Industrial Strategy: First Review Contents

4Horizontal policy pillars

97.This Chapter considers the horizontal policies outlined as part of the Government’s proposed industrial strategy. Given the time constraints on our inquiry and our own resource limitations as a Committee we have not scrutinised each of the commitments or policy pillars in detail. However, we do have a number of reflections and recommendations based upon the evidence we heard.

Science and innovation

98.Many witnesses to our inquiry highlighted a successful innovation ecosystem as key to boosting productivity.138 In addition to the challenges discussed in Chapter 2 of this Report, a number of particular themes emerged in evidence, including around the implications of leaving the EU on access to research,139 the importance of enabling and supporting disrupters,140 and the most effective ways to use public funding to leverage private sector investment.141 In the course of our inquiry we also visited two catapult centres, and saw first-hand the work that can happen when academia, the public sector and the private sector come together to boost commercialisation of cutting-edge innovation. As the Director of Global Manufacturing at Rolls-Royce told us, “The High-Value Manufacturing Catapults have plugged a massive gap that we used to have for decades and for me, honestly, if we had Catapult centres 20 or 30 years ago, we would not have some of the issues that we now face in industry.”142 We also took evidence from representatives of Durham University, Coventry University and University College London, and heard about how university collaboration with business is evolving into stronger partnerships that better enable commercialisation of research:

“By working together we are able to open up that underpinning fundamental research that is missing for those organisations. That allows them to take it forward and incorporate it into their products and services, whether that is consumer psychology or a functional service for a polymer or antibacterial work on antimicrobials.”143

99.Government has a unique role in crowding in investment into innovation and helping mitigate risks to business. We agree with the Secretary of State’s assessment that the UK needs to do more to commercialise its world-class R&D base and welcome commitments to do so. Catapult Centres are a promising model for public-private collaboration and we urge Government to allow them time to grow and avoid unnecessary tinkering. We also welcome evidence that universities are increasing their focus on commercialising their research; this should continue to be encouraged and supported.

100.Although, as set out above, we do not think the Government should set arbitrary targets, we do think there remains a strong case for a clear signal that the UK should be working towards ensuring 3 per cent of GDP is invested in R&D. We called for this originally in our Report into the Government’s Productivity Plan,144 in order to ensure that we catch-up and keep pace with our economic competitors. As we heard, it is important to achieve the “international gold-standard” of 3 per cent “to keep the UK ahead of the curve in tech, engineering and science.”145

101.Clear targets can give focus and energy to the direction of Government policy. While the Government’s commitment to an additional £2 billion of funding for science and innovation is welcome, we reiterate our call on the Government to formally set a target of increasing public and private R&D investment to 3 per cent of GDP.

102.We are disappointed that the Government’s response to our Report on the Productivity Plan did not accept our recommendation to set a target of increasing public and private R&D investment to 3 per cent of GDP.

103.We repeat our previous recommendation that the Government should set a target to increase R&D investment to 3 per cent of GDP and implement policies to achieve it.

The tax environment for R&D

104.We welcome the fact that the Government has launched a review of the tax environment for R&D. While HMRC has concluded that R&D tax credits, for instance, provide value for money,146 some academics have expressed doubt about their effectiveness, noting that UK investment in R&D as a proportion of GDP has continued to decline despite their introduction and arguing that more direct funding such as the Government’s Small Business Research Initiative (SBRI) may be more effective.147 Likewise, it has been argued that initiatives such as the Government’s Patent Box programme may be more likely to impact on multinational corporations’ tax planning arrangements rather than on the location of R&D.148

105.Any radical changes to the R&D tax credit policy would run counter-productive to the need to give businesses certainty and stability to invest, particularly under current circumstances. We therefore think that scrapping these policies would send the wrong signal, but Government should not shy away from strong measures to ensure additionality.

106.As part of its review of the tax environment for R&D, the Government should not shy away from ambitious measures to ensure additionality. These could potentially include: requiring reinvestment of tax saved in R&D, requiring year on year increases in R&D budgets, and/or a tapered rate with greater tax relief on larger investments proportionate to company size/turnover. These are suggested areas for exploration rather than specific policy recommendations. We recognise that each of these options would need considering in more detail to identify and address any risks of unintended consequences.

