Select Committee on Trade and Industry Minutes of Evidence

Memorandum submitted by the Department of Trade and Industry (COM 21)


  1.  This memorandum is in two parts; the first is an analysis of relevant factors, and the second a concise account of Departmental and some wider Governmental policies and actions.

  2.  Manufacturing matters. It is central to our future as a leading knowledge-driven economy. It accounts directly for around 19 per cent of GDP, about 60 per cent of exports and just under four million jobs. Manufacturing also supports large numbers of service sector jobs. As a major contributor to innovation and the exploitation of new technology, manufacturing is a major source of productivity growth. It plays an essential part in enabling Britain to pay its way in the world.

  3.  Manufacturing is also changing under the double impacts of technology and globalisation. Industry must respond positively to the increasing challenges by investing in new skills, increasing innovation and improving productivity. The Government is committed to helping with these aims.


Overall Manufacturing Performance

  4.  As with other major industrialised economies, the overall proportion of output and employment accounted for by manufacturing has fallen over the past 30 years. UK manufacturing output as a proportion of GDP fell from 35 per cent in 1960 to 19 per cent in 1999, compared with corresponding falls of 27 to 16 per cent for the US and 39 to 22 per cent for Germany. Manufacturing employment as a percentage of overall employment has fallen even more sharply in the major industrial countries over the past 30 years.

  5.  The following key factors, which affect all industrial economies, help to explain the relative decline in manufacturing's share of GDP.

    —  Rising Incomes—as incomes grow, consumers tend to spend a lower proportion of income on manufactured goods. Consumers are able to devote much of their increased income to luxuries, particularly services. The types of manufactured goods bought also change. Over the last 30 years we estimate that three quarters of the decline in manufacturing's share of GDP in the UK may be attributable to these domestic demand effects[1].

    —  Technology—the stock of scientific and technological knowledge is expanding at a growing rate. Modern economies are characterised by unprecedented speed of technological change, providing the opportunity for firms to develop innovative new products to meet the needs of increasingly sophisticated consumers. Productivity advance in manufacturing is more rapid than in the service economy. As well as helping to account for the declining share of employment in manufacturing, this contributes to a decline in the relative price of manufactured goods, which in turn partly explains the decline in the share of manufacturing in the value of output.

    —  Globalisation and Trade—open markets and rising flows of trade and capital further intensify international competition. Some decline in the importance of production of manufactured products in advanced economies is to be expected as a result of this increased competition. This means that businesses in all advanced countries need to be ever more productive and innovative in the face of lower-cost competition in standard products. However, globalisation also means that successful firms have much larger markets for their innovative products, permitting profitable specialisation. Globalisation has also led to changing patterns of production.

  6.  In addition, the fall in the reported share of manufacturing output in GDP can in part be explained by a tendency to outsource service inputs previously provided within manufacturing concerns. This has taken place as companies have restructured to concentrate more on their core businesses to improve performance. The result is that some activities which had previously been included within the manufacturing sector are now undertaken in firms classified within the service sector. There is a growing trend, for example, for companies concerned with logistics to be required by their customers to provide final assembly operations. This manufacturing activity would be classified as a service when undertaken by logistics companies.

Shorter term trends in the manufacturing sector

  7.  In addition to these longer term trends, UK manufacturers have undoubtedly had to contend with difficult circumstances in recent months. In common with other major industrialised economies, manufacturing output has contracted and the rate at which employment has fallen has increased. The slowdown in GDP growth in 2001 was most marked in the US, following the ending of the Information and Communications Technology (ICT) investment boom, the decline in equity prices and the rise in oil prices. This, alongside continuing difficulties in Japan and weaker growth in Europe, has meant that global demand for manufactured goods has been weak. And although the global manufacturing recession was already in evidence before the tragic events of 11 September, the resultant increased uncertainty has further accentuated manufacturers' difficulties.

  8.  Manufacturing output peaked in the UK in December 2000, and the latest available data shows that UK manufacturing output in the three months to November 2001 fell by 4.7 per cent compared with the same period in 2000. This period of contraction has been heavily influenced by falls in the output of high-technology industries stemming from developments in the US, especially the electrical and optical sector, which had grown very rapidly in the preceding period.

