UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1218-iii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

 

 

GLOBALISATION: ITS IMPACT ON THE REAL ECONOMY

 

 

Tuesday 17 October 2006

SIR GEORGE COX and MR STEPHEN RADLEY

Evidence heard in Public Questions 139 - 212

 

 

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Oral Evidence

Taken before the Treasury Committee

on Tuesday 17 October 2006

Members present

John McFall, in the Chair

Jim Cousins

Mr David Gauke

Mr Andrew Love

Kerry McCarthy

Mr George Mudie

Mr Brooks Newmark

John Thurso

Mr Mark Todd

Peter Viggers

________________

 

Examination of Witnesses

Witnesses: Sir George Cox, Chairman, the Design Council, and Mr Stephen Radley, Chief Economist, EEF, gave evidence.

Q139 Chairman: Sir George and Mr Radley, welcome to the Committee and our inquiry into globalisation. For the shorthand writer, can you identify yourselves, please?

Sir George Cox: I am Sir George Cox. I am Chair of the Design Council.

Mr Radley: I am Stephen Radley. I am Chief Economist of EEF.

Q140 Chairman: Sir George, does the Cox Review on Creativity in Business have anything to do with globalisation at all? The floor is yours.

Sir George Cox: Thank you, Chairman. The whole move towards globalisation was very much behind the report. In a world where we see what we had always assumed were the developing countries taking over not only a lot of the low-skill jobs but also progressively competing for the high-skill jobs, the question behind the report was: How do we respond to this?

Q141 Chairman: How should we respond to it?

Sir George Cox: I suppose the scenario we have always had in mind, as the world developed, was that what we have rather patronisingly called "the developing countries" would progressively take over many of the lower-skilled jobs - because they could bash metal sheet or they could weed plots, that is their right - and that is fine, because we are going to keep all the high-skill, intellectually interesting jobs. That is a very appealing scenario and totally unrealistic. Why should any country aspire to be the world supplier of cheap labour? That is not in Chinese history, for example. In a world like that - a world which, by the way, I think is going to create enormous wealth - the question is: What do we offer? What is unique? This applies to services just as much as manufacturing: What do we offer? You can only flourish in such a world - that is when you talk as an individual, a company in industry or a nation - by innovation, by progressively looking at new ways of applying new developments, new ways of doing things, whether it is new products, new technologies or new roots to market, whatever. The question is: In a nation which has a great record of innovation - whether you talk about creative industries or the remarkable record still of scientific innovation and discovery - how do we exploit it better? That has always been our weakness. The report addressed: What can we do, not to make us more innovative but to make companies better at taking advantage of innovation? It concentrated on the medium-sized company on the grounds that the report was pretty broad in its target anyway - and if you are a member of the FTSE 100 and you have not got the message yet I do not think the report is going to do much to change your mind. But there are thousands of companies out there with potential they do not realise. The report concentrates on how you get there to be more innovative. That is the whole background to it.

Q142 Chairman: You and I were at breakfast together, where one professional in design said that if companies are just thinking about their design proposals at the moment, they are ten years behind the curve of what is happening. Is that statement as realistic as that?

Sir George Cox: I think it is. One sees - and it gives me encouragement - that there is the huge potential if companies recognise it. As you may have recalled from my report, it addressed initially why companies are not more innovative. There is a variety of reasons: complacency; unawareness of the opportunity; do not see the relevance; do not have the skills; do not know where to turn; risk aversion; et cetera. The issue is: How do you get companies to change their attitude and behaviour? I find it encouraging that the work done previously by the Design Council has found that, when you do get to a company and do expose them to possibilities, there are changes that can be brought about. One of the examples is a company which makes cutlery. You would say, "There's a doomed industry. You cannot possibly provide knives and forks competitively in this world." That was a longstanding company, going down hill; they become involved with a new design team and the results pick up tremendously. You think, "If you can do that - a manufacturing company making cutlery - my God, what you can do in other areas?" I think it is question of how you get to organisations like that, the thousands of medium-sized companies that play such a big part in the economy, and get them to realise what is happening and how they can prosper.

Q143 Chairman: Stephen, other witnesses have mentioned to us that there will be winners and losers in globalisation. The losers will be in the low-skill areas. Is the prospect for the UK difficult in light of comments like that?

Mr Radley: The story is not necessarily one of looking at different sectors. I do not think it is even necessarily hi-tech versus low-tech. Many of the things have been developed in Sir George's answer there. It is about companies that are able to develop something that is unique, whether that is some innovative aspect of the product, whether it is introducing some form of design - which we find that our member companies are paying increasing attention to - or developing new revenue streams from services. In many cases, companies using their knowledge of the technology and their customers' needs to develop revenue streams from services really offers a way forward. Often that is very difficult to compete against from a low-cost country. You need to be near your customer and have a deep understanding of their needs.

Q144 Mr Love: Could I take us to manufacturing industry. In the last 20 years, it has now halved in size. It is now down to 15-16% of the overall workforce in this country. Some people think that is related to the exchange rate of the pound against major currencies. Separating that out, if we had a competitive exchange rate, what size would manufacturing be in this country, and is there a future for manufacturing?

Mr Radley: With respect, I would like to pick you up on some of the assertions you have made there. Certainly if you look at the number of people employed in manufacturing, it has continued to fall and we would expect that to continue to be the case. At the moment it is slowing. It does not necessarily have to be at the pace it has been, but the onward movement of productivity will mean that manufacturing can produce more with less people. If you look at its share as a size of the economy, it has shrunk - and we are looking at it being around about 15% now - but a lot of that is due to the fact that other parts of the economy, business services, financial services, have grown so much more strongly. It is also a little bit of a statistical illusion, because manufacturing has contracted out a lot of activities it did itself before. Before, it employed a host of consultants, cleaners, security staff, caterers, whatever, and they are now in the service sector. They buy in those services. Also, in many cases the prices of manufactured goods have been falling and that reduces its share in the economy in the way that the statistics are measured. In terms of factors that will affect its prosperity, if you look at the period in the early part of this decade, when we had a high exchange rate against the euro, we also had a severe downturn in the world economy which was intensified by the events of September 11 and the rise of China and other low-cost countries as major players. That was a real shock to the system for manufacturing. Since then, we have seen a steady improvement in productivity and its competitiveness. According to EEF's own survey, export orders/balances are the best for nine years, despite there being an exchange rate. We have found that manufacturing has become a lot more resilient. It has taken a lot of steps to improve its productivity and reduce its costs.

Sir George Cox: If I may add to that, I think that is absolutely right when we look at the figures. I started my career in an aircraft company and the factory I was at had about 10,000 employees, but an awful lot of those were cleaning the factory, providing the food, services and transportation, and now would be reclassified as services because they would no longer be employed by the company. The second thing is that a lot of things now are difficult to classify. If you look at a modern day fighter aeroplane, an awful lot of the investment in that is in software. If you are writing software to control that, is that manufacturing or not? Then if you look at a company like - to name an outstanding manufacturing company - Rolls Royce, over half their revenue now comes from services. It is not easy to put a simple classification any more between manufacturing and the rest.

Q145 Mr Love: Yes, but I am sure you would not argue that that is the whole answer to why manufacturing has declined.

Sir George Cox: It is certainly not the whole answer. Absolutely not.

Q146 Mr Love: Could I take you on then to a comparison with the United States. They are facing a similar problem - indeed, a lot of major industrial countries are - but that does not, as I understand it, appear to be the case in Germany. If we had a more competitive exchange rate, would the size of our manufacturing increase similar to that of Germany, or are we in a cycle that will maintain us at the same level as America?

Mr Radley: At a very simple level, if we had a cheaper exchange rate against the euro and the dollar we would probably have faster growth in manufacturing and we might have stronger growth in exports. There are, in some cases, benefits from having a stronger exchange rate. For example, it helps to cushion companies against the rise in raw material prices, oil, commodities and other raw materials, which tend to be priced in dollars. A stronger exchange rate also means that people at home have a higher standard of living. Their disposal incomes are growing more strongly, so it creates a strong market. It is not necessarily the case that there is a host of disadvantages in having a strong exchange rate, but we really need to look at the fundamental causes of how manufacturing prospers in some countries more than others. We would have to look at things like innovation, links with universities, regulation, our skills' base, whether our tax system is competitive. That is one thing that has concerned us: if you look at the period over the last ten years, our tax system has progressively become less competitive. We used to have a lower tax burden than the OECD. Our tax burden as a share of the economy is now four percentage points higher than the OECD and the gap with the euro zone has narrowed significantly. For manufacturers, who will often struggle to pass on rising costs to their customers, a lot of increase in taxation does have significant implications for their competitiveness.

Q147 Mr Love: Others will come on to ask you questions about those detailed areas that you have talked about, but may I press you on one thing. You say that manufacturing is more competitive now; its productivity has been going up. Also, the level of foreign ownership of our manufacturing base has gone up significantly in recent years. Are they better at getting it right on manufacturing than we are?

