Gerhard Schnyder and Merve Sancak / Jun 2025
Image: Shutterstock
The Labour government is in the process of developing a new industrial strategy, which is meant to deliver the economic growth promised during the election campaign. A Green Paper called Invest 2035: The UK’s Modern Industrial Strategy was submitted to consultation last year.
This is the first attempt at formulating an industrial strategy for the country since then Business Secretary Kwasi Kwarteng decided in March 2021 to abandon his predecessor’s industrial policy. We are promised that ‘this time will be different’, the Invest 2035 Industrial Strategy will be ‘unreservedly pro-business,’ and solve Britain’s low productivity problem.
Yet, does the British government – in its current state – have what it takes to deliver the goals outlined in the industrial strategy?
A key reason to doubt that it does, lies in the fact that these two promises – being unreservedly pro-business and increase productivity – may work at cross-purposes. Somewhat paradoxically, the state’s capacity to improve productivity may be undermined by the government’s rhetorical and ideological commitment to being ‘pro-business.’
Being ‘pro business’ through deregulation?
The government’s stated goals are “to capture a greater share of internationally mobile investment in strategic sectors and spur domestic businesses to boost their investment and scale up their growth – an essential step in achieving sustainable, inclusive and resilient growth.”
Attracting investment while being ‘unreservedly pro-business’ may hint at a well-established ‘industrial strategy,’ namely deregulation. The Green Paper avoids the mention of ‘deregulation’ and the section on regulation hints at a fairly balanced approach that acknowledges the need for some regulation rather than promising a ‘bonfire of red tape’ as politicians on the other side of the aisle have done.
Still, regulation is listed as one of the ‘obstacles’ to investment in the UK. The Green Paper explicitly states that ‘policy must make it simpler and cheaper for companies to scale up and invest in the UK.’
This suggests that the focus will be on easing the ‘regulatory burden’ on businesses including possibly weakening (or ‘streamlining’ in the government’s terms) labour-, health and safety, and crucially environmental regulations – as the ongoing planning reform for instance suggests.
Escaping strict regulation in the public interest and thus taking advantage of ‘regulatory arbitrage’ across countries is a key reason why companies go international in the first place. It is therefore plausible that the government could ‘capture a greater share of internationally mobile investment’ by simply deregulating.
The impact of the unreservedly pro-business approach on productivity
Yet, decades of research on industrial strategy and economic development have shown that industrial strategies based on deregulation can be detrimental to some businesses. Namely to those who seek to adopt a ‘high road’ competitive strategy based on high quality and high productivity – and hence those businesses with the greatest potential to contribute to the government’s stated goal of solving Britain’s productivity problem.
Indeed, deregulating often results in companies choosing the ‘low road’ to competitiveness, i.e. competing on low prices, low quality, low environmental standards, using low wage and low skilled workers. Being ‘pro-business’ by deregulating hence paradoxically leads to undermine companies’ incentives to enhance their productivity.
In contrast, regulations that impose ‘beneficial constraints’ on businesses in the short run, can enhance long-term investment in productivity enhancing activities such as the education and training of workers, technology, and R&D. These constraints thus support ‘high road’ strategies to competitiveness. For instance, labour regulations and relatively high minimum wage or strong labour unions make labour more expensive. But they tend to strengthen workers’ commitment to their employers and reduce labour turnover, which in turn encourages firms to invest in the training of their workforce. Moreover, with labour more expensive, firms cannot afford low productivity, further creating competitive pressures to invest in training, skills, and technology.
Businesses may not like such constraints due to the costs they cause in the short run. Yet, various examples show that such constraints can generate long-term socio-economic benefit for businesses (in terms of competitiveness and quality), their employees (in terms of wages and skills), and the country as a whole (in terms of productivity and growth).
Being ‘anti-business’ to be ‘pro-business’
Therefore, what it takes for a state to implement a productivity enhancing industrial strategy is the willingness and capacity to impose a regulatory framework that rewards firms that invest in quality, innovation, and skills. This also means ‘punishing’ the firms that seek to pursue a ‘low road’ business model based on short-term profits through low wages, low quality, and low safety standards. High regulatory standards put strong competitive pressures on ‘low road’ firms to upgrade their standards or go out of business. While this may prevent certain firms and investors from investing in the UK – namely those seeking quick returns on their investments – it would attract investors with a longer-term horizon. Such ‘patient capital’ providers are what firms need to pursue high road strategies that rely on significant re-investment in the business to increase productivity.
In short, the government’s avowed goal to create an ‘unreservedly pro-business’ environment in the UK is no basis for a successful, productivity enhancing industrial strategy. What is needed instead is a plan to strengthen the state’s willingness and capability to forego investment from ‘low road’ businesses and impose regulations that are ‘anti-business’ in the short run. Such regulations will turn into ‘beneficial constraints’ for those firms willing to make the necessary investments for a high road approach. The government’s determination to be ‘unreservedly pro-business’ may inadvertently mean that it becomes ‘anti-business’ towards those firms it urgently needs to achieve its productivity goals.