Embracing disruption

107.In his foreword to the Industrial Strategy Green Paper, the Secretary of State writes of the importance of making the UK a fertile ground for new industries “which will challenge and in some cases displace the companies and industries of today.”149 We wholeheartedly embrace this openness to innovation and disruption. Disruptive technologies and business models by their nature are hard to predict and it is crucial that we do not support incumbents without recognising the inevitability and importance of change. As one witness pointed out, “If you look at the technology roadmaps that were written in the 1980s and the beginning of the 1990s, none of them saw the internet coming.”150

108.The UK has been seen as a positive climate for disruptive companies and technologies to develop in, and the Government has been described as a “vocal champion for new and disruptive technologies over the past six years.”151 We heard that our openness and our world-class science and engineering base have given us a comparative advantage for innovators and disruptors.152 A hands-off regulatory approach has been seen as a benefit for disruptive business models.153 However, we have also heard that new businesses can exist in “a twilight zone of regulatory uncertainty” that can pose “potential existential threats.”154

109.Models such as the “regulatory sandbox” introduced by the Financial Conduct Authority were seen as a positive and pragmatic response to encouraging growth in a nascent sector.155 Although we did not hear a significant volume of evidence on this issue, the “sandbox” approach appears to have merit and lessons may be usefully applied to other sectors of the economy. One witness suggested that it could be implemented at a local level, facilitating early stage commercial market development “by giving regional governments power to declare geographically limited sectoral innovation zones.”156

110.We recognise that the Productivity Plan included a commitment for Government departments and regulators to develop “innovation plans” to set out how legislation and enforcement frameworks could adapt to emerging technologies and disruptive business models. But the fact that these were due to be published in Spring 2016 and are now delayed until “early 2017” does not give us confidence in the ability of Government to keep up with the rapid pace at which disruptive technologies can emerge and develop.

111.While recognising that regulatory landscapes may need to evolve rapidly, giving short-term clarity of regulatory approaches to new industry models and commitments not to retrospectively impose penalties on the basis of initial advice could help give businesses greater confidence to innovate. In line with the Secretary of State’s stated aim to support disruptors and economic innovation, we recommend that the Government review with industry whether additional steps are needed to provide regulatory certainty for emerging business models.


112.Throughout our inquiry we have heard that addressing the UK’s skills base is perhaps the most important factor underpinning a successful industrial strategy. Ed Twiddy, Chief Innovation Office at Atom Bank, and formerly a senior official in both local and central government, said that skills “is truly everything”,157 and Lord Heseltine told us in no uncertain terms that, “if I could design an industrial strategy, it would start in the primary schools.”158 However, unless Government funding is reprioritised, the scope to introduce new initiatives to support delivery of industrial strategy in schools will be highly constrained by the fact that mainstream schools in England are expected to make £3 billion of efficiency savings by 2019–20, at a time of rising pupil numbers—effectively, meaning an 8 per cent real-terms reduction in funding per pupil.159

113.The Industrial Strategy Green Paper makes a commitment to introducing a “proper system of technical education”.160 This is something we called for in our inquiry into the Productivity Plan, where we emphasised the need for parity of esteem between vocational and academic training.161 That said, we note that the announcement of £170 million funding for new ‘Institutes of Technology’ is considerably less than the £240 million allocated for Grammar schools expansion in the Autumn Statement 2016.162 Furthermore, while the funding commitment is new, the policy proposal for Institutes of Technology was actually announced in the Productivity Plan, and the proposals to simplify and streamline the number of qualifications in professional and technical education are also key elements of the Productivity Plan. A “new commitment” to “explore and further encourage the uptake of STEM subjects” is also vague and suggests little by way of a change in direction, as we assume that Government would already have been doing this in light of the emphasis successive Ministers have placed on the importance of STEM.

114.Many of the specific measures announced relate to school-age education. While a commitment to “explore ambitious new approaches to encouraging lifelong learning” is welcome, it is a shame that the more specific proposals on adult learning were not developed to inform discussions around the Green Paper. This is a significant omission given the OECD’s estimate that 9 million working-age adults in England have low literacy and/or numeracy skills.163 In the context of increasing automation and digitalisation of manufacturing and services, our education system needs to be nimble and able to adapt to future skills requirements. A significantly greater emphasis on whole-life reskilling will be essential to support people to stay in or gain meaningful and high productivity employment.

