Economic mission: SME productivity review

The aim of this short-term review was to identify actionable steps the Welsh Government could take in the short to medium term to support SMEs to enhance their productivity levels over the longer term. 

To achieve this, the review convened a group of external expertise and practitioners with direct experience of working with SMEs. Their objective was to develop practical, evidence-based recommendations and collaborate with the Welsh Government to explore feasible solutions to improve productivity among SMEs in Wales. 

The group focused on testing several key hypotheses including:

• whether SMEs in Wales face challenges in accessing finance
• whether SMEs demonstrate lower levels of innovation compared to larger firms

Whether addressing these barriers, particularly by boosting innovation and improving workforce skills, could be critical to closing the productivity gap in Wales.

The findings and recommendations from this review are intended to inform future policy development and targeted support for SMEs, with the overarching goal of enhancing economic resilience and inclusive growth across Wales.

While the review primarily concentrated on drivers of productivity, it also acknowledges the influence of external factors such as regional infrastructure, regulatory frameworks and market conditions which all play role in shaping the productivity landscape in Wales. The review focused on themes seven specific themes, which were agreed as firm-level drivers of productivity including: 

• business support
• access to finance/investment
• digital and technologies
• skills
• innovation
• exporting
• health and the workplace

The group was jointly chaired by Carys Roberts and Janet Owen-Jones from Welsh Government. Membership included representatives from a range of organisations with specific expertise in SME productivity. These included:

• Ben Cottam, Head of Wales, Federation of Small Businesses
• Peter Dunstan, Deputy Pro-Vice Chancellor for Entrepreneurship, Swansea University
• Professor Melanie Jones, Cardiff Business School, Cardiff University and Academic Lead for the Wales Productivity Forum
• Nick Pearce, Co-founder, Object Matrix
• Professor Stephen Roper, Director of Enterprise Research Centre, Warwick Business School
• Mark Turner, Unite the Union
• Jane Wallace-Jones, Founder and Managing Director – Something Different Wholesale Ltd
• Mark Williams, Founder and CEO, Limb-Art Ltd

The Welsh Government recognises that to make progress on its Economic Mission and the National Priority to ‘invest for growth’ it must work in partnership with others. By focusing on Wales’s comparative strengths, the aim is to boost investment and growth that promotes fair work and long-term planning. 

Currently, a number of relevant cross-sector policies and strategies in Wales are in place which are closely aligned with the Economic Mission. These include the Innovation Strategy, International Trade Policy, Digital Strategy, Export Action Plan, Plan for Employability and Skills and the Young Person’s Guarantee. Together, these frameworks collectively support the Mission’s overarching goal of improving productivity and fostering inclusive economic growth. 

Improving productivity rates is central to the Economic Mission, but also with respect to UK Government efforts to achieve economic growth. The recently published UK Modern Industrial Strategy offers a range of programmes for SMEs across eight high-growth sectors. Additionally, the UK Government’s trade strategy and Plan for SMEs outlines a several  funding initiatives and support programmes aimed at SMEs, which will further complement the support provided by the Welsh Government provision.

Business productivity refers to the efficiency with which firms use inputs to produce their outputs. Inputs for a firm may include capital, employees, equipment or land, while outputs consists of goods and/or services they provide. An increase in the ratio of outputs to inputs is typically considered an improvement in productivity. An increase in productivity does not always mean a business will hire more employees for every business, nor does it automatically lead to lower employment across the economy.

Improving productivity enables firms to increase competitiveness, profitability, as well as support higher employee compensation for their employees over time, which can contribute to raising material living standards sustainably over the long-term.

According to recent data, Wales demonstrates the lowest productivity levels among all the UK regions and is significantly below the UK average. While the size of this productivity gap, varies by region, it is evident across all non-manufacturing production and much of the service sector (Wales’ Productivity Challenge: A Focus on the Future | The Productivity Institute).

