Risk and Reward: sustaining a higher value-added economy - Business and Enterprise Committee Contents

1  Introduction

The purpose of the inquiry and the aim of the report

1.  This Report has taken far longer than anticipated when, on 26 July 2007, the Committee announced its intention to carry out an inquiry into creating a higher value-added economy. The intention of the Committee was to build on the findings of its reports into better skills for manufacturing and public procurement, but it was forced by the recession to turn its attention to other urgent subjects.[1] However, innovation remains a vital issue for an advanced economy like that of the United Kingdom and arguably is of even greater relevance at a time of severe economic challenge. The inquiry's terms of reference were broad:

  • What is meant by a high value-added economy? Which business activities qualify as such?
  • How UK business compares internationally in areas such as research and development, creativity and design.
  • What can be learnt from the experiences of other countries in this area and how fast other countries are moving up the value chain?
  • The extent to which UK business has absorbed new business practices such as lean manufacturing.
  • Why some sectors of the UK economy appear to be more effective at embracing value-added activities than others?
  • The impact on business of government efforts to promote research and development, including the research and development tax credit.
  • The progress that has been made on university/business co-operation and knowledge transfer since the publication of the Lambert Review in December 2003.
  • Whether business and government interpret innovation too narrowly?
  • What the Government can do to further promote higher value-added business activities and innovative thinking among UK businesses.
  • The impact of nationality of ownership on the location of research and development work.
  • The effectiveness of machinery of government arrangements in encouraging innovation and creativity.

2.  The Committee is not the only organisation preoccupied by these questions. They have underlain the work of many other bodies in recent years. As the Engineering Employers Federation (EEF) told us in their evidence "concerns have been addressed in the recommendations made in the reviews of innovation conducted by Lord Sainsbury and of skills by Lord Leitch".[2] In the course of our inquiry, the Government has published further documents and speeches relating to this topic.

Our inquiry

3.  This has been an extremely long running inquiry, informed by seven evidence sessions and an extensive programme of visits. The Committee is extremely grateful to all those who contributed to the inquiry. We were keen to ensure that we both looked at the way in which innovation could be supported in 'traditional' innovative industry, and that we also took a wider view. We took oral evidence from Professor Peter NC Cooke KPMG, Professor of Automotive Management at the University of Buckingham and Mr Eric Wallbank, Automotive Sector Leader for Ernst & Young; Sir John Rose, Chief Executive, Mr Charles Blundell, Head of Public Affairs, and Mr Mike Terrett, Chief Operating Officer, Rolls-Royce Group plc; Mr Richard Halkett, Executive Director, Policy and Research Unit, National Endowment for Science, Technology and the Arts (NESTA); Mr Will Hutton, Chief Executive, and Mr Ian Brinkley, Director, Knowledge Economy Programme, Work Foundation; Professor Michael Clarke, Vice-Principal, and Dr James Wilkie, Director of Research & Commercial Services, Birmingham University; Professor Madeleine Atkins, Vice-Chancellor, Professor Ian Marshall, Pro Vice-Chancellor for Research, and Professor Keith Popplewell, Director of Future Manufacturing Applied Research Centre, Coventry University; Mr Mick Laverty, Chief Executive, Dr Richard Hutchins, Corporate Director for Economic Development and Dr Phil Extance, Director of Innovation, Advantage West Midlands; Ms Rachel Elnaugh, Entrepreneur and former panellist on Dragon's Den and Mr Doug Richard, Entrepreneur, Chair of Conservative Party Small Business Task Force and former panellist on Dragon's Den; Ms Frances O'Grady, Deputy General Secretary, and Mr Tim Page, Senior Policy Officer, Trades Union Congress (TUC); Mr John Cridland, Deputy Director General, Confederation of British Industry (CBI); Mr Andrew Cave, Head of Policy, Federation of Small Businesses (FSB); and Mr Iain Gray, Chief Executive, Mr David Bott, Director of Innovation Programmes, Mr Graham Hutchins, Director of Operations and Services, Technology Strategy Board (TSB).

4.  We were eager to talk to practitioners around the country, and some of our oral evidence was taken on committee visits. As well as taking formal evidence, we met a wide range of people involved in innovation: academics, entrepreneurs and government bodies. We visited Cambridge, the West Midlands, the British Library in London, Glasgow and Edinburgh. A full list of meetings is included in Annex B.

5.  One of the most useful parts of the inquiry was the visit to the United States to assess what could be learnt from the experience there. That visit enabled us to look at: the way in which innovation was funded; interactions between universities, businesses and public authorities; industry collaborations; and publicly funded technology transfer organisations. We looked at Federal Organisations such as the Defense Advanced Research Projects Agency (DARPA) and the National Institute of Standards and Technology (NIST) in Washington; at the Research Triangle Park and at the university-centred activity in Boston. It was invaluable for setting the UK experience in context.

