UK Industrial Strategy – Mirage or Destination?

Posted in: Economics, UK politics

Dr Felicia Fai is Senior Lecturer in Business Economics and Director of Widening Participation and Outreach at the University of Bath's School of Management

The UK’s Industrial strategy green paper was released on Monday 23rd January 2017. It is founded on 10 pillars that the government predicts will drive productivity and balanced economic growth – but its reception has been mixed, with some business leaders giving a lukewarm and others a more resounding welcome.

A dirty term

To reiterate what Carolyn Fairbairn, Director-General of the CBI said, it is better to have an industrial strategy than not, so it is good to see the UK government explicitly embracing an industrial strategy – something of a dirty term in previous governments of the last 3 decades, among whom a non-interventionist philosophy has prevailed. If we look at emerging economy challengers such as China and India, however, it is common to have 5-year plans and to prioritise the industries that will receive investment and support – automotive and aerospace, pharmaceuticals, etc. Furthermore, as an academic working out of a Management School, I know that no organisation operates without a strategy; thus it seems strange to observe previous governments’ aversion to the term.

The reluctance to embrace industrial strategy proceeds, in the case of the UK, from having been burnt by such an approach in the 1970s – when the government attempted to ‘pick winners’ and failed miserably. However, modern academic definitions of the policies arising out of industrial strategy are much broader and more comprehensive:

“[Industrial strategy] comprises policies affecting ‘‘infant industry’’ support of various kinds, but also trade policies, science and technology policies, public procurement, policies affecting foreign direct investments, intellectual property rights, and the allocation of financial resources. Industrial policies, in this broad sense, come together with processes of ‘‘institutional engineering’’ shaping the very nature of the economic actors, the market mechanisms and rules under which they operate, and the boundaries between what is governed by market transactions, and what is not”[1].

This contrasts with a definition provided in a recent House of Commons Library Briefing Paper[2]:

“’Industrial strategy’ refers to government intervention which seeks to support or develop some industries to enhance economic growth”.

The latter definition appears to prevail in the minds of the public, and explains the rather mixed reception of the green paper. If our understanding of the purpose of industrial strategy is to support some industries, then it is unsurprising that industries which are specifically mentioned – such as the creative industries and aerospace – have welcomed it, whereas others perceive the green paper as merely reiterating what the government is already doing with little added that is new. It has also been criticised for being a broad, discursive paper with little insightful direction. To be fair, it is a green paper, not a white one – and in that sense fulfils its purpose: to engage discussion and seek feedback from those potentially affected by its proposals, and to inform future policy formulations. However, it seems that the government has moved to a definition of industrial strategy that is closer to the broader definition. What if we interpret its breadth and apparent reiteration of existing policies and initiatives as deliberate? How do we assess it then?

Safeguarding innovation

As an academic with a background in evolutionary economics and an interest in the role of systems, the fact that much of the content looks familiar is comforting to me, not disappointing. Most innovation is incremental rather than radical; knowledge progresses cumulatively. Radical shifts in policy are disturbing to industry, not reassuring (although maintaining stubborn adherence to an inappropriate path would be irresponsible). The ‘exogenous shock’ is of course Brexit, which does require a strong response from UK industries who look to the government for guidance. The steer the government has given in its proposed industrial strategy is not radical in itself, but the methods by which it will be pursued are more multifaceted than they have been in the past two decades – and their delineation clearer.

The green paper might be called ‘broad’, but a kinder interpretation is that it is seeking to be ‘comprehensive’. Much of it is encouraging. It continues with the horizontal support that has proven popular in the last three decades (albeit with some new initiatives – the Industrial Strategy Challenge Fund, for example), potentially allowing all industries to benefit. Importantly, however, the paper also signals a willingness to re-engage in vertical support for some industries, so far identified as ultra-low emission vehicles, life sciences, industrial digitalisation, nuclear energy and the creative industries. The paper recognises the need to increase productivity and the quality of human resources with improved basic education in STEM and more business-led vocational routes. It also recognises the role of capital in raising productivity – both physical capital investment in infrastructure for transport (rail, road and air) and digital infrastructure. Further, in its identification of the need for ‘patient capital’, it acknowledges the importance of financial infrastructure – particularly that targeted towards the commercialisation stage of innovation processes.

