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Unlocking Australia’s Growth: The Productivity Power of Small Business

Small business productivity in Australia is more than a phrase. It is a pathway toward renewed economic resilience, shared prosperity, and stronger local communities. With nearly 2.6 million businesses in Australia, 97 per cent of which are small enterprises employing fewer than 20 people, optimising their productivity isn’t just desirable, it’s indispensable (Reserve Bank of Australia, “Financing SME Innovation in Australia – Challenges and Opportunities”; RBA speech).

The Productivity Gap: A Hidden Cost

Globally, micro, small and medium-sized enterprises (MSMEs) generate roughly half the added business value and two-thirds of employment in advanced economies like Australia. Yet, these businesses typically operate at only half the productivity of large companies. Closing that productivity gap represents an opportunity worth approximately 5 per cent of GDP for advanced economies.

For Australia, that is a significant economic prize. Imagine the boost to national income, household wellbeing and regional development.

Unearthing the Causes: What Holds Productivity Back?

The productivity gap within Australia has multiple roots:

  • Regulatory burdens: Complex, broad-brush regulation slows innovation, disempowers SMEs, and chills the entrepreneurial spirit, especially in areas like planning, safety, digital governance and red tape.
  • Limited access to R&D support: SMEs have increased their R&D investment by 84 per cent between 2012 and 2022, but still receive fewer benefits from incentives. Though they make up most of R&D Tax Incentive registrations, they capture under half the actual R&D funding.
  • Weak competition: Australia’s dominant large firms, especially before COVID-19, impeded competition. That limited incentives to innovate and invest in productivity cost Australians potentially up to $3,000 per person in reduced living standards.
  • Tight financing conditions: Many SMEs still struggle to obtain external funding, particularly for innovation projects, despite their growing importance in driving national R&D efforts.

Innovation and SMEs: Rising to the Challenge

Despite obstacles, Australian small businesses are stepping up:

  • Innovation spending up: SMEs now spend about 25 per cent more on R&D than large firms, a historic shift. In addition, a growing percentage derives significant revenue from innovations: some make more than half of their income directly from innovative products and services.
  • RBA’s outlook: The Reserve Bank’s Assistant Governor for the financial system, Brad Jones, highlighted that small businesses serve as engines of innovation and are increasingly taking over from larger firms in early-stage R&D and IP development.

Global Insights, Local Solutions

McKinsey’s research reveals how huge MSMEs worldwide benefit from collaborating with other firms. Small businesses narrow their productivity gap by up to 40 per cent in sectors where such collaboration occurs. Examples include automotive suppliers in Japan and small software developers in clusters that benefit from talented workforces and capital ecosystems.

Such collaboration could thrive in Australia too, if facilitated effectively.

Tailored Actions to Boost Small Business Productivity in Australia

Here are seven strategic directions to help small businesses’ productivity in our context:

  1. Promote SME-Large Firm Collaboration
    Establish supplier development programmes, innovation clusters and mentoring networks. These connections allow SMEs to learn from stronger systems and access talent, while larger firms gain flexibility and innovation.
  2. Reform Regulations for Productivity
    Implement targeted reforms such as a 12-month moratorium on non-critical regulation, appoint a Minister for Better Regulation, modernise reporting regimes, and introduce digital governance frameworks.
  3. Improve Access to R&D Funding
    Simplify R&D tax incentives, increase caps for SMEs, and expand direct grant schemes. Ensure that a greater share of innovation funding reaches small businesses, not just big ones.
  4. Open Up Finance for Innovation
    Expand low-cost financing vehicles like the ABGF, extend asset write-offs, and enhance venture-type support. Use government co-investment where appropriate to crowd in funding.
  5. Prioritise SME Representation in National Policy
    Economic decision forums include voices representing small businesses, such as the Small Business Ombudsman. As highlighted, they are vital contributors to the national economy yet risk being overlooked.
  6. Enhance Competition
    Review structures in key sectors to prevent dominance by a few firms. Encourage fair competition in retail, professional services, and beyond. This will help spark productivity as firms vie for efficiency and innovation.
  7. Leverage Economic Rounds to Champion SMEs
    Use upcoming government roundtables, such as the Productivity Commission’s five-pillar review and the national economic roundtable, to champion tailored reforms and ground-level input on SME needs.

A Vision for the Future

Imagine a future where small business productivity in Australia becomes a headline of strength rather than a disparity statistic, where every local café, workshop, digital studio and regional service provider has access to the same modern tools, funding, and streamlined regulations that allow them to thrive. That future delivers better wages, lower costs, innovation across regions, and an economy that hums with inclusivity.

And the best part? The data shows it’s within reach.

 

Are you a small business leader eager to boost productivity? SBAAS offers tailored consultancy that unlocks these gains. Contact us today to arrange a strategic productivity assessment. Visit our About Us page to discover how SBAAS supports Australian SMEs in realising their growth potential.

Sources

Public Accountant. Bridging Australia’s SME productivity gap. https://publicaccountant.com.au/features/shrinking-sme-productivity-gap/

Eric Allgood is the Managing Director of SBAAS and brings over two decades of experience in corporate guidance, with a focus on governance and risk, crisis management, industrial relations, and sustainability.

He founded SBAAS in 2019 to extend his corporate strategies to small businesses, quickly becoming a vital support. His background in IR, governance and risk management, combined with his crisis management skills, has enabled businesses to navigate challenges effectively.

Eric’s commitment to sustainability shapes his approach to fostering inclusive and ethical practices within organisations. His strategic acumen and dedication to sustainable growth have positioned SBAAS as a leader in supporting small businesses through integrity and resilience.

Qualifications:

  • Master of Business Law
  • MBA (USA)
  • Graduate Certificate of Business Administration
  • Graduate Certificate of Training and Development
  • Diploma of Psychology (University of Warwickshire)
  • Bachelor of Applied Management

Memberships:

  • Small Business Association of Australia –
    International Think Tank Member and Sponsor
  • Australian Institute of Company Directors – MAICD
  • Institute of Community Directors Australia – ICDA
  • Australian Human Resource Institute – CAHRI
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