A new report from the Competition and Markets Authority examines the record of industrial policies in the UK and across a range of comparator countries, their effectiveness in boosting productivity, and the characteristics of the UK sectors most likely to drive future economic growth.
The UK government outlined its own vision for a modern industrial strategy in late 2024 in an Industrial Strategy Green Paper, with more details to follow soon.
To help the government design its industrial strategy based on the best available evidence, the Competition and Markets Authority (CMA) has published a new report, analysing the UK’s past industrial policy experience compared with its peers.
It also examines the impact of past policies on productivity and other outcomes of interest, and the characteristics of the growth-driving sectors identified in the government’s Green Paper.
The report comes in the wake of several new studies that use new methods or construct new datasets to measure how widespread industrial policies are and to reassess how well historical and contemporary industrial policies have worked.
One study summarises this new line of research as reflecting a richer understanding of the relevant policy toolbox, a more nuanced understanding of likely policy impacts, and a better appreciation of the governance mechanisms needed to implement policies.
The CMA’s new report focusses on the UK and some of its peers, and shows that countries vary widely not only in how much they spend on industrial policies, but also in what mix of policies they use. The UK, for example, has tended to devote a larger share of industrial policy spending to tax credits than loans or grants, in comparison with its peers (such as France, Germany and Italy).
The report finds that industrial policies can raise regional and industry productivity and regional employment, but on average these effects are small. But there is significant uncertainty around the estimates, reflecting the large differences in how these policies were designed, and what industries they targeted. Tax credits seem to be more effective on average than other instruments (such as direct capital injections or loans).
In the Green Paper, the government has identified eight ‘growth-driving’ sectors that it sees as central to its new industrial strategy. These are advanced manufacturing, clean energy, creative industries, defence, digital and technology, financial services, life sciences, and professional and business services.
The CMA report highlights that industries in these sectors are generally more productive, dynamic and competitive than the rest of the economy. They are also more important to UK supply chains. This suggests that the new industrial policy is tailored to existing UK strengths.
But the growth-driving sectors have relatively low investment rates, both compared with the rest of the economy and with their international equivalents. Some component industries of these sectors (such as battery manufacturing) show signs of market power (that is, the ability to raise prices above the cost of production).
This highlights the importance of monitoring competitive conditions throughout the implementation of the industrial strategy, enabling new firms to enter and compete in these sectors.
Regionally, the growth-driving sectors are concentrated in London, the South East, parts of the Midlands, Scotland and Northern Ireland. As a result, the effects of the industrial strategy may vary across regions and devolved nations.
The report concludes by examining how other aspects of the government’s wider growth mission are likely to interact with its industrial strategy, highlighting investment and skills as two potential bottlenecks for many sectors. It also underscores the importance of continued monitoring and evaluation, and the collection of better data needed to facilitate them.
