CBI Evidence for Business, Innovation and Skills Select Committee Inquiry on Industrial Strategy

Transcription

1 CBI Evidence for Business, Innovation and Skills Select Committee Inquiry on Industrial Strategy 1. The Confederation of British Industry (CBI) welcomes the opportunity to respond to the Committee s inquiry on industrial strategy. The CBI is the UK s leading business organisation, speaking for some 190,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington, Beijing, and Delhi, the CBI communicates the British business voice around the world. 2. The CBI have long supported the role that a long-term, consistent industrial strategy can play in boosting growth in the UK and we have worked closely with the previous government to ensure it delivers added value. Our 2012 report Playing our strongest hand laid out the groundwork for our position, setting out a number of principles that should underpin a modern industrial strategy and recommending that government takes a sector-led approach that seeks to capitalise on areas of the economy in which the UK has a competitive advantage. Our later report Raising the bar (2013) highlighted the bedrock of a competitive business environment upon which industrial strategy needs to be built, emphasising the importance of ensuring that the UK is internationally competitive on factors such as education and skills, tax and infrastructure. In 2014, our report Pulling together underlined the importance of taking steps to strengthen supply chains to maximise value capture in the UK as well as ensuring security of supply in our foundation industries. 3. As a membership organisation that represents business from all sectors and sizes, we have attempted where possible to address this inquiry s terms of reference from a broad perspective, covering the theoretical framework for industrial strategy as well as its implementation. To inform this submission and refresh the CBI s position, we consulted our members across all sectors and sizes on their views on industrial strategy in light of the changing political and economic context. 4. The consensus among members is that a modern industrial strategy should seek to build confidence and prosperity by unlocking growth and productivity across the regions and nations of the UK. To this challenge, the UK s companies hold many of the answers building a skills system for years to come, ensuring Britain is a leading location for cutting-edge innovation and helping to renew our nation s infrastructure. 5. The starting point should be to build on the sector-led approach to industrial strategy, capitalising on the momentum behind the partnerships that have developed between industry and government in recent years. This should be combined with a place-based approach that tackles key barriers to productivity growth, while ensuring close cooperation between industry and all parts of government across departments and geographies in order to play to the strengths of the UK economy. While the UK s industrial strategy should not be seen as the sole vehicle for achieving the UK s regional growth goals, considerable overlap means if implemented correctly, it has the potential to boost productivity, exports and business investment, helping to deliver prosperity across the UK. 6. This submission highlights that the key priorities for a modern industrial strategy are: Whether national, regional or local, industry and government must work in partnership to deliver a long-term, joined-up and proactive vision for UK industrial strategy a calling card for the UK s economy in the world. A sector-led approach, backing sectors in which the UK holds a competitive advantage, to build on the momentum already developed in recent years. A place-based approach which has a key role to play in industrial strategy, driving prosperity by leveraging strengths across all parts of the country.

2 Whether national, regional or local, industry and government must work in partnership to deliver a long-term, joined-up and proactive vision for UK industrial strategy a calling card for the UK s economy in the world. 7. The CBI has set out a number of core principles that should lay beneath a new approach to partnership between industry and government. Members feel that these principles must continue to sit at the heart of this government s thinking if an industrial strategy is to deliver a consistent and effective approach that helps to craft a unique place for the UK in the global economy, supporting our competitive advantages in areas such as innovation, high-value manufacturing and business services to create long-term, sustainable prosperity (figure 1). 8. It is important that successive governments take a longterm, strategic focus to industrial strategy in order for it to succeed. The UK has a number of strengths that have long investment and product cycles, making policy continuity and stability absolutely vital. Therefore, any industrial strategy must deliver a programme of action over ten-plus years in order to maximise return for investments and give businesses real confidence to innovate. Regular changes to the approach taken runs the risk of losing momentum, undermining the return on the groundwork that has already been done. Figure 1: The principles of Industrial Strategy Long-term strategic focus Proactive engagement with business Leadership across government departments Alignment of policy and action across all levels of government Focus on improving delivery 9. Industrial strategy will also work best where government Willingness to back innovation and empowers industry to take a lead, setting out the be bold at scale framework, allowing businesses to provide leadership in A strong political consensus design and then proactively engaging with firms on Playing our strongest hand, CBI (2012) implementation. This means going out to business to understand their needs as they develop new capabilities, removing barriers to investment and joining up initiatives to create advantage for the UK. 10. In addition, whole-government ownership of industrial strategy is absolutely vital. It must be driven at the highest level in government to ensure it can be delivered consistently across all government departments. This is especially important where businesses are affected by government policy that sits across departments, for example, as skills moves from the old Department of Business, Innovation and Skills to the Department for Education. 11. To deliver effective industrial strategy, all departments, agencies and levels of government should share common industrial strategy goals. They need to align to deliver a coherent package of action that is more than the sum of its individual parts. With the trend towards devolution and the agreement of a number of City Deals over the last few years, a number of important policy levers that can help to deliver an effective strategy are now at the local level, including skills, innovation and infrastructure. Whatever department, wherever the region, our strategy must pull in the same direction. 12. For the UK to be truly competitive, getting implementation of the strategy right is just as important as the strategy itself. Typically this means increasing the speed and nimbleness of delivery as initiatives to boost growth are formulated and rolled out. 13. Willingness to support innovation and be bold at scale is also critical to the effectiveness of an industrial strategy. This means taking a coordinated approach to boosting innovation funding for universities, businesses and institutions such as Catapult Centres in order to deliver a critical mass of activity that allows the UK to lead the way in key strategic technologies. 14. Finally, cross-party agreement is critical to delivering consistency beyond the political cycle. A core industrial strategy should be agreed that surmounts party politics and is able to deliver long term growth and prosperity to UK industry.

