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4.35 p.m.

Lord Desai: My Lords, we are grateful to the noble Lord, Lord Trefgarne, for giving us the opportunity for this debate. Like the noble Lord, Lord Weatherill, I made my maiden speech on this very question about three years ago. I shall confine my attention to the first part of the Motion—the importance of increased output from the United Kingdom manufacturing industry.

I do not know much about actual business. I am an economist and economists have a fond relationship with the real world: they know about it but do not want to be anywhere near it if they can help it. I wish my life to be comfortable. After what the noble Lord, Lord

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Skelmersdale, said, I am glad that I am not in the real world; I am in academia. It is hard work in the real world.

I wish to talk about the general state of manufacturing industry. My points are not made in a partisan spirit. Manufacturing industry is an important part of the economy. But increasingly there is a contrast between the ability of the manufacturing sector to generate wealth and its ability to generate jobs. Increasingly, because productivity increases have had to be rather fast in this competitive world, manufacturing industry can generate wealth but cannot always generate jobs at the rate it once did.

Virtually everything that I say arises from Economic Trends. It is an excellent publication; I recommend everyone to study it. Since 1970 production industries—manufacturing and other aspects such as North Sea oil—have grown but more slowly than any other sector of the British economy. Since 1970 there has been growth of approximately a third, from 73 to 98 in index number form. The recession has meant that we have not caught up with the previous peak in output in 1989. But there has been growth in manufacturing industry.

By the same token we have to be aware that as employers of people manufacturing industry has shrunk quite remarkably. In 1970 about 8 million people were employed. About 4 million people are now employed. That means that while output has grown by about a third, employment has declined by about a half. Of course, the balance lies in increased productivity.

When considering productivity, one achievement has been noticeable—a good rate of productivity growth in manufacturing industry. I believe that increasingly that will be so. Another good feature is that since 1980 productivity growth has been very rapid. We had slow productivity growth in the 1970s and good, rapid productivity growth in the 1980s. That means that productivity growth has to be kept up. We cannot look benignly to the manufacturing sector to provide us with jobs. We have to be sure that manufacturing industry stays competitive and generates wealth, especially manufacturing exports which are absolutely vital for the national economy.

I have to point out a disturbing trend. The rate of investment in our manufacturing industry is no longer as high as it was. With proper allowance for inflation, in real terms investment in our manufacturing industry is lower today than it was in 1970. I have to admit that it reached a peak in 1989 when about £15 billion was invested. Today the figure is only about £11 billion, compared with £13 billion in 1970.

We should approach the problem of manufacturing investment much more seriously. We may differ across party lines as to methods but encouraging manufacturing investment is urgent and central for our economic future. Whether we do that by inviting foreign investment or by encouraging domestic investment, or whether it takes place in small or large firms, are matters of choice. Indeed, I believe that one should do everything across the board.

Encouraging manufacturing investment in every way we can is central to the problem of British manufacturing industry. Our outward growth is slowed

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to the extent that our manufacturing investment is not rapid. Of course, by the same token, we get more out of our investment than other countries. We are very efficient at getting more out of the pound than others. That has to be said. However, it is true that we are not investing enough. It is a matter of diverting resources from other uses—consumption, government spending or whatever it is—to manufacturing investment. Perhaps on another occasion we should debate the best ways of encouraging manufacturing investment in the British economy.

What I think is happening, not just in the UK but throughout the world in the modern context of the global economy, is that countries who wish to survive as manufacturing nations must continue innovating at a rapid rate. They must put a great deal of money into research and development. They must move along the product front because the products we used to make can be made much more cheaply and better elsewhere in the world. We shall not be able to resist the tide of free trade. It is a delusion to think that we could. I would not even advocate it.

We live in a climate of growing free trade; we face global competition. Unless we invest a lot of money in manufacturing industry, unless we research and develop new products rapidly, we shall fall behind. It is a matter of vital national policy that we concentrate on quality output in manufacturing industry. Through debates like this we can draw the attention of our policy makers to the matter. Therefore, I am doubly grateful to the noble Lord, Lord Trefgarne, for having introduced this subject.

4.43 p.m.

The Viscount of Oxfuird: My Lords, there are few in your Lordships' House who are so eminently qualified as my noble friend Lord Trefgarne to speak on this subject, an area in which he made such a significant contribution in his days as a Minister of State at the Department of Trade and Industry. He is still so much involved with manufacturing industry by virtue of his presidency of the Mechanical and Metal Trades Confederation, METCOM, which numbers many small and medium-sized enterprises within its membership.

It has been obvious from the contributions from all parts of the House this afternoon that there are few of us who have not grieved at the decline of some sectors of the United Kingdom's manufacturing infrastructure over the past decades or alternatively have been heartened by the reversal of that trend in recent years. That reversal has been seriously spearheaded by our small and medium-sized enterprises—the SMEs.

There is growing evidence—and it has been highlighted by a number of noble Lords already—that we have turned the corner. In the three months to September 1994, manufacturing productivity was up 6 per cent. on the previous year, a level of growth not seen since the mid-1980s, but against a backdrop of the lowest inflation for generations. Manufactured exports are at record levels, having grown by 80 per cent. since 1981 and by over 10 per cent. in the past year.

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However, encouraging as these statistics are, they are frankly not good enough. In the British manufacturing company with which I was so closely involved for many years, the introduction of the principles of total quality management became one of the prime philosophies. That experience taught me that constant vigilance was needed for continuous improvement. No enterprise or institution, of whatever size, should forget this constant requirement for continuous improvement. Those who do will in the end decline and perish.