115.A skilled workforce is an essential foundation of economic success. Given the weaknesses identified by the Government in the UK’s skills base, the proposals contained in the industrial strategy Green Paper leave much to be desired. After six months in development we expected more than a disappointing combination of re-announcements, continuations of existing policy, and vague aspirations. It is deeply disappointing that the Green Paper fails to outline any detailed proposals for discussion in relation to encouraging the uptake of STEM subjects, and improving the skills of those already of working age. These will need to be addressed far more comprehensively in the White Paper. We welcome commitment to a proper system of technical education, linked to local needs, but it is unclear how this actually goes beyond proposals contained in the previous Productivity Plan. The Government needs to set out more detail about how it will achieve parity of esteem between vocational and academic training in practice.

Setting skills priorities at a local level

116.A number of submissions to our inquiry particularly highlighted the importance of “place” in relation to setting priorities for skills. Although the Green Paper states that it will “take further actions to address differences in skill levels between different areas”,164 it is unclear how the Government intends to work in partnership with Local Enterprise Partnerships (LEPs) and local authorities to achieve this aim. We heard from one witness that “the current fragmented system can lead to perverse outcomes in post-16 skills, for example with people training for roles in which there are either no jobs, or where supply already outstrips demand, whilst other roles remain vacant”, and that devolution of the 16+ education system could better enable skills support to be linked to local priorities.165 While proposals for devolving employment and skills are welcome, we also heard frustration that the benefits of this “remain constrained by limitations and caveats set by national government.”166

117.We recommend that the Government consider the potential for greater devolution of responsibility and funding for skills to local authorities and Local Enterprise Partnerships, who are well placed to work to identify regional needs and design appropriate solutions.

Skills and freedom of movement

118.Evidence from a range of sectors expressed concern about the impact of proposals to curtail freedom of movement on the UK’s future economic success. We heard, for instance, that freedom of movement underpins a successful service based economy,167 that curtailing freedom of movement could have a significant impact on infrastructure and housebuilding projects,168 and that freedom of movement is important to the success of our universities.169 This is a clear example of an area in which the Government’s industrial strategy needs to underpin its approach to Brexit negotiations and future immigration policy.

119.It is also unfortunate that the Government apparently has not previously sought to develop an “authoritative view of the sector specific skills gaps that the UK faces”;170 particularly in the context of plans to curtail freedom of movement. We question what Home Office “shortage occupation list” for work permits was based on to-date.

120.Improving workforce skills is a long-term project and, in the interim, Government will not be helping anyone if we starve our businesses of the talent they need to succeed. Any moves to place further limits on free-movement in the near future need to be carried in the context of a clear plan to ensure that the UK has a solid skills-base to meet industry’s current needs.

121.While for certain low-skilled employment, there may be a case for restrictions on free-movement given that businesses should be able to secure the necessary labour from within the existing UK market, the ability to retain, attract and access skilled workers will be essential to ensuring that we are able to actively attract the best talent to the UK. As a country we need to develop our workforce to be able to compete with the best. In the context of negotiations over free-movement as part of withdrawal from the EU, the Government must ensure that businesses continue to be able to access the skills they need. In its response to our Report, the Government should provide further clarity on how it intends to do this.

122.We recommend that the Government exclude university students from immigration totals and promote high skilled migration to the UK on an equal “who contributes most” basis to people wishing to invest and innovate in the UK.


123.We heard strong support for inclusion of infrastructure in the Government’s industrial strategy, with evidence placing an emphasis both on the importance of upgrading our physical and digital infrastructure. We also heard evidence of significant disparities in infrastructure spending per head of population around the country, with IPPR North stating that by their estimates this stood at £2,600 per person in London compared to £380 per person in the North for planned transport infrastructure investment.171 That successive Governments have failed to invest sufficiently in infrastructure because the benefits only occur outside of the electoral cycle illustrates the need for an industrial strategy that can provide a framework for long-term investment. While the Green Paper went on to include a number of new commitments to specific infrastructure projects, and we welcome the Government’s commitment to longer-term planning and investment in infrastructure, the Green Paper was unclear about what framework the Government proposed to use to rebalance spending. The Industrial Strategy Green Paper contained a commitment to “use infrastructure to support rebalancing”, and said that, “We will continue to prioritise the highest value-for-money projects, as we seek to address productivity weaknesses across the country.”172 However, there is a potential tension within this proposal in that the highest value for money projects may not always be those which address productivity weaknesses across the country.