Mr Radley: You are right. If we look at EEF's own membership, we estimate that just over one-third of our members are foreign owned, and there are significant benefits from foreign ownership in terms of exposure to new management ideas, technology, developing new products and services. Our feeling is that foreign ownership has been overall very positive for manufacturing. But it is a slightly unfair comparison. You are looking at the largest and the best companies in the world that are investing in UK-owned companies, so you are obviously going to see a benefit from the influx of foreign ownership. People have studied this in depth, and if you compare the best UK-owned multinationals with the best foreign-owned ones we compare very well. Where we struggle often is that we have an under-performing tail of medium-sized and smaller companies which could do a lot better.

Q148 Mr Love: Your answer was slightly different. Being that foreign ownership is becoming much important to us, should we focus our activities on our attempt to attract greater foreign direct investment? If we should, how should we do that?

Sir George Cox: That is a very good question. On foreign ownership, just talking from personal experience, I sit on the board of Shorts in Belfast which is owned by Bombardier - the biggest manufacturing unit in Northern Ireland and I think the second biggest employer in Northern Ireland in any field. I think it has benefited enormously from being owned by the Bombardier group. It is a very demanding management. We have found that Belfast competes very well with other plants that Bombardier has around the world. I think foreign ownership has brought a vigour and discipline which was not there before. That, as Stephen has already said, is a great advantage of foreign ownership. How do we attract more? I do not think "we" in a collective sense can do it. I think companies which have potential are always there as targets for people to come in and say, "We can make more of the potential than you are making already." I can see what happens at a company level but I do not think you can pull a lever to get more or less of it. That is my view. You see it happening in other fields, by the way. You see it happening, at present, in stock exchanges: consolidation happening around the world. One can impede it at the time, but it is very difficult to bring it about. I mean, there are natural forces there we cannot ----

Q149 Mr Love: When Martin Wolf came to us we talked about the motor manufacturing industry, and he said that he did not think that the decision of Peugeot would affect other manufacturers that were here. He was sceptical about Britain being able to attract further investment in the motor manufacturing industry because of globalisation. Should we be ruthless and say, "That's not our future. Our future is the much more hi-tech, high value-added area"? Is that the way we should go? How do you see it?

Mr Radley: If you look at the future of foreign direct investment into this country, it is likely to be a lot more innovation/research and development intensive, and, on the whole, you are less likely to see large volume employers/mass production investing in the UK. They are more likely, if they are seeking to find a route into the European markets, to be investing in Central and Eastern Europe.

Q150 Mr Love: Does that not mean that the level of workforce participation will continue to decline below 10%?

Mr Radley: Possibly. I think it is important, when you seek to encourage companies to seek to invest in this country, that we do not send out a message to potential investors that we are just interested in research and development. That is something we have picked up anecdotally. I think perhaps we have not intended to do that but, for all the best reasons, that message has sometimes gone out. In many cases you need to see research and development and some production located close together, because a lot of innovation is actually about experimentation. It is important that we do not send the wrong message out. Companies that are part of a large group are often competing for investment with lots of different sites, and if we send out that sort of message it can make life more difficult for them.

Q151 Peter Viggers: I would like to ask about ownership. "Wimbledonisation" is a word used about the City of London: we provide the pitches but we do not have any of the top players. I take the point that foreign ownership can bring in innovation, and we have Nissan and Honda to take the place, as it were, of British Leyland - in fact, I was the minister who sold Shorts to Bombardier.

Sir George Cox: Yes, good move, sir.

Q152 Peter Viggers: So I am sympathetic to foreign ownership. But is there, at the end of the day, something special about a BP or a Cadbury Schweppes which is controlled from a boardroom in the United Kingdom?

Sir George Cox: My view is that I do not get terribly hung up on ownership. Let me give you another example from my own experience. I sit on the board of Euronext, which is the group which owns the Paris Stock Exchange, the Brussels Stock Exchange, the Amsterdam Stock Exchange, the Lisbon Stock Exchange, the London Futures Exchange, and at the moment is endeavouring to merge with the New York Stock Exchange to make a big, consolidated group. I get apoplectic at reading the press about the "French" group Euronext. If you look at the breakdown of shareholding, there is a far bigger British than French shareholding in Euronext: about 26%. It is about a quarter British-owned. I do not think ownership matters; what matters is where management is run from. If the management is strong and powerful, then it will be sited where that is. Similarly, with Shorts, what is very important about Shorts is not just the ability of the factory but the design capabilities there. When they talked about launching the new series of airlines, the 'C' series, there was debate about what was to be done there, and the wings were going to be built in Belfast. But the important thing was not just the wings, but that the design authority was going to remain there. So issues like that are far more important than where the ownership is. Ownership in the global world is very difficult to pin down. It is moving all the time.

Q153 Peter Viggers: The other argument is that, with a board of a company based in a particular country, should they need to retrench, they will retrench back to that country and give second priority to the overseas activity.

Sir George Cox: I do not think that is likely to be the case if the company is, as you say, ruthlessly managed. If you retrench, you will retrench to where it is best to have things done. I do not think we ought to get terribly nationalistic. Good international boards do not. They will site things: Where is the best thing to have that designed? Where is the best place to have that manufactured? That is the mood I find in big companies now.

Q154 John Thurso: Sir George, I was struck by one sentence particularly in the review, where you said, "The model of the UK becoming an all-service economy, the world's leading repository of professional skills, is enormously appealing - and totally unrealistic" - in part, because it is unrealistic to imagine that other countries will not be developing. How big a threat is that to UK plc?

Sir George Cox: I think that is a very big problem. There is an assumption that certain things are almost ours by right. We have no reason to think that at all. I think there is still an image here of China being a country full of paddy fields and a grow-in culture, and you are talking of a nation here which for 18 of the last 20 centuries was the world's most advanced nation scientifically and culturally. When you talk about the advance of those countries, there is nothing Machiavellian about them, nothing hostile about this. What they are doing in such countries, in investing in hi-tech industries and a highly qualified workforce, is admirable. It is not anti us. You just have to say: In a world where this place is picking up, other countries will do the same. It is wrong too to focus just on those countries, because the debate we are having here is taking place in every industrialised nation. There is a recognition that the race has hotted up and you just have to run faster to be a part of this. You can look at almost every field and say: Why should that reside here? That applies to the City of London and it applies to almost every field of professional services. I think this is a tremendous competitive threat. It is not that it is such a shift from manufacturing to services; this goes right across the board. I think it is a terrific threat.

Q155 John Thurso: Presumably, as they develop, they also encounter the problems. Martin Wolf drew our attention to the skill shortages in the IT industry in India. To what extent do the problems of development mitigate the threat to us and leave us an opening?

Sir George Cox: I think to quite a large extent. I had some research done for my report by Professor Heskett who is based out in the Far East. We said, "Let's put a bit of flesh on the bones of this competitive threat." He points out a number of good points there. It is very difficult, in countries which have never served a customer, to be alert to markets, particularly product design and service design. This was brought home to me a few years back when the company I was heading up was running a programme for the senior figures in the province of Tianjin. We had them over and the programme was going very well. The whole Chinese delegation were very numerate and very astute, but the one thing they were finding it hard to come to grips with was marketing. I remember the question being asked of the Chairman, through an interpreter of the person running the tutorial for them: "Mr So-and-So, your role is that you run the refrigerator factory. What are your goals?" He said, "My goal is that I have to produce 30,000 refrigerators a month." He was asked, "But have you thought of who those refrigerators go to?" to which he replied, "Yes, the next 30,000 people on the waiting list for refrigerators." That is where it comes from. You have a market here which is much more alert to the customer - and that is one of great things - and it is going to take them time to catch up with that. And there are plenty of impediments. These countries are not just sailing ahead; many of them have to bring about an awful lot of change. We are not talking about a scenario of doom - you know: The world is changing and we are sliding down the scale - but I think there are terrific opportunities. Moreover, as these countries develop, there are going to be tremendous markets. The world is going to generate enormous wealth over the next half century, much more than we have seen so far. The issue is: How much of a slice of it are we going to get?

Q156 John Thurso: How best can UK businesses return that perceived threat into an opportunity and use the growth of those industries to places like India and China to our advantage?

Sir George Cox: The issue for me is alerting them to what is happening and alerting them to the possibilities. I think the world is full of possibilities if you have the wit to take advantage of them.

Q157 John Thurso: Is part of the problem the fact that we all look at it simply as a threat and rather ignore the opportunity?

