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New industrial capabilities for new economic growth

Published on November 1st 2017

New industrial capabilities for new economic growth: a review of international policy approaches to strengthening value chain capabilities 

Opportunities exist to unlock the competitiveness and innovation potential of UK sectors by supporting the ecology of domestic suppliers, particularly in manufacturing. Supplier firms are not only a source of materials, components, and subsystems, but also of new technologies, knowledge-intensive services, and ideas. However, UK supply chains in a number of sectors remain relatively weak, with lower levels of domestic sourcing than competitor countries. Large disparities exist between the levels of productivity of leading firms and the ‘long tail’ of lower performing firms along the supply chains. A large proportion of firms, particularly SMEs, find it harder to engage in R&D and innovate. Concerns have been raised that, without a healthy ecology of domestic suppliers, technologies developed in the UK might be taken abroad for industrialisation.

The objective of this report is to inform policy efforts, aimed at promoting industrial innovation and competitiveness, by providing insights into international policy practices and approaches. The report discusses key concepts and definitions relevant to understanding the role of domestic suppliers in modern industries, reviews programmes and initiatives in selected countries, and suggests policy implications for the UK.

Characterising a ‘sector’, as a group of large firms with a well-defined set of suppliers runs the risk of oversimplification. Modern industrial systems involve complex interactions and interdependencies between sectors, firms, and technologies. As such, it is increasingly challenging for policy makers to appropriately understand the role of suppliers within and across sectors, the market failures constraining their growth, and the potential for policy interventions to strengthen their capabilities.

In order to establish a common language and key dimensions for analysis, the concept of ‘value chain capabilities’ is introduced. ‘Value chain capabilities’ are defined in the context of this study as the collective ability of firms in the value chain to respond to value capture opportunities and deliver products and services at the specifications required by customers. The concept can be used to unpick two useful dimensions to frame and compare policy interventions: (a) the opportunity areas for increased value capture (opportunity dimension); and (b) the capabilities needed in the value chain to address those opportunity areas (capability dimension).

Four opportunity areas of particular relevance to the UK are highlighted

While this is not an exhaustive list and some overlap exists, this simplified categorisation has proved useful to distinguish different policy missions, and to structure the review of international approaches presented in this report. These areas include: 

  1. Exploiting domestic supply opportunities – value capture from efficiency gains & improved trade balance. Including opportunities for strengthening the domestic supply base in order to help UK sectors reduce delivery times, inventory costs, and supply risks. The CBI estimates that strengthening supply chains could add £30bn to the UK economy by 2025. Specific sectoral opportunities for UK suppliers include an estimated £4bn in automotive, and £4.7bn in nuclear new build projects.
  2. Technology diffusion along value chains – value capture from increased technology adoption. Including opportunities for the ‘long tail of unproductive firms’ across sectors to adopt new more efficient technologies. Regions and countries with higher rates of new technology adoption are likely to become more attractive industrial locations.
  3. Promoting R&D among SMEs in the value chain – value capture from a more inclusive national innovation system. Including opportunities to build R&D partnerships with SMEs, and exploit the potential of these partnerships as new sources of ideas and breakthroughs. Increasing SME engagement in R&D is essential if national targets on research investment are to be achieved.
  4. Enabling the development of the value chains of the future – value capture from industrialisation of emerging technologies. This includes opportunities for strengthening the UK’s ‘industrial commons’, to ensure that future value chains of emergent technologies and sectors where the UK has a leading edge – such as synthetic biology, biopharma, etc. – create a positive economic impact in the UK.

New industrial capabilities for new economic growth: a review of international policy approaches to strengthening value chain capabilities. A report to the Department for Business, Energy and Industrial Strategy (BEIS)

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