House of Commons - Trade and Industry

Select Committee on Trade and Industry Written Evidence

APPENDIX 7

Memorandum by the Department of Trade and Industry

INTRODUCTION

1. In the 1998 White Paper, "Our Competitive Future: Building the Knowledge Driven Economy", the Government stated that its aim was for British business to close the performance gap on its competitors. The White Paper argued that to achieve this aim, and to respond to the challenges identified in the White Paper and highlighted by the Committee, British businesses in all sectors needed to develop and exploit their knowledge and skills, creating innovative products and services to give themselves a competitive advantage.

2. The White Paper identified the ways in which Government policy could assist businesses to become more competitive and innovative, and presented them under three themes:

— strengthening the UK's capabilities, for example by investing in the science base, skills and knowledge transfer;

— acting as a catalyst for collaboration, for example between businesses and within regions; and

— promoting competition by opening markets, ensuring consumers are well informed and protected, and modernising the infrastructure and regulatory framework within which businesses operate.

3. Section 1 of this Memorandum briefly summarises how the policies set out in the 1998 White Paper have been built on and developed over the last five years (with further details contained in the Annex).

4. Section 2 summarises the UK's current performance, as measured by the UK Competitiveness Indicators.

SECTION 1: POLICY DEVELOPMENT SINCE THE 1998 WHITE PAPER

5. It remains the Government's goal to reduce the UK's productivity gap, as a means of promoting prosperity for all. Substantial progress has been made by the UK economy in recent years, but evidence shows that more can be done if the UK is to realise its potential, especially in terms of making the key investments in skills and innovation that are required for an enterprising economy. The challenges identified in the 1998 White Paper remain, and have if anything increased over the last five years.

6. Of the 77 commitments made in the 1998 White Paper, 73 have been fully achieved. The delivery dates of the remaining commitments have not yet been reached. Full details of progress against targets can be found in the White Paper Implementation Plan[1].

7. Much has been done to build on the policies set out in the 1998 White Paper by providing the building blocks from which individuals and firms can become more highly skilled and innovative. Significant policy changes were set out in further White Papers[2], and the Department has reviewed and refocused its activities to ensure it is best placed to contribute to meeting this goal[3].

8. Since the publication of the 1998 White Paper the Government has, for example:

— significantly increased funding for the UK Science and Engineering Base and the transfer of knowledge from the science base to industry;

— established the Regional Development Agencies to drive forward economic development in the English regions;

— supported investment through changes to the corporate tax regime, by introducing incentives to encourage businesses to invest in R&D and by tackling gaps in finance provision through Regional Venture Capital Funds and other sources; and

— overhauled competition law to make it stronger and more accountable; and introduced measures to empower and protect consumers.

9. More details of some of the policy initiatives taken since the 1998 White Paper can be found in the Annex to this memorandum.

10. During the period since the White Paper the UK has made progress in improving absolute and relative prosperity, and has enjoyed the fastest growth of GDP per head in the G7 over the most recent economic cycle. The UK's position in knowledge intensive activity has been maintained. However, a productivity gap remains between the UK and its main competitors, in large part because of our innovation performance and low skills levels in the workplace.

11. In July 2003 the Government published the Skills Strategy[4], which set out its approach to equipping the workforce with the skills needed for the future, and will shortly be publishing the results of the Innovation Review, which will set out its approach to making the UK a world class centre for innovation.

12. The Innovation Review's evidence paper[5], published in November 2003, highlighted the main factors that influence innovation performance, which match closely the priorities identified in the 1998 White Paper:

— Customers and suppliers—create the demand for innovative products and services.

— Regulatory environment—can create opportunities and incentives for innovation.

— Competition and entrepreneurship—competitive pressures spur firms to innovate, while entrepreneurial behaviour is needed to sport opportunities and turn them into profit.

— Access to finance—companies need money to invest in innovation.

— Sources of new technological knowledge—companies draw on scientific and business knowledge from a range of sources, including academia and research institutions, competitors, suppliers and employees.