Sir George Cox: Absolutely. You get the odd company that looks at the opportunity and you see huge successes. I do believe that with an imagination in this world there is terrific opportunity in every field. It is happening all the time. Let me give you an example. Very often the people who really do well out of technology are not the people who originate it. Companies may make losses (from PCs to mobile phones) but it is the people who take advantage of the capabilities offered. If we had sat here ten to 15 years ago, we would have been looking at the internet and saying, "Where are the great opportunities coming from this?" One of the things you might wish to have said is "Auctions." It is tailor-made for auctions: anybody can sell to anybody at any time of the day round the world. Terrific. Who is going to take advantage of that? Well, it must be Phillips and Sotheby's and Christie's - they have the reputation, they understand the business, they have the money. Forget it. It is eBay. eBay. That could be have been started here, anywhere. You do not need a big domestic market to start a project. It is the wit and the imagination to take advantage of it, and they did not. The big people in the market did not. That is the kind of thing. They were not looking at it. They were not looking sideways. Well, they had their business: "Of course people are always going to come to our auction rooms." Forget it. Auctions were going to grow on a scale they had never dreamt of, and they were not going to play a major part in it. That is the kind of thing. Whilst we are sitting here today, there are things which in ten years' time will be so obvious, and big world players will be saying, "We could have done that." Well, why didn't we?"

Q158 John Thurso: Because we will not have thought of it. Could I turn to the question of off-shoring and direct this question to Mr Radley. There are clearly winners and losers in off-shoring. The TUC in their evidence to us pointed to the fact that, whereas the whole of the UK economy might gain, for the specific worker who has lost their job in manufacturing very often a replacement job comes in at a lower-paid sector. They have suggested to us that companies who have a benefit from off-shoring should insure their workers, so that the loss that they suffer is compensated. Do you think that is a realistic proposal and one that could be the way forward for redistributing the gains?

Mr Radley: To answer your question, could I slightly step back from that. If you look at off-shoring, it is not simply a case of moving some production abroad, which means that we lose out here. Often it is not a zero sum gain. We do find that some companies are investing abroad to reduce costs but in some cases that means that leads them to expand the company. A classical example is Dyson, which moved some production abroad but has substantially improved its profitability, has invested more in R&D here and has grown the company. So it does not have to lead necessarily to a net loss of jobs. In many cases what companies are doing to invest abroad is to complement activities here. You find, for example, that it enables companies to speed up the rate at which they develop new products and the rate at which they innovate because they are working around the clock. I think there are many reasons to off-shore and in many cases it is also to get close to the customer abroad, to tap into some of these rapidly growing markets in China and India and the rest of the world, so it does create a lot of opportunities. Your starting point, that there are dangers for people in less skilled jobs in terms of lower increases in their standard of living or losing their jobs, is a significant one. We need to invest in people's skills right throughout their lives. This means improving standards in schools, particularly improving the number of people taking science, engineering and mathematical subjects in schools and higher education, and improving the levels of attainment and promoting apprenticeships. It also means ensuring, when companies invest money in skills and public money is invested in skills, that that delivers value for money. Those are the key priorities. Recently, EEF has set out some recommendations, because our concern is that large amounts of public money and company money have been invested in skills but in many cases that is not delivering the significant outturns, in terms of driving up our skill levels, that it should be.

Q159 John Thurso: You paint, quite rightly, a rosy picture in relation to some companies - and I have one in my constituency which has done exactly the same - where the whole company has grown. The increased manufacturing is abroad, but the number of people in Rochester has grown as a result of the development. In the specific case of MG Rover, where a vast amount of the work has gone very abruptly overseas, large numbers of people who worked perfectly well and were perfectly good employees have been thrown into unemployment. Most are now back in work, but earning, on average, £3,500 less than they were. That was a specific case put to us by the TUC in their evidence, with the suggestion that one could, for a relatively small amount of money, have an insurance scheme so that those workers would be compensated for that. Do you see that as a realistic or worthwhile scheme that we should be looking at?

Mr Radley: If you look at the case of Rover, the taskforce there was extremely effective in terms of finding job opportunities for a lot of people. In many cases, other manufacturers did snap up many of the workers. I would choose to highlight another aspect. There is a segment of people who have still not been able to find new jobs and these are the people who lack basic numeracy and literacy skills. That is the priority area, to make sure that everybody in work has the required standard of numeracy and literacy. That provides the building block. If people have that in place, they are much more likely to acquire new skills quickly and improve their job opportunities and their earning opportunities.

Q160 John Thurso: Another example of off-shoring, particularly if you look at the example of the call centre, is that those were jobs in the South East of England which then relocated to more distant parts of the United Kingdom, like Thurso, and then relocated to India or wherever it might be. There is an inevitability to a certain extent. It is not that which is my question, my question is: Does this mean that it is going to be the South East and London which benefit from off-shoring, whereas it is going to be the regions, the more further away areas of the United Kingdom, which are going to bear the brunt?

Mr Radley: I think to some extent that has already happened. If you look at the developments that have taken place in the last ten years and before that, we have seen significant increases in employment and also in the level of GDP within the southern regions in the country - I think, in many cases, benefiting from their proximity to London. We have started to see an improvement more recently in some of the northern regions of the economy but it is worrying that they have become extremely dependent on the public sector. If you look at some of the northern regions of the country, significantly more than half of their GDP is from the public sector. They have also struggled to create highly skilled jobs. In many cases, most of the skilled jobs are in the public sector and the private sector has really struggled. We need to put more effort into developing innovation, into creating highly skilled jobs - which are going to compete in world markets in the future - in all parts of the country, really raising up the standards of performance of other regions in the country.

Q161 John Thurso: You would see going to the root of innovation and high wealth jobs in the regions as being the answer to that.

Mr Radley: Exactly. Certainly there is an encouraging story to tell. Our recent survey of members did find that around about three-quarters of them, all over the country, were putting more emphasis on innovation and had forward plans to do that. In many cases they found that assistance from government, in terms of developing links with universities and collaborating with other organisations, was very effective. Where we struggle sometimes is that the RDAs can be rather narrowly focused, and they are not as effective at brokering relationships outside their regions. Because of the targets they have to fulfil, they tend to be very inward focused. If we really want to drive up our performance and innovation, that is something we need to address.

Q162 John Thurso: This is a subject that particularly concerns me, because the major employer in Caithness is Dounray, which is decommissioning, and in 2012 the number of jobs drops off the cliff. Our goal is to replace not simply the number of jobs but jobs of the same quality, so that we can retain the skilled workforce that we have. One of our problems is in getting the enterprise agencies to understand that a clear resource requires to be put to look outward and to bring people in from outwith. I am interested that your experience in England with the RDAs is a similar one, that they tend to be inward focused. Should we be doing more as a country to coordinate inward investment in specifically targeted ways, so that they are geared around innovations such as, for example, marine renewables?

Mr Radley: I think it goes beyond just coordinating inward investment. I think that is an absolute must. The situation we have seen in recent years, with different inward investment agencies from different parts of the country competing with each other around the world to secure investment into the UK, has been a nonsense. We have set out a really muddled message to people who are considering investing here and we have a wasted a lot of resources. We need to see more coordination in the inward investment area, but it is not just there. In the organisations that have responsibility for revitalising the regions and driving up our capabilities - and I am thinking particularly in the skills area - there is a lot of fragmentation generally. We need more coordination and simplification to make sure that the bodies work together effectively.

Q163 Mr Todd: There is a stereotype that Britain is good at innovating, in the sense of producing new ideas and developing research, but poor at implementing that in product for the market place. Is that a stereotype which has truth?

Sir George Cox: Yes. Having started my life as an aerospace engineer, I spent most of my life in what became known as information technology - an industry which did not exist when I got my degree. We have had successes. I can point to some good companies in the area but where are our Googles? Where are our Microsofts? Where are our Dells? This evening I am going to the British Computer Society's 40th anniversary. A few years back I gave an inaugural speech at 50 years of commercial computing in this country. We were at the very forefront - the very forefront - but we have not exploited that to the extent that we should have done.

Q164 Mr Todd: Of those three examples you have given, none of them one would quote as being at the cutting-edge of technology development.

Sir George Cox: Exactly, but it is the people who exploit the cutting edge, not the people who produce it. I gave the example earlier of eBay. It is the people who see the opportunity that technology opens up for them, rather than the originator.

Q165 Mr Todd: All of them started as SMEs essentially - very small - and in the case of Microsoft almost a garage business.

Sir George Cox: They did indeed.

Q166 Mr Todd: How do we move SMEs from being people with a great idea to being people who take global advantage of that idea?

Sir George Cox: That is one of the things I tried to tackle in my report. You are absolutely right, too often we talk about innovation and getting the economy more vigorous and we concentrate on start-ups. Start-ups are just part of this. The window-cleaner who quits his company and buys his own van and ladder: jolly good luck to him, but he does not add anything to the economy. We need to start companies which form and then grow. For some reason many of the companies we start just do not grow. We run out of ambition. We sell out to early.

Q167 Mr Todd: They are lifestyle businesses.