  9.  Chart 2 illustrates the global nature of the slowdown, with US output peaking in summer 2000, and all the major industrialised economies experiencing a contraction in 2001. The fall has been particularly strong in the US, where output was 6.7 per cent lower in October 2001 than in October 2000, and in Japan, where the corresponding figure was 13 per cent.

  10.  Manufacturing employment in the UK declined by 3.9 per cent in the 12 months to November 2001. Falls have been sharper in the US, where manufacturing employment fell by 7.2 per cent in the 12 months to the end of December, and in Japan where in the 12 months to November manufacturing employment fell by 5.4 per cent.

  11.  In recent years, UK manufacturers have also had to contend with the impact upon cost competitiveness arising from the weakness of the Euro's exchange rate. Alongside falling prices for exports to the euro zone, and more recent weaknesses in global demand, manufacturing profitability had until the last few months also been hit by higher oil prices. The net rate of return in 1997 was 11.9 per cent, but fell to 8.7 per cent in 2000, and by the third quarter of 2001 had fallen to 4.3 per cent. Manufacturing investment in the UK has also fallen, in common with the global trend, decreasing in real terms by 13 per cent over the year to the third quarter of 2001.

  12.  However, despite these long and short-term pressures on manufacturing the long-term trend in manufacturing output is still upward. Within manufacturing, some sectors have been able to grow faster than the overall economy. Annex A shows that since 1991 this has been the case for the chemical, electrical and optical sectors. Within these sectors the pharmaceutical, computer and communications sectors grew considerably faster than the whole economy.

The Productivity Gap

  13.  This analysis suggests that the current challenges faced by the manufacturing sector result from a combination of short and long-term pressures. Some of these short-term pressures will abate as the global economy recovers from the current downturn. The long-term ability of UK firms to benefit from the recovery of demand will depend on the sector's underlying productivity and competitiveness, which is in turn determined by factors such as the skills of the workforce, the quantity and quality of capital equipment, the level of innovation and the degree of enterprise and competition in the economy.

  14.  In this respect, the latest data from NIESR[2] on productivity (table 1) provides some cause for concern. It shows that both for the overall economy and for manufacturing, the UK's performance lags behind that of other major economies when measured in terms of labour productivity (both GDP per person employed and GDP per hour worked for the overall economy, GDP per hour worked for manufacturing). ONS data shows essentially the same picture, at the level of the economy as a whole.

Table 1

Whole economy (GDP market prices) Manufacturing (factor cost)
GDP person employed GDP per hour workedOutput per hour worked
US139126 155
France115124 132
Germany107111 129

  Source: NIESR.

  15.  NIESR also provide a breakdown of the productivity gap for different sectors within manufacturing (Annex B). The consistent nature of the productivity gap with France, Germany and the US is striking. Across the 17 sub-sectors, there are only three sectors where UK performance exceeds one of the comparator countries. This suggests that all UK sectors have an opportunity to become even more productive.

Explaining the Productivity Gap

  16.  NIESR have attempted to explain the gap in labour productivity between the UK economy and the economies of the US, France and Germany, using as a starting point levels of capital services and skill-adjusted labour inputs (table 2).

Table 2

US-UK gapFrance-UK gap Germany-UK gap
% contribution of:
Physical capital  65   62  73
Skills    1  14   25
Total Capital  66   76  98
Other Factors (or "Total Factor Productivity")   34  24    2
Total100100 100

  17.  This shows that the major factor accounting for the UK's productivity gap is a relatively smaller physical capital stock. Data specifically for the manufacturing sector supports the findings on the importance of investment for the whole economy. NIESR calculate that capital per hour worked in France was 80 per cent higher than in the UK in 1999, and 34 per cent and 33 per cent higher in Germany and the US respectively. When we look specifically at ICT capital per hour worked, the gap with the US is 167 per cent, although the UK exceeds France on this measure.

