We’re now quickly approaching the deadline for submitting responses to the Government’s Industrial Strategy green paper. We’ve blogged extensively in the weeks since Industrial Strategy first landed, covering the pillars relating to Infrastructure, Place, Sector Deals, Innovation support and Skills.
As we make a final burst towards the finish line, we look at how the Industrial Strategy green paper proposes to support businesses to start and grow. Or in the Government’s own words:
“We must ensure that businesses across the UK can access the finance and management skills they need to grow; and we must create the right conditions for companies to invest for the long term”.
What’s the problem?
The crux of the issue as set out in the green paper is that the UK ranks highly in generating start-ups but not so much on scaling-up those businesses. There are broadly three aspects to this challenge:
1. Access to finance
A good part of the problem relates to access to finance; despite the UK’s leading position as an international financial centre, its capital markets are not similarly developed. The under-supply of equity finance means that businesses with a high growth potential might not be getting the capital they need to finance that growth. This is especially true for highly innovative technology businesses where equity capital tends to be a more appropriate source of funding than bank debt.
2. Investment in productive assets
Tied to the first challenge is the UK’s poor record in fixed capital investment relative to the OECD average. The UK has seen under-investment in assets that drive productivity, such as robotics and automation. The green paper cites the structure of UK listed markets and short evaluation cycles as factors behind the lack of long-term investment for fast growing technology businesses.
3. Management skills
Investment is not the only variable that the UK compares unfavourably on internationally, with the shortage of management and leadership skills completing the trifecta of scale-up challenges. It’s not that the UK lacks quality management per se; rather, given the importance of effective leadership for managing rapid growth and allocating capital efficiently, there’s more that government policy can do in this space.
What’s being proposed?
The green paper proposes a number of solutions to tackle barriers for businesses looking to grow:
What does EEF think?
The Government is right to focus on ensuring businesses have the necessary ammunition to invest and grow. The broad perspective the government has taken – looking at access to finance, incentives for long-term investment and management skills – also seems appropriate given the scale of the challenge.
However (and there always is a however), the emphasis on equity finance solutions for scale-ups should not derail progress on a range of other important challenges faced by businesses with growth ambitions.
- Access to finance
On the access to finance side, there are still too many SMEs reluctant to access bank borrowing. Similarly, manufacturers are shunning external finance, with 2016 EEF survey data showing that 53% would postpone or cancel any investment they cannot fund internally.
In this regard, the impact of the CMA’s remedies on banking competition dynamics should play a significant role towards re-engaging businesses with external finance. This is likely to unlock significant levels of pent-up growth for businesses across sizes and growth stages.
Barriers unrelated to finance are as significant, if not more so, for manufacturers looking to scale up. The lack of available skills, both management and workforce are limiting the scale-up potential of manufacturing businesses. The capacity of managers to make quality decisions, including tapping into appropriate financing models, and the availability of workers with the skills to carry them out, are integral for successfully scaling up a business.
Tell us your view - Are you in a sector where you are facing sector-specific barriers and challenges? How could a sector deal address these challenges? What would you need to know to put one together?
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