124.We assume that to date the Government has already been prioritising “the highest value-for-money projects”, in line with the Treasury Green Book—the document which provides guidance on “ensuring public funds are spent on activities that provide the greatest benefits to society, and that they are spent in the most efficient way”.173 However, it appears that the current approach to investment appraisal and decision-making has led to widespread regional disparities in spend. In this context we heard evidence that Transport for the North are working with the Treasury and the Department for Transport to address the “challenge” of developing new evaluation frameworks that incorporate the potential benefits that transformative infrastructure investment can unleash:

“At the moment it is all demand-led, marginal or incremental change in transport that delivers a certain set of outcomes. We are looking to see what transformation will look like and how that impacts on the tax take or the benefit of expenditure that might be coming out of central government anyway.”174

125.Decarbonising the economy, ensuring we have a functioning transport system, enabling UK businesses to be at the forefront of the digital revolution and improving flood defences, all require decisive, long-term and strategic investment throughout the UK. We welcome the commitment to boost infrastructure investment to 1.7 per cent of GDP over the course of this Parliament.

126.The industrial strategy provides a welcome opportunity to set out a clear framework for making future decisions on infrastructure investment, but balancing boosting overall productivity with supporting growth in the UK’s different nations and regions will inevitably involve trade-offs around where funding is spent. It is unfortunate that the Green Paper does not address this tension openly, nor provide a suitable framework and criteria by which infrastructure will be allocated. We presume that the Government has always prioritised “the highest value-for-money projects”. Given this, we would welcome clarity on how its approach will differ in the future to better support rebalancing.

The role of the National Infrastructure Commission

127.In our Report into the Productivity Plan, we broadly welcomed the creation of the National Infrastructure Commission, noting the importance of its direct accountability to Parliament. Given that the purpose of the creation of the National Infrastructure Commission was to put infrastructure development on a long-term and stable footing, we were therefore surprised that the Government rolled-back from its initial intention to place the Commission on a statutory footing.

128.The decision not to place the National Infrastructure Commission on a statutory footing risks creating the impression that the Government is not backing up its aspiration for a long-term policy framework with action that will help embed that.

129.We are surprised that the National Infrastructure Commission gets little prominence in the industrial strategy and it is unclear how the questions in the Green Paper are intended to complement the Commission’s own call for evidence. For example, has the Commission been asked to prioritise rebalancing in its assessment of the country’s infrastructure requirements? We would welcome clarification from the Government.

Supporting businesses to start and grow

130.We welcome the Government’s focus on supporting businesses to grow and on considering the need to strengthen corporate governance. Both of these are issues we have taken a close interest in over the past year, including through our inquiry into Access to Finance and our Reports into Working Practices at Sports Direct and, jointly with the Work and Pensions Committee, the collapse of BHS. In September 2016 we launched an inquiry into Corporate Governance, which we hope will contribute to the Government’s own thinking.175 We note that there have also been a number of other reviews in recent years into the UK’s poor track-record on scale-up, such as the work by Sherry Coutu CBE.176

131.The problem of impatient capital and the UK’s poor track-record on scale-up have been subject to a number of reviews in recent years. We welcome the fact that Government is taking this issue seriously and look forward to seeing the review followed by meaningful action. We will also continue to consider this issue as part of our inquiry into Corporate Governance and a new inquiry into Scale-Up.

Improving management skills in business

132.In our inquiry into the Productivity Plan we heard that weaknesses in the leadership and management skills within industry was undermining our productivity.177 We welcome the additional clarity on the steps Government are taking to address this provided in their response to that Report, which included an additional £24 million funding for Growth Hubs. There is, however, a risk that this funding does not achieve its intended benefits. One area of potential concern we have heard is that the Growth Hub network, which provides a gateway and advice service to many businesses seeking support, is providing a “patchy” service and that “ there is a need to set a clear national direction and provide stronger support”.178 Given the shift towards localised delivery of business support, there is clearly more work to be done in light of research by Institute of Chartered Accountants in England and Wales (ICAEW) which found that “less than half of businesses are aware of LEPs and less than one in five had heard about Growth Hubs.”179 Furthermore, the Federation of Small Business told us that they have “consistently raised concerns over a lack of co-ordination and duplication of business support provision across both the public and private sectors, including the interaction between national and local schemes.”180

133.Evidence on the impact of Growth Hubs is mixed. In its response to this Report, Government should set out how it intends to evaluate the impact of current funding in order to determine what needs to be done to support Growth Hubs to provide a better service in the future.

