UK Industry: International Competitiveness

Lord Haskel Excerpts

Thursday 5th July 2012 Lords Chamber

[Lord Haskel]

My Lords, I start with a confession. I have a problem with the concept of international competitiveness. The factors affecting a nation’s competitiveness are different from those affecting the competitiveness of, say, a business sector. For instance, my country’s life sciences can be better than your country’s life sciences, as the noble Lord, Lord Kakkar, explained. The competitiveness of individual businesses is much more obvious—“My cars are better than your cars”. So I am grateful to the noble Lord, Lord Jenkin, for this debate about international competitiveness, but while international comparisons may be important to economists, politicians and bond salesmen, to most of us the competitiveness of our place of work is what is important. This is because competitiveness means productivity. That is where we earn our living, as the noble Lord, Lord Jenkin, pointed out; the two go hand in hand.

In 2003, the then Labour Government asked Professor Porter and others to say how we could become more competitive by raising our productivity. Their response was practical and direct: improve and modernise skills and skills training; stimulate innovation through science and product development; supplement manufacturing with services; encourage a faster take-up of new technologies in the public and the private sector, much of this done through clusters; and encourage people to win the race to the top, not enter the race to the bottom. In the five years up to the financial crash, these principles worked pretty well. Our productivity or competitiveness improved by 2% or 3% a year. Many of the policies of the coalition Government still reinforce and bring up to date these principles. I think they still remain true. Yet since the financial crash our productivity or competitiveness has hardly moved. If anything it has gone down. Can we find the answer in the international competitiveness league table? The noble Lord, Lord Brooke, mentioned the World Economic Forum’s global competitiveness index. This year we rank 10th, and two years ago we were 12th. This index is based on 12 pillars that provide a checklist of factors affecting our competitiveness. Some are relevant, others less so, and some are completely absent. On some of them we do very well. We have some strong institutions; we have a respect for law and an honest and uncorrupted public service. In health and higher education we perform pretty well. We have an effective, efficient and competitive market of a size which allows us to be productive. We also have a market which is conducive to innovation. Thanks to our science base, research organisations and organisations such as the Technology Strategy Board and our fascination with digitalisation we have recently developed a large number of clever, lively, innovative and enterprising companies that specialise in selling their products, ideas and services into what at first seem special markets. However, these markets often turn out to be large because we live in an era of global markets. This is the innovation and marketing that the noble Lord, Lord Jenkin, and the noble Lord, Lord Kakkar, spoke about. The Minister works hard at this and I join other noble Lords in giving him our thanks.

In other areas, we do less well. The noble Lord, Lord Liddle, pointed out that our infrastructure lets us down. The World Economic Forum ranks us 28th for infrastructure, just behind Malaysia. I agree with the noble Lord: our skills training has not kept up with demand, nor has it moved with the time—and, yes, this includes management. The conflict between the longer-term needs of industry and the short-term outlook of our financial sector is legendary. The financial sector may be competitive in its own terms, but in terms of UK competitiveness as a whole it could be a distinct disadvantage. No pillar includes intangible investment. In Britain this is certainly now equal to tangible investment and crucial to our competitiveness because of the nature of the businesses which are growing in this country. I am sure that the Minister of all people would agree that money spent on branding or market development is an important investment. All this illustrates the problem I have with international competitiveness.

However, economic data are not everything. It is always a mistake to separate the economics of business and industry from the needs of society. A fair society and a strong economy go together. This is why both social and economic considerations have to be taken into account when judging our nation's competitiveness. The noble Lord, Lord Jenkin, spoke about inward investment. The noble Lord, Lord Kakkar, pointed out that this means people coming here, as well as money. All of us get the feeling that we are less welcoming to foreigners than we used to be. We have benefited greatly from them in the past—are we having second thoughts? I think we are, and this will not help our competitiveness, nor our productivity. Ministers talk about having competitive regulation. This usually means less, but we are slowly learning that we need better regulation not just less, and we need to explain why it is required. Sadly, we are learning the hard way about regulating the banking industry. Our competitiveness does not increase as we reduce regulation. No, our competitiveness goes up as we introduce better regulation. It will be regulation which is enforced. It will be light regulation which encourages a feeling of freedom but not a feeling of impunity. It will be regulation which properly deals with market failure. In sectors such as the environmental industry, good regulation actually stimulates the innovation and investment, which adds to our competitiveness.

