Innovation in Manufacturing Industry: Select Committee Report

HL Deb 28 November 1991 vol 532 cc1435-77

5.21 p.m.

Viscount Caldecote rose to move, That this House takes note of the Report of the Select Committee on Science and Technology on Innovation in Manufacturing Industry. (1st Report, Session 1990–91, H.L. Paper 18).

The noble Viscount said: My Lords, the investigation and report by the Select Committee on Science and Technology was prompted by the 1985 report of the Select Committee on Overseas Trade. Paragraph 74 of that report reads: The Committee believe that manufacturing is vital to the prosperity of the country and that services, important as they are, are no substitute for manufacturing because they are too heavily dependent upon it, and only 20% are tradeable overseas. The Committee believe that expansion of the manufacturing base is the principal means of achieving growth". In the six years since then there have been significant improvements in the productivity and profitability of manufacturing industry and an increase in output of some 12 per cent. In spite of those improvements the excess of imports over exports of manufactured products is now running at an annual rate of about£5½ billion, virtually the same as in 1985. However, there has been a marked reduction in the balance of payments deficit since the peak of £19½ billion in 1989, due mainly to lower home demand brought about by the recession.

While that is a most welcome improvement, it must be seen against the background of the far higher growth rates of our competitors which started from a much higher base. When the economy expands again the greater demand will suck in imports and once more we shall be in the old balance of payments difficulties with pressure on sterling unless manufacturing industry invests and expands its output much faster. The problem is clearly set out in paragraph 1.1 of the report.

In preparing the report the committee assumed the vital importance of a faster growing and prosperous manufacturing industry. That view, I am glad to say, has now been powerfully supported by the CBI's recent publication Competing with the World's Best. That report states: Either we return to the 'boom or bust' cycle which has plagued British manufacturers certainly since the Second World War, or we invest in our manufacturing base. There is no middle way, and no alternative to a national commitment to make manufacturing the success story of the 1990s". Those are strong and encouraging words. The Engineering Employers' Federation has also recently issued a report, entitled Action for Economic Growth, which gives further support to the CBI view. Therefore there is no need for me to argue that point further.

As the committee recognised, there are many factors which make industry more competitive. Innovation is one of the most important, for only through investment in innovation—both in product and in processes—can industry maintain its competitive edge. That is the only way of breaking the vicious circle described in paragraph 1.1 of the report, for the fact is that as soon as sales of a new product commence it is obsolescent.

The committee defined innovation in manufacturing industry as, the commercial application of knowledge or techniques in new ways or for new ends". We did not therefore debate the need to stimulate invention or new ideas, important as they are, but rather their commercial application. We emphasise that innovation encompasses many disciplines as well as the efficient application of technology. It was on that aspect of innovation that the committee concentrated.

We also recognised that there is much more to technological innovation than research and development and that much successful innovation is of an incremental nature, of improving a product or a process, and also that it is not confined to high technology industry. Nevertheless, as the noble Lord, Lord Weinstock, said in his evidence: Innovation is indispensable in maintaining a successful business … if you do not change as the times, the markets and the products require, you are dead".

The report summarises the conclusive evidence that as a whole our manufacturing industry has not produced a sufficient volume of competitive products over a long period. As the Engineering Employers' Federation report says: The manufacturing sector is efficient but too small".

We have many top class companies which successfully sell a wide range of products in world markets. They have achieved that through, inter alia, wise investment in innovation. Our problem is that we need many more to follow their good example to create a bigger manufacturing base.

The committee therefore concentrated on identifying reasons why too many companies do not invest adequately in innovation. We sought to find ways of removing obstacles and promoting incentives. We took evidence from a wide cross-section of experienced people. We also visited Germany and Italy to gain first-hand knowledge of their practices, particularly regarding the support given to manufacturing industry and its relationship with financial institutions. The committee itself was also widely representative and not, as one commentator suggested, made up mainly of ancient, reactionary peers with an emotional, outmoded attachment to manufacturing.

I turn now to the principal recommendations which emerged from the evidence we received. I emphasise that those conclusions were not picked out of the air; they emerged from the evidence we received. The conclusions are set out in paragraph 9 of the report. In view of the time I shall mention only some of the most important of the recommendations.

The evidence confirmed the widely held view that antipathy to manufacturing industry runs deep in our society. We concluded that the most urgent need is for a change in our culture, a change in attitude towards manufacturing. Government can make a major contribution to stimulating that change and should give a clear and unambiguous lead towards that end. The report urges that Ministers must be heard to proclaim the vital significance of manufacturing industry to our national prosperity on every possible occasion. The DTI should be fully consulted on all aspects of government policy-making in so far as it might affect industry.

But industry's part in the campaign to change attitudes is at least as important. Young people deciding on a career must have evidence, and must perceive, that industry offers a challenging, interesting career, I financially rewarding and with opportunities for advancement as good as in any other field.

Industry's contacts with schools have markedly improved over the past decade, but much more needs to be done. Already many charities are working effectively in this field. But their impact is severely limited by lack of financial resources. We recommend in the report that Government should give financial support to this important educative work. I am sorry to say that that is one of the many recommendations that were turned down. I shall come to that point later.

Although the Government should provide a measure of selective support in this and in other ways, and must create the best climate for innovation, remove obstacles and create incentives, the main action is in industry. Therefore in paragraph 9.24 and onwards the report urges all companies to seek out and implement the best practice, emphasising that it is essential to cultivate a positive and enthusiastic attitude to innovation led by the chairman and chief executive, supported by the board. It is also important to embrace innovative developments from any source, whether within or outside the company, to meet the customers' needs.

The report emphasises too the importance of learning from competitors, and in particular urges British companies to look critically at the respective proportion of profits devoted to dividends and investment. It recommends that companies should pursue dividend policies more in line with those of Japan and Germany. To date in 1991 Germany and Japan have paid out about 30 per cent. of earnings in dividends compared with 70 per cent. in the UK. No wonder there is a shortage of financial resources to invest in innovation, particularly as we identified the high cost of capital as one massive disadvantage faced by British industry compared with our competitor countries. That, combined with the expectation by UK investors of high and relatively quick financial returns, discourages investment in innovation.

We therefore made recommendations to alleviate the problem by improving cash flow to provide more self-generated funds for investment. First, we recommend that 150 per cent. of expenditure on R&D should be exempt from corporation tax as described in paragraph 9.41. In the past such schemes have been opposed, perhaps laughed at, on the ground that experience elsewhere shows that they are ineffective. I was therefore interested to see during a recent visit to Australia that experience there indicates clearly that a tax allowance on those lines has been successful in stimulating investment. We also recommended in the report that companies should be allowed to choose for themselves the rate of depreciation against tax, but only for plant and machinery. Again, that recommendation was not accepted.

Although the report expresses great concern at the shortage of skilled manpower, without which investment in innovation cannot be successful, in view of the ACOST study on the problem we spent little time on it. However, we recommended in paragraphs 9.49 and 9.50 more favourable tax treatment of expenditure on training.

By contrast, the issue of "short termism" and its effect on investment in innovation was the subject of a spirited debate. We concluded that short termism is a real problem in that context and that the current over-emphasis on this year's achievements rather than the long-term prospects of a business is damaging to industry and therefore to the national economy.

The subject is fully covered in paragraphs 9.54 to 9.66 in which we urge companies to ensure that their own procedures, in particular incentive payment schemes, should not encourage a short-term outlook, and that financial institutions should improve their understanding of the workings of industry.

However, the most significant comment relates to takeovers. Paragraph 9.60 states: The proliferation of takeovers in the United Kingdom in the 1980s was a significant factor in creating short-term attitudes".

We noted that in Japan and Germany, where manufacturing industry is strong and efficient, and where a positive balance of overseas trade exists in manufactured products, opposed takeovers are virtually unknown. The evidence that we received in Germany and Italy clearly indicated that the argument often used in favour of takeovers—that the threat is an essential stimulus to good management —is without foundation.

We therefore welcomed the valuable work being done by the Innovation Advisory Board on the subject. But after considerable debate we concluded that effective action is urgently needed to discourage opposed takeover bids. Paragraph 9.63 recommends: Voting rights should be enjoyed only by those shareholders who have held their shares for at least a year".

I fully appreciate that that is a controversial and drastic proposal. It is an indication of the strength of feeling on the committee of the damage being done by excessive deal-driven activity. I shall be very interested to hear in the course of our debate any better proposals for dealing with that serious problem.

In paragraphs 9.67 to 9.86 the report makes a number of recommendations relating to government policy and action by the DTI. But those recommendations must be read in the light of paragraph 9.75 which states: Generally industry is best placed to assess its markets and make decisions about investment in innovation. But, as the DTI has said, industry alone may not always generate sufficient innovation for the national good".

I believe that the spirit of the report is well summarised in a concluding paragraph, paragraph 9.89, which states: Our recommendations will necessarily result in more Government interest and involvement in industry. While the mistakes of the past have caused these ideas to become unfashionable, the pendulum has swung too far the other way. All the evidence shows that the present lack of Government commitment, support and assistance is deeply damaging to industry and to our national interest. We are confident that the changes we recommend would contribute significantly to restoring a better balance between the two extremes of Government policy".

Since that was written there have been three significant developments—one bad and two good. The bad news is the Government's response to the Select Committee's report in Cm.1575. As in all such documents, there is an encouraging start. Paragraph 3 states: The Government warmly welcomes the House of Lords Select Committee's report … the Committee's most valuable work is making an important contribution to changing attitudes".

So far so good, my Lords. However, the response then goes on to turn down every significant recommendation made in the Select Committee's report or ignores them. In some cases the reasoning is far from clear and too often misses the main point of the recommendation. For instance, in paragraph 23 of the response, the rejection of the proposal that companies should be allowed to choose the rate of depreciation of plant and machinery makes no mention of the effect on cash flow for investment, which is the stated objective.

The response seemed to me to be lacking in appreciation of the vital need for action now to promote greater investment in innovation and so to increase output. It shows no awareness of the magnitude of the task before us, in particular in rebuilding important industries which are no longer in the top league. Nor does it seem to appreciate the risks implicit in the necessary innovation.

I give one example. Can we really be satisfied when we produce less than 4 per cent. of the world's output of machine tools whereas West Germany produces 19 per cent. and Japan 23 per cent., observing that virtually everything that we use is either made directly by machine tools or by equipment made by them? The Government seem to believe that market forces must prevail and no support should therefore be given to such important industries. That is in marked contrast to Germany and Japan. It is also at variance with the logic which rightly provides financial inducement to inward investment. Why should similar support not be given to stimulate expansion and investment by British companies? And why is it that when market forces fail to attract adequate investment in housing, support is given through housing associations to provide it? Industry appears to be treated far less generously. The need is clear, for once again during the past week we have seen the German mark very strong with sterling under pressure. A principal reason for that is Germany's strong manufacturing base and its long-standing positive balance of overseas trade compared with our relatively weak position.

Perhaps I may conclude on a brighter note. The Secretary of State for Trade and Industry has made a series of stimulating speeches on the importance of innovation, which he clearly appreciates. But, alas, though his spirit is willing the flesh is weakened by his dogmatic views about reliance on market forces which hold back effective government support for manufacturing industry. Such support, as the report makes clear, is quite distinct from intervention or picking winners.

The second piece of good news is the CBI's recent report, Competing with the World's Best, to which I have already referred. At long last it brings manufacturing industry to the top of the CBI's agenda. It is an excellent document and there is much support in it for the views expressed in the Select Committee's report. The CBI states: By the year 2000 the UK must be a world-class provider of high-quality and cost-competitive products".

It further states that one of the conditions necessary to make that vision of the future become reality is, continuous innovation—to meet the requirements of world markets—in terms of technology, design and product developrnent".

