Economic rationale for trade development

1.  There are significant productivity benefits to the UK from firms seeking to move into export markets. Where they face barriers to entry as a result of market failures, there is a role for government to play in helping them overcome these. UKTI is able to offer aspiring and established exporters a range of services to assist them in entering overseas markets and which, in many cases, lead them to improve their business performance. We therefore strongly support the case for a publicly funded service of the kind provided by UKTI to exporters. (Paragraph 12)

Economic rationale for inward investment promotion

2.  The UK can benefit from different forms of foreign direct investment not just in terms of the creation of jobs, and the injection of capital, but also through the competition and 'knowledge spillover' effects that inward investors have on the rest of the economy. UKTI has an important role to play in promoting the country as a location for FDI, and has had a successful record in recent years in attracting high-value foreign business to the UK. We agree that its emphasis should be on encouraging 'greenfield' investment where the economic advantages are more certain, and not takeovers. (Paragraph 18)

Is there an economic rationale for outward investment promotion?

3.  As globalisation intensifies the pressures faced by UK firms, there is a growing trend for them to outsource back office and certain supply chain activities to lower cost economies. This is to be expected if they are to remain competitive with emerging market rivals. We do not believe that there is a market failure rationale for UKTI using its resources to support such outward investment as this task is already fulfilled by other countries' investment promotion agencies. Any clarification or advice sought from UKTI in such matters should be charged for. (Paragraph 22)

4.  The role that UKTI should play in helping UK companies expand in overseas markets by investing in manufacturing or service capacity is more contentious. We recommend that the DTI and UKTI garner research to clarify the role such investment plays in increasing UK competitiveness and, consequentially, the role that it should play in supporting firms wishing to invest abroad. We recommend, too, that if UKTI is to offer such services to domestic firms, then it should charge them the full cost of doing so. (Paragraph 23)

Recent policy to support exporters and promote FDI

5.  The way in which the UK government promotes inward investment and trade development has undergone too many organisational and strategic changes in recent years, culminating in the most recent strategy, Prosperity in a changing world. We fear the outcome of the current 2007 Spending Review negotiations, and anticipated machinery of government changes resulting from the entrance of a new Prime Minister, may lead to further upheaval for the current body responsible for this work— UKTI. If UKTI is to have a chance of successfully implementing its current strategy, the Government, and in particular HM Treasury, must refrain from further adjusting the priorities and structure of the organisation, and allow it to get on with doing its job. (Paragraph 28)

UKTI's five sector strategies

6.  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. (Paragraph 31)

7.  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. 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. (Paragraph 34)

8.  UKTI has priority sectors within countries, as well as certain priority markets in each sector on a global basis. 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. (Paragraph 35)

9.  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. (Paragraph 36)

R&D Programme

10.  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. (Paragraph 41)

The role of the Regional Development Agencies

11.  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. (Paragraph 50)

12.  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. (Paragraph 48)

Focusing on emerging markets

13.  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. (Paragraph 58)

Providing the skills to market UK plc

14.  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. (Paragraph 62)

15.  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". 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. (Paragraph 63)

16.  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. 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. (Paragraph 60)

Charging for services

17.  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. (Paragraph 67)

New targets for a new strategy

18.  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. (Paragraph 72)

19.  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. (Paragraph 73)