Sir George Cox: They are lifestyle businesses. It is what I have heard referred to in the venture capital business as the "old rectory syndrome": as soon as the founders can afford the house they have always wanted, they run out of ambition. I have said that if Bill Gates had been born in this country, now he would be running the biggest software company in Guildford, and that is it. It is not just a stereotype, it really is true. We have to get our companies to be more ambitious and recognise the potential and get them carrying on. That is one of the things I tried to tackle in my report.

Q168 Mr Todd: The examples you have given are all American. Is that not a cultural issue?

Sir George Cox: Yes, it is a cultural issue.

Q169 Mr Todd: I worked with American companies before I did this job and there is a different approach.

Sir George Cox: There is. It can be broken. Let me give you an example of entrepreneurship which I admire enormously. If two or three lads out of university had come to me a few years back and said, "I want to start a fruit juice company" I would have said, "Forget it. Don't be daft. That is a crowded market dominated by big suppliers serving big customers, forget it. That is the dumbest idea." Innocent drinks, and they have broken through. The nice thing about them, if you talk to them, is that they are still full of ambition to grow the business. In almost any field, if you can be innovative enough, you can move it. You are quite right, the number of big successes that come from start-ups ... I know it is partly because the big companies cannot move swiftly enough and, again, reach a sort of plateau in terms of complacency - and I do think that is a pattern you see repeated - but it is getting people to recognise that potential and to have that ambition. If there is one thing I found in researching my report, it was that poverty of aspiration is at the heart of this - not naturally but at an individual company level. They are just not aspiring enough.

Q170 Mr Todd: What do governments do about that?

Sir George Cox: It is difficult for a government to change a cultural issue like that. If you think what a government can do, there are a number of things which are required: the regulatory environment, the economic stability, the highly skilled workforce. There are things like that. It is quite difficult to get beyond that and to do different things with companies. I hope that the kind of things I have put forward in my report will address that, though with many of the things in my report the recommendations are not in the hands of government to do. When you talk about the education system and you want universities to broaden what they teach and to get more cross-disciplinary courses, you cannot say, "Okay, let's get the government to do something about that." When you talk about getting companies exposed in programmes where they can sample design and they can use it to be encouraged, it is very difficult to do it centrally. When I was on the Board of the Institute of Directors I found that the amount of influence you can have with a megaphone from, say, Pall Mall or Centre Point is very limited. That is one reason why a lot of the initiatives have to be driven locally, out of self-interest. If you go and talk in the North East, you do not say, "This is part of a national programme." That kills it. You say, "Come on, this is the kind of thing that gets the North East on the map." That is the challenge in doing it. There are a limited number of things that government can do. In my report, the one thing that was in the hands of government was the R&D tax credit system, which, to the great credit of HMRC, they acted upon. But it is quite difficult.

Q171 Mr Todd: Looking at intellectual property rights, which can be seen as a way of imposing monopoly power in a market place - the Gower Review is looking at this at the moment - how do we strike the right balance there between protecting the rights of the innovator and ensuring that the benefits of that innovation are then shared, very often by exactly the businesses you listed at the start, so that they can exploit them for growth?

Sir George Cox: I did not go into that in my report, not because it was not important but partly because it was already being looked at and partly because we surveyed medium-sized and smaller companies as to what the innovations were. With selected exceptions, that was not the big issue. In some fields it is very important, in many others it is not. It really is not.

Mr Radley: I would very much agree with that answer and I would like to draw attention to some other areas where government can play an important role. One of those is public procurement. Ultimately, it is up to companies to spot the opportunities and to do what they need to do to grow their companies, to become more innovative, to add more value. If you look at some of the examples around the world, particularly the United States, the government can be a very important player in this, in terms of providing the first major order for the company that really gets them to enter the growth phase and move from being a small company to being a major player. We have picked up from companies that there is a lot of good stated intentions. We have had the innovation review, the Kelly review, various action plans from the Office of Government Commerce. Public procurement is still very bureaucratic, risk averse and slow. Many companies are able to offer products that are well ahead of what the government/the customer is seeking for them. I think there is a lot more we could do going down that road.

Sir George Cox: May I come back on that point. Public sector procurement generally could be a big force for innovation. At present it is just the opposite, with a few honourable exceptions. I have found from my own experience of running a big technology company when providing a submission to a big public sector procurement requirement, that you put in a response to an over-specified, wrong question, for which you have to come up with the cheapest solution. Enormously frustrating. It really is. I can remember one bid we worked on - and I will not go into the specifics - which took ages. It was a terrific bid. We spent £4.5 million on the bid and we had a partner in who spent about the same. I have no doubt, looking back, that it was the right solution. The night before you submit it, you come to the key issue. You sit down there with your partner and you come up with the eventual pricing - this was a PFI bid, so it was on a transaction basis - and it is not: What is this worth? It is: What is our competition going to come in at? It is like a game of poker. With that particular bid, we came in at the same level as the main competition. It went to a third supplier who did not understand the problem: they came in at about two-thirds of the price, they got the job, and it collapsed a couple of years later with great loss to them and the public sector. It was outrageous. It was absolutely outrageous. What a way to buy. I can give you example after example of this. You speak to companies about innovation and a number of design companies say, "We've got this great design here, where do we put it?" One company said, "We've designed a new area for the patient area in hospitals." It was tremendous. It was more than just a bed: it enabled the patient to sit themselves up, get themselves out of bed, lower the bed, get a drink of water, turn the television on - all the things for which you would press the button for the nurse. They abandoned it. I said, "Why?" and they said, "Where do you go with it? If you go to a health authority, they put you on to the man who buys beds. You go to him with the idea, he says, 'Tremendous! How much is that?" and you say, "£3,000" and he says, "No, no, I buy beds for £800. If yours was £850, I could stretch the point." So you say, "Look at the quality of the patient state" and he says, "Forget it." "Look at the saving in nursing time" and he says, "I'm not there to save nursing time; I am there to buy beds." You hit this. You are quite right about America. You can see it in so many fields. You are not about featherbedding your own industry - you just cannot do that - but if the public sector were a demanding buyer you would generate innovative companies which would supply markets overseas.

Q172 Mr Todd: In your report you commended the Design for Business Programme.

Sir George Cox: Yes.

Q173 Mr Todd: What else can be done to boost R&D and improve innovation and design? That seemed to be successful on a small scale.

Sir George Cox: Yes. When we looked at the programme, there were two things. One was the field where there is a financial incentive, which was R&D tax credits - on which I made specific recommendations, two of which have been taken up. The biggest one was to change the regime which was applied and get the Revenue to understand that this was an incentive scheme to be promoted, not an avoidance scheme to be policed (as I put it). Commendably, they have done that, and we can give examples. As I say, this is an example where you are seeing a different attitude to promotion, so I think that is a good one, and that is for the part of innovation which is dependent on R&D. The other one was to look at the Design for Business Programme, which had been originated long before I went to the Design Council and had been pioneered with RDAs to very good effect. I looked at how you could roll that out: How could you change that from a couple of hundred case studies to several thousand? We put forward a programme which is now rolling forward. I think eight of the nine RDAs are sold into it. I have had a word with the Deputy First Minister in Scotland and they want to roll it out there. The reason I went for that figure was that we thought it would be about the biggest the design industry could support. I have found that the thing which tends to alter the attitude and understanding of small companies is the behaviour of other companies in the area. My view is that if you get 6,000 case studies out there, right around the country, of companies who have not just used design to change their business but have changed their thinking, so that they are not just a "one-off innovation" but are going to keep innovating, I think that will have an effect. I think on the scale we have planned here - and it is being rolled out - it will have an effect.

Q174 Mr Newmark: If Bill Gates had been born in Guildford, I think he would be a lab technician. I think it is a cultural issue. The UK plans to reach 2.5% investment in R&D to GPD ratio by 2010. Given that the US and Germany are already above this threshold and that the Lisbon Strategy has set a target of 3%, is our target ambitious enough?

Mr Radley: If you look at the Lisbon Agenda you have to say that there are some very big aspirations there, but very limited delivery across Europe. It is absolutely vital that we do look to drive up levels of expenditure on R&D. That can both be in the public sector but also in the private sector as well. I think we need to look at whether the money is being spent effectively. For example, if you look at public spending on R&D, it tends to be extremely fragmented. We have high hopes with the engineering that we are going to see a lot more coordination here, in terms of the technology strategy brought, bringing together all the different pockets of money that the Government spends, bringing it into one large pot that business can access and leverage their own money to go in with it, and really start to make a difference. In the private sector, obviously driving up levels of R&D is important, but in many cases that is not the whole story about delivering innovation. In many cases, innovation is developing new services. Even in the manufacturing sector it can be about developing new and improved services. That does not have to be necessarily highly R&D intensive. We have already talked a lot about design. We have found a lot of manufacturers are putting more emphasis on that. Again, it does not need to be that R&D intensive. In many cases we are also looking at the fact that we need to improve substantially our links with universities. We have found a lot of companies are doing that, but we can do that far more effectively. Yes, we do need more R&D, but there are a lot of other things we need to do too.

