Underinvestment erodes UK knowledge economy and blunts competitive edge

It is somewhat ironic - particularly to non-British observers - that the country that shaped the industrial revolution and the process of globalisation through its outward expansion of empire should have such difficulty in sustaining a competitive knowledge-based society in a global world.

It is somewhat ironic - particularly to non-British observers - that the country that shaped the industrial revolution and the process of globalisation through its outward expansion of empire should have such difficulty in sustaining a competitive knowledge-based society in a global world.

There is little controversy in the fact that labour and capital do not determine competitiveness in the 21st century. A knowledge society relies on the slow and deliberate process of upgrading and developing the capacity to absorb knowledge, to create and upgrade new knowledge, and the ability to efficiently utilise it, whether by firms, individuals, or organisations. In short this is about innovation, and its direct offspring, research and development (R&D).

Promoting innovation is not rocket science. Rather like the principle of growing a fine lawn, it is about consistency of policy over a long period: plant, water and roll for several years. The longer you invest, the finer the lawn: there are no short-cuts.

Firms do not innovate in isolation. They expect - and need - high quality infrastructure and well-trained people, and prefer not to have to pay for these themselves. When governments consistently underinvest in these, firms who have other location choices will move where these resources are available of the right quality and price. Numerous studies have shown that firms need access to the best technologies and minds if they are to remain internationally competitive. Firms often locate R&D facilities in physical proximity to locations with the best knowledge infrastructure.

To be sure, there are advantages of creating competition in the supply of public goods and engaging the private sector in their provision; but successive governments in the UK seem to have gone too far towards shirking the responsibility of the state. Consistent underinvestment has made the UK a less attractive location for firms. Firms are footloose in an era of globalisation. Firms seek the best existing knowledge infrastructure; they do not seek to build it. On most science and technology indicators that measure private and public investment in knowledge creation, Britain has gone from rubbing shoulders with France and Germany to below the OECD average.

A knowledge economy cannot be largely about encouraging firms to be more entrepreneurial, but require complementary and holistic policy actions in the social and economic arena as well. Society functions as a complex system. Knowledge creation, likewise, requires the appropriate milieu, and its efficiency depends upon how well its constituent parts interact together, much like a biological ecosystem

As any runner will know, watching the other contestants in a race does not in itself help you to run faster. But it does help to revise your training strategy. In this matter, the UK government seems conflicted as to whom to match itself against. The US - much admired by UK policy makers - has important lessons, but ultimately, the socio-political milieu in America means that many US policies are of limited applicability here. That new obsession, looking to the East for inspiration also seems misplaced. Not because there is nothing to be learnt, but because China and India (on whom most attention is cast) are at a different, and less relevant, stage of growth. Their socio-political circumstances as well as their economic structure are not comparable. If the UK is indeed in a race with these countries, the situation is even direr than we thought.

There may be cultural reasons for ignoring the obvious. Politically, economically and even sociologically, Britain resembles other northern European states. In addition to a common history, they are also bound by EU institutions which have pulled them closer together. Germany is the UK's largest trading partner. More than 50% of the UK's trade is with its 26 EU partners, up from 40% just a few years ago. It is the trade deficit with the EU that is growing most rapidly. Like Britain, many of these economies have a capitalist outlook that sits comfortably with a social welfare system and a parliamentary democracy, and unlike Britain, many have been systematically investing in building up the appropriate knowledge milieu.

Britain's recession may well be addressed in the short term by the current government's fixation on macro-economic measures. However, greater consumer expenditures do not address the matter of waning competitiveness in the arena of knowledge creation. A long-term solution depends ultimately upon long-term thinking, and consistent investment to achieve this.

Rajneesh Narula is Professor of International Business Regulation at Henley Business School, University of Reading.

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