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The steps neededto digitise the UK’sSMEs and restoreeconomic growth September 2024 Contents Executive Summary In this paper, techUK set out the opportunity for the Government to tackle keyeconomic challenges by incentivising the digitisation of UK SMEs. As a keylever for growth, we call for any future Industrial Strategy to have digitisation atthe heart of this. This paper marks a response to the previous UK Government’s lack of a DigitalAdoption Strategy and the specific failure of Help to Grow: Digital. This wasa missed opportunity to seize the role of digital technology in supporting thegrowth and productivity of UK SMEs. The new Government must act to better support digital adoption among SMEs(particularly micro and small businesses), unlocking untapped productivity andkeeping ahead in the race to leverage technologies like AI for businesses. Thisa question of international competitiveness, with the UK already falling behindcompetitors on digitisation. Alongside this, as AI technologies begin to comeonstream, low adoption rates for UK SMEs are a particular risk. AI will first bedeployed through updates to currently in use business software, meaning if UKcompanies are behind on basic digital adoption, they will soon be behind on AIadoption as well. We recognise that the UK is home to some of the most innovative firms inthe world and a natural place for businesses to adopt digital and emergingtechnologies. Indeed, we are currently ranked fourth on the Global InnovationIndex 20231and highest ranking G7/G20 economy.2As a key growth sector,the tech sector will deliver future enterprise, innovation, and sustainability. Butharnessing the tools that the tech sector provides will only be possible withdigitisation across all businesses, including SMEs. SMEs digitisation is a huge growth opportunity for the UK. Analysis hasshown that if UK SMEs were to better utilise digital adoption, this could add anestimated £232 billion to the economy,3while at the same time improving theUK’s resilience against economic shocks. The OBR has also predicted that the widespread use of AI technology could support raising productivity by half apercentage point by 2028/29. In turn, the Government could expect to have anextra £39.9 billion of spending money while also reducing costs by £6.2 billion.4 techUK recommends that the new Government must prioritise digitisation as acentral theme within any future Industrial Strategy, recognising the opportunitiesit can bring to economic stability and resilience. A comprehensive DigitalAdoption Plan, with clearly defined targets by 2030, and a focus on the rightunderpinning infrastructure and regulation, is an intervention the Governmentcan get started on right away. In setting out our recommendations, we have worked closely with our membersto ensure they are practical, low-cost and will deliver on cost savings forbusiness and public finances, along with improving efficiencies. Our key recommendations include: Within this paper we follow the OECD definition of ‘digitisation’ as the use ofdigital technologies and data as well as interconnection that results in newor changes to existing activities.5Such digital technologies include the likesof digital/physical assets (cloud computing, mobile technology, automatedmachinery) and capabilities (E-payments and transactions, supply chaindigitisation etc).6 Section 1Digital adoption opportunity –tackle the productivity gap andsize of the prize Making up 99.9% of British businesses,7SMEsare crucial to the economic growth of the UK andrepresent some of the UK’s most resilient businesses.Despite numerous global and domestic headwindsover the past few years, including supply chainchallenges, high energy costs and ongoing stagnation,they have continuously demonstrated their ability tonavigate difficult circumstances. But the UK suffers from a productivity gap or so-called ‘long tail problem’ - where the gap between theleast and most productive firms in the UK is muchbigger compared to other advanced economies.8Thismeans a small number of companies at the top of thecurve are very productive, followed by less productiveSMEs. Research by the OECD also revealed that digitaladoption and diffusion could widen spatial and firmlevel disparities.9If the UK is to succeed in ambitions Following the closure of Help to Grow: Digital,there is an opportunity to leverage the £296 millionGovernment budgeted for the programme, using thisbudget elsewhere to support the digitisation of UK’sSMEs. to become the fastest growing economy in the G7,the Government must plug this productivity gap.Especially given that productivity is a key lever to driveup living standards, GDP per person and economicgrowth. In February 2024, polling of over 250 tech firmswith Public First further revealed that adopting newtechnology is a key motivation to remain competitive(42%), grow their revenue (40%) and remain innovative(38%).15Through their recent economic analysis,techUK mem