3 An industrial strategy should take a sector-led approach, backing sectors in which the UK holds a competitive advantage, to build on the momentum already developed in recent years. 15. In 2012, the CBI advocated a sector-led industrial strategy and members are in broad agreement that this should still continue to form the basis of the UK s approach. Following the creation and implementation of partnerships between industry and government in the last parliament in sectors such as automotive, aerospace, life science and oil and gas, it is important that we do not lose the momentum that has now been built. 16. Formulated upon the solid bedrock of an internationally competitive business environment for all firms in the areas like tax, regulation, basic educational standards and competition policy, a sector-led approach means taking measures designed to back sectors from across the economy in which the UK has a competitive advantage and the potential to grow into the future. This should not be about picking winners through subsidies or import tariffs, but rather about going with the grain of the market, backing the UK s existing economic strengths across the economy from manufacturing to business services and working in a long-term partnership with business. 17. This means using a mixture of horizontal policies to encourage specific activities such as innovation, exports and investment in productivity (pillar 2 enabling policies), while also taking a tailored approach in partnership with business to support activities in specific sectors, seeking to improve the business environment by tilting the playing field in the favour of sectoral strengths (pillar 3 tilting policies). The approach can be summed up in figure 2. Low Degree of Intervention High Horizontal Vertical 1. Ground Rules 2. Enabling 3. Titling 4. Principal actor Regulation Economic and competition policy Basic vision and ambition statement General education system Headline tax rate Funding for basic research R&D tax credits Access to finance Infrastructure investment (energy, transport, digital) Business export support University-business collaboration. Investment in skills Sectoral vision, ambition and leadership coordination Innovation in specific technologies and their commercialisation Public procurement Targeting support for investment and exports Value chain development Initiatives to tackle sector skill shortages State ownership and subsidy Direct investment in business Import tariffs Sector-specific incentives and regulation Precursor to industrial strategy Industrial Strategy Avoid International competitiveness is essential in all of these areas regardless of sector or region. This is not in itself industrial strategy, but is instead the bedrock on which a successful industrial strategy must be built. Measures that enable and incentivise all businesses to undertake activities central to realisation of the UK s industrial potential e.g. export, invest, boosting productivity, innovation. Measures that are tailored to support specific sectors in which the UK has a pre-existing competitive advantage to ensure the UK remains world-leading and captures maximum value. Should generally be avoided from inclusion in any industrial strategy as it constitutes picking winners, working against the grain of competitive advantage Figure 2: Government interventions and industrial strategy

