Scotland's productivity gap with international countries: research

Introduction

In 2020, the Enterprise and Skills Strategic Board commissioned NIESR to develop a report investigating Scotland's recent productivity performance and the drivers of productivity. This work adds to the existing evidence base by looking closely at a set of similar benchmark regions in the EU to examine Scotland's relative performance and identify the drivers behind differences in productivity growth.

The report investigates the causes of the underlying productivity gap between Scotland and the comparator regions during the period 2009-2017, which allows for a robust picture of productivity performance during this period. It is important to note, however, that whilst the so-called productivity puzzle has been a long standing issue and the long-term drivers of productivity are complex, the economic landscape has altered dramatically since the time period covered by this report.

In 2009, all regions selected for benchmarking were in the second quartile of GDP/Capita by OECD ranking. By 2017 all comparator regions had seen a significant improvement in their GDP per capita, whereas Scotland's position had stagnated. Overall for the period of 2009 to 2017, productivity performance deteriorated for both Scotland and the UK.

NIESR examined the role played in explaining productivity differences by: capital investment, labour quality, total factor productivity (TFP), innovation and foreign direct investment. TFP is a measure of productive efficiency and is an unobserved residual after accounting for labour productivity gains and gains due to capital accumulation. TFP is broadly interpreted as a measure of technological progress but can include technological, cultural and economic factors. The methodological approach and limitations of the methodology are outlined in the annex.