We have moved a long way since the days of the early 1980s when it was confidently asserted that we were a service economy and that manufacturing was of little importance. But the wiser counsels that now prevail have not yet resulted in any effective action being taken to stimulate the massive increase in output which is a sine qua non for a strong economy. As was said by my noble friend Lord Vinson in our debate on the Qucen's Speech, we need a recovery strategy to ensure that growth does not rekindle reflation.

Recently, the Prime Minister, when addressing the Engineering Council, demonstrated his support for engineering and innovation. He said: We need to stay at the leading edge of innovation and technology if we are to achieve for this country what it expects of itself and what we wish to achieve".

That was a powerful and encouraging statement from the Prime Minister. However, that goal can be achieved only by greater investment in innovation. The vital question, to which I hope we shall receive a clear answer tonight, is whether these constructive thoughts are now to be followed up with effective action to stimulate investment and faster growth in manufacturing. Or do the Government still believe that market forces alone, if given free rein, will do the trick? I submit that action on the lines recommended in the 'Select Committee's report will make a good start on the road to lasting prosperity.

Finally, I wish to pay tribute to the members of the committee who worked hard and conscientiously for a long period. I wish to thank too our specialist advisers, Mr. Oscar Roith and Professor Roy Rothwell. Last but by no means least I wish to thank Miss Mary De Groose. our Clerk in the Committee Office. All contributed so much to preparing this very successful report. I commend it to your Lordships and beg to move.

Moved, That this House takes note of the Report of the Select Committee on Science and Technology on Innovation in Manufacturing Industry. (1st Report, Session 1990–91, H.L. Paper 18).—(Viscount Caldecote.)

5.44 p.m.

Lord Butterfield

My Lords, I am delighted to support the noble Viscount in recommending the embracing of the report. I must first plead for your Lordships' indulgence. I have been informed that my wife has slipped in Cambridge and has a black eye—this is perhaps not for Hansard. It would be generous of your Lordships to allow me to withdraw to defend my reputation in that university town before it gets the wrong idea of how she got the black eye.

I wish to assure the noble Viscount that anyone who is involved with young people in this country—I am sorry that there has been such an exit from the Gallery—must wish to find a change of heart towards the reputation of industry in our society. My father manufactured motorcycles but my mother did not like that very much. For a variety of reasons I finally became a doctor. I am not sure whether, if I had stayed in engineering, I would have done as much or more for the country.

The three sentences that I have selected from the report are in its summary of conclusions and recommendations. I make no apology for leaping to that chapter and hope that all noble Lords will take the opportunity of reading the report. The paragraph states: Industry's failure to remain competitive has grave implications for our future prosperity… We must change the national attitudes which lead to the belief that manufacturing is a second class occupation… We must have a concerted campaign to promote greater esteem for manufacturing". Sadly, I slipped out of engineering and entered medicine. I had been fascinated by medicine as a result of the British and international pharmaceutical industry. It is a good example of a highly innovative industry. That move arose by prescribing medicines and being involved in testing new medicines and substances as a research worker. For six years I was chairman of the Medicines Commission, which is the instrument whereby the Medicine Act is bound together. It is indirectly responsible for the maintenance, purity, safety and efficacy of the medicines that we have in this country. I have also been called upon as a consultant by some of our leading pharmaceutical firms. I was for a time chairman of the editorial committee of the Office of Health Economics, concerned with the publication of educational pamphlets.

I am anxious to encourage your Lordships to pay real respect to this remarkable industry. During my professional career it has been up and down. It was low after thalidomide but it has pulled itself up by its bootstraps and is now an industry of which we can be proud. It earns almost £1 billion per year as a positive addition to the balance of payments. It is an industry to which our young people leaving school can go in the expectation of having a clean, rather than dusty, existence and that they will be at the cutting edge of a great deal of science. The industry has many of its roots in our biomedical and scientific history. I shall throw back a glance to William Harvey and the circulation (we are all anxious about diseases of the circulation) and to the Reverend Hale who was the first man to measure blood pressure—and 10 per cent. of the western world is concerned with high blood pressure. More recently was Fleming who discovered penicillin and Chain and Florey who developed it during the war for use against gas gangrene. Since the war there has been Frederick Sanger who won two Nobel prizes for his work which opened up molecular biology. More recently, and rather dazzlingly, were Watson and Crick who worked out the form of the deoxyribonucleic acid molecule.

It is important that I convey to your Lordships the way in which those discoveries have become ingrained in our manufacturing life. My inquiries show that although in population terms we are not as large as the rest of Europe, Japan or the United States, we have almost a quarter of the patents of the present leading 50 worldwide medicines. Taking the more recent new chemical entities—as we call the new substances coming into the medical world—we are able to hold up our heads as 14 per cent. are British developments. Surely it must be clear that anything that we can do to maintain a healthy and thriving industry is bound to be helpful to our balance of payments.

We have an astonishing reputation because we have been able to test those products through the NHS. The fact that the NHS purchases them through the remarkable arrangement which the industry has—the pharmaceutical price regulatory committee—is widely seen overseas as a sign of clear, ethical development. We must do all we can to maintain that reputation for British fair play and striving for the best.

The present situation is that to launch a world product you probably need to salt about £100 million into the research and development to get it through all the tests and bring it forward onto the market. Because that is done in England, you would have the wonderful advantage of a post-marketing surveillance scheme, which is what all the animal rights people should talk about much more. That follows the first 1,000 or more people who are taking a new chemical entity through the medicine's first period of use. It uses the people who benefit from it. I do not wish to describe them as guinea pigs because that has the wrong connotation. However, it allows those people to show up any difficulties or side effects which have not already been picked up in the earlier work carried out with tissues, molecules and animals.

Those costs lead the industry to be extremely anxious that there should be reasonable profitability when something is up and running because those pounds produce the innovatory laboratories which are to be found everywhere.

I remind your Lordships that it is essential that all vice-chancellors and professors should support industry in their universities and polytechnics. About 200,000 young people in 1980 were qualified to study science at university and about 40,000 were so qualified to study at the polytechnics. Whenever the Department of Education and Science cuts back on the potential for developing those young people into first class scientific and technological workers it is indirectly harming the innovative skills of the country.

Today the Cross-Benchers had a remarkable presentation by Helen Sharman who came from Sheffield, where she is a chemist at the university, to tell us about being Britain's first astronaut, or spaceperson. Earlier she was sitting below the Bar. She is a marvellous girl and a great credit to the young women of this country. What did she do while she was in space for eight days? She grew crystals. Why did she do that? She did that because there are no convection currents if there is no movement of the air and it is possible to grow crystals more quickly and more satisfactorily in space than on earth. She grew some biological crystals.

I ask the noble Viscount whether he thinks it is dreadful that that girl acknowledged to us at about 2.40 p.m. that no one has invited her to a government office, or any office, to debrief her on what she had done. I do not know what it cost her to grow crystals in space, but if one has an idea about a problem such as alzheimer's disease or rheumatism, one will wish to grow a crystal of that part of the body for which one has to find a compound to match and to work on. Growing crystals is difficult and unreliable, but Helen Sharman has found a quick way to grow them.

To the noble Viscount and to the other committee members I say that this is a wonderful, holistic report. I hope that it sets the country on fire.

5.55 p.m.

Lord Aldington

My Lords, I am proud to take part in the debate and as I shall show later, I illustrate my support for my noble friend Lord Caldecote. Before I do that, I should like to say to the noble Lord, Lord Butterfield—outside the House he is a noble friend but he is not allowed to be that inside it—that I am sure that the House will understand if he leaves immediately. I certainly understand. The noble Lord's courtesy to me throughout our association at the Leeds Castle Foundation and otherwise has been such that I shall not mind and will well understand if he leaves at once. He carries with him a message from myself and, I am sure, all noble Lords to his wife that we hope she gets well quickly and does not suffer pain.

We heard some wise words from the leader of the medicos. We should remember what he said about the importance of manufacturing industry. He spoke of the success of the pharmaceutical industry. Indeed, it is a global success. He spoke of the support of universities and polytechnics for industry and the links between them. The report said something about that and so shall I, if time permits.

The report on which I have already congratulated my noble friend is most influential. It is full of thoughts and recommendations of long term significance for the British economy and for the future of our manufacturing industry. My noble friend introduced the report in what I thought was an exemplary and very lucid speech. I thank him for that.

I add a few remarks which I believe your Lordships will understand. The report is beautifully laid out and is easy to read. It contains many tables to illustrate the arguments and gives value to students of our economy. When we read Select Committee reports, we should remember that we need to congratulate the chairman, the committee and the clerk. The system of Select Committees has grown over the years. It is extremely valuable to our House. It brings together noble Lords whose skill and experience is not surpassed. Together they are able to bring out the evidence better than most, to consider the implications of the evidence and to submit first class reports which are widely read outside as well as inside the House. They are read by industrialists, bankers, investors, academics and all those engaged in government. I use this opportunity to express my hope that no one will promote any reform of our Select Committee system which will prevent or crab such inquiries.

I have read, as has my noble friend, the Government's reply with interest. I am not as discouraged as he is. Perhaps that is because of my recollection of the Government's reply to the 1985 report. However, like my noble friend I was encouraged greatly by reading the speeches of my right honourable friend the Secretary of State for Trade and Industry. He has made a number of speeches on this and related subjects. I am pleased about what he said. I am encouraged also by the additional funding forecast for purposes related to innovation and the success of industry.

I am not as dismayed as my noble friend is, but, as I have said, that may be because of earlier experiences. Like him, I attach importance to the report of the CBI's manufacturing advice group whose conclusions lie harmoniously with the report and that earlier report, about which I see the noble Lord, Lord Williams, nodding.

Like others of your Lordships, I have never had any doubt about the importance of innovation. I agree, incidentally, with my noble friend, that innovation is more than just research and development. The words of the noble Lord, Lord Weinstock, which are quoted in the report are not new to me, because I have watched him put into practice the thoughts that he expressin there. It may well be that the main reason why our manufacturing base, efficient as it is, is now so much smaller than it needs to be to match the demand for manufactured goods in Britain is that we have had too little innovation and too few innovators.

I shall mention only a few of the report's opinions and recommendations. That does not mean that I do not value them all; I do. First, the paragraphs on national attitudes echo and bring up to date the theme of the 1985 overseas trade report. It continues to puzzle me why the people of Britain as a whole do not realise, hat manufacturing industry is vital to their well-being. The report rightly says that campaigns which were going on at the time of our inquiry—one was started after it—have been ineffective. As a result, even greater effort is needed now. Powerful voices that treated the 1985 report as special pleading are either not heard any more or are not so powerful. I prefer what Ministers are saying today about the importance of manufacturing.

Of the many good things that the report says about industry's role, I want to draw attention to two. Both were mentioned by my noble friend. The first relates to learning, from our competitors overseas and at home. I regard that as important. The second is the value of companies working in partnership with their suppliers and customers. Noble Lords may remember that my noble friend Lord Sieff gave us examples in 1985 of how that partnership had benefited Marks and Spencer and had replaced imports with home produced goods. The noble Lord, Lord Butterfield, today referred to the partnership between the pharmaceutical industry and the NHS.

That is a valuable lesson for all to learn. It is one that was not learnt by the machine tool industry which may explain why it dwindled so much. If it learns it now, that may lead to its recovery.

Short-termism is explained in a well balanced manner on pages 26 and 27. The key must be mutual understanding by financiers and manufacturers of the need for long-term investment in plant and in research and development. They must understand why investment is proposed, why it is not, and what will happen if it is not proposed. The problem of excessive takeovers is better solved by achieving an understanding between financiers and manufacturers than by Government taking more dramatic powers. There I may not be in full agreement with other noble Lords.

