UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 592-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TRADE AND INDUSTRY COMMITTEE

Europe moves East:

the impact of the 'new' EU Member States on UK business

Tuesday 5 June 2007

MR STEPHEN RADLEY and MS LEE HOPLEY

Evidence heard in Public Questions 1 - 47

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Trade and Industry Committee

on Tuesday 5 June 2007

Members present

Peter Luff, in the Chair

Roger Berry

Mr Brian Binley

Mr Peter Bone

Mr Michael Clapham

Mr Lindsay Hoyle

Mark Hunter

Judy Mallaber

Mr Mike Weir

________________

Memorandum submitted by EEF, the Manufacturers' Organisation

Examination of Witnesses

Witnesses: Mr Stephen Radley, Chief Economist, and Ms Lee Hopley, Senior Economist, EEF, the Manufacturers' Organisation, gave evidence.

Q1 Chairman: Thank you very much indeed for being our first witnesses in a formal evidence session on this Committee's inquiry into Europe moves East. We have already made one visit, as part of our inquiry, to Lithuania, and we have taken some formal evidence from others as well, but this is the first formal session. Thank you for your characteristically cogent and well-argued evidence, which we are used to, and we are very grateful for it once again. Can I begin by asking you to introduce yourselves?

Mr Radley: I am Stephen Radley; I am Chief Economist to the EEF.

Ms Hopley: Lee Hopley, Senior Economist at EEF.

Q2 Chairman: Thank you very much for coming here. Can I ask you a very general question, really, but it is, in a sense, the key question: your evidence is spent discussing the threats and opportunities from the new entrant countries. What do you believe are the most important threats and opportunities for the people you represent in our relationship with those countries?

Ms Hopley: If we look back to just before the accession countries formally became Members of the European Union, there was quite a lot of talk about the threats and opportunities for the UK manufacturing sector in terms of competition for foreign direct investment, competition for export orders and concerns about a mass exodus of manufacturing to these lower-cost economies. Broadly speaking, none of that has really materialised. The opportunities came from access to faster growing markets for manufacturers, certainly faster growing than the traditional Western European markets, and that is providing an opportunity that has been realised; exports to the new EU countries have grown quite a bit faster to the more traditional Western European markets. There have also been opportunities in terms of off-shoring, both locating manufacturing or just from a sourcing point of view, and opportunities for cost-cutting or relocating, perhaps, the non-core functions within a business. It is difficult to look at manufacturing as a whole, in answer to that question. Certainly, some sectors have been affected by EU expansion more than others - motor vehicles is probably quite a good example. Central and Eastern Europe has become something of a hub for automotive production and many of the international OEMs (?) are located there, and that has had implications for suppliers based in the UK. I think there are still opportunities there for the taking, both in terms of off-shoring and exporting.

Chairman: That is very helpful. We will flesh that out, obviously, in more detail during our further questions.

Q3 Roger Berry: So some of the threats that people suggested did not materialise but there have been significant opportunities. Does that mean that, overall, you think the recent accessions have been a benefit to British manufacturing?

Ms Hopley: I think, on balance, the opportunities from trade have been important. Increasingly, manufacturers are dependent on export orders, and the rapidly-growing world economy in recent years has been a benefit, and I think the new EU Members, operating within a similar regulatory framework has offered opportunities - again, for some sectors more than others.

Q4 Roger Berry: You have mentioned the demand side. Clearly, greater access to a market where demand is growing more rapidly than in the UK is a benefit. You did not mention the supply side very explicitly, in the sense that it is also the case that where you have access to a wider market you increase the competition, increase the supply. Has that, for manufacturing as a whole, not caused significant difficulties? Competition with manufacturing produced by low-cost labour, and so on and so forth?

Mr Radley: It is very difficult to take these things in isolation. If you look at the last few years, certainly from the start of the decade manufacturing has been under a lot of pressure and has been changing a great deal over that period. Probably just as significant has been the rise of other low-cost countries, such as India and China. Manufacturing has had to address the issue of being stronger against other currencies - to start with the euro and, more recently, the dollar - and also it had to cope, in the early years of the decade, with a downturn in world markets. So there has been a lot of forces which have been changing the pressures that manufacturing is under, and has forced manufacturing to change. You cannot really look at what is happening in Eastern Europe in isolation. What we have found is that in response to a range of these pressures, including increasing competition from Eastern Europe, manufacturing has reoriented its activities. It has looked at different ways to reduce its costs (part of that has come through investing abroad); it has embraced more fully modern manufacturing techniques, such as lean manufacturing, but, also, more fundamental changes - a lot more focus on innovation and getting into niche markets as well, where there is perhaps less intense competition on price, and a range of other factors as well.

Q5 Roger Berry: Do you see this general picture changing over the next five, ten, or 15 years? You have given reasons why the impact thus far may well have been quite positive. Do you see things changing in the future?