  18.  Table 2 also shows that the UK's low average skill level explains a significant part of the gap with France and Germany. Part of this skills gap arises from a lower proportion of workers with intermediate vocational skills (ie level 3)[3]. The importance for manufacturing of investment in skills is illustrated by the data in Annex A. This shows that the most rapidly growing manufacturing sectors tend to have high levels of educational attainment, as proxied by the percentage of employees with degrees.

  19.  Around one third of the whole economy productivity gap with the US, and a quarter of that with France, cannot be explained by lower physical and human capital. Table 3 shows relative labour productivity in both the overall economy and in manufacturing after taking account of physical capital stocks and labour force skills (total factor productivity (TFP)). Whilst the whole economy TFP gap with Germany is insignificant, in the manufacturing sector it is much larger. The TFP gap with the US is also much larger in manufacturing than for the whole economy.

Table 3

USFrance Germany
Whole economy115106 103
Manufacturing143110 120

  Source: NIESR.

  20.  The gap is made up of other factors, which are difficult to measure but are likely to include differences in:

    —  Competitive intensity: studies show that increased competitive pressures in an industry are associated with improved firm efficiency and productivity growth rates. [4]Increased competitive pressures encourage firms to innovate and reduce costs. They also encourage changes to market structures, allowing successful firms to grow, and moving resources away from less efficient producers.

    —  Innovation, including the application of new technology: Annex A shows that the most rapidly growing manufacturing sectors tend to have high levels of R&D, one important indicator of innovation. In terms of our international performance for innovation, chart 3 using data from the Community Innovation Survey shows that UK manufacturers are in the bottom half of the EU league in terms of the revenue they earn from new or improved products.

    —  Management: management is a key input into the production process and the quality of management can be crucial in determining competitiveness. Rapidly changing markets, new technology and demanding customers place a premium on managers' ability to lead, innovate and organise employee and supplier relationships. However, recent research suggests that the UK is performing behind most of its main competitors. The Government's National Skills Task Force found that UK managers were inadequately qualified compared with international competitors and that there was a perception that they were of low quality. [5]The report quoted survey evidence suggesting that UK managers performed particularly poorly in terms of their adaptability, entrepreneurial and technical skills.


  21.  The Government's policies can be considered under two headings:

    —  the environment in which businesses operate;

    —  proactive measures to address the issues which underlie the productivity problem.

Business Environment

  22.  Long-term macro-economic stability is the key basis for providing the right framework for manufacturers. We cannot insulate ourselves from the setback in industrial production, illustrated in chart 2 of the previous section, which has occurred worldwide. Nevertheless—as a result of actions taken to establish a stable macro-economic framework—the UK has the lowest inflation for 30 years, long-term interest rates are at their lowest for 35 years and employment has risen by 1.2 million since 1997.

  23.  We have acknowledged (in paragraph 11) the pressures arising from the weak Euro. But companies have responded positively and have in many cases sought to maintain export volumes and market share at the expense of profit margins. This was evidenced by the fact that the value of UK exports of goods to the Euro zone grew in 2000 by 10.7 per cent compared with 1999. In recent months the global slowdown has led to a fall in the growth of world trade including between the UK and Euro zone.

  24.  In principle, the Government is in favour of UK membership of EMU—a successful single currency offers potential benefits in terms of trade, transparency, costs and currency stability. In practice, the economic conditions must be right. The determining factor underpinning any Government decision on membership of the single currency is the national economic interest and whether the economic case for joining is clear and unambiguous. The Five Economic Tests will define whether a clear and unambiguous case can be made, and include the impact of membership on investment and jobs.

  25.  Ensuring macro-economic stability makes a major contribution to encouraging investment. In addition the Government has improved incentives to invest by:

    —  making permanent the enhanced 40 per cent capital allowances for small firms investing in plant and machinery;

    —  reforming capital gains tax to provide better incentives for investment by introducing a capital gains tax taper;

    —  cutting corporation tax to its lowest-ever level.

  26.  Since 1997, the Government has introduced measures to improve the UK's overall competition regime. The Competition Act 1998 strengthened the powers of the Office of Fair Trading (OFT) to identify and address anti-competitive practices across the economy and introduced strong financial penalties for firms that breach competition law. Further reforms will be taken forward in the Enterprise Bill.