The report contains important recommendations on research councils and education into which I shall not go. I know just enough about those topics to realise that I do not know enough to talk about them to your Lordships.

I come now to the DTI's support for innovation and industry. Even at the height of the rhetoric regarding that support, it was always more than was consistent with the market forces only philosophy; but is it enough? It is here that I commend to the Government the lesson given to industry about studying what our competitors do.

The report contains some startling figures about the aid given to industry one way or another by our European competitors. Those figures are to be found in paragraph 7.5. Not all such aids come under the powerful axe of Sir Leon Brittan in the Community. I must remind your Lordships of what the Community is doing with its programmes. It is important. The committee had some comments to make about the support offered by the Community. I believe that the Government accept the recommendation on that point, and I am delighted. However, they are not the recommendations which involve the payment of money, and I believe that that is the key. The report refers to the procedures carried out in Brussels and to the failure of manufacturers in Britain to understand what is on offer to them. We must help Brussels improve procedures and help ourselves by understanding what is available.

The report calls attention to the additionality factor in Community grants. We have had long arguments on that subject. I note that the committee does not go into it other than to mention the attributive rule of the Government. I understand that it is right that any government should wish to have overall control over public expenditure. If they have anticipated receipts from the Community in their expenditure plans, it is right that they do not seek further additionality. They have done it once. I have a feeling that that is not always understood, which is why there are sometimes complaints.

I shall now refer to the importance of doing something to expand our manufacturing base. Doing something does not mean that the Government should throw money about. Industrialists are the only people who can expand our manufacturing base. The only way that it can be done is by increasing the number of innovators, and that is what the report is about. To help innovators to expand it is important that the Government should play a part, with the rest of the nation, in encouraging a greater understanding of the importance of manufacturing. Why must we expand the base? It is for the reason given by my noble friend which is set out in the report and which is discussed over and over again in the House. So long as our manufacturing base is too small—smaller than the demand for manufacturing goods in Britain—so long we shall have a deficit on our balance of trade in manufacturing goods and a deficit in our current account.

I share my noble friend's view of the importance of market forces and the danger of innovation and over-regulation by government. But there are times when market forces should be helped, not by government intervention but by government support. It is that line which has been taken by our competitors; it is that line which has been taken in Germany; it is that line which has been taken in France and it is that line which has been taken in Italy where things are a little different. But we should not neglect the success of those countries, particularly Italy, through their manufacturing industry. The gross national product per person of Italy is very nearly as great as ours despite the fact that a large chunk of south Italy is a poor producer.

Lord Williams of Elvel

My Lords, it is bigger than ours.

Lord Aldington

My Lords, the noble Lord says that it is bigger, but I am satisfied that the latest figures do not support that although it does not matter to my point which I make with as much power as I can. That is why it is important to look at what our competitors do. I have made the case for the importance of manufacturing industry to our economic future. I commend to your Lordships the closing words of the paragraph in the report which refers to expenditure by government. It states: The expenditure (by Government) involved should be regarded as a sound investment by Government in the future prosperity of the United Kingdom on behalf of us all and not as a cost to be reduced to a minimum". That is good advice to the Government but also good advice for us all, for manufacturing companies, research bodies, individuals and companies. I thank my noble friend for the report.

6.11 p.m.

Baroness Denton of Wakefield

My Lords, six months ago I knew very little of the workings of your Lordships' House, but as an outsider I had always admired the excellence of the reports produced by your Lordships' Select Committee on Science and Technology. Once a subject had been for examination then as sure as night follows day, a whole new raft of information emerged and was of enormous value. The report that we are discussing today on innovation in manufacturing chaired by my noble friend Lord Caldecote, serves to confirm this view of excellence. As someone utterly committed to the cause of a manufacturing base for this country and as a director of manufacturing companies, I believe that we are indeed most fortunate that my noble friend and his colleagues chose to examine this issue and did so to such depth.

I agree with my noble friend Lord Aldington about the readability of the report. I found it fascinating. I wonder whether perhaps, with a different cover and title, it could become a bestseller because it deserves to be.

Lord Aldington

My Lords, it is Crown copyright.

Baroness Denton of Wakefield

My Lords, as the report indicates, there is much to do by all involved. The speed of change makes it even more urgent and difficult. Once a company could expect at least a three months' lead from an innovative edge—that is to say, the minimum time that it would take for a competitor to tool up. Now it is days. That was brought home to me most graphically by a French car designer. He went out to do some work in Tokyo, instructed the design and said, "I'm going off to be a tourist. I shall see you in four days when the model is ready". It was pointed out to him that it would be ready the next morning.

I cannot agree with my noble friend's suggestion that the Government should be blamed for the loss of our market share in the machine tool industry. We were there and we lost it. Should we suggest that we actually reward failure with more funds? I agree that the loss of the machine tool market share is crucial. I was pleased to see that your Lordships included marketing in the innovative process. Too often it has been neglected and an advantage lost. The report calls for more technical skills in the financial services area. I would extend that to require much greater linking of literacy and numeracy. Too often our education system seems to produce people who can write or those who can count. Yet as your Lordships know, the innovative process is seamless between the two.

My right honourable friend the Secretary of State for Trade and Industry has himself acknowledged that BS 5750 is not an attention-grabbing name for an ethos of quality which is essential in uplifting our manufacturing. Nor does the frequent use of initials by government departments in that area inspire confidence. I have frequently heard requests for explanation of "EDTEED" answered by "Well, it was the training agency". The training agency did not need explaining. Perhaps we could use initials less frequently because it would make matters easier.

The report identifies that the Government initiatives that already exist could be used more extensively to bring additional resource to the marketing area. It would be an ideal opportunity for the private sector secondees as your Lordships suggest. Those secondees, both ways—though I understand the department's fears that often people who go out stay out—are very important. Industry and government do not yet understand each other. The Cabinet Office's top management course of 24 people (50–50 divided between the private and public sector) is excellent. It would have to be to attract the attendance of the noble Baroness, Lady Blackstone. But it consists of 24 people and it is held only three times a year.

I have seen chairmen of very successful companies become excessively nervous at the prospect of meeting a parliamentary under-secretary whose specialist knowledge of a subject must by definition be less than theirs. The reason for that is a lack of understanding of each role. There must be greater exchanges. In that area it seems that the French are ahead of us. The need for industry, and most of all manufacturing industry, to be better understood, particularly by young people, is rightly identified as crucial to our future. Therefore, it is very good to read evidence from Sir John Harvey-Jones, the one man who more than anyone else has singlehandedly made the business culture look as exciting as it is.

Very little can make the adrenalin flow as fast as closing a successful sales deal or finding your working capital 50 per cent. over the limit. Sir John's BBC2 series was a masterpiece and an example of what can and must be done again. The responsible media played a considerable role in supporting competition in the innovation area. Schemes such as the Engineering Council's "Young Engineer of Britain" and organisations such as Understanding Industry, are growing steadily without heavy resources being thrown at them. They show that children can he fired up. I still recall a school visit to Rover when I worked there. At the end of a very constructive visit the teacher was heard to say, "And this is where you will end up if you do not do your homework". I hope that things are changing.

Industry Year should have been a start and not a project. We have lost five years; indeed, we have given them away. In innovation in larger corporations the garden shed is important. It is important for innovation to thrive; it must get away from the large company corporate culture. It was interesting to watch General Motors trying to handle that. It moved its Saturn project down south away from Michigan and then wondered why it was not working until it discovered that everyone got on the plane on Friday night and returned to Detroit and picked up the culture. The process had to start all over again. Eventually that state of affairs was changed.

On a visit this morning to British Nuclear Fuels in Preston, where I am a director, I was pleased to find one of our own garden shed-based projects, though I hasten to assure noble Lords that it was in fairly high-class buildings. The unique position of BNFL as the only British-owned company with elemental fluorine production capability had been identified. A significant growing market opportunity for fluorine chemicals was identified. There were also opportunities that would reduce the UK's dependence on imports and generate export earnings from bottled fluorine. The initiative has support already with bridgeheads in two British universities; namely, Leicester and Durham. They are setting up centres of excellence. It is highly profitable and brings high added value products. In its own area it has great opportunities, separately managed and moved out from the main culture. In large corporations senior management must give a loose rein and time if innovation is to thrive.

My noble friend's report draws attention to the importance of non-executive directors who are their own men and women. They can be a source of encouragement, wisdom and focus, and ensure that those appointed know the role that they must play is important to the long-term view which will make innovation possible. The executive directors are often much too close to the wood to see the forest never mind the view over the hill.

It is to be hoped that financial institutions will begin to look more closely at the quality of non-executive directors and, indeed, overall management. Now is not the time for government to give more money to industries. They must search for real managements of "A-team" quality to achieve value for money. It would be better if the DTI helped market forces a little and asked one or two of the major institutional shareholders to check the quality of the management of their investments. If senior people need to be changed then they must force the changes. The messages of the report will only be instigated by the best management. Such DTI city conversations will do much to reduce the dreaded short-termism, and institutions and companies will come closer together in the manner which my noble friend Lord Caldecote must know so well from investors in industry.

By focusing attention on the sectors which will bring most national benefit, the DTI will not be asked to pick winners —which the report rejects. However, it will have influence without causing Brussels too much anxiety, although all of us with an interest in today's subject must be anxious about what will happen in the competition area in Europe when the current commissioner's term of office comes to an end.

At this point I should add that in criticising short-termism, industry must be conscious of the number of times it asks its own pension managers to drive through on short-term objectives. Again I argue that extra funding is not the easy answer. It may be seen by drawing a comparison between those industries with a chemistry base—pharmaceutical companies and parts of the large oil companies—that many medium-sized companies have become world-class practitioners, while those with physics and engineering bases coming from nationalised areas and supplying government contracts have on the whole missed the opportunity of becoming world-class players.

It would be unwise not to accept the needs identified in the report. But I hope that no further short-term projects on innovation will be launched. I understand that there are already over 100, and all below critical mass. Much better that existing best practice is spread from large companies to medium-sized companies to make them world class and that overseas experience is shared with medium-sized companies.

I watched Cad Cam put in by large companies to their smaller suppliers uplift the quality levels in quantum leaps. There are 73 factories in the UK employing over 2,000 people; double that number employing between 1,000 and 2,000, and 3,300 with 100 to 500 employees. As the report identifies, the medium companies could change the world.

I have not mentioned education. Others with much greater knowledge than I will do so. However, I must praise the effectiveness of one area of the German intermediate institutions which, although operated by government, allow young graduates to qualify for a PhD or other higher degree while on a five-year contract working on five- to 10-year research programmes funded and driven by industry. Those young people then take their intellect into industry. For me the best form of technology transfer is in a person's brain. We must improve intellect in British industry; that is the answer: not perpetuating the mediocre with more funds.

I hope that today's debate will bring added value to this splendid report and increase awareness of the importance of manufacturing innovations. I hope that it will extend thoughts on innovation to other areas as a pathway to success. I hope that the wife of the noble Lord, Lord Butterfield, is quickly recovered but I am sure that she was as pleased as many others were that the first British person into space was a woman. I am now proudly a member of the Science and Technology Select Committee. It is a privilege that I value.

6.26 p.m.

The Viscount of Oxfuird

My Lords, I too must apologise to the House as I may not be in my place when the debate concludes. I must meet potential overseas customers for my company.

I am sure that the House is grateful to my noble friend Lord Caldecote and his committee for initiating this debate on a subject of great interest to all Members of your Lordships' House. The high calibre of the committee and deeply relevant experience of so many of the industrial witnesses made the report riveting reading from cover to cover. For many months to come the well presented data within the report's appendices will prove an invaluable source to those of us who work within British manufacturing industry.