Ms Hopley: Certainly the larger Eastern European economies are trying to move more towards an innovation-led manufacturing strategy. The question there is the timescales over which it will succeed. At the moment, R&D intensity is low compared with Western Europe and the UK, and also they do not compare that favourably on other innovation indicators, such as proportion of those in the workforce with a higher education, for example. So they are moving in that direction and certainly policy is trying to encourage foreign direct investment not just in the production side of things but, also, in the innovation side. It is a question of over what timescale those policies will be successful.

Q6 Mr Weir: One of the things that has always concerned people, perhaps, is migration from the accession countries to the UK. Manufacturing has been the second-largest employer of workers entering from the new Member States. Can you tell us what impact this migration has had on the UK labour market in manufacturing?

Mr Radley: I think the starting point is, probably, just to look very quickly at the impact it has had on the UK economy. We would say that, on balance, it has had a beneficial impact because access to more workers, and often very skilled workers, has allowed the economy to grow at a faster rate without problems of wage inflation taking off and interest rates needing to rise. That helps manufacturers because it has meant that they have been selling into a stronger growing domestic economic. That has been one positive point. I think, in general, you obviously have to look at the number of workers that have come from the accession countries into manufacturing, and we are looking at round about - certainly on the official figures - an extra 25,000 people a year, which is not tiny but is still fairly small in relation to the overall size of the manufacturing workforce. So you have to bear that in mind. Certainly, if you look at the figures, and we have had a lot of conversations with members on that, they have actually said this has given them access to some very skilled workers with very good working habits, and also, probably, in parts of the country - particularly the South East where the problems are just as much labour shortages because the labour markets are so tight - as skills gaps. It has often helped to plug a gap there as well. I think what is clear is that, although it has actually helped to fill some skills gaps in manufacturing and helped manufacturers expand when they might otherwise have been somewhat constrained by skills or labour shortages, it is not a long-term solution to the problems and we still need to put more emphasis on getting more skilled people coming out of schools in science and technology subjects and actually helping manufacturers to develop more effective training, but it has certainly made the situation better than it would otherwise have been in the short term.

Q7 Mr Weir: Would it put off the evil day when manufacturers have to invest in more training?

Mr Radley: Well, our evidence is that manufacturers invest significantly in training. I think the problem is that often the investment is not as effective as it could be and we need to take steps to do that.

Q8 Mr Weir: When we were in Lithuania, we were told that some 15% of the population was now working overseas since accession and it is causing problems in Lithuania with skills shortages in reverse, if you like, and a rise in wages. You say it has helped the UK economy, but is there a danger of people being sucked back to Lithuania with the changing economic situation there and in other accession countries?

Ms Hopley: I have to say, I do not know.

Q9 Mr Weir: Finally, obviously in the last enlargement the UK put quotas on the number of people who could come to work from Romania and Bulgaria. Do you think in these circumstances they were right to do so?

Mr Radley: I think that what is sensible is to have some sort of priority system where you actually give greater priority to those workers that have skills that are in greatest demand, and I think that makes absolute sense for economic reasons. Beyond that, I think you are really looking at reasons of social policy, which we may all have a view on in terms of social cohesion and things like that, but probably that is not particularly the subject of our evidence.

Chairman: Of course that is to put limits on a free labour market, which the European Union is supposed to be.

Q10 Mr Clapham: Obviously your focus has been on engineering, but have you looked at any of the studies which have been done on other sectors? There is, for example, in construction a fear that what is happening is a casualisation in that industry. Is that something that you have looked at and is there any indication that that type of casualisation is also sort of affecting manufacturing generally?

Ms Hopley: I do not think that is something we have picked up.

Mr Radley: I think we would find it surprising if that was happening because everything that we are actually picking up from the survey evidence we have done and from detailed discussions with members is that manufacturers are shifting upmarket and they are looking at producing high-value-added goods and that means that they need more skilled workers and that tends to require long-term investment in a long-term relationship with those workers rather than actually a more casualised approach where you take people on as and when you need them and then let them go again. Certainly we have picked up nothing which suggests we are going in that sort of direction in manufacturing.

Q11 Mark Hunter: I would like to ask you about comparisons with other Western European countries because the evidence that you have submitted to us implies that businesses from other Western European countries are better established in these Central and Eastern European Member States than the UK is. If this is the case, of course then we have the prospect of UK entrants, as it were, having to overcome well-established competitors in order to enter these markets. Could you tell us a little bit more about your view in this area and whether you think that the UK has missed the boat when it comes to exports and investment in the A8 and A2 countries particularly?

Mr Radley: I think it would be true to say that we have been slow off the mark, but I think it is a bit alarmist to say that we have missed the boat. Certainly if you look at the share of our exports going to the new members of the EU and also the Eastern European countries that are outside the EU at the moment, we are behind many of our European competitors, and that is concerning. I think if you just made a simple comparison with Germany, you would regard that as something of an unfair comparison because clearly Germany borders some of these countries and has got strong historical links with them. I think it is worrying that we are behind some of the other countries, such as France, Italy and even Spain, and that is clearly something we need to address. I think what is encouraging though is the most recent survey evidence that we have got has shown that there has been a big increase in interest in manufacturing in Eastern European markets, both within the EU and also outside the EU, so we may have come rather slow to the party, but it looks as though manufacturers are getting involved now. What our evidence also does suggest is that companies have low levels of experience in these markets, so that actually does put a premium on good-quality information provided by organisations like UK Trade and Invest.

