29. UKTI's new strategy, Prosperity in a changing world, committed the organisation to a number of changes both to its activities and its structure. These include, among others, the setting up of a new R&D programme, the creation of priority sector strategies, reforms to instigate culture change within UKTI, and the agreement of new targets. In the 11 months since its publication UKTI has made significant progress in putting the new strategy into action. In this chapter we consider those aspects of it which we believe are most important for the organisation's future performance.

UKTI's five sector strategies

30. Prosperity in a changing world outlined how UKTI plans to work in partnership with the regional development agencies, devolved administrations and national bodies, including VisitBritain and the British Council, to market 'Business UK'. As part of this work, UKTI has conducted a strategic marketing exercise to identify the core messages about the UK's strengths that will assist it in marketing the country to inward investors and help UK companies to sell themselves overseas.[55] At the time of the strategy's publication, UKTI had identified six themes, which defined what the UK has to offer. These were: a stable business environment; a flexible and pragmatic approach to business; a climate of creativity; a capital city that is a magnet for the rest of the world; English as the language of commerce, finance and law; and a multicultural population. It intends to use these themes as the basis for five detailed sector strategies targeting financial services and the City, information and communication technologies (ICT), life sciences, creative industries, and energy. UKTI told us that these strategies would contain "specific targets on investment and trade".[56]

31. UKTI launched the first of its sector strategies, focusing on financial services and the City, in December 2006.[57] Financial services are a major asset to the UK, representing around 10% of GDP and growing at about twice the rate of the overall economy.[58] The sector, nevertheless, faces competition from other financial centres. Hence, the aim of the strategy is to attract company listings and other business from China, India, Russia and the Gulf region in particular, as these countries grow further and seek to develop stronger links with more established financial markets.[59] We are disappointed that the financial services and City strategy does not give more explicit attention to Brazil—the subject of our concurrent inquiry—as a potential market, particularly given that the UK has established a Joint Economic and Trade Committee (JETCO) with that country, which identified financial services as a strategically important sector.[60]

32. Implementation of the strategy is the responsibility of UKTI's newly-created Financial Services Sector Advisory Board (FSSAB), which includes representatives from sub-sectors of the financial services industry, leading trade associations, the public sector, the English regions and devolved administrations, but unfortunately not trades unions. Since its inception, the FSSAB has met three times, and has made some progress in implementing the City strategy. The Chancellor and Trade Secretary have made trips to India, resulting in agreement with the government there on market access for financial services. For example, steps have been taken to allow Lloyd's of London to operate in India.[61] In addition, new UKTI diplomatic positions dedicated to financial services have been created in Mumbai, Beijing and Shanghai.[62] UKTI is also producing promotional materials, including brochures and DVDs, advertising the City as a place to do business, which are being sent out to posts overseas for distribution.[63] The FSSAB has also created a sub-group to develop a strategy for Islamic finance.[64] We welcome this increased level of activity, and the promise of more to come, but note that the strategy does not include the specific targets on investment and trade promised in UKTI's original memorandum to us.[65] We raised this with its Chief Executive, Andrew Cahn, but he could only confirm that UKTI "do not at the moment have specific City-defined targets".[66]

33. In their evidence to us, Amicus and the Trades Union Congress (TUC) questioned the need for UKTI to devote resources to a sector that was already so successful, arguing that there was little value that the organisation could really add.[67] The Confederation of British Industry (CBI) took the opposite view.[68] In its defence, UKTI told us it did have an important role to play in co-ordinating the way in which the City promotes itself abroad. It noted also that relatively little money was going into the strategy—roughly £250,000—and that this represented "money well spent" for a sector which did not previously have its own marketing strategy.[69]

34. UKTI intends to publish the remaining four sector strategies on ICT, life sciences, creative industries, and energy later in 2007. These strategies, which we note were initially scheduled for publication by April 2007, will "illustrate UK sectoral strengths, gaps, key messages, channels to market, activity plans, targets, and marketing and promotional initiatives".[70] Some of the evidence we received expressed concern that the manufacturing sector was not well represented in the priority sectors chosen by UKTI, particularly the automotive and aerospace industries, where companies such as Rolls Royce, BAE Systems, Toyota and Nissan have a world class reputation.[71] We agree that this is a disappointing omission. We are also disappointed that, one year into the five year plan, UKTI has only managed to publish one of the five sector strategies.

35. With the sector strategies, and across all UKTI's sectoral work, the organisation takes a global view in terms of priority countries. As we have seen above, UKTI has chosen China, India, Russia and the Gulf region for its financial services and City strategy. At the same time, though, our concurrent inquiry into trade with Brazil and Mercosur notes that UKTI also has priority sectors within countries, as well as certain priority markets in each sector on a global basis.[72] In general, we found it difficult to understand how UKTI's global and country sector priorities interrelate, and how this affected the actual work it does on the ground. We also note that there is a danger of confusing everybody with too many priorities—true prioritising means omitting many possible activities in favour of focussing on a few. We seek clarification on these important points.