Q175 Mr Newmark: Do you think it should be across the board? Twenty-five years ago, I did a study with Michael Porter, when I was at business school, and we came to the conclusion that there were some areas, like advertising, where we had a great expertise and so therefore we developed a cluster of advertising. You can go to Finland, where they developed expertise in mobile phones. Rather than spreading R&D flatly across the board, why not let it be driven into much more narrow silos? Is that a better way of going about it? Is that a more effective way of doing R&D in terms of where money should be going to?

Sir George Cox: I think the real issue with R&D is not trying to give more push to it and to drive it, but it is getting the pull. R&D should be driven out of self-interest. Companies should invest in R&D not because they are part of a national programme, but because: "If I invest in this, I am going to have a winner." That is what we are trying to get across. It is the same with education: if companies were demanding these skills as well as supplying them, then we would change them. It is the demand side.

Q176 Mr Newmark: Is government a facilitator?

Sir George Cox: Government is a facilitator. Things like the financial incentive count towards it, and a different attitude towards public sector procurement. In relation to public sector procurement, I would like to see the National Audit Office and the PAC, when they get something in, asking, "What more innovative ways did you look at doing this?" but also accepting, when you innovate, that there is an element of risk. One of the problems we have in the public sector - and I have great sympathy for it - is that when it goes wrong, as innovation does at time, heads must roll. It is outrageous. The penalty for failure is far too strict.

Q177 Mr Newmark: That is a cultural thing.

Sir George Cox: It is a cultural thing. But I do think we could alter this. I have spoken to people at the NAO - I have not spoken to the PAC - and the question should be asked, when you come up with something, "Did you look at the problem more widely? What other solutions did you look at?" When you get a submission which has come from a company which is too small to provide it, why do you not put them in touch with another company and say, "We love this. We love your idea of a bed but we are not going to order it from a company your size. However, if you were to get into bed with a bigger company, like So‑and-So, and come back to us, we could do it." If we had that part of it then you would get more innovation.

Q178 Mr Newmark: Do you think the EU has any role in stimulating innovation and R&D? What role do you see the EU has versus the UK Government, especially in those areas which are perceived as slightly weaker, like IT hardware/software or electronics?
Mr Radley: I think the EU can have a role. Particularly where we are looking at emerging industries, for example some of the energy efficient industries, some of the low carbon technologies, low carbon industry sources. I think it is a good idea to have a common strategy there to move forward and, rather than have lots of small markets, have one major market which is really going to push innovation.

Q179 Mr Newmark: Give me an example of what you mean by that.

Mr Radley: Wind, I think, is an emerging area, but there are lots of other examples of micro-generation where we could see opportunities to develop new industries.

Q180 Mr Newmark: We could have it at the other end. For example, we have 200 years of coal. Should we be getting EU support for carbon capture, carbon sequestration, for the coal industry? Is that a role that the EU should be playing or is that a UK role?

Mr Radley: I think it may be a case of both. One important priority there is we look at the Emissions Trading Scheme and we are moving towards greater levels of auctioning now, initially on the power generators. That is going to raise a lot of money. One thing governments should be looking at very closely is investing the money that is raised in that in R&D. They could play a very important role in making carbon capture and sequestration a commercial reality. We are still some way from it being commercially viable, but there are obviously enormous opportunities there.

Q181 Mr Newmark: I am curious, which do you see as preferable: the Government encouraging R&D by providing incentives to companies through R&D tax credits - and I know you touched on this a bit earlier - or the Government increasing public expenditure on R&D itself? Would you flesh that out a bit more?

Sir George Cox: There are two elements to this and one is the generosity of the scheme. It is a tax credit scheme; in other words, it is not a tax allowance. You do not make losses to get this. It is a straightforward: "We will fund R&D" provided it is not just product-specific. I spoke to a number of large companies about it - because, although my report focused on the smaller business, large companies have design units which are actually small units around the world - and they explained to me, "This is quite competitive. Other people are competing for us to be based there." I said, "What makes the difference? Is it the percentage you get?" and they said, "No, what makes the difference is the consistency of the scheme - if we are going to make a 20-year decision on where we base research, we want to know the regime is going to be stable for the next 20-odd years - and, secondly, the ease of dealing with the scheme - we do not want to spend all the money on bloody accountants." Saying we should tweak it by another per cent does not matter. I think a lot of it comes back to the point we have hammered already: the public sector demanding innovation. It is very important, because I do not think there is a single issue that we face in society that is going to be served by throwing resource at it. Whether you talk of health care, security, congestion, energy, it is down to innovation. It really is down to innovation and how one demands that innovation that is going to have a big impact.

Q182 Mr Newmark: That is answering a different question from the one I have asked.

Sir George Cox: It is a good question to have answered though!

Q183 Mr Newmark: Just focusing a little bit here, you recommended a move to partly an incremental scheme of R&D tax credits.

Sir George Cox: Yes.

Q184 Mr Newmark: What do you see the advantages or disadvantages of that particular scheme?

Sir George Cox: That is a good and specific question.

Q185 Mr Newmark: Your last answer was very good but it was not question specific!

Sir George Cox: I argued for a scheme which was incremental. In other words, too much of the money spent on R&D tax credits at the present, I believe, is just being spent on R&D which would be done anyway - which is great, but you are just giving a large amount of money to people who would do it anyway, perhaps just helping to keep it here. I would like to see a scheme where you were rewarded for upping the level. For example, for the R&D you did above the level you have done - say, the best of the last five years - it should be at a much higher rate. You are trying to get people to increase their game, not just to maintain it. In other words, if a company, this year, for the first time spends money on R&D and they are quite satisfied, get them to do more. The argument against it was: It complicates the scheme. As a person who in the past has argued against the complexity of the tax scheme, I have a fair amount of sympathy with that, but when I argued this with HMRC and the Treasury, the view, not unreasonably, was: "All right, we are not rejecting that, but it would be better to do the other things you are saying and get the present scheme working well and people using it before we further complicate it." I have not abandoned that as something I would like to see or would like to see considered very seriously, but if they can get a regime at present where people find the scheme easy to deal with, where they do not have to deal with the tax inspector who has never encountered research before but deal with a special unit, good enough for a start.

Q186 Mr Newmark: What difficulties confront businesses attempting to establish stronger links with universities?

Mr Radley: The starting pint is that it is becoming more positive. Certainly our survey evidence suggested that around about half of companies were working with the universities. In many cases, these are not necessarily high level projects - I think in many cases it may be about getting access to a specialist bit of equipment or specialist skills for a period of time - but we have a strong starting point. In many cases, we faced a problem of a lack of understanding of the different cultures, the different timescales, the different objectives that the two organisations are working towards.

Q187 Mr Newmark: It seems to work very well in the US and does not seem to work particularly well over here.

Mr Radley: I do not think that is necessarily the case. We have interviewed quite a lot of companies which have experience in both countries and they have said that in some cases the UK universities tend to be as good, if not better, in understanding how to work with business.

Sir George Cox: I think the issue with working with universities is that, for the larger companies, it is working pretty well: if you ring up a university and speak to the vice-chancellor and say, "I'm from Rolls Royce" you are in, but if it is Cox & Newmark: Who do I ring up? Who do I get to?

Q188 Mr Newmark: You get to lots of people!

Sir George Cox: It is difficult for the smaller company to plug into universities, and in many cases they could benefit. They could benefit enormously from the research facilities available in the university, from prototyping facilities and the like, or if you get a placement. Too many university graduates are looking for a placement with a blue-chip company. If you get a placement with a small company, you can transform them. This is an issue I have debated a lot with universities and the question for them is: Where do we go for the smaller company? I have advised them to use the local Chamber of Commerce. Why are you not a member of the local Chamber of Commerce? Why are you not a member of the IOD? I once had a meeting with a dozen university chancellors who wanted to talk, when I was heading up the IOD, about better relations with business. They entertained me to dinner. In the Athenaeum. My view was: "Why are we not eating across at the IOD or somewhere like that?" If you want to understand the fishes better, jump in their water. A lot of this has to come down to the universities to reckon on what you do to access companies. That is a huge potential. I think it works very well with the large companies but I think the smaller companies do not take advantage of what the universities could offer them.

Q189 Jim Cousins: Sir George, you were talking earlier about cultural models, which I think is a very powerful point. Is it not right that a very powerful cultural model of success that we offer in this country is working in the professional services that surround the activities of the City of London and working in financial services and having a huge bonus and having a tax account in the Cayman Islands, or similar? Do you think that is the right kind of cultural model to offer people in this country?

