The UK’s new industrial strategy: what can we learn from past policies?

A new report from the Competition and Markets Authority examines the record of industrial policies in the UK and across a range of comparator countries, their effectiveness in boosting productivity, and the characteristics of the UK sectors most likely to drive future economic growth.

Industrial strategies – that is, coordinated policies with the aim of shaping the industrial make-up of an economy – have seen renewed interest from economists and policy-makers alike in recent years.

The United States, for example, passed the CHIPS and Science Act aimed at strengthening its domestic semiconductor industry in 2022. In a much-discussed report last year, Mario Draghi (former prime minister of Italy as well as a previous president of the European Central Bank) argued for a more coherent industrial strategy across the European Union (EU). Meanwhile, the UK government outlined its own vision for a modern industrial strategy in late 2024 in an Industrial Strategy Green Paper, with more details to follow soon.

To help the government design its industrial strategy based on the best available evidence, the Competition and Markets Authority (CMA) has published a new report, analysing the UK’s past industrial policy experience compared with its peers. It also examines the impact of past policies on productivity and other outcomes of interest, and the characteristics of the growth-driving sectors identified in the government’s Green Paper.

The report comes in the wake of several new studies that use new methods or construct new datasets to measure how widespread industrial policies are and to reassess how well historical and contemporary industrial policies have worked.

One study summarises this new line of research as reflecting a richer understanding of the relevant policy toolbox, a more nuanced understanding of likely policy impacts, and a better appreciation of the governance mechanisms needed to implement policies (Juhász et al, 2023).

The CMA’s new report turns the lens onto the UK and some of its peers, and shows that countries vary widely not only in how much they spend on industrial policies, but also in what mix of policies they use. The UK, for example, has tended to devote a larger share of industrial policy spending to tax credits than loans or grants, in comparison with its peers (such as France, Germany and Italy).

The report finds that industrial policies can raise regional and industry productivity and regional employment, but on average these effects are small. But there is significant uncertainty around the estimates, reflecting the large differences in how these policies were designed, and what industries they targeted. Tax credits seem to be more effective on average than other instruments (such as direct capital injections or loans).

In the Green Paper, the government has identified eight ‘growth-driving’ sectors that it sees as central to its new industrial strategy. These are advanced manufacturing, clean energy, creative industries, defence, digital and technology, financial services, life sciences, and professional and business services.

The CMA report highlights that industries in these sectors are generally more productive, dynamic and competitive than the rest of the economy. They are also more important to UK supply chains. This suggests that the new industrial policy is tailored to existing UK strengths.

But the growth-driving sectors have relatively low investment rates, both compared with the rest of the economy and with their international equivalents. Some component industries of these sectors (such as battery manufacturing) show signs of market power (that is, the ability to raise prices above the cost of production).

This highlights the importance of monitoring competitive conditions throughout the implementation of the industrial strategy, enabling new firms to enter and compete in these sectors.

Regionally, the growth-driving sectors are concentrated in London, the South East, parts of the Midlands, Scotland and Northern Ireland. As a result, the effects of the industrial strategy may vary across regions and devolved nations.

The report concludes by examining how other aspects of the government’s wider growth mission are likely to interact with its industrial strategy, highlighting investment and skills as two potential bottlenecks for many sectors. It also underscores the importance of continued monitoring and evaluation, and the collection of better data needed to facilitate them.

How has the UK used industrial policies in the past, and how does this compare with other countries?

The CMA report shows that in the last decade, the use of industrial policies has increased around the world. Compared with some OECD peers, the UK has tended to use industrial policy tools in mining, trade, information and communication technologies, arts and entertainment and the hospitality sector. These choices are likely to have reflected the strategic priorities of the government at the time.

Figure 1 plots spending on different types of industrial policy instruments across countries. As shown, the UK has in the past favoured tax credits over ‘direct’ financial measures, such as grants, guarantees or loans. In contrast, other OECD countries in the sample have relied more heavily on direct tools.

The UK has also given out less in direct subsidies as a share of GDP than most other European countries. This is consistent with other service-focused OECD economies, which generally favour tax credits over direct instruments.

Figure 1: Industrial policy spending across types of instruments, UK and OECD peers, 2019

Source: CMA with data from the OECD Quantifying Industrial Strategies database

How do industrial policies affect productivity, employment and market power?

Governments implement industrial policies to shape the industrial structure of the economy – for example, to increase average productivity, to protect domestic supply chains against geopolitical threats, to decarbonise the economy or to support employment in industries vulnerable to structural change.

Industrial policies are therefore, by definition, targeted at industries that are in some important way different from the rest of the economy. Consequently, when looking at how they affect outcomes like productivity, it is necessary to account for these pre-existing differences.

CMA research finds that on average, industrial policies have tended to target higher productivity industries. Not taking this into account is likely to lead to overestimates of the effect of industrial policies on productivity.

Taking account of selection as far as is possible with the available data, the research shows that industrial policies across the OECD in recent years have had a small, positive effect on targeted sectors over a two-year horizon. Productivity effects may be larger in the long run, but there is a lack of long-run data to test this.

The data show that an increase in a sector’s industrial policy spending as a share of GDP by one percentage point was, on average, followed by a labour productivity increase in the targeted sector of about 0.25% over the following two years (see Figure 2). The proposed new industrial strategy presents an opportunity to improve on the effectiveness of these policies, by targeting productivity specifically.

Figure 2: Effects of industrial policy spending on labour productivity, 2019-22

Source: CMA with data from the Quantifying Industrial Strategy and OECD National Accounts database

Employment, investment or research and development (R&D) spending in targeted sectors did not rise measurably on average over the following two years in response to an increase in industrial policy spending. This may reflect the fact that average effects are estimated over many types of programmes. Comparably, studies of specific programmes – for example, of R&D in US space-related industries during the space race or, more recently, of investment in Chinese shipbuilding – sometimes find stronger evidence of positive impacts.

