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Expanding abroad drives innovation
British businesses planning to launch into international markets for the first time are at the forefront of tackling the UK’s productivity crisis.
Santander’s Trade Barometer 2018 Annual Report, published this autumn, reveals that companies with plans to expand abroad over the next 12 months are significantly more committed to measures that will drive up their productivity than competitors intending to remain purely domestic.
This is important. While British companies offer fantastic goods and services that are in demand around the globe and bearing in mind that the UK is the world’s 10th largest exporter – they do so less productively than their competitors in other economies. Statistics show UK productivity is 16% lower than across the G7 group of industrial nations as a whole – and 22% and 26% respectively behind the US and Germany.
Ambition drives innovation
Economists have various explanations for this lag, but one key driver appears to be the failure of UK companies to invest in new skills and ideas. Santander’s research is therefore significant: it shows a link between global ambition and commitment to innovation. Indeed, this has been a recurring theme of the Trade Barometer, Santander’s quarterly survey of the attitudes and confidence of British businesses.
The latest research shows that 40% of domestic UK businesses expecting to expand abroad deliver a product or service that is new to their customers; only 33% of other domestic businesses say the same. Some 35% of aspiring internationalists have a new approach to existing technologies in their sector, against 27% of other domestic businesses. And 29% of these companies are spending a regular percentage of turnover on research and development (R&D), against 24% of the remaining UK businesses.
Rising to the international challenge
This link makes sense. As businesses prepare to expand abroad, they recognise their exposure to new competition and greater cost pressures in new markets. To launch successfully and protect their margins, they must find new points of differentiation and improve their efficiency.
To achieve innovation, businesses look beyond product differentiation. The Trade Barometer also reveals the extent to which UK businesses are leveraging digital innovation to sell overseas. Almost half of “international UK businesses (45%) use e-commerce platforms when trading globally.”
There is plenty more potential in this area. Currently, while 55% of larger businesses are selling via e-commerce, only 29% of small and medium-sized enterprises are doing so. Increasing their digital trade, given the lower cost of entry to new markets through this route, offers real potential for SMEs to expand their international footprint.
Support where it is needed
With all the above in mind, it is clear that businesses need greater support to drive the productivity agenda through expanding abroad.
The public sector is part of the story. R&D tax credits, worth around £4 billion a year to British businesses, already offer an incentive to innovate with direct financial support that helps lower the cost of investment. Similar tax credit support for businesses investing in building their exporting structures could be quite valuable.
In the private sector, meanwhile, banks such as Santander have an important responsibility. In providing both banking and non-banking support to international and innovative businesses – financial support, for example, but also help with exploiting digital opportunities and leveraging new technologies – the opportunity is to help the UK move up the export rankings. And in doing so, we will simultaneously help to address Britain’s ongoing productivity problem.
By John Carroll, Head of International & Transactional Banking, Santander UK.
Read more about the Santander Trade Barometer.