UK Economy Hampered by Proliferation of Low-Productivity Firms, BCG Report Reveals
The United Kingdom's economic performance is being significantly undermined by a rapidly expanding cohort of low-productivity businesses, according to a comprehensive new analysis from Boston Consulting Group's Centre for Growth. The report, released this week, paints a concerning picture of declining business dynamism and widening productivity disparities across the nation's corporate landscape.
A Growing Tail of Underperforming Enterprises
Between 1997 and 2023, the number of firms operating below the 25th percentile for productivity nearly doubled, surging from 444,500 to 873,000. This dramatic increase far outpaced the overall growth in the total number of firms, which rose by 70 per cent over the same period. In stark contrast, the number of high-productivity firms—those above the 75th percentile—increased by just 62 per cent, indicating that productive enterprises now constitute a smaller proportion of the UK economy than they did a quarter-century ago.
"We've witnessed lower productivity firms being able to survive for longer periods," explained Raoul Ruparel, chief UK economist at BCG's Centre for Growth. "This lack of business dynamism is partially responsible for the proliferation of these underperforming businesses." Ruparel emphasized that policy interventions should specifically target this long tail of unproductive firms by encouraging greater economic dynamism, including elements of creative destruction and facilitating more efficient labor redistribution across the economy.
Sectoral Shifts in Productivity Drivers
The BCG research uncovered significant changes in which sectors are driving productivity growth. Before the financial crisis, three key sectors—information and communications, manufacturing, and financial services—accounted for a dominant 84 per cent of all productivity growth across the UK economy between 1997 and 2007. However, this concentration has dramatically diminished in subsequent years.
From 2008 to 2018, these same sectors contributed just 46 per cent of productivity growth, and between 2019 and 2024, their share fell further to only 34 per cent. "Previously, the UK was able to thrive despite aggregate productivity growth being concentrated in a small number of large, high-performing sectors," the report noted. "However, while these sectors remain the main drivers of productivity growth, they are contributing much less than in previous decades."
The Broader Productivity Challenge
Productivity, which measures output per hour worked, is fundamentally connected to wage growth and improvements in living standards. Since the financial crisis, productivity growth has declined sharply across Western economies, with the UK experiencing a more pronounced slowdown than many of its international peers. The BCG report calculated that if the UK had maintained its pre-crisis productivity trend, the economy would be approximately £557 billion larger today.
Successive Chancellors have attempted to address the UK's persistent productivity challenge with limited success. The BCG paper suggests that meaningful progress will require the government to develop targeted, sector-specific solutions rather than broad-brush approaches.
Divergent Sector Experiences
The report highlights distinct patterns across different industries. In manufacturing, productivity growth has slowed across virtually all firms, suggesting the sector faces structural headwinds. Ruparel identified persistently high energy prices as a likely contributing factor to this widespread slowdown.
Conversely, in the information and communications sector, the most productive firms have performed relatively well in recent years, while lower and mid-tier firms have struggled significantly. This divergence implies that the diffusion of new ideas and technologies from frontier firms to laggards has been unusually slow—a long-standing problem for the UK economy across multiple sectors.
Ruparel referenced a 2018 speech by Andy Haldane, then chief economist at the Bank of England, which identified diffusion difficulties as a major cause of the UK's productivity slowdown. "We align with his view that we have a diffusion problem," Ruparel stated. "We have some of the most innovative firms globally, and at the top end, our most productive firms have been growing productivity strongly. But then there is this long tail of underperformers, and we've genuinely struggled to spread best practices, whether those are management techniques or new technological innovations."
The BCG report concludes that without addressing both the survival of low-productivity firms and improving knowledge diffusion across the economy, the UK will continue to face significant headwinds in achieving sustainable economic growth and improved living standards for its citizens.
