The role of industrial strategy policy in business growth and innovation

Job creation and employment: ‘What jobs’ is as important as ‘how many jobs’
17th December 2019

The role of industrial strategy policy in business growth and innovation

The well-known management expert Peter F. Drucker (1974) argued that a strategic plan that does not commit the necessary resources to back it up, is only wishful thinking and promises rather than a strategic plan.
The test of a plan is whether management actually commits resources to action which will bring results in the future. Unless such commitments are made, there are only promises and hopes, but no plan.

Peter F. Drucker

The latest Industrial Strategy Council's report on UK's strategic planning for industrial growth offers a strong criticism to the government's lack of resource commitment to back the government's own industrial plan (Industrial Strategy Council: Annual Report, 2020). This is exactly what Drucker cautioned managers almost half a century ago, and while he was discussing business management and corporate strategic planning, one can see that the same principles apply to a government's strategic planning as well. There are signs everywhere in the labour market that something strange has been at play that suggests the existing industrial strategy has not been working as as it should have (see e.g. What jobs is as important as how many jobs ). Planning, be it short range or long range, has been part of business strategy and government policy alike for a long time. But plans rarely become reality unless they are done with purpose and followed by action. Sadly too much of politics is concentrated in meaningless debates and empty promises about grand plans that often end up in the drawer as the months from general elections day pass by.
The degree of focus and scale in this allocation of financing is encouraging when making progress on these areas of the Industrial Strategy. At the same time, this means that most of the 142 policies in the Industrial Strategy have very limited, and in some cases no, funding associated with them. As a result, they are very unlikely to be operating at a scale necessary to have a material impact on the economy.

Industrial Strategy Council

The creation of the Industrial Strategy Council was itself a grand plan, which was made reality in 2018 after the publication of the Government’s Industrial Strategy White Paper in 2017. Andy Haldane, the Chair of the Industrial Strategy Council, said "I look forward to working with these leading business men and women, investors, economists, and academics to provide impartial and unbiased evaluations of the government’s progress in delivering on the Industrial Strategy. They will bring valuable collective insight into the challenge that the government has set for us". As the Industrial Strategy Council's report explains in the executive summary: The Council’s remit is to provide impartial and expert evaluation of the Government’s progress in delivering the aims of the Industrial Strategy –a long-term plan to boost the productivity and earnings power of people throughout the UK. Following the 2019 General Election, the Government has recommitted itself to these goals.

Given the dispersion of policies and funding across Whitehall, the Industrial Strategy is not run as a single programme and decisions are not taken through one accountable body. However, the government has put in place several cross-Whitehall governance processes to drive and monitor delivery. A total of 142 policies across five Foundations of the Industrial Strategy have been identified by the Industrial Strategy Council, based on the commitments set out in the 2017 Industrial Strategy White Paper. The latest report finds that most of the policy commitments have made progress and are now in a delivery phase. However it notes that not all policies have an announced delivery date, and many are commitments to review existing policies rather than enact new ones. This is a key element to an efficient industrial strategy, that is in order to prepare of a different tomorrow we need to get rid off the no-longer productive elements of past policies today. The market is dynamically changing with time and what worked fine yesterday might be a handicap tomorrow.
But the key to doing something different tomorrow is getting rid of the no-longer-productive, the obsolescent, the obsolete.

Peter F. Drucker

Economies are not stagnant. Things change, and when they do, history may well not be a guide to the future.

William Baumol

The report draws attention to several elements of the industrial strategy challenges, such as Grand Challenges, Regional disparities, R&D expenditure, workforce Skills, and Supply of SME finance. The overall findings suggest that so far, government has not made much progress in galvanising public, private and academic support for action around these challenges. As a result, progress towards putting in place plans to meet these challenges has been slow and modest. Progress towards implementing these plans has been slower and more modest still. SME Finance Monitor data has shown persistently higher rejection rates for younger, small businesses, and for those looking to grow, than for larger well-established SMEs. These effects have persisted since the financial crisis with disheartening effects to the entrepreneurs and negative effects for entrepreneurship overall.
The UK appears to be facing an unprecedented skills challenge. In surveys, more than three-quarters of businesses report skills shortages as their biggest impediment to growth and competitiveness.

Industrial Strategy Council

On the positive side, the Research & Development expenditure appears to be ambitious and the government has committed to increase UK R&D spending to 2.4 percent of GDP (the OECD average) by 2027. The 2.4 percent of the R&D expenditure target comprises contributions from both the public and private sectors.With the current private R&D is estimated at around 1.2 percent of GDP. That about half the overall government target. With estimates suggesting that every £1 of public expenditure on R&D, there is £1.36 generated in private R&D investment (on average), the goal to increase R&D expenditure to 2.4 percent of GDP can play an important role in innovation and business growth. SMEs that focus on innovation and effective productivity could also benefit from the increase of R&D expenditure.

The report finds that productivity performance differs very significantly between industrial sectors. For example, since 2010 air transport has seen a rise in the output per hour of 50 percent, while during the same period other industries such as, food and beverage service activities, and water supply services (including sewerage, waste management and remediation activities) saw their output per hour decline. Moreover, the report highlights significant differences in productivity across UK regions are large and have been persistent over time. Factors such as geography, local culture, local governance, local infrastructure, industrial clusters of specialised businesses, and spatial sorting, can be independently influential or mutually-reinforcing. In the regions several of these factors are mutually-reinforcing these regions will suffer the most. Across the UK, weak productivity growth has been seen in weaker wage growth for many workers. Despite a pick-up in nominal earnings over recent years, real pay growth has been muted for many workers. The median real pay in the UK is no higher today than it was at the time of the recent financial crisis.
the UK being home to a disproportionate number of globally productivity-leading companies –more than in competitor countries compared to whom the UK has a large productivity gap. This suggests the full fruits of this innovation are not being diffused evenly across the UK economy.

Industrial Strategy Council

References

Baumol, W. J., Litan, R. E., & Schramm, C. J. (2007). Good capitalism, bad capitalism, and the economics of growth and prosperity. Yale University Press

Drucker, P. (2012). Management. Routledge

Industrial Strategy Council: Annual report (2020). Available at: https://industrialstrategycouncil.org/sites/default/files/attachments/ISC%20Annual%20Report%202020.pdf

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