It’s easy to see the good economic news in North Carolina: above-average growth and below-average unemployment, strong inward investment, lots of new residents and a healthy business climate. But there are shadows, too. Not only is our median household income lower than the national average, but our poverty rate is higher; since 2008, inequality has ticked up too.
To put it simply, when it comes to economic growth North Carolina could do better. The key for staying competitive and raising living standards over the long-term is boosting productivity — creating jobs that produce more output with the same human labor. These jobs tend to be good jobs, meaning those with good pay, working conditions and opportunities for advancement. And in North Carolina, productivity remains about 10 percent below the national average.*
When it comes to such issues, attention is usually directed at government and large businesses. But improving productivity cannot be achieved in North Carolina without involving micro, small and medium-sized businesses (MSMEs). These account for almost 60 percent of the state’s jobs, about 40 percent of business receipts and 23 percent of exports. MSMEs are too important to be overlooked — yet they are.
The opportunity to lift MSME productivity is high. In North Carolina, MSME productivity, measured in business receipts per worker, adjusted for regional price parity, is only 50 percent that of large companies (about the same percentage as in the United States). If MSMEs could raise that figure, perhaps to the 60-percent-plus level found in Germany or the UK, they could not only help themselves, but also help make our economy more inclusive.
MSMEs do not have to go it alone. When the McKinsey Global Institute looked at 68 economic sectors, it found that productivity in large and small businesses went hand in hand in 45 of them. One long-term study of 26 European countries found that for every 1 percentage-point increase in MSME productivity, there was a 0.12 percent increase in large-company productivity. It appears that when they work together, large and small companies benefit each other.
Consider manufacturing, where North Carolina has a strong position — manufacturing accounts for 12 percent of state employment, compared to less than 10 percent in the United States. In this sector, productivity levels of MSMEs and large companies are highly correlated. We estimate that about a third of these North Carlina jobs are in MSMEs. Manufacturing jobs tend to pay well above average, and so can be an important avenue to economically inclusive growth through their economy wide effects.
Looking specifically at pharmaceutical manufacturing, North Carolina is home to a number of large companies, particularly in the Research Triangle. These often outsource particular operations to MSMEs, such as specialized production and clinical trials and services that offer quality remediation and specialized engineering skills. It’s a good story; it could be a great one with shared effort on best practices, land use and talent attraction.
The U.S. software industry provides a good analogy; MSMEs in this sector are 1.7 times as productive as their global peers, and earn more patents per employee than large companies. But the latter provide capital, market access and branding, as well as being customers of MSME services. Small and large companies are intertwined in a way that benefits both.
Advanced industries such as auto and aerospace manufacturing, where North Carolina is home to more than 280 companies, are additional high-potential sectors. Large firms already routinely engage with small ones, in the form of subcontracting, joint ventures, strategic partnerships and participation in government programs. Such efforts present MSMEs with a range of opportunities, including market expansion, access to new technologies, and finding a place in supply chain support. Yet, they face challenges in seizing these opportunities, particularly in regard to talent and lack of IT standardization.
To address these issues, MSMEs and large companies can collaborate on training to create a deeper pool of talent to support and grow high-potential industries and meet their urgent need for engineers, technicians and software developers. Similarly, standardizing IT systems can smooth production across the supply chain. By improving how big and small companies work together, the end result could be to boost productivity for the whole sector.
Finally, consider retail and wholesale trade and hospitality, which account for about a third of North Carolina’s employment in the business sector and tend to have lower wages, since they are on average only three-fourths as productive as the rest of the economy in the United States.* Lifting productivity in these sectors is therefore critical for economic inclusion. Many these businesses in North Carolina are MSMEs, including specialty shops and locally sourced restaurants that support other North Carolina entrepreneurs. Retail and hospitality MSMEs are notably less productive than large ones, in part because they lack economies of scale. By networking, they can create scale, through shared infrastructure such as preparation areas for grocers or joint technology platforms. They can also collaborate with large retailers, to their mutual benefit. MSMEs may be able to facilitate access to in-demand local goods and services, for example, while big companies integrate the smaller ones into supply chains.
There is of course also a role for the public sector, in the form of providing the necessary infrastructure and education, as well as access to credit and other essentials. Government can also foster inclusion by ensuring that women- and minority-owned MSMEs, who are under-represented compared to their share of the workforce both in North Carolina and the U.S., get a better shot at winning new business.
There is there no single road to success. Different sectors, even specific companies, will have to find their own paths. Even so, the general principle is clear: more productive MSMEs would help North Carolina foster the sustainable and inclusive economy it wants to be. And it would be good for business, too.
This article originally appeared in Charlotte Business Journal.