I was heartened by the emphasis that the report gives to market-led innovation. For most of the past 20 years or so my own time has been taken up in promoting the sale of British manufactured goods in the export markets of the world. Let me make two points from the viewpoint of the exporter.

First, it is enormously encouraging when one returns from an overseas visit with new intelligence regarding the perceived needs of the customer to be listened to by the board and to see resources deployed quickly and responsibly towards fulfilling that requirement. In making that point, I draw your Lordships' attention to the words of Sir Geoffrey Allen who not only emphasised the need for market-led innovation but also highlighted the importance of a proper business plan. Good innovation will yield improved profitability and better overall results for both the innovating company and the end user. A little time spent in quantifying both, before plunging too deeply into an investment which may in time be heavy, is essential.

My second point—again from the point of view of the exporter—concerns the importance of technical salesmanship. The report correctly emphasises the critical importance of trained manpower. Nowhere is that more important than at the sharp end—the customer interface. Too often have I seen a new idea undersold because the negotiating representative had not grasped its true significance or was too obsessed by the cleverness of the technical solution to emphasise the tangible benefits that the product could offer to the business needs of the end user.

Some years ago I was involved in the presentation of a novel technical solution to the problem of handling containerised loads in the Port of Bombay. It was all too easy to present the technical merits of the solution; it was not until the chief engineer of the port realised that by investing some of his scarce resources in the new technology he would significantly improve the productivity and throughput of that port. It was then that I began to make progress. How much easier it is to sell a product that has a really unique selling feature than just a "me too" product.

The report deals at length with the need to create the right environment for change, on the need for improved supplier relationships and on the problems that a cultural disdain for engineering and manufacturing industry presents to British industrialists. There is one graph in the report which I believe is well worth attention. That is the one which forecasts the routes of students for the year 1990. The graph shows that only 15 per cent. of students were interested in the manufacturing industries, whereas approximately 32 per cent. of those students were interested in the world of media.

The path of manufacturing and engineering was, and to quite a large extent still is, perceived as a difficult, uncomfortable route perhaps laden in the past with strikes, protests and to a certain extent the "dark Satanic mills" syndrome. That is not an alluring prospect. There is little sense of eagerness, understanding, fascination and pride promulgated by the media. The media have a responsibility to manufacturing.

I hope that your Lordships will forgive me if I make rather a parochial point about Scotland. In Scotland, the thirst for engineering knowledge has always seemed more acceptable than south of the Border. That legendary figure, the Scottish engineer, used to be found in all corners of the globe making the new technologies happen—indeed, it was not so long ago that I met one at the very bottom of Chile running a specialist lighthouse unit. But why is that? It comes in part from a deep respect for the education process and from a special understanding of the value of trained manpower. That has engendered a real understanding for the need for and the value of change, which lead to greater flexibility and the willingness to work at it.

Having said that, I have to say that I think the report is a little harsh in the way that it deals with the very real changes that have occurred within British industry during the past decade. For the past four years, I have been deeply involved in introducing the concept of total quality management into the company for which I work and also into a number of the supplier companies. It is quite remarkable what a little dedication from the top can achieve in a relatively short time. By listening to and involving all members of an industrial team one can quickly realise and release enthusiasms that have been pent up for years. Naturally that leads to a more flexible approach and to a very real change in attitudes. I believe that that augurs well for the future.

There are so many relevant parts of the report that one is spoilt for choice in those that can be highlighted in a short debate. However, one passage which struck home forcibly to me was the emphasis on the need to learn from others. Perhaps we in British industry have been a 'little too arrogant in our reluctance to exploit new ideas from abroad. Sir Robin Nicholson describes this well as the NIH —the "not invented here"—syndrome. Of course, the other side of the coin is the point already made by my noble friend Lady Denton which has also been made strongly by Sir John Harvey-Jones. We have a wealth of good ideas of our own. It is important to exploit these ourselves, rather than selling them to others abroad.

The report deals at length with the perceived problem of "short termism". In my view, it present a pretty well balanced case. There is the core of a real problem here, but there has been a tendency to use short termism as an excuse to blame the other fellow and not get one's head down to sort the problems out for oneself. I was heartened by the report's confirmation that there seems to be a new realisation in the City and within the investment institutions of the importance of using industrially experienced analysts who really understand the industries that they are researching and who recognise the merits of investing in the short term to achieve a longer-term business gain.

To balance that point, I have to say that we still have some way to go in changing the attitude of some of our leading clearing banks which seem able radically to change their position almost overnight, and wil hdraw that umbrella just when it is most needed. It seems to me that some of the decision makers within the banking community have not seriously researched and understood the industries that the y are supporting. It has been confirmed on the tape tonight that banking complaints for the past year increased by 62 per cent. The problem has led to quite unnecessary anguish for a number of dedicated industrialists who have had to spend more of their energy solving short-term and artificial problems created by unsympathetic banks than on managing the core of their businesses.

The report gives a valuable comparison of fiscal incentives and the cost of capital available in the leading manufacturing nations of the world. Both sides of the case for 100 per cent. capital allowances are fairly presented. I was pleased to see that the committee recommends that companies should be allowed to chose for themselves the rate of depreciation against tax for plant and machinery, without a return to a higher rate of corporation tax. Perhaps we could also return to straight-line depreciation.

I felt that one of the most interesting parts of the report is that which deals with the performance of the Department of Trade and Industry and on the need for a more stable and consistent approach if industry is to benefit from DTI initiatives. The report rightly stresses that industry is usually best placed to make its own decisions and that it is not the province of government to intervene. However, the DTI has a real role in establishing a sympathetic and stable environment to allow it to do so. My own view is that the DTI has made rather more progress in this area than the report acknowledges. Attitudes are changing and the DTI should be given some credit for the role it has taken in establishing the enterprise initiatives, for promoting total quality management and for taking the lead in promoting the need for open systems within the computer-based systems of our industries.

I should like to conclude on a note of hopeful cautiousness. I sense real change swelling up from the grass roots of many of our quite mature British manufacturing enterprises. The report acknowledges the fact that the best British manufacturing companies are among the best in the world—they are not only among the best, they also "head up" the best in Europe. Recently I had a chance to visit some of these companies and also some of those which have not quite made it as yet. I believe that there is a new generation of dedicated business managers. Many of them, like our present Prime Minister and the four who proceeded him, are drawn from a new grammar school educated meritocracy. They are giving, or have given, the leadership to change attitudes, engender flexibility and they lead innovation from the front. I believe that these men will take serious note of the findings and recommendations of the Select Committee and will learn valuable lessons from the report. I shall not go so far as to say that the report should be compulsory reading for all British industrialists, but I suspect that many of them will be eager to read it and to work to implement some of its recommendations.

The committee has presented us with a well-researched and balanced report that contains many valuable lessons for the future. I hope and believe that British industrialists, our academic institutions and the British Government will respond positively and constructively to the well-reasoned recommendations and that these will form the basis for new hope for the future of our industry here in Britain.

6.40 p.m.

Lord Sharp of Grimsdyke

My Lords, I wish to echo the compliments paid by previous speakers to the noble Viscount, Lord Caldecote, for initiating this important debate. I do so from the standpoint of an industrial career spent in part in the United Kingdom with ICI and in part in the United States with Monsanto: both world-class chemical companies. For the last decade I have served as chairman and chief executive officer of Cable & Wireless—a privatised company renowned for its application of leading-edge technology in satellite and fibre-optic communications, and a company of which I have the present honour to be life president.

I therefore welcome the report of the Select Committee and its central conclusion, reaffirmed by my noble friend Lord Caldecote in his opening speech and also by my noble friend Lord Aldington, that a climate in which innovation can more readily flourish is urgently needed. There are, however, other conclusions and recommendations which I cannot so readily endorse, such as preferential rates of interest for innovation. My intervention in this debate has necessarily to be limited, and I will confine myself to just two or three aspects of the committee's deliberations.

The report refers briefly—perhaps too briefly—to short-termism and mergers and the inhibiting effect they have on innovation. The report comments on a publication by Professor Marsh, Professor of Management and Finance at the London Business School, which roundly rejects suggestions of City short-termism. He drew attention to the lack of hard evidence of a short-term bias in share prices. My friend and ex-ICI colleague, Sir John Harvey-Jones, said of Professor Marsh that he, proves conclusively to his satisfaction that there is no such thing as short-termism". Sir John goes on to say in his usual forthright way, and again I quote: I am bound to tell you that he did not prove that to me". I have to say that I entirely agree with Sir John. There is evidence enough for those who wish to find it.

The question of merger and takeover policy and its effect on innovation and efficiency really deserves a debate on its own. I wish here to record my view that reliance on the competition criterion alone, which is currently the merger reference for Her Majesty's Government and for Sir Leon Brittan, is acceptable only in a perfect world.

Unfortunately for the purists, we are dealing in the United Kingdom and in other EC and overseas countries with the economics of imperfect competition and discriminatory administrative, political and shareholding barriers. I am now more persuaded by the view that centres of excellence in research, development and innovation are so rare and precious to this country that relying on the competition criterion alone is not sufficient, and that the deliberations of both the Secretary of State for Trade and Industry and the EC Commission should be obliged to consider the ramifications of any merger on manufacturing efficiency, innovation, research and development.

In recognition of the imperfect character of the market, I point to the fact that in this country some 12 fund managers have such a huge control over the equity of our major companies that their decisions alone could effectively determine the fate of any company under threat of takeover, even though the fund managers themselves do not own a single share.

The report quite rightly dwells on the cultural and historical influences on the general manufacturing environment, leading, as the report puts it, to the common perception of manufacturing as dirty, dull and unrewarding and that the relatively low remuneration and poor recognition of those involved in wealth creation is a deeply-rooted phenomenon". Indeed, the report emphasises in bold black print: It is clear that the importance and value of industry must be more widely recognised if the United Kingdom's innovative record is to improve". Linked to that high-minded assertion is the comment of an eminent witness that the country lacks industrial heroes and, to quote again, that, many of our great leaders of industry deliberately seek to avoid publicity and the high ground". Quite so, and I point to the media, among others, as directly or indirectly being responsible for this state of affairs. I refer in particular to the uniquely British embarrassment in accepting that those industrial leaders, entrepreneurs and innovators who excel at their job in creating wealth and employment should receive a reward commensurate with the high rewards earned by football, golf and tennis professionals, by rock and film stars and even by boxers whose appearance in the ring could last less than three minutes. We now have the British phenomenon that when the annual report of a company reaches the media the first page turned to is that which shows the remuneration of the chairman and highest paid director. Those figures are singled out for media attention. We have only to consider the recent brouhaha concerning the remuneration of senior managers of industry who, through their skills, really create the wealth of this country in contrast to those who inherit it and thereby avoid the critical glare of publicity.

If there was a published list of the wealth and income of all individuals in this country, whether derived from inheritance or ownership of land, property or equity, on the one hand, or derived from earned income only, on the other, I have absolutely no doubt that the remuneration of the chairmen of major manufacturing companies and other senior executives in British industry would come very low down indeed on that list. I apologise for speaking so bluntly, but it really is not possible for your Lordships to agree wholeheartedly to the proposition put forward by the committee that the importance and value of industry must be more widely recognised if at the same time there is an open licence to pillory senior executives on their remuneration.

I believe that successful and efficient management, enterprise and innovation should be highly rewarded. I also believe that mediocrity and failure in high places, in industry as elsewhere, should be appropriately penalised. I have never understood, for example, why senior directors or executives who have demonstrably failed, who are dismissed or resign in consequence, should walk away with huge payments in lieu of service contracts. If there is any revision of the Companies Act I would hope that such payments would be admissible only with shareholders' approval.

