Strong foundation industries: How improving conditions for core material producers could boost UK manufacturingPublished Thu 24 Mar 2016
The foundation industries – manufacturers of core materials that supply other manufacturing and construction firms – have had a tough post-crisis period. Despite pockets of stronger than average investment, productivity and pay compared to the economy as a whole, these industries have experienced a deeper contraction, and been in recessionary territory for longer, than both the rest of manufacturing and the economy as a whole.
Although partly the result of increased competition from emerging markets, globalisation isn’t the whole story: the foundation industries in the UK are smaller, and have contracted faster, than has been the case in other developed countries facing the same challenges. This reflects a broader weakness of the UK’s economy: our manufacturing diversity has been lost over the last 40 years, and we remain an anomaly among advanced economies in having so few industries with comparative advantage. This is a key reason for our large and longstanding trade deficit.
Our analysis suggests that EU competitors support their industries in ways that the UK does not, which warrants investigation. Evidence on public and private research and development (R&D), productivity and investment performance shows that the UK performs relatively poorly, and that there is a role for government and industry in terms of helping firms to improve. With transitional support, the UK’s foundation industry firms have the potential to supply advanced manufacturing firms, such as those in aerospace, automobiles and pharmaceuticals, to a much greater extent than they do currently. Building on our areas of existing comparative advantage would be a low-risk way to diversify our production capacity; this is, therefore, where the government should focus its efforts.
The government’s response should have two phases. First, it should ease the pressure on those industries in acute distress by ensuring that UK firms are not unfairly disadvantaged by tax, energy costs or subsidised imports. Second, it should look to strengthen the institutional support available to the foundation industries, in line with other EU countries, in order to help them adjust their production to better integrate into domestic supply chains. This could include providing firms with more patient forms of finance, improved collaboration and innovation systems, and more life-cycle-costing forms of public procurement for the goods the foundation industries produce.