Sir George Cox: I see a fair amount of truth in what you say. I suppose, to some extent, we have come through. I think we went through a period of a lot of people, particularly people who studied maths, thinking that was the glamour profession, to become traders. I think we are moving through that. People are recognising, for example, that if you study engineering it widens up an awful lot of opportunities to you. When you are talking about the model, you are talking about people who are studying and what they are going to do. I spoke to the Royal Academy of Engineering about this, to say that we should encourage people not to become engineers (because that is a career choice at 17 which a lot of people are not prepared to make) but to study engineering. Just study it. If you look at the head of the New York Stock Exchange, who came from Goldman Sachs - the head of Goldman Sachs globally, and that is pretty well paid - he came from MIT. That is what he studied. To get more people like that is not a loss to engineering. More people understanding innovation is an asset. Getting more people to study technology like that, I think, would be a great thing. If some of those people want to become traders, that is a very small element of the world. Even though it is highly paid, many think, "I wouldn't want to do that." The view that that was the kind of career opening, I think is changing. I hope so.

Q190 Jim Cousins: Mr Radley, you were referring earlier to the training and education system. Is it not far more economically rational for a British company to acquire trained workers from Poland or Slovakia than it is to train British workers from the start?

Mr Radley: I do not think it is the case of either/or. You may have a temporary increase in demand for particular skills, you may need to get access to particular specialist skills, and in many cases it will make sense to import those skills from abroad, sometimes permanently and sometimes on a temporary basis. But if you are looking at driving long-term change in a company and really improving its performance, you have to invest in your own skills as well, and you have to invest in skills in order to achieve a change in the culture of an organisation. In many cases, as well, you will see workers coming over from Central and Eastern Europe but they may be gone in a couple of years: Where does that leave you then? I think it makes sense in a global labour market to tap into those skills where they are available but you also need to develop your own. We are concerned. If you look at the evidence the Sector Skills Development Agency recently issued, some research suggests that business as a whole is spending £33 billion a year on investing in skills, which is enormous money, but we need to do it more effectively. Certainly the evidence we have produced suggests that too few companies link what they do on training to where their overall business is going, their business plan, and we need to do more to ensure that we spend the money better. One of our suggestions is that you revitalise the Investors in People initiative.

Q191 Jim Cousins: Earlier in your comments to the Committee you said - and I have not got the exact phrase - that the British educational system was not delivering the results in terms of attainment and lifetime training and being value for money. I think that is more or less what you said. I wonder if you could explain that to the Committee, say why you think that, and perhaps give some examples.

Mr Radley: I was not just talking about the education system, I was also talking about the system that encourages lifetime investment in workforce skills; so we are looking beyond the school system. If we look first at schools, I think there have been some major improvements in the output from education, but what concerns us particularly in manufacturing is that too few people are actually studying science, technology, engineering and mathematics, and in many cases they are not being taught sufficiently well because they are not being taught by a teacher with the specialist knowledge, so I think we need to do more to actually invest in the people who are teaching these subjects, and that may involve further financial incentives. I think they are starting to have an impact. Another thing we need to do is actually improve the quality of careers advice and guidance. In many cases people are actually receiving very limited advice and often it is coming too late. I think that what we really need to do is look from the age of 11, and possibly earlier than that, at actually enthusing people about taking science subjects by actually providing concrete examples to them of the relevance to the world of work, to actually show them that if you are taking a degree in science you can do lots of things: you could work in the City, but, for example, you could be working in developing the next generation of low-carbon technologies that will really address the problems of climate change that we face. There is a lot that can be done there. I think there are some areas where we have high hopes. I think the introduction of specialised diplomas from 2008, when that is being rolled out, offers a significant opportunity to raise the number of people that are taking science and engineering subjects and are attaining good standards in that, and that will certainly be one of the priorities that we will be looking for in the forthcoming spending review.

Q192 Jim Cousins: Finally, to both of you, some people who look at issues of globalisation are increasingly concerned at the silting up of inequalities in society that create a kind of low-skilled, low-achieving low-aspiring section of society, not just in our own society but certainly in other European societies. We have seen some recent examples of how people actually vote, perhaps inspired by those kinds of experiences. Are either of you concerned about this, and, if you are concerned, what would you suggest we did about it?

Mr Radley: I think the first thing to say is that, certainly at headline level, clearly what we are seeing in terms of the trends in globalisation are going to be increasing the premium on high-skilled, talented workers - the people who are the best are going to be able to command a significant wage - and, at the other end, if you have got low skills, your job opportunities are likely to be less secure, you are less likely to see improvements in your living standard, but I think that over simplifies it slightly and I think what we will be seeing looking forward is that some tasks that will be considered high skill, in areas such as accountancy and law, I think in many cases will be under threat. Any job that can be standardised and located elsewhere, people who are in those industries will face significant threats as well. Ultimately, what we need to do, I think, to repeat an answer I said earlier, is to absolutely invest in basic levels of numeracy and literacy. If people do not have that, they have a very limited chance and I think their ability to acquire new skills is going to be extremely limited. I think what we are really looking at is what are the skills that are in demand now? Certainly there are technical skills, but what we find talking to companies is that it is about problem-solving, being adaptable, being a good communicator, being able to work in teams, and that does not just mean just putting your ego to one side but actually having the ability to work with people from a range of different disciplines effectively. I think those are some of the areas that we need to see action on.

Sir George Cox: Perhaps I can give an answer to that. I think there is a great danger of this wealth which I see being generated being very unfairly split in terms of who benefits from it. Internationally the countries which worry me most are those which globalisation is by-passing. Through another interest, going to Sub-Saharan Africa, the issue there is not globalisation, it is that they just will not benefit at all. Customers will not invest there, they will not operate there. The Democratic Republic of the Congo, which I visited, the issue is that it is not taking an interest. It is a big world issue. If you come down on countries which are not being by-passed yet, you have a problem in some of a great disparity in wealth. I think it is a huge threat to Russia that you have got a country generating enormous wealth, in many ways a very wealthy country, creating, I think, a very unstable society. I spoke in Russia recently on corporate governance, which was quite a challenge, and, having spoken there previously and a month earlier in Lagos---

Q193 Jim Cousins: No doubt military training comes in useful.

Sir George Cox: I am sure it does. And someone argued with me, I got a question from the audience: "Mr Cox, you talk of this corporate governance. This all sounds good stuff, we like that, but your country grows at 3%, ours grows at 8% and people who ignore this are booming and people like you in the West are obviously held back by this and there is a big premium to pay for all this corporate government stuff", he said. One had to reply, and I said, "Look, if you do not take any notice of what is said here today about corporate governance, it will not affect your growth in GDP in the next five, ten years at all, but what you are building is a society where that money will not even attract any external investment and the priority of people who make the money will be to get it out of the country, and that is your issue." I think you have got that kind of disparity which you have to address. When you come down to countries like our own, there is a danger of disparity as wealth is generated, and I think the answer to it is exactly what Stephen has said. The issue there is getting in younger people the aspiration to want to take advantage of this, to want to work, to want to have a career, and the education. That really is it. There are a number of issues to address there. I think when you talk of younger children, we are very good now at making education much more creative. I have daughters of ten and 12 and, if you go and see what they are doing in any subject, it is remarkably exciting and creative to compare with when I studied, but, by the time they get into their O and A Levels, much of that is squeezed out and they do not see the relevance. We spoke earlier about training. The issue of training is getting people who want to be trained, want to be educated, want to be developed. It is the demand. I was recently at a university degree ceremony and all those doing engineering and computer science, not all but the vast majority were from overseas and it sends out a sense of pride. That is not because the universities do not want to educate them, it is because that is where the applications come from. I think that is the way we tackle it. It is no good saying, "Let's make more courses available and more training", you have got to get people wanting to do it.

Q194 Mr Gauke: Mr Radley, you talked earlier about the impact of the increased tax burden on Britain's competitiveness. Is your concern principally the one that in absolute terms the tax burden has increased in recent years, or is it that at the same time the tax burden in a number of competing countries, if you like, has reduced? Is it the absolute tax burden about which you are concerned or the relative tax burden?

Mr Radley: I think it is both. Just to elaborate on that a bit more, I think for manufacturers, what we have seen is that quite a lot of the increase in taxation that has occurred has been on the cost of doing business; so it is things like higher national insurance contributions and a variety of environmental taxes, which are there for understandable reasons, but for a lot of manufacturers it is extremely difficult to pass these costs on to their customers. That means that you suffer a squeeze on profitability. If you look at the recently published official statistics on profitability in manufacturing, they are now down to their lowest level since 1992. I think there is also an issue about whether our tax system is losing some of the competitiveness that it used to have, and I think that is partly about the fact that taxation levels, as a share of the economy, have risen in the UK while they have fallen in many of our competitor countries, but I think it is not just about that. What we have also seen is that our tax code has become increasingly complicated. That ties up a lot of management time and also means there are some very good incentives out there, but many companies are not accessing them because the system is too complex. I think what we are also seeing (certainly this is coming from the larger companies particularly) is something of a deterioration in the relationship between business and Her Majesty's Revenue and Customs because of the increased emphasis on anti-avoidance. Clearly, it is absolutely right to clamp down on illegal tax evasion activities, but I think this (rather something of an obsession with tax avoidance at the moment) is leading to a deteriorating relationship. What does this mean in practice? I think what you see is that across the world there are a huge variety of tax systems, a huge variety of tax rates, and companies do not make decisions in terms of where they are located overnight, they do not take these decisions lightly, and they are going to be taking a huge range of factors into account - the quality of our universities, our transport system, skills, science, a whole range of factors - but we are starting to see signs that companies are starting to raise questions: "Is it competitive to be here on the basis of our tax system?" and people are looking at this really seriously now.