Finally, I should like to end on an upbeat note. The report comments on a witness's view that, one of the most surprising things in this country is that we have some of the best examples of industry and some of the worst almost side by side". The Economist magazine in its issue of 7th September this year, in a most informative article, revealed that it had teamed up with the London Business School to rank the world's most successful companies. In order to eliminate differences between capital and labour intensive companies, between debt and equity finance, it concentrated on added value; that is, the measurement of how much more a firm's output is worth than all its inputs of materials, labour and capital. The London Business School/Economist team calculated added value during the decade 1981–1990 for some 2,000 publicly quoted companies, drawn from a Paris-based financial information service. Your Lordships will be interested to learn that of the top 30 of the best and largest companies in the world, the first two were British —number one being Glaxo and number two being Cable & Wireless. An American company came third. Japan and Germany were rare among the top earners.

We have a simple task in front of us. All we have to do is create an environment in which we can bring the rest of British industry up to the efficiency of the top two British companies I have mentioned.

6.50 p.m.

Baroness O'Cathain

My Lords, I greatly welcome the fact that the matters contained in the report of the Select Committee on Science and Technology on Innovation in Manufacturing Industry are being considered this evening. I congratulate the noble Viscount and the members of the Sub-Committee on the immense amount of work undertaken. But I have to say that after a careful reading of the report I have certain anxieties which I would like to air.

I do not believe that lack of industrial innovation is the major problem. We have a long history of great innovation throughout the industrial developments which have taken place over nearly 200 years. Transforming such innovation into marketable products to be sold profitably is the trick that does not yet seem to have been mastered. Technological aptitude is not lacking in this country—quite the reverse, We seem to have an obsession with every new piece of gadgetry. We have more mobile phones in the UK than in the rest of the EC; we had more video recorders per thousand population in the early days of their introduction than in the US or Japan; and we have more home computers per thousand population than any other country. None of us is afraid of technology. Even I at my advanced age I have recently taught myself computer skills, and these few words have been prepared on my little laptop computer. Incidentally, therein lies another problem. Britain, the major developer of computers, has to a large extent lost out on the manufacture and marketing of tiny laptops.

I have used the words "marketable" and "marketing" and I do so advisedly early on in my remarks. To many people marketing comes a long way down the list in the development of an idea. Indeed, the development of an idea through to its launch on the market place is innovation. Sadly, I see that the report has also fallen into the same trap. The very first section of the report lists in paragraph 1.5, the business process or activity, and marketing comes fifth in the list after research, design, development and manufacture. The marketing person should be alongside the designers and engineers in the first place. The good marketing person (I am not talking about an advertising whiz-kid) tells the designers and engineers what the customer wants, or is likely to want, following that person's analysis of trends in the market place.

I am told that sometimes the designer, engineer and marketing person are one and the same—but not that often. That is not at all surprising. Most people have neither the time nor talent to develop such significantly different skills. In over 15 years in manufacturing industry in this country I have only once come upon such a hybrid. I am referring to a design engineer whose business was shot to ribbons by the introduction of VAT on yachts in 1981. He had a small business on the south coast and his only skill was making yachts out of fibreglass. He did not know what to do. His main problem was to try to save the jobs of his employees. By chance his wife said to him one day, "I have done a stint at the local cottage hospital as a voluntary worker trying to help disabled people. With all your design and engineering skills, can't you design and engineer something which will help the wheelchair-bound to have a proper bath rather than rely on hoists, or else putting out the backs of carers?"

That man decided he would be able to transfer his great skills in fibreglass moulding to making such a bath. He did it and marketed it. Not only has it been a worldwide success, but it has been of enormous benefit both to the wheelchair-bound and to carers. I came across that man when I was a judge of the Prince of Wales award scheme for industrial innovation and production. I was gratified to learn that my putting forward of that project won the prize for 1982 and also the prize for the whole decade. He has gone worldwide with it. That is just one example of how a design engineer has good marketing skills.

In my years in manufacturing industry, during my period on the Design Council serving under the chairmanship of the noble Viscount, Lord Caldecote, and also during the time I served on the Engineering Council beside the selfsame noble Viscount (I have to remark that the pool from which one fishes for people to serve on such bodies seems very small), I was struck by the amazing creative talent which went into the conception of prototypes and the enthusiasm with which engineers and designers evolved state-of-the-art technological wonders. But then something went wrong. Often the upshot was that either the product never reached the high street or (slightly less galling but galling, nonetheless) it was subsequently launched by an overseas company which employed the original designers or bought the patents.

The ability of firms to innovate and the capacity of this nation to compete in knowledge-based world markets depend in large measure on the skills of our workforce. It is a pity that the report was published too early to reflect important new developments on the education and training front which will be critical determinants in our future investment in people and in corporate growth and innovation. First, last July the CBI promulgated, and the Government endorsed, new education and training targets. They provide a national framework for action to secure a skilled and competitive workforce of world class standard. Secondly, the National Council for Vocational Qualifications is engaged in a major project which by 1992 will give us recognised standards and portable qualifications applying to all jobs in all sectors at all levels.

Thirdly, in the past month the Secretary of State for Employment launched Investors in People. That sets a rigorous standard of excellence for employers' investment in the training and development of their workforce. Finally and perhaps most importantly, there has been the establishment of 82 training and enterprise councils in England and Wales and 22 local enterprise companies in Scotland. In a bold new initiative the Government have devolved responsibility for vocational education, training and enterprise development to the TECs and LECs, giving employers the lead responsibility for upgrading the local skill base and driving local economic growth and community regeneration. Taken together those ambitious targets—a framework of standards and qualifications, a kitemark of excellence and an employer-led delivery system—represent dramatic changes in our capacity to make the 1990s the skills decade. I suggest the points contained in chapter 9 of the report have now been largely met by those developments which are uppermost in my mind at the moment, as I have recently been appointed to the National Training Task Force.

The evidence to the Select Committee with some honourable exceptions—particularly that of 3i plc—has an awful ring of inevitability about it, with a moan that the world is unfair. Whoever said it was fair? There is a plea for government help yet no interference. There is a strongly argued case that something should be done to improve the standing of manufacturing industry, but there are not a lot of suggestions that perhaps a case can be made for self-help. How often do we see young industrialists currently employed on the television expounding the excitement that people can derive from working in manufacturing industry? The noble Baroness, Lady Denton, has rightly referred to the work in this area of Sir John Harvey-Jones, but how many of today's leaders of manufacturing industry make it an important part of their job to give the principal speech at prize-giving occasions at their local sixth-form college, comprehensive school or —dare I say it?—girls' school? Are they too busy? Is it irrelevant? Surely, one of the most important and relevant activities of senior managers, be they in manufacturing industry or the service sector, is to ensure that they are attracting the best new talent to their organisations thereby protecting their future.

My first job in British manufacturing was in 1966. How I wish that I had kept some of my papers from that date! It would have confirmed my view that little has changed. The litany, I fear, would read more or less the same: "Please give us a level playing field". That is not strictly true because I reckon that that phrase has only been around a short time, although it seems ages. "Please give us government help, but no interference". "Please crack down on short termism in the City".

As a banker—and I feel exposed here tonight—I know that few things irritate me more than criticising the so-called short termism of the City. Recently, the huge sums set aside for provisions do not all relate to property. The banks are seen as the current whipping boys and, I have to admit, not totally unfairly but largely so. Let it not be forgotten that despite what has been said here this evening, the banks have sustained UK manufacturing industry over long and difficult periods, including the 1960s and 1970s—periods of stop-go economic policy.

To sum up, let us all try to encourage manufacturing to produce what the market wants. The housewife does not necessarily want to buy a German kitchen. The teenager does not necessarily wish to buy a Japanese personal CD player. The man or woman who does not have the benefit of a company car does not necessarily wish to buy a Fiat or a Renault. Someone somewhere must plead with the manufacturing industry to wake up to the market place. In so doing, they will attract the best talent.

Would it be crazy to suggest that a good future subject for the Select Committee to examine would be the reasons why so much of our consumer expenditure does not support UK manufacturing industry? Government help is not the answer. Probably the best thing is to remember that the Lord helps those who help themselves.

7.2 p.m.

Lord Mottistone

My Lords, how very refreshing to succeed the noble Baroness, Lady O'Cathain, after her remarkable speech. She debunked the whole report when everyone else said how splendid it was, which I am about to say. What she said is true, but I see it as complementary to the report rather than critical of it. I do not agree that it is right to say that chapter 9 has more or less been answered already. However, what the noble Baroness said is important, and we should balance it against what many others will say and some of what I shall say.

I wish to congratulate my noble friend Lord Caldecote and his committee very much for producing a first-class report. For a country which for two centuries has depended more than any other on trade for its survival, let alone its prosperity, I believe that we have failed miserably—particularly in the past 50 or 60 years—to maintain our position in the world market place. If noble Lords are doubtful about that, I suggest that your Lordships read The Audit of War by Correlli Barnett which picks out exactly why we got into this position from which we have not yet recovered.

This excellent report of the Select Committee is most timely and I agree with those noble Lords who said that it was well written and easy to study. It requires careful study by all concerned especially, to my mind, manufacturing companies in recruiting the best people for key decision making, the Government for helping manufacturing companies to become competitive in the market place at home and abroad and not hindering them from doing so, and trade unions in encouraging their members to give priority to the success of their employers.

My closest relations and their friends are all employed in banking, finance and the law. Figure 17 in the report to which my noble friend Lord Oxfuird referred shows that they are not alone. Manufacturing industry was almost completely closed to one young man of my acquaintance because he read history at his university. He found a job on the production side of a food manufacturer, but it was not organised to retain him or to try to entice him back after he had tried elsewhere.

The CBI says that the best world practice must be spread throughout our manufacturing industry. The noble Baroness, Lady O'Cathain, said much the same. Of course, we agree, but that will only come about if a great many more manufacturing companies make an effort to recruit and retain the best people.

As a chartered engineer, I have been one of the many who have been puzzled for over 50 years as to why engineers in this country are not held in as high regard as in the countries of our main competitors. Some of the blame must fall on the attitude of the universities, especially 100 years ago. However, I believe that these days the main culprits with outdated attitudes to engineers are to be found in senior managements of big companies and their City acquaintances.

We must not only pay proper regard and reward to first class engineers when we meet them—and I note what my noble friend Lord Sharp said on this point—but also set a pattern which recruits first class brains from other disciplines to join them.

Turning now to the government contribution, the CBI says that government must play their part by creating a climate that makes long-term investment in manufacturing worth while. The Electronics and Business Equipment Association —which some noble Lords may know better as the EEA—says that prior to the 1987 election the DTI was perceived by its members as a supportive partner, willing and able to discuss and promote new markets, support exports, take a head role in European ventures and promote industry views elsewhere within the government machine.

The association goes on to say that from 1987—when, I have to admit, my noble friend Lord Young of Graffham became the Secretary of State for Trade and Industry—this positive perception has changed in almost every detail. No doubt my noble friend the Chief Whip, who is to reply, will remember that because he was there for part of the time.

The DTI is now non-supportive and merely the focal point of a totally inadequate UK industrial policy. This great disappointment has been represented to the Prime Minister whose advisers invited him in replying to concentrate on drawing attention to the pre-1987 attitude of the DTI. It has also been represented to my right honourable friend the present Secretary of State for Trade and Industry, whose reply in writing also referred to the past decade.

There is now, however, some hope from the more encouraging remarks regarding manufacturing industry made recently by my right honourable friend the Secretary of State, to which my noble friend Lord Caldecote referred, and also from the comments made at the CBI conference. However, these encouraging remarks need to be given more positive expression by his department. I am advised that the impression gained is that the Secretary of State's heart is in the right place, but that the officials are not yet converted to his approach.

