Joanne Roberts and Andrew Hunt

1. A Regional Analysis of Productivity in Business Services: Implications for the UK Knowledge Economy Joanne Roberts and Andrew Hunt

2. Background and Purpose of the paper • Exploratory in nature • Reporting findings of an initial analysis • Investigates difference in productivity levels in the UK business services sector by region and sub-sector. • Reviews GVA data and GVA per head • Employs the econometric technique of stochastic production functions to examine efficiency in selected business service sectors. • Identifies directions for further development of the research • Broad aim to contribute to a deeper appreciation of UK business services • In so doing, to offer insights into an important component of national and regional knowledge economies.

3. Table 1. UK Standard Industrial Classification of Economic Activities 2003, Section K: real estate, renting and business activities • Division Group Description • 70 Real estate activities • 71 Renting of machinery and equipment without operator and of personal and household goods • 72 Computer and related activities • 72.1 Hardware consultancy • 72.2 Software consultancy and supply • 72.3 Data processing • 72.4 Database activities • 72.5 Maintenance and repair of office, accounting and computing machinery • 72.6 Other computer related activities • 73 Research and development • 73.1 Research and experimental development on natural sciences and engineering • 73.2 Research and experimental development on social sciences and humanities • 74 Other business activities • 74.1 Legal, accounting, book-keeping and auditing activities; tax consultancy; market research and public opinion polling; business and management consultancy; holdings • 74.2 Architectural and engineering activities and related technical consultancy • 74.3 Technical testing and analysis • 74.4 Advertising • 74.5 Labour recruitment and provision of personnel • 74.6 Investigation and security activities • 74.7 Industrial cleaning • 74.8 Miscellaneous business activities not elsewhere classified Source: Extract from UK SIC 2003, available from the Office of National Statistics, http://www.statistics.gov.uk/methods_quality/sic/contents.asp (assessed 15th July 2008).

4. Significance of Business Services • Engage in the creation, dissemination and application of knowledge both within and between firms at the level of the region, the nation and internationally (Miles et al., 1995; Antonelli, 1999; Andersen et al., 2000). • Contribute to the competitiveness of enterprises generally - an important factor driving long-term growth (OECD, 1999; CEC, 1998, 2001). • Among the EU 15 employment in the sector has grown at a rate of 4.4 per cent per annum between 1979 and 2003 (Kox and Rubalcaba, 2007 p. 6 & 7) • Total employment level of over 19 million or 11.4 per cent of total EU 15 employment by 2003 (ibid) • Over the same period value added grew by 4.2 per cent per annum amounting to 11.2 per cent of total value added in the EU 15 in 2003 (ibid)

5. BS Contribute to: • Client performance (O’Farrell et al., 1995; Dawson, 2000) • Economic performance across the economy (Tomlinson, 2000; Antonelli, 1999) • Regional development (Marshall et al., 1988; Perry, 1991; Kebble et al., 1991) • Innovation (Howells, 2006; Metcalfe and Miles, 2000; Wood, 2002)

6. Productivity in Services and BS • Traditionally associated with low levels of productivity because of their labour intensive nature (Baumol, 1967; Petit, 1986) • Growing interest in understanding productivity in the service sector (Wolfl, 2003; Gronroos and Ojasalo, 2004; OECD, 2005; Crespi, Criscuolo, Haskel and Hawkes, 2006; Griffith, Harrison, Haskel and Sako, 2003; inter alia.) • Productivity levels vary across service sub-sectors. • Studies of the business service sector highlight variability in the levels of productivity by sub-sector and location (Rubalcaba-Bermejo, 1999; Kox and Rubalcaba, 2007) • Measuring productivity in business services

7. Regional Productivity Levels in BS • To explore productivity we begin by looking at Gross Value Added (GVA) by sector and region • Productivity can be measured by GVA per head • Such data gives an indication of levels of productivity • What factors account for the variations in levels of productivity? • To address this question we turn to an examination of efficiency levels

8. Locations of regional sectoral GVA, proportions averaged over 2001-3

9. Locations of regional and selected sectoral GVA, proportions averaged over 2001-3

10. GVA per head average over 2001-3

11. GVA per head selected averages over 2001-3

12. Stochastic Production Frontiers Standard frontier Input 1 Stochasticfrontier f(xi,β) yi≤f(xi,β) Input 2

13. Estimated function A trans-log production function was estimated, in natural log form... v is not a measure of efficiency but rather an approximation of inefficiency

14. Results - Sector effects

15. Results – Labour effects

16. Results – Error terms etc

17. Efficiency Truncated Normal Efficiency Kernel

18. The efficiency equation

19. Key Points • Consistent conclusions across specifications • The broad business service sector is estimated as just under 90% efficient • The maximum observed efficiency is 97-8% • Certain sectors appear to be less efficient, namely those among computer and related activity and research and development • Increases in the proportion of working proprietors was associated with a decline in efficiency – possibly correlated to sectors • Significant ‘London effect’ - higher efficiency • Differences in skill level does not appear to fully account for the gap between London and other regions • Further work needed to unpick relationship between skill levels, sector and efficiency

20. Policy Implication • Scope to improve BS efficiency levels • The role of working proprietors • Skills development is important, but not sufficient • Support further research into the business service sector at both a national and regional level

21. Next Steps • Further exploration of interrelationships between working proprietors, sectors, skill levels • Adding in 2004-5 data • Adding in variables relating to the condition of regional economies and sector specific variables (output growth?) • Incorporating additional factors, e.g.: • Innovation • International trade