Does an investment in Britain make sense? To Put the Great Back in Britain was the battle cry for the Conservatives under Margaret Thatcher during her tenure as Prime Minister in the 1980’s. Today with the Conservatives back in power, despite all the rhetoric, the way to prosperity for Britain is no great mystery. Growth needs to be driven through a revitalization of exports.
This is easier said then done. As an open trading nation Britain has become complacent over the years especially the time right before the Euro crisis of 2008. The financial meltdown that followed exposed for all to see the weakness of the British economy and its currency. It slowed the rate of investment dramatically.
One of the first imbalances in the British economy is the lack of sufficient medium-sized and smaller more nimble firms. This is particularly evident in the export market. Over 50% of shipping containers that are on their way back to Asia are leaving the country empty. This is happening in a country that at one time controlled 40% of world trade. In 1950 this percentage had dropped to 25%.
Today is barely 2.5% and still dropping. In 1990 Britain was the 5th ranking nation in a league table of goods exporters. This was in line with the size of its economy. Of course the entry of nations like India, China and Brazil have increased competition dramatically. Still Britain has dropped its ranking the most. It is now in 11th place behind Italy, Belgium and even Russia. This reality makes investors both domestically and internationally hesitate.
Britain’s historic links through the Commonwealth and former colonies have not worked in recent years. This is despite the help it has done for a number of other former European mother countries like France. A case in point would be India. In 2012 Britain ranked 19th as an exporter to India. Britain despite its former close contact with its former colony grabbed just 1.5% of the market. This in a nation where all people with a higher education speak English.
Britain still has some major strengths. The trade surplus in services first achieved in 1966 continues and is only second to the United States in total revenue. British investments abroad which exceed foreign investments at home provide a large income surplus. However the growing goods deficit negates these advantages in the overall balance of trade.
In 2012 the goods deficit in Britain exceeded 100 billion pounds (155 billion U.S.) This brought the current account deficit for the year to 59.2 billion British pounds which is the equivalent of -3.8% of GDP. In 2011 the deficit was 22.5 billion pounds or 1.5% of GDP. This trade gap is funded by borrowing which puts more pressure on the British pound.
Since 1998, Britain has run continuous trade deficits due to the increase in demand of consumer goods, paralleling the decline in manufacturing. This is complicated further with the ongoing deterioration of gas and oil production. The biggest trade deficits are with Germany, Norway, the Netherlands, China and Hong Kong. The countries that Britain maintains the largest trade surpluses with are the United States, Australia, Saudi Arabia, and the United Arab Emirates.
Export industries employ more workers and offer better wages than truly domestic industries. These industries are also more productive investing far more in research and development. Selling goods abroad is also a way to expand a market for services.
Britain is unusually welcoming to foreign investments even if it means the sale of flagship industries and businesses. Some of these sales have created public controversies but still were allowed to occur. Examples of this are Harrods, Rolls-Royce, Jaguar Land Rover, Cadbury, Branston, Robertson’s, Weetabix, Newcastle Brown Ale, Camelot (the National Lottery), Boots, Raleigh and Asda.
As stated previously the lack of middle-sized companies make an increase in exports harder to achieve. Of Britain’s 24 million private sector jobs 10 million have jobs in firms with more than 250 employees. If these larger firms want to reach foreign markets they often make a direct investment in these host countries. This of course does not help much with British exports.
Therefore, exchange rates even if they become more favorable for Britain are largely not going to make a dramatic change in increasing exports. This partly explains why 70% of British companies claim they are unaffected by changes in the exchange rate. There is also a low rate of exporting among the country’s small and medium-sized companies. In Britain only 20% of these firms actually export. The European average is 25%. In some nations like Belgium it is as high as 35%.
In order to encourage more exports Britain has established a government agency United Kingdom Trade and Investment (UKTI). It has offices in 96 countries. It is one of the few parts of the British national budget where outlays are increasing rather than falling. It works with middle-sized companies in assisting with bank financing, cooperative efforts among companies, reduced shipping costs and even offers export insurance.