4 18. The CBI has set out five key selection criteria for identifying sectors that would maximise the benefit of an industrial strategy to the UK: i) Where the UK already has a core advantage: the UK s excellent universities base, with three of the world s top eight in the UK and 16 in the top 100 naturally lends itself to areas of cuttingedge technology, backed further by a mature, innovation-savvy consumer market creating a domestic base for new designs and technologies. ii) A reputation for excellence: from factors such as brand, quality, design and innovation, productivity and price. These can come together at a sector level to build strategic advantage encompassing a wider range of industries. For example, Germany has a reputation for high quality engineering because similar strengths are repeated across different sectors and reinforce each other. iii) Market access and supply: side factors including availability of raw materials or talent or the extent of value chain activity that provides a critical mass for a sector. iv) Strategic industries: those very important to the economy or critical to the UK in other ways. This is typically where: Industry is, and could remain, a major component of the UK economy in terms of jobs and export potential. There is a long-term need and a UK solution provides advantages such as security of supply e.g. in the UK s foundation industries such as steel and cement. v) Future opportunities as the world changes: there is significant growth in emerging markets, changing demographics and shifts towards a low-carbon future all offer real opportunities in areas where the UK holds competitive advantage. What more, with the implications of Brexit not yet clear on the UK s position in the Single Market we must strengthen the position of our domestic industries. 19. As these five selection criteria make clear, this is not about picking winners, but about working with the grain of the market to back sectors in which the UK has a natural competitive advantage and real growth prospects for the future. In the last parliament, government committed to supporting a number of sectors that match this criteria, including aerospace, agri-tech, automotive, construction, information economy, education, life sciences, nuclear, offshore wind, oil and gas and professional and business services. 20. In many of these areas, sector strategies have already started to deliver benefits, as highlighted in the case studies below. With momentum behind this approach, it is important that government continues to partner with business to back the sector strategies in order to realise their full potential. Just a few years in, a change of course risks the positive work done just as results are starting to come to fruition. Case study: Automotive The establishment of the industry-led Automotive Council in 2009 has provided a strong, collaborative platform from which the industry and government are able to work together. In 2013, they published the sector Industrial Strategy: Driving Success. This in turn led to a number of measures including the establishment of the Advanced Propulsion Centre (APC) to facilitate collaboration on low-carbon propulsion systems. With 1bn invested by government and industry over 10 years, it is based in Coventry, the heart of the automotive cluster in the West Midlands. The strength of this strategy has helped the automotive sector become one of the most successful sectors post-recession: UK car manufacturing hit a 10-year high in 2015 with nearly 1.6 million vehicles, 77% of which were for export and employs 770,000 people across the UK. 21. In addition to sectors in which the UK enjoys a competitive advantage, the CBI also recognises in the criteria above the case for including strategies to support foundation industries those sectors that play a critical role in underpinning the supply chains in areas such as manufacturing and construction.

5 This includes sectors such as metals, chemicals and materials such as cement sectors where domestic supply is essential to the future well-functioning of the UK economy. Some of these sectors have seen significant challenges in recent years, most notably in the steel crisis of early In continuing to take a sector-led approach to industrial strategy, it is right that government and business together take steps to assess whether these strategies are having a positive impact. An industrial strategy should not be about backing incumbent industries, but rather backing those that deliver for the UK. While benefits of structural changes in a number of sectors may not be realised over short timescales, for example, below five years, the creation of sector-specific KPIs would ensure that government and industry are effectively partnering in order to drive change in key UK sectors. Case study: Life Sciences Life sciences comprises of pharmaceuticals, medical technology and medical biotechnology. As of 2014, Life Sciences employs 176,000 people and has a turnover of 52bn from sales in the UK and overseas, representing 6% of the world market. It also has a strong R&D base, with 25% of R&D expenditure in the UK occurring in the sector. It was one of the first sector strategies to be implemented by the government in The strategy was underpinned by three pillars: building an ecosystem for the sector, attracting and developing talent and overcoming barriers and creating industry incentives. The Cell and Gene Therapy Catapult plays a starring role in the strategy alongside the Biomedical Catalyst, a partnership between the MRC and Innovate UK, funding competition for SMEs in the sector to help being research to market. Since the formation of the Catapult, it has established the UK as a world leader in cell therapy. Among the innovative projects that have been launched, the Catapult is currently building a manufacturing centre that is designed for businesses that are looking to scale-up the manufacturing of cell or gene therapy and something that is expected to generate 1.2bn of revenue by 2020, with the vast majority via export. A place-based approach has a key role to play in industrial strategy, driving prosperity by leveraging industrial strengths across all parts of the country. 23. From oil and gas and financial services in Scotland to aerospace in the south-west, the UK has worldclass industrial strengths across the length and breadth of the country capable of competing abroad to deliver growth at home. While industrial strategy should not be seen as the sole vehicle for achieving the UK s regional growth goals, considerable overlap means if implemented correctly, it has the potential to boost productivity, exports and investment, helping to deliver prosperity across the UK. 24. With the trend towards devolution and the agreement of a number of City Deals over the last few years, a number of important policy levers that can help to deliver an effective industrial strategy are now at the level of nations and regions, including skills, innovation and infrastructure. If an industrial strategy is to be more than the sum of its individual parts, it is more critical than ever that the devolution agenda is seen as an opportunity to ensure that regional initiatives join up with a national strategy to deliver policies that are tailored to each part of the UK s industrial strengths. Whatever department, wherever the region, our strategy must pull in the same direction. 25. The CBI s project Unlocking regional growth, in partnership with McKinsey, has been conducting research and economic analysis aimed at underpinning the regional competitiveness debate with clear economic evidence in order to identify practical solutions to improve growth and prosperity across all regions and nations of the UK. Our full analysis, which will be published later on this year, indicates a number of key factors that are critical in explaining variance in productivity between regions and therefore growth. The findings suggest that improving competitiveness in three horizontal areas should underpin a place-based approach to industrial strategy: Education and skills: Transforming the school system will transform productivity tomorrow. But to transform productivity now, a focus on in-work training is vital - 9 out of 10 workers in the workforce today will still be in the workforce in 10 years time. Skilled international immigration also has strong

