Business, Innovation and Skills
Oral evidence: Exports and the role of UKTI, HC 741
Tuesday 2 February 2016
Ordered by the House of Commons to be published on 2 February 2016.
Members present: Mr Iain Wright (Chair), Paul Blomfield, Richard Fuller, Peter Kyle, Amanda Milling, Amanda Solloway, Michelle Thomson, Kelly Tolhurst, Craig Tracey
Questions 1 - 67
Witnesses: Professor Richard Kneller, Professor of Economics, Nottingham University, Professor Holger Breinlich, Professor of International Economics, Nottingham University, and David Smith, Economics Editor, Sunday Times, gave evidence.
Q1 Chair: Good morning, gentlemen. Thank you for attending the Business, Innovation and Skills Select Committee. It is our first oral evidence session on exports and the role of UKTI, so welcome. I hope you can set the scene for this important inquiry. For the record, please introduce yourselves and tell us where you come from.
Professor Breinlich: My name is Holger Breinlich. I am a Professor of International Economics at the University of Nottingham.
Professor Kneller: Richard Kneller. I am also a Professor of Economics at the University of Nottingham. We are both representing the Nottingham Centre for Research on Globalisation and Economic Policy.
David Smith: David Smith, Economics Editor of the Sunday Times.
Q2 Chair: Mr Smith, can I start with you? I am a big fan of your very knowledgeable columns that I read in the Sunday Times. You talk about trade quite frequently. Why has our trade performance been so awful for so long, and can we do anything about it?
David Smith: Yes. There are two aspects to this. First, recent trade performance has been quite poor in the context of disappointing growth in world trade. It is perhaps important to separate this in to pre-crisis and post-crisis.
Pre-crisis we had a disappointing performance, particularly in trade in goods, for a number of reasons. Some of them were to do with the exchange rate. For example, for a long period, from autumn 1996 until the onset of the financial crisis in autumn 2007, we had a particularly strong exchange rate vis-à-vis European currencies. That was an issue for exporters. All the arguments you will know about—a shift of manufacturing output to lower cost locations and so on—affected our trade. The fact is that, particularly for manufacturing trade—the area in which the UK was traditionally strong—there was a 30-year long weakness. The last time we had a manufacturing trade surplus was in 1982. Since then it has been deficits and increasing deficits along the way
Post-crisis the disappointment has been that many of us thought the fall in the exchange rate we saw with the onset of the crisis—sterling fell by around 25% on average between autumn 2007 and early 2009—would give us quite a powerful upward kick for exports. That really has not happened. Export performance has been quite disappointing in general.
Some of that is to do with depressed growth in world trade. World trade was hit very hard in the crisis. In 2009 we saw the biggest post-war fall in world trade, of the order of 9% or 10%. We saw a big increase in 2010, which was a false dawn. People thought that it was a quick return to normal, but world trade growth has been very disappointing since then.
Other factors that have hurt the UK have been that, after that initial fall in the exchange rate, it has come back up again, particularly against the euro. If you also look at the current picture of UK exports, it does seem that, particularly in order to export manufactured goods, we need to import a lot of components. From the mid to late 90s to the onset of the crisis we saw a hollowing out of UK manufacturing—in the sense of finished manufactures— continue to a large extent, but a lot of semi-manufactures, components, shifted to lower cost locations. It is as though to export manufactured goods we have to import semi-manufactures on an almost equal scale.
Just to finish, if you look at the recent past since 2012, when the target of doubling Britain’s exports of goods and services to £1 trillion by 2020 was set, we have seen very little growth in exports. Exports in that period are up by around 3%. I calculate that exports of goods and services in 2015 will probably have come out at about £515 billion, which is, as I say, barely 3% up on the figure for 2012. At the present rate of increase we will be lucky to get to £600 billion by 2020, let alone £1 trillion. Since 2012, exports of goods have actually fallen and exports of services have risen.
The success story within the UK exporting picture is service-sector exports. The failure, if you like, is exports of goods. They have struggled in recent years.
Q3 Chair: You have described the trade deficit as an economic millstone around our neck. Why does the trade deficit matter?
David Smith: The current account deficit matters more than the trade deficit itself. To my mind, the trade deficit is too large but has been relatively stable. But the current account deficit widened, particularly in 2014, because some of the traditional sources of overseas earnings for UK investment income turned negative, having been usually positive for a long period. The reason for that seems to be the difference in relative performance between the UK and eurozone economies. Our investment earnings in Europe were weaker than foreigners’ investment earnings in the UK.
Why is that a problem? Having a trade and a current account deficit is a problem in two ways. First, it is some kind of measure of competitiveness. If you are running a chronic trade deficit, particularly with a widening one, it is no longer as immediately relevant as it was in the 1960s when we had a fixed exchange rate. If you had a big trade deficit then, that put pressure on sterling and could feed almost immediately to the need for a monetary policy response—in other words, putting up interest rates to protect the pound, because the pound was weakened because of the trade deficit. But it is one of those things that tells you, as a nation, whether you are competitive or not.
Some of the things within the current account are no longer as reliable as they were. In other words, invisible earnings are no longer necessarily as reliable as they were. Post-crisis we have seen a big fall in international banking flows and, as I say, the investment income picture has turned around. You would hope to do better on the trade deficit, just in case those things have turned permanently negative—and that leaves you vulnerable to the requirement for international capital flows to offset your current account deficit.
There is an element of competitiveness and there is an element of vulnerability if you run a large current account deficit. Recently the current account deficits have been very large.
Q4 Chair: You mentioned the doubling of exports to £1 trillion by 2020. That is one of the Government’s targets. The other one is increasing the number of firms that export by 100,000. Are they the right targets to have?
David Smith: One of the things that have made the target of doubling trade more difficult to achieve is outside the control of any Government, which is what has been happening to world trade. As I say, world trade growth has been very depressed in recent years.
Secondly, for example, if you achieved a doubling of exports and all that was achieved through higher prices, that would not be a particularly good achievement. One of the reasons it looks so bad is because export volumes are not doing very well. The other reason is that inflation globally is very low. We had zero inflation in the UK last year, and if you set a nominal target, you are prey to what is also happening to global inflation. There are periods in our recent past where doubling exports over a relatively short period would not have been difficult, but all of it would have been inflation. It is not a particularly good target. It was a target to grab headlines.
It is the same with the number of companies. It is very desirable that more companies, particularly small and medium-sized companies, export, but there is a quality element there. It could be that some of those companies that are exporting are selling one or two things overseas from a website somewhere, rather than actively engaging in export markets. There is a question of definition there.
I know why they chose some headline-grabbing targets, but they are not necessarily that well specified.
Q5 Chair: Professors, may I ask you the same question? Are these targets, of £1 trillion of exports and 100,000 new businesses exporting, the right ones to have?
Professor Kneller: I would agree with David’s point that a nominal target like that has been easier to hit in years gone by because of inflation, whereas in a low-inflation environment doubling export values—the real improvement in export values—is very large. In that sense, having a nominal target like that is not particularly helpful.
The number of exporters is perhaps a more realistic target. You can count that much more easily, but there is a tension there. There is a very strong skew in the distribution of exports. As David said, there are lots of firms that export very small values. If you want to increase overall value, you want to see a large increase in the number of firms exporting large volumes.
Q6 Chair: This is very important to us. Your evidence on this was excellent. Should we focus more on export superstars in the way that, say, Germany does—in terms of those who export to a lot of countries with high values—rather than ensuring that small companies export minor things of relatively little value?
Professor Kneller: You can make a case for that. I do not want to say you should not also have some support for SMEs that want to export, because they could potentially become export superstars as well. There is a case for some support for SMEs as well, but if you want to think about improving overall values, it makes sense in many ways to target firms that are already exporting, have demonstrated their ability to succeed in export markets, and are selling products that foreign firms and consumers value in some way.
