The Harrington Review on Foreign Direct Investment, published last year by myself and my team, looks at how the UK can better attract foreign direct investment into key growth sectors to ensure the UK is the most attractive destination in Europe for internationally mobile investment.
An industrial strategy is about the partnership between government and the private sector. We had a very good industrial strategy in 2016, but the government at the time didn’t follow through on delivery.
UK business needs government help – for training, research and development – so I’m hoping our new government will reinstate an industrial strategy. Manufacturing and engineering is highly skilled and highly paid, and it’s got to be the future of our country.
I recently met with one of the leadership of a large foreign automotive company who are big employers in this country. The bosses there are worried because they can’t see what the UK’s strategy is for the next five/ten years. It doesn’t matter to them which is the ruling party, they want to know that the government of the day has a permanent industrial strategy in place.
We need a new Business Investment Strategy, headed up by a senior minister at cabinet level, with dedicated cross-government machinery to deliver it here and abroad. The prize is a big one: most of our competitors have about 12% of GDP in business investment (domestic and foreign) – our equivalent is ten per cent. The difference is about £50bn per year. If we can attract a sizeable portion of that from abroad, the effects on the economy would be very significant.
And I don’t blame them for worrying; the UK has chopped and changed so often. Look at the road to net zero; when we wrote the industrial strategy, we cited 2050 as the time when there’d be no more internal combustion engines on the roads. That wasn’t on a whim. We arrived at that date because we had spoken to manufacturers, economists and scientists to reach this consensus.
However, four years later, that date was changed to 2030, and then subsequently to 2035. The industry was amazed and didn’t know how to react. Consistency is really important in business; you need to know the rules of the game. We’ve had enough turmoil due to COVID and Brexit etc, and we now need some stability which is vital to foreign and domestic investors.
As well as a lack of consistency in policy, which overrides everything, the money that government uses to support businesses in skills, research and development etc, takes so long to come through – even for comparatively small amounts. This again, can deter foreign investors.
Then there is the issue of planning. This is not an issue that is solely the domain of the residential arena; getting planning permission for a factory, plant or laboratory takes far too long. There’s also the added complication of connection to grids, provision of skills visas, etc.
Brexit was also a shock to the system that was unique to the UK (unlike COVID which was a global issue). It caused a change in the rules, and huge costs for the provision of goods and services from abroad. And because the country was in paralysis for two years while the departure from the EU was being worked through, it presented the view of the UK as an unstable country to do business with.
All of these things came out in The Harrington Review of Foreign Direct Investment. Fortunately, the suggestions to remedy these issues were accepted by the then Conservative government and adopted by the opposition, the now new government.
Foreign investments are so important, bringing jobs and prosperity into the country. The government has arrangements with creative industries, automotive and aerospace etc, but it’s all piecemeal. An industrial strategy would provide a wrapper for the whole thing.
There are a lot of funds available for research and development in the UK, but when it comes to keeping it in this country, much of the investment still tends to go elsewhere. So, I’m proposing setting up a large financial institution backed by the British government. Foreign investors are very welcome, but it would fundamentally be an institution to back UK companies, so that the IP and management stay here rather than go abroad.
I’d also like to see an industrial strategy enacted as a law of the land, so that it’s more difficult for future governments to abolish. Obviously, a new government can change the law on almost anything. However, the fact is it’s far harder to repeal an Act of Parliament. I want that industrial strategy to be enshrined in law where it would go back to Parliament every five years for renewal. It needs to become part of the fabric of the partnership between government and the private sector.
The Harrington Review
I was asked to carry out the review into foreign direct investment because of concerns at the highest levels of government that the UK is missing out on potentially transformational investments by multinational companies and foreign investors.
These investments have gone to competing countries, with the follow-on benefits to their economies, rather than ours. It is easy for some politicians and commentators to say ‘it’s because of Brexit’, or ‘it’s because of Corporation Tax’. The situation is far more complicated than that.
Our comprehensive analysis into what leads to an investment decision has given us a unique view of how the UK government appears to prospective investors, and what we can do to improve. We have worked with more than 200 companies, financial institutions and sovereign wealth funds as part of this review to find out exactly what their experiences were – why they invested here if they did, and why not if they didn’t.
I have formed the view during this process that capitalism has changed. Gone is any residual view that government shouldn’t use taxpayers’ money and other resources to assist private companies in investment decisions. Often this position comes with a fear that civil servants and ministers alike will try to pick winners, and fail, or that it will manifest as companies with ‘begging bowls’ at government’s door, asking for money when they would have invested anyway.
The reality is that many of our competitors chase investments via their industrial strategies backed by substantial government support. They identify which ‘races’ they want to be in, the sectors and sub-sectors where they have a competitive advantage, and how they are going to attract the finest businesses in the world to their country.
The UK needs to respond. To do this, I believe we need a new Business Investment Strategy, headed up by a senior minister at cabinet level, with dedicated cross-government machinery to deliver it here and abroad. The prize is a big one: most of our competitors have about 12% of GDP in business investment (domestic and foreign) – our equivalent is 10%. The difference is about £50bn per year. If we can attract a sizeable portion of that from abroad, the effects on the economy would be very significant, helping to make the country more prosperous, with better-paid jobs and tax receipts to fund public services.
The evidence we have received reflects a picture of the UK rich in advantages: our language, our open and vibrant culture, our outstanding research base, the deeply embedded rule of law, the pull of London as one of the world’s great financial centres, and many other assets.
However, the barriers outlined in this review, and the uncertainty they create, act like a tax on investment. We have heard time and again about government systems that are too often disorganised, risk-averse, siloed and inflexible when it comes to the needs of modern investors.
We have developed a system where civil servants and politicians alike will do anything to de-risk a decision, by shoving financial decisions to a series of semi-arm’s length institutions as well as a series of ‘competitions’ as a system of allocating taxpayers’ money. All too slow and cumbersome to compete in the modern world.
In an environment of intensifying international competition for the industries of the future, we need to learn from the best examples globally. We must provide a fast, tailored, responsive and comprehensive offer that meets contemporary investors’ expectations. We know that when government invests, the private sector follows, and that £1.00 of government investment can unlock between £7.00 and £9.00 of private sector investment. This shows that when we are proactive, we can achieve great things in partnership with business. I believe all this is achievable. In my experience, all businesses need to evolve to compete with changing circumstances. Government is no different.
The UK government is organised into separate departments – each with individual policy objectives. It is confusing for potential investors who are used to dealing with companies, or with countries who have outward-facing investment organisations with a single front door, to have to navigate their way around different entities for policy, finance, visas, skills, grid and regulation.
From my personal experience as a minister across three departments, leading two refugee crises, I know how effective a cross-government model can be in breaking down departmental silos. This has been reflected in the organisational recommendations within this report. My recommendations will put investment at the heart of all parts of government from the cabinet down.
This will help deliver the ambition for the future that the Prime Minister, Chancellor and Business and Trade Secretary have for the UK: a global leader, with innovation driving investment in the five key growth sectors of digital technology, green industries, life sciences, advanced manufacturing, and creative industries. I hope these recommendations will help us achieve that vision.
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