36. We welcome UKTI's commitment to setting sector strategies targeting industries where the UK is, or aspires to be, a global leader. The financial services and City strategy has provided a good starting point, although we note that it focuses primarily on activities rather than outcomes. In developing these strategies UKTI should set itself clear performance indicators by which it can measure the value it is adding in each sector, and therefore judge whether its work represents good value-for-money. If the current set of strategies is successful, we recommend UKTI produces similar strategies for manufacturing sectors where the UK has strengths, such as the engineering and aerospace industries.

R&D programme

37. Scientific and technological advances are a key driver of productivity growth. Expanding the UK's science and knowledge base, and translating this into innovative products and services, is crucial if the UK is to maintain its prosperity in the long-run. This underlies the importance of both the public and private sectors investing in R&D. Within the Science and Innovation Investment Framework 2004-14 the Government has set itself the target of increasing the proportion of GDP spent on R&D from its current level of 1.9% to 2.5% by 2014.[73] To achieve this it has put in place initiatives such as the DTI's Technology Programme and the R&D tax credit system. It has also increased the Office of Science and Innovation's budget to £3.4 billion in 2007-08—double its 1997 level.[74]

38. In the private sector, the pharmaceutical, aerospace, defence, and automotive industries constitute the UK leaders in R&D expenditure, collectively investing around £10.6 billion in 2005.[75] Our three biggest R&D investors are GlaxoSmithKline (£3.14 billion), AstraZeneca (£1.97 billion) and BAE Systems (£1.45 billion). Foreign-owned companies based in this country also make a significant contribution to the UK economy. There are 245 foreign-owned firms in the UK's top 800, ranked by R&D expenditure, spending a total of £4.36 billion in 2005. The largest three foreign R&D investors are Ford (£689 million), Pfizer (£350 million) and Airbus (£343 million).[76] UKTI highlighted the good position the UK is in globally in terms of getting value-for-money from R&D expenditure, stating also that "we have a particular strength in attracting R&D facilities from overseas companies in this country".[77] This is reflected in the fact that eight of the ten largest foreign-owned R&D investors in the UK have a higher level of R&D intensity than their parent companies.[78]

39. Foreign direct investment that is focused on R&D intensive activities can provide various benefits to the UK. The associated jobs created tend to be of a higher value than, say, assembly plant investment. R&D intensive firms are also more likely to entrench themselves in the UK, for example, as a result of developing links with universities and other scientific institutions.[79] Nevertheless, the UK is increasingly facing competition from other countries, which are also investing in their R&D capacity. Together, China and India produce over 2 million university graduates each year—around eight times the output of the UK, albeit that together they have around forty times the population.[80] Elsewhere, Singapore is investing heavily in its research infrastructure, providing corporation tax breaks to companies investing there.[81] These developments suggest that the UK's current lead in certain sectors is by no means secure in the long-term. As UKTI's Chief Executive put it to us: "I do look over my shoulder and I do not always feel comfortable".[82]

40. In addition to the threat of overseas competition, UKTI highlighted to us the risk that, although foreign firms have a positive view of the UK as an R&D centre, they do not always have enough information on the available opportunities, or how to access them.[83] It is for these reasons that UKTI has established a dedicated R&D programme, one of the main aims of which will be to promote to multinationals and overseas companies the benefits of undertaking R&D in the UK, and collaborating with UK companies and research organisations. The programme will also support UK R&D intensive firms wishing to enter overseas markets.[84] Annual expenditure on the programme will build up to £9 million over the next few years. Most of this money will be spent on staffing, including the wage, travel and subsistence costs of 20 specialists with knowledge of UK R&D activity in specific technologies, who will then be used to target particular companies around the world. Their aim will be to persuade those firms to carry out R&D, or increase their current R&D expenditure, in the UK, be it through inward investment, partnerships with domestic companies, their supply chain relationship or by contracting research from UK universities. UKTI's new specialists will also target UK-based R&D intensive firms wishing to develop their export capacity.[85] Because of the new programme's infancy, UKTI has not yet set itself targets for achievement, nor was it able to give examples of any 'early wins'.

41. R&D undertaken by foreign investors represents a large proportion of total UK R&D business investment. As the UK faces increasing competitive pressures from countries which are rapidly developing their R&D capacities, we support UKTI's dedicating of resources for the targeting of R&D intensive firms. Given that most of the programme's £9 million annual budget will be on staff costs, we recommend that UKTI establishes specific targets for the programme's performance, which should then feed into robust performance measures for all of the staff employed as part of the programme.

The role of the Regional Development Agencies

42. Despite what its name might suggest, UKTI does not have sole responsibility for trade and investment promotion across the whole of the United Kingdom. As noted earlier, the devolved administrations in Scotland, Wales and Northern Ireland operate their own trade and investment functions, while also making use of UKTI's services and its overseas network. Since the 2004 Spending Review, UKTI has also provided around £15 million a year to the 'single pot' from which are funded the English Regional Development Agencies (RDAs). This money, which is more than UKTI spends centrally on its inward investment promotion programmes, is for the RDAs to conduct their own inward investment promotion activities, as part of the Government's economic policy to reduce disparities between the regions.[86] UKTI retains responsibility for trade development advice and services, which it carries out through teams of advisors located in the English regions, working with the RDAs. In addition to the funds allocated to the RDAs from UKTI's budget, the agencies are free to spend additional monies on inward investment promotion from elsewhere in their budgets, and many choose to do so.

