Rethinking industrial policy design in the UK: foreign ideas and lessons, home-grown programmes and initiatives

There is now renewed interest in the UK in the potentially beneficial economic effects of industrial policy, that is, government policies designed to influence the structure of output and employment. Much public discussion and debate on this subject emphasises the lessons that can be learned from other countries which have proved in recent decades to be more successful in terms of innovation and the commercialisation of the results of research and innovation. However, there are no guarantees that particular industrial policies that have worked well in different times and countries will enjoy similar success in the future, even in those same countries, let alone in other places. Furthermore, in the UK as in other countries, product and labour markets and socioeconomic institutions have their own deeply rooted characteristics that need to be taken into consideration in the design and development of industrial policies and programmes.

In this paper we argue that new efforts to design effective industrial policies in the UK need to be informed, not just by foreign examples, but by past experience of what has worked well and what has worked badly in terms of previous industrial policy endeavours in the UK. We examine these issues by focussing specifically on programmes and initiatives that have sought to improve UK innovation performance by fostering knowledge transfer flows and research collaboration between firms in particular sectors and between firms and universities, and by promoting the development of industrial clusters. We identify examples of both successful and unsuccessful UK policy borrowing from other countries and varying degrees of success in home-grown policies and programmes.

A key constraint on industrial policy design in the UK is the relatively low level of research and innovation activity by UK-based firms (as compared with firms in many other countries that the UK is urged to emulate). This has contributed to failed efforts to develop a UK equivalent of the US Small Business Innovation Research programme and also imposes limits on any attempts to scale up relatively successful home-grown programmes such as Knowledge Transfer Partnerships. In order to try and increase the proportion of UK firms which engage in innovation, priority needs to be given to policies which target firms that are currently not undertaking innovative activity but which face commercial pressures to start doing so.

We identify some key mechanisms which may help in this process, all of them with implications for the delivery of industrial policy at sub-national level:

First, firms with innovative potential but little or no prior track record in innovation will need external advice and support if they are to stand a chance of breaking into supply-chains in innovation-intensive sectors such as automotive, aerospace and renewable energy. Well-funded regional agencies would be best placed to identify firms with such potential and help broker relationships between these firms and Research and Technology Organisations (including the new Catapult centres) and universities, with the aim of helping firms fill gaps in their skills and knowledge and develop links with lead contractors in supply-chains.

Second, it is notable from evaluation evidence that many recipients of government R&D grants subsequently found it easier to obtain finance from banks and other sources, suggesting that prior awards of R&D grants serve as endorsements of the firms concerned so far as lenders are concerned. This process depends on the detailed scrutiny that business applicants receive when applying for government R&D grants and adds to the case for a regionally-based Business Bank to provide SMEs with relationship banking services rather than process credit requests through a computerised scoring procedure. The aim would be for business lenders to base their responses to credit requests on a deep understanding of different firms’ commercial prospects, especially innovative SMEs.

Third, our review of the evidence on the performance of cluster policies suggests that successful clusters of high-performing firms in particular sectors tend to develop organically through the decisions of firms and individuals and the interactions between them. Rather than provide support for cluster development of this kind, industrial policy initiatives seeking to foster innovation and growth in specific regions should give more attention to the benefits and costs of agglomeration and the evidence of what makes some cities and their surrounding regions more productive than others. ‘Agglomeration policies’ should aim at increasing the benefits of urban location (for example, by improving skills and infrastructure) while reducing some of its costs (eg, congestion).