Productivity in the Midlands

In recent years, new devolution reforms have begun to reshape and impact the region’s economy, with the establishment of the East Midlands Combined County Authority (EMCCA), the Greater Lincolnshire Combined County Authority (GLCCA), and the Compact agreement between the West and East Midlands Combined Authorities marking an important step toward more coordinated regional governance. However, several undevolved areas remain across the Midlands, underlining the need for new combined authorities or expanded membership to reduce territorial fragmentation and deliver more consistent economic planning across the Midlands.

While the region has a strong industrial base and the new Industrial Strategy wants to reindustrialise the economy, businesses are increasingly constrained by high energy costs. UK’s electricity prices up to four times higher than competitors in the US and Asia. This is hurting energy intensive and manufacturing businesses. The region’s productivity gap remains stubborn (around 13 per cent below the national average), and energy costs have become an increasing constraint on competitiveness. Industrial users in the Midlands pay roughly twice the average electricity price faced by competitors in the EU, which has been particularly damaging for manufacturers and other energy-intensive sectors.

Despite these key industries having the potential to provide a strong foothold for the Midlands’ contribution to the wider-UK economy, key challenges persist which require intervention from Government to unlock productivity in the region: skills shortages, underinvestment in research and development, and infrastructural inadequacies.

"The Midlands continues to face unique productivity challenges such as insufficient skill levels, low employment rates, and a high prevalence of low-quality jobs. These factors contribute to the region's persistent productivity deficit, which has widened over the past two decades.” (The Productivity Institute).

However, the picture is not uniformly negative. Emerging initiatives such as Midlands Mindforge, Forging Ahead, Expansion of SmartParc (Derby), and Repowering the Black Country illustrate how universities, local authorities, and industry are working together to build resilience through innovation and circular-economy practices. These partnerships show growing confidence in the region’s ability to generate and retain value locally, laying the groundwork for a more productive and sustainable Midlands economy.

Productivity challenges

The Midlands faces a range of productivity challenges, many of which have deepened due to recent shocks. These challenges, identified in both local consultations with business stakeholders and numerous reports, underscore the structural issues hampering regional growth. Below, outlines nine key challenges which negatively impact productivity in the Midlands.  

Skills Shortages & Mismatches: The Midlands’ labour market continues to struggle with significant skills shortages, particularly in high-value sectors such as advanced manufacturing and digital technologies. Between 2017 and 2022, skill-shortage vacancies in the East Midlands rose by more than 150 per cent, reflecting the pace at which employer demand has outstripped training supply. Devolved adult-skills funding under WMCA has brought improvements, yet provision outside combined-authority areas remains uneven. A stronger focus on lifelong learning, particularly for older workers adapting to new technologies, will be key to retaining experienced talent and closing persistent participation gaps (but not via unpopular study loan system with about 5% of the total funding being used).

Investment and R&D: The region's underinvestment in research and development (R&D) continues to constrain productivity. Although the Midlands hosts world-class universities and research parks, it attracts only around five per cent of total UK R&D funding. New initiatives such as Place-Based Impact Investment and regional Investment Zones are starting to bridge the gap, but challenges remain around late-stage commercialisation and spin-out growth. Building clearer routes from research to market—through platforms such as Dealroom—would strengthen the link between innovation and local economic benefit.

Infrastructure & Connectivity: Poor infrastructure, particularly in transport connectivity, has been consistently cited as a key challenge for the Midlands. Progress on major east-west transport corridors has been slow, and several key freight routes still operate close to capacity. The quality of digital connectivity also varies sharply between urban and rural areas, restricting SMEs’ ability to trade and collaborate. Recent analysis suggests that targeted investment in “digital corridors” and last-mile connectivity could yield quick gains in productivity, especially for logistics and technology firms.

Regional and Sectoral Inequalities: Productivity levels vary significantly not only by UK wider regions but also across the Midlands, with urban centres like Birmingham, Derby, and Coventry outperforming rural areas such as Herefordshire and North Nottinghamshire. More than half of local authorities in the Midlands continue to sit below the UK average for output per hour. Addressing this imbalance requires place-specific approaches that build on existing strengths: advanced manufacturing and automotive clusters in the West Midlands, food processing, logistics, and clean-energy technologies in the East Midlands.

