Dr Felicia Fai is Senior Lecturer (Associate Professor) in Business Economics and a member of the Centre for Governance and Regulation & Industrial Strategy (CGR&IS) at the University of Bath.
The UK referendum vote on Brexit took place on 23 June 2016 and the White Paper on Industrial Strategy was published on 24 November 2017. It would be natural to see the formulation of an industrial strategy as a response to Brexit – but not entirely. In fact, it was the 2008 financial crisis which exposed the UK’s vulnerability, with its wide sectoral and regional imbalances and an over reliance on financial services, that was the catalyst for the return to an explicit industrial strategy.
The seeds of the new industrial strategy began under the then Lord Mandelson, Secretary of State for Business, Innovation and Skills (2009-2010) in recognition of the UK’s need to diversify its industrial base. Concerns about stagnant economic recovery, especially at local and regional levels, were evident in Lord Heseltine’s 2012 report ‘No Stone Unturned’ who advocated a greater decentralisation of powers to local levels to 39 newly formed Local Enterprise Partnerships (LEPs). Subsequently, devolution to the Northern Powerhouse, Midlands Engine and six Mayoral Combined Authorities (MCAs) has occurred. Between 2010-15, the government also sought to reduce regulatory barriers to business and introduce private sector-friendly reforms, all set against the backdrop of austerity. These policy forerunners are reflected in the new industrial strategy which is founded upon five pillars: Ideas, People, Infrastructure, Business environment and Place.
While the antecedents to the current industrial strategy have historical roots, the very real prospect of Brexit has reinforced the need for an industrial strategy, triggered a sense of urgency for its implementation, and will also affect the deliverability of the strategy.
Need
While the UK’s future trading relationship with the EU remains uncertain, it is clear the UK wants more independence to tailor its own trading and investment relationships with the rest of the world. The UK’s overly narrow industrial base has perhaps in part, been hidden by its EU membership. As part of the EU, the UK benefits from the scale and scope of the Single Market and the EU’s collective strengths to generate favourable terms of trade with non-EU countries across a bundle of goods and services.
Post Brexit, UK firms will no longer be able to access the Single Market as easily as they currently do. Nor will the UK be able to benefit from the scale and scope economies membership of the Single Market brings. A competitive strategy based on low costs is also not feasible. The creation of high quality, innovative products, accessible locations, and a good quality workforce across a broader base of industries is the only way for the UK to maintain, let alone increase, its international ties with the rest of the world. The industrial strategy White Paper at least recognises and seeks to address this head on.
Urgency
Brexit brings greater urgency to the implementation of the Industrial Strategy compared to the ‘Remain’ scenario, but it is difficult for significant achievements to be made in the short timeframe before the UK exits, even allowing for a two-year transition period. In hindsight, perhaps earlier initiatives since 2009 ought to have achieved more, although the various approaches within industrial policy have been fragmented and set against the context of austerity. It is imperative that the current industrial strategy be approached more comprehensively, cohesively, and is appropriately resourced to deliver.
Improvements in industrial performance in a number of areas are possible within the near future. Sterling’s devaluation brought unexpected gains for UK exporters, though this has not yet been reflected in an improved trade balance, largely because many UK supply chains are fully embedded in the EU Single market. Post Brexit, this may play in the UK’s favour, if adjustments are made that favour the re-shoring of UK domestic supply chains. This will require support to upgrade skills and capabilities in the UK suppliers.
The new apprenticeship levy allows firms to invest in raising workplace skills for existing staff. However, improvements to a poorly constructed degree apprenticeship system, and bringing forward the 2020 date for the teaching of the proposed T-levels, are also needed. Improvements in local transport provision can be achieved but requires joined up action between local providers, encouraged by MCAs and LEPs in advance of the Local Industrial Strategies (LIS) that will be considered by central government for the first round, in March 2019. However, these are relatively incremental changes when what the Industrial Strategy seeks is long-term change in the very foundations of the economy.
Deliverability
Brexit will impede upon the deliverability of the Industrial Strategy by extending the period within which its already long-term ambitions might yield returns at best, and at worst, by restricting it altogether.
Immigration control is one the main factors behind Brexit. Many sectors including construction, health and agriculture have indicated their dependence on immigrant labour. While this may be seen as a transitional situation, it may actually indicate a more permanent structural shift. The hope of the government is that investment in people and ideas encouraged by a supportive business environment and upgraded infrastructure, will both substitute for any labour shortages that may arise, and will increase its productivity through skills improvements, assisted by technological change with the advent of Industry 4.0.
There are, however, complex relationships between immigrant labour and the government’s reliance on the ‘ideas’ pillar in the Industrial Strategy that may not be overcome with time. Significant sections of the UK science and engineering base in both the public and private sectors rely on foreign workers. On the demand side, many firms who rely on this workforce are non-UK multinationals located in the UK. Whilst improving Science, Technology, Engineering and Maths (STEM) in UK schools is a supply-side initiative, it will take a generation to have an effect and even then, the question arises as to whether the UK will have sufficient numbers of STEM skilled people entering the workplace, given the underlying demographics of the indigenous UK population. Unless employers are willing to offer attractive careers in the UK, STEM graduates will seek employment overseas, and/ or in more attractive sectors (in the UK) in which their transferable skills are more highly rewarded monetarily, or held in higher esteem culturally. Both on the supply-side and demand-side constraints on labour, as a resource, may impinge on the deliverability of the Industrial Strategy.
The desire for sovereignty in decision-making and the freedom to conduct trade and investment deals with countries beyond the EU will also impact upon the Industrial Strategy. Upon leaving the EU, the UK effectively becomes a much smaller market for overseas companies to sell into. Currently the possibility to leverage the non-pecuniary advantages the UK affords (English being the lingua franca of business, the ease of doing business and a transparent, enforceable legal system and the UK’s proximity to the EU) have allowed the UK to become the most attractive location for inward foreign direct investment (FDI) for multinational firms who view the UK as a gateway to the EU single market.
For multinationals, the possibility of tariff and non-tariff barriers between the UK and the EU26 will need to be balanced against these non-pecuniary advantages. Brexit will focus investment attention more on the EU26, not just for foreign invested MNCs currently operating in Britain, but also for domestic British companies that seek FDI-based entry into the larger EU Single Market as they try to circumvent the costs of the trade barriers. This puts the UK in a potentially weak position at a time when MNCs are conceiving international locations as part of a global factory.
The Grand Challenges in the Industrial Strategy are global challenges. If the UK can maintain its leadership in science and technological research, liberty from the constraints of an enforced EU bias may enable the UK to work more closely with American and Asian nations to deliver solutions. The UK needs to consider carefully which niche specialism it will focus on in these globally networked solutions however, as again the scale of investment in these challenges in a more encompassing manner may be limited by the UK’s size and its independent stance from other supra-national regions.
Brexit may motivate the acceleration of UK industrial strategy implementation, but whether it does or does not finally happen, the UK’s need for a comprehensive and coherent strategy remains.
This blog post is part of the Brexit, Money and work series, a new series of IPR Blogs with a focus on employment and skills, trade and business, industrial strategy, tax and pay that highlights some of the crucial issues policymakers may face in the coming years. Subscribe to the IPR blog to get the latest blog posts, or to keep up to date with our activities, connect with us on Twitter, Facebook or LinkedIn.
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