Creating the right incentives for long-term investment

134.One issue that the Industrial Strategy Green Paper rightly considers is the fact that the United Kingdom has lower levels of fixed capital investment than competitors in other countries. One of the key tools that has been used by Government to encourage business investment in recent years has been adjusting the corporation tax rate. HM Treasury has written that one of the reasons for having the lowest corporation tax rate in the G20 is to “increase the investment and productivity that drive economic growth.”181 Government’s own modelling of corporation tax cut reductions implemented in the 2010–15 parliament suggested that they would increase: business investment, GDP, demand for labour, wages and consumption.182 However, we have also heard evidence suggesting that “international data suggests there is little correlation between a country’s corporation tax and its economic performance.”183 We recognise that the merits or otherwise of lowering corporation tax are highly politicised issues and subject to considerable debate among different schools of economics. We also note that despite the UK having had some of the most competitive corporate tax rates among comparable economies since the early 1990s our productivity gap has not closed. While the OECD argue that lower corporation taxes can improve productivity, it also notes that trade-offs must be made against other policy objectives, such as improving equality, and that “it is probable that there are diminishing growth returns to adjusting taxes.”184

Figure 7: Corporate tax rates in selected countries, 1981–2015

Source: Institute of Economic Affairs

135.While we recognise that there are multiple factors which contribute to a country’s productivity, hence the need for a multi-faceted industrial strategy, it would be an omission not to more fully consider the potential role of tax levers in promoting productivity beyond potentially blunt reductions in corporate tax rates. Instead, a more holistic review of the business tax landscape and the incentives it provides to boost productivity is worth further consideration.

136.Fiscal levers can play a key role in shaping business behaviour. We recommend that Government commission an independent review bringing together broad representation to consider whether taxation levers can better be used to boost investment in physical and human capital, research and innovation.

Business rates

137.With regards to business taxation we also heard that the current business rates system can “penalise” manufacturers for investing in new plant and machinery, creating a perverse incentive against investment.185 While we recognise that the Government’s move to give control for business rates to local authorities is intended to provide “a direct incentive on councillors to allow developments to take place,”186 we are concerned that this will not address the fundamental issue that investing in improving a premises or plant may increase the overall rateable value of the property. It has also been suggested that there is a risk that the move to full business rates retention by local authorities could entrench economic inequalities,187 leaving councils in more affluent areas able to reduce rates further, with councils in deprived areas facing stark choices about whether to cut rates to attempt to attract investment or maintain them to fund crucial local services.

138.We have heard evidence that the current structure of business rates act as a particular disincentive to capital investment and that devolving responsibility for rate setting to local authorities is unlikely to boost investment in those areas which need it most. Furthermore, in an environment where retail is increasingly carried out online, it risks disadvantaging retailers who maintain a physical presence on our highstreets. We recommend that the Government conduct a fundamental review of the outdated structure of the business rates system, given that it acts as a disincentive to investment regardless of who is responsible for setting the overall rate.

Public procurement

139.The UK’s public procurement budget is worth around £200 billion and accounts for around a third of public spending,188 meaning that it can play a significant role in supporting delivery of the industrial strategy. When it comes to public procurement issues, there is clearly a trade-off to be made between reducing short-term costs by maximising competitive pressures through procuring internationally, and delivering long-term value for the UK by investing taxpayers’ money in UK businesses and products where possible. Even within existing EU procurement rules, the Government can procure on ‘Most Economically Advantageous Tender’ principles, which can include criteria such as local economic impact on jobs. For instance, we heard that this approach had been used in the procurement of contractors to deliver the Crossrail scheme.189 However, we have also heard of frustrations where poor procurement planning by Government has led to major contracts going overseas, because successive Governments have not supported domestic industry in a way that enables it to meet current demands.190 As the TUC explained, “The UK has a poor record on the strategic use of procurement to support industrial policy, despite the fact that EU rules allow the creative use of procurement structures.”191

140.We welcome the fact that the Government is considering opportunities to better utilise public procurement to maximise economic opportunity for UK firms, and it should make greater use of flexibility in existing state aid rules prior to our departure from the European Union. The Government should also consider the opportunities to further boost procurement from within the UK as part of its negotiating strategy for withdrawal from the EU.