If you look at the underperformance of the UK, particularly relative to France and Germany, once you adjust for the scale of the manufacturing sector, the performance relative to France is very similar. A similar proportion of firms export and they export a similar amount of their total sales. The underperformance is relative to Germany. There in particular—and this is true for France as well—more of the SMEs tend to export and they tend to export greater values, compared with French and German firms, but the underperformance is in the bigger firms. Given that those are so important for the overall value and total volume of export sales, you can see that is a key part of the explanation behind that.
I have perhaps a couple of additional points: there is also evidence that the barriers to exporting—the types of factors that export promotion agencies such as UKTI would hopefully try to leverage on—actually increase, rather than decrease, as you become more experienced. That is presumably because you are coming across more challenging markets and finding new customers is that much more difficult. Again, that suggests simply targeting SMEs is not necessarily the right answer.
Even if you look at the very big and well-established exporters, it is still the case that the majority of their export sales are just of one product to one single market. If they could improve the balance of their portfolio of where they are exporting to and what they are exporting, you could again affect total export values.
Q7 Paul Blomfield: I am interested in what you say, particularly in relation to these two objectives of increasing the value of exports and increasing the number of exporters. You are implying that, to some degree, those are potentially conflicting policy objectives. In a time of scarce resource, if the Government are seeking to target effectively, that could be pulling policy in different directions. Is that right?
Professor Kneller: I would not necessarily say they are conflicting.
Paul Blomfield: Potentially conflicting.
Professor Kneller: Increasing the number of firms exporting should, hopefully, increase the value of exports as well. If you increase the number of exporting firms by 100,000, it depends whether they are small or big exporters. If you were looking to spend your marginal pound, it would be about trying to uncover those future superstar exporters, which are the ones you would like to try to target.
Q8 Paul Blomfield: You are saying that the Government should be concentrating on the value of exports rather than number of exporters.
Professor Kneller: They should concentrate on the superstar exporters—the firms that potentially have high-value exports.
Professor Breinlich: Yes. To some extent there is a tension. For example, if you spend a lot of money getting small firms to export, there is less money available to help established exporters enter new markets.
Q9 Paul Blomfield: At the same time, if we are looking at exports driving performance and creating jobs, it is small businesses that account for more than 60% of private sector jobs. Is that a factor that should be borne in mind? Small businesses are certainly leading in the creation of new jobs.
Professor Breinlich: That is true. In our response, we suggested one of the things that maybe should be looked at more when evaluating export promotion policies is the impact on employment, for example, rather than just on the narrow target of exports. It is not clear to me that, if a small firm increases exports or just starts exporting and sells 5% of its turnover, it will have a large impact on employment.
Q10 Paul Blomfield: That is helpful. I want to pursue one other point that Richard made about barriers becoming bigger as people became more successful at exporting. Certainly, when I talk to SMEs locally, the barriers seem to be when you first get in to exporting. Could you elaborate on that point a little?
Professor Kneller: That comes from UKTI survey evidence asking firms about the barriers to exporting that they faced and just simply aggregating up the number of different types of barriers they reported. It is true that what you might classify as network and marketing types of barriers are more pronounced for firms when they are trying to export for the first time, and they very clearly go down as you go across more experienced exporters.
When you start to think about barriers that you might describe as more cultural or legal, those rise as you become slightly more export-experienced. Clearly, there are some learning by exporting or learning to export types of stories. You become more experienced and you overcome the barriers to exporting more easily, but for a lot of firms those first export sales are perhaps easier to find than their next export sales: trying to find a new export market or a new customer within an existing market. In that situation, those barriers become more important and that is why they report greater numbers.
Q11 Chair: Professor, you mentioned culture. To take that off on a tangent, Mr Smith, you go up and down the country, you speak to businesses. Is there a cultural problem in this country? Are firms slightly too comfortable and is it the case that they do not want the hassle of exporting? “It is too hard. It is too difficult. I am making a good living, in terms of a domestic market; why do I need the bother of exporting?”
David Smith: Yes, there is quite a lot of that. We have moved from, if you like, a culture of complacency about exporting. I remember way back in the 1970s when the UK manufacturers took a lot of their export markets for granted, and this was the period of late delivery, unreliable products, and so on—we did have a wake-up call subsequently to that—particularly with markets in the old commonwealth. We took them very much for granted and lost a lot of those to better products, more reliable delivery and so on.
Now there is that culture, but it is a perfectly logical culture because we sometimes forget that entering a new market—or certainly exporting for the first time—even for firms that export already can be a big and risky investment. We have been in a period, particularly in recent years, when firms have been cautious about investing in anything. They have been cautious about investing in plant and machinery. They have also been cautious about potentially risky ventures a long way from home. You do not know whether it is going to work. Whether you are going to succeed is an unknown, particularly in these difficult markets where everybody is being encouraged to get in to what were the fastest growing markets, the emerging markets—they are slightly less fast growing now. They are inherently risky. It is now a cautious culture rather than a complacent one. Businesses sometimes think, “Well, we would like to if we could, but it is risky.”.
Just on the point that was raised just now about comparisons with Germany, France and so on, there is always this thought—and it has always been present in UK policy—“If only we had a Mittelstand.” I do not know whether your evidence says that we overstate the importance of the Mittelstand in German exports and that it is the bigger firms that tend to do it, but that has been the driver for every Government I can remember for the last 30 years: “If we could only emulate this powerful base of middle-sized companies that Germany has, we would be okay.” We do not have that. We have plenty of good SMEs, but some of the best ones, as you suggest, are mainly focused on the domestic market.
Chair: That international comparator point is well timed because, Amanda, you want to focus on this.
Q12 Amanda Milling: I have a couple of things. I just want to go back to barriers very quickly, if you do not mind. It is a question to all of you. There are lots of barriers discussed. I am really interested in understanding which ones are really critical barriers and ones where Government could support businesses. We have talked about the different sized businesses. We talk a lot about game changers. What are the really critical barriers and what are the game-changing things that Government could help with? That is to each of you.
Professor Breinlich: Looking at the evidence, anything that is related information: finding new contacts in foreign markets, just learning about customs procedures and things like that—these are things that are what economists call “public goods”. Once you have the information, you can disseminate it at basically zero cost, so that is a natural target for government activity.
Professor Kneller: If you broke them down into internal barriers and those that are external to the firm, which Holger talked about, there is evidence that both of those are important. There is not a magic bullet barrier that everyone faces and all firms report is the same barrier every time, in every market and every customer. I am not sure there is a game-changing policy that is focused on one particular issue. Those internal barriers are also important. We know a key driver of the ability of firms to export, and their success in export markets, is all due to the characteristics of those firms. Firms that are more productive, more skill intensive, more R and D intensive or foreign owned all tend to be more likely to export, and export in larger volumes.
It is important to remember that UKTI’s impact on the export story is primarily going to be on the external barriers rather than the internal characteristics of the firm, but clearly those are aspects that the Government can influence more broadly as well.
Q13 Amanda Milling: Do you think that the plans for UKTI are going to help to address those external factors?
Professor Kneller: I do not know, to be honest. The information part clearly could impact on that. There is also an element of government-to-government negotiations, and trade policy more generally, where it can impact.
Professor Breinlich: That is a more general point that needs to be kept in mind: export promotion is only a very small part. It is not going to get us anywhere near the £1 trillion target. From the evidence we looked at on the average multiplier effect, each pound you invest in export promotion will get £40 back in terms of additional exports. If you look at UKTI’s budget, it is not going to get us anywhere near £1 trillion. It is only going to be a very small part. That is one of the important points we wanted to get across: export promotion will only ever be a very small part of the overall picture.
David Smith: I would say, particularly in the last few years, looking round for reasons why world trade has been disappointing since the crisis, you can point to the fact that the initial crisis of 2008 and 2009 moved on to the eurozone crisis, and that obviously hit trade in the advanced world. You can look for protectionism and there has been a little bit of that, but the big change has been trade finance, trade credit and export credit. That is a big barrier, particularly now, to exporters.
