Table of Contents
Summary
The new Industrial Strategy is an opportunity for the UK to approach economic policy in a way that it has rarely done. Industrial strategy is essential, not just to increase economic growth, but to direct that growth towards other national objectives, particularly national security.
Doing industrial strategy well is challenging. To succeed, the British state must adopt an approach that, by many measures, it is not yet fully equipped to deliver. In our response, we highlight the importance of building state capacity to identify opportunities for growth. We also make the case that the government will need to make the most of external expertise if it is to succeed.
Choosing subsectors and technologies with the greatest opportunity for the UK will be a challenge. A successful strategy will require making tough decisions and navigating complex trade-offs. We argue that national security must be a central priority in these decisions, alongside the goal of driving economic growth.
We have not conducted a comprehensive analysis of all the potential subsectors the industrial strategy could prioritise. However, UK Day One’s research suggests that there are particularly strong opportunities in AI and advanced nuclear.
The industrial strategy should make use of all government levers to address barriers that stand in the way of growth. Our growth survey highlighted reforms in planning, energy, high-skilled migration, and the UK’s trade relationship with the EU as priorities. Our research also suggests regulatory innovation will be an important tool for government to accelerate growth in emerging sectors.
For an industrial strategy to succeed, government decision-making must align with its objectives. To achieve this, we recommend empowering the Industrial Strategy Council to respond to major government announcements, particularly fiscal events.
Finally, we note the peculiar omission of businesses from the theory of change, arguing that a successful industrial strategy is one that enables the next generation of large, globally-competitive British firms to scale up and thrive.
Developing State Capacity to Implement the Industrial Strategy
This section responds to questions one, two and three in the green paper.
Recommendation: The government needs to rapidly build state capacity to execute industrial strategy.
The UK has a poor track record of executing industrial strategy. At times, it abandoned the concept entirely; at others, attempts were made but delivered limited success and notable failures. However, these past shortcomings do not mean industrial strategy cannot succeed. Many countries, including Germany, Taiwan, France, the United States, and China, have implemented strategies that spurred economic growth, secured leadership in emerging sectors, and strengthened national security.
The green paper published by government on the 24th of October is a good start. We welcome the initial choice of sectors by government. In particular, the inclusion of financial services and defence is positive, when compared to the May government’s industrial strategy. These are two sectors in which the UK has considerable strengths and ones we should continue supporting.
Identifying more specific subsectors and technologies will be challenging, as will implementing measures to support the overall strategy. Executing industrial strategy is a skill that must be learnt. It is one of the most challenging areas for a government, which is part of the reason that some people oppose it entirely. The government must urgently build its capability if it is to ensure its industrial strategy succeeds and endures. Government can build this capacity by (1) recruiting external technical experts to lead sector strategies and allocate funding, and (2) strengthening analytical capabilities within departments like DBT to better understand markets, supply chains, and technologies.
Recommendation: The government should learn from the ‘Programme Manager’ approach taken by ARIA and recruit external technical experts to lead sector plans and allocate industrial strategy funding.
Industrial strategy requires placing bets on emerging technologies and subsectors. This requires not only deep knowledge of specific areas but also the judgement to identify new opportunities within them. Contrary to some criticisms of industrial strategy, the government doesn’t need to ‘beat’ the market for industrial strategy to be successful. Instead, it can focus on finding productive investments that are undersupplied by the market and utilise its unique authority in areas like regulation. However, achieving this requires expertise within government that is comparable with that found in the private sector.
The government should learn from how the private sector spots new opportunities in emerging sectors. In particular, it should learn from the model of venture capital. Many industrial strategy decisions cannot be taken on the basis of economic cost-benefit analysis, or a similar process. Relying on those processes will lead to conservative decision-making, leave the government vulnerable to capture by powerful incumbent stakeholders, and result in the UK missing out on some of the highest-value opportunities. Instead, the government should learn from the ‘Programme Manager’ approach taken by ARIA, which recognises the importance of good judgement in making decisions about novel technologies.
Sector strategies should be led by external, senior, talented, and technical individuals. The government has already adopted this approach for the AI sector, where industry expert and investor, Matt Clifford, is leading a sector review: the AI Opportunities Action Plan. The government should replicate this approach in the development of other sector plans. These individuals should have strong technical expertise, as well as the authority and prestige to inspire action.
