How to drive Britain’s new industrial strategy
Professor Michie is Professor of Innovation and Knowledge Exchange at Kellogg College, University of Oxford. This blog is a reposting of an article originally featured in The Conversation.
The desire to design and deliver an industrial strategy for the UK was shaped in its earliest days by a then lowly young politician called Winston Churchill. And the current government has put the idea back at the centre of British politics. The trick, however, will be to acknowledge just how big the job is, and how many disparate elements must come together to make it work.
The Industrial Strategy Commission, a body set up by the universities of Sheffield and Manchester, has published an initial report which is the latest contribution to this age-old debate. It makes some good points, particularly on the powerful links between industry and business services and the need to improve access to finance for investment.
The nature of investment is key. A century ago Britain was the world’s leading economy, before losing out to the US and Germany, then Japan and China – all because their industries outperformed Britain’s. Why did that happen? Unlike industry in the US, Germany, Japan and China, Britain’s has been dominated by finance. The City of London developed largely to service Britain’s empire, while the financial sectors in the other countries invested primarily to service domestic industry. Churchill by contrast had wanted to see “finance less proud and industry more content”.
A new, New Deal
Britain has since suffered from a lack of investment. The public has continued to consume more manufactured products, but these have increasingly come from Germany, China, and other more successful economies.
It is important that banks invest long-term in industry. More specifically, the state-owned Royal Bank of Scotland could be transformed into an industrial investment bank, funding a “Green New Deal”, recalling Franklin Roosevelt’s project to lift the US out of the Great Depression.
I argue that funds from a Green New Deal should be invested in productive and social infrastructure, creating the drivers for environmentally and socially sustainable growth, devolved across the UK’s nations, regions and localities. This would help to address regional imbalances which have been exacerbated by the UK’s reliance on the City of London. For evidence of that, look no further than the economic recovery since 2008 which has only delivered increases in income per head in London and the south-east where wealth and investment have long been concentrated.
Britain has also suffered from a sustained lack of corporate diversity, as documented in a 2012 report from the Ownership Commission. The 2010 coalition government pledged to do something about it but in fact, there was a deterioration. A simple step to improve this would be a vigorous promotion of mutuals – financial institutions owned by customers rather than shareholders.
Other advanced economies have a strong base of small and medium-sized firms, long-standing family ownership, and a range of co-operative, mutual and employee-owned companies, but the British economy is dominated by large shareholder-owned firms.
This in turn has encouraged a tendency to short-termism among corporate leaders, who focus their energies on quarterly profits and dividend payments to bolster share prices. Another contributory factor is said to be the threat of hostile takeover, which causes managers to take short-term measures to maintain the share price (when shares fall, a company can start to look like a bargain).
The controversial hostile takeover of chocolate maker Cadbury by the US food multinational Kraft in 2009 signalled that the UK should perhaps become more like other economies, which retain the right to block takeovers of companies regarded to be of strategic importance, and where boards of directors have more discretion to reject bids.
An effective industrial strategy also needs to address imbalances in pay, where inequality and low wages effectively subsidise inefficiency. Hence Churchill in 1909 promoted minimum wage standards, otherwise “the good employer is undercut by the bad, and the bad employer is undercut by the worst”. In truth, the UK has made some progress on this issue, but the emerging challenge now is to ensure that the minimum wage and living wage can be effective across the “gig economy”.
Finally, the UK labours under a lack of sufficient research, innovation, education and training. Previous governments made matters worse by withdrawing funding from students who seek to retrain in order to make career shifts which could boost emerging industries.
There is also the threat from Brexit. This isn’t just about funds, it’s also about European researchers being able to work in the UK, and about building upon existing successful research collaborations. The good news is that large increases in public funding for research, innovation, education and training were announced in the 2016 Autumn Statement, so of all the pressure points this looks the most promising.
But industrial strategy needs to address every policy area if progress is to be made. Churchill pointed the way, from the creation of minimum wages, to promoting the interests of industry rather than finance. Now we must pursue the six-pronged approach which promotes corporate diversity while addressing hostile takeovers, regional imbalances, short-termism and wages in the gig economy. All of that must take place while making sure increased investment into research leads to innovations which are adopted successfully by firms and then diffused across the economy, underpinning sustainable growth.