The second coming of industrial strategy

A month or so ago I was asked to do the after-dinner speech at the annual plenary meeting of the advisory bodies for the EPSRC (the UK’s government funding body for engineering and the physical sciences). My brief was to discuss what opportunities and pitfalls there might be for the UK Engineering and Physical Sciences community from the new prominence of industrial strategy in UK political discourse, and especially the regional economic growth agenda. Following some requests, here’s the text of my speech.

Thanks for asking me to talk a little bit about industrial strategy and the role of Universities in driving regional economic growth.

Let me start by talking about industrial strategy. This is an important part of the wider political landscape we’re dealing with at the moment, so it is worth giving it some thought.

If there’s a single signal of why it matters to us now, it’s the Industrial Strategy Challenge Fund – in last years Autumn Statement – a very welcome and quite substantial increase in the science budget – but tied in a very explicit way to industrial strategy.

What is that industrial strategy to which it is tied? We don’t know yet. We had a Green Paper in February – (a “very green” green paper, it was described as, which is civil service speak for being a bit half-baked). And we’re expecting a White Paper in “autumn” this year. i.e. before Christmas. I’ll come back to what I think it should be in a moment, but first…

How a soft matter physicist learnt about industrial strategy

Why should it me that’s talking to you about this stuff? I’m a soft matter physicist, returning to research now after 7 years as PVC for Research and Innovation at Sheffield. I’ve paid my debt to society.

During that time I became very interested in this subject, and I’ve engaged quite seriously with economists and innovation specialists around it.

I worked extensively with our Local Enterprise Partnership – it was big job to convince them of the role that science and innovation could play in turning round the economy of Sheffield and South Yorkshire – one of the most underperforming cities in the UK. This, frankly, was a struggle.

During this process I learnt that there are lots of misconceptions about the role of universities and what was realistic to expect from us.

How did people in the LEP think about innovation, growth and the role of the universities?
I think there were three stages:

In the first stage, it was just a question of unlocking the dynamism of the private sector. “We’ve got a great offer, we just don’t sell ourselves hard enough.” was the sort of phrase one heard quite often.

The requirement for the LEP to produce a growth plan did at least involve an Independent Economic Review; this made it clear that there were obvious economic failings that needed to be addressed. The headline was that 70,000 new jobs were needed for the region to catch up with the average. But people would still say things like “If every SME just took on 2 more people we’d be there”. Of course, this wasn’t going to happen. Most of the SMEs are, at best, stable businesses occupying their niche and with no scope to expand … at worst, what Paul Nightingale calls economically marginal, undersized, poor performance enterprises – “Muppets”.

The second stage was to say “We’ve got two great universities, why aren’t we Cambridge?”

Underneath this was an unrealistic view of the number of spin-outs even a good university could produce. They were hoping for hundreds of new businesses a year, but the reality is that we’re doing well to produce half a dozen. To some on the LEP, the problem must be the way we handle our IP. But that’s not the problem – the problem is the huge over-emphasis we’ve seen on the IP-based spin-out as the main vehicle of knowledge exchange out of universities.

The third stage was to say “We’ve got loads of young men with inappropriate beards drinking craft beer and artisan coffee, why aren’t we Shoreditch?”

Of the three views, this is the one I have the most sympathy with. I think there does tend to be an over-optimistic view of the potential of the digital and creative sectors, but there is undoubtedly more we can do to make more of this sector, for example universities could do more to encourage start-ups by students and recent alumni (male and female, bearded and beardless…). But I still don’t think that this can be enough to close the prosperity gap that places like South Yorkshire face.

But, if none of the above is the whole solution, we still have a problem, so what we should do? What’s our alternative plan?

There’s an idea that’s come from EU thinking about regional development that’s worth pursuing – the idea of “Smart Specialisation” – which amounts to asking what works with the historical grain?

In Sheffield, there’s no doubt that the historical specialisation was in manufacturing. But in stressing manufacturing as the city’s specialisation, we have to know how to respond to the accusation that we’re engaged in a doomed attempt to regrow the rust belt.

The answer must lie with the idea of high value manufacturing – and if you’re talking about high value, you have to focus on productivity, not on number of jobs. We need to talk about new technologies, and in particular the deep incorporation of digital technologies that people call Industry 4.0. We need to focus on growing translational research and skills, leading to productivity growth and inward investment.

I think this is an argument we did win. The Science and Innovation Audit we did for Sheffield and Lancashire made the point clearly in a way people really bought into.