While the UK has always been a great trading nation, the pillar ‘encouraging trade and inward investment’ takes on particular significance in the Brexit and post-Brexit era. Addressing the gap in basic skills to raise productivity, thereby driving our comparative advantages in science and innovation, is critical if we are to ensure that our capabilities are augmented to the point that they compensate for any higher costs companies might face when trading from the UK with the EU in their international value chains. In this way, the UK can remain attractive as a location for inward direct investment. Simultaneously, the government is using industrial strategy as a tool to address the underlying reasons behind Brexit – inequity in wealth creation and disparities in regional growth. The pillars on ‘developing skills’, ‘upgrading infrastructure’ and particularly ‘driving growth across the whole country’ resonate with earlier rhetoric to improve the UK economy for all and achieve more balanced growth across regions.

The move to devolved regions makes sense. Regional economic geographers and scholars of innovative clusters all find the formation of relationships and knowledge creation, diffusion and transfer operate best when there is physical proximity between different organisational players. The emphasis on regions also reflects influences from EU policy based on the SMART specialisation of regions. Having conducted the first Science and Innovation Audit in 2016, the government’s understanding of the industrial basis upon which various UK regions might build industrial strength is much clearer and the variance highlights why a one-size-fits-all approach will not work.

At the same time, clusters – when completely localised – can lose their energy, inspiration and relevance. They need to be connected to other clusters and the wider global economy. These connections can be created through the presence of multinationals in the economy. These are often, but not always, large corporates – academic work on international new ventures and born-global companies attest to the rise of technology-based SMEs which operate globally. Therefore, the sections in the green paper stressing the importance of anchor organisations and the supporting role they play, the importance of supporting start-up businesses, and, crucially, the importance of encouraging trade and inward investment are integral. Anchor firms have the capability to embed local SMEs into their global supply chains. The small firms can be supported by anchor firms through their growth stages via mentoring support, and their financial security ensured through procurement contracts – but this requires the UK to have strong SMEs with ambitions to be international in the first place.

Policy to practice

Nevertheless, as managers are well aware, strategy – while useful as a broad plan of action – is one thing, its implementation and the fulfilment of strategic objectives another. So whilst the outline proposals for UK industrial strategy are reassuring, it is still an open question as to whether this strategy will come to fruition.

In part, it depends on how the 10 identified pillars will influence the UK, as well as its regions and industries, as systems (national, regional and sectoral innovation systems). In the evolutionary economic perspective, systems consist of both ‘nodes’ and, critically, their relationships. Indeed, within the green paper there are lots of ‘nodes’ – the involvement of private firms (large and small, manufacturing and service based), universities, colleges and schools, government departments and supporting institutions. They are each being asked to undertake multiple tasks, roles and responsibilities which may be challenging for some. The role of relationships between the nodes seems to be recognised in several ways. For example, creating the right institutional support that helps the sharing of knowledge, establishing contacts for businesses and representing their collective views, encouraging organisations to come together to seek support from the government to ease the regulatory environment and so on.

The importance of relationships is also reflected in the green paper’s emphasis on the regions, and this is perhaps the greatest novelty in the proposed industrial strategy. Whilst we know the benefits and potential pitfalls of localised economic activity from regional economic geography and innovative cluster research, these agglomerated effects have emerged rather organically. How to purposively foment these same changes by implementing a place-based strategy within devolved government is a new challenge of which the UK has little experience beyond the level of the four nations within the UK. You can create the institutions to support the growth of industries, small businesses and regions, but whether they operate effectively to raise productivity and economic growth is another matter.

Financial commitment from the government will also affect its ability to deliver the strategy. Whilst big announcements about increased investment for UK science and technology and the establishment of various funds for horizontal support are welcome, local governments and LEPs face tight budgetary constraints – so although it would be politically popular, giving greater autonomy at the regional level might put additional strain on resources.

Another significant challenge is the timeframe. To implement this proposed industrial strategy requires a long-term commitment from the government – and successive governments. Political challengers to the incumbent government may not look substantial at present, but there must be a degree of continued support for these various initiatives in future.

Overall, this green paper is a stage in a process. The government appears to be genuinely seeking a coherent and consistent strategy which will led to the formulation of a set of policies that are designed to improve the performance of the economy. Time will tell whether this stronger embracing of industrial strategy is any more successful than its predecessors.

The green paper is open for consultation until 17 April 2017.

[1] Cimoli, M. Dosi, G. and Stiglitz, J. E. 2009. Industrial Policy and Development: The Political Economy of Capabilities Accumulation, Oxford, Oxford University Press, pp1-2.

[2] Rhodes, C. (2016) “Industrial strategy”, House of Commons Library Briefing Paper, Number 07682, 14 October 2016.

Posted in: Economics, UK politics


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