP-LSE.
• How competition improves management and productivity, an article by John Van Reenen at CEP-LSE
• Competition, Innovation and Productivity Growth – A Review of Theory and Evidence, an OECD working paper.
• Assessing the Economic Impact of Competition, a research report from the Overseas Development Institute.

What ‘works’ for improving small business productivity?, a blog from the Innovation Growth Lab

The next blog in our understanding key concepts in local economic growth series will be on land. Sign up to our newsletter to get an update on our next blogs, briefings and events.