The implementation of sector strategies should be carried out by Programme Managers within government. The government should put aside a significant proportion of industrial strategy-related funding to be allocated by Programme Managers. Success depends on recruiting individuals with the necessary experience and talent, which will require offering competitive salaries and granting them the authority to make decisions. For some sectors, these Programme Managers could be embedded in existing institutions. In others, new institutions may be needed, such as an Advanced Procurement Agency to support innovation in health sciences and defence.
Recommendation: The government should build analytical capability, particularly in DBT.
Decision-makers need to be supported by technical teams with the necessary skills to understand businesses, markets, supply chains, and technologies. The best private-sector investment teams often include engineers and scientists who combine deep technical knowledge with a clear understanding of how technology impacts the market.
The ability to conduct market analysis, supply chain mapping, or even read a financial statement is too rare among civil servants. Meanwhile these skills are bread and butter for analysts who work in investment firms. The government should consider how it can build these skills within relevant departments, particularly within DBT. This could include secondments from regulators (such as the CMA or FCA) and the financial sector.
Selecting Subsectors & Technologies
This section responds to questions four, five, and six in the green paper.
Recommendation: The choice of subsectors should be driven by national security objectives as well as growth. To support this, the Chancellor of the Duchy of Lancaster should be involved in industrial strategy governance.
The Green Paper includes an objective to ‘Promote key sectors in the economy which drive growth and strengthen economic security’. Economic and national security considerations should help guide the choice of subsectors, supported by integrated economic, technological and security analysis. For example, the industrial strategy should learn from the analysis that supports the government’s Critical Technologies framework to identify which technologies we wish to ‘own’ in the UK.
We believe that security should be the key ‘secondary’ objective for industrial strategy alongside growth. We are concerned that the objectives outlined – including decarbonisation and regional growth– are too diffuse. Instead, the industrial strategy should be sharply focused on maximising economic prosperity and security. A regional growth objective is duplicative of the overall growth objective: we do not believe success towards one metric will be possible without the other. For example, national growth will require improving productivity in Britain’s second-tier cities. Meanwhile, our net zero objective should be treated as a ‘constraint’ against these objectives, rather than something industrial strategy looks to optimise.
Achieving this will require top-level involvement by security departments. We recommend that the Chancellor of the Duchy of Lancaster play a role in industrial strategy governance, given the Cabinet Office’s responsibilities for national security, including implementation of the National Security & Investment Act. To align growth and security objectives, ‘economic’ departments such as DBT and DSIT must also upgrade their security capability. This will likely involve increasing the number of staff with higher levels of security clearance.
Recommendation: The industrial strategy should help the UK to ‘win’ in markets that are not yet mature. We believe AI and advanced nuclear are particularly strong candidates that are not currently explicitly identified in the Green Paper.
The industrial strategy should help the UK to ‘win’ in markets that are not yet established but that have the potential for huge scale. Through the work of UK Day One, we have worked on analysis that suggests the following technologies have particular promise:
AI is a general purpose technology with the potential to power enormous growth, as well as significant national security implications. The UK is well positioned to capture some of the benefits of the AI revolution, in areas such as AI for science, AI assurance technologies, and chip design. To support the growth of the AI sector, and the adoption of AI across the economy, the government should address barriers to computing infrastructure, talent and regulatory approvals. It should also use spending on R&D, procurement and data infrastructure to support AI innovation. More detailed recommendations can be found in UK Day One’s briefing on AI Industrial Strategy.
Advanced nuclear technologies, like other clean energy technologies, are going through their own revolution. We believe the UK is well-placed to capture the benefits of advanced nuclear, relative to some other clean energy technologies that are more mature. For example, Rolls-Royce is one of a handful of companies at the forefront of Small Modular Reactor design. Britain also has world-leading strengths in fusion research, anchored by the UK Atomic Energy Authority. Global demand for nuclear power is increasing rapidly, with major companies and countries ramping up investment. We also foresee nuclear capacity being a necessary source of clean firm power for the UK in the future. The UK has an opportunity to get ahead of the curve and capture a significant proportion of this growing market – we should aim to be the best place to develop and deploy nuclear technologies.
Dissolving Barriers to Investment
This section responds to question seven, ten, and eleven in the green paper.
