French lessons in industrial success
Today’s Financial Times reports on the TUC’s call for a new strategic investment fund, with a budget of £5bn, to invest in key industrial sectors. This is one of a number of recommendations set out in our new policy paper, ‘Developing UK industrial policy: lessons from France’.
Five years ago, many would have rejected the idea that we could learn much from across the Channel. But after an economic downturn in which the French have suffered markedly less than the UK, the TUC felt it was prudent to understand why this was the case, and to see if there were lessons to be learned .
We found that there are a number of reasons for the difference in economic performance, but one of them is that France has relied less on financial services and more on a broader range of industrial sectors. What is more, France continues to target key growth areas of the economy. It does not accept the argument that with the growth of large industrial players like China and India, manufacturing will become less relevent to Western European economies. What is crucial, however, is that the right industries are developed. Those industries are in high skill, high value sectors, not those where we will never be able to compete on low costs.
A new French initiative, the Fonds Strategique D’Investissiment (FSI), has 20bn euros at its disposal to take minority stakes in key companies that will be vital to France’s future. These stakes will be long term. The FSI will be a friendly investor, but will use its seat on the board of companies in which it invests to press for long-term investments, of the high value kind, that will secure the company’s competitiveness. The FSI will expect a return on its investment, like any other private sector employer would, but it will not be so risk averse as to only back certain winners. So long as it breaks even overall, it will succeed. In this way, companies that have potential, but without 100% certainty of success, can be supported.
The TUC has called for a pilot version of the FSI, with 5bn euros, to replicate the work of the FSI in the UK. Its investment strategy, guided by a board including industrialists and trade unions, should support the long term strategic sectors in which the UK can succeed.
As we have developed this proposal, one question in particular has been asked of us many times. Why should the Government fund these investments? Why should this not be the role of private sector financial institutions?
One answer, equally simply, is that it should be the private sector’s role, but the private sector is not currently fulfilling it. With a taste for short-term rewards, the private sector has not backed long term investments, in new sectors such as green technologies, to the extent that it should. In that sense, the TUC’s proposal seeks to correct a market failure.
But there is another reason. UK policy makers have finally recognised that some industrial sectors are particularly important in securing the UK’s long term economic future. We don’t like “picking winners” in the UK, but it is a hard truth that certain industries, based on our history, our skills base, our industrial traditions, even our geography, are more likely to succeed in the era of globalisation and this is where our focus must lie.
The myth that the market will always act in the overall interests of the economy has been exploded by the financial crisis. Government has an interest in the development of strategic sectors and it must start to focus on those sectors. If it does so, the UK has a modern, high employment manufacturing future.