  27.  An efficient infrastructure is important to manufacturing. The Government's 10 year plan for transport is intended to address weaknesses in our transport infrastructure over the long-term.

  28.  Business has its part to play in protecting the environment, including tackling the threat of climate change. The Government introduced the Climate Change Levy on 1 April 2001, as part of its strategy to reduce greenhouse gas emissions and meet the UK's target under the Kyoto Protocol. The levy package is revenue-neutral to business as a whole. The Government foresees commercial as well as environmental advantages to UK businesses starting the transition to the low carbon economy expected in the future. A number of EU competitors already have energy taxes and other climate change policies which affect their manufacturers in varying ways. UK businesses are adapting to the Levy. It incentivises energy efficiency improvements and offers the chance to buy levy-exempt electricity from new renewables or direct from good quality combined heat and power plant. Those manufacturers in Climate Change Negotiated Agreements are working towards energy saving targets and receiving an 80 per cent Levy discount in return. The Government is keeping in touch with business to monitor early experience with the Levy.

Pro-active measures addressing productivity issues

  29.  Raising productivity is the key aim of the Department of Trade and Industry. This is reflected in policies to promote the spread of best practice, encourage innovation, raise skill levels and improve the transfer of ideas from the science base. Changes following the recent DTI reviews will aim to enhance the Department's capability to help drive up productivity. We will maintain and enhance the drive towards higher value added manufacturing exploiting the best of modern technology and supporting well-paid jobs. We are about to recruit by open competition a new Director General for science and technology who will be responsible for technology transfer particularly into manufacturing.

Best Practice

  30.  We are helping established industries to modernise by promoting lean manufacturing, best practice, the improvement of skills and supply chain development. In the automotive sector the Society of Motor Manufacturers and Traders Industry Forum has recruited over 40 UK engineers and trained them in process improvement techniques. It has completed more than 600 activities in over 350 companies (predominantly small and medium sized enterprises) in the automotive sectors. The DTI has provided £9.8 million to support the development and products of the Industry Forum, out of total costs of £34 million. The results of companies undertaking master class activities have included a 30 per cent average increase in labour productivity, and a 25 per cent average reduction in things not right first time. Comparable benefits are being achieved in other key sectors as similar techniques are applied in aerospace, chemicals, metals and oil and gas.

  31.  The CBI-led Fit for the Future Campaign, which DTI supports, provides a focal point for UK best practice activities to increase productivity at a national, regional and local level. The Fit for the Future campaign promotes the best practice message more widely between organisations, encouraging individuals and organisations to swap ideas. It signposts companies to valuable sources of information and advice and helps raise the profile of their best practice activities. The campaign is building a network of partner organisations delivering best practice programmes and initiatives. Within the best practice campaign, we are encouraging joint approaches to developing high-performance working practices through our support for partnership in the workplace. At the Manufacturing Summit in December 2001 the Secretary of State for Trade and Industry announced new investment of £20 million to help take forward the joint CBI/TUC work on productivity. The money will go towards an expansion of the Partnership Fund to help employers and employees work together and promote the lessons learnt, and to extend further the reach of the Industry Forum techniques to additional manufacturing firms.


  32.  Success in manufacturing comes from constantly innovating, investing in new products, new designs and materials and new production technologies. Exploitation of the UK's strong science base is an important means of achieving this. Expenditure on the science base has risen from £1.4 billion in 1996-97 to just under £2 billion in 2002-03. We have put a major effort into measures to turn more scientific ideas into commercial success. It is expected that the University Challenge seed funds will increase the number of research discoveries that are exploited commercially, thus helping to move companies up the value added chain.

  33.  Although the specific detail will be looked at as part of the follow-up work of the Business Support Review, the Department offers a number of schemes which encourage industry to develop and take up new technology:

    —  LINK: promotes partnership in pre-competitive research between industry and the research base;

    —  SMART: provides grants to help SMEs to utilise technology and develop innovative products and processes;

    —  Teaching Company Scheme: facilitates the establishment of project-based partnerships between the science base and companies using graduates;

    —  Faraday Partnerships: promotes collaboration between industry, Research and Technology Organisations and universities;

    —  International Technology Service: helps firms become aware of new technological developments and management practices from across the world.