The Small Business Research Initiative

141.During our inquiry we heard positive evidence in favour of the Government’s Small Business Research Initiative (SBRI) programme. However, we also heard that the US scheme on which the SBRI is modelled was perceived to be far more successful, with the UK scheme too limited in scope by comparison.192 In particular, we were told that uptake of the SBRI has been “patchy,”193 and its scale is “miniscule” in relation to overall public procurement spend.194

142.We welcome the review of the Small Business Research Initiative that the Government has commissioned; we hope this will be ambitious in its recommendations and that the Government will increase the scale of the scheme and better embed it across Whitehall.

Encouraging trade and inward investment

Supporting UK companies to export

143.We welcome the fact that trade and investment are being considered a core part of the Government’s new industrial strategy. While global growth may partly explain the persistent deficit, it does not explain why UK export growth has been the slowest in the G7 since 2008. As we heard during our own inquiry into Exporting and the role of UKTI, the Government’s previous model for supporting exporting had significant flaws and we welcome the fact that steps are being taken to address these. Responsibility for scrutinising Government exports policy and the work of the Department for International Trade now rests with the International Trade Committee, to whom we wrote to set out the findings from our own work in this area.195

Inward investment

144.Launching her campaign to become Prime Minister, Theresa May spoke of the need to assess foreign takeovers of UK companies to determine whether they are in the national interest: “A proper industrial strategy wouldn’t automatically stop the sale of British firms to foreign ones, but it should be capable of stepping in to defend a sector that is as important as pharmaceuticals is to Britain.”196

145.Under the current legislation, the Secretary of State for Business may only intervene in takeovers by foreign companies in very specific circumstances. There are presently three public interest considerations specified in the Enterprise Act 2002 as legitimate bases for Ministerial intervention. These are:

146.The UK is a top destination for Foreign Direct Investment (FDI), and in 2015 was reported to be the largest destination for FDI, attracting 28% of total FDI in Europe.198 We have received evidence from a range of businesses in a variety of sectors, expressing concern about what additional Government intervention might mean in practice. Businesses ranging from the glass sector199 to the creative industries200 were very clear that they had benefited from multinational investment. We also heard that Government intervention could “disincentivise foreign investment”201 and could lead to retaliatory behaviour by other countries that would be counterproductive for UK companies.202 However, disadvantages arising from foreign investment were also identified; for instance, that “when corporate decisions are taken, it tends to be the home site that is the last one to be negatively impacted and the first one to see positive investment.”203 We heard from Lord Mandelson that he believed it was important to “put some grit in the wheels” of takeovers to ensure they were properly scrutinised; a view shared by Alex Brummer, the City Editor of the Daily Mail.204

147.Views on foreign takeovers are highly emotive and potentially distorted by high profile issues such as the Cadbury/Kraft and AstraZeneca/Pfizer takeover proposals. We also note that since the Kraft takeover of Cadbury, and the subsequent reneging on pre-takeover commitments, the Takeover Panel has tightened its rules and that new provisions to ensure post-offer commitments are enforceable are now in place.205 These rules are being put to the test for the first time through Softbank’s takeover of ARM, which received significant media coverage in July 2016.206

148.Looking at the data on the volume of inward and outward investments, it appears that patterns of inward and outward investment by the UK are broadly balanced.207 The vast majority of inward and outward investment since 2010 has been with the United States.208 The challenge is less about the overall volume of foreign investment in the UK than a judgment as to whether certain industries or sectors should be protected in the national interest. For instance, we heard that while the UK Government has golden shares in BAE Systems, Rolls-Royce and National Air Traffic Services that can be used to prevent foreign takeover, many other countries restrict FDI for a wider range of industries for security reasons.209

Figure 8: UK vs. foreign M&A activity

Source: Mergermarket

149.The UK has been extraordinarily successful in attracting foreign direct investment over the past 20 years. This has improved the business environment, not only through the creation of employment, but by bringing in new ideas and innovations, which have improved the competitiveness and productivity of British business as a whole, with management techniques cascading through the economy.

150.The UK’s openness to foreign direct investment has been an advantage for Britain. The recent deal with Nissan is another example of this, for which the Government should be commended. It is often said that Britain is more prone to “selling off the crown jewels” than other nations. However, certainly when it comes to the last six years, the number of foreign acquisitions in the UK more or less match the number of UK acquisitions overseas. That said, foreign takeovers of major UK national firms, such as Kraft Heinz’s recent (and short-lived) proposed takeover of Unilever–the second biggest company by market capitalisation in the FTSE100 and a leading player in food and drink manufacturing, the country’s biggest manufacturing sector–clearly can cause concern. While M&A activity has the potential to improve productivity of an individual company, in the case of an international takeover this risks being at the expense of jobs and investment in the UK unless the Government is able to extract commitments on these. It is not exactly clear the framework or criteria by which the new Government will approach foreign takeovers, given the Prime Minister’s rhetoric. Given the Prime Minister’s previous comments about foreign takeovers, the Government needs to provide much greater clarity and certainty as to what steps it intends to take to intervene in foreign takeover deals and in what circumstances.

