The industrial policy debate is back with a bang. But from semiconductor chips to renewable energy, the UK’s unambitious approach means it is falling behind rival nations in encouraging the businesses of the future to set up on these shores.
A much-changed geopolitical climate is being reflected in how other countries are legislating: protectionist policies are in vogue in the post-pandemic world with free trade taking a back seat. America's Inflation Reduction Act (IRA) and CHIPS and Science Act include hundreds of billions of dollars of subsidies, while the European Union is trying to shore up supply chains and incentivise investment on the continent through its Green Deal and European Chips Act.
You don’t have to be a disciple of economists Milton Friedman or Friedrich Hayek to believe governments, very often, spend money inefficiently and in a way that damages innovation. There are concerns that something such as the IRA, ironically, could actually worsen inflation and damage American competitiveness in the long-run.
But the fact is the UK has no industrial policy worth speaking of in comparison with its competitors. Deutsche Bank thinks our approach is characterised by “piecemeal policymaking”. The Treasury’s strategy is widely acknowledged as being inherently short-term.
Policy failures are evident in the UK's weak foreign direct investment (FDI) levels. According to the latest figures from the Office for National Statistics, inward net FDI flows fell every year from 2016 to 2021. Flows turned negative in 2021 for the first time since 1984, albeit this was impacted by the pandemic. Effectively, we're investing more in other countries, than they are in ours.
The UK isn’t in a position to simply battle it out with the US on an absolute financial basis, but the sums involved still highlight fundamental issues. The government’s national semiconductor strategy only plans to invest a rather miserable £1bn in the sector over the next decade. This isn't to say that the UK should simply ape its peers on legislation. But we shouldn't be surprised when companies act rationally and take their money to markets with a more favourable landscape.
For investors, this has nuanced implications, because it isn’t necessarily domestic companies which benefit from big new stimulus programmes. Taiwanese chipmaker TSMC plans to double its investment in the US on the back of the subsidy environment, while the German state is paying for a third of Intel's planned €30bn chip facilities in Magdeburg. These are businesses listed outside of the countries they're bagging subsidies from.
And while government money might incentivise onshoring, companies are concerned about local labour skills. TSMC expects to delay production at its factories in Arizona because the US technicians available to them have inferior skills to their Taiwanese counterparts. Such issues have share price, as well as operational, implications.
A mature, long-term industrial policy shouldn't be about government "picking winners" even if, as UK business and trade secretary Kemi Badenoch noted recently, “it is a battle of wits competing with countries prepared to offer eye-watering sums to pry business away from our shores”.
But picking winners – a tempting option from a government point of view – is what the UK seems to have done in the case of Tata Group. The government will shell out £500mn of subsidies to the business, which is planning to build a £4bn electric-vehicles battery factory in England.
As academics at Imperial College argued in relation to improving UK competitiveness in the biopharma, medtech and telecom sectors: A "more innovative, collaborative and flexible regulatory environment” would help as it battles it out with the US and EU. But with short-term thinking still characterising the UK approach, don't hold your breath.