6.  In addition to our evidence, we have drawn on the wide range of material published by others. There is a danger that so much is said about the high value-added economy, about innovation and about how policy can foster it, that it is difficult to keep up with the policy debate. Our purpose is to focus at a very high level on what the higher value-added economy means for the United Kingdom, and to make recommendations about the overall policy approach. In addition, we encountered many examples of best practice, and the Report offers an opportunity to draw attention to some of these. We recommend that those who are interested in exploring these topics in more detail look at the evidence published with this Report, where experts have given their views freely.

The background to our inquiry: history and circumstances

7.  No sensible assessment of the United Kingdom's needs can be made without an appreciation of two underlying factors—our nation's extraordinary history of innovation, beginning with the Industrial Revolution and continuing to this very day and, linked to that, a proper understanding of the current economic context.

8.  Britain's continuing success as a manufacturing nation—something not fully understood and which we analyse below—owes much to our long history of innovation. Dating the exact beginning of the Industrial Revolution would be a matter of academic debate. It would be convenient for our Report to say it began in 1709, exactly 300 years ago, when Abraham Darby first used coke to smelt iron ore, replacing wood and charcoal as fuel. But it is safer to be less specific. As one of Britain's leading historians says:

    From the 1730s and 1740s, the majority of British commentators argued that modern achievements were superior to those of former times, especially the ancient world. A culture of improvement lay at the heart of much innovation and the diffusion of new techniques and machinery, although art, architecture, furniture and much else in the cultural world, all used classical designs.

Progress took many forms, but the most important was a belief in the prospect and attraction of change. From 1759, there was a marked increase in the number of patents, testimony to an interest in the profitable possibilities of change.[3]

9.  It is safe to say, then, that Britain's Industrial Revolution began at least 250 years ago and that this head start on the rest of the world is one of the reasons that the United Kingdom, to this day, enjoys a lead in many manufacturing technologies—a lead that is not properly appreciated or celebrated. A central theme of this Report is the need for politicians and commentators to understand just how successful we continue to be as a nation in many sectors.

10.  All too often, the rhetoric about the British competitive position is unduly pessimistic. In the last few months the following headlines have appeared:

  • UK manufacturing 'falls off a cliff' - The Guardian, 1 December 2008;
  • Manufacturing outlook "grim" - The Telegraph, 2 January 2009;
  • UK Manufacturing report near record Jan weakness - Reuters UK, 2 February 2009;
  • Outlook for UK manufacturing continues to worsen - businessweekly.co.uk, 6 February 2009;
  • UK Manufacturing still on the decline - Agent Cities, 13 May 2009; and
  • Figures reveal biggest slump in manufacturing output for 35 years - The Daily Mail, 2 June 2009.

11.  This Report is not about the recession or its causes. It does not look at any alleged failures of policy by this Government that may have contributed to the recession, just as it does not look at any similar allegations about the then Government's response to the previous recession in 1991. It is, however, a matter of fact that the current recession has hit British industry hard. The CBI, in supplementary evidence to the Committee, summarised the effects of the current economic downturn on business:

Aside from the negative effects on aggregate demand and output, there will undoubtedly be other, more permanent, effects on the business community. Clearly the UK financial system has already changed radically. Even when the economy emerges from recession, we do not envisage a return to pre-2007 credit conditions anytime soon. This may have adverse consequences for business formation, investment and innovation.[4]

12.  The most recent figures show the severity of current conditions for industry. Manufacturing output has fallen 13.7% below the level of a year ago, and is at the lowest level since 1991. But although the Committee recognises that the economy is facing severe difficulties, the United Kingdom is not alone in this. For example, in the year to January 2009, manufacturing output in Germany fell by 20%.[5]

13.  However, the broader context—the product at least in part of two and a half centuries of innovation—is rarely given. As the title of a PricewaterhouseCoopers report issued this April put it: "The future of UK Manufacturing: Reports of its death are greatly exaggerated".[6] Similarly, whatever one's views of the right balance of different sectors in the economy, one cannot deny that the United Kingdom has real competitive strength in the service sector. The United Kingdom was the second largest exporter of commercial services in the world in 2008, surpassed only by the US.[7]

14.  There is, of course, room for legitimate debate about the extent to which the policies of successive governments since the Second World War have assisted or damaged industry, but the UK economy is not the weakling some commentators suggest. Innovation Nation (published in March 2008) states that "In 2007, the UK exported around £75 billion of knowledge services, an increase of 170% on the decade before, and now makes up about a quarter of all UK exports. Exports have outpaced imports such that the surplus on trade has trebled from 1.8% of GDP in 1995 to 3.3% in 2005."[8]