To be blunt, the Government generally and the DTI in particular need to have a long, hard think in conjunction with the best of the most successful British companies—to which my noble friend Lord Sharp and perhaps a few others referred—on how they can most usefully help industry without hindering it. I suggest to your Lordships that paragraph 10.9 of the report makes that point most succinctly.

The trade unions must also play their part more effectively. Paragraphs 12, 13, 14 and 15 of the report show how far down the productivity league table we still are. Although there have been steady improvements over the past 10 years, we started well down at the bottom of the table at the beginning of that period.

It was my privilege to be the director of an industrial training board in the early 1970s when my employers and friends included senior and experienced trade union leaders. From many conversations with them I obtained the impression —especially at that time—that trade union membership invited divided loyalty between the union and a company. That applied particularly to manufacturing companies with strong union membership. I am sure matters have improved in the past 20 years, especially in the past decade. However, fundamentally, manufacturing companies can only be truly competitive if all of their employees give their first loyalty to the company. Until we can be sure of that in this country, we shall continue to struggle to succeed collectively in the market-place.

It is nearly a year since this report was printed. I hope that its urgent and important message, and the message from this debate, are understood and acted upon by all those to whom they are addressed.

7.11 p.m.

Lord Butterworth

My Lords, I was a member of the Select Committee that produced this report and I was somewhat anxious about some aspects of the report. We seemed to highlight deep-seated areas of weakness. As has been said this evening, that factor is not true of the pharmaceutical industry. That industry has an excellent record of innovation. Our report was concerned narrowly with manufacturing industry. As one must now admit, the weaknesses in that area often go back to the middle of the 19th Century. As has been pointed out, the heart of our conclusion is that we ought to plan and bring about a change in our culture.

Our weakness in industrial technology has become more apparent as technology itself has become more sophisticated and more firmly based upon science. Industry is certainly not held in high esteem in our society. My experience in universities has shown me that industry is not obtaining its fair share of the most able men and women. They are simply not choosing to enter industry.

However, we must ask ourselves how a change in culture is to be brought about. It certainly cannot be brought about initially by the Government and certainly not by legislation. However, the Government can help at a certain level by restoring incentives, removing obstacles and introducing measures which may act as a catalyst to change, as the report details. I am bound to agree with my noble friend Lord Caldecote that, so far at any rate, the Government's response to our detailed recommendations cannot be described as helpful.

However, the principal responsibility for change must remain with industry. If fundamental changes are to occur in management, business, the education system and in financial institutions, those changes must first occur in industry itself. Indeed the very nature of successful innovation has changed and is constantly changing. The problem is changing and the game has moved on. Innovation which only assists in making yesterday's products better will not generate the growth we need. By innovation we now mean the ability to bring to the market a continuous stream of sophisticated products ahead of the competition.

Too frequently, in some areas of industry, research and development are regarded in terms of an external black box that is only loosely connected to the industrial enterprise. The input into the black box is money and by mysterious and incomprehensible works within the black box, the money either produces good results or it does not. Too often it does not.

A professor of manufacturing industry at the Harvard Business School has commented on research and development in American companies. He said research and development are regarded simply as the company's fruit machine that rarely hits the jackpot. Innovation occasionally produces remarkable breakthroughs, but I maintain that modern commerce depends to an extraordinary extent upon a continuous stream of innovation at every step of the economic process. That applies to the invention of new products, the streamlining of existing ones and to the continuous improvement of production, distribution and, as has already been mentioned, marketing.

I shall return to the matter of the continuous stream of innovation. Before I do so, I wish to draw the attention of noble Lords to the well known complaint that the British are excellent at innovation but poor at follow-up development. If that is true, I believe it constitutes a criticism of management. It suggests that management has been dislocated both from innovation and from research and development. Too often chief executives have become frustrated at being unable to influence the output of their research departments which have retreated into splendid isolation beyond the understanding and control of management. Frequently the distance between innovators and executives is increased because they speak different languages. The executives speak the language of industry while innovators frequently speak the language of science.

The change which is required is to bring innovation and R&D within the ambit of corporate decision making. The operators of research and the innovators, whoever they may be, must be made full partners in the decision making process. Let us remember that sometimes that process may require a change in language conventions. Taking decisions on innovation should be no different in kind from taking any management decisions. If innovative contributions are to form a continuous stream, management needs to be able to assess systematically all research projects and all innovative projects and synchronise them with strategic corporate decisions.

I wish to quote a sentence from Lowell Steele, the former director of strategic planning at General Motors who made the point well when he said: How can the Japanese move so fast in introducing new products and responding to market dynamics? The answer does not lie in access to or use of more advanced technology … the US still equals or leads the world in every field. The answer lies in management". In other words, Japanese ascendancy rests squarely on leadership in management, and especially the management of innovation.

It is getting late, so perhaps I may turn from Japan and very quickly mention our visit to Germany because I am sure that there is an important lesson to be learnt. Those of us who were privileged to go to Germany were impressed by the universal appreciation in Germany of the importance of innovation. Everyone we met—management, workforce, unions, bankers, central government, and lenders—understood not only that innovation was fundamental to industrial expansion and that without a stream of innovatory ideas the best industries would eventually wither, but also the nexus between management and innovation. On the German visit I was impressed by the extent to which both government and lender were prepared extensively to support industrial research which they judged to be commercially promising.

I suspect that, since our report was published, views have been changing in this country about the extent to which the Government might support innovation and research. The division between basic research and near market research is proving increasingly unsatisfactory and we need greater flexibility in our approach. As we force industry to become more and more competitive the funds which industry is able to make available for research may become more limited.

I should like to tell your Lordships about one visit we made in Germany because it illustrates the point that I am trying to make. We saw public funds being deployed on major industrial research projects. There was one project which was quite extraordinary. It was based in a Max Planck institute. I am sure that your Lordships are aware that a Max Planck institute is concerned with basic pure research. The research, which was enormously expensive, involved a project attempting to find a new material for the manufacture of engines. The researchers were deep into ceramics, to avoid the heat limitations inherent in the use of metal. Your Lordships may imagine our surprise when we discovered that the professor in charge of the whole operation was an Englishman. He had been professor of ceramics at the University of Leeds. The significance of that research is tremendous, because whoever gets ahead in that field will capture the high ground and make enormous commercial and financial gains.

I have some crucial questions for my noble friend the Chief Whip. To what extent is the DTI prepared to alter its present practices? To what extent is it prepared to tolerate greater flexibility so that important projects can be fully supported, not only by industry but also by government?

7.24 p.m.

Lord Laing of Dumphail

My Lords, in congratulating my noble friend Lord Caldecote on his report I should like to focus in the main on short-termism as a reason why industry has failed to invest enough in research and development. Before I do so it would be wrong to ignore the ravages of inflation—a point I believe has not been mentioned—which, with the erosion of the value of savings and the increase in the cost of money means that there is less money to invest and pressure for quicker returns.

Short-termism in our society has, as I see it, led to an imbalance in the relationship between those who provide the capital for British industry and those who manage businesses, which I shall try to demonstrate may be structural. I am grateful to my noble friend Lord Sharp for his remarks, with which I wholly agree.

I am a firm believer in the validity of the market economy. However, to work efficiently over a long period it needs to be in a healthy state of balance. In a free market system the nation functions through the interaction of interdependent yet distinctly separate institutions. Dangers exist if a monopoly is allowed to develop or control of wealth or power is concentrated in the hands of a limited number of people. In the 1920s and 1930s management had substantial economic power over working people and sometimes abused it. The pendulum then swung to the point where in the 1970s trade union leaders had very considerable power in many sectors of industry and, similarly, sometimes abused it. That came to be seen as detrimental to the national interest. We now have to ensure as far as we possibly can that the power of capital concentrated in the hands of a few institutional investors is not similarly detrimental.

When the business community was made up of a great many small companies, and private shareholders predominated, it was extremely unlikely that the actions of any one or even several could damage the national interest. Now, however, we have some very large companies which are crucial to our economic well-being, and relatively few dominant shareholding institutions which own about three-quarters of the UK's equity market compared with only half in 1978. A quarter of the market is in the hands of only 12 fund management groups and the top 50 hold over half the equity. Therefore, the national interest should be a factor in their and our considerations.

The providers of capital and its productive users seem to be living and operating in different worlds with different timescales. That is extremely unhealthy for the national economy. For a publicly-owned company in this country the interests of the shareholders are paramount and their rights are enshrined in law. While a company must be run for performance rather than for the benefit of management, it is wrong to define performance as short-term gains for shareholders. That subordinates all other constituencies to them.

The problem for the nation is that immediate shareholder gains do not optimise the creation of wealth, which requires a balance between the short term and the long. It is management's responsibility to provide that balance by exercising its commercial judgment. The crucial factor in that judgment is management's belief, rightly or wrongly, that it is being judged by the financial institutions on short-term results. That was confirmed recently by institutions expecting, and saying, that companies should at least maintain their dividends when quite clearly their results did not justify it.

That short-term pressure means that companies forgo investment in areas which are essential to their long-term prosperity in order to protect the bottom line. We are not making the vital technological quantum leaps which, as the Japanese have shown in some important industries, lead to winning dominant world market shares.

Can it be just coincidental that the UK and United States, the two countries with the freest market systems and the highest level of predatory activity, have had the lowest level of reinvestment as a percentage of total output over the past 20 years, at 12 per cent. and 13 per cent. respectively? Japan, not surprisingly, has the highest investment rate at 22 per cent. There are, of course, many reasons for Japanese, and German, success and to focus on just one would be a mistake. However, what is common to those two countries is that their companies can take a longer view because their markets for capital operate differently from the Anglo-American and the threat of takeover is virtually non-existent.

The opposed takeover is justified in the UK as being a spur to management, but the absence of it does not seem to have done much to stop the onward march of German and Japanese industry. The response of British managements to threat of takeover is often to concentrate—probably to excess—on bottom line and on their share price at the expense of investment for the long-term development and future security of the business.

The culture in which the shareholder is the principal person worthy of consideration and protection must be challenged. Other stakeholders—I like that word; I used to try to run my company for the benefit of the stakeholders—have recognition, for example, in Japan, Germany, Holland and in some American states.

The fundamental business system in this country has worked well. However, we must ensure that in an environment of expediency we do not end up compromising the basic strength of our free market heritage. The joint stock company was a device to meet a specific financial need at a time when ownership and property were essentially individual, and in Victorian times the concept of limited liability enabled the family company to bestride the globe. Looking at the situation today, the idea of a company as a piece of property is somewhat bizarre. Just as the powers of managements in the 1920s, and of unions in the 1970s, had to be constrained, we should consider seriously in the widest possible debate whether the present balance between capital and managements may need adjusting. I was delighted that one of the recommendations of the Select Committee's report helps to restore that balance.

Other countries have developed their own ways of maintaining a balance. I hope that one day your Lordships may wish to devote time to debating that wider subject. We have to ask ourselves whether the structures which worked so well in the past will necessarily work sufficiently well in the future for the Europe of 2000.

7.32 p.m.

Lord Ezra

My Lords, I am particularly pleased to speak after the noble Lord, Lord Laing. I have known him for a number of years. I have had the pleasure of visiting his most effectively run company and have been impressed by the way in which he has practised what the remainder of us preach. We were also very fortunate to hear the noble Lord, Lord Sharp, whom I have also known over a number of years. We met first in Paris during the 1940s and 1950s and attended meetings of the OEEC together. He too has had a remarkably successful career in industry, as has the noble Viscount, Lord Caldecote. Indeed, all speakers have brought considerable knowledge to the subject.