  34.  DTI also supports sector based research and technology programmes. For example, the DTI's civil aeronautics research programme, worth £20 million annually, works in partnership with the industry, research organisations and academia to improve the competitiveness and sustainability of the sector. The programme supports research and technology into wing design for large civil aircraft (where the UK has world-leading capability), aero-engines (giving the UK a capability in large civil turbofans matched only by one US company) and for mechanical and avionic sub-systems (such as landing gear, cockpit and flight management systems) where the UK industry is strong, supplying both Airbus and Boeing.

  35.  DTI also helps develop new industries. Assisted by Government policy, the UK is a world leader in biotechnology, along with the US and Germany. The biotech sector already employs around 20,000 people in some 300 companies—that number is expected to increase four-fold in the next 10 years. Ensuring the UK has a strong capability to exploit biotechnology through manufacturing is key to maintaining our leadership in this important sector.

  36.  In recognition of the crucial role R&D plays in the innovation process, the Government has introduced an R&D Tax Credit for small firms worth £150 million a year. This offers a super-deduction on qualifying R&D expenditure equivalent to 150 per cent of actual spend, thereby reducing tax. For companies not in profit, the benefit is payable as a cash payment of £24 for every £100 spent on qualifying R&D. The Chancellor has also announced that a volume-based R&D tax credit for large companies will be introduced in the 2002 Budget to further encourage greater levels of R&D activity.

Regional Investment

  37.  We have established nine Regional Development Agencies in England, to harness regional knowledge and initiative. From 1 April 2002 they will have targets to increase productivity, innovation, enterprise and investment in their regions, in ways that depend on the specific strengths and weaknesses of each region. As an example of cluster policy, four RDAs, led by the East Midlands, are working with the Motorsports Industry Association and DTI Automotive Directorate to develop a joint strategy to promote the sector and to ensure it maintains its international expertise through capitalising on the supply chain linkages, facilitating technology transfer and the diffusion of innovation, spreading best practice across other sectors and exploiting commercial spin-offs. In Rotherham, Yorkshire Forward have been working with Sheffield University and Boeing to establish the Advanced Manufacturing Park as a base for Boeing's worldwide research in advanced alloys for the aerospace industry.

  38.  In partnership with RDAs and the Small Business Service, a Manufacturing Advisory Service (MAS) is being set up with two main components. Firstly, Regional Centres for Manufacturing Excellence (RCME) are being established in every English region and in Wales to provide hands-on advice, support and practical assistance to local manufacturers. Secondly, a national network of Centres of Expertise in Manufacturing is being established to support the introduction of best manufacturing practices, methods, processes and technologies. The MAS will also network with other complementary activities such as the Industry Fora programmes. It will provide guidance to appropriate sources of help to meet manufacturers' skills and training requirements, working closely with the Centres of Vocational Excellence and New Technology Institutes which are being developed by the Department for Education and Skills.

  39.  Through the Small Business Service, we are establishing Regional Venture Capital Funds in every English region, operating as public/private partnerships. The Government is investing up to £80 million and the European Investment Fund up to £53.5 million. Taking account of private sector funding, the Government expects that the funds will provide up to £235 million of extra finance for small firms. Two funds started operating in January 2002 and the majority of the remaining funds should be up and running by the end of this financial year; they will help SMEs with growth potential, including manufacturers, by increasing access to new, commercially run, small scale venture capital funding, which was not previously available from commercial sources.