43. As part of our inquiry, we asked the RDAs to complete a short survey, detailing their current trade and investment activities, and the benefits they had brought to the regions in recent years.[87] The results showed a number of differences in the approach taken by the nine agencies. Reported annual expenditure on inward investment promotion varies significantly, from £676,000 in 2006-07 for Yorkshire Forward, to more than £3.5 million for the London Development Agency (LDA), with the other seven RDAs spread fairly evenly in between. Staff numbers followed a similar pattern, with the LDA's dedicated investment promotion agency, Think London, leading with 55 employees, based both in the UK and overseas. The level of resources has been reflected in projects won by the regions. Table 1 below shows the number of new projects over the last three years, and the resulting jobs created or safeguarded claimed by each RDA, broken down by agency region.

Table 1: Inward investment projects won and jobs created or safeguarded by the regional development agencies
(2003-04 to 2005-06)

Source: Trade and Industry Committee RDAs survey

44. The fact that 1,143 projects were won and 92,284 jobs created or secured over three years suggests that the RDAs' expenditure on inward investment promotion has yielded results for the regions. However, there is insufficient evidence to judge whether these figures would have been better—or possibly worse—had UKTI carried out the activities devolved to the RDAs itself, acting as the sole inward investment agency for England.

45. Another area in which we sought information from the RDAs was with regard to the sectors on which they focus. Table 2 below outlines which sectors each agency views as a priority for inward investment. It shows a wide range of priorities across the agencies. Understandably, for example, financial services are a particular focus for London and the south east, whereas oil and gas is a priority for the north east. There are many similarities as well. For example, all of the RDAs told us their food and drink, and environmental technology sectors were priorities for inward investment promotion. Eight said this of life sciences and biotechnology, and six said the same for aerospace and automotive, creative and digital, ICT, and medical technologies. This is not a surprising result, given that these industries are not necessarily clustered in one part of the UK. It does, however, suggest that there may be wasteful duplication in the activities of the RDAs in seeking to draw foreign investment into these sectors.

Table 2: Inward investment sector priorities for the regional development agencies

	West Midlands	East of England	East Midlands	London	North West	North East	South East	South West	Yorkshire
Aerospace & automotive	√	√			√	√	√	√
Building technology	√
Business & prof. services					√		√
Creative & digital				√	√	√	√	√	√
Engineering					√	√	√		√
Environmental technologies	√	√	√	√	√	√	√	√	√
Financial services				√			√
Food & drink	√	√	√	√	√	√	√	√	√
ICT	√	√		√		√	√	√
Leisure & tourism								√
Life sciences & biotechnology		√	√	√	√	√	√	√	√
Medical technologies	√		√		√	√	√		√
Oil & gas						√
Transport technologies			√

Source: Trade and Industry Committee RDAs survey

46. We also asked the RDAs about their overseas activities. Table 3 below outlines which agencies currently have a presence in which countries, either through dedicated offices or third party contractors. It shows a range of activities across a number of countries. For example, until fairly recently all of the RDAs were represented in the US and seven in Australia.[89] Within both these countries, the East Midlands Development Agency and Advantage West Midlands operate together under the 'British Midlands' brand (which they also do in India and Japan), while OneNorthEast, the Northwest Regional Development Agency and Yorkshire Forward work together under the 'North of England' brand—in both cases, pooling resources. Yorkshire Forward and OneNorthEast also work together in Japan. In all other cases, however, such as with the five offices in China and the offices in France and Germany, the RDAs operate separately in promoting their regions as destinations for foreign investment.

Table 3: Regional development agencies' presence overseas

	West Midlands	East of England	East Midlands	London	North East	North West	South East	South West	Yorkshire
Australia	√		√		√	√	√	√	√
Belgium	√
China				√	√		√	√	√
France	√		√				√
Germany	√		√		√
India	√		√	√
Japan	√		√		√	√	√	√	√
Korea					√		√
Norway					√
Sweden	√		√
USA	√		√	√	√	√	√	√	√

Source: Trade and Industry Committee RDAs survey

47. A number of organisations expressed their concern to us at the level of RDA activity overseas and how it affects foreign businesses' perceptions of the UK.[90] EEF told us that the agencies "aggressively compete with each other".[91] The Confederation of British Industry (CBI) said there is "a certain amount of overlap and in some cases … an element of confusion".[92] UKTI themselves acknowledged to us that "there are times … when there has been such duplication and competition between regions".[93] It did qualify this, though, by asserting that UKTI retained a good relationship with the RDAs and worked "constructively with them most of the time and in most locations".[94] However, the overall consequence of these overlapping activities is, inevitably, confusion and a dilution of the 'UK brand' overseas and the wastage of taxpayers' money. As the CBI put it, competition between the RDAs "seriously undermines the effectiveness of marketing the UK to foreign investors".[95] We were particularly surprised to learn that the current profusion of RDA representation abroad had taken place with Ministerial approval. UKTI told us the Trade Minister must sign-off the opening of an office overseas.[96] The decision to allow these regional offices seems bizarre to us, given the level of criticism their existence has attracted from all quarters of British industry.