Protecting taxpayers’ investment

151.In addition to areas where there are particular national interest reasons to prevent foreign investment, we can also see merit in ensuring that where companies have benefited significantly from taxpayer support then there are restrictions to prevent expertise and intellectual property being developed in the UK from leaving. The former Business Secretary, the Rt Hon Sir Vince Cable, told us that one of his concerns about the AstraZeneca/Pfizer takeover was the “need to have some protection of concentrations of British science, which have been built up over many years with taxpayer support.”210 The Prime Minister also specifically referred to the attempted Pfizer takeover of AstraZeneca in her comments about the need for greater safeguards against foreign takeovers.211 We agree that it is appropriate that where a business has received benefits from taxpayer support then those benefits should remain in the UK.

152.We recommend that the Government takes steps to ensure it has the power to retain IP benefits in the UK in the event of a foreign takeover where a business has been supported in developing new IP through taking advantage of taxpayer funding or tax-incentives. At the very least, it should ensure that any transfer of IP delivers a substantial return for taxpayers. This could be done, for instance, by placing constraints on access to funding and incentives. The Government should also develop mechanisms to clawback any tax relief or funding should tax-payer subsidised IP be transferred abroad.

Affordable energy and clean growth

153.As the Secretary of State has said, the global challenge to decarbonise is not just an imperative on its own grounds but also presents an enormous economic opportunity.212 The International Energy Agency estimates that global investment in energy efficiency alone was USD 221 billion in 2015, an increase of 6 per cent from 2014.213

154.Transitioning to a low carbon economy will require significant economic shifts and will affect every sector of the economy.214 As the Director of Global Manufacturing at Rolls-Royce told us, “industrial strategy is not just meant to fix what is wrong today but to have a longer-term view about how it is that in the low carbon economy […] we will maintain that success for the next 30 to 40 years.”215 While we understand why the Government is keen to claim that security of supply and progress against carbon budgets are settled, we are concerned that these should not become secondary as the Government places a “higher priority” on affordability and securing the “industrial opportunities” of energy innovation.216

155.The framework of the “trilemma” exists because it recognises “the need to have a secure, affordable and decarbonised energy supply”217 and that there are inherently trade-offs between policies that deliver this. While security of supply does not have to be delivered through new generation, but can also be delivered through other measures such as smart grids,218 and energy efficiency investment,219 there are trade-offs between the types of approach adopted, the rates of decarbonisation and affordability. Likewise, with regards to meeting future carbon budgets, while clearly we welcome the explicit commitment to this ambition in the industrial strategy, we are deeply worried that the Committee on Climate Change has identified significant gaps between our ambition and our current policy delivery.220 It appears unrealistic to assume that closing this gap can be divorced from issues around the affordability of decarbonisation and the types of energy innovation that the UK should be looking to grow. The fact that progress in reducing emissions since 2012 has been almost entirely due to the power sector221 suggests that the industrial strategy needs to include meaningful policies to support decarbonisation of our industries and buildings. While the Industrial Strategy Green Paper does suggest that the new Industrial Strategy Challenge Fund could support smart and clean energy technologies, and we welcome signs that the Government will establish a new institute to act as a focal point for work on battery technology, energy storage and grid technology, it is important that we also see clear signs as to how Government will embed clean growth in our economic future. For our own part, we continue to see the balance of security of supply, decarbonisation and affordability as equal priorities.

Figure 9: Progress reducing emissions since 2012 has been almost entirely due to the power sector

Source: Committee on Climate Change analysis of DECC data

Figure 10: Assessment of current policies against the cost-effective path to meet carbon budgets and the 2050 target

Source: Committee on Climate Change analysis of DECC data

156.While we welcome the industrial strategy’s support for energy innovators, taking advantage of the economic opportunities presented by decarbonisation also means ensuring the UK continues to be seen as a world-leader in the transition to a low-carbon economy. In this context, we trust that the Government will publish its Emissions Reduction Plan by the end of March 2017, as indicated to us by the Minister of State for Climate Change and Industry. The Government needs to ensure that the Emissions Reduction Plan and industrial strategy are coherent and consistent, with commitments in the industrial strategy to actively support delivery of current and future carbon budgets.