Recommendation: The industrial strategy should drive action to reform planning, reduce energy costs, rebalance the immigration system towards high-skill migration and improve our trading relationship with the EU.
We welcome the Green Paper’s focus on removing barriers to growth. The Paper highlights some of the barriers that stand in the way of companies looking to enter and scale up in the UK like an inadequate planning regime and skills shortages. These barriers to entry and scaling can help explain the decline in dynamism in the UK economy.
UK Day One recently conducted a survey of 44 pro-growth economists, researchers and policy experts to help identify what the new government should do to pursue growth.
Respondents suggested that the government should prioritise its efforts towards overcoming the following key barriers:
Barriers to new housing and infrastructure, to be addressed by planning reform.
High energy costs, which respondents thought would be best addressed by additional investment in nuclear generation.
Barriers to high-skilled migration, given the UK’s potential to attract global talent.
Trading barriers with the EU, which make improving our trade relationship a priority.
Open Innovations conducted a similar survey. Their respondents identified similar priorities, though reforms to fiscal frameworks, including devolution, ranked more highly in their survey. We agree that fiscal devolution is an important intervention to support growth, and enable the development of economic clusters.
Recommendation: Industrial strategy, innovation policy and regulatory innovation need to be closely aligned.
Innovation policies delivered by DSIT need to reflect industrial strategy priorities. This includes directing spending levers, such as the R&D portfolio, towards industrial policy priorities. A greater share of UKRI funding should be explicitly targeted at opportunities with significant potential to advance the UK's economic growth and security objectives. This allocation should complement the funding managed by Programme Managers, as recommended in the first section of this document.
Regulatory reform is one of the government’s most powerful tools to drive growth, and the newly established Regulatory Innovation Office should play a proactive role in removing barriers to growth in key sectors, subsectors, and technologies. Our briefing on the Regulatory Innovation Office sets out how the government can make it a success.
Empowering the Industrial Strategy Council
This section responds to questions thirty, thirty-one, and thirty-two in the green paper.
Recommendation: The Industrial Strategy Council should respond to Fiscal Events and other major announcements, reporting on how government decisions align with the industrial strategy.
The industrial strategy should serve as the government's primary framework for growth policy, with its sectoral priorities shaping decisions across policies like regulatory reform, migration strategy, skills policy, and public spending. To ensure consistency and accountability, the Industrial Strategy Council must have the independence and authority to assess and report on how government actions align with these priorities.
Similar to how the Committee on Climate Change and the Office for Budget Responsibility hold the government accountable for long-term decarbonisation and fiscal sustainability, the Industrial Strategy Council should drive a sustained focus on long-term economic growth and security. To be effective, we recommend the council remains sharply focused on these two core objectives, treating other priorities—such as firm dynamism—as means to achieve growth and security rather than ends in themselves. This oversight will help maintain alignment across government policies and reinforce the industrial strategy's role.
Supporting the Next Generation of Globally-Competitive British Firms
This section responds to questions thirty-three, thirty-four and thirty-five in the green paper.
Recommendation: The theory of change should aim to support the next generation of large, globally-competitive British firms.
Businesses remain the key unit of production. It is odd that the draft logic model targets outcomes such as ‘successful people’ and ‘successful places’ without the key outcome of ‘successful businesses’.The importance of having large, innovative British firms has been underplayed in the past. A truly modern industrial strategy should be sensitive to the consequences of globalisation and explicitly aim to enable the emergence of large, British ‘superstar’ firms in key sectors. A country’s success in a sector can often be reliant on a very small number of globally competitive firms, which anchor a broader sector and supply chain. Therefore, the industrial strategy should explicitly aim to enable the next generation of world-leading British firms. It should demonstrate to company founders, managers and investors the unique advantages of building and scaling their business in Britain.
John Bachelor is an economist working on growth policy. He was an economic policy advisor for the Labour Party, where he covered the treasury, business, energy, transport and science & technology briefs. Before that, he was a civil servant in the Treasury and the Department for BEIS.
Julia Willemyns is a Founding Co-Director of UK DayOne, where she focuses on science and tech policy, high-skilled STEM immigration, and energy infrastructure. She previously worked at Schmidt Futures on science and tech policy and, before that, was an entrepreneur. Julia holds degrees from the University of Oxford and the London School of Economics.