UKTI will help but it alone is not the answer. Britain must move beyond a few premium lines of quality brands It must reinvent itself if the British are to maintain their high standard of living. In order to do that there must be a change in how the export market is viewed by the public at large.
A case in point is the Harry Potter franchise. Warner Brothers Entertainment an American company spent 10 years in Leavesden Britain producing 8 films. Location shots were filmed all over the kingdom. The books have sold over 400 million copies and the franchise itself is worth over 15 billion. Yet a British company could not produce these world famous films? It is time for the government to further encourage the growth of new industries that will allow Britain to compete on a world scale.
Merlin Entertainment Group founded in 1998 is a prime example of what can be done. This company was founded by a British businessman and is still headquartered in Britain. Today in operates over 70 attractions in 10 European countries. It also owns attractions in the United States, Japan, South Korea, China, New Zealand and Australia. It has become the second largest most visited theme park operator in the world after Disney.
Ownership has changed over time but success was achieved by strong partnership arrangements with both public and private sectors. The companies net worth is now over 2.25 billion pounds. This is close to 3.5 billion in American dollars. A major industry already the tourist trade has tremendous future potential in Britain.
British exports have done better in 2013. The nation’s exports of goods and services hit an all time high of 43.2 billion pounds in June, bringing the overall trade deficit down to 1.55 billion for the month. Exports were up 4.9 % in June, rising nearly twice as fast as imports. The growth was powered by cars, chemicals, aircraft and intermediate goods.
A very encouraging sign was the export of British goods for countries outside the EU. The Euro-zone is still mostly mired in recession. The surge amounting to 14.2 billion pounds in June shrank the countries non-EU trade deficit to its lowest level since 2005. Of this, 1.1 billion pounds was attributed to the export of aircraft and works of art including paintings and sculptures. These are areas of trade where Britain can continue to exploit to great advantage. Another encouraging sign is the growth in industrial output. At 1.2% on year to year growth it is now growing faster than at anytime since the beginning of 2011. Manufacturing is now measuring a 2% growth rate.
This pattern would continue in the fall of 2013 where the export of goods would increase by 2% between October and November to a total of 25.3 billion pounds. Imports rose by 0.8 % to 34.8 billion pounds for the same period. To continue to move forward with this trend the British government will need to do more to create an environment that encourages more small scale and medium-sized business growth. This can be done with an even more advantageous tax credit scheme for companies in the export sector.
However, the main issue for many smaller companies will continue to be the difficulty in obtaining credit for business expansion. The government has committed to keep interest rates low at least until unemployment dips below 7 % but the credit crunch has become a major impediment to the growth of business. The lack of lending by the banks despite low interest rates outside the housing market has created a dearth of new firm creation. If one factors in inflation, lending to firms since 2008 is down over 30% and is somewhat accelerating.
Business investment has fallen by a third in 5 years. Research and development spending is near the bottom among developed nations mostly due to the lack of credit. Investment in relation to GDP in Britain is among the lowest throughout the world. It is now in the lowest quartile.
The government will also need to take a second look at a potentially damaging new immigration policy. People with high skill level, business acumen or money ready to invest should be welcomed with open arms regardless of their country of origin. There are a few exceptions of course in matters of national security.
Britain needs to continue to be a place that welcomes investment. However to maintain competitive advantage Britain will need to make further investments in the most important part of the equation. That would be its people. The government has already begun to provide additional resources for vocational training. A number of new university technical schools had already opened in the spring of 2012. Many more were in the planning stage.
The Tory government plan aspires to have 100 schools in operation by 2015. This is a partnership between business and government modeled somewhat after the system that exists in Germany. It will provide the future workforce that the nation will need to maintain a competitive advantage.
On balance, Britain is still a place to invest in if the investment is in a growth industry.