It is difficult, as you all know, and you will have encountered SMEs that say it is difficult to get bank loans for anything. It is very difficult for many businesses, particularly businesses that are dipping their toe into exporting for the first time, to get export credit and trade finance. That is not just general anecdotal supposition. I advise or recommend that the Committee has a look at the International Chamber of Commerce reports on this. They have been doing it every year, for the last few years, on trade finance and—if anything—they suggest the picture is getting more difficult rather than less because of anti-money-laundering regulations. To get trade finance is a more difficult process. In their latest survey—and this not just for the UK respondents, clearly—70% of this year’s respondents report declined transactions due to anti money laundering. In general, SMEs find it tougher than large companies to get trade finance. That has been one of the big problems recently.
Whenever you get anything new happening in the global economy—and obviously we have had a big fall in oil and commodity prices recently—that triggers new alarms among the banks about trade finance because they expect losses in those areas. That has been a particular problem in recent years, and it is a significant barrier, particularly for new exporters.
Q14 Amanda Milling: Therefore, what is the solution?
David Smith: Of course, you have the submission from the Government, which I have seen, which talks about both UKTI and UK Export Finance. You will take more expert evidence than I have on this, but people tell me that UK Export Finance is particularly geared towards bigger export contracts. It is, if anything, even more difficult for many SMEs to get through than trade credit. There is a guarantee role there for Government, in terms of trying to increase the flow of trade credit.
Richard and Holger will know whether the evidence is that UK exporters are at a disadvantage compared with other countries in the trade credit area, but we certainly do not appear to be at any advantage whatsoever—as far as I can see. There are problems there and the scale of it, just looking at the numbers for UK Export Finance, is extremely small. In 2009-10 they supported one SME. It has now gone up to 129, but that is still a very small number of SMEs being supported.
Q15 Amanda Milling: Are there some international comparisons that we should be considering?
Professor Breinlich: Yes. We looked at the evidence on that part as well. I have figures for Germany on the volume of extended guarantees. These are a bit outdated, but in 2004 there was a total exposure of €120 billion, so much higher, through the Euler Hermes guarantees in Germany, for example. There is also evidence, again for Germany, that they seem to increase exports, but again the multipliers are not that high. For every pound spent in guarantees, you get three pounds of exports. That is the headline finding. Again, they are effective, but it is not enough to generate a huge amount of new exports. That is the consensus in the literature.
Export finance is very important. That is very clear, but the question is the role of Government. First of all, the role of Government is constrained by international agreements on subsidies in the WTO. The OECD has some agreements and the European Union also has limits on how much in export guarantees you can extend. These agencies are not allowed to make losses, for example, so costs need to be covered. That limits the amount of credit that can be extended.
It is very useful and private sector credit is very important. The role of Government is probably limited by international agreements and by this multiplier effect. That is not to say it is not going to work, but the overall effect will not be that huge.
Q16 Peter Kyle: You both, Holger and Richard—I do not want to call you both “the professors” because it makes you sound like a partnership—imply that the broad economic climate is absolutely essential to this. If we take that as read—that the macroeconomic climate and the international trading environment are crucial to this—and if we take from the macro down to the micro, to what extent, in a company, is exporting a standalone skill within a business? Do you get a company that has weaknesses in its ability to trade domestically or is not a high-functioning organisation, but can be made into a fantastic exporter? To what extent is it about just improving the general capacity of a business and the capability of the business: the leadership, the middle management and the R and D? Would that lead to a general increase in export or is export a bolt-on that you can just do to a business? Have I made myself clear enough? I am not sure that I have.
Professor Kneller: Yes. There are no obvious examples of firms in the UK that are solely an export success. Maybe there are some, but you tend to get those sorts of situations where firms are exporting close to 100% of their total production in countries such as China and Mexico, where you have these export processing zones. In the UK it tends to be the case that there is a strong positive correlation between the characteristics of the firm more generally and their ability to export: increasing the firm’s productivity, size, skill intensity and so on.
That tends to suggest that it is not a bolt-on characteristic. It is well-run, well-managed firms: they are productive and they also spot export opportunities as well. It is more that there is a positive correlation more generally.
Professor Breinlich: Yes.
David Smith: I would agree. There are some sectors, and the motor industry is a classic example of that, where the inward investment that we had in the past was almost geared towards an important exporting role. The Japanese inward investment of the 1980s had in mind the European market as well as the domestic market. It is the case that something like 80% of UK car production is exported. You can think of individual companies like JCB, which are big exporters and obviously have an important domestic market, but it is integral to the business. As Richard says, there are not many where there is nothing sold in the UK and everything is exported, but there are some that are and have been considerable export successes in recent years. For a long time we thought we would never have a trade surplus in cars—this is one of our traditional weaknesses. In recent years we have flirted with a trade surplus in cars and that is the nature of the industry.
Q17 Peter Kyle: It is interesting that seems to have come through foreign investment though, isn’t it?
David Smith: Yes. Again, one of the things that an effective UKTI will do is bring inward investment that then exports. It does seem that, particularly in manufacturing, foreign firms that have invested in the UK have a higher propensity to export than domestic firms.
Q18 Peter Kyle: My point is if, for example, you look at Dyson, there seems to be an inevitability about Dyson being a great exporter because it has great R and D, innovation and marketing. It is a very well-led company. It seems inevitable that will become a great exporter and a great brand for Britain, so should we not be focusing on supporting businesses in the round rather than just focusing on export?
David Smith: I do not know how much Dyson manufactures here anymore. That was a controversy. Obviously a lot of the R and D and development is done here, but we should not lose sight of what has been the export success story of recent years, which is service sector exports. Within manufacturing, however, it is that goal of high-value exporting, with a lot of embedded high technology, which can succeed where traditional mass manufacturing may not be able to succeed. That is the aim. You move up the value and technology chains.
Q19 Peter Kyle: Finally, do you think the changes in standard business support, like Business Connections, which was not a universal success, have impacted on our export, or do you think export support is a specialist area that needs to be fine-tuned and implemented?
Professor Breinlich: Both are important.
Peter Kyle: Both are important for export.
Professor Breinlich: For export, but maybe the point we are trying to get across is that export promotion agencies have the role, but basically we cannot hope they will delivery this £500 billion increase. It will be much smaller than that, and of course general policies are very important too. Maybe if I had to say which was more important, I would say that the general policies are more important than export promotion.
Professor Kneller: Dyson is a nice example in many ways because we know the difficulties that he originally had in getting that product to the market, and he was turned down by people probably better informed than we are. Trying to create products that are very knowledge and R and D intensive is clearly a way that you can succeed in export markets. However, for that process of experimentation, you need to allow these firms the opportunity to undertake those innovations and bring those products to the market. Some of them will fail and some of them will succeed. It is very difficult. Ex post you can see why Dyson succeeded, but ex ante it is much more difficult.
Q20 Chair: Just following on from what Peter said, before I bring Richard in: can we generalise in terms of chicken and egg? Do innovative, research-intensive firms export and therefore are great, or are firms exposed to new ideas in international markets and then become great and will research further?
Professor Kneller: That has probably been one of the largest areas of research within economics because it has been such a difficult question to answer. Ultimately causality goes both ways. Therefore, the question is which is relatively more important, and it seems to be the case that it is the characteristics of the firms that drives their export success rather than the exporting driving the success of the firm. But there is some evidence that exporting, partly because it gives you access to larger markets, provides a motivation for firms to invest in their R and D, but also in capital equipment, new processes, new products and the rest of it. That can improve the performance of the firm as well.
Q21 Richard Fuller: Our Scottish nationalist colleagues recently called a very useful debate about the longstanding trade problems of the United Kingdom, and throughout that period we have had a Board of Trade or UKTI. You yourselves have poured scepticism on the current bout of targets for UKTI, in terms of the £1 trillion of exports and the 100,000 more exporters, so a quick “yes” or “no” question for each of you: should my hard-pressed taxpayers continue to pay for UKTI?
Professor Breinlich: Yes, but of course it depends on the amount.
Professor Kneller: Yes, I would agree. The evidence suggests “yes”.
David Smith: You need a UKTI and it would be a terrible signal to businesses if it were abolished, but it clearly needs refocusing.