138 E.g. ISG133, CBI which stated that one of the principles of the industrial strategy should be a “willingness to back innovation and be bold at scale”

139 Russell Group (ISG071)

140 Institute of Directors (ISG025)

141 SPRU (ISG111)

142 Q113

143 Q368 [Dr Thompson]

144 BIS Committee, Second Report of Session 2015–16, The Government’s Productivity Plan

145 ICAEW (ISG0183)

147 For example see David Connell, Creating markets for things that don’t exist, Centre for Business Research, University of Cambridge (November 2014)

148 As above.

150 Q113 [Professor David Greenwood]

151 IOD (ISG025)

152 Centre for Process Innovation (ISG033)

153 IOD (ISG025)

154 Q345 [Mark Littlewood]

155 Responsible Finance (ISG062)

156 Matthew Rhodes (ISG069)

157 Q379

158 Q64

159 National Audit Office, Financial sustainability of schools (December 2016)

160 HM Government, Building our Industrial Strategy: Green Paper, January 2017, p.47

161 BIS Committee, Second Report of Session 2015–16, The Government’s Productivity Plan

162 Although media reports announced an extra £200 million for Grammar Schools, the detailed tables in Autumn Statement 2016 indicate that has allocated £60 million a year for four years.

165 Core Cities (ISG186)

166 Newcastle City Council (PEG049)

167 ICAEW (ISG0183)

168 TUC (ISG112)

169 Q248 [Dr Sarah Main, Dr Celia Caulcott]

170 HM Government, Building our Industrial Strategy: Green Paper, January 2017, p.47

171 IPPR (PEG007)

172 HM Government, Building our Industrial Strategy: Green Paper, January 2017, p.58

174 Q438 [Nigel Foster]

176 [Accessed 30 January 2017]

177 BIS Committee, Second Report of Session 2015–16, The Government’s Productivity Plan

178 Royal Academy of Engineering (ISG142)

179 ICAEW (PEG50)

180 Federation of Small Businesses (ISG166)

181 HM Treasury and HM Revenue & Customs, Analysis of the dynamic effects of corporation tax reductions (December 2013)

182 As above.

183 New Economics Foundation (ISG172)

185 Construction Products Association (ISG024)

186 Q66 [Rt Hon George Osborne MP]

187 Newcastle City Council (PEG49)

188 Unite the Union (ISG048)

189 Rail Delivery Group (ISG017)

190 UK Metals Forum (ISG035)

191 TUC (ISG112)

192 Royal Academy of Engineering (ISG142)

193 CaSE (ISG158)

194 The R&D Society (ISG123)

195 See letter from Iain Wright MP to Angus Brendan MacNeil MP, Chair, International Trade Committee, 23 November 2016

196 Rt Hon Theresa May MP, Speech of 11 July 2016

197 Mergers & takeovers: the public interest test, House of Commons Library, CBP 5374 (September 2016)

199 British Glass (ISG021)

200 COBA (ISG167)

201 Rolls-Royce (ISG146); MasterCard (ISG044)

202 British Aggregates Association (ISG162)

203 Q144 [Dr David Greenwood]

204 Q353; Q333

205 Takeover Panel (ISG020)

206 As above.

207 Analysis is based solely on the volume of M&A activity, not the value of transactions.

208 Mergermarket, volume 2010–2016. Acquisitions from the United States in the UK alone were greater than the sum total of the next nine largest overseas investors into the UK by origin country.

209 TIGA (ISG178)

210 Q38

211 Rt Hon Theresa May MP, Speech of 11 July 2016

212 Rt Hon Greg Clark MP, Speech of 11 November 2016

213 International Energy Agency, Energy Efficiency Market Report 2016 (2016)

214 Aldersgate Group (ISG138)

215 Q112

216 HM Government, Building our Industrial Strategy: Green Paper, January 2017, p.89

217 Renewable UK (ISG171)

218 Institute of Mechanical Engineering (ISG143)

219 New Economics Foundation (ISG172)

220 Committee on Climate Change, Meeting Carbon Budgets: 2016 Progress Report to Parliament, June 2016

221 As above.

1 March 2017