Industrial Strategy – What Is To Be Done?

Professor David Bailey - Aston University

Professor David Bailey – Aston University

By David Bailey, Professor of Industrial Strategy at the Aston Business School

The new government under Theresa May has brought with it a marked change of tone on industrial strategy.

Whereas the last Business Secretary Sajid Javid couldn’t even bring himself to utter the words ‘industrial strategy’, the new Prime Minister Theresa May has emphasised its role.

But what might it mean?

A quick re-cap of where we are may be useful. The last coalition government’s record in relation to industrial strategy was mixed at best. The previous Chancellor George Osborne made promising noises about rebalancing the economy and a “march of the makers”, but much was empty rhetoric.

Some support was made available to rebuilding the UKs fractured supply chains and to encouraging ‘rebalancing’ but the sums on offer were small and failed to match the scale of George Osborne’s hot air.

Indeed, the manufacturing recovery since the financial crisis has been weak, characterised by concerns over its durability centred on fragility in key export markets, low levels of investment spending, concerns over the impact of high energy costs across the sector, and issues of skills and access to finance down the supply chain.

The last government did away with the old Regional Development Agencies and replaced them with the local enterprise partnerships (LEPs). The intention of devolving more power to ground level was laudable, but in practice many powers were initially recentralised and LEPs anyway had insufficient funding.

Their performance has been very mixed. While LEPs in Birmingham and the Black Country have received praise, further afield there is a question mark as to how much LEPs are really doing. In particular, they lack the regional scale to support wider development.

And the coalition government was slow to address the problems that small businesses face in raising finance, largely because the banks are now much more risk-averse. These companies are crucial in  our industrial supply chains. The latter are often fractured leading to final output sucking in components as imports.

Recent governments have also made no attempt to address the UK’s lax takeover rules, which unlike in other countries do very little to protect strategically important businesses from foreign predators.

On the positive side, the last government did introduce a series of so-called Catapults. These are centres where businesses, engineers and scientists work together on late-stage research and development.

The different catapults are each dedicated to different priority areas such as high-value manufacturing, transport systems and offshore renewables. They are about long-term sector development, so it is still too early to judge them, but they look like the right sort of intervention.

Equally encouraging has been the work of the Automotive Council, which started under Labour and which developed under Vince Cable into an effective body in fostering public – private cooperation and discovering knowledge in terms of challenges and opportunities.

The Council’s work has, for example, set out clear priorities for key technologies that need to be developed (such as on powertrains, lightweighting and intelligent mobility) which has both aligned government support and has underpinned business confidence and investment.

More recently, though, Sajid Javid’s tenure over the last year at BIS has been disappointing.  His immediate decision to sell off a majority stake in the Green Investment Bank was an indication of this free-market stance and raised questions about the government’s commitment to the low carbon economy.

The Automotive Council has continued. Critically, though, its work was previously backed up by a range of (modest) interventions to boost skills, rebuild supply chains, and encourage investment in the industry, such as through the Regional Growth Fund, the Advanced Manufacturing Supply Chain Initiative, MAS itself, and MAS’ Tooling up Fund to support investment in tools in the Supply Chain. All were scrapped by Javid.

The UK didn’t ‘do’ industrial strategy for many years. It finally got things right in a few sectors on a modest scale and much of this has been tossed aside over the last year through the combined pressures of Osborne’s overblown austerity and Javid’s liberation instincts.

This was a shame as where policy was reasonably well developed, as in the automotive industry, it really did make a difference. For example, interventions like the Advanced Manufacturing Supply Chain Initiative and Tooling Up Fund cost small amounts of money in the big scheme of things (£245m and £12m respectively).

Enter, centre stage, the new Business Secretary, Greg Clark. What’s to be done?

Firstly, let’s hope that the government looks again at the LEPs and returns to development bodies that can intervene more widely and strategically at a regional level, and do ‘smart specialisation’ through regional level industrial policies.

Combined Authorities may be one way to do that, and are an area where Clark has much expertise. Beefing up the local growth hubs to fill the vacuum left by the abolition of MAS could be part of this ‘Combined Authority Plus’ model, as would complete devolution of skills funding to the regional level.

Secondly, there’s much more that the government could be doing in really trying to ‘rebalance’ the economy, for example by stimulating investment in manufacturing such as through enhanced capital allowances, by resurrecting something like the Advanced Manufacturing Supply Chain Initiative (preferably on a much wider scale), and by plugging funding gaps for small firms in the supply chain.

Thirdly, it should also do something about UK takeover rules to put the country on a level playing field with many of its main competitors.

More broadly, there is a strong case for UK industrial strategy to be afforded an institutional status similar to both UK monetary and fiscal policies. At the very least, it should be the subject of regular strategic long-term reviews. By giving it that sort of priority, the new government would send out the kind of powerful message that British industry badly needs to hear.

On a positive note, the new Business Secretary is perhaps unique in government in bringing with him a welcome devolving instinct that offers the possibility to join up sectoral policy at the national level with place based policy at the regional level.

But let’s hope the new government really is more serious about the need to rebalance the economy than the last one. More rhetoric about the ‘March of the Makers’ won’t be enough.

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