Wednesday 15 February 2017 11:40 am

Industrial strategy needs a three-pillared approach to boost British productivity

It is clear that government intervention is required to address faltering productivity across the UK, and that this could be a positive step towards meeting the underlying structural challenges facing the UK economy, such as regional inequality and low wage growth.

The government has now released its industrial strategy to address such issues. So how does the proposed 10 pillar approach stack up?

Some have criticised the strategy for continuing to rely on “picking winners” or “chasing unicorns” with a sector-specific approach. There is, however, more depth to this strategy that, if refined and focused, could provide a strong foundation for improving the competitiveness – and not just the performance – of UK business.

Targeting market failure

The role of government funding for industry should be to subsidise the private sector only where there is a market failure. The government can help identify these failures, and to provide support only for the time it takes for competitiveness to improve and the market failure to be eliminated.

However, as government resources are scarce, they should be selectively targeted where they make the most difference. Ten pillars may well be too broad, yet they include three areas which would be well-served by closer government attention: skills, trade and innovation.

There is a market failure in the immobility of UK labour, caused by a combination of geographical, industrial and occupational factors.

Regional variations in house prices and living standards have priced workers out of urban centres which are home to the majority of knowledge-intensive highly productive jobs. The decline of traditional manufacturing industries and rise of the service sector has increased the need for rapid skills diversification and has contributed to displacement.

Meanwhile, a workforce high in non-transferable skills has meant that workers have had to spend substantial time retraining if they want to move industries. A higher level of transferable “soft” skills, such as communication, negotiation, team building and leadership, are needed to enable greater sectoral mobility.

Infrastructure, skills and trade

Government investment in infrastructure such as transport and broadband is key to providing access to jobs for workers, and increasing the pool of talent from which business can hire. More focus on initiatives like the Northern Powerhouse or Midlands Engine could assist in regional rebalancing.

Skills improvement is also a vital piece of the puzzle: we need more policy work on opening up apprenticeships (with a focus on quality over quantity), and more incentives for employers to improve on-the-job training and the offering of transferable skills. While continued professional development (CPD) has traditionally been limited to the professions, there is scope to expand this to the full workforce – a point well made by education secretary Justine Greening a few weeks ago.

Funding and support for education at all levels is critical, and the potential loss of the European Social Fund for local education and skills projects is a concern. We need assurances from the UK government that such funding will be honoured post-Brexit.

International trade is an equally important pillar of activity for government over the next two years, as it negotiates access to talent, access to finance and (hoped-for) equivalence arrangements for financial services firms in a post-Brexit Europe.

While service firms and their related trade bodies have conceded on the continuation of passporting rights for professional services, it is vital for the sector that equivalence arrangements become a desired end-goal for Brexit negotiators. This will be pivotal to maintaining the strength of the financial services sector in the UK, which employs huge numbers of workers across the country and underpins many regional business ecosystems.

It is also vital that the UK government continues to explore and develop new models of funding for SMEs, drawing on the important work undertaken by Lord Hill.

Barriers to innovation

A third area worthy of greater government focus is innovation – the profitable application of new ideas. We need to improve the current environment to encourage the introduction of new or significantly improved products (either goods or services) and processes.

The early focus on social mobility in the industrial strategy is vital – if we can improve this, we will be broadening the talent pool for employers. A more diverse workforce will be a catalyst for new ideas and further innovation.

Current barriers to innovation are driven by three main factors: access to finance, costs and perception of the economy. There is a lack of incentives to innovate – making the industrial strategy’s Challenge Fund a welcome initiative. Innovation is also hindered by short-termism: under pressure to deliver returns quickly, some firms conduct inadequate research and rush processes, resulting in a reduced return or perceived failure.

The government will be well-served by further investment in areas such as internal research and development, training, acquisition of external knowledge, or machinery and equipment linked to innovation activities. The emphasis on research and development in the industrial strategy green paper is a positive first step, from which government and industry can discuss the most effective initiatives. Perhaps the logical next step is to review associated tax breaks to ensure that we have the appropriate industrial environment to allow British innovation to flourish.

Of course the most important aspect of any strategy is that these initiatives are delivered with proposed timelines and clear outcomes. Yet if these three pillars are able to address the UK’s infamous productivity puzzle then their benefit to the economy will be immense.