A ‘Global Britain’ depends on an innovative economy

In 1761, Matthew Boulton[↗] leased thirteen acres at Soho in Handsworth, Birmingham. The thirteen acres gave ample land for the entrepreneurial Boulton to construct a watermill to power machinery for grinding and polishing the metal components of the buttons and buckles he manufactured. Following a few years of manufacturing at the site, he expanded operations into plated silver and eventually he succeeded in establishing the ‘largest hardware manufactory in the world’. 

His need to produce more goods drove a revolutionary development in operations at the Handsworth site. By 1768, Boulton had already developed an experimental steam engine[↗]. James Watt was already ahead in developing his own steam engine, but once Watt arrived in Birmingham from Scotland to see Boulton’s development, the duo utilised their thirst for invention with mass production to completely change the world. 

Watt transported his ‘Kinnel’ engine from Scotland and applied it to providing a regular and consistent flow of water to the Soho site’s mill wheel. Shortly after engines were constructed at the site to power the machinery at Soho. 

Invention drove productivity, which powered growth, which in turn drove prosperity across Britain, enabling the country to translate its new-found wealth into global power and influence. It began, not in London or the Southeast, but through a Scottish-Midlands partnership. The industrial revolution that changed the world was a consequence of the British union. 

As the United Kingdom (UK) endeavours to address the unequal levels of growth and wealth across the regions, divisions exacerbated by the Second World War and the loss of Empire, Boulton’s success in marrying innovation with production provides a handbook to addressing this challenge. 

Currently, the UK economy is one of the most regionally unequal[↗] countries in the industrialised world and one of the most fiscally centralised large countries in the developed world. London and the Southeast prop up the British economy whilst the regions and nations of the UK are more akin to the economies of former Soviet states than the monstrously productive regions of Britain in the 18th century. Weak productivity growth is not a problem unique to the UK, with all G7 nations experiencing post-financial crisis drops in productivity, but Britain’s slowdown in productivity has been sharper than our international peers. The difference[↗] between post- and pre-crisis productivity is 15.6% in the UK in 2016, double the G7 average[↗] of 8.7%. 

As a result of the 2008 financial crisis UK productivity is 20% of pre-crisis levels of national output. Since 1970 productivity was closely following n averaged 2.3% year growth, but since 2008 it has flatlined. Between 2010 and 2019[↗], in the Organisation for Economic Cooperation and Development (OECD), only Greece and Italy registered poorer productivity growth. 

Poor productivity underpins low wages, reduces the tax taken by Her Majesty’s (HM) Treasury to fund better public services and reduces the scope to invest in research and development across the regions – thus hampering innovation across the UK. Comparatively, the labour productivity of Germany and France[↗] has performed well, briefly overtaking the United States (US) in the early 1990s, but having since slipped behind again. 

Britain is a weaker and poorer international actor because of its poor productivity. 

There is no single greater economic challenge for the UK, especially if it seeks to retain its international standing in a more competitive age, remain a key ally in the North Atlantic Treaty Organisation (NATO), and project power in the Indo-Pacific to craft an open international order. To meet the ambitions and vision outlined in the Integrated Review the UK needs to solve the productivity puzzle, which would increase tax take to HM Treasury and enable HM Government to spend more on global projection.

The success of Boulton, which was based on introducing innovative technology to his business operations to drive productivity and growth, gives insight to how this productivity puzzle could be solved. 

The fundamental origins of productivity growth are to be found in innovation. Research and Development (R&D) is a critical component[↗] of driving innovation and allows firms to seize opportunities that materialise from advances in science, to better produce products or perform processes in a more efficient way. 

Countries that have higher public sector R&D tend to have higher private sector R&D. One does not drive out the other but rather stimulates the other – their relationship tends to be complimentary. For every £1 spent by HM Government or charities on biomedical research and private pharmaceutical R&D, the private sector provides[↗] £0.83-£1.07 in extra funding[↗]. Currently, 55%[↗] of R&D comes from the private sector, whilst public sector investment accounts for 26% of the total, with the remaining 14% coming from overseas investment.  

The current Government seems to acknowledge the benefits of R&D. HM Treasury has outlined its target of investing 2.4% of national output on R&D by 2027. This is going to be a key driver of growth in the next decade and subsequent years beyond. Without it, the UK’s low productivity will continue to stifle growth, drive inequality, depress wages and make Britain a poorer economy and weaker power. Without a modernised and competitive economy Britain’s relative power and influence in the world will decline. And that should be unacceptable to any government in power.

Ben Brittain is the Matthew Boulton Associate Fellow in Economic Modernisation at the Council on Geostrategy.