Despite the concerns expressed by successive governments over the competitiveness of the manufacturing sector, manufacturing productivity has consistently lagged behind that of our international competitors for more than twenty years. To add to the problems of the sector, the terrible events of 11 September 2001 in New York had a significant impact on international trade which, amongst other things, could have served to exacerbate the problems of UK manufacturing sectors dependent on export markets. The Committee decided to investigate the underlying reasons for the manufacturing productivity gap and to assess the significance of 11 September on the ability of the sector to compete on international markets.
The key findings of our inquiry are :
i) Most witnesses felt that the events of 11 September reinforced and accelerated a decline in world trade that was already well underway. Although serious in the short term, particularly for sectors such as aerospace and engineering, there should not be any great long-term significance for the competitiveness and productivity of UK manufacturing.
ii) The long-term shortfall in capital investment in UK manufacturing relative to its international competitors is the main obstacle to improving productivity in the sector. Financial institutions need to recognise that investment in manufacturing may require a longer term view than other types of investment. Smaller companies should be more flexible in their approach to securing investment, and more open to the use of venture capital. Government has a central role to play in encouraging greater manufacturing investment. We welcome the introduction of tax credits for R&D and believe that the Government should consider a similar incentive for capital investment.
iii) Considering the scope for further relaxation of the administrative burden imposed on smaller firms by regulation should be a routine element of the process of regulatory assessment.
iv) There is no doubt that the strength of sterling has adversely affected the competitiveness of UK manufacturing in the short term. This will impact upon productivity in the longer term, because many UK firms have chosen to squeeze margins in order to remain competitive, rather than make efficiency savings. The current situation therefore differs from previous periods of exchange rate volatility, which saw industry react by improving productivity.
v) The Government's Manufacturing Strategy, published on 16 May, provides a summary of its activities in support of the industry. But what is needed is a proper focus across the DTI on the importance of manufacturing and its needs. Once that is established, the DTI should lead other government departments to give the priority to the needs of manufacturing that its importance to the economy warrants.