Bank of England blog reveals disparity in productivity between foreign and domestically-owned firms

bank of england

Foreign-owned firms are more productive than domestically-owned ones and therefore pivotal to the UK economy, according to research by Bank of England staff.

In a blog by Sandra Batten and Dena Jacobs, analysis of 40,000 UK companies indicates foreign-owned firms are 50 per cent more productive, City AM reports.

Meanwhile, productivity growth is stronger by overseas-owned companies. Foreign firms contribute around 30 per cent of productivity growth compared with an average of 16 per cent.

The pair wrote in the blog: “Continued foreign investment and the presence of foreign-owned firms will therefore be important for the UK’s productivity outcomes.

“We suggest three reasons why: foreign-owned companies invest more in R&D [research and development]; they are better managed, and they collaborate with other organisations and promote the diffusion of ideas.”

The comments come as the UK’s productivity figures continued to baffle. Productivity fell 0.1 per cent in the second quarter of 2017, according to the Office for National Statistics’ (ONS) flash estimate. This follows a 0.5 per cent drop in the first three months of the year.

On average, foreign-owned firms spend five times more on R&D than domestically-owned counterparts.

The blog says family-owned firms – where, for example, the role of chief executive is passed from one generation to the next – are more prevalent in the UK than Germany or the US. This suggests business leaders in non-UK firms are promoted on their own merit and through exercising better management practices.

The report concludes: “We find that foreign-owned firms are more productive than domestically-owned ones and there are several channels through which their presence can boost aggregate productivity. It is true that large productive foreign-owned firms are able to expand and invest in overseas branches located in the UK and this boosts UK productivity by simply raising the average.”

Batten works in the Bank of England’s structural economic analysis division, while Jacobs works in the Bank’s inflation report and agency intelligence division.