Small businesses can drive up Australian productivity. But they need support

The prosperity of future generations of Australians is at risk as our economy faces a persistent decline in productivity growth.

This is according to the Productivity Commission’s latest five-year productivity enquiry report. The 1000-page document, entitled ‘Advancing Prosperity’, warns that Australia faces a “productivity predicament” which arises from an “entrenched slowdown in the rate of productivity growth.”

What is productivity growth? In a nutshell: it is the process by which people get more (greater profits, higher wages) from less (less effort, fewer hours at work, fewer resources) over time. It occurs because of the human tendency to try to find more efficient ways of doing difficult things. This results in innovation, technological advancement, greater knowledge, and improved production processes. 

Since the Federation of Australia in 1901, strong productivity growth has resulted in today’s full-time employees working 14 hours less, on average, while earning six times more in real terms. We don’t even have to go back to 1901 to make a comparison. For each of the decades between 1960–70 and 1970–80, and again between 1990–2000, productivity growth was above 2.2%. Between 2010–20, however, it fell to just 1.1%, down from 1.4% the previous decade. Productivity growth is on a steady downward trajectory. 

What is to be done? The Productivity Commission’s role is to provide the Government with research and advice on what policies will best enable greater welfare for current and future generations of Australians. 

While the Productivity Commission’s latest report offers recommendations for policies that can enable greater welfare for current and future generations of Australians, small businesses are often forgotten in the conversation about productivity growth. 

Yet, Australia’s economy was built on small businesses. From cattle farms to “mum and dad” shops, from trades to hotels, small enterprises have been an essential part of the Australian economy since the country’s early days. They have traditionally been a vital source of employment and economic growth and have helped develop the entrepreneurial spirit that led to the invention of the refrigerator, the black box flight recorder, the pacemaker, and the ultrasound machine.

But, you might say, the economy of tomorrow will surely look different from that of the past. We are now in the age of AI and electric cars, not calculators and diesel tractors. There are, however, good reasons to consider that our future economy will nevertheless be driven by the same “engine room”: small businesses. 

Small businesses, by their nature, offer certain economic advantages over large corporations. They foster innovation, increase efficiency, provide healthy competition, and boost local economies in a way that large companies can’t. The most important of these advantages, from a productivity growth perspective, is innovation. 

Small businesses tend to foster innovation for several reasons. Their size means they are nimble and can adapt to changes in the market quickly. They can pivot their business strategies in response to market changes and can implement new ideas quickly. Small businesses have fewer layers of management and less bureaucracy, which means that decision-making is often faster. This allows for more innovative ideas to be implemented without getting bogged down in bureaucracy.

Most of society’s entrepreneurs begin their business journeys by founding a small company, with which they are willing to take risks and try new things. This mindset encourages innovation and creativity. It also moves them “closer” to their customers, allowing a better understanding of customer needs and preferences. Customer focus can lead to the development of innovative products and services that more efficiently meet the needs of the market. 

Small businesses, characteristically, have limited resources. When resources are scarce, businesses are forced to be innovative, to find better ways to accomplish their commercial goals, more efficiently. Well-resourced, large corporations simply don’t have the same efficiency imperative. 

However, small businesses in Australia face several challenges that hinder their growth and success, such as high costs of compliance and lack of access to appropriate financing options. Many Aussie SMEs struggle particularly with working capital because of long payment terms and difficulties in securing traditional bank loans. This creates a financing gap that stifles growth and sometimes leads to SMEs’ failure. 

Simply put, businesses struggle to buy stock, pay staff, and manage other essential expenses while enduring extended payment delays, ultimately hindering their operational continuity and growth. These challenges can be mitigated through financing solutions that are tailored to complement the business cycle (in contrast to conventional, one-time bank loans).

But Australia’s productivity predicament will not be solved by innovative financing alone. Policymakers, financial stakeholders, customers, and all other actors involved in the SME business cycle need to work together to create an environment that fosters innovation, encourages risk-taking, and supports the growth of SMEs. 

An urgent rethink at every level is needed if we are to solve Australia’s productivity predicament. Policy and regulation should help (not hinder) fostering innovation, increasing efficiency, and driving productivity growth. The Government — and indeed every stakeholder in financial markets — needs to help restore small businesses to their rightful place as the engine room of the Australian economy, driven by a burning desire to create “wealth for toil” and, preferably, far less toil over time. 

Wayne Morris is CEO at Fifo Capital, a business finance provider that offers SMEs sophisticated financial solutions that support the long-term control of their finances.