SMEs account for approximately 62.3% of employment in Wales, higher than the UK average of 60.3%.  Supporting SMEs to raise their productivity levels is therefore crucial to improve economy-wide productivity performance.  Productivity is crucial for SMEs as it enables them improve efficiency, strengthen competitive advantage and increase profits.

Productivity can also have tangible impacts on employee and customer satisfaction, alongside improving sustainability and adaptability as well as enabling businesses to respond more swiftly to market changes and customer demands.  In turn, once achieved, improved productivity enables more investment in innovation, research, and development, fostering long-term growth potential.

However, it is acknowledged it is challenging for many SMEs to invest the necessary resources to improve productivity. A significant proportion of SMEs are ‘microbusinesses’ who often need to prioritise daily operations and have limited capacity for strategic planning and innovation.

The Welsh Government offers a robust ecosystem of support for SMEs through a range of interventions and services designed for different stages of business growth and productivity improvement. Services include: 

• The Welsh Government Business Wales Service aims to improve productivity and stimulate entrepreneurship, business development and growth to support the creation of good quality employment in an inclusive and sustainable way. The service provides digital resource and impartial business advice on accessing new markets, financial management, employment and HR, and digital skills through workshops, events, specialist advisory support, mentoring and relationship management
• The Business Wales Accelerated Growth programme provides tailored business support, relationship management and specialist coaching for selected businesses that can demonstrate the potential to achieve high growth and associated productivity gain. The support focusses on opportunities to export; innovate; improve productivity; increase employment; and facilitates access to finance.
• The Development Bank of Wales helps Welsh businesses get the finance they need to strengthen and grow and provides loans from £1k to £10m as well as mezzanine, and equity funding. They also help businesses find the right finance partner to leverage in private finance with its own gap finance when necessary.
• The Export Support Service provides hands-on assistance with international trade. This includes market research, trade missions, and access to International Trade Advisers who guide businesses through the complexities of exporting.  
• The Innovation Service, through programmes like SMART Flexible Innovation Support, connects SMEs with funding, technical expertise, and R&D partnerships to develop new products and services.
• The Welsh Government offers skills support to SMEs through a number of programmes including the Flexible Skills Programme, Personal Learning Accounts and Green Personal Learning
• The Healthy Working Wales programme provides comprehensive guidance and resources to employers on health-related matters alongside practical tools, resources and learning opportunities for employers to assess and improve workplace health.   

The following themes were examined by the group. This involved a review of the supporting evidence and a discussion on the issues, possible solutions and recommendations.

Business support services offer SMEs tailored access to resources, training and networking, expert advice and market insights. These services can crucially draw upon wider resources for SMEs to access support. The Welsh Government Business Wales Service provides a ‘one stop shop’ which is accessible to all SMEs. However, there is potential to refine its focus on productivity improvement.

Improvements should be made to improve the customer journey.  This could include better more tailored communication to encourage SMEs to take steps to improve productivity and tailored pathways which enable them access to the most suitable support for them. It was also noted there sometimes appeared to be overlap between business services provided by the Welsh Government and those provided by the UK Government. 

Focusing on high-potential businesses and supporting technological solutions may further increase productivity. Face to face support, and relationship management is highly valued by SMEs and this should be considered when reshaping/evolving services.

It was also highlighted that there is a need to challenge and address perceptions from both SME leaders and their employees that improved productivity equates to job cuts, particularly in relation to investment in technology.  Communicating the potential benefits of improved productivity levels to SMEs and their employees should be explored when communicating the aim of advice and services.

• Recommendation 1: The Welsh Government should consult external experts to help businesses measure productivity and provide relevant advice, guidance, and best practices.  They should also consider developing a business toolkit with practical resources to support long-term growth, promote available business support and finance options.
• Recommendation 2: The Welsh Government should review and monitor the marketing of all Welsh Government Business Support Services with a view to expand their reach.  They should also share more informal case studies on SMEs who have accessed the services and secured productivity gains.
• Recommendation 3: Welsh Government should work closely with the UK Government to share good practice, avoid duplication of services and to agree consistent messaging to businesses wherever possible.