Market power and concentration (a market being dominated by a small number of firms) also did not seem to change in response to observed industrial policy changes. This suggests that industrial policy and competition policy are not necessarily in conflict. Relatedly, some experts have argued for joint design of competition and industrial policy for both to be effective (Coyle, 2024).

The CMA report also seeks to look beyond the average impacts of industrial policies as a whole and examine how effects vary by industrial policy type. For example, the introduction of a tax credit policy has approximately ten times the effect on productivity that other measures have. This demonstrates the importance of considering specific design choices as the industrial strategy is developed and implemented.

What are the regional impacts of industrial policies?

The report considers the regional effects of industrial policies, taking advantage of the fact that industries are unevenly distributed across regions, and therefore that national policy changes will affect regions differently.

It finds that recent industrial policies increased productivity by a small and marginally statistically significant amount. The introduction of one additional industrial policy measure raised productivity by 0.5%, on average, over the following two years.

At the regional level, industrial policies also have a modest positive effect on local employment, in contrast with what the report finds at the industry level. Workers moving from one region to another in response to a policy change may account for this difference. One study that summarises the state of knowledge on wider place-based policies argues that effective targeting and policy design are key to ensuring value for money (Bartik, 2020).

Mapping out the location of business establishments in the eight growth-driving sectors in the government’s new industrial strategy gives an indication of its likely regional impacts (see Figure 3).

These growth-driving sector firms are predominantly concentrated in London and the South East, and parts of the Midlands, Scotland and Northern Ireland. In contrast, recent subsidies, as a share of the regional economy, were biggest in Wales and Yorkshire and the Humber. The impacts of the new industrial strategy may therefore differ across regions and devolved nations.

Figure 3: Establishment location quotients for the growth-driving sectors, UK regions, 2024

Source: CMA with data from Glass.AI

How do the UK’s growth-driving sectors compare with the rest of the economy?

The UK’s growth-driving sectors are generally more productive, more dynamic and more competitive than the whole-economy average (see Figure 4). But investment rates are generally below average, both compared with the rest of the economy and with their equivalents in peer countries.

Industries within each of the eight growth-driving sectors vary substantially in their competitive dynamics. Some, such as battery manufacturing within the clean energy sector, are more concentrated, with lower firm entry, job reallocation and firm exit rates, as well as lower investment rates than others.

This suggests that careful attention to sector dynamics will be crucial for the success of the new industrial strategy. In the more concentrated industries, the government may, for example, consider additional interventions aimed at increasing dynamism and competition, as argued in the CMA’s Green Paper consultation response.

Figure 4: Market power and concentration measures for the growth-driving sectors, UK, 2019

Source: CMA, with Office for National Statistics business microdata

Analysis of UK supply chains also shows that the growth-driving sectors are more central (which means that they are directly and indirectly connected to more industries), and more upstream (which means that they supply more industries) than the average industry in the economy. High centrality and high ‘upstreamness’ indicate that the chosen sectors are likely to be well-placed to deliver any indirect productivity impacts.

How might the industrial strategy interact with other parts of the growth mission?

Finally, the report reviews the UK’s performance on measures related to the other pillars of the government’s growth mission. Joint analysis of sector-specific (or ‘vertical’) industrial policies and economy-wide (or ‘horizontal’) policies ensures that the different components of the growth mission work towards the same goal.

The analysis pinpoints areas where the UK fares worse than international peers, such as investment and innovation, but also comparative strengths, particularly in services trade and the transition to net-zero carbon emissions. For specific sectors, investment and skills may represent bottlenecks that limit the effectiveness of any new vertical industrial policies. For example, skill shortages are particularly acute in the life sciences.

Where are the current evidence gaps?

There are currently three clear data and evidence gaps. The CMA has already committed to addressing some of these gaps in the coming months through further research, with reports in progress on supply chains, productivity diffusion and high-growth firms.

First, accurate sector definitions are crucial for understanding the industry and regional impacts of an industrial strategy. Standard Industry Classification codes are inherently backward-looking and therefore particularly problematic when trying to understand emerging sectors of the economy (including many of the growth-driving sectors) and high-growth firms.

Second, policy-makers need to be able to track evolving supply chains at a much more granular level than is currently possible. Where key suppliers cannot expand or are not resilient, industrial policies aimed at growing an industry’s productivity or turnover will be less effective. The location of upstream and downstream industries also matters for understanding the geographical impacts of industrial policies.

Finally, the report indicates that specific design choices can make or break industrial policies. Policy-makers may therefore want to consider building data gathering and evaluation directly into the design of their industrial policies. This will make it easier to measure the success of chosen policies and adjust course when necessary.

Where can I find out more?

Industrial policies: new evidence for the UK: New CMA analysis of past industrial policies, their impact on productivity, and the industries in the UK government’s growth-driving sectors.
Invest 2025: the UK’s modern industrial strategy: the UK government Green Paper published in late 2024.
The new economics of industrial policy: Réka Juhász and colleagues’ survey of the emerging evidence on the impact of industrial policy which has contributed to a more nuanced understanding of the issue.
An industrial policy framework for OECD countries: an OECD report providing a new framework for classifying industrial policies and offering some policy recommendations.
Everything everywhere all at once: competition policy and industrial policy choices in an era of structural change: Diane Coyle reflects on the challenges created by the twin transitions towards the digital and green economies, and how to integrate competition and industrial policies more effectively in response to them.
The state of UK competition report 2024: CMA research into how competition is working across the UK economy.