So what factors do we need to study and address in looking for greater improvements in output within our manufacturing enterprises? It was, as some noble Lords may recall, Rudyard Kipling who referred to the,

    "Dear hearts across the seas".

Perhaps I could, first of all, recall the thinking of some of the industrial leaders from beyond our shores. I think, first, of some points I made in a debate back in 1988 proposed by my noble friend Lord Joseph, recorded in the Official Report of 4th May, vol. 496, col. 620. I spoke of the research of the learned American, Professor Birch of the Massachusetts Institute of Technology and of his emphasis on the importance of training our manufacturing workforce in the new technologies. He also emphasised how important the small business was in reducing unemployment. This business is by nature dynamic; it has young entrepreneurs and a very high percentage effect on the unemployment figures.

However, it is equally important to consider the training of people. How heartening it is that we are beginning to see the fruits of some of the investments that the Government have made in this field since that time.

I confess that I have also been somewhat influenced by the works of the American writer, Tom Peters, and I was reading one of his books this weekend, Thriving on Chaos. In it, he contrasts the American penchant for what he describes as "giantism" with the Japanese passion for smallness. He argues that part of the Japanese economic miracle since the Second World War can be explained by their exploitation of the "smaller is better" strategy. He quotes from the book: Smaller is better: Japan's Mastery of the Miniature by the Korean writer O-Young Lee who emphasises the "smaller is better" philosophy. He argues that this is a major factor in explaining the reasons for Japan's economic success since the Second World War.

He is thinking in part, of course, of the success that the miniaturisation of consumer electronic products has brought to the Japanese electronics industry, but he also highlights that the small business sector in Japan is more vital than that in the West and that even the largest Japanese corporations are less vertically integrated and count upon a network of smaller subcontractors for a significant part of their innovation. This helps to foster their commitment to continuous improvement.

This theme is taken up most positively in the recent White Paper to which some noble Lords have already referred, Competitiveness—Helping Business to Win.

The White Paper emphasises that to become more competitive companies need to change the climate within their organisations to stimulate innovation, to

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train their people, to invest in new technology, to take advantage of external skills and knowhow and to use, adapt and develop novel processes.

It is often in these very areas that our small and medium-sized enterprises tend to be more responsive and faster on their feet. That is why a significant and growing proportion of total employment, not just in the United Kingdom but in most of the developed economies of the world, is in small and medium-sized enterprises.

The White Paper on competitiveness highlights the need to improve the effectiveness of our financial institutions in supplying funds to SMEs. It seems that there is an over-reliance in the United Kingdom on the part of small firms on the use of overdraft facilities to provide the funding to sustain growth. In the United Kingdom, overdrafts account for 56 per cent. of small firms debt, compared with 14 per cent. in Germany. It seems that there is a need for both the banks and the SMEs to place greater emphasis on longer term finance.

It is encouraging that the Chancellor took heed of that need in last week's Budget in his plan to create venture capital trusts (VCTs). These are investment trusts which will be owned by individual shareholders and which will attract generous tax relief. They are designed to encourage investors to put their money into equity for small businesses. The trusts will be able to make investments up to £1 million in companies whose net assets cannot exceed £10 million. As an inducement, investors will be able to claim tax relief at 20 per cent. on the investment and to defer capital gains tax that is due on other asset sales if the proceeds are invested in such a trust. Profits and dividends from the trusts will be tax free.

There were also measures to shelter the small and medium-sized enterprises from some of the more onerous requirements of government regulation until they are strong enough to cope with them. The proposal to extend the number of businesses which can pay their PAYE and national insurance contributions quarterly rather than monthly will help an estimated 100,000 employers. The gradual rise in the VAT threshold to £46,000 will also help, as will the proposal to move to annual simplified VAT accounting for small businesses.

I spoke of a Korean observation earlier which asserted confidently with respect to Japanese economic success that "smaller is better". Let me be extremely careful to make it clear that I do not believe that smallness should be an end in itself. Smallness is at its best when it acts as a precursor for growth—a fact that was excellently illustrated by the Financial Times a couple of years ago when it changed the name of its regular "Small Businesses Column" to the "Growing Businesses Column".

A very real example of what I am trying to say is provided by the common agricultural policy of the European Community. The CAP insulates European farmers from market forces and encourages uneconomic farmers to stay in business. Most British farms would still fall within the DTI's definition of small and medium-sized enterprises; but the size of farms in the

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United Kingdom tends to be larger than elsewhere in the Community. They are hindered from exploiting their competitive advantage by the millstone of the CAP.

Smallness is not an advantage in itself if it encourages the Luddite forces of reactionism to resist change and shun improvement. The farming community in parts of our European Union should take note, and the Government should continue to press for further reforms of the CAP and seek further reductions in support prices.

Our British farms are successful medium-sized enterprises and might well be described in the phrase that was immortalised by William Cowper in the late 18th century in his Tirocinium,

    "Tenants of life's middle state,

Securely plac'd between the small and great".

I conclude on a note of optimism. Our debate this afternoon has emphasised the need for improved manufacturing output and has given us all a number of valuable indicators of the direction that we should take. The outlook is improving. About 226,000 new businesses were started in the first half of 1994, an increase of 10 per cent. over the first half of 1993. The DTI's Business Link initiative is beginning to provide a most effective support network for our businesses, particularly our small and medium-sized enterprises. With hard work and a commitment to continuous improvement, I believe that we can succeed.

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