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The risks of intervention

Government must take care when making industrial policy

By Geoffrey Owen  

Mandatory Credit: Photo by David Cole/REX/Shutterstock (8883403c) Various coloured tablets and pills on top of pill packets Various prescription pills, UK - 24 Feb 2017 There is a massive waste of resources in the number of Prescription drugs which are unused by patients, The cost to the National Health Service (NHS) in the UK is enormous.

Attitudes towards the Brexit vote among science-based firms in the UK have gradually shifted from deep gloom at the start towards a more balanced assessment of what departure from the EU might mean and how it could be turned to the UK’s advantage. There is a view that an active industrial policy—what Theresa May has called a modern industrial strategy—could offset some or all of the disadvantages of non-EU membership. This is reflected, for example, in the recent report by John Bell, the government’s adviser on life sciences. He has suggested that Brexit, if carefully managed, could be used as a catalyst, setting in train a range of new measures that would speed the growth of the pharmaceutical industry in the UK.

The government, for its part, seems set on a more interventionist approach, supporting industries where the UK either has, or could reasonably be expected to develop, a strong competitive position; some observers have suggested that the UK will be freer to provide such support when it is no longer constrained by EU rules on state aids. Yet, as past experience shows only too well, government intervention can be risky. Lessons from history, and from other countries, are relevant in at least four areas.

First, in dealing with particular sectors, the government should be wary of relying too heavily on incumbents. An industry that is dominated by three or four companies is easier for civil servants to interact with than one that is highly fragmented; such companies are familiar with how Whitehall works, and they may have disproportionate influence. Moreover it is rare for an established firm to adopt a radical innovation which might have a disruptive impact on its business. Many of the breakthroughs in sectors such as information technology or biotechnology have come from new entrepreneurial firms which are not locked into current methods and techniques. These are the disrupters that the government should encourage.

Second, the idea that politicians, civil servants and their advisers can identify industries and technologies that will be important in the future should be treated with caution. The government cannot foresee how the economy will evolve over the next 10 or 20 years, or which industries will grow faster than others. No one thought in the 1960s and 1970s that pharmaceuticals would become one of the UK’s most successful industries; the fact that four British companies—Glaxo, Wellcome, Beecham and ICI—emerged as world leaders (now reduced through mergers to two, GlaxoSmithKline and AstraZeneca) was not the product of industrial policy. While it is reasonable for the government to want to build on the country’s existing strengths, this should not be allowed to distort policy in favour of maintaining the status quo.

A third, related point: the government should steer clear of top-down, centrally directed projects where the objective and the route towards it are laid down in advance. Misleading comparisons are sometimes made with the Manhattan atomic bomb project and the Apollo moon landing programme, seen as examples of government-led technological achievements. But in these cases the government was both the sole funder and sole customer; the driving forces were military and political, not economic. A more interesting case is the internet, where the initial research was indeed funded by government, through the Defence Advanced Research Projects Agency (Darpa). But no one imagined that the research would open up, some 20 years later, a huge commercial market. When the National Science Foundation (NSF) gave a grant to the Stanford researchers whose work would eventually result in Google, the aim was to improve the science of information storage and retrieval; there was no commercial motivation. But the grant was flexible enough to allow the scientists to pursue lines of research which proved, in the end, to be hugely profitable. The internet is as much the product of entrepreneurial experimentation as of government planning or support.

Fourth, innovation policy—and this applied to industrial strategy as a whole— should not be used as a vehicle for protecting from British firms being taken over by foreigners. On this front the current Conservative government appears to be moving in a protectionist direction; the threatened takeover of AstraZeneca by Pfizer in 2014 has evidently had a lasting impact on government thinking. But most of the science-based industries which figure in the government’s industrial strategy are global in character, and inward investment can often be a source of strength. When a Japanese company buys a promising British biotechnology firm, as has happened on several occasions recently, the likely result is to inject more capital, and more resources, allowing the acquired firm to accelerate its drug programmes, and to develop its international business. If the UK is to be “open for business” after Brexit, as the government hopes, it must not put obstacles in the way of foreign investors.

Brexit Britain: the future of industry is a publication which examines the future of UK manufacturing through the prism of the recently released Industrial Strategy White Paper. The report features contributions from the likes of Greg Clark MP, Miriam Gonzalez, Richard Graham MP and Frances O’Grady.

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