Q195 Mr Gauke: Sir George, would you agree with that analysis?

Sir George Cox: Yes, I think you get to a balance, and you get to the point where tax levels are a disincentive and also the application of the system is too complex. I say that, not from the work I did here, but from my previous role at the IOD, of course. Can I, again, almost answer a question that has not been asked but it leads on to the regulatory environment as well?

Q196 Mr Gauke: You are about to answer a question I was going to ask, so please carry on.

Sir George Cox: You talk about what government can do. It cannot make people want to become entrepreneurs or heads of companies, but government does play a big role in setting the environment in which companies operate and I think with the regulatory environment you can see areas of advantage. If you look at what has happened to the United States since Sarbanes Oxley, if you want to see how effective regulation can be and how negative it can be, look at the impact it has had there, look at the reaction of American business: a huge impact from clumsy knee-jerk regulation. Equally, if you talk about regulation here, one of the big issues that I have always felt is not the need for regulation, it is how it is applied. When we talk about regulation, how it is applied is almost as effective as the regulation itself. Can I give you an example? There was a company, a very good company, a food processing company, in the Midlands, doing very well, and they had expanded their factory, which was on an old farm site, three times over and it was understood that they would not get any more planning permission because of vehicles down the lane. Fine. So they looked for a brownfield side, and they get a brownfield site six miles away, they can develop it. Everyone is pleased. So, they are going to move, they are going to employ more people, all the local produce companies are happy. You know the company, A&B Foods. Anyway, they buy the site, get planning permission for it no problem at all. Of course, they have to dispose of the old site. No-one is going to turn it back into a farm and no-one is going to put in a factory there. So they put in a planning application for half a dozen nice residential buildings. Everyone is happy. They are told there is to be a planning inquiry. As soon as you say that, that is money, that is a lot of expense, that is about 40 grand just going in a planning inquiry. Everybody at the inquiry speaks up for it - the parish council, the local MP - everybody is in favour. Fine; no problem. You do not get an answer. The inspector has to give you an answer within six months. After five months the MD rings up and says, "Have you got an answer yet?" He gets a snotty reply, "No, Mr So and So is very busy." I am pretty busy trying to run a company here, but, just like that, turned down on the grounds that it is against policy to turn agricultural property into residential property, and they appeal, and I make this a bit of a cause célèbre and eventually they got it.

Q197 Mr Todd: I was going to say, it is in my constituency, I know they got it. You are talking about A & B?

Sir George Cox: A & B Foods. I am not getting against planning permission. Living in Gerrards Cross, God knows why they allowed Tescos to be built over my railway, but I am not against planning. Who is against planning? Why on earth do you not get a quick answer? It is that. It is the cost, it is the delay, it is the uncertainty. So, when we talk about regulation, it is not just whether we should have it or not, it is how easy it is to comply with. Make it easy to comply with.

Q198 Mr Gauke: That is an answer to a much better question than the one I had. Can I return for a moment back to the tax point, if I may. The flip side of the increased taxes we have is increased public expenditure. Can I ask to what extent, compared to the disadvantages of the higher taxes, there have been advantages for the competitive position of UK businesses by the increase in public expenditure we have seen over the last seven years?

Mr Radley: That is obviously a very big issue and, clearly, some of the big increases in expenditure have been in areas such as the National Health Service, in relation to which, ultimately, there are benefits to business in terms of a fitter, healthier workforce, but I do not think are necessarily areas that EEF would hold a detailed view on. In terms of those that are more directly related to business, we have seen benefits for increased investment in science, and I think there can be more that can be done to make that more effective, and we have talked about some of those issues already, and also greater investment in skills. If we look at the skills issue in particular, there have been benefits in terms of improving the standards of educational attainment from schools, but we are concerned that there has been quite a lot of money wasted in this area. If we look a bit wider at the overall skills system, we have actually invented a very bloated bureaucracy, we have got the Learning and Skills Council, Sector Skills Councils, the Sector Skills Development Agency, very soon, and at the local level we have got Regional Skills Partnerships, we are soon going to have Skills Academies, and so you do need to ask questions. Yes, we have seen an improved increased investment in skills but in many cases is it actually delivering the outcomes we are seeking or has a significant chunk of this money gone to sustaining bureaucracy?

Q199 Mr Gauke: If you were to do this - this is a very big question - if you were to try to balance out the disadvantages of the higher taxes with the advantages of the higher public expenditure, if you were to do an audit of the Government on that, what would your conclusion be?

Mr Radley: I think I would answer on two fronts. Firstly, if you look at a country like Britain, I think there are natural limits to the share that public spending should take as a share of the economy, and I think once we get much beyond 40% it is starting to cause problems in terms of the competitiveness of our taxation system. I think probably the other concern is not necessarily that spending has been in the wrong areas or that overall it has been vast spending, but the direction of the travel. We have gone extremely fast from being a low taxation country, compared to many of our competitors in the OECD, to having a tax burden significantly above the OECD average, and I think that is what most concerns us, the speed at which this change has occurred.

Q200 Mr Gauke: Finally, just returning to regulations, there was a poll of company CEOs that was published earlier this week in which 52% of them said that the regulatory burdens created by the EU outweigh the advantages of the single market. Can I ask both of you whether you would agree with that assessment?

Mr Radley: We have not polled our members on this recently, but certainly the last time we looked at this issue extensively we still found that the overall majority of our members actually saw being part of the European Union as a significant benefit to their company, but I think if you actually looked at the strength of feeling there it had actually cooled considerably. So, companies did see a strong case of being in the EU but their feelings towards the EU overall were a lot less warm, and a lot of this was because of the increased level of regulation that they saw. In many cases what companies are actually seeing is high levels of regulation and there is a tendency to blame it on Brussels, which in some cases may be correct, but I think in many cases what is really driving the bad experience of companies is not that we are seeing more regulation from the European Commission but it is the very poor implementation in this country. I think, particularly in the environmental area, if we see the directives that have affected the disposal of refrigerators, the re-directives, some of the measures that have been taken in terms of landfill at the moment, the overall objectives, the measures, are generally fine, but there has been absolutely abysmal planning and implementation, and I think that is one thing that the Government could do make a real difference there.

Sir George Cox: I think the question of whether the costs outweigh the benefits is too broad. I think most companies that I speak to now just accept being part of the European Community and the single market for granted. There are certain things you take for granted now which are a great advantage, the ease of moving people around, it is just a way of life, so one never considers whether you should do it, that is it. I think coming back to regulation, whatever the source, and some of it is frustrating and hard to understand that comes out of Brussels, the thing I would tackle would be the application. Make it easy to understand, easy to comply with, particularly for the smaller business. Remember that in the smaller business there is no department to give it to. Faced with a form to submit there is no-one to give it to, it is you. I argued very strongly, I think with eventual success, to take the payment of tax credits out of the payroll system on the grounds that, fine, pay people who have worked on site or at home, I agree with, but do not make the company apply it. I do not want to get involved in the administration of benefits. If I am running a small company, I have got eight people, it is Monday morning, I have got an angry customer, I have got the bank manager, and someone says, "You did not pay my benefits on Friday", "I did not even know you were entitled to benefits", but that is my biggest problem. I then say, "We will attend to that some time." Ease the burden on companies at the moment. It is very simple, a simple answer: "Am I allowed to do this?" Yes or no? "What do I have to do with this?" Make it more supportive. "How do I have to do this?" I think that is the key to it. The only thing I would tackle is planning. You cannot go to a single company which cannot give you a horror story about planning. The whole attitude of planning should be a service: "I am going to help you decide what to do."

Q201 Kerry McCarthy: I have to say, I entirely agree with what you have just been saying about planning, but moving on to a different topic, you talked about the predicted economic growth. I think you mentioned an explosion in likely production and, obviously, that would be an explosion in consumption as well, which will have environmental consequences.

Sir George Cox: Yes.

Q202 Kerry McCarthy: To what extent do you think the concept of contraction and convergence has got legs: the idea that as developing economies start producing more by way of emissions the developed countries ought to reduce theirs and we meet somewhere in the middle? Do you think that is a viable template for moving forward?