Working conditions, too, have become a factor in competitiveness. Social considerations mean that cheap, sweat-shop clothing has not been competitive for some years. The competitiveness of our tax regime has become a social consideration, too. Yes, the generous arrangements whereby companies and individuals can reduce their tax bills may have been a competitive advantage at one time but, now that it is all out in the open, this will change. Social considerations of fairness have to be taken into account in the competitiveness of our tax regime.

We certainly need a policy boost. At national level, we can encourage the national stewardship code for our enterprises, as the noble Baroness, Lady O’Cathain, implied. We must develop a national long-term vision as to where our economy is going, and we must certainly continue with the productivity work of the 2003 paper. This has served us well.

At a more local level, we must concentrate on raising our performance, our presence and our productivity in those sectors where we are strong. The noble Lord, Lord Liddle, explained why. It will inspire people to make where they live and where they work more competitive. At the same time, we must work towards a more equal society, because all these efforts are much more likely to flourish and succeed in an equal society than in a divided society.

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[The Minister of State, Department for Business, Innovation and Skills & Foreign and Commonwealth Office (Lord Green of Hurstpierpoint)]

My Lords, I thank my noble friend Lord Jenkin of Roding for initiating this important debate and raising the issues with such clarity. Strong trade and inward investment are of course vital to our economic success going forward—on that the whole House seems to be agreed. I thank my noble friend, too, for his kind comments about my role. It is perhaps worth noting that I have spent a fair amount of time in recent weeks and months travelling to 40 different countries as well as continuously around this country. This is not just industrial tourism; this is about understanding the issues that businesses face at this end and at that end in order that we can plan appropriate support going forward.

One lesson we all learnt from the 2008 crisis was that the old growth model is bust. In the run-up to the crisis there was too much growth based on domestic consumption fuelled by debt, and we know that we cannot continue to drive growth in that way. We also know that we cannot rely on government spending also fuelled by debt to drive growth either. The economics textbooks tell you that there are only two other sources of demand in any economy that can drive growth and create jobs—they are, of course, investment and net trade. I would like to talk briefly about each of those.

First, on investment—and focusing especially on foreign direct investment, which plays a key and strategic role in the UK economy—nearly half of total output in this economy is supported by foreign direct investment, a figure which is significantly higher than in France, and much higher than in Germany, America and elsewhere. It is a clear source of competitive advantage to us that the UK is, and has been for many decades, so open to foreign direct investment. It is a cultural orientation which has enabled—famously—the regeneration of the UK automotive industry since the 1980s by Japanese, German, American and now Indian investment. Iconic British brands such as Jaguar Land Rover, the Mini, the Rolls-Royce and the Bentley have been strengthened and revitalised by investment from Germany and India. Innovative cars are being developed and built in Britain now and exported around the world. One-quarter of all of Ford’s engines are built in the UK. The Japanese investor Nissan builds cars in Sunderland and exports some of them to Japan. An impressive 83% overall of cars built in the UK are now exported. The link, therefore, between foreign direct investment and exports is clear.

It is important, however, to remember that it is not just the automotive industry that we can use as an example here—the aerospace industry is another case in point. Airbus and Bombardier, to name but two examples, play a part in an industry that has a 17% global market share. Another recent example of a different kind of openness to foreign direct investment is the China Investment Corporation’s investment of 8.7% of Thames Water. The interesting point about that investment is that it has caused so little comment or nervousness in the British public domain. Can you imagine the same being true if a Chinese sovereign wealth fund invested in the water supply of either New York or Paris?

It is important that we remain an attractive destination for FDI, which means ensuring that our tax regime is attractive, that we minimise unnecessary red tape and that we have a planning regime that is fit for purpose. I know that the whole House will agree with me when I say that a lot of work needs to be done, and is in hand, under those three headings. The headline rate of corporation tax is the most visible sign of how competitive a country is and we are cutting that to 22% by 2014. That will be the lowest in the G7. We are supporting innovation through the patent box and R and D tax credits, and high-growth companies with programmes such as the enterprise investment scheme.

