Article published in the Parliamentary Monitor: Blue Skies supplement, June 2005

S F Bush

The loss of around 600,000 jobs from manufacturing in the last 8 years has created a void filled not so much by the private services sector (where employment has fallen in the last two years) but by the creation of around 700,000 jobs in the public sector paid by the taxpayer. At the same time, the goods trade deficit has ballooned from £12 billion in 1997 to over £40 billion in 2004, the £30 billion difference being almost exactly the added value output from those lost 600,000 manufacturing jobs.

Trade in goods is crucial to a country like Britain, where imports plus exports amount to over 50% of GDP (less than half this proportion in the USA). Manufactures account for over 60% of our exports with another 5-10% in technical services dependent on them, mirroring pretty well the world trade pattern. Among those countries where trade is of the order of 50% of GDP or more, export sales of goods is a good marker of the added value of all production.

The graph Annual Export Sales shows annual export value divided by annual industrial R&D expenditure over a period of 25 years.  As may be seen, three main competitor countries including the UK have converged to a value around 20.  (The USA is much the worst on this measure because only a relatively small proportion of its GDP is exported.)  Evidently Britain has a massive goods trading deficit not so much because its present manufacturing industry is uncompetitive, but because it is too small for the goods appetite of its population.

Moreover, manufacturing industry is not just the principal means by which we pay our overseas creditors, it is also the leading performer in terms of labour productivity.  Of the three output components of GDP – labour productivity in industry has consistently been around 35-50% above the average for the whole economy, while public services are around 20% below, with private services about 5-10% below.

What can be done to arrest and reverse the dramatic shrinkage in manufacturing of the last 8 years or so?  To recover the £30 billion of lost output would require at current labour and capital productivities about an additional 0.5 million people, additional capital of around £30 billion (or about three years of current investment), matched by about £1.5 billion of additional annual expenditure on industrial R&D.  Like the people and the investment, this increase would have to take place mainly in the SME sector.

But how exactly?  Business expenditure on manufacturing R&D by industry is around £9 billion (depending on definition) employing about 140,000 people, of whom possibly 60,000 are qualified scientists and engineers (QSEs).  The lion’s share of QSE employment in business R&D is in the 2,500 firms with over 250 employees; possibly 5,000 firms in the medium category may have one QSE in R&D.

Of the 114,000 firms in the small category (under 50 employees) possibly one in 20 firms may have one QSE in R&D.  While R&D employment in industry fell along with general industrial employment by about 15% over the 10 years to 2002, publicly funded employment of QSEs in higher education R&D rose by over 50% in the same period, to around 50,000, approaching if not now exceeding the 60,000 QSEs in Manufacturing industry R&D.

The Centre for Manufacture with its partner consortium company NEPPCO Ltd have conducted around 80 R&D projects with SMEs (small and medium-sized enterprises) over the last 8 years, split about 2:1 between processes and products.  Of those 50 projects which have reached some sort of maturity, the lifetime added value to R&D investment multiplier has averaged about 15, which is consistent with the export multiplier on the graph.

This demonstrates that this model of an inner university-based core of permanent QSEs plus an outer ring of temporary research engineers passing through, plus a permanent network of businesses supplying the expertise which a university centre won’t normally have (marketing, prototyping, actual production facilities) can offset the scale disadvantages which 122,000 SMEs suffer from by comparison with the 2,500 large firms.

Our experience shows, as does that of many international studies, that only R&D directed on a continuing basis at commercial objectives has significant economic results, wherever the initial inspiration comes from.  Of all the competitor countries in the graph with the exception of Italy, Britain, however, devotes the highest proportion of its national R&D expenditure to the public sector (over 50%).

To support the postulated £30 billion recovery of lost output, manufacturing industry R&D needs to have around 10,000 more QSEs devoted to it, principally in the SME sector.  Arguably this effort should be organised around the product pipeline concept (as employed in pharmaceuticals) with matching process optimisation.

Given the present distribution of QSEs between the private and public sectors, the people for this endeavour can only come from the universities.  For this to happen, there needs to be an extension of the research assessment (RAE) criteria to allow original unpublished work in industry by university researchers to count alongside published work.  Without this shift in emphasis for at least part of the publicly funded research, the taxpayer will be less and less inclined to pay for it.