Key Focus Areas for the UK’s Upcoming Industrial Strategy

Following this week’s spending review, the UK government is set to unveil a ten-year industrial strategy. This initiative aims to allocate public funds to enhance the nation’s expertise in emerging technologies and maintain its competitive edge in established sectors.

Observers from Whitehall have noted that the release date for this strategy has been postponed several times; it is currently anticipated for June. These delays highlight the challenges involved in formulating a practical and effective industrial strategy.

In November, the Department for Business and Trade initiated a consultation focusing on the UK’s economic strengths. Eight primary sectors were identified: advanced manufacturing, clean energy, creative industries, defence, digital technologies, financial services, life sciences, and professional services.

The government believes these sectors offer the highest potential for sustained wealth and productivity growth. Plans are in place to support these industries further, with tailored strategies for each after additional consultations.

Discussions are underway to determine which specific activities within these sectors should receive priority. Some decisions have already been reached; notably, Chancellor Rachel Reeves has publicly supported the nation’s defence technology sector, committing £5 billion to reinforce findings from June’s strategic defence review, which emphasizes increasing domestic arms production and advancing drone technology.

Artificial intelligence (AI) has also been identified as a key focus. The UK ranks as the “third-largest AI market globally” according to government sources, and earlier this year, an AI Opportunities Action Plan was introduced to outline necessary actions for maintaining momentum in this field, building on the previous government’s ambition to position the UK as a “global AI superpower” by 2021.

Ongoing trade negotiations with the US highlight that promoting one industry, such as automotive production, can detrimentally impact others, like the bioethanol sector. Vivergo Fuels, the UK’s largest bioethanol producer, has warned it may shut down soon if it does not secure financial assistance from the government, illustrating the potential for disparities among sectors due to industrial policy decisions.

To assist with this endeavor, the Entrepreneurs Network has collaborated with Quid, a research and analytics firm, to align government investment plans with actual funding trends observed from private investors.

Quid has analyzed funding received by UK-based, privately held companies, identifying 2,773 firms that attracted over $1 million in equity investment between May 2022 and May 2023. This data suggests that strategic investment aligned with governmental support could lead these companies to become industry leaders akin to future Googles and Nvidias.

Bob Goodson, founder and president of Quid, noted, “Venture capital can reveal the most promising areas for the next five to ten years and indicates where VCs believe value lies in UK innovation.”

Comparing the government’s eight key sectors with current UK innovation hotspots, Quid has found broad agreement between government priorities and private sector investments. Goodson expressed optimism, saying, “I was expecting greater divergence in the focus areas, so seeing this alignment is encouraging.”

However, there are three notable sectors not covered by the industrial strategy that exhibit significant innovation and investment: food and drink, hospitality, and education and training. The food and drink sector includes sustainable agriculture, meat alternatives, and innovative dining concepts. The hospitality industry, as highlighted by UK Hospitality’s chief executive Kate Nicholls, remains underappreciated despite its social contributions. In education, opportunities lie in companies leveraging AI for reskilling efforts, though they may fall outside the government’s immediate strategy targets.

Quid’s network map reveals strong interconnections between various sectors, indicating that tightly-knit industries tend to collaborate and innovate. The research indicates that the cybersecurity technology sector plays a central role in the UK tech landscape, significantly influencing other priority areas identified by the government.

Critics argue that if private investors can successfully generate returns in certain tech sectors, taxpayer-funded support may be unnecessary. However, there is growing concern over the trend of promising British tech startups being acquired by foreign investors just as they reach critical value, as demonstrated by CMR Surgical’s recent sale.

The British Business Bank conveyed in recent testimony the urgency of developing local financing options to support domestic tech firms. Without sufficient scale-up capital, the UK risks merely incubating innovative companies that may relocate overseas when they start to thrive.

Furthermore, the government may have strategic reasons to engage in its industrial policy, such as ensuring the domestic production of essential materials. Private investors often hesitate to back capital-intensive technologies, evident in the slow rollout of sustainable aviation fuel in the UK despite regulatory encouragement.

Lastly, there is a concern that the expectations from this industrial strategy could be overly ambitious. The National Audit Office has highlighted the existence of multiple industrial strategies and growth plans over the last decade, questioning the effectiveness of current efforts.

Goodson raised a crucial point about government investment strategies, suggesting, “When considering investment across multiple projects, should the government spread funds thinly or focus its resources on a few high-potential initiatives? This requires a level of commitment that can be challenging for governmental bodies.”