Written evidence from England’s Economic Heartland Strategic Alliance (ISG 97)

 

England’s Economic Heartland Strategic Alliance is responding to the House of Commons inquiry on the government’s Industrial Strategy. 

England’s Economic Heartland Strategic Alliance brings 9 Upper Tier Authorities and 4 Local Enterprise Partnerships together in a partnership whose aim is to look beyond current success and:

The Strategic Alliance stretches from Oxfordshire to Cambridgeshire.  It has an economy valued at £92.5bn, and is home to 3.45 million people.  Its 175,000 businesses employ 1,640,000 people.  It is an area that makes a net contribution to the Exchequer and yet is an area whose continued economic success must not be taken for granted.

The Strategic Alliance was established in response to its partners recognising the need for strategic leadership in order to address strategic issues and realise economic opportunities across the Heartland area – an area that is in effect a global cluster. 

The Heartland’s economic success reflects its specialisms in advanced manufacture of computer, electronic and optical products; computer programming, consultancy and related activities; architectural and engineering activities, including technical testing and analysis; scientific research and development, including life sciences; creative industries.

The Strategic Alliance’s response to the recent National Infrastructure Commission’s call for evidence set out the need for a co-ordinated, corridor-wide approach in order to enable its economic potential in the global marketplace to be realised and the delivery of planned growth accelerated.   It set out the case for co-ordinated investment in infrastructure along and throughout the corridor to connect its ‘growth poles’ together and connect them to their labour and business markets and international gateways, and to provide capacity for such movements that not only accommodates growth but also acts as an incentive for investment. 

The Alliance’s submission – which built on work commissioned by the Local Enterprise Partnerships – set out how in order to achieve significant growth in productivity and employment there is a need to address several interconnected barriers through a co-ordinated approach operating at a strategic level.

The Government’s Industrial Strategy should seek to provide a national context within which the emergence of sub-national partnerships can subsequently build co-ordinated approaches.  It should look to reflect the importance of both manufacturing and service sectors to the UK’s future economic success.  England’s Economic Heartland Strategic Alliance will look to build upon its proposal to establish a statutory Sub-national Transport Body to develop an approach that embraces the broader infrastructure agenda as well as the skills agenda.

Q1. What does the Government mean by industrial strategy, and what does the private sector want from one?

Given the current economic, financial and trade climate, England’s Economic Heartland (EEH) welcomes the strengthening of government’s enthusiasm for an Industrial Strategy and supports the ambition to establish a more strategic, joined-up, long-term, predictable and sustained approach to economic policy making and delivery, with a framework set out by government, developed in partnership with emerging sub-national partnerships.

EEH argues that the Industrial Strategy must be an integrated, cross-departmental strategy that goes beyond mere strategy, to develop some strong lines of implementation; ones that bring together international, national, regional and local stakeholders and government policies to actively strengthen the UK economy and the operating environment for UK businesses. In our experience too many past industrial strategies have not had sufficient impact on delivery.

It is critical that the Industrial Strategy is seen as being reflective of the strengths of the UK economy, not only in manufacturing, but also the financial and service sectors.  EEH believes the word ‘industrial' is too backward looking. We should be talking about a plan for growth. The UK’s Creative Industries, for example, are now worth £84.1 billion per year to the UK economy and grew almost twice as fast as the rest of the economy as a whole.

What the private sector wants from an Industrial Strategy is the best possible conditions in which to do business. They want;

EEH believes it’s important that the scope of the Industrial Strategy extends beyond the relatively narrow BEIS departmental responsibilities (of energy, climate change, science, research, business and enterprise) to encompass other important factors of production for business including transport infrastructure, skills and global trade arrangements.  Skills and Supporting Infrastructure in particular are two key issues for economic growth in the UK that the country has long struggled to get hold of. 

For example, the Strategic Alliance’s submission to the National Infrastructure Commission identified that productivity was being held back across the Oxford to Cambridge global cluster by the difficulty in connecting to wider labour and business markets; journey speeds; skills gaps; and changing population demographics.

The Strategic Alliance is the partners’ resolve to tackle these issues in an integrated way so as to enable the Heartland achieve the open, inclusive, productive, higher wage economy that everyone aspires to.

Q2. How interventionist in the free market should Government be in implementing an industrial strategy, for example in preventing foreign takeovers of UK companies?

