UK COMPETITIVENESS POLICY: CLOSING THE INVESTMENT GAP ON OUR COMPETITORS IS ESSENTIAL
There is a significant and, in many cases, widening gap in the UK’s investment performance relative to that of its major competitors. The last government’s White Papers on competitiveness failed to recognise this most pressing problem facing the UK economy. If the UK is to achieve sustained economic growth and greater economic prosperity, there needs to be a major increase in the rate of investment in ‘broad’ capital - not just in fixed assets, but also in R&D, innovation, education and training. What’s more, the government must ensure that such improvements in investment are widespread through an active regional industrial policy. These are the conclusions of Dr Christine Oughton, writing in the latest issue of the Economic Journal.

International comparisons of investment per employee and expenditure on education per head suggest that the UK has one of the worst investment performances of the advanced economies. Even in terms of R&D investment, where the UK has consistently been among the top 5 leading investing nations, there is evidence that real net expenditure on R&D has declined in recent years - real net business expenditure peaked in 1990-91. Moreover, R&D expenditure in the UK tends to be concentrated in a few industries and in the top 100 firms.

Dr Oughton advocates a number of measures designed to overcome the market failures and short-termism surrounding these shortcomings of investment in broad capital. In particular, she focuses on how to make improvements in investment widespread so as to reduce variation in performance.

By improving the quality and standing of vocational qualification
By improving the innovative performance of firms outside the top 100
By speeding up the diffusion of new technology
And by improving the performance of lagging regions
Dr Oughton reviews the policies outlined in the UK White Papers on competitiveness. These were introduced primarily in response to declining relative economic performance, reflected in the UK’s falling position in international league tables of income per capita. In common with European competitiveness policies introduced in the 1990s, they ostensibly represented a reorientation of industrial policy away from sectoral measures (commonly known as ‘picking winners’) to horizontal (or generic) policies designed to create the right underlying conditions to allow industry to flourish.

But what are the right underlying conditions and how are they influenced by policy? According to Dr Oughton, both UK and European competitiveness policies correctly stress the central role of investment in tangible (fixed capital assets) and intangible assets (R&D, innovation, education and training) in promoting productivity growth and increases in income per capita (competitiveness). But a notable difference between the UK and European policy is that the latter recognises European underperformance in investment, while the former fails to assess fully the extent to which the UK underinvests in broad capital in comparison with other leading economies.

The last government’s White Papers measured the UK’s investment performance in terms of the share of investment in output, maintaining that it differed little from that of other advanced economies. But international comparisons of investment per employee (which is more closely related to productivity growth) indicate that the UK has one of the worst investment performances. Similarly, an analysis of government R&D expenditure reveals that real spending fell during the late 1980s and early 1990s. And European comparisons of expenditure on education per head show that the UK has a comparatively low rate of investment in human capital.

The policy outlined in the White Papers relies heavily on the role of macroeconomic stability - an aspect that has been embraced by the new administration. But while stability is a necessary factor, it is unlikely to be sufficient to close the UK’s investment gap in capital equipment, R&D and education and skills. Dr Oughton advocates exploring a number of measures designed to overcome market failures and short-termism surrounding investment in broad capital (see page 1499 of her article for the details).

While the overall rate of investment is important, part of the problem also appears to lie in the variation in performance across firms and regions. R&D expenditure in the UK is known to be highly concentrated in the top 100 firms and in the pharmaceuticals and defence industries; and poorer performance in lagging regions tends to lower the UK’s overall rate of growth. Similarly, educational attainment in the tail tends to pull down the average performance of UK pupils in international comparisons of, for example, standard maths scores.

It follows, Dr Oughton argues, that in designing measures to raise the overall rate of investment in broad capital, we need to ensure that improvements in investment in tangible and intangible assets are widespread in order to reduce variation in performance. Crucially, this suggests a decentralised approach to industrial policy and a key role for regional industrial policy.

Note: ‘Competitiveness Policy in the 1990s’ by Dr Christine Oughton

is published in the Autumn 1997 issue of the Economic Journal. Dr Oughton is Director of the Research Centre for Industrial Strategy, Department of Commerce, The Birmingham Business School, University of Birmingham.

For Further Information: contact Romesh Vaitilingam on 0171-878-2919 or mobile telephone 0468-611095 (email: rvaitilingam@cepr.org); or after 18 October, Christine Oughton on 0121-414-6387 (email: C.P.Oughton@bham.ac.uk)