tech2035 opinion - Industrial Strategy…or Investment Strategy?

The words ‘industrial strategy’ are ones to conjure with. Even though industrial policy has come back into vogue in recent years, they still give the impression of 20^th-century-style planned economies, complete with directives, subsidies, and other measures to forcibly guide the economy towards a particular end point.

It may be more helpful, though, to view this Industrial Strategy as just as much of an ‘investment strategy’, in keeping with the Industrial Strategy Green Paper’s title: Invest 2035.

What is an investment strategy?

An investment strategy is different from an old-style industrial strategy. An investment strategy principally seeks to guide private investment into areas the government believes would maximise growth and productivity. Instead of using direct subsidies or other measures, it relies on its power to persuade private business to invest in specific areas because businesses are free to not invest in the areas the government has identified.

An investment strategy has definite advantages for a globalised economy such as the United Kingdom’s. Firstly , an investment strategy, with its lack of bureaucratic requirements in comparison to a traditional industrial strategy, allows businesses to retain the capacity for innovation and creativity that the UK’s strong service sector thrives upon. The strategy presents businesses with the government’s desire to solve a problem, or removes a barrier to them, and allows business to then act in a way that they see fit. This offers far greater rewards than enforcing solutions, as it allows the full creativity of the private sector to be brought to bear upon an issue in consort with government support.

This also makes an investment strategy inherently cheaper to operate, as it relies on encouraging foreign direct investment and domestic private capital instead of spending state-raised cash to drive growth. Not only are fewer public resources required, important given the UK’s high borrowing costs, but the investment strategy has a greater potential pool of resources to draw from, namely resources from abroad to invest in the UK. The investment strategy can then be used to address specific ‘pinch points’ in the UK economy to maximise the gains from any investment.

This philosophy of encouraging foreign investment has been found in the UK before, notably in the 2023 Harrington Review and in the subsequent work of the Office for Investment. Investment strategies have been taken forward in Saudi Arabia and the UAE. Both countries have significant amounts of FDI they want to channel into specific, strategic projects in order to diversify away from oil extraction. The UK’s strategy is more of a mix of domestic and foreign investment, but nevertheless chooses key sectors to support in a bid to increase investments like the Saudi and Emirati strategies.

However, while this reliance on persuasion is its greatest strength, it could also be the investment strategy’s greatest weakness. If business does not have confidence in an investment strategy as an indicator of government priorities, then incentivising businesses to follow the strategy will be much trickier and, unlike state spending, the much larger pool of money an investment strategy can mobilise will dry up. Businesses need to be confident that the government is committed to the vision of growth in the strategy and their investments will be fruitful, more so than if they had invested differently. In short, this makes an investment strategy more vulnerable to the ‘animal spirits’ of the economy, making confidence paramount.

How to maximise the benefits of an investment strategy

When the government releases the final Industrial Strategy paper, there are three important questions to be borne in mind:

For the Industrial Strategy to succeed as an investment strategy, receiving ‘yes’ answers to all three of those questions is essential. With fiscal headroom limited, crowding in the private sector has never been more important, and if the Industrial Strategy struggles to generate the confidence necessary to persuade business to follow its vision, the drive to bring in investment will not succeed. The government must also maintain these answers throughout the life of the Strategy, and this requires collaboration with business. This is something techUK has already offered to help the Government with.

Furthermore, the government has already embarked upon reforms that will make an investment strategy more likely to succeed by aiming to improve the government’s relationship with business generally.

Most notably, the government is attempting to provide long-term stability in policymaking by setting out ten-year visions, including in the Industrial Strategy, Strategic Defence Review and Infrastructure Strategy, among others. These longer timelines aim to better suit business investment cycles, and therefore an investment strategy benefits from them rather more than a traditional industrial strategy, which often take shorter timeframes (usually five years). Matching up with the investment cycle will provide welcome and necessary investment stability for businesses and make the strategy more likely to succeed.

By seeing the Industrial Strategy as primarily an investment strategy though, it is easier to understand what the strategy is trying to achieve, the true markers for success, and critically how the government can best succeed. It also allows the private sector to set their own expectations of the strategy realistically and will be good for building the confidence in the strategy necessary for its success.

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