All is not well with the UK industrial economy

UK PLC - The state of industry

The British economy seems to be in reasonably good shape. The 1980s shake-out under Margaret Thatcher means that it is not lumbered with a millstone of obsolete 'industrial revolution' industries. Furthermore, contemporary governments seem to be willing to maintain a policy framework that is reasonably consistent, unlike the 'Left-Right' and 'Stop-Go' lurches that so disastrously marked the first forty or so years after the Second World War.

It is reasonable to claim that there is still a wellspring of inventiveness and creativity in Britain equal to that anywhere in the world. And we are not just speaking of a few eccentric individuals (though they need to be treasured!). As an example, the performance of the new industrial complex that has sprung up around Cambridge bodes well for enterprise, if it is given proper infrastructure support.

The British workforce, contrary to some views, is well motivated, generally hard working and responsive to high quality leadership. Just look at the performance of various Japanese owned enterprises with predominantly British workforces. The Nissan car factory in Sunderland and the Honda equivalent in Derby are models of quality and productivity - unlike indigenously managed carmakers -Rover for example.

Last, but not least, Britain is a country that has a long history of openness to the wider world and foreign trading. At official level, unlike France, it is relatively un-defensive about foreign influence and open to welcoming inward flows of money and skills. The City of London financial markets are a positive haven for the foreign-owned investment banks that dominate the UK economy.
So, we are looking at a prospect that holds much promise and potential - but......

So, what are the 'buts'? These relate to the relative performance of too many British companies and the apparent unwillingness of the financial community to invest in indigenous innovation and enterprise. Of huge concern is the performance of British enterprises in high innovation, high-science and high knowledge-based industries, the sorts that need very heavy and consistent investment in R&D and capital. Much of the growth and innovation in Britain has been a result of inward investment, which can flow out as well as in, or has happened outside the arena occupied by large companies. The performance of the investment community in funding smaller enterprises isn't so hot either. Private capital is now almost entirely focused on buy-ins to established companies, stripping them of cash and cost and passing them on after a few years to a trade sale or possible flotation - the amount of genuine venture capital in new and innovative enterprise is actually very small. Thus the investment community is hardly active in supporting innovative enterprise.

In no small measure, we will be describing an old, old and well-known British syndrome, that of 'Lions Led by Donkeys'.

We would contend that the fact that large British companies are no longer leaders in many industrial sectors that they once dominated is due to four main influences:

• The rise of foreign competitors that sometimes enjoy special advantages, like government support, but frequently are just better than their British counterparts. For example, it was not just bad luck or unfortunate accident that killed the British-owned motorcycle, car and truck industries; it was the fact that the Japanese/Germans/Italians/Americans made far better and more attractive products much more efficiently and marketed them better. The same applies to investment banking - it was timidity and incompetence on the part of British leadership that led to the failure of UK investment banks in the face of US and European competition.
• The incompetence and lack of professionalism of industrial leaders, the whole culture of elitism and the class system.
• The actions and policies of many governments of both political persuasions.
• The behaviour and expectations of the suppliers of capital.

But let's start with the good news:

Inward Investment.

The UK economy has attracted and is now significantly dependent on inward investment:

• Between 1998 and 2003, inward investment exceeded outward by £3530 Billion and has continued to burgeon.
• In 2003, foreign investment amounted to 37.5% of GDP
• In 2002, 40% of UK's top exporting companies were foreign-owned, and nearly 50% of Britain's gross exports came from foreign-owned companies.

NIESR, ESRC and Financial Times

....and move on to the difficulties:

The performance of foreign enterprises in Britain is markedly better than British-owned counterparts.

• The levels of investment, pay and productivity of foreign companies in Britain far exceeds that of indigenous companies:

Comparing the characteristics of foreign-owned and host country (UK) establishments in Britain, 2001.

* All industry, service and mfg.
** US multi-nationals in UK
*** Other foreign multi-nationals in UK
Sources: Institute for Fiscal Studies, NIESR, DTI.

International Comparisons.

The UK still has a world class science research base in universities and other institutions:

The number of academic papers and citations produced per head is the highest amongst the G8 nations (Thompson ISI)

However, this apparent advantage has historically not been translated into practical innovation in industry and into new products and services:

The UK stands 8^th in Europe, behind Germany, Ireland, Austria, Sweden, Netherlands, Finland and Spain in terms of revenues generated in industry from new or improved manufactured products. (DTI)

The UK also stands well behind all OECD countries in maintaining spend on industrial Research and Development:

Only the UK amongst OECD countries had a lower share of GDP spent on R&D in 2000 than in 1981. In Britain, in 2000, it was 1.9%, in the US, 2.7% and Germany, 2.5% (OECD). In 2005, the investment in R&D by Britain's 750 top-spending companies decreased by 0.5%. Most tellingly, this decline was driven by a 3% decrease by foreign-owned companies - deepening the concern that foreign companies are likely to 'offshore' research and innovation, whilst maintaining investment in productivity-enhancing capital expenditure. Thus, foreign ownership is likely to decrease the creation of 'break-through' and advanced knowledge creation in UK industry.
Also, the number of patents generated in Britain per million inhabitants was exceeded by the US and 15 of the largest developed countries. The US achieved 70% more, Germany and Finland twice as many and Sweden three times.
(OECD)

Skills, Employment and Earnings

Skills.