— Networks and collaboration—firms rely on a variety of types of collaboration and the relationships with many partners.

— Capacity to absorb and exploit knowledge—firms have to build the capability to make the most of external sources of knowledge.

SECTION 2: UK PERFORMANCE SINCE THE 1998 WHITE PAPER

13. One of the Government's commitments in the 1998 White Paper was to develop a set of Competitiveness Indicators in order to measure the UK's performance. These indicators were first published in 1999, and provide a benchmark for the UK's performance against each of the five main drivers of productivity: investment, innovation, skills, enterprise and the competitive environment.

14. The fourth edition of the Competitiveness Indicators was published on 20 November 2003[6]. The main findings are summarised here.

Overall performance

15. The UK has made progress in raising prosperity (GDP per head), through improved labour market participation. It has maintained its position as a knowledge intensive economy. The economy has become less volatile as macroeconomic stability has been locked-in as a result of reforms to the fiscal and monetary framework. Strong GDP performance has been largely the result of growing numbers in employment. Productivity growth remains subdued, and insufficient to narrow the productivity gap with our major competitors, which has remained broadly unchanged since the first edition of the Competitiveness Indicators was published in 1999.

Investment

16. Investment performance has picked up since 1997, but in common with our competitors has slipped since the peak in 2000. Government investment—especially in transport—has increased, but overall UK investment performance remains behind that of our competitors.

Innovation

17. The UK science base has continued to perform strongly in the international rankings. It continues to attract foreign investors, but domestic firms are not always making the best use of the advantage this presents—UK firms are undertaking less R&D that their competitors. However, there are some positive signs. Patenting has increased and there is evidence of increasing knowledge transfer. Contract research undertaken by higher education institutes from industry in the UK in 2000-01 showed an increase of 7% on the previous year, and there has also been an increase in university spin-offs.

Skills

18. The UK continues to possess a relative weakness in human capital. Although there have been improvements in schooling since 1998, the overall position in terms of both adult skills and training is broadly unchanged. There have been substantial improvements in ICT skills relative to the other G7 countries.

Enterprise

19. The UK remains average as an enterprise economy, with entrepreneurship significantly behind the US but ahead of much of continental Europe. Although overall venture capital provision remains strong, there has been a reduction in early stage investment.

Competitive environment

20. The earlier editions of the Competitiveness Indicators highlighted weaknesses in the UK competition regime, but following reforms the UK's position has improved. The UK remains an open economy, well positioned to take advantage of greater world trade and investment. The labour market remains successful with the UK now enjoying the lowest level of unemployment in the G7. Although business perceptions of Government policy and the wider competitive environment remain positive, they have slipped slightly since the first edition.

Knowledge based activities

21. The current edition of the Competitiveness Indicators also assesses the UK's performance in knowledge based output and exports.

22. Knowledge based activities are often characterised by rapid growth in demand and by externalities in the production process. The OECD defines a number of these as "knowledge based" and uses them to proxy the importance of high quality outputs across countries. These "knowledge based industries" comprise knowledge intensive services and high tech and medium-high tech manufacturing.

23. While there are problems with such a measure—in particular that it ignores the role of knowledge in other sectors—the degree of specialisation in knowledge based output and exports nevertheless provides an indication of the UK's performance in the knowledge economy.

24. The UK's share of exports in knowledge based goods declined in 2001 and 2002, after almost 20 years of increasing importance. Even so, the UK's share of exports in knowledge intensive industries is the highest amongst the G7 countries, at over 20%. The recent decline was also experienced by four other G7 countries and was partly due to retrenchment in the ICT sector, the final stages of the "Year 2000 effect", and global economic uncertainty.

25. Exports of knowledge based services, on the other hand, have remained strong. In 2001 these accounted for over 60% of UK exports in the services sector, a higher share than for any of our G7 competitors.

26. The UK's share of output in knowledge based services and industries is second only to Germany, and ahead of the US, although all countries have shares within 10 percentage points of each other.