The level of the debate is entirely justified by the importance of the report, which is brief, readable and to the point, but supported by an enormous amount of evidence, both oral and written. I find it a little surprising that a report of this importance, which was published in January, should be debated only in November. It has lost nothing by the delay; it is still very relevant. However, I believe that that delay merits some inquiry.

Two matters disturb me about the report. First, as the noble Viscount said in introducing the report, it takes over from where the 1985 report produced under the chairmanship of the noble Lord, Lord Aldington, left off. Indeed, it virtually repeats what was in that report. It is disturbing therefore that six years after the recommendations in the Aldington Report, we now have the Caldecote Report repeating those recommendations. Secondly, as the noble Viscount, Lord Caldecote, told us, while the Government's response generally accepts the broad argument of the report, in detail it failed to accept any of the major recommendations. I find that disturbing also.

A perusal of the report will show, as those of us know who were involved in the original report, who have read the present report and who have had various experiences in industry, there is no simple answer to the problem that we debate. All parties are involved, and all parties will need to take action if we wish to remedy the situation with regard to manufacturing industry.

A number of important points are made in the report on enterprises. For example, those firms which have achieved the most successful innovative progress are those where innovation has started from the top. There has been encouragement from the boardroom downwards. Equally, those firms which have achieved the best relations with their suppliers, and therefore have stimulated British enterprise in that respect, also have started it from the top. When I was at the Coal Board I made a point of developing close relations with our suppliers. We assisted them in every way possible to develop the world's best mining machinery technology. We then found that we could competitively buy our requirements from British firms.

However, it takes a lot of trouble on the part of major buyers to get the proper response from their suppliers. It is not enough to go back two or three times and say, "You haven't produced it so we'll go elsewhere". I shop at a major store nearby. When I wish to buy a present, I go to its gifts department. The buyer for the gifts department is interested in the Far East because the department is filled with very interesting Chinese, Indian and Japanese products. However, very often I go with the intention of buying gifts for my foreign friends. The last thing I wish to do is to send some gift from as far afield as that. I should be delighted to see many British products in the department store. Insufficient attention is paid to stimulating British suppliers.

On the institutional sector, a number of remarks have been made about the problems that the concentration of power in the hands of a limited number of institutional investors has created. Some institutional investors clearly show a long-term attitude, but in my experience many others take a short-term view. I was particularly disturbed in the report by a footnote on page 33 that the chairman of a leading unit trust group is reported to have written to companies in which the group invests, urging them not to cut their dividend payments in the current recession. That does not seem very responsible advice from a leading institutional investor.

Working down the line, we come to the position of Government. Much has been said in both the Aldington Report and the later report on what needs to be done in our opinion —I was a member of the Aldington Committee—in the way of a change in government attitude. That was also borne out in the recent CBI report. The Government have taken up a firm position of seeing the limit of their task as removing what they consider to be obstacles, and, having cleared the ground, to leave it to market forces to work. However, a number of noble Lords have shown tonight that in certain circumstances that is not enough. It certainly is not practised among our major competitors. The experience of the representatives of the committee who visited Germany and Japan bears that out. The fact is that no one is talking about intervention but about positive support. The forms of support are spelt out in the report, in particular fiscal support to stimulate investment, research and training.

The summary of the report is clear: there is still much work to be done. However, I wish to conclude on a positive note. I shall glimpse into the future and assume that another report on manufacturing industry will be published in 1996. Perhaps on that occasion the noble Viscount, Lord Caldecote, and the noble Lord, Lord Aldington, will act as joint chairmen. I have worked out what should be, and I hope will be, contained in that report and I shall give your Lordships a glimpse of the future. As my comments will appear in Hansard, they can be compared with what the report then actually states.

First, I expect the report to state that during the period that had elapsed since the publication of the present report there had been greater public recognition of the importance of manufacturing and that an increased number of highly trained young people had joined industry to make a career there. Secondly, I expect it to state that the continuous stream of innovation had been established (to which the noble Lord, Lord Butterworth referred) and that innovation had been noticeable not only in the pharmaceutical industry but in many other sectors.

Thirdly, the report will state that as a result of those initiatives there had been a substantial increase in productive capacity in manufacturing industry and a continued rise in productivity. In turn that would have led to a sustained positive balance of trade in manufacturing. The financial institutions will deliberately have developed a policy for supporting long-term development and research and not opted for short-term gains. The Government will have introduced fiscal policies which will have successfully stimulated greater investment in industry and more research and training. As a result of all that we shall have established a lead position in the European Community and the prospect of a single currency will no longer hold any fears.

It is quite simple; between now and then all we need to do is to make it happen.

7.43 p.m.

Lord Williams of Elvel

My Lords, the House will be grateful to the noble Viscount, Lord Caldecote, for introducing the debate on this excellent report. The report was published a long time ago—on 29th January 1991—and it is odd that we are debating it now on 28th November 1991. Since its publication your Lordships have debated manufacturing industry on two or three occasions. During our debate on the humble Address, manufacturing industry played an important part. Therefore, we are traversing somewhat well-worn ground. I shall refer later to the excellent report of the Select Committee on Overseas Trade chaired by the noble Lord, Lord Aldington, in 1985.

I wish to look away from the report which your Lordships have debated at considerable length and with a great deal of expertise. A volume of new evidence has been produced during the past year or so from the CBI, EEF, ACOST and other organisations. It indicates that a consensus is growing around the approach indicated in the report before us. That new consensus is right. It is different from the attitude described by several noble Lords; that market forces prevail, that that is the end of the matter and that nothing more is to be said.

I wish to look at four key points for the future and indicate where we should be moving so that when we have the report indicated by the noble Lord, Lord Ezra, it will be in the terms that he described rather than describing how we have failed yet again. First, I believe that no one doubts that to correct our balance of trade, and hence our balance of payments deficit, we must have a substantial increase in manufacturing output. That was a fundamental message of the report and I believe that no noble Lord can seriously contest the argument. There used to be a theory that services would in some way take over from manufacturing industry as a generator of foreign earnings and that we could forget about the industry.

One must remember that even in the depths of a recession we are, according to the Autumn Statement, facing a balance of payments deficit of £6.5 billion. After every previous recession we have come into a balance of payments surplus—perhaps we have gone into it with a deficit but we have come out with a surplus. According to the Autumn Statement we shall next year emerge from the recession with a balance of payments deficit between £11 billion and £11.5 billion. That is so even with the modest recovery forecast contained in the Autumn Statement. There are spokesmen who say that that does not matter so long as one can finance the deficit. I do not believe that to be true; we cannot go on like that. All the figures show that we shall never get the deficit under control even in recession, let alone during a period of recovery, unless there is a substantial increase in output volume in manufacturing industry. How do we achieve that?

I agree that we must try to ensure that there is best practice in all firms. I agree with the comments of the CBI. I agree with the report's virtuous recommendations about training, marketing and so forth. However, the report emphasises two aspects that I wish to point to in particular. First, we must have an industrial policy and I do not apologise for saying that. We must know where we are going. I do not believe those noble Lords who say that there has been a sudden change in the attitude of DTI Ministers to the problem. I thought that the noble Lord, Lord Mottistone, was a little unfair on the noble Lord, Lord Young of Graffham, whom I regarded as a slightly interventionist Secretary of State for Trade and Industry. Nevertheless, I do not believe that DTI Ministers have grasped the idea that we must have an industrial policy. They are still under the yoke of the doctrine of market forces. Until we change that attitude, as we will, we shall not get anywhere. The problem has nothing to do with officials; it has to do with Ministers and the direction of government.

Secondly, the report rightly pointed out that we must develop a closer partnership between government and industry. Ministers, officials and industrialists must ensure that they are working along the same lines. The noble Lord, Lord Ezra, and others pointed to experience in Germany. The noble Lord, Lord Butterworth, said that he is impressed with what happens in Germany, France, Japan and so forth. The noble Lord, Lord Laing, rightly pointed out that it was only in the economies of the United Kingdom and the United States, which have that curious theory about market forces ruling everything, that investment in new technology and techniques is so low.

The second major point which I must make is that generally the United Kingdom is not spending enough on civil research and development compared with our competitors. How do we solve the problem? There are some fairly worthy ideas on that subject. I include the technology trusts which my party has put forward. However, the only promising avenue which I see is redeployment of the resources which are going to R&D in defence industries. I fail to see any of that in Options for Change, a document dealing with the size of our armed forces. Proportionately we spend a great deal on R&D in the defence industry. I should like to see some of that, so far as it is consistent with the proper defence of the country, switched to civil applications of R&D.

Obviously, education and training in science and technology must be at the top of the agenda. Training in skills is fundamental. However, the third point I wish to take up from the noble Lords, Lord Sharp and Lord Laing, is the question of short termism and the financial community. I do not believe that we can avoid tighter rules on takeover bids. I am bound to say that my experience as a banker is that the amount of management time and effort spent in fighting off bids or putative bids or thinking about quarterly earnings figures in order to fight off a possible bid from someone else is detrimental to the long term future of industry. That is now generally accepted.

It is also true—figures from the DTI show this time and again—that takeovers do not, on balance, add to the general efficiency of industry. That was proved in the Green Paper of the 1970s which studied merger policy and proved again in the DTI document published a few years ago which also studied merger policy. Those matters are not necessarily successful. What is successful is long term commitment to the in-house development of technology.

How do we achieve that? The noble Lord, Lord Laing—and I am not being impertinent—made an extremely effective and useful analysis of the shareholdings in British industry showing how a few fund managers can almost, by a few telephone calls, determine the fate of a company. We must try to develop a system—wider share ownership, though possibly desirable, is not a cure—whereby relations between the fund managers who run other people's moneys (not their own) and the institutions for which they work and companies can become much more developed and loyal than they are at present. My right honourable friend John Smith has put forward some ideas. I do not want to go into those ideas. However, we are seriously considering the possibility of trying to develop a system, which the noble Lord, Lord Laing, was groping towards, whereby we have a much closer relationship between the fund managers and managers of companies.

The fourth point is the question of the role of government and allied to that I introduce the role of Parliament and political parties. In my view the report quite rightly says that government/industry relationships are unsatisfactory and we must do better. Before coming to that point, I believe that Parliament should do better. In this House we are fortunate to have representation from industry, bankers and the commercial sector. I am bound to say that in my view it is the job of industry to make sure that candidates for another place who have experience in industry, are put forward and are supported. That is a matter which industry should take on board. It is not sufficient for companies to say, as some companies do, "If you are going to fight for a seat in Parliament, you had better forget about your industrial career". We should encourage better contacts between political parties, the activists in parties and industry. Over the past few years my party has tried to do that. At local level we have talked to industrialists who were surprised that representatives of the Labour Party should wish to talk to them. All parties should do that.

I turn to the role of government. I cannot add to what the report says in criticising the role of government with regard to industry. We are in fairly serious trouble as regards the relations between government and industry when the Secretary of State, who I shall not name, arrives at his office at the DTI asking "What is this place for?" The report made that absolutely clear. The latest examples of privatisation—the Insurance Services Group of the ECGD and the British Technology Group—are examples of how DTI Ministers have not yet got the message.

I shall not weary your Lordships by explaining my party's proposals. I introduce a commercial plug at this point by saying that a document is available which I shall be delighted to sell to noble Lords outside the Chamber. We have many proposals which are spelled out in great detail about what we propose to do. They are broadly along the lines of this report. There are some differences of opinion but they are not significant. That is because the consensus which I mentioned at the beginning of my speech is now emerging. Whichever party wins the next election, the time has come to change the role of government vis-à-vis industry. There was the Aldington Report in 1985 and the Caldecote Report in 1991. If we are to have the Ezra Report in 1996 or 1998 in the terms which the noble Lord wants, then we must work on that new consensus. I do not believe that this Government are doing that.