48. Unsurprisingly then, a number of witnesses told us they wished to see better co-ordination of activities between UKTI and the RDAs on inward investment, so that the UK can promote itself with one voice to the rest of the world.[97] In response, as part of its strategy work, UKTI is currently conducting two joint reviews on its relationship with the agencies. One is looking at the regions' overseas presence to see whether there is any "duplication or fragmentation or confusion caused by the RDAs having a network of offices overseas".[98] The other review is considering the delivery of services in the regions, where UKTI currently has responsibility for trade development, while the RDAs have responsibility for inward investment. We were concerned to note that trade services in the regions was also an area where there was a perceived need for greater co-ordination, and where there appeared to be a degree of confusion as to who was actually responsible for delivery of these activities.[99]

49. UKTI intends to complete the review of the RDAs overseas' presence by March 2008, and its review of regional trade and investment activities later this year.[100] In his evidence to us, the Chief Executive, Andrew Cahn, expressed his desire not to see a transfer of resources back to UKTI from the RDAs, but to reduce duplication and fragmentation by persuading the agencies to purchase inward investment services from his organisation instead.[101] We were comforted to see from our survey results that nearly all of the RDAs are aligning their investment strategies with Prosperity in a changing world, with the only dissenting voice coming from the Northwest Regional Development Agency, which expressed its concern about the new focus on emerging markets—the subject of the next section of our Report. We are sceptical, though, about the extent to which UKTI will be able to rein in the RDAs' work overseas. Andrew Cahn told us: "UKTI is location neutral within the United Kingdom. I am equally happy if an inward investor chooses to locate in the South West … or in any other English region".[102] Although this is a rational modus operandi from a UK-wide perspective, we do not believe the RDAs will be willing to adopt such a sanguine attitude unless there is a structural change in the way funding is allocated for inward investment promotion.

50. The Regional Development Agencies have taken the lead in winning a large number of inward investment projects to the UK in recent years. We are deeply concerned, however, by the current plethora of overseas offices being operated by the RDAs. We believe this is diluting the 'UK brand' and confusing potential foreign investors. In addition, we were surprised to see that this problem has been created by central government, which has approved the opening of these offices. UKTI's review of the agencies' overseas operations is to be welcomed, although it is taking place over a long timescale and we are sceptical about its ability ultimately to bring about real change. In the meantime, taxpayers' money will continue to be wasted and the UK's ability to compete in a challenging environment undermined. We recommend that central government seeks to address this issue as a matter of urgency as part of the current negotiations for the 2007 Spending Review. For example, the Government should look closely at whether the division of resources between UKTI and the RDAs is optimal in terms of providing 'front line' support to businesses across all markets.

Focusing on emerging economies

51. Many emerging economies are growing at an unprecedented rate. China's annual economic growth currently stands at just over 11%, while that for India is 8.6%.[103] In these markets there are increasing numbers of middle class consumers who demand specific products and services to meet their needs.[104] At the same time, high-growth firms in these countries are seeking to become global players by establishing themselves with regional headquarters overseas.[105] These emerging economies represent a massive opportunity for the UK, which firms here are only just beginning to seize. Last year saw exports of goods and services to China and India grow by 24% and 28% respectively—much higher than overall export growth, which stood at 13.5%.[106] At the same time, the number of inward investment projects from India more than doubled in 2005-06, creating 1,449 new jobs, making it the third largest foreign investor in the UK.[107]

52. The emerging markets, therefore, represent a huge opportunity for the UK. Yet despite the high level of growth in exports to these areas, we received evidence expressing concern that UK firms were failing to take full advantage of these new markets. The CBI told us UK exports are still heavily focused on the EU and North America, accounting for 78% of goods and service exports, with only 2% going to China and India.[108] EEF cited its research, suggesting only 20% of manufacturers see China as an export opportunity, and only 8% view India as such. In fact, most of the companies surveyed saw both countries as a major competitive threat rather than an opportunity.[109] Part of the reason for this is that companies view emerging markets as challenging to enter, often requiring them to redesign products or acquire new skill-sets.[110] For example, UKTI said to us that "markets like China and India are much more taxing in terms of the culture, the business environment, the regulatory environment".[111] Worryingly, EEF stated that other European firms seem also to be faster than those in the UK at making inroads into these markets.[112] We found this to be the case in our inquiry into Brazil.[113]

53. The Government has established a number of initiatives in order to address some of these concerns. Its cross-departmental Asia Task Force was set up with the aim of lowering barriers to trade between the UK and Asia. It is looking at ways in which government can help companies do business in the emerging markets, for example, through ministerial visits, lobbying for market liberalisation, and targeted support for new and established exporters to these regions.[114] Joint Economic and Trade Committees (JETCOs), chaired at ministerial level, have also been established for India, China and Brazil. These are bilateral partnerships, designed to strengthen trade relationships between the UK and these countries by providing a forum for discussing how to overcome barriers to cross-border trade and investment.[115]