As far as preventing foreign takeovers is concerned, EEH believes the government may need to adopt a more proactive approach than has operated in the past.

EEH argues that the Industrial Strategy should generally continue to embrace a free-market / non-interventionist approach, but - given the current financial, economic and international trade environment in which the UK finds itself – we advocate that there is a case for identifying certain sectors of the economy  as being of ‘national significance’ as part of the UK’s Industrial Strategy.  This may include identifying some key policy areas where intervention may be required to stimulate recovery or amplify the UK’s competitive advantage in key sectors.   

EEH believes the key question here is not how interventionist the strategy should be, but what are the key areas for intervention and what are the primary objectives government is seeking to achieve from any investments it makes? 

It is important that we do not create an investment culture of trying to pick winners, however any Industrial Strategy needs to recognise that many major industries of our competitor nations have benefitted from significant government support somewhere along the line. China, for example, has 23 companies in the FT’s top 500 biggest companies, all of whom are owned by state or local government. The average amount of State Aid spent by Germany, France and Belgium is approximately €170–€240 per capita, in comparison with the UK which spends approximately €90 per capita.

In summary, EEH believes these developments should encourage government to focus on adopting a new approach to Industrial Strategy making – one which broadly emphasises;

Only by adopting this bottom-up approach do we believe the UK will be able to achieve the close collaboration that is needed between the public, private, academic and/or community sectors to stimulate the growth of indigenous firms and emerging sectors, whilst also ensuring the economy develops the resilience needed to protect itself from global economic fluctuations and shocks.

 

 

Q3. What lessons can be learnt from previous governments' industrial strategies?

EEH believes past attempts to develop Industrial Strategies in the UK have delivered fairly mixed outcomes. Generally speaking, past attempts have tended to oscillate between highly interventionist, centralist approaches and very ‘laissez faire’ hands-off, unplanned approaches.

Where pro-market industrial strategies have actually resulted in the production of a strategic document they have also generally tended to suffer from;

EEH believes that, in complex times like this, it is vital the government develop a pro-market industrial strategy and delivery plan, which ensures that the UK has the right environment for business when it comes to tax, regulation, competition, education and infrastructure and which;

Q4. What lessons can be learnt from other countries' attempts to develop industrial strategies?

EEH believes there is much that could be learnt from other countries industrial strategies, both at the macro and micro economic level.

At the Macro-economic level, the Chinese government’s recent practices of investing government funds in strengthening their own industrial base, whilst also investing in global infrastructure projects which can generate them a commercial return (but also load our own businesses with a higher cost base) cannot be ignored.

At the micro-economic level, EEH believes that there are a number of elements of Germany’s Industrial Strategy that might form the basis of the UK’s approach.

For example;

EEH believes that what makes many good international Industrial Strategies so admirable is their concerted and integrated approach to delivery and their bottom-up approach. EEH believes that economic and industrial policy needs to be informed by well-founded ideas where businesses, industries and communities come together to play their part in constructively designing and delivering the solution.

Q5. What tensions exist between the objectives of an industrial strategy and the objectives of other policies, and how should the Government address these tensions?

Government must acknowledge that the areas of policy that need to be addressed sit at different levels of government, as well as in the private, academic and community sectors – it does not and cannot only rest within one Government department. In developing its Industrial Strategy we believe the government should consider;

EEH partners envisage they could play a useful role in helping to shape the strategy, design the support services and help implement the strategy.

Q6. What are the pros and cons of an industrial strategy adopting a sectoral approach?

EEH believes that an effective Industrial Strategy needs to adopt an approach that embraces both Horizontal (Skills, Infrastructure, Business Support etc.)  and Vertical (Sectors, Specialist R&D Facilities etc.) issues. The debate should not descend into an either/or discussion.

Similarly, the important debate to have about sectors is not about whether to focus on them or not, but what are the right policy interventions to support the strengthening of our key sectors.

The reason this is the important question is because - despite sector and cluster theory having achieved significant credence in the public sector over the last two decades - examples of successful public policy interventions in the field are relatively limited.

As far as the horizontal issues are concerned;

As far as the vertical issues are concerned;

Q7. Should the Government proactively seek to ‘pick winners’?

Our extraordinary scientific excellence owes much to the principle that government does not interfere in expert judgements, but it supports the institutions and the environment that allows that excellence to flourish. The same is true of many of our best businesses.

