As the UK publishes its long-awaited Industrial Strategy, our UK MD, Nick Watson, argues that debates over whether the UK should be ‘picking winners’ are a misplaced distraction. The key question is not whether to have an industrial strategy but how to implement it.
Industrial policy is back in vogue. In the US, Biden’s incentives carrot has given way to Trump’s tariffs stick – but both seek to drive investment and reindustrialization. In Europe, the EU’s Emissions Trading System and Green Deal Industrial Plan shoot for net zero – and global leadership in the sustainable industries that will support it. While in the Middle East, Saudi Arabia’s Vision 2030 is perhaps the most rapid industrialisation programme ever attempted, as the Kingdom reduces its dependance on hydrocarbons.
In this, these governments are emulating what has been standard practice in many Asian countries for decades: placing big bets – funded by tax payers and consumers – to transform their economies and secure a foothold in the industries of the future.
The UK has until now been more circumspect. A debate has rumbled for the last four decades over the state’s ability to ‘pick winners’, leading successive governments to shy away from a full blown industrial strategy. But it is a false dilemma; in reality, all countries use industrial policy: think state-funded education, tax breaks for selected industries, research grants, investment attraction activities and so on. Whether explicitly or implicitly, the state cannot perform these functions without taking a view on what the economy needs.
Furthermore, the ‘should we have an industrial strategy?’ debate is an unwelcome distraction from two more important and, frankly, more interesting questions:
1. Empirically, which levers of industrial policy have been most successful in achieving economic development around the world?
2. How do you join up the different elements of industrial policy to create a coherent whole, greater than the sum of its parts?
On the first question, there has been a welcome shift in focus in academic investigation in recent years from correlative evidence (‘countries that have done x tend to have higher economic growth’) to the more forensic job of establishing causative evidence (countries have higher economic growth because of x 1¹).
This tranche of recent research has strengthened the case for industrial strategy. There are clear market failures that a well-executed strategy can and do help to address, such as skills spillovers (when one firm upskills an employee it helps the wider economy), agglomeration effects (the value of a cluster is greater than the sum of its parts) and, of course, national security.
But while this research has been, on balance, more positive towards industrial policy and helped to answer the question of what governments should do, if it offers less on the question of how these policies should be enacted.
On this question, we believe we can make useful contribution to the debate. Having worked at the forefront of economic development for twenty-five years, across all continents of the world, OCO Global has accumulated first-hand experience of how these policies can be successfully implemented in practice – as well as the pitfalls to avoid.
On the second question, our experience has taught us that as useful as some of these policies can be in isolation, the real transformative power comes from thinking about how the pieces fit together into a coherent whole. Every country has industrial policy. It’s an industrial strategy when you join up the parts.
Here are a couple of examples to illustrate these points:
FDI Attraction and Skills Development
Most countries and thousands of subnational regions proactively target foreign direct investment (FDI). And typically, they target the numbers of jobs those investments directly create. Now there is a good economic development case for attracting FDI but, perhaps surprisingly, it isn’t really about creating jobs. Or, at least, it isn’t just about creating jobs. Because attracting FDI is hard – it requires laser-like analytics, a global network, and expert facilitation to overcome regulatory and legal barriers… to name just a fraction of what goes into the typical process.
If you just wanted to create jobs, it would frankly be cheaper to fund a Keynesian public works programme. So why bother with FDI? In short, because of the external benefits it creates. Of those, skills spillovers are key.
Foreign investors are not typical and they are not average. Not typical, because by definition they come from a different economy, where there may be different processes, management techniques or technology. And not average, because firms that are in a position to expand internationally must first be unusually successful in their domestic markets. They are the business equivalent of Champions League qualifiers².
By being different from, and often better than, domestic firms, they can expand a country’s skills frontier – what the country collectively is able to do – and will train employees who then carry those skills to other parts of the economy.
That is the empirically-sustained theory. What flows from that theory in practical implementation terms?
First, that KPIs should reflect this causal mechanism. KPIs drive behaviours so if you want to do more than just create jobs you have to target more than just jobs. We have worked with dozens of investment promotion agencies to help them redesign KPIs to reflect that it is the type of job as much as the number of jobs that should be the proper target of their activity.
Second, when we target prospective investors on behalf of clients, we are looking for those businesses that will make an outsized contribution to the local economy both because of their innovative nature and because they are in high-growth sectors. There is no point bringing in skills that will be obsolete in ten years’ time. Our most forward-thinking clients are increasingly concerned with FDI quality over quantity.
Third, landing a foreign investment is not the end point of this connection between FDI and skills. New investors can be supported to hire locally, to run apprenticeship programmes and to work collaboratively with local educational institutions to develop courses that support the talent pipeline they require.
Conversely, the availability of skills is a critical factor for globally mobile investors in deciding where to locate. So the relationship is symbiotic: skills development needs FDI and FDI needs skills. Again, however, in practical terms, being able to present the availability of skills to investors is critical. That is why we have supported clients on skills mapping, so that at the tap of an interactive map, an investor can see exactly where they can find the combination and concentration of talent they need. That can be the difference between a decision to invest and a decision to set up in a competing location.
Cluster Development – and Export Promotion
Similarly, many locations rightly focus on cluster development. The logic is sound: when there is a concentration of businesses within related industries, there are scale economies for the supply chain, knowledge transfers and labour pool advantages.
Similarly, the argument for export promotion is compelling³ . SMEs, in particular, face prohibitive costs of discovery (which are hugely diminished by the scale economy of export programmes) and yet when they do successfully export, begin a journey that leads to higher productivity and higher-paid job creation – another positive spillover for the economies in which they operate.
However, these two levers of industrial policy can be even more effective when used in combination. One-off, traditional trade missions – where a delegation of companies is taken on a visit to a foreign country to meet with businesses there – are particularly suboptimal. A much better format is the digitally enabled Trade Corridor4.
These Trade Corridors begin with an analytical exercise finding suitable matches between a cluster in one location and a related cluster abroad. Connections are then established not only between businesses from the two clusters but also between institutions such as universities, local authorities and business support organisations. By facilitating these connections through a digital platform, many of the challenges of physical distance can be overcome – recreating, virtually, many of the spillover benefits inherent in a cluster. The return on investment for these programmes can be spectacular. There are many more such examples illustrating the importance of joined up economic development policy.
For this reason, the cross-departmental coordination announced in the Industrial Strategy is welcome, as are the plans to devolve and embed the strategy at a local level through the Nations, Mayoral Combined Authorities and Industrial Strategy Zones.
But to be successful, the Industrial Strategy will need determined, intelligent and joined-up implementation. That’s what gets results.
[1] Juhász, Lane and Rodrik (2023) provides an excellent overview
[2] For non-football fans, the Champions League is a pan-European soccer competition contested by the leading teams from each domestic league
[3] https://tradepromotioneurope.eu/new-impact-study-the-returns-of-export-promotion-for-tpe-members/
[4] Pioneered by OCO Global during the Covid-19 pandemic
