Micro, small, and medium-sized enterprises (MSMEs) are the backbone of the Welsh economy, comprising over 99% of all businesses in the region1. Despite their significant role, MSMEs in Wales often underperform relative to the UK average in productivity - a key factor in driving economic growth and regional prosperity.
Recent analysis by the McKinsey Global Institute highlights global trends in MSME productivity, offering insights into sectors where smaller firms can outperform their larger counterparts. In the UK, MSMEs achieve 84% of the productivity of large firms, significantly above the average of 60% in other advanced economies. However, this national figure masks regional disparities, with Welsh MSMEs trailing behind2.
This briefing explores opportunities for Welsh MSMEs to close this productivity gap by leveraging existing strengths, such as lower operating costs, sector-specific clusters, and strong institutional support. It identifies priority sectors, strategic challenges, and actionable recommendations for policymakers, business leaders, and advisors.
McKinsey's comparative analysis of MSME productivity across 16 advanced economies reveals the UK as an outlier, with small businesses achieving 84% of large enterprise productivity. This exceeds performance in countries such as the US (76%) and Japan (62%). Welsh MSMEs, however, have struggled to reach this benchmark, reflecting structural barriers such as limited access to finance, skills gaps, and underinvestment in technology requiring bespoke support and advice.
SMEs in the UK contribute over half of value-added services in sectors like construction, professional services, and ICT. This aligns closely with Wales' economic structure and presents clear opportunities for targeted growth. Wales also benefits from distinctive advantages:
These factors, combined with improving infrastructure such as the South Wales Metro, create a foundation for sustainable SME growth.
Computer programming and ICT services represent 17% of potential productivity gains identified by McKinsey. Wales's growing technology hubs and recent investments in digital infrastructure position it well to capitalise on this high-growth sector. Initiatives like Cardiff's FinTech cluster demonstrate the potential for sector-specific strategies to drive innovation and attract inward investment.
With a productivity rate of 73% compared to large firms, professional services are a strength for UK MSMEs. Wales, with its competitive labour market and proximity to key English cities, can expand its share of this high-value sector. Enhanced collaboration between businesses and universities could further develop workforce skills and foster innovation.
While overall UK manufacturing MSME productivity reaches only 64% of large enterprises, subsectors such as fabricated metal products and machinery manufacturing stand out, each contributing 2% of potential productivity gains. Wales' established industrial base and skilled workforce, particularly in regions like Ebbw Vale, provide a solid foundation for growth in these areas.
Closing the productivity gap among Welsh MSMEs could deliver substantial economic benefits. McKinsey estimates that addressing the national SME productivity gap could add £73 billion to UK GDP. For Wales, with its higher proportion of SMEs, the regional impact could be transformative.
Addressing skills shortages is essential to improve productivity, particularly in:
Wales benefits from the Development Bank of Wales, which provides patient capital and targeted funding. To maximise this advantage, efforts should focus on:
Technology is a critical enabler of productivity. Welsh MSMEs should prioritise:
Welsh MSMEs have a unique opportunity to drive regional economic growth by closing the productivity gap. With strong institutional support, competitive operating costs, and emerging sector clusters, the foundations for success are already in place. However, realising this potential will require coordinated efforts from businesses, advisors, and policymakers to address key challenges in skills, finance, and technology. By focusing on these areas, Wales can unlock the full economic potential of its SME sector and create a more prosperous future.
This briefing note draws extensively on the findings of the McKinsey Global Institute report, A Microscope on Small Businesses: The Productivity Opportunity by Country (2024). The report provides a comparative analysis of MSME productivity across 16 advanced economies.
1 Welsh Government: Size Analysis of Businesses: 2022
2 ONS: Subregional productivity in the UK: June 2023