Industrial strategy for the few?

In Theresa May’s speech to the Confederation of British Industry yesterday evening,the Prime Minister gave us a preview of the government’s proposed approach to industrial strategy.Through the direct funding of research, and by tweaking the tax system to make it more innovation-friendly, the government hopes to put the UK at the “cutting edge” of new scientific research as it exits the EU.

A renewed focus on the supply side of the economy is undoubtedly welcome; as recent IPPR work has shown, the UK economy is blighted by a number of longstanding problems, including below-par levels of investment and productivity, long-term unsustainable public finances, and gains from growth that are increasingly concentrated, both geographically and across income groups.

But is a narrow focus on science-based, early-stage innovation enough to start to fix these issues? Our investigation of what the UK needs from an industrial strategy, published today, suggests not – for two reasons.

The first relates to the way the UK economy now functions, and the role that scientific research plays in job creation and whole-economy productivity growth. The UK is overwhelmingly a service economy: 79% of economic output and 83% of jobs are within the service sector. Employment within manufacturing, meanwhile, is on a long-term downward trend, both as a result of technological progress, and as the UK has lost comparative advantage in more basic manufacturing to lower-cost countries abroad. Nascent advanced manufacturing industries, using the discoveries of scientific research, could prove extremely lucrative for the UK in terms of the economic value they create, but they are unlikely to result in a large-scale shift of employment from services back to manufacturing.

This means that in order to raise productivity in the economy as a whole, and with it living standards, the government needs to adopt a broader, more practical definition of innovation. IPPR has found that, particularly for the low-wage service sectors such as retail and accommodation services, UK firms are much less productive than their equivalents in Europe – which suggests the challenge is one of adoption of cutting-edge practices, rather than origination. Service-sector innovation looks very different from ‘industrial’ innovation: it means better job and process design, improved skills utilisation, and adoption of ICT. The government’s strategy therefore needs to do more to speed up the adoption of existing innovations – particularly by the service sector – as well as the development of new ones.

The second reason that a focus on early-stage research is insufficient relates to the nature of the UK innovation ‘ecosystem’. Currently, UK firms do not reap the full benefit of innovations generated domestically, instead tending to sell promising new innovations to international companies at a relatively early stage. The government’s move to establish UK Research and Innovation, which will have as one of its objectives the improvement of the domestic commercialisation process, is promising. But the government could go further. It could set up a dedicated commercialisation arm alongside the Research Councils, as Nesta has recently suggested, to ensure that the public money that goes into research provides the maximum benefit to wider society.

Appetite for new, ambitious thinking on industrial strategy is currently higher than it has been for a generation. It would be a shame if the government didn’t seize the opportunity this presents to develop a genuinely inclusive, comprehensive approach to nurturing an economy that works for everyone.