And now my work in this area has culminated in the Industrial Strategy Commission, a Sheffield/Manchester initiative that’s currently attempting to engage with the policy making process in this area. I’ll talk a little more about that later.

I’m also a Council member of EPSRC, so I’ve been part of the strategic discussions at Council about how EPSRC should position itself in this new landscape. But I stress that here I’m speaking personally – these aren’t the official positions of EPSRC (but, of course, they should be!)

A cartoon history of industrial strategy

Let me return to Industrial Strategy.

A cartoon history of industrial strategy in the UK goes something like this. In the 1960’s, we had the white heat of technology, where government thought it could pick winners. Instead, losers picked the government and we ended up with British Leyland and cars with square steering wheels. Mrs Thatcher ended all that, the story goes: industries were exposed to the full force of international competition and our economy flourished. At the end of this, we had a belief that the role of government is simply to provide basic infrastructures that the market cannot provide – education and basic science being among those – and the private sector can provide all the innovation we need.

But the picture starts to crumble with the Financial Crisis in 2007/8. Another cartoon history says that Peter Mandelson returned from Brussels in 2008 converted to the value of European style intervention. 2009 saw DIUS and BERR merged to produced the super-ministry of business, innovation and skills under Mandelson’s direction. The launch of the policy document “New Industry New Jobs” led to a new era of interventionism, which Vince Cable carried on in the Coalition years. And, apart from a brief Thatcherite reversion under Sajid Javid, when civil servants weren’t allowed to talk about industrial strategy, only an “industrial approach”, there’s been continuity of approach into the current Conservative administration.

What this means is that we are now allowed to talk about industrial strategy. It doesn’t mean that we know what the strategy actually is. Or indeed, what it should be.

So let me now turn to this question, of what industrial strategy should be. I’ll start by asking, where are we now, and what’s the problem the strategy is trying to solve?

Facing up to the UK’s economic problems

First, we have to recognise we have a problem. It’s taken a financial crisis, nearly a decade of stagnation, and the political upheaval of Brexit, to make the establishment finally sit up and notice that not everything is brilliant in the UK economy

What are our problems?

1. Productivity growth is stagnant. In terms of GDP per hour worked, we’ve seen the worst decade of growth for more than a century – worse than two wars and a depression. As a consequence, wages are stagnant and we’ve seen the sour politics this leads to. And the fiscal deficit stubbornly won’t close, leading to the prospect of endless austerity.

2. We have the worst regional economic inequality in Europe. London so dominates our economy that most of the country is below average. Our core cities should be drivers of growth, instead they are a drag. Only Aberdeen and Bristol are above the UK average. We have areas that have failed to recover from de-industrialisation. Places like Barnsley, Bolton, Methyr Tydfil, the Medway Towns and many more, are trapped with weak economies, low investment, poor skills and bad infrastructure. And we have some of the poorest parts of the country in the rural and coastal peripheries.

3. In the private sector, we have some great companies which continue to drive productivity growth in the wider economy, but behind these is a long tail of underperforming companies. The innovation diffusion machine seems to have stalled.

4. Our research and development record is very poor. Our overall R&D intensity is substantially less than competitor countries like the USA and Germany, not to mention rising east asian countries like Korea and China. Within that, business R&D is weak, and more than half business R&D is done by overseas countries – this is a real outlier for a developed country of our size.

Basically, economic growth has stalled, we aren’t paying our way in the world, and we’re seeing the effect of that in weak economy and sour politics.

Science, innovation and economic growth

The opportunity for the engineering and physical sciences community, then, is this. It’s widely accepted that productivity growth comes, ultimately, from innovation, so if we can show the link between our engineering and science base and innovation, then the case for strengthening the EPS base follows. Actually, I do think this is accepted now. Phil [Phil Nelson, CEO of EPSRC] spoke this afternoon of the very strong position EPSRC has with respect to the Industrial Strategy, with many examples of demonstrable success.

So what’s the problem? We do need to understand that innovation is not the same as science or engineering research.

Using a neat formula that I stole from David Bott, late of InnovateUK:

“Innovation is the process of turning ideas into money.
Research is the process of turning money into ideas.”

I don’t think we’ve fully worked out how to make that link yet. But I don’t think the problem is wholly with research councils or the universities.

Regional imbalances in science funding

We’ve also neglected the regional dimension. Government science spending is hugely geographically focused on London and the Southeast; business R&D largely – but not completely – follows it.