Mr Radley: I am not sure I fully understood your question, but I think that clearly the developed part of the world, particularly the European Union, has been taking the lead in terms of having tougher environmental standards and regulations and also developing technological solutions to that. I think, looking forward, looking beyond 2012 when the Kyoto Treaty runs out, I think we need to work harder actually developing something where we have got an international agreement which countries around the world can buy into. I think also there are significant opportunities for companies in countries like Britain to actually provide assistance to other parts of the world which are experiencing a very rapid growth in terms of developing low-carbon energy sources and advising companies in terms of how to curb their emissions, improve their energy efficiency. I think there are big opportunities there for British business that we need to capitalise on, and I think what we need to do now is use that opportunity by investing significantly in research and development so that we have actually developed those goods and services to meet the challenges.

Sir George Cox: I think the question is a very broad one and a very important one. As this wealth is generated, if it is spent the way that the wealth has been so far, it is unsustainable. You just cannot do it. You cannot raise the population of China with the same lifestyle as everyone has in America, you cannot have the degree of travel that we enjoy, but that is a given. What I think it means with regard to the spirit of my report is that this is increasingly recognised, not just here, and I think when it comes to innovation it will create a great demand for innovation. When you talk about products the emphasis will be on it. If you talk to an aerospace company like Rolls Royce, the whole emphasis is on energy and efficiency, that is the big demand. That is they only reason people are replacing planes, there is a great demand for it, and I think you are going to find this in energy, you are going to find it in transportation and I think, again, coming back, companies which can plug into this will not only be doing a service to the world but that is where the opportunities are.

Q203 Kerry McCarthy: If you accept that companies have got to do more to meet environmental standards, is the way forward to set higher environmental standards or is it through, perhaps, more vigorous means like taxation?

Sir George Cox: No, I think the way forward will come through public pressure. That is what will stop people taking four litre cars for the school run; it becomes socially unacceptable to do it.

Q204 Kerry McCarthy: The idea of corporate social responsibility, you think that is a heavy enough pressure on the corporate conscience?

Sir George Cox: I think it is growing. I think companies are very strong on those issues, much stronger on those issues than the public perception, but I think the big issue is the public. The public go on about energy waste, the big waste in the home. You have only to look at the school car park, it is full of----. It will become publicly unacceptable to do it.

Q205 Kerry McCarthy: In this country?

Sir George Cox: In this country, but that will expand quite rapidly. No-one wants their country polluted. I think attitudes will change, remarkably so.

Q206 Kerry McCarthy: Do you think it is realistic in developing countries where they have not gone through the over-consumption, if you like, and then have realised, you think they can jump several steps ahead?

Sir George Cox: No, there will be a big challenge because the aspirations of those countries is to have a motorcar and all the things that we have, and so I think it is difficult, it is not an easy problem to tackle. People talk about things being manufactured in countries where they do not give a damn about environmental pollution. I do not think that is the right scenario at all. I think the attitude of that is changing in all these countries. In some of the cities being planned in China there is terrific environmental consideration. There was one I saw when I was in Davos, the city there. He said, "Here is what it looks like now." There is going to be an industrial city - lovely green fields - and his picture after was the same. He said, "We will just plant over the top of it." A lot of these areas will probably be leapfrogged, by the way. I think these are issues.

Q207 Kerry McCarthy: Do you think there is any credence in the suggestion that companies are moving overseas to avoid---. The evidence we have had from Martin Wolf, when he appeared before the Committee, was that he did not think that was happening, he thought companies, if they were being asked to meet higher environmental standards, were adapting their technology appropriately in this country rather than thinking of that as a reason to move overseas where the regime was less restrictive. Would you concur with that?

Mr Radley: It is not necessarily looking at the difference between investing in the UK and investing in China. I think if you are doing that you are going to be doing it for a whole host of reasons, and that will lead you to levels of taxation, regulation, whether you need to be there to be near the customer to exploit the opportunities. I think the regime, in terms of environmental regulations, is only going to be one factor. What we do find, though, is that companies are making short-term responses where they are facing increases in their energy bills at the moment relative to their competitors, and what can be done relatively easily is actually to shift the loading of some of your production from here to other locations, and in many cases this is not in China, it is in other parts of Europe. On one point I would like to agree very strongly with what Sir George was just saying. I think that in many cases what you do find is that for some companies it can be easier to actually address these environmental challenges, in countries like China, than it is here. In China you can develop a new facility fairly cheaply from scratch and really make it state of the art in terms of its efficiency and also its energy efficiency. In this country many manufacturers are finding that they have plants that are unsuitable for their needs, that are too large, and they need to make a change and in many cases the planning system gets in the way of them being able to do that. I think that is probably one of the priorities that we need to look at urgently.

Q208 Kerry McCarthy: You are almost saying it could work the other way: because they want to be greener they would be driven overseas because it is more difficult to be green?

Sir George Cox: I think there is a general issue here. I think we could sit here and swap horror stories of outcomes of behaviour around the world, but I do believe that global companies are an enormous force for spreading the standards we believe in. If you want to get people treated differently in these countries, you cannot do it as a government, but a company can. I have worked for multinationals and we had global standards for training people, global standards of behaviour. I believe an awful lot of the spread of standards will come from companies. I think there have been good moves for some of the big oil companies with regard to environmental issues around the world, make a feature of it here. I think the bigger, more responsible companies will be a great force for spreading standards.

Q209 Kerry McCarthy: So you do not think there is an argument for requiring them, for example, to include more information about what they are doing on the corporate social responsibility side?

Sir George Cox: Reporting?

Q210 Kerry McCarthy: Yes.

Sir George Cox: No, I am very cynical on this. We believe that company reports are read avidly by people. Company reports are read by almost nobody. Thank God we chucked the other one. I am on the Board of a company, a bank. It came up with this requirement to report further on directors' pay. It was going to be for a non-binding vote of the shareholders, and I said, "What do you do with this?" They said, "You put it in your company report." No, you cannot put it in your company report because, of about 1.25 million shareholders, 95% or even higher elect not to take a report. They do not want it. You say, "Okay, well put it in the summary." No, you cannot put it in a little summary because, as it is going to a shareholders' vote, you have got to give them the full information; so the summary consists of a page of results and about five pages on directors' pay. The belief that people who pick up these reports and read them is nonsensical. Company reports are written by the PR department anyway, it is all boiler-plate on any issues like that. I do not think reporting gets us. I think company reputation does. That is what has a real force. If you get exposed in the media because of some malpractice, that gets to millions of people. Millions of people would never look at a company report, and so further reporting I do not believe is the answer to this.

Q211 Chairman: That does not apply to your report, Sir George, of creativity though?

Sir George Cox: That should be read as widely as possible. If only the Treasury were not so mean. They would not have another production run!

Q212 Chairman: Thank you very much. Can I finish with two quick questions and your answer. In the report I was reading last week on the US congressional elections there was mention that US businesses are becoming more socially environmentally friendly, not least because of the issue of oil and self-sufficiency. Do you think businesses here will increase in that way? Secondly, at a seminar I was at very recently in terms of public/private procurement and public policy, the speaker said the question for these projects is how much can you afford to waste or throw away, and if you cannot afford to waste or throw away anything, then you are not taking any risk and things would not work. Do you agree with that?

Mr Radley: I think if I was to answer the first of your questions, certainly the evidence that we found researching our companies was that the overwhelming majority of them are paying increasing attention to energy efficiency, and clearly the big increases that we have seen in gas/electricity prices have been one of the major imperatives of driving this forward. In many cases actually being a low carbon emitter and actually improving energy efficiency and seeing improvements in profitability can all go together hand in hand, and what we need to do is make sure we get rid of things that get in the way of doing that. At the risk of being repetitive, one thing we need to address is the planning system but what we also need to do, bodies like the Carbon Trust and EEF itself and others, is to facilitate this by making sure that companies are aware of the opportunities that are out there and what they need to do to exploit them. I think, again, there are probable implications for developing some of skills they need to become more energy efficient.

Sir George Cox: There are two questions. I think, in terms of company behaviour, the big force will be public pressure. That is what is happening in America now. Global warming was just not believed in in America. Whether Katrina had anything to do with it, it sure has shocked a lot of Americans I speak to that this is an issue; so I think that public pressure will bring about great change. The more awareness we are, it becomes socially unacceptable to drive a huge Getty or to throw things away, and companies will respond to that, their markets will respond, their reputations will respond, and so I think that you can see changing. Turning to your second question, yes, if you are going to innovate you are going to get certain things wrong. I am not arguing for gung-ho innovation, I am not saying, "Go for innovation." You take it in a controlled way and you get used to managing risk, it is part of it, but there are certain avenues you will go down and it will not get anywhere, and I think you have got to accept that, and I think you have also got to accept that if people make mistakes, provided they are made for the right reasons, fair enough. The idea that heads must roll for a mistake I think is outrageous, in business or in the public sector. A person took a decision on all the available evidence, they took it for the right reasons, fair enough, that is a change we have to bring about.

Chairman: We invited you here for the right reasons because what we have found out this morning has been fascinating. Can I thank you, Stephen, for coming this morning and helping us with this inquiry. Thank you very much.