We hear much of the UK skills gap, mainly based on the premise that the supply of skills will somehow drive demand through the creation of skilled occupations.

Is there any evidence of that happening? Not much, in fact the data point in the opposite direction:
Between 1991 and 2001, the most rapidly growing occupation has been Hairdressing.
Other huge growth areas were 'Elementary Occupations' like retail assistants and cleaners; professionals in Health and Education and associate professionals, like nursing auxiliaries, social workers and community policing.
The number of people in management remained the same, but there was a change in the nature of what was managed towards office-based occupations like call centres, sales and 'customer service'.
There is no evidence of a marked increase in demand for technological and science-based jobs, as might be caused by a surge in demand for skilled employees in high-tech industries.
A report by the Warwick University Institute for Employment Research, 2004, sourced from the DfES Working Futures national report, is revealing.
The data start in 1987 and are projected forward to 2012.
These data show a large decline in:

• Professional occupations
• Associate professional and technical occupations
• Skilled trades occupations

Significant increases in:

• Elementary occupations
• Transport and machine operatives
• Sales and customer service occupations
• Personal service occupations
• Managers and senior officials

An interpretation of these figures would show that the engines of growth in employment are the public sector and unskilled and semi-skilled jobs in services, driving and retail, with an accompanying increase in managers in these occupations.
The glaring decreases are in professional and technical skilled occupations. So much for Britain as a hot-bed of science and technology.

Qualifications.

Other clues lie in the employment of qualified staff.
The table shows the proportions of employees with High, Intermediate and Low qualifications in the workforce in several developed countries:

Source, ESRC

Employment

The industrial sectors that have seen the greatest increase in employment are:

• Banking and finance, from 2.9% to 4.6% of total employment,
• Distribution and retailing, from 5.0% to 5.7%,
• 'Other Services', from 7.2% to 7.9%

The biggest 'loser' is Manufacturing - which in the US contains 25 out of the 29 concentrations of highly skilled occupations but is said not to matter in Britain - with a decrease from 4.5% to 3.9% and still dropping rapidly.
The most rapid growth in employment has been amongst part-time women, and then in other relatively low-skilled employment categories. This gives rise to the fear that we are seeing the emergence of 'hourglass' employment, with a group of very highly paid employees at the top, a declining middle group, containing skilled and semi-skilled workers, and burgeoning employment in relatively low-skilled, often part-time employment.
Source, ESRC.

Commitment and Work-related Stress

Many commentators have been warning of a coming crisis of trust and confidence in the private sector - and by and large they have been exaggerating in the past.
Now the portents are really ominous:

• 'People who run large companies' now enjoy the same levels of public esteem as estate agents, politicians, Red-top journalists and banks - and that 'aint good!.
  YouGov 2005.
• Britain's long-hours culture is causing a crisis of health and declining productivity among white collar staff, according to research from the Chartered Management Institute, published in March 2006. The survey, by Professor Cary Cooper of Lancaster University and others established that over 90% of managers worked more than their contract hours, with 40% working more than 60 hours a week. In addition, the proportion of managers on short-term and fixed contracts reached 57%. Prof Cooper said 'Managers are telling us that the psychological contract has been broken between them and their employers. We are seeing a short-term contract culture added to a long-hours culture'.
• Yet more research by Prof. David Guest of King's College London identifies distinct longer-term trends in the attitudes of private sector employees. These trends begin to move in a markedly negative direction from the year 2000 and have continued in 2004.
  In particular, there are strongly negative trends in perceptions of the relationship between pay and work demands, trust in management, work satisfaction, motivation and the intention to quit.
  Employee satisfaction and the Psychological Contract, CIPD, 2004.

Earnings and Wealth Relativities

The earnings of CEO's of FTSE 100 companies are about 100 times those of the average employee - and the gap is still widening. (Authors' research).

In 1999, about 28% of households with children had incomes of 60% or below the median income - and the gap is still widening.
Britain comes 13^th out of 16 developed countries in the relative poverty league table. Only Greece, Portugal and the US have a worse position.(Luxembourg Income Study, 2002).
The largest employment growth categories are low-paid and part-time service jobs - often filled by women, who are markedly lower paid than men.

Balance of Payments

Despite an increase in services-related exports, the UK Balance of Payments deficit (Imports vs Exports) has reached near-record heights and the long-term trend line suggests that this is a permanent condition. The reason - science, technology and manufactured products generate more exports than services, a significant proportion of which tend to be domestically-oriented, at least until someone finds a way of exporting local hairdressing!
We should emphasise that we are not employment snobs - any economy needs to be able to provide satisfying work for people of all ability levels. It is the apparent lack of balance in employment that is of concern. This does not smack of Gordon Brown's powerhouse of finance, enterprise and technology: "I want Britain to be not only a centre for the science-based industries of the future but also the hub for creative industries as a whole".