A crucial area where we need to attract FDI is not only in productive activity but in the public economic infrastructure. A number of noble Lords have referred to that issue. The kindest friends of this country would not accuse it of having a world-class public economic infrastructure. Infrastructure UK, a body started by the previous Administration and continued and developed by this one, has been developing increasingly specific project-based plans for investment in transport, energy, water and broadband networks which we will need if we are to compete effectively in the 21st century. It is estimated that around £250 billion of investment will be required between now and 2015, the bulk of which will, of course, have to come from private sector capital working in harness with the Government. That capital will come from foreign institutions, from domestic institutions and also from sovereign wealth funds. A lot of work is being done on that. This is a long-term programme that we have to keep at.

Our regulatory environment is another important signal for overseas investors in this country. We are often, quite rightly, very critical of ourselves, but actually we have a strong reputation overseas for transparency, predictability and the rule of law, and we must never lose this. According to the World Bank, the UK ranks seventh in the world for the ease of doing business and second only to Denmark in the EU. The UK has the fewest barriers to entrepreneurship of any country in the world. It takes 13 days to set up a business here, which is two days fewer than in Germany and almost a third fewer than the international average and a fraction of the time that it takes in some of the fastest-growing, emerging markets around the world.

We have to do much more especially to tackle bureaucracy that is holding businesses back. I note the point made by a number of noble Lords that this bears down particularly on SMEs. It is a continuous challenge. I suspect that if we are standing here in 10 years’ time we will still be pleading for an attack on unnecessary regulatory bureaucracy on behalf of small businesses. But we are working on it. That is why we have introduced the Red Tape Challenge and are seeking to simplify planning procedures—one in, one out on red tape; and the new National Planning Policy Framework creates a presumption in favour of sustainable investment, reducing some 1,000 pages of planning guidelines to just 52.

Secondly, I should like to comment briefly on trade. Historically, our performance has been weak. In fact, since the 1960s, trade has tended to be a drag on growth rather than a driver of growth in this economy. We also have had a burgeoning balance of payments deficit, although that seems to have stabilised in the past year or two or three. The fact, however, is that over the long term we have to find a way of paying our way in the 21st century. We have therefore set an ambitious target of doubling exports to £1 trillion by 2020, which requires growth of a little over 8% per annum compound. Last year we achieved 10.5%, so we are on track, but we have to keep that up, not merely to 2020 but beyond that. To achieve this, we need to look at where we stand in terms of market share. In most markets we lag behind Germany; in many we lag behind France, and in some we lag behind Italy too. I mention those three countries because in some ways they are our most obvious direct competitors.

The rise of the global middle class is a huge opportunity for all of us. As the emerging markets take their place on the world stage—or, in some cases, retake their place on the world stage—what you notice is that everywhere the appetite for the sort of goods that we take for granted is exactly the same, and as strong, as ours. So the opportunities are there. But if our exports do not keep pace with the rates of growth of those emerging markets then we will fall behind the competition. Our challenge is to get more companies exporting and to increase the amount that we export outside of the European Union.

Central to implementing this strategy is UK Trade and Investment. I would like to spend a few moments discussing how UKTI has been reorganised and refocused to meet the challenges we face. We have appointed a new chief executive and renewed the top management team, bringing in people with strong private-sector enterprise. Our UK-based trade advisers now work on incentivised contracts and so do our inward investment services.

In overseas priority markets we have set up a new group to identify so-called high value opportunities—contracts for major infrastructure projects, whole new cities and so forth, which create opportunities so long as we showcase the British offer cohesively and effectively. This is methodical work. We have identified in particular 60 top priorities. For each one of those we have an action team led by someone from UKTI, drawing in industry representatives from the relevant sectors. In some cases they are helping consortia to form; in others they are providing a cohesive offering, in particular creating the framework within which SMEs can access these enormous project opportunities which can seem so daunting to an SME working on its own. As just one example, in Malaysia, UK firms, including some small ones, have won business designing train stations and providing engineering consultancy for the country’s largest infrastructure project, worth over £10.5 billion, in mass rapid transit.

We have also introduced best business practice by strategically managing relationships with our leading exporters and leading investors so that they no longer feel that they have to run from pillar to post when trying to deal with government. This is beginning to produce benefits, although I am confident that this is, again, something that we have to keep up over the long haul if we are really to gain the benefit of providing a cohesive presence for inward investors and large British exporters to deal with. It is showing benefits.

