At a glance
- Australia’s SMEs lag 50% behind large firms in productivity.
- Key barriers include regulation, skills gaps and slow tech adoption.
- In 2025, government policy is focusing on five pillars to boost productivity.
- But management, labour and the accounting profession can all help shrink the gap.
Though big business gets the media headlines, it’s actually small and medium enterprises (SMEs) that form the majority of the Australian economy. They create 56 per cent of total Australian value-added, worth around $1 trillion of the nation’s $1.8 trillion yearly total.
Yet SMEs consistently underperform their larger counterparts on the one metric that matters most: productivity.
“Productivity” captures the rate at which we turn inputs into outputs. It drives progress. Farms that once used huge teams now run for most of the year on the work of just a few people, plus a lot of machines. Accountants who once laboured for days over a huge paper spreadsheet now complete their task in an hour using a computer spreadsheet. Productivity growth has driven the modern world’s prosperity more than anything else.
And yet productivity growth has been falling in recent decades, not just in Australia but across the developed world.
Advanced nations’ long productivity growth decline
Rates of productivity growth in Australia and other OECD economies, percent, 1975-2023
To raise the rate of productivity growth, one fix seem obvious: shrink the notable gap between the productivity of Australia’s largest businesses and its smaller ones. How big is this gap right now? Researchers at Australia’s Productivity Commission, at well-regarded think-tank the Grattan Institute and at management consultancy McKinsey all broadly agree: around 50%.
This 50% gap between the productivity of Australia’s smaller and larger businesses seems oddly high. We live in an era when technology has reduced many of large firms’s advantages. Big and small alike now have access to the same digital tools, the same worldwide trove of internet knowledge, the same ability to draw on the expertise of people around the globe. Some other countries do worse – South Korea’s gap is closer to 66%. But other countries do better: the OECD reckons Germany’s SME productivity gap is just 30%.
Knowing all that, SME productivity seems an obvious place to go looking for more economic growth.
An SME productivity breakthrough
So how can Australia raise productivity growth amongst its SMEs? How can SMEs turn inputs into outputs at a rate closer to that of their larger compatriots?
Economists are still coming to grips with this question, admits Michael Brennan, CEO of think-tank e61 Institute and a former Productivity Commission chairman. Indeed, he says economists still are not sure to what extent they should focus on dynamic young companies or older, much bigger companies. Without much data, economists have tended to focus on today’s industrial behemoths.
The good news, says Brennan, is that Australia has begun gathering more data about SME productivity. A government system called BLADE now pulls together anonymised information not just from traditional Australian Bureau of Statistics surveys, but from trade, intellectual property and the tax system. So in the past few years economists have gained a much more fine-grained picture of how SMEs fit into the productivity picture. That is probably already changing the shape of the productivity debate.
And just in time. As a topic of public debate, productivity is having a few weeks in the policy sun. By August, the Productivity Commission will report on “five pillars of productivity” which the federal government has asked it to examine. From August 19 to 21, the government will hold a Cabinet-room discussion to hear new reform ideas from invited business, state government and union representatives, plus other experts. Australian Treasurer Jim Chalmers has locked himself into at least some pro-productivity reforms, declaring productivity his big issue for this term of government. And Chalmers says he has an “open mind” on the shape of productivity reforms, including tax changes.
So for perhaps the first time ever, it’s possible that SME productivity will play a prominent role in Australia’s national economic debate.
The tallest pillar: economic dynamism
Of the Productivity Commission’s “five pillars”, the first – and for SMEs, perhaps the most important – is “a dynamic and resilient economy”. e61’s Michael Brennan suspects this is the area where the Commission “will try and get at where the SMEs are playing a particular role”.
In a dynamic economy, firms constantly enter, grow, shrink and leave the market, keeping resources under the control of the people who can use them most productively. Similarly, people move around – and typically move to more productive firms. This is an important theme of e61’s thinking, Brennan says. And Australia’s economic authorities – the Commission, the Treasury, the Reserve Bank – have all publicly voiced concern that Australian business dynamism has declined. They just don’t quite know why, or how SMEs are involved in the story.
“For strong productivity growth… it’s the adoption and diffusion of those ideas across the economy that’s more important.”
Michael Brennan, CEO of e61 Institute, former Productivity Commission chair
Brennan explains the question that is puzzling the economic authorities and outside economists alike. “Is it enough to have incumbent firms that innovate, cut costs, deliver new business models and … serve their customers better? Or is [productivity growth] the process of creative destruction, the arrival of new firms, the growth of small into medium firms, industry structures where you have a lot of SMEs, so that there is a lot of experimentation, and some are growing and some are contracting?”
Innovation for the 98%
It’s possible that the really important productivity growth work is done by the vast majority of companies, small as well as large, that are not at the economy’s cutting edge. Under Brennan, the Productivity Commission argued exactly this in a report titled Innovation for the 98%. That title points to a fundamental economic reality: 98% of Australian businesses don’t engage in new-to-world innovation. They instead take existing ideas and adopt or adapt them.
As Brennan notes: “There is a tendency sometimes in this debate generally, to overweight the extent to which Australia needs to be at the cutting edge of first-in-the-world innovation … We’re very proud, naturally, of people, whether it’s in tech or in biomedicine or whatever, you know, coming up with something that’s a world first. But arguably, for strong productivity growth across our economy, it’s the adoption and diffusion of those ideas across the economy that’s more important.”
The Productivity Commission’s current deputy chair, Alex Robson, notes that the barriers to adoption of new ideas are complex and vary business by business. The reason that small businesses aren’t adopting new tech or a new idea, he says, will vary from business to business. “It could be cost. It could be uncertainty. It could be [that] they can’t employ someone who is familiar with it,” Robson says.
