An Industrial Strategy Fit for Regional Growth

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The UK is facing a number of critical challenges at the present time with Brexit at the top of most agendas. But most fundamental of these challenges are the result of significant regional differences in productivity, economic growth and social well-being across the country. These uneven patterns of inequality and socio-economic opportunity were a key factor behind the Brexit vote and will affect its outcomes. But they threaten to undermine our future prospects as a nation regardless of our future relationship with Europe.

The national industrial strategy launched recently [i] provides opportunities to distribute economic growth and the benefits of growth more evenly across the nation. But there is an urgent need to develop and implement regional variants of this strategy, with greater devolution of resources and power.

I address three key questions: Why do we need regional variants of a UK industrial strategy? What should they look like and what are the challenges? What are our main priorities? Each of these, but particularly the last draw on our work with regional organisations in the West Midlands and the Midlands Engine.

 

  1. Why do we need regional variants of a UK industrial strategy? 

Places vary in terms of their economic endowments and their potential for different forms of economic growth. They are comprised of complex combinations of:

  • people (demography, skills, preferences),
  • built assets (housing, stadiums, cultural attractions),
  • transport and communications infrastructure (from rail and roads to broadband),
  • firms and local value chains (large and small, across different industry sectors)
  • anchor institutions (city councils, local authorities, LEPs, schools)
  • innovation assets and capabilities (universities, R&D firms, science parks, start-ups)

These combinations will attract and retain different businesses and skilled people, provide the foundations for different kinds of investments and drive different kinds of growth. The Strategic Economic Plans (SEPs) developed by Local Enterprise Partnerships (LEPs) and combined authorities across the country have mapped out many of these opportunities and tried to identify the major local constraints to growth, from a lack of certain kinds of skills and housing to infrastructure or investment bottlenecks.

Every place is different and London is the major outlier compared to the rest of the UK. Policy interventions need to take these variations into account and while there is a place for an overarching industrial strategy at the national level, there is also a need for place-based industrial strategies in the regions.

 

  1. What should they look like and what are the challenges?

Regional industrial strategies across the UK should be developed as customised and focused variations of the national industrial strategy. There is no point in developing complete alternatives to the national plan, economically or politically. But they do need to be based on an understanding of the current and future competitive advantages and constraints at the local level.

For example, skills are in short supply everywhere, but in the Birmingham city region, only 28 percent the workforce is highly skilled (NVQ4+) compared with 37 percent nationally and just 16 percent have no qualifications compared to 8 percent for the UK. [ii] Not only is the general skill shortage more acute in the region, but specific local mismatches between demand and supply constrain growth in key sectors like automotive manufacturing. Skills improvements account for about 20 percent of the growth in average UK labour productivity in the past. So, skills shortages limit the capacity for firms in the region to improve GVA (Gross Value Add) per worker, increase high-value, well-paid jobs and to innovate and export.

But skill shortages are only one factor. Regions need to focus on what they do best, just like nations. It is clear that one important component of a regional industrial strategy is ‘smart specialisation’, to focus investment and policy interventions on industries, firms, technologies, local agglomerations (clusters) which your regional assets, institutions, and capabilities are best-suited to supporting.

A major challenge facing central government (particularly BEIS and Treasury) is that a large number of UK regions currently claim to have unique advantages in very similar areas, including advanced manufacturing (and robotics), digital technologies, life sciences, advanced materials, creative industries and so on. A closer look shows that they do not and a great deal more robustness and precision, from comparative, empirical research, is needed for regions to identify more specific, niche competitive advantages. In many cases, this also means clearly differentiating between local specialisms and business clusters that are the result of historical path dependency (legacy industries) from those that will provide the strongest foundations for future growth.

 

  1. What are our priorities?

Each region, ideally taking a coordinated approach involving public sector agencies, businesses, and universities, should have a coherent view about questions 1 (the ‘why’) and 2 (the ‘what’) above, before focusing on a manageable set of key priorities. These will be long-term (e.g. housing and skills) and short-term (e.g. transport infrastructure and attracting inward investment). But a systemic approach is needed, which links long and short-term interventions across the components of growth, including people, assets, infrastructure, institutions and firms.

Enhancing the capacity of a region to innovate is a central principle of regional growth. While this relates to all of the dimensions discussed above, it underpins a focused investment approach that, if successful, will drive a positive cycle of improved competitive advantage, increased growth opportunities, the creation of higher value-adding jobs and greater inward investment.

Regions should focus effort and investment into enhancing their regional systems of innovation, as part of a specialisation strategy concentrating on a complementary subset of the technologies and sectors identified in the national industrial strategy white paper. This means building on existing partnerships and potential complementarities between anchor institutions, such as universities, and businesses. Universities and other higher education institutions (HEIs) already provide new skill sets and develop R&D assets and capabilities which feed through, over various timescales, into the mainstream economy.[iii]

These complementarities need to be actively developed to enhance the innovative capacity of regions in selected areas, where scientific, technological or knowledge advantages already exist.

This strategy will have the additional benefit of making regions more attractive to a selected set of inward investors and skilled professionals in the focal areas. It will also improve the chances that firms that are currently invested in the region, stay in the region, to some extent mitigating against some of the more negative potential outcomes of Brexit. In many cases this involves sticking to a current industry strength but pushing the regional business portfolio up a particular global value chain, abandoning low-cost, low-margin activities and focusing on higher-value, higher-income activities. It may require a focus on scale-ups and not start-ups and it may need particular forms of infrastructure investment (e.g. broadband rather than rail links). This is all a matter of selecting the right trade-offs to build on current strengths and accelerate the move away from declining industries.

Finally, a priority for the country, to enable much of the above to happen, is to devolve further powers and resources to the regions to develop and implement locally-appropriate growth plans. The economic dominance of the London city-region is linked to its political dominance and the concentration of fiscal power at the national level, making the UK one of the most centralised advanced economies in the world. [iv] If power and resources are not devolved to stimulate growth at the regional level we are likely to see worsening economic and social inequalities with inevitable political consequences.

Professor Simon Collinson was a guest speaker at a dinner discussion hosted by the Industry and Parliament Trust on the 13th November 2017, with CEO, Nick Maher, its Chair, Baroness Prosser and over 25 other Lords, MPs and corporate representatives.

[i] Industrial Strategy: building a Britain fit for the future

[ii] City-REDI Policy Briefing: Fueling City-Regions, why skills matter

[iii] City-regions need great universities as strong and committed ‘anchor institutions’, The Birmingham Brief, University of Birmingham

[iv] There is a historical pattern of fiscal centralisation in the UK. Local taxes in 2014 were 1.6% of GDP (OECD, 2016), almost 20 times less than the taxes collected at the central government level and far below Sweden 15.8%, Denmark 12.5%, the US 3.59%, and Turkey 2.72%, placing the UK 24th among 35 OECD countries. OECD (2016) ‘Fiscal Decentralisation Database’ – available here.

More than 73% of the revenues for the West Midlands Combined Authority come from central government transfers. When these figures are compared to the relevant ones for Frankfurt (13%), Berlin (33%), New York City (26%), Madrid (32%), Paris (16%) and Tokyo (13%) (London Finance Commission, 2017; Slack, 2016), it is evident that local government in the UK is fiscally more constrained compared to other global cities. London Finance Commission (2017) Devolution: A capital idea. London Finance Commission. Slack, E. (2016) International Comparison of Global City Financing. London Finance Commission.

Disclaimer: 
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI or the University of Birmingham.

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