Q22 Richard Fuller: Just on that point of refocusing, in the last couple of weeks we have seen mounting criticism of the ability of large corporations and multinationals to evade—sorry, to take advantage of—the tax laws that have been put in place by successive Governments, which are seen as biased against small businesses and entrepreneurs and in favour of large businesses that have more flexibility. A quick “yes” or “no” question from me: do you think it is fair for small businesses in my constituency to have a UKTI that is so heavily biased towards large companies?
Professor Breinlich: I cannot give a yes or no answer to that one. That question deserves a longer answer.
Q23 Richard Fuller: Is it fair to say that UKTI, historically, has been biased towards support for large companies at the expense of small businesses?
Professor Breinlich: No, I would not necessarily agree with that.
Q24 Richard Fuller: So, the finance point that David Smith—
Professor Breinlich: On the finance, yes, but I am talking about export promotions. These are two different things.
Q25 Richard Fuller: Let me just expand, because it is unfair to continue to ask “yes” or “no” questions, obviously. When the Minister came to chat with us and we looked at the role of UKTI, five things came out: the provision of contacts at high levels for companies, the opportunity for finance, practical support, advice and signposting. There is some scepticism about whether UKTI does a good job of some of those. Do you think they should focus some of those activities or do you think different things help different types of companies?
David Smith: Part of the problem is the nature of large versus smaller businesses. UKTI does things that may be very helpful, like trade missions, training sessions and engagement, but if you are a small firm a trade mission is time-consuming and the reward at the end of it may be that you decide that that market is not right for you, and so on. If you are a large firm you send somebody from the export division or you may send somebody more senior, but they can afford to spare the people. The nature of these things is that it is more difficult to tailor and have a tailor-made service that fits very small businesses in particular. Perhaps you can do that for medium-sized businesses, but there is also evidence—and an admission by the Government—that the approach is often very bureaucratic, and that puts off a lot of SMEs.
In that sense—and it is true of a lot of things that the Government do—if you are a big company with different departments that deal with these different things, you can deal with most things that Government throw at you. If you are an SME, even when Government are there to try to help, it is often more difficult to take advantage of that help and it is more bureaucratic and time-consuming. That is part of the problem. From what people tell me, and I am not an expert on this, they would favour something simpler, more streamlined, quick answers to quick questions—those kinds of things.
Q26 Richard Fuller: Thank you for that. In the statement by Lord Maude in January, he talked about putting UKTI into each of the departments so that you had domain expertise to assist with the efforts to grow our exports. Do you think that is a good move? What do you think the benefits might be of broadening it out? What do you think some of the weaknesses might be of not having a central focus?
Professor Breinlich: We looked at some of the evidence and it is very tentative. Only one or two studies show it is better to bundle these services in one institution, basically, but I would not place too much weight on this evidence just yet. Just one or two studies have shown that. In that sense it is probably better to not spread the activities out, as is planned.
Q27 Richard Fuller: I do not want to put words in your mouth. You are saying it is a decision the Government could make—there is no strong evidence one way or the other—but your instinct would be—
Professor Breinlich: There is no strong evidence, but the evidence we have is that bundling services in one institution would be better than spreading them out.
Q28 Richard Fuller: Why do you think the Government have decided to ignore that evidence?
Professor Breinlich: Maybe they are not aware of it. I do not know.
Q29 Amanda Solloway: Richard, earlier on you mentioned underperformance of big firms. Was that underperformance against previous targets, current targets or anticipated performance?
Professor Kneller: None of those. It is just a comparison with the French and German companies. It is true there are more big than small firms in UK exports, but, if you look at the comparisons, the percentage of small firms that export is definitely greater than in France and similar in Germany. If you look at large firms, fewer large UK firms export compared with French and German companies of the same size. That is where the underperformance is.
Q30 Amanda Solloway: It is against expectation; you are saying we could potentially export more—or should be.
Professor Kneller: Off the top of my head there is no inherent reason why large UK companies could not do as well as French or German companies.
Q31 Amanda Solloway: I have a final, quick question. Do any challenges arise from opportunities offered in other countries in terms of financial support or grants? For example, I know incentives are given in Germany, and some of our companies might decide to produce out there. Do we face challenges from other countries’ incentives?
Professor Breinlich: I do not know.
Professor Kneller: I do not know of any.
David Smith: In terms of where companies decide to locate their production, attracting inward investment is one area in which we have been successful over the past two or three decades. We have tended to be the largest EU recipient of inward investment from outside the EU. The challenge there is from lower cost locations rather than other people’s incentives to invest, and I would not see a particular competition between us, France and Germany for that kind of project.
Q32 Craig Tracey: Picking up on the export credit side, when I was in business I did quite a body of work about two or three years ago with predominantly small midlands businesses that had an appetite to export. One of the barriers they found was around trade credit insurance: something to underwrite the cost of their actual trading. That was a real barrier for them, and even if they had their own money to use, there was no way of underwriting it, especially in emerging markets. Do you still see that as a barrier and, if so, is there the possibility or the thought that some kind of government scheme to underwrite that cost would either encourage more smaller businesses to put their own money on the line or allow people to give them the credit available?
David Smith: It is still a barrier. There is some evidence that it has improved at the margin, but a lot of it is the risk aversion left over from the crisis. We saw a big fall in world trade. It was quickly recovered, but there was a lot of dislocation around the time, when world trade fell very rapidly. Some losses were made on credit insurance and it takes time before that comes back, so there is a role there for Government.
Professor Breinlich: Yes, I would agree. As I said before, it is a small role, but it is certainly important, yes.
Q33 Chair: Gentlemen, I have two related questions. Thinking about Richard’s hard-pressed constituents and not just those of Bedford but those of Hartlepool, and trying to persuade them to pay their taxes in order to fund this, where should Government spend its money? Should it be on a sectoral basis as part of, say, an industrial strategy? David, you mentioned the automotive industry, which is a huge success and a good strategic approach. Should UKTI’s basis, and their focus and priority, be a sectoral approach rather than just individual firms, regardless of size?
David Smith: The Automotive Council has been a great success. As you know, that model is being applied to other sectors. Although I agree with Holger that you would not want to spread the trade promotion effort too thinly—and particularly too thinly around different government departments—focusing it on those sectors, all of which are essentially covered within BIS, seems to be a reasonable approach. People in the automotive industry will look to the Automotive Council and will look to trade promotion opportunities there, and the same with other sectors, like aerospace and so on. That is essentially a good idea.
Chair: Do you have any comments?
Professor Kneller: It is true that in all industries you get firms that are exporters and some that are non-exporters, and that is in industries in which you might think the UK has a comparative advantage, as well as in industries in which you might think the UK has a comparative disadvantage. There are potential exporters in every industry, but, in a world of limited budgets, I can see a role for focusing on particular sectors you think have greater scope for success and allowing the build-up of specialist knowledge about those sectors.
Professor Breinlich: I agree, but the key question is what the marginal benefits are of investing in a sector that is already doing well. I do not know of any evidence that has looked at this, so that is just intuition.
Q34 Chair: My final question is this: Richard, you mentioned limited budgets, but I would also suggest that there is—frankly, let us be honest—limited governmental ability to shift the needle on things like exports. The ability for Government to be able to say, “We can pull a lever and something will happen that will have a seismic change in exports,” whether it is value or number of firms, is minimal. In terms of making sure they can have the biggest impact possible, what practical steps should we be considering recommending to the Government in order to make that seismic change, both in terms of export value and number of exporters?
Professor Breinlich: One of the points that we were trying to get across is that export promotion lacks a solid evidence base. We have talked a lot about evidence, but all the methods that have been used are outdated, in some sense. In other policy areas randomised control trials have been used a lot. I am not at all an expert on this, but I am not aware of, for example, any single randomised control trial that has evaluated the efficiency of export promotion services. As researchers, our view is that one important step is to get a solid evidence base for export promotion. The evidence we have mentioned here is the best we have, but it is not as good as in other areas of policy. That should be the very first step.
Professor Kneller: I completely agree with Holger there about the importance of proper evaluations of the effectiveness of these different policies. Thinking more broadly, it would be helpful for the Government to place its export strategy into a larger description of an aim to improve the performance of UK firms more generally.