EEH believes that picking winners is notoriously difficult. The best industrial policies allow winners to pick themselves.

This will only happen if government achieves the right market conditions and environment for growth, and builds supporting activities to help potential winners to thrive in a competitive environment.

Industrial policy needs a long-term view and stable policy goals and institutions that operate beyond the short term focus on an individual electoral cycle.

Q8. What criteria should be used to identify which sectors are supported?

Our perception is that what sectoral partnerships have existed in the past have generally been nationally constructed. On the whole, they have lacked deep reach out into the business community and have generally not been equipped to drive improvement down the supply chain. 

In The Heartland’s case, we believe the key sectors we should be seeking to strengthen are those in which we have particular strengths and possess a sustainable source of competitive advantage globally. In our case, as of today, that would include;

EEH believes the government needs to use the market knowledge and analysis acquired from the Strategic Innovation Audits (SIA) process, and a range of other local knowledge and expertise, to guide their investments in existing industries, new activities and new industries and use incentive based solutions to encourage businesses to respond to these opportunities.

Q9. Should the Government prop up traditional industries that it considers to be in the national interest?

In the past, government’s approach on this has been inconsistent.  There may be a case for identifying some traditional industries as being of ‘national significance’ and, through the Industrial Strategy, seeking to support structural adjustments required in response to wider economic changes.

Q.10 If not a sectoral approach, should the industrial strategy have a broader objective, such as improving productivity?

EEH is supportive of the concept of the Industrial Strategy setting itself a target of improving productivity. EEH also believes the Industrial Strategy should also target improvements in international trade figures, R&D spend etc.  

Business in the UK generally complain that it often harder to scale a business here than it is other parts of the world: an issue that should be addressed as part of the Industrial Strategy.  

The tools that the Industrial Strategy might put in place to bring about these sorts of changes could include:

•      Investment Climate: At present, investing in property and/or saving is more attractive to many than investing in a business. Only by redressing this situation will government be able to claim that the UK is the best place to start and grow a business;

•      Innovation/Tax Policy: Re-focussing the R&D tax incentive system to reward those that invest in developing new products/services (post protection), rather than the protection itself, would be useful;

•      Tech investment: Government needs to act as an exemplar for tech investment, championing its adoption and diffusion, rather than investing in outdated technologies;

•      Premature exits: The government needs to ask itself why British firms tend sell to foreign buyers at a relatively early stage? What does the government need to do to make growing a business to multinational world-beater more attractive?;

•      Planning Policy: Why is the British system so restrictive? The permitted development rights are having a significant negative impact on the availability of employment space.;

•      Immigration: Allowing, and indeed encouraging, foreign workers (especially those with specialist skills) to decide to come and work in UK rather than go elsewhere is an important issue for a developed economy like ours;

•      Promoting design and innovation: Government has an important job to do in this regard, so that our goods remain at the forefront of design and function effectively;

•      Environmental impact assessment: Government could work harder to improve the effectiveness of environmental impact assessment during the development process;

•      Civil Service Culture: Is much too insular at present. There should be quotas for external recruitment especially at senior levels to reduce group-think and enhance innovation at a strategic level.

In addition, all too often in recent times, government investment has been far too focussed on job creation, rather than improving our economic performance.

Because of our tight labour market and our higher cost base, we believe many of the businesses in the Heartland area would benefit from a programme which encourages them to invest in automation and robotics, rather than just creating more jobs. 

In addition, whilst 80% of the UK economy is service orientated, around 70% of all UK research and development (R&D) spending takes place in the manufacturing sector. The manufacturing sector is also responsible for a disproportionate level of the UK’s exports.

Collectively, this data would indicate to us the need for the government to take a more holistic view about what good growth means, to support businesses which have the potential to trade overseas and develop and protect their own IP to be more productive.

Q11. Should the industrial strategy have a geographical emphasis?

EEH believes it’s extremely important for the industrial strategy to have a strong geographic focus. As we have set out previously, EEH believes that building on the emerging sub-national governance provides a strong opportunity for government to encourage the UK’s industrial base to grow from the ‘bottom-up’, thereby ultimately establish a more resilient economy.

EEH believes this could be achieved by building on the existing broadly-based local economic governance structures and looking to use the emerging sub-national governance arrangements to provide the strategic leadership which affect the future direction of the economy (e.g. decisions on employment, investment, the environment) and co-invest in creating the solutions.