Whatever the result at Maastricht, the problems which we have are problems at home. Whichever party forms the next government, it will have to deal with those problems.

7.58 p.m.

Lord Hesketh

My Lords, may I first of all thank my noble friend Lord Caldecote and the members of the committee for giving us the opportunity to debate their important and valuable work in producing the report Innovation in Manufacturing Industry. The Government warmly welcome the report as it addresses a topic which they regard as particularly important. Indeed, my right honourable friend the Secretary of State for Trade and Industry, when giving evidence to the committee, said that he could not imagine a healthy UK economy without a vigorous and successful manufacturing sector. He went on to say that he believed that manufacturing industry was vital for the future prosperity of the country.

The Government agree with the committee that the prime responsibility for innovation rests with industry. The government's role must be to establish the right climate in which enterprise and business can flourish, and to act as a catalyst for change in attitudes towards industry and innovation. A wide range of policies determine this including taxation, education, competition, privatisation, trade union laws, deregulation and reducing the burdens on industry. I could go for others as well, but I will not.

We believe that the Government have done much to assist the achievement of the right climate by, among other things, cutting tax rates, to restore incentives; reducing the share of the nation's income taken by public spending, to release resources for industry; scrapping pay controls, price controls, dividend controls, exchange controls, and countless other controls, to restore managers' right to manage; reforming trade union law; reviving vocational educational and skill training; by the privatisation policy that has been followed over the past decade; and, most importantly, by encouraging competition.

One particularly important, and noteworthy, achievement that I should like to mention is our success in reducing UK corporation tax to 33 per cent. At that level it is now the lowest in any European Community or G7 country. The rate for smaller companies is even lower at 25 per cent. That means that mare money is left with industry, so that a greater proportion of company profits is available to invest. Investment is essential for a company to innovate and so stay ahead and, most importantly, to remain competitive. I am sure that all noble Lords will agree with me that R&D which has been planned and funded by industry is, by far, the most important R&D. It is encouraging, therefore, that the latest statistics available on such company-funded R&D show growth in real terms of more than 50 per cent. over the six years leading up to 1989.

However, even taking account of the rise in company-funded R&D, it is still not enough. Comparisons between Britain and the most successful economies suggest that the British private sector still invests less in R&D than its competitors, and manages the commercial development of new products and processes less effectively. If UK manufacturing industry is to compete in national and international markets, its success in doing so will depend increasingly on its willingness to invest in effective R&D, leading to innovative products which the market needs and wants. Of course, the pre-condition of private investment in R&D is profitability. Without profits, industry has neither the resources nor the incentive to invest in its future.

The Government recognise that the market on its own will not undertake enough pure or pre-competitive R&D. Therefore, the Government support research in areas where there are net national benefits to be gained and where industry alone cannot be expected to shoulder the whole burden of funding. To that end the Government support civil R&D to the tune o r some £3 billion a year, a not insubstantial sum of money, and one that is as much as the Japanese Government spend as a percentage of GDP.

But the idea that government should spend more on R&D and that that will automatically lead to innovation and commercially successful products is untrue. As the Government have said in their response, innovation is more than just R&D, it involves the continual introduction of new products and processes, using new designs, deploying new skills, and opening new markets. Successful innovation will help a firm stay ahead of its competitors and provide a healthy level of profits in the future.

I am encouraged that the Government and the members of the Select Committee share the view that there must be a national change of attitude to recognise the full importance of innovation to a successful manufacturing economy. That is why, when the committee's report was published, the Government were able to respond positively by endorsing many of the report's recommendations. Indeed, a significant number of its recommendations had already been implemented prior to publication of the report. For example, we have introduced a package of new measures, collectively worth nearly £50 million, for smaller firms as they have an important role to play in innovation which depends chiefly on their R&D activities. Smaller firms often find it particularly difficult to raise funds, and the new schemes will help them to be more innovative and exploit more effectively the science base.

The largest of the new innovation schemes is SPUR (support for products under research). I hope that that will be the last time that I shall use an acronym this evening. My noble friend Lady Denton made a telling point on the subject of acronyms when discussing innovation, and I am hoping to resist further urges. SPUR was introduced in February this year and offers smaller firms a fixed 30 per cent. grant towards eligible project costs, up to a maximum grant of £150,000, to develop new innovative products and processes. SPUR has been widely welcomed and got off to a most promising start, and over 1,000 registrations of interest have already been received. Other recommendations that we have implemented include: an expansion of the number of awards under the SMART scheme for very small firms with fewer than 50 employees; tax relief for individuals to cover training leading up to and including national vocational qualifications; and making DTI schemes more readily accessible and easily understood.

On a personal note, when I had the privilege of going to the DTI on my first day as Minister of State there, I arrived on the basis of having applied for a period of 10 years for grants from the DTI. I had never successfully obtained one. On accessibility, it is important to emphasise the difficulty that the ordinary layman—entrepreneur or innovator—has, in achieving access to the great doors of state in Whitehall.

On my last example, I might just mention what the DTI has done to assist. The new DTI brochure Technology and Change — Help for Business, published in May 1991, draws together for the first time, all the innovation services offered by DTI. That is supported by an innovation enquiry line on which people can phone without charge for information about the schemes available. Both those initiatives have significantly improved the access of the ordinary man in the street to DTI schemes. At the same time, the rules and procedures for all collaborative schemes were simplified. The take-up of schemes such as LINK and EUREKA has been accelerating. That is significant.

But I touched upon the crux of the matter earlier when I said that the Government and the Select Committee agree that there should be a national change in attitude to recognise the full importance of innovation to a successful manufacturing economy. Cultures and attitudes cannot, as we all know, be changed by law or decree. What government can do is restore the incentives, remove the obstacles and introduce measures which cumulatively will act as a catalyst to change attitudes and practices of management, in business, the education system and financial institutions. That is what my right honourable friend the Secretary of State for Trade and Industry had in mind when he recently established an innovation unit in his department. The innovation unit will act as the catalyst for change in attitudes to innovation. It seeks to overcome the cultural bias against business and practical skills that inhibit innovation in the UK's industrial base. To do that it will draw on the services of senior industrialists who, with direct experience of innovation in business, are joining the unit on secondment—a further example of the Government's commitment to the committee's recommendations.

The new unit aims to improve the commercial exploitation of our excellent science and technology base; increase the importance and improve the management of innovation in business; improve communications on innovation between companies, investors and banks; raise awareness in education of the wealth-creating potential of technology and engineering; and, lastly but by no means least, to increase public awareness and understanding of the role of innovation in wealth creation.

I am sure that I join all in your Lordships' House in hoping that Lady Butterfield will be restored to good health as soon as possible. I also take the opportunity to make a commitment that the department will investigate Miss Helen Sharman's crystals, mentioned by the noble Lord, Lord Butterfield, and her recent endeavours in space.

I was encouraged to hear of another Member of your Lordships' House with an interest in motorcycles, which the father of the noble Lord, Lord Butterfield, certainly had. It is also important to remember that the vision of the noble Lord, Lord Ezra, has certain attractions, but I dare not make a statement as to whether or not he is correct that by 1996 a single currency will hold no fears.

My noble friend Lord Caldecote rightly referred to the proposals for recommending tax credits on R&D. However, there is the difficulty of actually defining R&D. That must be addressed if one is to pursue the argument. I was greatly impressed by the speech of my noble friend Lord Laing of Dumphail and by his extremely strong feelings as regards both shorttermism and his principle of interest in stakeholders in a company above and beyond that of the property of the shareholders. I am sure that there will be a future debate giving an opportunity for that subject to be discussed again.

I was also pleased and surprised that my noble friend Lord Aldington was happier than he was in 1985. I was also pleased and impressed when he quite rightly pointed out the importance that we have as a country to make young people understand the opportunity of manufacturing industry as a career. I agree with his support for innovation and information, which is vital. I am also grateful for the remarks made by my noble friend Lord Caldecote as regards cultural change as he saw it in the United Kingdom and also for the way in which he welcomed the Innovation Advisory Board.

My noble friend Lady Denton mentioned a cause close to my own heart, which is not exciting but one that is destroyed by bureaucracy's acronym-creating ability; namely, BS 5750. I have been deeply impressed by the pleasure that that gives to various companies that I have the opportunity on most Fridays to visit in order to present certificates. It shows that they believe that although difficult to understand by its descriptive powers it clearly provides commercial advantage for their own future betterment.

My noble friend Lord Aldington asked whether there was additional funding. I drew his attention this evening to the extra £50 million provided since the report was published. The noble Baroness, Lady O'Cathain, pointed out three remarkable facts that are worth remembering: there are more VCRs per head of population in this country, more cellular telephones than in the rest of Europe and more personal computers per head of population. That does not indicate a country that is uninterested in change or innovation. The noble Lords, Lord Ezra and Lord Williams, drew attention to the lateness of your Lordships' debate. It is worth remembering that the report was published only in March rather than January. The response from the Department of Trade and Industry was made in June and then followed the summer holidays. I like to think that in terms of balance we have just about got it on the right spot.

My noble friend Lord Sharp of Grimsdyke quite rightly finished expressing his views in the debate by pointing out the success, little advertised, both of Glaxo and Cable & Wireless in achievement and comparability around the world for British companies. I have always strongly felt that as regards this country's ability in innovation and creativity we do ourselves down. I should like to conclude the record by saying what other people think of us rather than what we think of ourselves. Other people such as Japan and the United States invested nearly one dollar and one yen out of every two in the United Kingdom last year as compared with the rest of Europe. We may put ourselves down, but in manufacturing industry in the past decade our productivity rose by 52 per cent. and exports by 61 per cent. Those are figures not of failure but of success.

8.15 p.m.

Viscount Caldecote

My Lords, we have had a most valuable and interesting debate. I am very grateful to all noble Lords who have supported the report and also those who have provided constructive criticism. There is very wide agreement that we need a culture change very urgently. We need more innovation. It is mainly industry's task but the Government can help. My noble friend Lady Denton thought that I was blaming the Government for the lack of market share in the machine tool industry. That is not so. I believe that they made mistakes about 25 years ago. I was suggesting that some action needed to be taken in industries of that kind where it is important to help them to get hack. It is necessary to help the weak, and to help small companies to become big again. It is not a question of helping lame ducks, but of helping good, small companies to become big again. They need help with investment problems.

I entirely agree with the noble Baroness, Lady O'Cathain, about the importance of the market. If she reads the report, she will see that we place a great deal of emphasis on that and I do not believe that there is anything between us on that subject. I was not arguing for subsidies of any kind but merely that industry should be supported as the Japanese machine tool industry was. When it was changing from numerically controlled machine tools to computers on the machines, they gave special tax incentives to help that part of industry which it was thought was very important to the future of Japan. That measure was very effective.

I liked the plea from my noble friend Lord Laing of Dumphail for innovation in the structure of companies and also the views of the noble Lord, Lord Ezra, on the 1996 report. I hope that that will come true. My noble friend Lord Hesketh gave us some encouragement. I am very grateful to him for his reply. I believe that the Government are putting too much emphasis on supporting research and not the more expensive and later parts of the process of innovation. A great deal is being done, and I welcome the work of the Innovation Unit of the DTI; but I believe that we are agreed that not enough is being done.

Perhaps I was lacking in recognition of the new attitude in the DTI and that of the Secretary of State of Trade and Industry towards innovation. I take this opportunity to pay tribute to him for his very exciting and encouraging contribution of £375,000 over four years to the Fellowship of Engineering MacRobert award for innovation in engineering which he announced this week. That is a very encouraging pointer to the new outlook in the DTI. We all hope that we can go forward rapidly from there to even greater support and towards the growth of manufacturing industry. I thank all noble Lords who have taken part in the debate.

On Question, Motion agreed to.