David Smith: Picking up on Richard’s earlier point, one thing you should not do is try to create something where the ground is very barren. You should go with the flow, in terms of what UKTI does. ONS brought out a note just last week on international trade and services, and the international trade and services it defines have doubled over the past eight years, so that has been a success story. The emphasis tends to be on goods and what we think of as traditional exporting, which is fine. But within that there are some dead horses that continue to be flogged, in terms of export promotion, where we are going to struggle because we do not have comparative advantage, and where people within those sectors may feel hard done by if they do not get the services of UKTI. Given limited budgets, given that there are some areas where no amount of export promotion will transform things, you just have to think about things strategically—about where we are most likely to be successful—and concentrate the support in those areas.
Q35 Chair: You think that we should pick winners.
David Smith: Picking winners is a pejorative term, in the sense that you tend to think of picking companies. Picking winners was 1970s style. Picking sectors in which we are likely to do well is different from picking winners, because you are then allowing any number of businesses to succeed within those sectors and within sectors that benefit from them. That is the kind of broad approach that UKTI would benefit from. Go with the flow rather than try to change trends that are not going to be changed.
Chair: Gentlemen, thank you very much for your evidence. We really appreciate it. Thank you for your time.
Examination of Witnesses
Witnesses: Tim Ambler, Senior Fellow, Adam Smith Institute, Graham Cole, Former Chairman of AgustaWestland and Chair of the Cole Commission on Exports, and Jon Coleman, Chair, British Exporters Association, gave evidence.
Q36 Chair: Good morning gentlemen. Thank you for giving evidence to our inquiry about UKTI and exports. For the purposes of the record, could you tell us who you are and where you come from?
Graham Cole: I am Graham Cole. I am former chairman of AgustaWestland. I am largely retired now, but I also chaired the Commission on Exports, which reported last year.
Jon Coleman: I am Jon Coleman. I am chairman of the British Exporters Association. We are a small organisation, but our focus is very much as the label says on the tin: we are all focused on export. It is large, medium and small sole traders, plus a lot of the international finance banks and credit insurers.
Tim Ambler: My name is Tim Ambler. I was nearly 30 years in the wine and spirit business, both importing and exporting, and then nearly 20 years at the London Business School teaching international marketing and researching it. I am now with the Adam Smith Institute and I congratulate the chairman on the continuing success of Camerons Brewery.
Q37 Chair: We should have a pint of strong ale to celebrate that. May I begin by asking you the same question I asked the first panel, which is: why has our trade performance been so awful for so long and can we change that?
Graham Cole: There are a number of reasons. When you look at a large company, in my own company, before I was chairman, I was responsible for all of the international sales. You know what your export market or potential is for the next three, five or seven years. You are tracking it yourself. You know it. You want the Government to help you get those across the line. Very rarely would Government or UKTI come to you with a new potential or possibility that you had not had your eyes on for some time. But when you come to the small businesses, you have to get them into the export market; you have to sync their exports.
As part of the commission report, we went to Germany. If I can suggest, Chairman, it is a very valuable visit if you are able to make it. We visited various organisations, including the German chamber of commerce. They have 45% of their SMEs exporting; we have 18%. It is much more in their culture to export than it is here. There is a large part of that that is yet to flow through. The chambers in Germany have been there for many years, and there are things that are significantly different from our arrangement, not least of which is that belonging to a chamber over there is mandatory. We would never do that. Nonetheless, they have a culture that drives the large and smaller companies into the export market.
Q38 Chair: Can I just pick up on that? I asked the previous panel, in terms of culture and characteristics, why firms that may be making a good living through the domestic market would want the difficulty, the hassle and the risk of thinking about international markets. How do Government play a role in trying to nudge different characteristics of firms?
Graham Cole: It is very difficult, Chairman. I chaired the CBI in the South West for two years. Lots of the companies in the South West, going from Gloucester down to the Scilly Isles, are small companies. They would say to you, “Look, I make a good business in the UK with perhaps one or two small overseas contracts. I know that if I go into the export market and I am successful, I could be really big. But if I go into the export market and fail, I have not got the business that I have got now.” So, it is a risk. With a large company, you are driven towards exports because that is the business you are in. We could never sell the amount of helicopters we needed to in the UK. You had to export; you were forced to do it. On the small and medium-sized business side, that is a very different challenge. Government, or Governments, through other organisations need to help take away that fear of going into the export market and failing.
Q39 Chair: Mr Coleman, you must play a part in taking the fear away. Do firms that are already exporting come to you? How do we ensure that we can shift the needle in terms of making exporting seem an attractive, desirable proposition?
Jon Coleman: We have one or two new members who have joined because they have just done their first export. They may have not fully assessed the issues they had and come across some risks they have not assessed, so they join a trade association to get advice and experience from fellow members. We find that, certainly for the small exporter, there is the fear factor of going into an export market, as Graham has said. If you have a good domestic market, why go and export? It has been lost from the business culture in the UK over decades. In combination with that, the economy has been very much service based. Whereas the service sector has been exporting fairly successfully, the manufacturing sector has reduced, so there is less capability to export. The focus really needs to be, in our view, on the practicalities of making sure that potential exporters, particularly new ones, are aware of the risks and that they then know where to go and what the mitigants are in the market, be it the private market or from Government.
Q40 Chair: Is there a need for UKTI? Could you not do it?
Jon Coleman: We are very small, Chairman, so I do not think we could. There certainly is a need for UKTI. In our last benchmarking of UK Export Finance, which we submitted to the Committee, we identified a requirement for a more whole-government or pan-government approach. It is a good thing to refocus UKTI and put a policy requirement into individual government departments to put exports on the agenda. It can only be good to have UKTI embedded in those departments and then feed back through their advisers around regions to really link export opportunities to the UK supply chain.
Q41 Chair: Your evidence to us was excellent. You mentioned how you are pushing that whole-of-government approach. The coalition Government did that in 2011‑12, and now Lord Maude is doing it again. Did it not work last time?
Jon Coleman: It is an iterative process. If we go right back to about 2009, Lord Mandelson at the time decided that we needed to put a focus on exports. That was taken forward by the coalition Government. Steps were certainly made within UK Export Finance, which is now fit for purpose in nearly every way we believe—there are one or two tweaks they could do. However, on the UKTI side, we were always concerned there was a lack of a metric in terms of performance, linking their performance and activity to actual exports won. We are encouraged that we believe there will now be a more structured view of the value of exports that UKTI helps UK companies win. UKTI obviously cannot win an export, but they have a valuable role to play. The way to go is to put policy into individual government departments to get the export agenda on those departments’ agendas and link that into the domestic market.
Q42 Chair: Mr Ambler, you have long experience in exporting and importing. What practical recommendations do you think we should be considering in order to raise our game when it comes to exports?
Tim Ambler: Yes, I am sorry to disagree with the previous speaker, but I rather agree with the previous panel. UKTI—and I have worked with them on and off for 20 years—has not changed. It is as bad now as it was then. This may be over the top, but it is an actual blockage to exports rather than a help at the SME level—it is quite different at the bigger company level. I have been filled with tales for all of those 20 years—and you have been, too, as MPs—about trying to be a small exporter and getting some help. I tried to be a small exporter myself last week, because I knew I was coming here, to see what would happen. I am not going to take up the time of the Committee, but it is not a good story—at least not from their point of view. The Government have recognised that UKTI is not fit for purpose. The reason I know this is that they have a new model. The new model is not very precise yet; it is a bit sketchy, which makes it difficult to criticise.
But to come back to your question, I am all for getting government Ministers—all the Cabinet—up one by one at the end of each year and saying, “What have you done for exports this year, my boy? How many trade missions have you led and what have you actually done about it?” That is a very good thing to do. However, to spread all the civil servants around Whitehall so that they can have more chit-chats to each other is, frankly, going to make the lack of contact between UKTI and the real world even worse.
Q43 Chair: Your evidence was excellent, too. You are very scathing about UKTI in your evidence to the Committee.
Tim Ambler: I am a little.
Q44 Chair: You say that UKTI has offloaded responsibility. What model do you want to see UKTI have?
