Sustaining a higher value-added economy report

• Report: Risk and Reward: sustaining a higher value-added economy
• Business and Enterprise Committee

The Business and Enterprise Committee’s report says that despite the real and severe challenges facing the country at present, Britain has a much more successful and innovative economy than is generally recognised, and that it has the potential to build a very successful higher value-added economy. The Committee heard compelling evidence from a range of witnesses about how the UK can best compete in a rapidly changing world - by offering products and services that generate larger margins - creating "higher profits for businesses and higher wages for workers." The CBI told the Committee in evidence:

"The global accessibility of inexpensive labour means that UK-based businesses cannot compete in markets for internationally traded goods and services on the basis of low labour costs alone. Thus our economy naturally tends to focus on higher value and higher value-added activity where investment in skills, knowledge, technology and innovation more broadly are important factors."

The report therefore urges:

"Higher value-added goods and services will be essential to the strength of the UK economy in the future. Encouraging the growth of such activities depends on a realistic and measured assessment of the United Kingdom’s strengths and weaknesses. This does not mean refusing to acknowledge the very real economic difficulties which face the country. However, this should be balanced by more confident and better-informed acknowledgement of the economy’s very real underlying strengths."

Committee Chairman, Peter Luff MP, said:

"If you ask people to guess where the UK ranks internationally on many economic measures, they usually underestimate wildly. In fact, in 2008, as well as being the world's second largest exporter of services it was also the world's sixth largest manufacturing nation. And our opportunities to do still better aren’t just in new technologies such as the transition to a low-carbon economy – we also need to safeguard and build on our existing strengths. That includes areas of successful innovation often neglected in public debate, such as branding and design."

The report warns:

"If, as some reporting suggests, Britain genuinely and wrongly believes itself a nation in which manufacturing is in decline, there is no high technology industry, and the scale of the service sector is a weakness rather than strength, then we will deter potential partners - from foreign investors to the young people in our schools - from participating in some extraordinarily successful businesses. That would help make sure that long-term economic decline becomes a self-fulfilling prophecy."

The report looks at areas where more could be done to foster higher value-added activities, and makes a number of specific and more general recommendations on issues such as encouraging research and development, public procurement, the need for broader definitions of innovation, developing clusters of innovative businesses and the role of universities. It also urges that the route to a higher skilled workforce lies in simplifying the skills system and ensuring that young people properly understand the opportunities in the modern economy.

The report says:

"We also stress the importance of well-informed, up-to-date careers advice in schools to encourage children to consider careers in business – especially in engineering – and in entrepreneurship. Careers advice in most schools appears not to be of the standard required to enable young people to make properly informed choices…"

Mr Luff said:

"Members of the G20 are meeting in Philadelphia to deal with the results of excessive risk taking in financial services. But if the United Kingdom has a culture in which appropriate risk taking, whether by entrepreneurs or by public servants, is discouraged, it will soon be overtaken by other more dynamic economies. As our witnesses told us, risk aversion, and a culture which sees business failure as a personal disgrace often stifles our capacity for innovation. We need a more adult approach."

The report notes that the Government has published at least five significant policy papers on the subject. However, it warns that:

"…a higher value-added economy cannot be built by central government alone; regional bodies, local government, academia, the third sector and, above all, businesses of all sizes must also play their part. The challenge now is to make sure that broad policy statements are translated into action."

Following visits to well-established clusters of higher value-added activity, the Committee identified six key factors in their success:

• Skills: the successful centres we saw built on the intellectual capital around them.
• Ideas: the areas we visited had centres of research excellence and many organisations dedicated to ensuring ideas could be successfully commercialised.
• Networks: ultimately, success owed a great deal to the fact that different parts of the system were connected to one another. Universities and technology transfer organisations collaborated; venture capitalists had links to universities and to local government.
• Finance: there was ready access to risk capital, and encouragement and help for would-be entrepreneurs.
• Leadership: this could come from business, from academia, or from the relevant part of government. Often, a variety of organisations worked together, or complemented one another.
• Culture: it was taken as read that good ideas should be commercialised and accepted that not every initiative or business would succeed—indeed frequent failure was seen as part of the price of success.

However, in the Committee's view, the most urgent change is one of culture, and that will be the hardest to bring about. The report concludes:

"Collectively, we need to identify our strengths, publicise them and build upon them. We also need to accept that the innovation and experimentation the higher value-added economy requires will mean that projects sometimes fail, and that, in the long term, there is no reward without risk. We should start by recognizing that we already have a higher value-added economy; the challenges are to sustain it and to broaden that success to other sectors."

Peter Luff said:

"This report identifies real problems for British high value-added business, such as the lack of venture capital. But just as importantly, it also identifies real British successes. We need to hear more about them. People make career choices on the information available to them. If they hear from politicians and the media - wrongly - that there is no significant successful UK business outside the financial sector, and that manufacturing is in terminal decline, they will channel their talents accordingly. Policies matter – but so do attitudes."