We like to hate big businesses but they get one thing right

In the US it was household names such as Apple, Amazon and United Airlines. More than three-quarters of productivity growth could be traced back to just 5 per cent of the American businesses they looked at.

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These were businesses that made bold moves and were able to dramatically grow the number of customers they were serving and amount of money they were bringing in – without footing as much of a jump in the costs they were paying.

In doing so, they triggered chain reactions – prodding other businesses to respond and lift their game. The growth of digital firms and discounters in the UK retail sector, for example, meant not only did those businesses bring productivity gains, they also pushed other businesses, such as Tesco, to start boosting its online presence.

Big businesses often get big precisely because they’ve found ways to be the most productive.

Now, looking at Australian big businesses, though, you might be scratching your head. Have Qantas and Virgin really been helping productivity growth to take off? And how innovative have Woolworths and Coles been in improving our weekly grocery shopping?

While the McKinsey researchers didn’t look at Australia, we know larger firms do tend to be more productive here as well.

But there are a few important points to note. First, we know Australian industries tend to be more dominated by a handful of firms than industries in the US or UK.

Coles and Woolworths, for example, make up about three-quarters of the supermarket sector, while Qantas and Virgin control about 70 per cent of the aviation industry.

While that’s not totally a bad thing, it gives these companies disproportionate power and can lead to weaker competition, which we know is key to keeping companies on their toes and looking for ways to improve.

Big firms lead a lot of productivity gains but we also have to remember many of the behemoths started off as small firms themselves. In order to kick-start the productivity growth of our existing big businesses, and also usher in young, innovative and groundbreaking firms, we need to do frequent health checks on the level of competition in our economy.

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We also know that labour mobility – the ability for workers to move around to better-suited jobs – has been weaker in Australia than it has been in the US.

As former economics professor and Assistant Minister for Productivity Dr Andrew Leigh points out, not all firms are equally productive, and one way of getting productivity growth is by having the most productive firms grow faster than those that are lagging.

In the US, for example, half of the productivity growth identified in McKinsey’s research came from the most productive firms expanding and unproductive firms closing or rethinking their business.

How do we make this happen more in Australia? By making sure it’s easy for people to move to the jobs that best match their skills, and to companies that are best at doing what they do.

That’s a big part of the reason, Leigh says, that the government this year promised to get rid of non-compete clauses – the fine print in many job contracts that make it difficult or impossible to move jobs – for low- and middle-income earners.

Knocking down hurdles for people to move to the jobs where their time and skills are most effectively used is key to driving productivity growth.

And it’s not just about sneaky clauses in job contracts. Another issue – one that stares us right in the face, most days – is housing affordability and the incentives in place for us to stay put, even if our home isn’t the best fit for us.

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Our major cities are where many of our best job opportunities are. But with a continued surge in residential property prices across most of our major cities – and less in the way of wage growth – it has become increasingly difficult for people to move to the jobs that are the best fit for them.

That means businesses are missing out on some of their best talent, and people’s skills are not being used in the most productive way they could.

Stamp duty – a tax paid when purchasing a property – also makes this problem worse because it discourages people from moving, even if they have outgrown a place, want to downsize or move closer to their work. It should instead be replaced with a broad-based tax on the value of the land.

While we like to hate big businesses, they do get some things right, especially when it comes to productivity growth. The big challenge is keeping our heavyweights in boot camp by making sure they don’t muscle out newer, nimbler firms.

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As I blearily yanked myself out of bed and to the airport this morning, I pondered the productivity costs of our aviation industry. Probably profound, I concluded between yawns. A new, more reliable airline – and one that texts me at reasonable hours – would be a most welcome competitor.

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