Tim Ambler: I do not want it to have any more—let it have a great deal less. As I say, they are getting in the way, so if there was less of them, they would get in the way rather less. Government in this area should only do what only Government can do, and that is really the key to it. There are obviously many things that the private sector cannot do for itself and where it needs help: introductions to foreign Governments, high-level contracts or trade missions. There are lots of things that only the British Government and, in my view, UKTI itself can do—because it is not all bad; I do support it in some respects. However, there are an awful lot of the other things that they, frankly, fail to do, and dealing with SMEs is one of them. Dealing with the overseas posts is another, because that is a disaster area as well. They should, frankly, offload that because they cannot do it, so they should give it to somebody who can.
In the case of domestic small businesses, we should follow the German pattern, which is what Michael Heseltine suggested 20 years ago. They have 45% SME exporters; we have 18%. Like the Germans did, why do we not give it to the British Chambers of Commerce, who are themselves—as you will know, Chairman—extremely keen to take that role on. Whether they should take it on overseas is a more difficult question.
Q45 Richard Fuller: There is one point in Mr Ambler’s evidence I would just like to highlight and get some views on. It is about the way in which foreign direct investment is used in statistics in that, when someone does a direct investment, the Government herald the full amount of that. If it is, say, setting up a new plant and it costs £500 million, we have £500 million and we call it a big success but, equally, that could be purchasing a British company and, essentially, it is taking over future profits that would have come to UK shareholders to give to overseas shareholders. Do you think UKTI should bear in mind Mr Ambler’s advice and be a bit more dexterous in heralding foreign direct investment statistics?
Graham Cole: If you are in the business, you are running a company and you are looking to export, it does not really matter what the statistics say or do not say. One accepts that some of those statistics that come out can be challenged. We have a target of £1 trillion. You could challenge that if you want. I do not think it changes the fundamental, which is: how do you get more people out there exporting and those who are out there exporting more? I personally do not think how you use the statistics or whatever is a major issue.
Tim Ambler: The £1 trillion target was never viable, and they knew perfectly well at the time that it was never viable. It sounded good in the media, but the real purpose of the £1 trillion target was to get the massive increase in the budget of UKTI. That is how you get bigger budgets: you have bigger targets. They manifestly achieved that. Even with the current round of cuts, they will still be a lot bigger than they were five or six years ago.
Graham Cole: I take a slightly different position to that. I worked with UKTI, or whatever it was called—it changed its name—for some time. There are areas of excellence for large companies. They can make a difference. Certainly, if you are going on a trade mission—and certainly, as I have done on several occasions, if you are going with the Prime Minister—it works extremely well and can make a difference. But you are asking one organisation to support Jaguar Land Rover, British Aerospace or AgustaWestland and also a valve manufacturer with 30 people in Newlyn. It just does not work like that. It is a different skill set; it is a different size.
Q46 Richard Fuller: To be clear, I am not asking them to do it; you are asking them to do it. I would rather we did not use that much money because I do not think it is spent particularly effectively. That is a question I put to the last panel. We are in a time of the Government still living beyond their means and trying to meet their deficit reduction targets. For taxpayers in my constituency—and each of you in your careers have been in large businesses—there is a lot of scepticism about taxpayers’ money being spent on large companies. Do you think that the Secretary of State for Business lost an opportunity here to show that he could do his bit for deficit reduction by really challenging the structure of UKTI and paring it down to where it could be truly effective, rather than, as you say, Mr Cole, trying to do too many things and perhaps not doing them very effectively?
Graham Cole: I believe, and the report we issued last year states, that with the smaller companies—the SMEs—you have to judge where the “S” starts and where the “M” starts and where a large company starts. Also if you have a supply chain that is part of a larger company, where do you cut it off? It is not quite that simple. I believe UKTI should look after the larger companies, because that is really what it does well. There should then be a different system for the smaller ones.
Can I quickly make two other points related to that, Chairman? First of all, exports are today’s debate, but they must be part of an overall UK industrial strategy. On their own they do not mean anything, so you need a co-ordinated strategy.
The other point I would make is about putting the civil servants around the other ministries. I believe there is an awful lot of activity that could happen within each of the other departments, particularly the spending departments. When they are making major procurements, they could look to see what the potential impact is on exports. I do not know whether you physically need to spread civil servants around or whether you can drive an export mentality into each of those departments, but you need to get the senior people in that organisation—in that department—thinking exports. That can make a change.
Q47 Richard Fuller: Many small businesses in my constituency would shudder at the prospect of the Government announcing an industrial strategy. It is a perfectly reasonable point of view; it is just how I think my constituents and small businesses will feel. They like the free market and the opportunity to meet their customers; they want the Government to get out of the way.
Graham Cole: Germany, Japan, America and France all have an industrial strategy you can identify with.
Q48 Richard Fuller: Mr Coleman, in your evidence—and I think in your response to the Chair—you were quite supportive of the distribution of UKTI into different departments. In your evidence, you make a specific point about DFID and supply chains. Am I right about your view about moving into different departments because, in the previous panel, they were saying, “Well, we are not really sure about the evidence, but the evidence we do have suggests that is not a good idea and centralising it is good.” Would you just elaborate a bit more on the supply chain in DFID, as that is one government department that is seeing significantly increased budgets?
Jon Coleman: We are certainly supportive of the idea of having UKTI more focused within government departments. In terms of DFID, we feel there should be a stronger focus on linking DFID programmes and DFID aid projects back into the UK supply chain. A very small percentage of the DFID budget is spent with UK suppliers. We think there is a big opportunity there, particularly in the context of the National Export Challenge.
Q49 Richard Fuller: Why do you think that is, compared with other countries? Is it because we are just worried about what it might look like?
Jon Coleman: There is quite a strong element of that. If you look at OECD countries, there are only four OECD countries, of which the UK is one, where there is no tied aid element. We are not asking for trade for aid, but regarding UK standards, UK quality, UK delivery of programmes, if there was a stronger link into the UK supply chain, we could deliver truly UK projects into LIDCs. That can only be of benefit to the UK. Certainly, as a taxpayer, I would feel prouder of that than some of the spend we see out of DFID.
Q50 Amanda Milling: The Chairman spoke earlier on about nudging small businesses into exporting. What are your views—I think I know some of your views—in terms of the move from the regional trade advisers to more of an online offer? What are your views in terms of that as a model?
Graham Cole: I believe that, if you are to encourage people who are not in the export market or who are on the fringes of it to do more, you have to be close to them. You have to know the business; you have to encourage them out. I do not think going online would do it. Again, going back to our report, we suggested that if you look at the German model, the chambers there operate close to the customer. They know their customer; their customers know them. They know it is a one-stop shop they can go to where they can go and talk—and it works. The difficulty is that, frankly, the excellence of the German chambers has been developed over many years. With unlimited money and support, you cannot go from 0% to 100% like Germany overnight. I would suggest that journey will have to be made at some time if you want to get the smaller companies involved.
I understand the difficulties in doing it. Certainly, you could say, “The market can form. Perhaps in one area it could be this organisation; in that region it could be that.” But I just do not think that works, because you are looking for an organisation that has quality control, that is excellent, that provides and that can link to the overseas. I just do not think that you can do that if you have six, seven, eight or 10 organisations all linking with the smaller companies.
Q51 Amanda Milling: Can I just probe you on that point a bit more? Obviously, you mentioned earlier that the difference in the German market is that the chamber of commerce is mandatory. How do we address this in the UK?
Graham Cole: I accept that it can never be mandatory here. But as you build up, and the standard and the excellence of the organisation is seen, it becomes easier. It is a long-term process. One of the questions or statements I get back when we say, “You need an organisation—a one-stop shop or similar—to do this,” is, “There isn’t one; the British chambers are not ready for it.” The answer to that is “true”, but I do believe that, unless you set up at that level an organisation that can provide the knowledge, the experience and the encouragement and that knows the customer and can then link to an overseas chamber, you are not going to do it. Again, forgive me for saying, Chair, but if you see the way Germany operates, you will see how this has linked over many years and is very positive.