The diffusion of new techniques to smaller businesses may be an important idea to emerge from the government’s August consultations, even if few people are sure what policies would spring from it.
One-size-fits-all regulation
The other critical factor for SME productivity is the regulatory burden. IPA general manager of advocacy and emerging policy Michael Davison names this as one of the IPA’s central productivity issues. “Small businesses and even our members in practice spend more and more of their time on… dealing with regulation, responding to government requests, filling out forms, doing their quarterly BASs, that sort of thing,” he says.
The IPA has partnered with Deakin University on the IPA-Deakin SME Research Centre. Professor Rui Torres De Oliveira, the Centre’s research director, argues complex government rules and mechanisms are constraining SMEs in fields from health and safety to digital transformation. That, he says, is fuelling a risk-averse culture that deters innovation.
e61’s Brennan echoes this concern: “Things like regulatory policy… often are struck with larger businesses in mind, where the compliance costs are manageable, but they’re prohibitive for smaller enterprises. That often gets lost in the debate. We have a bit of one-size-fits-all”.
And the Productivity Commission’s Alex Robson confirms that as the Commission investigates the issue of dynamism and resilience, it is focusing on the regulatory burden.
Here too, the intellectual trends are favourable to SMEs. Within the government there’s a concern that regulation might trip up Labor’s ambitions in fields like home-building and the renewable energy build-out. Chalmers has warned that reformers must not “get in our own way”. Labor, philosophically wary of deregulation even after the Hawke-Keating reforms, seems to be growing slowly more comfortable with it.
Case study: construction productivity lags
Nowhere is the productivity gap more pronounced than in construction. This sector has seen its productivity barely improve over three decades. And as a big slice of Australia’s economy, construction’s failures make a big dent in overall economic growth. The Australian Constructors Association itself reckons construction’s 30-year productivity freeze now costs the economy around $60 billion a year. And as anyone who has ever had a house built will know, large parts of the industry are dominated by SMEs.
Research suggests several factors underpin this persistent underperformance:
- The construction industry struggles to produce enough skilled workers, forcing firms to rely on less effective on-the-job training. Companies hesitate to invest in training because workers often move between projects and employers.
- Management capabilities vary wildly. The competencies of firm directors often become the primary constraint on growth and efficiency. Unlike manufacturing, where systems can compensate for management weaknesses, construction’s project-based nature places enormous weight on leadership decisions.
- Technology adoption lags. While other industries have embraced digital transformation, construction remains stubbornly analogue, with resistance to everything from project management software to advanced building techniques.
Working smarter
Economic dynamism is not the only challenge confronting Australia as it tries to shrink its productivity gap. Another of the Productivity Commission’s five pillars is “a skilled and adaptable workforce”.
As a paper from the OECD’s Dan Andrews puts it, the global productivity slowdown of the 21st century has “coincided with a marked deceleration in the rate of human capital accumulation”. That is, people don’t seem to be picking up new skills as fast as they did 30 years ago. That problem, too, seems most marked in SMEs, and in sectors like the construction industry (see the case study above).
The Productivity Commission says it is focusing on ideas for improving school outcomes, reducing red tape in occupational entry regulations, and supporting more flexible post-secondary education and training. The IPA-Deakin Centre’s Rui Torres De Oliveira argues there’s a sensible way to address skill gaps without disrupting operations: short courses, possibly government-funded, focused in emerging fields like artificial intelligence and cybersecurity.
Digital technology
Australian SMEs appear to lag behind overseas businesses in adopting proven technologies. One recent survey found Australia’s SME technology adoption trailing most other nations in the Asia-Pacific in areas from cybersecurity to new digital and payment technologies. Artificial intelligence is the latest technology to confront SMEs – and potentially, for many, the most transformative of all.
Brennan suggests that one of the biggest digital technology gains for SMEs might come from regulators themselves: “One of the things that… the Productivity Commission could well talk about is whether… to the extent that regulators themselves are good adopters of technology, that can cut compliance costs pretty significantly for SMEs”.
He points to the ATO’s transformation as a model: “Small business people are sitting at the kitchen table at night, trying to work out how to fill in the BAS, and that’s been revolutionised by technology that interfaces with ATO systems”.
The IPA-Deakin Centre’s De Oliveira adds a note of caution. He warns against overly restrictive AI regulation, urging government to simplify compliance via AI-driven platforms that can achieve goals like automated ATO reporting.
For SMEs themselves, e61’s Brennan advocates starting small with AI adoption: “I think for a lot of SMEs, just putting a toe in the water… Part of that journey can be quite regular”. He expects the biggest impact will be in professional services: “My gut says that it will be in the services sector, because they’ve had less automation to date, and probably in professional services: finance and insurance, legal, accounting.”
Other pillars
The Productivity Commission is also investigating two fields where SME-specific issues are less obvious – cheaper energy in the Net Zero transformation, and “delivering quality care”. The Commission’s recommendations will nevertheless touch SMEs here too. It is sometimes estimated that one in seven small businesses operate in the health sector, from GPs to natural therapists. And many small businesses would welcome both advice and financial incentives during the energy transition.
The path forward
A solution that narrows Australia’s productivity gap will likely include these three elements:
Government must create enabling conditions through regulatory reform, improved competition policy, and targeted support for technology adoption rather than mere business survival.
SMEs themselves must invest in management capabilities, embrace digital tools strategically, and build productive business networks.
And professional advisors – particularly accountants – have a crucial role in guiding clients through this transformation, moving beyond compliance to become productivity partners.
A version of this article was initially published in June 2025.
Find out more about how the IPA is advocating on behalf of the accounting profession and their clients here.