15.  Similarly, although Britain runs a significant trade deficit in manufacturing, the manufacturing sector is not as weak as commonly supposed. Manufacturing accounts for 13% of the United Kingdom's GDP, making the United Kingdom the sixth largest manufacturer in the world (measured by output)[9] and 25% of the United Kingdom's exports are high-tech goods.[10] Innovation Nation argues that the sector is, therefore, not in decline, particularly as manufacturing production has increased by 50% since 1997. This is not simply the Government's view; EEF told us that there had been a "modest increase in manufacturing output of 4.2% between the end of 2002 and August 2007".[11]

16.  The United Kingdom is also a relatively open economy. The EEF told us "Relative to its GDP, the stock of foreign direct investment (FDI) stood at 37% in the UK in 2005. This compares with 28% in France, 18% in Germany, 13% in the United States and 12% in Italy. Similarly, the stock of British outward investment stands at 56% of GDP, well ahead of France (40%) and Germany (35%)".[12] This has advantages and disadvantages; there are clear signs that companies prefer to locate their research and development (R&D) in their home market.[13] On the other hand, the need to compete globally provides an inbuilt spur for competitiveness, and exposes companies to best practice elsewhere.

17.   This is not to deny there are serious challenges. The UK economy is competing in a global market of goods and services, and cannot compete on labour costs. China, India and other developing countries can offer skilled workforces at far lower costs. In the view of NESTA, "for the UK to remain competitive it will need to move up the value chain, rather than compete solely on cost. It will therefore have to both generate high value-added activities and create the conditions that sustain its advantage against increasingly rapid progress by international competitors".[14] The Sainsbury Review considers that "in today's global economy, investment in science and innovation is not an intellectual luxury for a developed country, but an economic and social necessity, and a key part of any strategy for economic success".[15] The more open an economy is, the more important it is to ensure that it has the skills and attitudes needed to sustain higher value-added activities.

18.  Over-caution and even pessimism about the country's relative economic situation, and the skills and expertise it can offer, can lead directly to the United Kingdom appearing a less attractive place for investment than is actually the case. This would be unfortunate in any case; it is doubly so in such an open and internationally linked economy. It can also deter able young people from even considering jobs in the industry sectors whose future is wrongly disparaged in casual comments by those who should know better.

19.  Higher value-added goods and services will be essential to the strength of the UK economy in the future. Encouraging the growth of such activities depends on a realistic and measured assessment of the United Kingdom's strengths and weaknesses. This does not mean refusing to acknowledge the very real economic difficulties which face the country. However, this should be balanced by more confident and better-informed acknowledgement of the economy's very real underlying strengths.

1   Trade and Industry Committee, Fifth Report of Session 2006-07, Better skills for manufacturing, HC 493. Trade and Industry Committee, Thirteenth Report of Session 2006-07, The future of UK manufacturing: public procurement, HC 1109. Back

2   Ev 183 [EEF]. HM Treasury (2007), The Race to the Top, A Review of Government's Science and Innovation Policies conducted by Lord Sainsbury of Turville; HM Treasury (2006), Leitch Review of Skills, Prosperity for all in the Global Economy- World Class Skills Back

3   Jeremy Black, "The Making of Modern Britain", 2001 Back

4   Ev 160 [CBI] Back

5   BNP Paribas, March 09 Back

6   http://www.pwc.co.uk/pdf/UKmanufacturing_300309.pdf Back

7   WTO Trade Statistics Database Back

8   Innovation Nation, DUIS, HMT and BERR, March 2008 Back

9   In 2008, the UK was still the 6th-largest manufacturer in the world by value of output as ranked by the UN Council for Trade and Development." Source: http://www.pwc.co.uk/pdf/UKmanufacturing_300309.pdf Back

10   2006 was a record year for UK exports, and according to a 2008 report by BERR, 25% of UK exports in 2006 were high-tech goods, compared with 22% in the USA, 15% in France and 11% in Germany." Source: http://www.pwc.co.uk/pdf/UKmanufacturing_300309.pdf Back

11   Ev 176 [EEF] Back

12   Ev 181 [EEF] Back

13   Ev 118 [Advantage West Midlands] Back

14   Ev 213 [NESTA] Back

15   HM Treasury (2007), The Race to the Top, A Review of Government's Science and Innovation Policies conducted by Lord Sainsbury of Turville; HM Treasury (2006), p22 Back

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Prepared 25 September 2009