54. In line with these initiatives, Prosperity in a changing world announced UKTI's intention to increase the resources it devotes to developing trade with, and attracting investment from, particular emerging and high growth economies where there are the greatest potential benefits to the UK. It identified 10 countries in which it intends to increase its efforts—China, India, Brazil, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, Turkey and the United Arab Emirates. Where possible, UKTI is also considering expanding resources for six other countries—Malaysia, Qatar, Singapore, South Korea, Thailand and Vietnam. This increased focus on certain emerging markets is being achieved through the recruitment of 15 business advisors, who will focus on medium-sized UK firms with the potential to succeed abroad. More significantly, though, a reallocation of posts is taking place from other parts of UKTI's overseas network. For example, by 2008-09 the number of commercial officers allocated to China will have risen to 113, from 99 in 2005-06. India will see a rise from 76 to 91; Russia from 16 to 26; and Brazil from 39 to 45, although this last increase does not make good the significant cuts made after the 2004 Spending Review.[116] UKTI is not increasing the overall number of staff it employs in its overseas network.[117] Hence the increase in resources in these priority emerging economies is being achieved by a reduction elsewhere—in particular, through a decrease in its US resources by 13% and in its EU representation by 9.5% by 2008.[118]

55. In their evidence to us, EEF and the CBI both welcomed UKTI's increased focus on key emerging markets.[119] For example, EEF said: "we see the value of more resources in the field and think that is very important".[120] The same organisations also noted their concern, however, that this increase in resources was being funded by cuts in UKTI's largest and more established markets. EEF noted that exports to the pre-enlargement EU account for 55% of the UK total, and that this dominance is likely to remain the trend for some time.[121] For inward investment, in 2005-06 the US was by far the most prominent source of FDI, responsible for 446 projects and 14,431 new jobs. This was followed by Japan with 84 projects and 2,054 new jobs. In fact, countries which accounted for about 75% of new jobs and 70% of projects are seeing a reduction in their resources.[122] British Expertise noted also that just because these markets were considered to be 'established', this did not necessarily make them 'easy' to enter or operate in.[123] They believe that there is, therefore, a risk that UKTI is undermining its core markets.

56. We also note that not only are resources being transferred from the UK's established markets, but cuts are also taking place elsewhere in the overseas network. Ghana, Hungary, Kuwait, Nigeria, Philippines, Poland, Senegal, Sri Lanka, Uganda, Uruguay and Zimbabwe will all see a reduced presence and, in some cases, no presence at all by 2008. British Expertise expressed its concern that smaller countries received less attention as priority markets in UKTI's strategy, noting that, at least amongst its members, there was often more interest in doing business in countries such as Trinidad than, say, South Africa or Mexico.[124] British Expertise were also critical of the logic employed by UKTI that by simply increasing resource in a particular country, this would lead to better results. It noted that often a "single well-trained and motivated commercial officer in a market will be highly cost-effective".[125] Increasing posts in one country, therefore, at the expense of removing representation completely in another country, would not be likely to increase the overall effectiveness of the overseas network. A particular case, which we discovered as part of our inquiry into trade with Mercosur, is where the office in Uruguay is to be closed in order to increase resources in Brazil.[126]

57. In the context of not being able to increase the overall size of its overseas network, UKTI defended the greater emphasis on certain emerging economies on the grounds that it is better able to add value for companies seeking to operate in these areas. UKTI said to us: "we do proportionately more good for individual companies in the so-called emerging markets, where some kind of government-to-government market-opening work can be done, than we necessarily do in the more developed markets, where companies are more readily able to help themselves …".[127] UKTI also emphasised the fact that the strategy's emphasis on a few emerging markets did not entail a wholesale retreat from other countries. In fact, only 5.6% of the total overseas network posts would be reallocated over the next two years—hardly a significant re-emphasis.[128]

58. The emerging and high-growth economies present a major opportunity for the UK, both in terms of potential export markets and as a source of inward investment. We are concerned, however, that in order to increase resources in this area, UKTI has had to cut posts elsewhere in its overseas network—particularly in North America and Europe, which are currently its largest export and investment markets, and are likely to remain so for the foreseeable future. We acknowledge, though, that with the exception of those few countries where UKTI representation has been shut down altogether, the overall changes across the overseas network will be relatively minor, affecting 5.6% of posts. UKTI should monitor closely the demand for services across its markets, measuring the activity levels and value-added of its staff, and use this information to ensure its resources are allocated in the most cost-effective way and in the best interests of the businesses it serves. We are also concerned that UKTI does not appear to appreciate that there are 10 emerging markets within the EU.

Providing the skills to market UK plc

59. UKTI's staff require a unusual skill-set for a public sector organisation. Most of its employees have to engage with businesses in the private sector on a day-to-day basis. As EEF put it to us, staff need "to be really expert in understanding the needs of business and identify how it can be helped". As such, it is vital that they have "a good basic knowledge of the market and the available contacts".[129] Overall, "the quality of its individuals is absolutely key to it working".[130]

60. The 2004 Spending Review (SR04) settlement brought about a number of changes, which had repercussions for UKTI's staffing. The requirement to reduce administration costs by £24 million a year has led to a 40% reduction in the number of staff in its London headquarters. There has also been a 15% cut in the size of its overseas network.[131] We have learnt too that funding has been cut in areas such as FCO language training for spouses or partners of overseas officers. Rather than receiving one-to-one classes, they are now offered group courses, either at the FCO or abroad, or online learning.[132] Given the important role that spouses or partners can play in networking overseas, it is most regrettable to see that FCO is reducing the available resource in this area.