Despite government’s clear support for LEPs, we are concerned that government policymaking around some of the key local components of industrial strategy has, at times, been somewhat mixed.

It has not, for example, included a particularly concerted focus on allowing local areas to lead the skills agenda or (to date) considered the implications of local industrial structures on the on deployment of science and research spending, both of which are vital components of an effective long term industrial strategy.

Whilst transport policy has had a stronger relationship with local areas, there is still more work that could be done on improving the integration of between the delivery of transport infrastructure and local development (whether housing or commercial property) to deliver better economic outcomes and value for money.

Internally the UK is regionally decoupling, dislocating and disconnecting. According to the OECD, the UK has the greatest regional disparities in economic performance, an issue which numerous authors put down to the differential regional impacts of globalisation.

However, the situation is exacerbated by the current governance arrangements.  Centralised/top down governance systems are highly unsuited to addressing the economic geography of globalisation.

Generally speaking, other advanced economies have better sub-national/local governance models, for example Federal systems (USA , Canada, Germany, Austria), Bottom-up centralised systems (Nordic countries, The Netherlands) and/or rapidly decentralising countries with enhanced intermediate governance (France, Japan).

EEH believes the best policy responses to the challenges facing skills, transport, infrastructure and business support can be achieved through a strong collaboration between the public, private, academic and community sectors at the sub-national level: the establishment of the Strategic Alliance reflects the fact that its partners see this as a gap that needs to be filled. Government, through its Industrial Strategy, should look to support such initiatives and encourage their development.  We envisage that the Strategic Alliance could have a particularly strong role in corralling public, private, academic and community partners together to deliver the micro-economic elements of a strong industrial strategy, including (for example);

Q12. How should an industrial strategy link with devolution initiatives aimed at devolving taxation and decision making away from Westminster?

EEH believes that the Industrial Strategy should look to build upon initiatives – in particular those at the sub-national level – that are seeking to realise a genuine devolution of responsibilities and accountabilities from Westminster.

However, EEH believes the process for devolving services to local areas has become too complex and stymied by debates about local authority governance (rather than being focussed on exploring how localities can work together to deliver better improved outcomes for less money).

 

 

Q13. What examples are there of interventions from central Government that have successfully supported economic growth away from London and the South East of England?

EEH is concerned that government continues to describe economic performance across the wider London and the South East area as being broadly consistent. Our evidence suggests this is generally not the case.

For example, whilst London has outperformed the UK for 10 of the last 11 years, the South East has failed to match the national rate of growth six times in the same period.  Whilst the Plan for Productivity notes “London and the South East have accounted for half of all Gross Value Added (GVA) growth since 2010, whilst London alone has accounted for over a quarter of all GVA growth since 1997”, London actually generated 32 per cent of GVA from an economy that represents 22 per cent of the national economy, whilst the South East generated 15.2 per cent from an economy that represents 14.8 per cent. 

In addition to the above, government policy making around regional investment has, at times, seemed confused, not being clear as to whether it is investing in market failure, trying to address regional disparities or investing in success to generate the maximum return for the Exchequer.

Q14. How should the industrial strategy work with local authorities and Local Economic Partnerships, reconciling a U.K.-wide strategy and local, regional and devolved nations' priorities?

EEH believes there are some key components of an effective industrial strategy which can only be delivered at the sub-national level. EEH partners are up for taking on this challenge, and would like to see government develop a more concerted and consistent approach for working with localities to deliver the Industrial Strategy.

We are also keen to see the government adopt a more concerted ‘single pot’ approach that enables sub-national partnerships to use the funding available to invest in delivering outcomes by considering the inter-linkages between policy areas in response to local needs in a way that Westminster is unable to do.

Ideally, we would prefer to see the government utilise standard frameworks and models for working with each location on delegated service delivery models, rather than utilising ‘growth deal’ style approaches, which have tended to prioritise capital funding programmes with appraisal processes and award criteria which lack clarity and transparency.

EEH partners are well equipped to support the government deliver on an ambitious programme of industrial restructuring and growth and look forward to discussing our ideas with government further.  We would be very happy to help the Business Innovation and Skills Committee in collecting further evidence as it proceeds with its consultation programme.

 

27 September 2016