Lord Mandelson sets out his path to UK recovery; is it the right one?

This blog enters 2010 with a look into the UK's industrial future. Today the Business Secretary Lord Mandelson showcased his new policy agenda 'Going for Growth: Building Britain's future economy' in a lengthy speech at the Work Foundation. This blogger was pleased to be given an invitation, and duly took it up. This speech has got a little lost among the news noise of a possible Labour leadership challenge and bad weather in the UK, but it remains important, and also suggests that the government are at least aware that economic growth is the way to get the UK out of debt.

In terms of business policy Lord Mandelson is broadly suggesting that the UK should look away from solely relying upon the financial sector for economic growth and tax revenue. Government will aim to set up new partnerships with the private sector to drive capital investment, while the government will attempt to pressurize firms to improve the links between pay and performance. The sectors to be concentrated on will generally be knowledge intensive, such as electronics, the nuclear industry, plastics, biotechnology and low carbon industries. A regional approach will be pursued, with Regional Development Agencies working closely with Universities in their areas to establish new R&D centres of excellence. These will include a plastic and electronics centre of excellence in County Durham and a nuclear centre of excellence in Yorkshire. Herman Hauser, mentioned on this blog previously in his role as co-founder of Acorn Computers, will report on the possibility of the UK emulating the German Fraunhofer Society to establish a new research concentration. Universities will also be expected to commercialise their work further.

A new Technology Strategy Board will direct all these new research activities, as well as the new Innovation Investment Fund, which will make grants to SMEs of between £2-10m. Some funding will also be given to infrastructure development, although this will require private sector co-operation, but will involve the further expansion of broadband internet access and railway electrification among other projects. Lord Mandelson also has lofty aims for corporate culture; with former Courtaulds Chairman, and present Chair of the Financial Reporting Council Christopher Hogg having undertaken a review of corporate governance. Among the most striking of proposals was that any company making a major acquisition would have to set out a full manifesto for the future of the assets, including what would happen to the head office and R&D functions as well as the productive assets of the company. We were also told that the fiscal plans now set out by the Conservatives suggest that they have no real plan for the future beyond cutting public spending, prolonging recession. An interesting policy agenda for sure, and one which Mandelson claims will see a 'new politics of production and growth.'

But how realistic is this policy agenda? Very little was said in the speech about the future of the service sector, surely now the most important element of the UK economy (and infact the most important element of the economy since at least the mid-nineteenth century). It is true that British manufacturing, while continuing to shrink in employment terms has become more productive, and also true that the UK continues to have a good record in scientific research. The UK also already has a good record in knowledge industries, particularly the niche low-economy-of-scale parts of them. It may also be the case that under such a research intensive policy a lot of highly skilled and high earning jobs will be created, but its less clear that the UK will be able to capture the longer term rents of these inventions. The UK already has a fantastic historic record in invention, with inventions as diverse as the steam engine and polyester fabric historically emerging from its economy. However in both fields it has been clear that just because a country invents something, it does not confer permanent competitive advantage upon that country in manufacture, with today very little polyester fabric manufacture remaining in the UK. The UK is also likely to be unable to competitive advantage in the manufacture of these new products for long, at least for the mass market; as the adoption curve for a new technology rises, the returns per unit from its production fall, and maufacturing is likely to move to developing countries.

While it is worth investing in R&D to the extent that it will generate TFP growth in the UK, it seems that Lord Mandelson may risk placing Britian's eggs dangerously in this basket too, perhaps creating the risk of a UK based 'green technology' bubble reminiscent of the Californian dot-com bubble of 1999-2000. To reduce this over-dependence, surely Lord Mandelson should be looking to further development of the UK's service sector away from manufacturing. Most of the value of products is actually created through their distribution and retailing, not their manufacture. Additionally, in an online world services are becoming increasingly exportable, while knowledge can remain an important input. The UK should also target research resources towards service industries to help them to remain a competitive source of employment in the UK, not just attempting to create a new manufacturing sector which is unlikely to have a great life expectancy. The UK can have a vibrant economic future which need not only mean relative economic decline, but this will only be possible if growth comes from all the sectors in which the UK is strong, not just some of them.

Gordon Brown returns to old venture capital idea

Yesterday UK Prime Minister Gordon Brown gave his 'keynote' speech at the UK Labour Party Conference, setting out the party's policies for the 2010 General Election. There was precious little on business policy; the headlines were grabbed by the promise of new regulations to disqualify negligent bank directors if they are considered to be unfit to run banks. Quite how it is to be decided that they are unfit to run banks remains unclear, but the FSA as it stands may not be the best people to judge this. The other policy announced has been elaborated on even less - this is a promise to create a new £1bn 'national investment corporation' to provide finance for new and growing businesses.

This interested me because back in the days when bankers were to be trusted with the economy we did indeed have a similar body. The Bank of England created the Industrial and Commercial Finance Corporation (ICFC) in 1945 to plug the gap then extant in corporate finance for firms too small to obtain stock exchange or merchant bank capital. The Big 5 UK clearing banks also took stakes in ICFC, helping to provide capital to the infant firm. During this period ICFC was successful in providing finance for start-ups, although in a period of general industrial decline in the UK the benefits remained unclear. ICFC was renamed Finance for Industry in 1973, then became Investors in Industry, or 3i in 1983. The banks then floated on the stock exchange in 1987. Ironically 3i was later better known for its role in funding mature businesses such as National Car Parks and the German/Danish ferry operator Scandlines, than start-ups, particularly during the private equity boom of 2005-7.

It remains to be seen how Gordon Brown's proposed firm will work in the event that he wins the 2010 election, but it will be interesting to see where the capital for it comes from, how it will be constituted (hopefully he won't repeat the Alan Sugar mistake by putting the star's of TV's Dragon's Den in charge) and what schemes are considered worth investing in by the new body. And further, how long will it be before the new company, which if it invests well in rapidly growing firms, should become very valuable, ends up itself being floated off by a future government seeking a quick return? This would jeapardise the original purpose of the new company, just as the banks did with 3i.