61. UKTI acknowledged to us that the cuts resulting from SR04 "have led to a morale issue" within the organisation, although it hoped that this had been, at least in part, addressed by the new strategy, providing "a clear way forward, a clear prospectus for the future".[133] We remain to be convinced that this is the case, given that Prosperity in a changing world comes only a year after UKTI's previous strategy. Indeed, the new strategy places much emphasis on the role its staff will play in its delivery. It sets out UKTI's aim to become "a marketing led, client focused organisation". The implication of this is that staff will have to become more 'entrepreneurial' in their approach, proactively seeking opportunities for UK businesses. To this end, UKTI told us it is putting greater effort into training and retraining its employees, and selecting the right staff for some of its new schemes.[134] As noted already, UKTI is contracting 20 R&D technology specialists from the private sector, who will work with its staff at home and overseas to implement the new R&D programme. Elsewhere, 15 private sector business advisors are being employed as part of its emerging markets programme. In addition, there is already in place an 'International Business Specialist' scheme, which brings 12 private sector secondees into UKTI. Under the new strategy, this will be supplemented by 17 'Sector Champions', also employed from the private sector, who will, among other activities, play a role in developing and implementing UKTI's five priority sector strategies.[135]

62. Our own impression gained from meeting many UKTI staff both overseas and in the UK and from talking to their clients in UK business is that staff overseas are generally well motivated and effective, perhaps because they are relatively isolated from the repeated changes of priority and strategy the organisation has undergone. Staff based in HQ, however, seem less convincing or positive in attitude, perhaps because it falls to them to interpret ever-changing policies imposed on them from outside. Although our interlocutors in UKTI and in business are reluctant to be quoted, we are clear that the reputation of the centre must be improved if the organisation is to win the full confidence of its clients.

63. The successful implementation of Prosperity in a changing world is largely dependent on the buy-in and skills of its staff. Yet, changes to UKTI's structure and strategy have undermined morale within the organisation in recent years. That said, we welcome the increased focus on training, and the recruitment of over 60 staff from the private sector across a range of initiatives, as an important part of UKTI's aim to become a more "marketing led, client focused organisation". As noted earlier, we believe UKTI should now be left to get on with its job, so that staff morale is not adversely affected again in the future by further changes to the organisation.

Charging for services

64. In Chapter 2 we discussed the market failure rationale for government intervention to carry out trade development and inward investment promotion work. There are many aspects of both these activities, where government is the only viable provider or, if not that, then the most cost-effective. For example, trade negotiations in order to obtain access to export markets, or marketing activities that advertise the benefits of operating in the UK, can only really be provided by government. In other areas, such as the provision of tailored information for companies, UKTI may still be best placed to access this readily through its overseas network and central office commercial officers. For these kinds of services, though, the benefits that accrue from them are arguably captured mostly by the firm in receipt of the information, rather than the wider economy. It is debatable then, to what extent these services should be provided free by government. Indeed, UKTI does charge customers for some of its activities, such as the Overseas Market Introduction Service, which puts businesses in touch with its overseas network. UKTI also charges for its Export Marketing Research Service, at a subsidised rate, which offers market intelligence research to aspiring exporters. Here, the level of charging for the service reflects the amount of assistance required.[136]

65. Following the 2004 Spending Review (SR04), UKTI committed itself to increasing the amount of revenue it earns from charging. In 2006 it raised £1.4 million in this way.[137] It is on course to double this in 2007, and double it again by the end of the SR04 period, to £5.6 million. UKTI acknowledged, though, that these figures are still very small in comparison to its overall budget of over £250 million, and that "there is clearly scope … to be significantly more ambitious".[138] To date, one of the biggest difficulties it has found is in engendering the cultural change across its offices, associated with beginning to charge for services that it had previously provided free.[139]

66. UKTI also stated that charging would allow it to be more innovative in its work, and "to provide companies with a much more exciting range of services".[140] This is because charged services would encourage it to develop new offerings that customers would be willing to pay for, and which placed them in competition with private sector firms that also offer information services to potential exporters or investors. At the same time, though, the organisation would have to ensure consistency in the quality of its products so companies knew what standard of service to expect.[141] It would also have to give consideration of the 'willingness-to-pay' of its client groups. For example, small firms thinking about exporting may be put off by charges for services that larger firms are better able to afford.[142]

67. UTKI is beginning to introduce charges for some of the services it offers its customers, although its current revenues from doing so represent a very small proportion of its overall budget. We believe this is an area where UKTI should be much more ambitious, tailoring its services more closely to its clients' needs, and offering innovative products for which customers are willing to pay, while seeking, as far as it is possible, to avoid engaging in what could be seen as unfair or subsidised competition with the private sector. Its incentive to charge should not be undermined by commensurate cuts in its resource budget by HM Treasury.

