Just how bad is the economy? The chancellor, Rachel Reeves, warns that hard choices on tax, spending and borrowing need to be made on 30 October when she delivers the first Labour budget since 2010, so poor is the economic legacy. Phooey, respond those still standing in the shredded Tory party. The economy, clipping along at a growth rate north of 2% this year, is in good shape; it is her giving in to her union “paymasters” that is the problem. She responds that the crisis in public sector pay had to be confronted.
Yet widen the economic lens to the condition of corporate Britain and the scale of its presence in new technologies and the Tory bequest is unambiguously bad. Britain simply does not possess a critical mass of ambitious, sizeable-growth companies at the frontiers of technology capable of leading any private sector investment or growth boom.
We may have an outstanding science research base, multiple entrepreneurial startups and the largest venture capital industry in Europe, but turning those assets into a “global science and technology superpower” eludes us. In tech sector after tech sector British representation is painfully thin or just nonexistent, even while there has been the opportunity for it to be very different.
David Connell and Prof Bobby Reddy, of the Judge Business School at the University of Cambridge, address the issue in an important paper, Selling Less of the Family Silver. The UK, box one shows, has only one software company and one electronics company in the respective global top 100s; one medical device maker in the top 50.; no companies at all in the top 25 listed global biotech firms; just one company in the top 24 scientific and instrument list. If you count the chip designer Arm, now quoted in New York, as British (a stretch), it is our only representative in the semiconductor top 100. We do have two pharmaceutical companies, AstraZeneca and GSK, in the top 50 and five firms in the top 100 chemical companies. But any relief should be qualified: Britain has only eight pure technology businesses quoted on the London stock exchange worth more than £1bn. For an allegedly advanced economy this is pitiful – the measure of the Tory legacy.
Tributes to the tech entrepreneur Mike Lynch, who died when his luxury yacht sank in a freak storm last week, described him as “Britain’s Bill Gates”. He was anything but. Gates remains in control of Microsoft; Lynch had to sell so many shares in his company Autonomy – a potential Microsoft – to attract investment that he had insufficient votes to resist Hewlett-Packard’s knockout $11.7bn offer. It became the subject of a 12-year lawsuit alleging fraud, which Lynch eventually won; but the sale prefigured thousands of others. The AI company DeepMind to Google, Arm to Japan’s SoftBank and Darktrace to the US private equity firm Thoma Bravo – in each case shareholders were offered such a rich premium and the founders had so little control that the result was a foregone conclusion. All in all, 2,300 growth companies were sold abroad between 2013 and 2023. On one estimate, 50 of them could now be members of the FTSE 100. Foreign investment is to be welcomed: but not when it transmutes into pillage.
Any growth economy has to have a critical mass of prime, nationally domiciled companies. It is not just that they invest on their own behalf: they are a crucial market for the innovative goods and services provided by startups and scale-ups, so they don’t have to rely on successive rounds of venture investors for vital cash. Such “primes” are not only a rich source of talent that can be poached to join an attractive startup but also investors in startups of their own accord – corporate venturing. On all these metrics Britain is weak.
A parallel problem is that British stock market values slid for close on 20 years, as pension funds and insurance companies have withdrawn from the market. If publicly quoted shares are valued poorly, so inevitably are shares in private companies – more have to be sold to raise investment, founders lose control and they become vulnerable to foreign takeover.
All this and more must be unravelled if Labour is to reach its ambitious growth targets. The good news is that there is growing recognition in business, finance and even in government that there must be change. If there are insufficient tech companies to provide a ready market for innovative goods and services from inventive startups, then government procurement must step into the breach – as a letter to the prime minister from the Council for Science and Technology argued two years ago supported by the then chief scientific adviser, now science minister, Patrick Vallance. Some suggest that the government could even act as a surrogate venture capitalist, taking equity stakes in the young innovative companies from which it buys.
Equally, the UK needs to boost the pool of risk capital that invests in British public and private companies. The first step is consolidating more than 30,000 tiny pension funds into superfunds capable of taking risks. Beyond that, pension contributions need to rise: and the government will have to find ways of ensuring that British investors are incentivised – or even mandated – to invest in British companies.
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It is a mindset revolution: becoming a developmental state to stay in the front rank of economic nations. Lord Vallance, many other ministers and, I think, Rachel Reeves herself are prepared to make the jump – a review of pensions is already in train and Vallance’s views are on record. The problem is the Treasury, reluctant to let go of its traditional role as bean counter-in-chief. Already it has persuaded Reeves to cancel the £800m exascale quantum computer project at the University of Edinburgh and is ready to lose AstraZeneca’s vaccine production to the US as it quibbles over investment support. I would be astonished if more than 10% of its officials are aware of the desperate data produced by Connell and Reddy. The Treasury should beware. If the economy fails to perform in the next five years because of its evident obstruction, its break-up will become a national necessity. It’s not just Britain’s tech sectors that are in the last chance saloon.