EPSRC is not the worst offender here! Biomedical research is even more geographically concentrated – but the situation in engineering and physical sciences is still not great.

Let me illustrate this with some examples:

Cambridge has a powerful, science based economy, with high government spending more than matched by private sector spending. Yorkshire and the Humber, on the other hand has a struggling economy, with low government spending on science, low business spending – and poor business productivity growth. Total R&D is less than 1/5 per head in South Yorkshire than in Cambridge, and for Business R&D the situation is even worse – less than 10%.

So we know what a successful science-led economy looks like – it’s Cambridge.

And it doesn’t seem a stretch to connect South Yorkshires dismal R&D record with its poor economic performance.

Rebecca [Rebecca Endean, Director of Strategy at UKRI] mentioned in her talk one aspect of science communication that the Secretary of State particularly stresses – how can we make people in Grimsby appreciate science? A good question – and one that draws out a bigger problem.

Here’s that problem – government and HE spending on R&D in East Yorkshire and north Lincolnshire is €19.50 per person, while for inner London the number is nearly forty times bigger – €761 per person. With these numbers, why should anyone in Grimsby think science has got anything to do with them?

London is an interesting special case, with very high state spending on R&D, and a relatively low proportion of business R&D spending.

This leads to one potentially bad message people might get from the Crick Institute, which glitters next to St Pancras as one gets off the train from the grim North – science is an ornament to a prosperous society, not the driver of that prosperity.

That’s the danger, then. You might well think that if you lived in one of the many parts of the country with very low investment in science and technology, science was an elite activity, not something that connects to your life.

So science and innovation needs to be recognised more as a driver of economic growth – but it’s got to be done right, in a way that’s connected to the real economy.

Here the University of Sheffield’s AMRC is, I think, a great example. It’s focused on translational research, and includes skills – including apprenticeships.

It does two things for the region:
1. It directly boosts productivity in the local business base – it works with supply chains, so a local company that wants to supply to a multinational like Boeing would work with AMRC to get their levels of innovation and skills high enough to enable this,
2. It attracts inward investment. We’ve seen new manufacturing facilities (I stress manufacturing, not just R&D) moving to Sheffield directly as a result of AMRC – MacLaren and Boeing. This has a direct, positive effect on the local economy, but there are indirect effects too – we hope that it will drive up productivity in the rest of the region, as local companies raise their game.

There is a long tradition in UK science and innovation policy of saying that, in funding decisions, excellence has to come first, and there’s a worry that more focus on regional growth will compromise excellence.

It is important to stress excellence (for some value of excellence, of course). But we may have to make structural changes to undo years of policies some deliberate, some accidental, that have led to this concentration.

Political pressures on this are going to get more intense as regional voices get stronger. Frankly, I don’t think the 40-fold disparity in investment we see between London and East Yorkshire is politically sustainable in the long-run.

The wider innovation landscape

Now I’d like to turn to the wider innovation landscape. If we don’t understand the whole innovation system, and EPSRC’s proper place in that, we’ll end up with bad policy.

We now have a (slightly surprising) consensus – between all political parties, and organisations from the CBI to the Royal Society – that R&D intensity is too low at 1.7% of GDP or so, and we need to increase that towards 3%.

The key point to remember here is that government supported science is only one part of the complex innovation landscape that contributes to the aggregate R&D intensity figure. There is private sector R&D, both product focused and long ranged, some in big companies, some in small start ups. There are government labs focused on delivering government priorities, in defense for example. There are institutes for translational research. The Catapult Centres should fill this niche, which is likely to be important for solving the diffusion problem. Our AMRC is a great example. Then you have the university science that is supported by research councils.

Building up from 1.7% to 3% needs to be done in a balanced way that doesn’t bend any one bit of the system too far out of shape; lots of this is outside the direct control of the government.

To return to what EPSRC should do, we need to remember its multiple roles, as described by Phil in his talk earlier:
• to support the existing business base to make the most of new technology (for example, in much more widespread use of digital technologies, automation and robotics in manufacturing)
• to drive the development of new technologies that may be the basis of new industries (for example in machine learning, nanotechnology, biotechnology and quantum technology)
• to support the creativity of outstanding individual scientists and groups, as they explore new fields whose potential impact is entirely unpredictable.

And there’s an overarching, and very important, role of supplying trained people.