New targets for a new strategy

68. UKTI's current Public Service Agreement (PSA) target for the 2004 Spending Review period is to "by 2008, deliver a measurable improvement in the business performance of UKTI's international trade customers, with an emphasis on new-to-export firms; and maintain the UK as the prime location in the EU for foreign direct investment".[143] Its performance against this target is measured against five indicators:

—  At least a 30-percentage point increase by 2007-08 in the proportion of UKTI trade development resources focused on new-to-export firms;

—  At least 40% of new-to-export firms assisted by UKTI improve their business performance within two years;

—  At least 50% of established exporters assisted by UKTI improve their business performance within two years;

—  Improve the UK's ranking within Europe in terms of the GDP-adjusted stock of EU foreign direct investment based on the UNCTAD World Investment Report; and

—  374 (in 2005-06), 440 (in 2006-07) and 524 (in 2007-08) successful inward investment projects secured by UKTI in each year of the Spending Review of which 75% are knowledge driven.

69. UKTI's Autumn Performance Report 2006 states it is either 'on course' or 'ahead' in terms of progress towards meeting these targets by the end of the 2004 Spending Review period. Its first two targets, on trade development, focus on new-to-export firms. This approach was widely criticised in the evidence we received.[144] As EEF put it to us, it has led to an "over-concentration of resources on small firms, who have often had limited potential to make a significant difference to our overall trading performance and for whom in some cases exporting was not appropriate".[145] This criticism has been taken on board in Prosperity in a changing world. UKTI told us it would continue to offer a service to new-to-export companies, but they would not be the focus of its next set of targets. This reflects new research conducted by UKTI, which suggests the financial benefits of its trade development work are greater for more experienced exporters than for inexperienced exporters.[146]

70. Despite the change of strategy, UKTI told us that it will continue to work towards its current PSA targets until the end of the 2004 Spending Review period in 2008.[147] As part of the 2007 Comprehensive Spending Review, it is working with HM Treasury to agree a revised set of targets, which will measure delivery against the new strategy from April 2008. Details of these will be announced alongside the final settlement, due later in 2007. UKTI's strategy outlines four broad areas in which it expects to set targets:

—  High value foreign direct investment;

—  R&D and innovative activity of UKTI's customer base;

—  UK business performance; and

—  The UK's reputation as a place to do business.

71. UKTI told us that in the last year it had "shifted … to being a target-based organisation".[148] The targets it is developing as part of the four areas above will be reflected in clear targets for its staff.

72. UKTI is in a period of transition as it completes its final year working under the targets set for it in the 2004 Spending Review. We note that the previous targeting of new-to-export firms for trade development was not supported by industry, and did not necessarily provide a cost-effective use of UKTI resources. We welcome, then, the move away from this focus, acknowledging that this does not mean that UKTI has simply stopped supporting new-to-export firms. Looking forward, we hope that for the next Spending Review the organisation will agree with HM Treasury targets that both reflect the priorities set out in the strategy, and which also have buy-in from the private sector.

73. Overall, we support the reforms to UKTI that will be brought about as a result of its new strategy, Prosperity in a changing world. Developments such as the R&D programme and an increased focus on emerging and high growth markets are welcome. We have expressed concern, however, in other areas, particularly regarding the competing work of the Regional Development Agencies. This is an issue which should be tackled immediately. UKTI must now be given time to implement its new strategy over the next four years, without further major changes to its structure and objectives.

56   Ibid. Back

57   Financial Services Sector Advisory Board, Financial Services UK-promotional strategy, December 2006 Back

58   Q 470 (UK Trade & Investment) and Appendix 15 (Department of Trade and Industry) Back

59   Q 472 (UK Trade & Investment) Back

60   House of Commons Trade and Industry Committee, Seventh Report of Session 2006-07, Trade with Brazil and Mercosur, HC 208, para 109 (hereafter 'Trade with Brazil') Back

61   UK Trade & Investment, Press notice: Financial sector board highlights progress made in promoting strengths of City, May 2007 Back

62   Appendix 50 (UK Trade & Investment) Back

63   Q 473 (UK Trade & Investment) Back

64   Appendix 50 (UK Trade & Investment) Back

65   Appendix 15 (UK Trade & Investment) Back

66   Q 474 (UK Trade & Investment) Back

67   Q 206 (Amicus); Appendices 2 (Amicus) and 48 (Trades Union Congress) Back

68   Appendix 10 (Confederation of British Industry) Back

69   Q 472 (UK Trade & Investment) Back

70   Appendix 50 (UK Trade & Investment) Back

71   Appendices 28 (KPMG), 44 (Society of British Aerospace Companies) and 48 (Trades Union Congress) Back

72   Trade with Brazil, para 48 Back

73   HM Treasury, Department of Trade and Industry, and Department for Education and Skills, Science and Innovation Investment Framework 2004-14, July 2004 Back

74   HM Treasury et al, Science and innovation investment framework 2004-14: next steps, March 2006 Back

75   Department of Trade and Industry, The R&D Scoreboard: The top 800 UK and 1250 Global companies by R&D investment  Back

76   Ibid. Back

77   Q 487 (UK Trade & Investment) Back

78   Department of Trade and Industry, The R&D Scoreboard: The top 800 UK and 1250 Global companies by R&D investment; R&D intensity is calculated by dividing total R&D expenditure by company sales. Back