6 positive links to productivity, so enabling skilled immigration and ensuring it is distributed across the UK is vital. Business practices: These are the second most important driver of productivity and cover areas like management practices and the level of ambition and knowledge needed to grow businesses successfully. Good management practices such as the use of incentive schemes vary significantly across the UK and are linked to different ownership structures and sizes of business. Infrastructure: Areas with a greater number of people within a given travel time are more productive. Improvements to inter-regional connectivity (between cities) could enable some Northern Powerhouse and Midlands engine cities to access a population of up to 17m the same number as is within an hour of London today. Some cities could also gain significantly by improving local transport links, but this is dependent on the size of population in the local area: for example, Liverpool, Sheffield and Leicester would gain significantly here due to wider populations in the region to draw upon. 26. Building on this, there are a number of places where regional policies should be designed to link up directly with the UK s industrial strengths particularly where sectors are clustered. Indeed, many initiatives already serve this function. Initiatives such as Catapult Centres with specialist facilities that are located closely to the sectors they work with, or City Deals that back regional economic strengths indicate that in places, the UK is linking up places with sectors. Case study: Aberdeen City Deal City Deals were started in the last Parliament and are an agreement between government and a city. It provides the city and its surrounding region with greater powers relating to policy and spending. The Aberdeen deal was a partnership between the UK and the Scottish Government to jointly invest 250m over the next ten years into the city with a targeted focus on the oil and gas sector, acknowledging the challenges that the industry has faced over the last few years and focused on how industry must adapt to changes in the economic environment in order to continue to leverage the international expertise found in the city. 27. There is scope for the consistent alignment by design between regional growth policies and a national industrial strategy in future. By consistently aligning policy regional economic strengths with initiatives aimed at regional growth such as funding (for example, the Regional Growth Fund in the last parliament), Enterprise Zones and the composition of Local Enterprise Partnerships (LEPs), policy initiatives will maximise long-term, sustainable impact for the region. 28. Taking this approach means that is absolutely critical that there is an alignment of central government and devolved policies in their philosophy as well as their implementation. When adding a devolved or further level of government or decision making, we must ensure that this does not increase bureaucracy or red tape, add burdens to the business environment and slow down processes. Case study: Manufacturing Technology Centre (MTC) The MTC was established in 2010 to bridge the gap between academia and industry address the so-called valley of death the significant gap on UK manufacturing technology provision. Based in Coventry, drawing in not only a large manufacturing base from across the Midlands, but also expertise at the Universities of Birmingham, Loughborough, and Nottingham, it has been delivered in partnership between national and local funding from schemes such as Advantage West Midlands and the East Midlands Development Agency. Working with businesses to create pioneering technologies such as electron beams capable of melting of crushable structures, the MTC works with all sectors that manufacture, from assembly to data systems, helping ordinary businesses to innovate.