Accessing finance and investment is often an essential process for SME leaders seeking to expand their business and invest in productivity improvements. There is a very broad range of finance options available to business in Wales (and across the UK). However, not all businesses are successful in accessing those options. 

While the UK banking system remains strong and resilient, there are weaknesses in non-bank finance, such as private equity, venture capital, and alternative lenders, that could amplify shocks and restrict access to finance for some businesses (Financial Stability Report - July 2025 | Bank of England).  It is noted that tightening credit conditions and reduced risk appetite among lenders may disproportionately affect SMEs and startups.

The Wales SME Access to Finance Report presents findings that show 1 in 5 SMEs report difficulties in accessing finance. Among those who anticipated that they would need additional finance over the next year, 61% felt confident in their ability to secure it. 

The most common reported barriers to accessing finance was a lack of confidence in obtaining or repaying finance (along with time/complexity of applications, poor perception of relationship with finance providers and lack of awareness of finance options/support).  This suggests that when accessing finance, SMEs could benefit from a better understanding about the potential impact of any proposed investment on their productivity/profitability and factors that may affect this.

• Recommendation 4: The Welsh Government should work with the Development Bank of Wales and external organisations to deepen their collective understanding of the impact of investment activity on productivity, identify influencing factors and support SMEs in addressing them. Productivity impact metrics should be further developed and monitored with a view to potentially include in future headline KPIs. 

There is growing agreement that the global AI sector will significantly affect economies worldwide, impacting both public and private sector and at all levels. Therefore, it is vitally important that SMEs across all sectors consider the potential opportunities and impact of AI and take steps to maximise their economic resilience and improving competitiveness. AI and digital technologies can deliver efficiencies and cost savings resulting in improved outcomes, if harnessed and effectively utilised. 

To improve general awareness of digital support services and increase uptake, there is a need to better understand the advisory landscape in Wales and improve service coordination.  This will enable better signposting, greater awareness of the range of digital support services available and an increase in uptake. It is also noted impartial, in-person guidance is also highly valued by SMEs seeking support.

• Recommendation 5: Welsh Government to consider launching a broad awareness campaign explaining the benefits of SMEs adopting new technologies, such as accessing new markets, digital solutions for data management and improving productivity. It should also cover a broad range of new technologies including in the areas of AI, cybersecurity and cloud computing.
• Recommendation 6: The Welsh Government should provide an enhanced digital support offer, including a signposting service to help businesses to access existing digital advisory services and support available from the wider ecosystem. 

Linking skills development to productivity improvements can enable SMEs to create a more efficient workforce, ultimately driving better business outcomes. Skills are crucial to sustain growth and competitiveness. However, we know that areas such as skills and innovation can be reduced when budgets are stretched. 

Agile education and skills programmes aligned with economic needs are key in enhancing productivity levels for SMEs. The Welsh Government’s Plan for Employability and Skills and the Young Person’s Guarantee comprise of a number of  initiatives and skills programmes that collectively support the Mission’s overarching goal of improving productivity and inclusive economic growth.  However, although specific figures are not available, it is believed that awareness of the Welsh Government skills programmes is low among SMEs and their accessibility could be improved. 

Medr, the Commission for Tertiary Education and Research, could potentially play a broader role in identifying and addressing skills gaps and promoting a stronger integration of Higher Education into the wider skills ecosystem, especially through Continuous Professional Development courses, micro-credentials, and leadership training.  It was also noted that SMEs should be involved in the review of apprenticeship frameworks and encouraged to help to shape solutions.

• Recommendation 7: Welsh Government should review skills support programmes with a view to better address employer and SME needs. This should include exploring how to; increase awareness of skills support available, improve accessibility, simplify application processes as well maximise the flexibility of schemes.
• Recommendation 8: Medr to consider how they can effectively engage with SMEs on the development and delivery of skills support, including the apprenticeships framework.

The importance of exports and exposure to international markets often leads to an improvement in an SME’s productivity.  The Welsh Government export service is highly valued by businesses who have used the service and enabled them to reach new markets. The range of support on offer are designed to inspire exporters, build capability, find customers and reach markets.  Businesses often access multiple parts of the support on offer before securing export deals. 