79   Appendix 21 (EEF, The Manufacturers' Organisation) Back

80   Indian National Association of Software and Service Industries and Chinese National Bureau of Statistics Back

81   Appendix 3 (Association of the British Pharmaceutical Industry) Back

82   Q 488 (UK Trade & Investment) Back

83   Appendix 15 (UK Trade & Investment) Back

84   UK Trade & Investment, Prosperity in a changing world, July 2006 Back

85   Appendix 15 (UK Trade & Investment) Back

86   UK Trade & Investment, Annual Report and Accounts 2005-06 Back

87   Appendices 1 (Advantage West Midlands), 19 (East of England Development Agency), 20 (East Midlands Development Agency), 34 (London Development Agency), 37 (Northwest Regional Development Agency), 38 (OneNorthEast), 46 (South East England Development Agency), 47 (South West of England Regional Development Agency) and 52 (Yorkshire Forward) Back

88   The figures for London include new jobs, but not jobs safeguarded, for which the London Development Agency were unable to provide estimates. Back

89   East of England Development Agency (EEDA) announced the closure of its US office in San Jose, California with effect from 1 April 2007. Back

90   Appendices 3 (Association of the British Pharmaceutical Industry), 8 (British Printing Industries Federation), 10 (Confederation of British Industry), 12 (Deloitte and Touche), 21 (EEF, The Manufacturers' Organisation) and 28 (KPMG) Back

91   Q 38 (EEF, The Manufacturers' Organisation) Back

92   Q 158 (Confederation of British Industry) Back

93   Q 528 (UK Trade & Investment) Back

94   Q 531 (UK Trade & Investment) Back

95   Appendix 10 (Confederation of British Industry) Back

96   Q 536 (UK Trade & Investment) Back

97   Q 39 (EEF, The Manufacturers' Organisation); Appendices 3 (Association of the British Pharmaceutical Industry), 8 (British Printing Industries Federation), 12 (Deloitte and Touche), 21 (EEF, The Manufacturers' Organisation) and 28 (KPMG) Back

98   Q 525 (UK Trade & Investment) Back

99   Q 38 and Appendix 21 (EEF, The Manufacturers' Organisation); EEF, Improving performance? A review of regional development agencies, May 2007 Back

100   Q 525 and Appendix 15 (UK Trade & Investment) Back

101   Q 527 (UK Trade & Investment) Back

102   Q 528 (UK Trade & Investment) Back

103   The Economist, April 28^th-May 4^th 2007 Back

104   Appendices 10 (Confederation of British Industry) and 12 (Deloitte and Touche) Back

105   Appendix 12 (Deloitte and Touche) Back

106   www.uktradeinvest.gov.uk/ukti/appmanager/ukti/countries?_nfls=false&_nfpb=true#c; National Statistics Back

107   UK Trade & Investment, UK Inward Investment 2005-06, July 2006 Back

108   Appendix 10 (Confederation of British Industry) Back

109   Appendix 21 (EEF, The Manufacturers' Organisation) Back

110   Appendix 12 (Deloitte and Touche) Back

111   Q 511 (UK Trade & Investment) Back

112   Appendix 21 (EEF, The Manufacturers' Organisation) Back

113   Trade with Brazil, paras 29, 37 and 82 Back

114   Appendix 15 (Department of Trade and Industry) Back

115   Ibid. Back

116   House of Commons Official Report, 11 December 2006, cols 809-810W Back

117   Q 486 (UK Trade & Investment) Back

118   House of Commons Official Report, 11 December 2006, col 810W Back

119   Appendices 11 (Confederation of British Industry) and 21 (EEF, The Manufacturers' Organisation) Back

120   Q 31 (EEF, The Manufacturers' Organisation) Back

121   Appendix 21 (EEF, The Manufacturers' Organisation) Back

122   UK Trade & Investment, Inward Investment 2005-06, July 2006 Back

123   Appendix 5 (British Expertise) Back

124   Q 383 and Appendix 5 (British Expertise) Back

125   Q 382 and Appendix 5 (British Expertise) Back

126   We discuss the case of Uruguay in: Trade with Brazil, para 174 Back

127   Q 509 (UK Trade & Investment) Back

128   Ibid. Back

129   Q 33 (EEF, The Manufacturers' Organisation) Back

130   Q 34 (EEF, The Manufacturers' Organisation) Back

131   Appendix 15 (Department of Trade and Industry) Back

132   Appendix 53 (UK Trade & Investment) Back

133   Q 463 (UK Trade & Investment) Back

134   Q 500 (UK Trade & Investment) Back

135   Appendix 53 (UK Trade & Investment) Back

136   Appendix 21 (EEF, The Manufacturers' Organisation) Back

137   Q 513 (UK Trade & Investment) Back

138   Ibid. Back

139   Q 514 (UK Trade & Investment) Back

140   Q 515 (UK Trade & Investment) Back

141   Appendix 5 (British Expertise) Back

142   Appendix 28 (KPMG) Back

143   UK Trade & Investment, Autumn Performance Report 2006 Back

144   Appendices 5 (British Expertise), 11 (Confederation of British Industry), 21 (EEF, The Manufacturers' Organisation) and 40 (Scottish Council for Development and Industry) Back

145   Appendix 21 (EEF, The Manufacturers' Organisation) Back

146   Appendix 40 (Scottish Council for Development and Industry) Back

147   Appendix 15 (Department of Trade & Industry) Back

148   Q 502 (UK Trade & Investment) Back