Perhaps our most important task is to help more and more SMEs into the export markets. We have set a target for UKTI of doubling its client base from around 20,000 currently to 50,000, between now and 2015. Of course the vast bulk of that client base is already, and will continue to be, SMEs. We have a new team in UKTI headed by a new executive with strong personal business experience leading the charge on this. We have put in new programmes, and I am pleased to report—because this struck me almost from day one when I got into the job—that we have reversed the downward decline in trade access programme support. We have pushed the budget up this year, and if I get my way we will push it up next year too.

We have introduced new programmes of e-connectivity designed to help SMEs talk to each other and share experiences, because there is nothing so powerful as an SME talking to another SME about the practical challenges of getting into the international markets. We have introduced a new, more flexible approach to charging for market introduction services. I believe that there was too much of a confusion of ends and means, as the budgets for selling these services became the end. No, they are a means and not the end itself: the end is to serve clients and help them get into the export markets.

UKTI is also working much more closely with UK Export Finance, formerly known to many of us as the Export Credit Guarantee Department, which can now for the first time in 20 years offer services to companies of all sizes. For the past 20 years it has in effect been providing services only in the form of big-ticket, long-term credit guarantees for the defence and aerospace industries. We now have a range of products in place which are relevant to an SME in the smallest possible denominations.

Moreover, we know that exporting helps companies to grow. We know that businesses that export do better with the help of UKTI and UKEF. We know that on average companies that work with UKTI go on to win overseas sales of over £100,000 within 18 months. We know that this is value for money from the point of view of the taxpayer. However, I think that it is important to stress a theme that has come through this debate already on several occasions; that is, that the Government cannot do this alone. You will no doubt hold the Government to account for the quality of the services they deliver through UKTI and UKEF and through the Foreign Office and its work through the missions and posts overseas. However, even if you scored us 10 out of 10 on all of those dimensions, it still will not be sufficient.

There is a key role for the supporters and networks of SMEs to play as we help small companies face the often daunting challenge of getting into the export markets for the first time. I am working as closely as I can with, for example, chambers of commerce, including the British Chambers of Commerce, the Confederation of British Industry, the FSB; and also with banks, lawyers and accountants—all of whom are clearly critical to the prosperity and growth prospects of small companies—as well as with trade bodies such as the Energy Industries Council, which my noble friend Lord Jenkin mentioned and with which we do indeed co-operate on many levels, just as we do with a number of other such institutions representing industry interests and needs. The sector groups include the aerospace, defence, security and space industries; the BBA; the Law Society; and the Institute of Chartered Accountants, which I believe is playing an extremely valuable role in helping its members—who have so many SME clients—understand the opportunities.

I have also been working with honourable Members from the other place in a cross-party initiative to encourage them to seek out businesses in their constituencies. If you divide the target that the Prime Minister set of 100,000 new companies into the export markets over the next few years by the number of constituencies in the UK, it works out as just two or three dozen businesses per constituency per year. Put like that it does not seem as daunting as the figure of 100,000. The critical point is that this is a collective effort. Again, a number of noble Lords have raised the possibility of the roles that Members of this House can play, and one or two Members have already referred to missions led by Members of this House. I would be delighted to work with any of the noble Lords in this House who have links to business groups or know particular places well, to find ways of engaging them in what I believe is a collective challenge.

Turning to the various comments made in the extremely interesting and very wide-ranging interventions by noble Lords, I have to say that I will not have time to do justice to all of them. This was a very wide-ranging debate covering many of—essentially all—the issues in the economy today. I will attempt to focus on some of the major themes and commit to writing to noble Lords where I am not able to address particular points.

My noble friend Lord Jenkin mentioned three things in particular. The first was the issue of the awareness of UKEF and, come to that, UKTI. There is work to be done on this. It is clear that not enough of their potential customer base knows of their services and how to get to them. We need to work hard on that. We are putting a lot of effort into this. In particular, in the case of UKEF we are appointing representatives into all of the UKTI offices around the region. I have regularly, as I mentioned, been around the regions meeting with businesses, holding events and so forth. This is continuous work and we have to keep at it.

My noble friend also mentioned the question of life sciences, the importance of the life sciences initiative and the need to ensure that we showcase what we are seeking to do, as well as the need to get on with it— I think that that was really the thrust of the point. I resonate with the point that we need to make sure that the world beyond our shores understands what a telling proposition we have to offer. This is simply one of the best centres for life sciences development and investment anywhere in the world and we need to work to showcase that as effectively as we can. I would like to take away the thought of having some form of group of ambassadors from the industry to work with us in showcasing these opportunities. I believe that we have done that increasingly successfully in healthcare services, a related area where, for example, the noble Lord, Lord Darzi, has led both missions and a working group for us in helping us to showcase UK healthcare services more effectively.