Tim Ambler: Can I go back to your first question regarding those people online? Having had the dubious benefit of being online with ExportSavvy, which was quite an interesting experience, some of the online information is quite helpful and some of it is plain wrong. However, it is very unsatisfactory to deal with because it asks you a lot of questions you cannot possibly know the answer to, like, “Which country do you want to export to?” How do I know? I will not spend too much time on this issue, but I will just say that what someone who is a potential exporter really needs is somebody who has been there and done that himself or herself, and can sit with you and say, “Yes, I remember being in your stage at that stage. Here is what I did and here is what other people have done,” and that kind of thing. You are not going to get that online.
Q52 Amanda Milling: Do you think the advisers you have had to date in UKTI have been able to do that? Have they had the expertise to guide potential exporters?
Tim Ambler: Quite a lot of them have been or are very good. Their problem is management. It is bad generals; there are no bad soldiers. Specifically, it is about not being directed and being given time to do the thing. At the same time, there are quite a lot of other ITAs who are in it for the money and really should not be employed. That is part of the management problem again. It is back to UKTI all the time, because they have subcontracted out quite a lot of the ITAs to other firms, but because they are not managing them properly it does not work.
Jon Coleman: Back to the original question, which was about an IT system, BExA has concerns. If you look at the Government’s record on introducing large IT systems, it is not good. The ability to go and speak to someone who can either give you the answer or point you in the right direction is far better than going online and struggling with a website, which, as Tim has said, can often give you erroneous information. I can see people spending man-years trying to sort and sift information on a website and trying to make sure it is right and appropriate.
There has been a lot of talk about the SME space. What we would really like to see in the SME space coming from a combination of UKTI and UK Export Finance is some real practical support. I note that, in the Trade Minister’s announcement, he talked about vouchers for exporters. We support that. We can also look elsewhere, such as at the French example of having prospect insurance, whereby it is applicable to SMEs and they can obtain funding or a guarantee for funding to support a marketing campaign. They have to go and identify their market, come up with a business plan and they then get government support. We see that as really practical support.
The Canadians have the rather nattily termed CanExport, which is a similar product. That announced, at the beginning of the year, 50 million Canadian dollars aimed at SMEs. An SME can apply for anything between 10,000 and 100,000 Canadian dollars, and that is a 50/50 share, as I understand it, so they have to come up with the equivalent amount. But that goes to support travel and subsistence—actually getting into the country. We see that as a real practical use of government funds, because you are focussing on individual exporters, you are agreeing a plan with them, you are working with them and you are following through. You have a metric you can follow.
Amanda Milling: Can I ask one last question?
Chair: You certainly can.
Q53 Amanda Milling: We have talked a lot about different things that can be done. I suppose I am sitting here and feeling quite concerned that we can do lots of things that are not going to make a difference. Do you think these different policies, initiatives and changes to UKTI are value for money?
Graham Cole: I come from a large company background and, therefore, I have got used to using UKTI. They have been very beneficial, but I am also convinced that if we really want to change things, we have to get small and medium-sized companies involved. I do not see the UKTI route as the route that is going to change that. You have to put something in place that is going to help those people.
As I say, it is not a definitive grouping, because what is an “S”? What is an “M”? What is an “M” that is related to a large company? All those are difficult things to sort out but, by in large, you want to encourage people to go into the export market. The sort of initiatives that Jon has just mentioned—in Canada etc.—are valuable. When you go out into the market, you see your opposition there with quite a toolbox of things to do. But you will not get to there unless you know the suppliers; you talk to the suppliers; you get the suppliers with confidence; and you know that if he has an issue to look at with regard to export paperwork or the UK Bribery Act or whatever, there is somebody there who can help him. That is what you have to break through.
Jon Coleman: The proof will be in what happens in the next four years. Over the last five years, certainly the SME sector has not had support from UKTI. I would agree with what has been said by the members of the panel. They had a deliberate focus on medium and large companies—probably because that is where they could deliver best what they had to offer.
The way forward seems to be having a refocus of UKTI on government departments and then, hopefully, a focus on linking into the supply chain, with a focus on SMEs and on getting awareness out there about the risks of exporting. It is about helping them into the market, but also then helping them through the process of understanding the risks and pointing them in the right direction, be it UK Export Finance or the private market, to cover those risks.
Tim Ambler: My expectation is rather gloomy. I do not think I am allowed to be ad hominem, but we are dealing with a Minister who was going to get rid of quangos, you may recall. My expectation is that it will not change very much and there will be another meeting 20 years from now in which the same conversation will be had.
I would hope, on the other hand, that this is an opportunity for radical change. Sorry to wave my own flag around, but the supplementary evidence that I was allowed to put forward—I do not know if you had a chance to see it—is quite specific about the point I was making earlier: namely, that UKTI or the Government should only do the things that only Government can do. That cuts it right back because, in the latest thing from BIS, it says in almost every paragraph, “We are going to focus more and, by the way, here are another six initiatives.” That goes on right through their evidence—it is uncanny. They really should focus more; that is the good part of the paragraph. They should focus on what only Government can do and find a way, be it through these voucher schemes—that is a good scheme and I entirely support that—or through recentralising SMEs to BCC, with a method for controlling that, because you cannot just give the taxpayers’ money away. I am not going to take time now, but I have specified exactly how that could be done with a faint wish, not a big one, that it might be read in high places.
Q54 Chair: Can I just mention this very briefly? An emerging theme, even at this early stage, is whether UKTI should focus upon small exporters and expanding the range—those exporting to one or two markets of relatively small value—or is it the export superstars, in terms of really capturing a lot of export value? Where do you think we should be looking? Is it small businesses or is it export superstars?
Graham Cole: It is both.
Q55 Chair: Even with limited funds and different skills?
Graham Cole: Yes. You have to support large companies because they are going to bring in £1 billion, £2 billion, £3 billion, £5 billion or whatever, in one contract. You cannot afford to lose that because your competitors have greater government support than you and everything that means. That has to go on, and that is where UKTI are very good; they play a very good role.
For the smaller companies, you need a different system. UKTI, with all their structure and all their need to be showing what they are doing, is the wrong organisation. Tim mentioned that Government should only do those things that only Government can do. If you do that, which I agree with, but what they stop doing is to do with the smaller companies and you allow six, eight or 10 people to go in and try to make a market of it, you will have six, eight or 10 different standards and it will not work. You need to have a standard, a quality control, for SMEs across the board.
Tim Ambler: I agree with that. I would say it should be given lock, stock and barrel to the British Chambers of Commerce, on the German model. To have six or eight people competing will not work.
Q56 Chair: Can I focus minds upon export superstars or increasing the number of small businesses with small export value? Mr Coleman, do you have a view?
Jon Coleman: If we put this, as we do at BExA, in the context of the National Export Challenge and objectives, which I agree have stretches—they are objectives; they are challenges; it is called a “Challenge”—there are two sides of the coin. To really get to the trillion, you have to be supporting the large corporates and the medium-sized ones, but there are an extra 100,000 companies exporting. They are going to be mainly SMEs. If you are going to have a joined-up government approach that has targets, you have to address how you address each side of the coin.
Q57 Chair: Do you think those two targets are contradictory then?
Jon Coleman: I do not think they are necessarily contradictory, because if you have an extra 100,000 new exporters and a lot of them are SMEs, they will be delivering a percentage increase in exports, but it is not going to be £500 billion.
Q58 Chair: Okay. Mr Ambler, do you have a view in terms of export superstars?
Tim Ambler: Yes, I do. It is the opposite of Graham’s: not both, neither. I do not think the export superstars should need government help. The superstars will go and get it. When we launched Baileys in 1972, it was a non-brand. The Irish Government wanted it for exports and we were a big enough company to lean on the Irish Government and say, “Right, we expect all your embassies around the world to give a Baileys party, just for starters.”
Chair: It does not sound like a bad idea.
Tim Ambler: We were big enough to do that. The superstars can get the help they need from various sources because they are superstars. Conversely, I do not think—as I have said several times—that UKTI is any good with SMEs. They should abandon ship.