The service is available to businesses of all sizes, with established companies in trade mission, helping to attract new SME exporters. However, if services could be expanded and made more accessible, more companies could potentially benefit from the service, particularly those who haven’t exported before.  It was noted, there is likely to be demand from businesses located in Freeports, and plans are already in place to link these businesses with the export service. 

• Recommendation 9: The Welsh Government to continue to work with HMRC and ONS with a view to obtain a granular understanding of companies who export in Wales.
• Recommendation 10: The Welsh Government to be more flexible with respect to the timings involved with the application processes for funding to support exhibits at trade shows and overseas visits.
• Recommendation 11: The Welsh Government to review the marketing plan for all Business Support Services to broaden the reach and share  more informal case studies on SMEs who have accessed the service and secured productivity gains. 

Supporting SMEs to invest in Research and Development (R&D) including innovation is an important way to support them take steps to improve their productivity levels.  While the Welsh Government’s SMART Flexible innovation support provides a high-quality service for those businesses who have used it, it is recognised more could be done to increase its reach and impact.

There are already plans underway to target companies who are most likely to benefit from the service.  Collaboration specialists will work with academic institutions to strengthen links with private sector ‘tenants’ and the service.

To maximise the impact of those already using the service, it is recognised more could be done to support successful applications to funding streams such as Innovate UK.  Positive action and discussions are ongoing with respect to implementing the Memorandum of Understanding between Innovate UK and the Welsh Government to support joint working and increase the number of successful applications its funding.

It is also recognised there is a need to improve the general understanding among SME leaders about the link between innovation and its role in improving productivity alongside greater efforts to make the innovation scheme more accessible and easier to navigate.  However, it is acknowledged, to secure the long term benefits which innovation can bring, businesses often access multiple support strands over a period of time which requires a significant amount of time and commitment and not every business will be able to do this.

• Recommendation 12: Welsh Government to assess the feasibility of achieving a more detailed understanding regarding the types of businesses that utilised the innovation service and determine their success rates in securing Innovate UK funding.

There are significant health-related challenges impacting the workplace in Wales, these include increased prevalence of mental health issues and long term health conditions as well as high sickness absence rates. This is in the context of high levels of economic inactivity, particularly in areas with higher levels of deprivation.   

To help tackle these challenges, there are evidence-based measures that businesses can put in place to help enhance workplace health which in turn has positive impacts on productivity and staff retention.   

However, it is acknowledged SMEs often struggle to implement these measure due to limited resources. The Healthy Working Wales service is considered valuable by those businesses that use it, but there needs to be greater awareness of the service among SMEs and greater efforts to highlight the link between productivity and workplace health.

• Recommendation 13: The Healthy Working Wales programme should promote their service to SMEs by clearly communicating the link between workplace health and productivity.  This could be supported by encouraging the sharing of best practice between businesses as well as systematically evaluating the impact of health interventions to build evidence and confidence. 

The Welsh Government would like to thank the group members for their participation in this Short-Term Review on SME Productivity and for their contribution of knowledge and expertise in this area.  The findings and recommendations provide useful intelligence 

It is noted the findings show SMEs would benefit from additional support to help them measure productivity and understand the connections between taking particular actions (whether this be exploring options to innovate/export or implementing things like digital solutions or workplace health initiatives) and improving productivity. 

The findings also clearly highlight the need for services to promote productivity outcomes of interventions though better messaging and sharing the benefits of participating through ‘storytelling’, while also to understand the barriers SMEs face.  There is also a need to explore how available data can be used to target services more effectively and increase their impact.

The Welsh Government’s will now consider the findings and recommendations carefully and consider what action is required in the short to medium term to inform how the Welsh Government could adapt existing services to better improve SMEs their productivity levels. 

It is noted that this review closely aligns with and the other short-term reviews on Green Skills and Artificial Intelligence and these linkages will also be considering how to implement any future action.