  40.  In addition to this venture capital support for investors, Regional Selective Assistance (RSA) provided about £220 million in 2000-01 of direct funding in Great Britain (including the Devolved Administrations) for capital investment and jobs in the Assisted Areas. About 90 per cent of all RSA offers accepted by value go to the manufacturing sector. Since 2000, RSA has been refocused more on high quality, knowledge-based projects, with skilled jobs. Recent success stories of investment procured by RSA include:

    —  expansion of the Nissan car plant at Sunderland for the production of the new Primera and Micra ranges;

    —  a new speciality chemical facility on Humberside by Nippon Gohsei;

    —  the modernisation of a copper tube manufacturing facility in Bilston, West Midlands;

    —  the Atmel semiconductor wafer fabrication facility in North Tyneside;

    —  BMW's new engine facility at Hams Hall, West Midlands.

  41.  As a general guide, we expect on average every £1 million of RSA to lever in £10 million of private sector investment and create or safeguard 200 jobs. In the four years 1997-20 around 3,000 companies accepted offers of RSA in support of proposed investment of £6.5 billion, estimated to create or safeguard 135,000 jobs.

  42.  Complementing these measures, Invest UK promotes knowledge-based inward investment and provides assistance on innovation and other investment issues to help retain and further expand existing investment from overseas and multinational companies. UNCTAD[6] figures released in January 2002 showed that Britain was the world's second most popular destination for inward investment last year, and number one in Europe.

  43.  Working with its UK network partners, Invest UK provides information about starting or expanding a business in Britain, including details of locations, financial incentives, product sectors, availability of labour, employee costs and skills, and tax. It also helps to find suppliers and deal with utilities and planning regulations. Its role can vary significantly, from making initial contacts abroad, to helping a company manage the whole process of setting up or expanding its business.

  44.  International trade enables manufacturers to increase the potential markets for their products, and to benefit from resulting productivity gains. Trade Partners UK spends some £67 million per annum in supporting UK business to engage in international trade and investment, through for example attendance at international trade fairs, participation in overseas missions and provision of market and sectoral information, much of which is focused on manufacturing industry. Trade Partners UK is currently evaluating the impact of its activity on individual business performance.


  45.  Modern manufacturing demands people with high-level skills who can adapt quickly to changing requirements. Success in delivering those skills will depend on joint action from Government, employers and individuals: all must be actively engaged in skills development, which is an essential pre-condition for sustainable economic success. Individuals will need to raise their level of skills and to be prepared to adapt them, when required, over their whole lifetime. We have created new services to provide timely and flexible solutions to support this change through, for example, Ufi/learndirect.

  46.  We have already made a lot of progress. Standards are already being raised in schools, colleges and universities and the reform of the 14-plus curriculum is particularly important if we are to provide technical and vocational careers to manufacturing industry. The new Learning and Skills Council and its 47 Local Learning and Skills Councils provide a strong voice for employers in the planning and delivery of post-16 learning. They work with a range of partners including the Small Business Service, National Training Organisations/Sector Skills Councils, local authorities, Regional Development Agencies and the Employment Service. The introduction of new Sector Skills Councils to replace the current National Training Organisations will ensure that the needs of specific sectors, including the manufacturing sectors, are factored into the decisions of all the key players in education and training, and are addressed by all Government Departments.

  47.  A number of key specific initiatives support manufacturing. The network that promotes Science, Technology and Maths in schools is being strengthened with funding of £6 million over three years and the Modern Apprenticeships programme today has 223,000 young people undertaking apprenticeships. In 2000-01 engineering manufacturing was one of the top five most attractive sectors with 8 per cent of new trainees.

  48.  To drive up the quality of the workforce the Government is also working with employers and women scientists and engineers to increase the recruitment and retention of women in UK research, development and manufacturing.

  49.  New Technology Institutes and Centres of Vocational Excellence are being created to provide courses mainly at technician level, bringing together teaching and skills development with work. They will work closely with the Manufacturing Advisory Service to identify and target real need amongst manufacturers.

  50.  The Learning Skills Council is currently running a number of workforce development pilots based in specific sectors of industry including the automotive sector. The Automotive Skills task force in the West Midlands is designed to attract new entrants (from school, FE and HE); upskill the existing workforce while maintaining quality throughout the supply chain; and meet the skills demands of expansion and innovation. To date the task force has improved the responsiveness of further and higher education institutions through "preferred supplier" arrangements. It has also established an active dialogue between FE colleges and employers and improved skills analysis through a clear regional focus, together with effective liaison with national bodies such as the National Training Organisation for Engineering Manufacture (EMTA).