Graham Cole: I am not sure I could see each embassy having a helicopter somehow. Chairman, I just do not agree with Tim. You need the support out there fighting in your corner because your competitors are strong.
Q59 Paul Blomfield: This is very much the same theme I want to pursue, because alongside this enquiry I have been carrying out a dialogue with local SMEs about their challenges with exporting. I have to say, contrary to Mr Ambler’s observations, there has been, from those most successful in exporting, a very positive response about UKTI and the role it has played in helping them. But I was interested in Mr Cole’s suggestion that, although clearly we are talking about different companies facing different challenges in terms of scale, you think there should be a complete split in UKTI. Isn’t there a basis of expertise that simply needs to be applied differently to SMEs?
Graham Cole: The support you need as a large company is international, political, geopolitical, long term—it is all sorts of large issues. The support you want to encourage SMEs to go into the export market is very different. You are quite right: if you talk to some SMEs, they will say very good things about UKTI. Often that is where they have been the recipient of contracts as part of a large contract. The supply chain to JLR is a good example of that. But you need to have people at a local level, close to the exporter, to help them through. I do not see that as a government function. I do not think to do that is the same ethos or the same structure as supporting large companies.
Q60 Paul Blomfield: For example, I was talking to the local hand-tool manufacturer who had broken into exporting into Russia. He is on the M side of SME, but he said that the overseas market introductory service that UKTI did was really useful. The kind of skillset that they have can be applied differently, but that knowledge base—
Graham Cole: I do not know the particular instance, but most people would say that the chambers overseas are a very effective way of introducing. The problem at the moment is you have the embassy doing some, the UKTI doing some and the chambers doing some. The whole encouragement for smaller companies is different. Now, you could certainly incorporate what your tool manufacturer is seeing going into Russia into a new system, but I would argue that the majority of people who are looking to go into the export market want a different relationship, different support, than your tool manufacturer.
Q61 Paul Blomfield: I very much accept your point that there needs to be a kind of intimacy in the relationship and mentoring and support for small businesses trying to get into exporting, but I am just curious to know what your model looks like and who is doing that differently. You mention chambers, but the truth is that chambers are pretty patchy across the country, aren’t they?
Graham Cole: This is the point I made to Ms Milling. You have to start that journey at some stage. In the report I chaired last year we recommended a one-stop-shop focused around the chambers. There is an awful lot of background to that to go through. The response quite often is, “Well, the Chambers are not able to do that; they are not ready to,” and you are right, but you have to create that. Again, I go back to the German model. That has been created, frankly, since 1945.
Paul Blomfield: Yes, we put it in place.
Graham Cole: Well, that is for historical reasons. You are not going to go from 0% to 100% overnight, but at some stage you have to do that. In my view, you have to pick your vehicle and then support it, back it and certainly iterate it, but that is the way forward.
Q62 Paul Blomfield: Thank you for that. One last question. My local tool manufacturer said that one of the problems at the moment was that where in the past, as an SME with a limited budget, they had been helped by matched funding from grants, that financial support did not seem to be available in the way that it was. It is a big problem for them. Is that your experience as well? I see Mr Coleman is nodding.
Jon Coleman: That certainly is a problem, yes. We have a rather perverse situation where support for a new exporter going into a new country and maybe going to a tradeshow is there, whereas an existing exporter who is successful in one country and is assessing another market and wants to go into that market cannot get the support in terms of funding from UKTI. You have someone who can export, knows what they are doing and just wants to go in and expand their market.
The needs of the SME in terms of the real understanding of getting into a market are very different from the needs of government support for a large corporate. Large corporates have marketing departments, legal departments and export departments, so they know what they are doing. When you get down to the SME, particularly the new exporter, it is the real nuts and bolts. That is where the regional advisers—the good ones, and there are a lot of good ones and one or two who are not quite so good—can really help by either providing the advice or pointing people in the right direction to get advice from a broker, on the insurance side, a bank or a trade association, or whomever it may be. You do need that personal support.
Tim Ambler: Mr Blomfield mentioned that some chambers are patchy in this area and that is also true of overseas posts. Some are good and some are not. The proposal I have put up is that in offloading this—a bit like the Arts Council, which hands out money annually or every two years or whatever it may be—the chambers have to bid for financial support once every three years or whatever it may be. The good ones that show results get the money and the bad ones that do not show results do not get the money. One can use the competitive bidding process in order to drive standards up, both at home and indeed overseas while one is at it. I would see that as a big opportunity. That could never happen in the present structure of UKTI, but it could happen in an offloaded structure.
Chair: I am very conscious of time. BIS orals is happening in the Chamber of the House shortly and I have Kelly and Amanda wanting to come in, so if we could be brief, that would be appreciated.
Q63 Kelly Tolhurst: It is quite interesting to hear what you are saying. I have had a very good experience with UKTI as a small business trying to export into a challenging market. Because of the published focus of UKTI on large organisations, do you think small businesses or SMEs may feel they are not big enough to export and therefore do not necessarily get in touch with UKTI at crucial points?
Jon Coleman: That probably is the case. I do not have any empirical evidence for that, but if a small company is going to get into the export market, the first port of call is to go and ask someone, “How do I do it?” It is that basic. The fear factor is wondering, “Am I putting my whole company at risk by investing in an overseas market when I am happily paying the bills and I have a nice business here in the UK?” Having somewhere to go and having the help and support of UKTI, as well as other private organisations and trade bodies, is vital.
Q64 Kelly Tolhurst: Following on from that, is there any value in regional governments’ involvement in the promotion of their local areas and their particular skills? That seems to work in some other European countries, specifically Italy, that are performing much better than the UK in the developing markets.
Tim Ambler: That was the evidence from these other regional things. They all said, “Give us the money,” basically. There could well be value in that, but to have local government and the chambers competing would be trouble. They should be encouraged to work together, because you are quite right; there is a lot that could be done.
Graham Cole: It depends on what you want regional government to do. To set a culture that encourages exports is good and there may be some things they can do on a regional basis, but it does not remove the need for individual companies to have individual support to get them there and then get them through.
Jon Coleman: There is also the danger that you almost disperse the support for export if you have some things that are done regionally, some things that are done centrally, and different government departments. You run the risk of having a completely dispersed area of support, which may cost more in terms of the government purse.
Q65 Kelly Tolhurst: Can I quickly come back on that? For example, we do know that countries like Italy are more successful in getting their SMEs to export, and that is an example of one of the ways that they do it. What is stopping us?
Jon Coleman: I guess the devolution process in the UK.
Tim Ambler: Italy has a remarkable system in which each town is almost a specialist area in shoes or belts or whatever it is, so they have a huge concentration of expertise in small areas. Those small areas are the equivalent of our chambers. That is why they are successful exporters. They have a real focus, town by town.
Graham Cole: Again, my company was Anglo-Italian. Their system has been developed over many years. Whatever you put in place, you are not going to get there straight away.
Q66 Amanda Solloway: Given that UKTI cannot be everything to everyone—i.e. large businesses and small businesses—and if it has to come under one body, which is a message that has come across, and that body is called UKTI, would you suggest that it is a lack of focus on behalf of UKTI or is it a management issue, as some of you have been saying?
Jon Coleman: I would say focus.
Tim Ambler: I think the same thing. Management is obviously the focus.
Graham Cole: It is being asked to do too broad a job.
Q67 Amanda Solloway: But couldn’t it do that big a job if it had good management? I think that is my question.
Graham Cole: If you are going to provide that close support that SMEs want, you could call it UKTI but they have to be local, they have to be funded, and they have to be aware. It is exactly the same issue. Whatever you call it, it has to be quality controlled.
Tim Ambler: I have dealt with UKTI and its predecessors under the DTI for over 20 years. Many talented people have come and gone. I have admired them and they are good individuals. It is the actual culture and structure that is wrong, not the individual managers.
Chair: Gentlemen, thank you very much. That was incredibly helpful for our inquiry. Thank you for giving evidence. We appreciate your time. Thank you.
Oral evidence: The Productivity Plan, HC 466-iii 3