Small businesses could see big gains by boosting productivity

National Small Business Week is just around the corner. And some new research from the McKinsey Global Institute looks to quantify just how much the economy stands to gain if small businesses get more done in a given time period.

Productivity has been lagging across U.S. companies for the past 15 years or so. But this is especially true when it comes to small- and medium-sized businesses, according to McKinsey. It finds increasing productivity among these smaller businesses — so that it’s closer to the kind of output we see at large businesses — represents a value-add to the economy that’s equal to about 5% of GDP.

Anu Madgavkar is partner at the McKinsey Global Institute and one of the co-authors of this new report, “A microscope on small businesses.” She spoke with “Marketplace Morning Report” host David Brancaccio, and the following is an edited transcript of their conversation.

David Brancaccio: What are you finding out about smaller businesses?

Anu Madgavkar: Well, small businesses are, really, the backbone of the economy in so many ways. Ninety percent of all businesses tend to be small. But in terms of productivity, they do lag. In the U.S., for example, they are about only half as productive as larger companies that do similar kinds of work. The productivity gap is partly because of the technology gap. Indeed, in technologies like artificial intelligence, for example, small businesses are only about half as likely to adopt these as large companies are. And there is also a gap in terms of just talent and human capital. It’s not that small businesses don’t attract talented people, but their ability to invest in things like training or performance management is much less than a larger company.

Brancaccio: Smaller businesses hearing this, seeing that there’s money left on the table, where do they get started in increasing productivity?

Madgavkar: We find that, in some ways, the answer lies in working with larger companies in your sector, and then working also with other small businesses to boost a sort of collective efficiency or a collective scale benefit that can come. Because the fortunes of all companies in a particular sector or type of business are very closely intertwined. They do work together. And partnerships, collaborations, ways to work with other companies and gain technology, or gain training, or gain the ability just to partner and sell to them — that can actually boost small business productivity a lot.

Brancaccio: What I hear you saying is, let’s say there’s a smaller business saying to itself, “I mean, what am I going to do about all this artificial intelligence stuff?” One answer to that might be get together with other smaller businesses and see if you can pool your resources to figure out answers.

Madgavkar: That’s absolutely correct. And the other thing is also to work with larger companies in the supply chain to figure out the answers. And we see examples of that. If you think about Japan’s auto sector, for example, the largest manufacturers work very collaboratively with smaller companies to transfer those technologies or build those skills. It’s not just in technology and AI, but all forms of partnering to gain access to markets, or just learn more organized production methods that can really boost small business productivity.