  51.  The Government also recognises that more must be done to raise demand from employers and individuals for workforce development. The recent Performance and Innovation Unit report on workforce development proposed a much more demand-led system and assessed a number of policy measures to take this forward. A detailed action plan setting out agreed policy will be published in the summer.


  52.  At the Manufacturing Summit in December there was a consensus between government, industry and the trade unions on a vision for the future of manufacturing, focusing on high skill and high value added activities. All the partners agreed on the need to work together to drive up productivity and competitiveness.

  53.  The United Kingdom has many highly successful manufacturing businesses and the potential to create many more. In automotive, Britain has the two most productive car plants in Europe, the most productive truck plant, and is the world centre for the production of Formula One racing cars. The sector is supported by high technology steel production—70 per cent of steels used in cars today did not exist 10 years ago. In the aircraft sector, Rolls-Royce is one of two world leaders in its field. Since its formation 30 years ago, Airbus has risen to be one of the only two large civil aircraft manufacturers and it recorded 53 per cent of total orders in 2001. In Britain we design and manufacture the wings for the whole range of Airbus aircraft. We have world leading companies in key areas of electronics, pharmaceuticals, biotechnology, food production, technical textiles and boat building.

  54.  We need a successful manufacturing sector to create and sustain well-paid jobs, to sustain exports and prosperity, and to support our service industries. The Government's policies are based on partnership with industry and unions and are aimed at fulfilling our manufacturing potential.

Annex A: Factors influencing productivity, by sector
Percentage of whole economy (1995) Average annual percentage growth (1991-2001 q3) R&D as per cent of value added (average 1991-2000) Percentage of employees with degrees
Electrical and optical2.78 5.06.618.8
—of which computers and office equipment 0.5115.55.5 27.5
—communication equipment, TV, radio 0.795.212.9 20.9
Chemicals and man made fibres2.39 3.118.526.4
—of which pharmaceuticals0.68 7.144.2n/a
Plastic and rubber products1.06
Transport equipment2.04 1.213.411.0
Publishing, printing, paper and pulp2.75 0.50.3<19.4
Food, drink and tobacco2.85
Non-metallic minerals0.81
Basic and fabricated metals2.52 -
Machinery and equipment1.92 -
Textiles1.07-4.0 0.4<8.5
Manufacturing total/average21.85

  Source: DTI calculations from ONS data.

Annex B: Relative output per hour worked by sector, 1999 (UK = 100)
USFrance Germany
Manufacturing155132 129
Electrical and Electronic Equipment273 145135
Wood products218169 240
Petroleum products210 21892
Basic metals198148 166
Chemicals169141 104
Mineral products168 142121
Textiles, clothing and footwear159 196129
Motor vehicles150200 111
Machinery146107 123
Rubber and plastics140 119111
Paper, printing and publishing139 90115
Miscellaneous manufacturing138 125136
Food, drink and tobacco136 10892
Instruments133129 125
Metal products100160 138
Other transport equipment100 109140
Office equipment 161
Market economy139122 119

  Source: NIESR.

1   Pre-Budget Report 2001, HM Treasury. Back

2   O'Mahony, M and de Boer, W, Britain's Relative Productivity Performance: Updates to 1999, NIESR, forthcoming (2002). Back

3   UK Competitiveness Indicators: Second Edition, DTI, February 2001. Back

4   See for example, Blundell, Griffith and Van Reenam: Dynamic Count Data models of technological innovation. The Economic Journal, 105, March 1995, and Nickell: Competition and Corporate Performance, Journal of Political Economy, 104(4), 1996. Back

5   Johnson S, and Winterton J, Management Skills, Skills Task Force Research Paper 3, 1999; Bosworth D, Empirical Evidence of Management Skills in the UK, Skills Task Force Research Paper 18, 1999. Back

6   UNCTAD Press Release, 21 January 2002-FDI Downturn in 2001 Touches Almost All Regions. Ref: TAD/INS/PR36. Back

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