In the media

Why the idea of a national industrial strategy is coming back into fashion

Future of Business

22 October 2012

There has been much discussion recently about why countries may need an industrial strategy to assist  their economic recovery. In fact governments picking commercial winners has even been compared to the way countries select their sporting winners as many did at this year’s Olympic Games. However Colm Reilly a government and public sector expert at PA Consulting Group argues in this article that simply picking a winner is not enough and that instead governments should aim to make economic conditions equal and fair.

Ian Poulter knew how to hit a golf ball, an airline got him to the USA to play in the Ryder Cup, his hotel put him in a nice room we can be sure and catering made sure there was enough food, but it was Poulter who sank the putts on the last five holes and turned the contest around. When the pressure came on, he was alone with his thoughts, his inventiveness, his courage and not a little bit of genius.

Industrial strategy at large
The evidence suggests that governments cannot pick commercial winners and, when they try, it ends up being expensive and counterproductive. Examples of this exist around the world and also in the UK. The Japanese government’s investment in nanotechnology or the French investments in the Sophia Antipolis technology park show that, even when the market is right, the government cannot always exploit it. Successful lessons (such as the development of the Cambridge technology cluster in the UK) show that governments can, however, enable winners by ensuring that the correct framework is in place. Thinking broadly about the inventiveness and innovation demonstrated by individuals when the conditions are equal and fair – that is what creates winners. You need swimming pools to make great swimmers but it is people who do the swimming. You need cycle tracks to enable cycling but you need people to ride the bikes. For business, governments should aim to simply make the conditions equal and fair. Economic value can only be created by companies that have employees and are doing things (designing products or services, making them and selling them). And all that these companies ask is that they be given a fair chance, without hindrance from any obstacles beyond those that are necessary to ensure fairness and competitiveness for all. It gets complex here though. Fairness in practice means different things in different sectors. In energy, for example, it means access to the grid and reasonable tariffs. In information and communication technologies, it means adequate infrastructure and education. In healthcare, it means effective regulation. So the correct framework becomes different, depending on the sector and the business. And all of these must be balanced against each other, with their respective values understood. As this fairness requires investment, that can soon become prohibitive.

From F1 to patient care
And then it gets more complex. Technology drives all sectors and there is potential for crossover between sectors, which results in opportunities for real cost reduction, innovation and market insight. So the same technology that controls a Formula 1 racing car (using advanced monitoring and measurement equipment to process large amounts of data) can also be reapplied to make sure a patient in hospital receives the best care. Or the technology that is used to slow down human-tissue decay can be used to keep fresh food fresher for longer, with no detriment to the nutrition of the product. The list goes on and on and it is therefore foolish for any country to set boundaries on the development of any technology save those that cause harm to people or the environment.

Supporting the national value chain
Industrial strategies help governments understand how to build frameworks and support companies within individual sectors. These strategies make sure a country knows what it has and how to develop what it has. They also clarify what the country doesn’t have, what it needs to do to attract this and why doing so is important. So perhaps a country has a significant portion of the value chain for one particular sector, but it misses a component or a new development that has emerged elsewhere. It is possible to target the development of this missing element (either to attract it or develop the capability within the country) and on that basis complete a supply chain that makes the economy stronger. For example, an economy can be brilliant at developing products while lacking the factories to make these products. Therefore, the economy should seek to build or attract those who operate factories. An industrial strategy starts by looking at the megatrends of the global economy (for example, recognising that people want to live longer and better, that economic wealth is being distributed to emerging markets, that costs are rising and that water is increasingly scarce). It then seeks to understand what the economy needs in order for companies to survive and develop related ideas and innovations and bring them to market. By doing this, governments can decide what actions they need to take in different sectors to build a framework and make it possible for companies to grow, survive and build. There are always trade-offs to be made and priorities to be determined. Ultimately though, economic value is created by the companies operating within the framework that has been set up for them, like swimmers in a swimming pool or cyclists in a velodrome. For example, an economy wanting to enter a high value sector such as embedded software (this is software that sits within machines or computer chips and enables them to work fast) needs to decide not simply to develop software engineers but those who understand hardware and how it works (something most software engineers have little detailed knowledge of). The economy then needs to decide how many courses, graduates, etc, it needs to keep this industry developing while working out what new policies and regulations are needed to support companies in the sector. Some liken the development of industrial strategies to a growing consciousness of what an economy is trying to achieve and what it needs to do to achieve this. All countries have industrial strategies in that they all make decisions on what and what not to prioritise on an ongoing basis. What we admire about others is their ability to express theirs in a conscious fashion and to know when they are following them, when they are not, and when to change. This is why the time is right for the UK to implement its proposed industrial strategies – because we need to know what, how, why and then when we will need to change that thinking. After that, it is companies and people who should create the value.

Colm Reilly is a government and public sector expert at PA Consulting Group

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