Simon Horner: How the State can help foster economic growth through benign industrial activism

Simon Horner is public affairs manager for the British Private Equity and Venture Capital Association and writes here in a personal capacity.

The British Right is generally more sceptical about industrial activism than their opponents. The Right cite the painful history of British Leyland’s nationalisation and near oblivion through to its eventual rescue by the Chinese in the guise of Nanjing Automobile, as far removed from the British State as you could imagine. The British Left look wistfully across the channel at France’s Nestle, and Germany’s BMW and wonder whence our promotion and defence of national champions? But is there a sensible role for the state here that goes beyond questions of shielding national corporate treasures?

‘Picking winners’ is a hackneyed phrase but it is an instructive one. The reason why doing so is often a mistake is not because such interventions destroy some capitalist shibboleth. It is because it is top-down and short term, not bottom-up and strategic. It is also an answer to a question that should never be asked. Take Sheffield Forgemasters. This was an established company that reached a position where it would live or die on Government support. The fact that Ed Milliband justified it because ‘it was only a loan’ is neither here nor there. This is a classic example of picking a loser.

So what can a Government do if not this? Peter Mandelson’s rhetoric earlier this year of a ‘new industrial activism’ sent chills through anyone who can still remember life under Heath and Wilson’s industrial policy. But the content was far more soothing.  He wrote in February:

“We need a strategic lead and vision from government that commits this country to change and in doing so sets the right frameworks for the private sector and uses public investment strategically”.

Few but Milton Friedman himself could be spooked by this.  But what intervention is available, particularly such that an economic liberal could be comfortable?

Nick Boles, one such liberal, has had a stab at this in his recent book Which way’s up? He starts with deficit reduction to keep interest rates down to boost business investment. So far so good. He then advocates an early return to boosting investment in infrastructure from 2012/13 where it will have fallen to 1.6% of GDP – he cites sensible things like Crossrail and other high-speed rail networks. No controversy here, provided this investment doesn’t interfere with the deficit reduction plan.

We then move on to more vague notions of having a more aggressive ‘export promotion’ policy. Stephen Green’s recent appointment is surely a good start and indeed a return to this 19th Century, ‘East of India’ approach to promoting UK plc is welcome.  Boles eschews picking winners but he does advocate the promotion of sectors on the grounds that this is what our competitors do. Provided this is promotion after the event rather than subsidy before, this is a sensible approach where the UK could do more. 

But beyond this safe haven is the more controversial element of actually spending public money. This is where unanimity on the Right will likely break down, but I would suggest there is an enabling role that the State can play here without treading on too many entrepreneurial toes. Firstly, we should protect R&D budgets wherever we can – if there is any area where we need a strategic long-term and stable funding environment it is here. Following directly, we need to look again at ways to deploy capital to crowd in private investment and help spin out university innovations into fully fledged viable enterprises. Imperial Innovations and University of Manchester Intellectual Property are two examples of organisations dedicated to this. Similarly CPI Enterprises, a body set up by Labour is designed to turn spinouts into viable businesses. This is an area where we can afford to be more aggressive without fear of having to pick winners or even sectors.

It is now de rigueur to ‘green’ the economy. If we want to do this strategically and deftly, the medium of the Green Investment Bank, a mainstay of the Coalition Agreement, is a sensible one. By mitigating risk for investors (be it political, scale, early stage or technological) through specifically designed products, Government intervention can be used to attract private capital to new sectors without Ministers having to choose what they are.

Lastly, we need to improve finance channels for viable SMEs. This means increased competition in banking but we also need to prevent the next credit crunch by diversifying away from reliance on bank lending. Equity is an underutilised source of finance but it needs to be promoted if SMEs are to regard it as a viable option. There is work to be done on the investment readiness side – attracting angel or VC finance is not like getting a bank loan. The Government should be supportive by sponsoring finance training for entrepreneurs. More directly, the ‘equity gap’ for attracting expansion capital, which ranges from approximately £250,000 to £15m, requires targeted intervention. If this is doled out via commercial fund managers then the Chinese wall between state and markets need not be breached.

These are just a few areas where the state has a positive contribution to make in fostering economic growth through benign ‘industrial activism’. Provided further private investment follows government interventions, we will know we are on the right lines. Tony Blair once spoke of the enabling state in the context of equality of opportunity but it is a concept that lends itself to industry as well.