There are some things we need to resist:

We have to resist the tendency to push EPSRC away from its mission, closer to development and applied research. This doesn’t mean that we have to have our heads in the clouds – use-inspired basic research is what we should be aiming at. What we want to avoid is the “grey goo” of poor quality “quasi-applied” research that claims relevance but in reality is neither fundamentally interesting nor well connected enough to users to go anywhere.

We have to resist the tendency to imagine too linear a progression from science to technology. Take, for example, InnovateUK. This is a great agency, and I’m a strong supporter of it. It has a clear role as supporter of business led, pre-competitive research, bringing in the university research base to help with that as much as possible. We do need a better strategic coordination between InnovateUK and EPSRC and I think that’s happening. What we have to avoid, though, is any suggestion that InnovateUK is an intermediary organisation between the research base and industry. Those links can be, are being, and should be, made directly from research groups to industry.

We have to resist too easy a reach over to overseas models that are fashionable, without people understanding what makes them work, and what environment they need to make them work. For example, there’s currently a very bad outbreak of DARPA envy amongst UK policy makers, which I don’t think is always accompanied by an accurate understanding either of where DARPA sits in the wider innovation landscape in the USA, or what are the special features of that landscape that make DARPA’s success possible.

Industrial strategy and the role of Engineering and Physical Sciences

So what should our industrial strategy look like?

That’s what our Industrial Strategy Commission will make recommendations about – we’ll launch our final report on November 1st.

For me, this has been a great example of the rewards of truly interdisciplinary work. We’re chaired by a very fine economist, Dame Kate Barker; the team involves, from Manchester, the economist Diane Coyle and the policy specialist Andy Westwood, while from Sheffield, besides me there’s the political scientist Craig Berry.

Our different backgrounds bring different perspectives – from economics, for example, there’s a sense of proportion about the overall size and scale of the economy and of its component parts, of the need for evidence over assertion, and a sense of where the statistics come from and what they can and can’t tell you. From political science, there are always questions about what institutions you’d need to make any proposals work, and how they should be connected.

So how should we think about industrial strategy – what should it be driven by?

I don’t think it should be driven by the science – perhaps an unpopular view for this audience. We’ve just seen the publication of an industrial strategy for the Life Sciences – I think this is the wrong way to think about it. There shouldn’t be an “Industrial Strategy for the Life Sciences” for the simple reason that the life sciences aren’t an industry.

Likewise, the engineering and physical sciences aren’t an industry, so we shouldn’t have an EPS industrial strategy. But, just as the Life Sciences do underpin many different industry sectors, many different priorities for government, so too do engineering and physical sciences.

So should we think of industrial strategy as being driven by industrial sectors? I have more mixed views about this. In some cases, definitely yes – the revival of UK automotive industry really is a success for post 2008 industrial strategy.

But there is a danger – sectors are backward-looking and their definitions don’t reflect new technology. We see this in the way even the distinction between Manufacturing and Services becomes eroded as digital technologies get more embedded.

One thing I have learned from interdisciplinary working is that if you say “fourth industrial revolution” in the hearing of a proper economic historian, you’ll get an earful of abuse, and I understand why. But (to leave this in the decent obscurity of a foreign language) there is something important going on in this thing people call Industrie Vier Punkt Null.

What I do think should drive industrial strategy are the big problems we all know that we, as a society, needs to solve. We need to decarbonise the energy economy, we need to create an affordable and just health and social care system. What is absolutely clear to me is that it is the Engineering and Physical Sciences community that has a crucial role to play in solving these problems.

But as a community, we’re going to need to think differently about how our work contributes to these wider goals:
– we need to think about how our work fits into a wider innovation system, as that system is rebuilt
– we need to be conscious of how our work contributes to the solution of the big strategic problems the nation faces
– we need to think about what contribution we can make to helping overcome the very real economic difficulties faced, both by the country as a whole, and those parts of the country that really are sinking behind.

But I’m convinced that our community is absolutely up for stepping up to those challenges, and EPSRC stands ready to support us in doing that.

Thank you.

1 thought on “The second coming of industrial strategy”

  1. I would like to thank you for your excellent analysis. The idea of a industry strategy is out of date as trying to bring back industry!

    New Industries need to be found but China, Korea, Japan, Europe, USA are all competitors in this race! The UK’s record of competing at this level is poor.

    I think that we will be stuck with Fintech for a long, long time until the finance sector is reformed root and branch!

    Thanks again
    Zelah

Leave a Reply

Your email address will not be published. Required fields are marked *