I will move on, if I may, to comments from other noble Lords. The noble Lord, Lord Liddle, made a number of points about the importance of skills investment and the linkage between research in the universities and commercialisation thereof. A number of other noble Lords made similar points. The role of catapults will be extremely important in this.

The term “pea shooter” was used to suggest that we were not doing enough. This gives me the opportunity to make a general statement in response to a number of comments, including those of the noble Lord, Lord Stevenson. It would not be fair to characterise what the Government are doing as merely using a pea shooter. Extensive investments are going on, for instance in apprenticeships. The Government will spend £1.4 billion on start-ups, which this year will involve something of the order of 450,000 new apprenticeships. What we are doing was started by the previous Government and has been continued and ramped up by this one. We are rebuilding an apprenticeship system that fell into disrepair in the 1970s, 1980s and 1990s. We need to rebuild it. I will repeat something that I have said once or twice already. We must stick at this over 10 or more years before we get back to where we should be—with a skilled industrial base for this country. Along with all noble Lords in the House, I look forward to the report of the noble Lord, Lord Heseltine, on the competitiveness of the UK economy.

A number of noble Lords raised the question of Europe. I will dwell on that for a moment or two. It is clearly the case that, whatever the uncertainties about the way forward for the eurozone, we are involved in Europe. We are a member of the European Union, 45% of our exports go to the eurozone and half of them go to the European Union. We are impacted by the European Union. It is absolutely in our interest to continue to press for full implementation of the Single Market Act. The services directive and the digital single market are areas that will make a huge difference to Europe’s competitiveness globally, and to the opportunities that our companies will have in global markets. The Government are fully committed to arguing continually and loudly for Single Market Act implementation.

I am reminded that we are running out of time. This reflects the extensive nature of the debate. We have covered many topics. I would love to have had more time to talk about energy reform and its implications, and to respond to the point of the noble Lord, Lord Paul, about the importance of getting energy policy right for industry, for consumers and for long-term security. This is a difficult and complex area. As noble Lords will know, a Bill on this is being scrutinised in the other place at present.

In general, the message is clear. This is a collective effort. We need to work away at encouraging more companies into international markets. This is not a one-year fix. It is not a programme that we can conceive of implementing only for the lifetime of one Parliament. We will be living with this for a generation as we rebalance the economy away from excessive reliance on domestic consumption towards international engagement.

I will make one final comment. I promise to write to noble Lords whose points I have not been able to address. The more we succeed in this, the more we will not only repair our balance of payments position but contribute to growth. Very important research shows that SMEs in particular that get into international markets enjoy very considerable productive efficiency gains quite quickly—something like 30% gains in the first year or two of taking the first steps into the international market. That goes on as they spread their wings into new markets. It leads to higher profitability, greater longevity, further job creation and, in summary, to the strengthening of the backbone of the economy.

My final point is therefore that what we are talking about is not simply the balance of payments. It is not simply the need that we have to pay our way in the 21st century. It is about the regeneration of the economy that is core to the growth strategy that this Government have in place alongside the deficit reduction strategy and the strengthening of the macroeconomic environment.

Finally, I thank the noble Lord, Lord Jenkin of Roding, for introducing an extremely important opportunity for us collectively to talk about an issue that is central to all of us who have concerns about this country’s future economic potential.

[Lord Haskel]

The Minister spoke warmly of reducing corporation tax. Of course, what he forgot to say was that the Government are also reducing capital allowances by an even greater amount. What impact will that have on our competitiveness?

[Lord Green of Hurstpierpoint]

Corporation tax must be seen in the context of an overall tax package. We have a number of new measures in place. I referred to the patent box, whereby we will tax revenue from intellectual property at 10%. We have very generous R and D tax credits. We have introduced enterprise investment allowances. It would be very difficult to do anything other than recognise that the overall tax framework contributes to a very business-supportive tax environment. It needs to be competitive. The goalposts are moving internationally as other countries seek to create competitive tax regimes. We need constantly to watch what others are doing if we are to go on being an inward destination that foreign investors find attractive.