Industrial Clusters & Circular Economy: The Midlands’ economic growth potential is heavily influenced by its industrial clusters, which include sectors such as automotive, aerospace, digital technology, and food production.  Recent evidence from the West Midlands Combined Authority (WMCA) shows that the region has developed a structured cluster programme designed to support high-growth and high-value sectors. The programme aligns with the Mayor’s Growth Plan and the national Industrial Strategy, prioritising five strategic areas: Next-Generation Services, Digital and Creative Industries, HealthTech, Smart Energy Systems, and Advanced Engineering and Manufacturing. Together, these encompass ten operational clusters across the region, each coordinated through industry-led partnerships that connect firms, universities, and local institutions to identify barriers to growth and support innovation-led expansion.

The cluster model has already demonstrated measurable impact. For instance, the SuperTech cluster has become one of the largest regional innovation partnerships in the professional and financial technology sectors, contributing over £17 billion in GVA and creating pathways for start-ups and scale-ups in FinTech, PropTech, and LegalTech. Similar activity within advanced manufacturing and energy systems clusters is being linked to Investment Zone developments and supply-chain transition programmes, enabling firms to pivot towards electrification and low-carbon technologies.

Policy and Institutional Effectiveness: The Midlands’ ability to overcome its productivity challenges depends heavily on the effectiveness of its policy frameworks and institutional structures. Following devolution reforms, Combined Authorities now play a greater role in coordinating growth and skills policy. While this has improved accountability, fragmented funding and short-term pilot schemes still limit long-term planning. Strengthening collaboration between EMCCA, WMCA, the new The Greater Lincolnshire Combined County Authority (GLCCA) and independent (undevolved) local authorities in the Midlands could help align regional strategies and avoid duplication.

R&D and Innovation Diffusion: Despite the Midlands' strong industrial base and academic presence, the region faces significant challenges in R&D investment and innovation diffusion. R&D funding, both public and private, remains below the national average, with the region receiving just 5% of the UK’s R&D investment in 2022. Recent developments across the Midlands indicate growing momentum in strengthening the region’s innovation and R&D ecosystem. For example, the newly launched Midlands ecosystem planform (midlands.dealroom) led by Midlands Innovation in order to improve regional R&D collaboration, attract investors to innovation investment opportunities.

Competitiveness and Market Dynamics: The competitiveness has been under pressure in recent years, with firms in the region facing structural inefficiencies that hinder their ability to compete domestically and internationally. The Government’s new business growth services, using Growth hubs are welcomed by businesses as they need ‘one stop shop’ for all support needed. Evidence from the Coventry & Warwickshire Growth Hub showed that firmst supported through an account-management model experiences measurable productivity gains – a 15% rise in jobs, 31% growth in revenue and higher labour productivity. But such growth hub support differs from place to place and it requires long-term commitment and existance to be effective.

Trade and Supply Chains: The Midlands’ supply chains, particularly in manufacturing, aerospace, and automotive sectors, are key drivers of regional competitiveness. However, these supply chains face significant challenges, including fragmentation, inefficiencies, and over-reliance on international markets. There is growing interest in near-shoring and digitalising supply chains to improve resilience. Greater collaboration between anchor firms and smaller suppliers—supported by data-driven logistics hubs—could anchor more value locally and reduce exposure to global disruptions.

Recommendations 

The policy recommendations outlined in the report focus on four main areas:

• skills development must prioritise industry-focused upskilling, especially in technical and digital fields, through partnerships with local colleges and online platforms. Regional skills hubs and flexible short-term training supported by Apprenticeship Levy adjustments will help close critical skills gaps quickly.
• infrastructure investment - particularly in transport and digital connectivity—will enhance regional competitiveness. Improved connections between cities and underserved areas, alongside expanded rural broadband, will support labour mobility and digital adoption, enabling a more inclusive economy.
• innovation ecosystem strengthening is essential. Increased R&D investment and the creation of industry clusters in green tech, advanced manufacturing, and digital sectors will reduce dependency on global suppliers and bolster local supply chains.
• Short and long-term actions should balance immediate needs with sustainable growth. Rapid-response training, accelerated transport projects, and local supply chain partnerships provide a foundation for durable economic resilience across the Midlands.

This policy briefing was written by Dr Arman Mazhikeyev. It is a summary of a report written by Loughborough University and other academics for The Productivity Institute: Productivity in the Midlands: Trends, Challenges & Solutions - The Productivity Institute, A. Mazhikeyev, J. Godsell, N. Driffield, J. Duck, and T. Triebs (2025).

The report goes into further detail about the short and long-term measures it recommends are enacted to address the productivity challenges outlined.