Q12 Mark Hunter: So slow off the mark then rather than having missed the boat completely. You also raised concerns in your evidence submission that trade promotion strategies prior to the 2004 accession did not do enough, I think the words were, to ensure that the UK made the most of its opportunities in the region. Do you have any specific observations you would like to make about policy at that time and, perhaps more importantly, what implications are those lessons for today's trade policy?

Ms Hopley: This was also something that was picked up by this Committee in the late 1990s when there was a feeling that the Trade Promotion Board at the time might have been a bit slow in promoting the potential opportunities because the restructuring of these economies occurred long before they actually joined the EU. I think there might potentially have been more of a focus on promoting opportunities further afield in Asia and the Far East at that time, and there might have been reasons for that. If you look at the size of the A8 when they joined, their economy was only about the same size as the Netherlands', so that might have been one of the factors behind that. I think there probably are lessons for the future, depending on Turkey, which is potentially going to be joining at some point in the future, and how the opportunities and threats are promoted in advance of its membership. There are not any other sort of large economies that are probably going to join in the next five to ten years other than Turkey.

Q13 Mark Hunter: I do not want to over-labour this point, but could you just say a little bit more for me specifically about what you think the lessons are for today's trade policy, bearing in mind the mistakes of the past.

Mr Radley: I think one point we would want to make is that overall we have actually found that the new strategy which was developed by UKTI last year is a very sensible one and I think it has put more emphasis on the companies that are really going to be able to sell innovative products in world markets and really make a difference to our trade performance, and it has put more emphasis on emerging economies. I think what we are concerned about is that, although it is right to pay a lot more attention to China, India and possibly other major economies, such as Brazil, it still seems as though Eastern Europe is not getting the attention it deserves, so I think what is absolutely vital is that we address that immediately.

Q14 Chairman: There are wry smiles around the committee table. We have a report coming out tomorrow on the UKTI strategy and one next week on Mercosur Brazil, and some of these issues will be addressed, so I hope you are saying it is consistent with what we say in those reports. Before we move on, there is a very interesting table in your evidence, figure 6, from a survey in 2003 about UK companies viewing different parts of the world as better investment opportunities, and it shows that Britain has a particular interest in China and significantly less interest in Central and Eastern Europe. It is dated 2003 and quite a lot has happened in our discussion of these issues in the last three years, so have you got more up-to-date information or is there more in the pipeline that is coming because not everywhere can be a priority for the British Government or for British business? The world is bursting with opportunities and everybody wants us to be there, it is very flattering, but we have to make these choices, so this is a very useful piece of information for the Committee.

Ms Hopley: We used this table to highlight the difference between UK companies' views of Central and Eastern Europe relative to French and German companies' and a sort of higher degree of interest in China. Since then, we have definitely seen a shift in interest. We have got a survey coming out probably in the next month or so which looks at investment intentions abroad. China is still at the top, but Eastern Europe is now second.

Q15 Chairman: So it will be out within the month, do you think?

Mr Radley: Roughly. What it in particular shows is that it looks at a range of activities that manufacturers are conducting and the area which is, not surprisingly, most likely to see some investment abroad is production and assembly and, if there is going to be any movement out of the UK as a primary location, it is more likely to move to Asia, but there is more of a focus on Eastern Europe than there was before.

Chairman: We look forward to seeing the details of that survey when it is published.

Q16 Mr Hoyle: Historically, government initiatives have been better placed towards Asia and the attraction has been pushed that way, and that has been the problem. Unfortunately, Eastern Europe has had better relationships, for whatever reason, with Germany - geographical or the language barriers have not been as bad. I just wonder what your views are, that the Government's emphasis has always been "Look at Asia, much bigger." Jetco agreements have been with India and China and, really, we have not pushed the boat out in the former Eastern Bloc. Would that be fair to say?

Mr Radley: I think that is right. However, even if you look in detail at Asia, we have done well in some markets, such as India and Hong Kong, compared with our competitors, where we have historical ties, and less well in China. Even in Asia, it is not a simple picture. The thing is we probably do need to pay more attention to Eastern Europe but what we always have to bear in mind is that companies invest abroad for a range of different reasons; they can be reducing costs, they can be market entry, it can be getting more flexibility, it can be access to specialist skills and facilities. What you need to do is provide information and promote a range of different markets and locations rather than loading all your eggs into just one or two baskets - and maybe we have been rather guilty of that in the past.

Q17 Judy Mallaber: A couple of times you have referred to the fact that some of the A8 states are looking to move more into the innovation area in their own economies, to the higher value end of the market, R&D, and so on. However, you have been studiously neutral in terms of whether you think they will succeed in making it. Can you come off the fence and say what your estimate is of how likely it is that those countries will be competing, either medium or long-term, with the UK at that high value end?

Ms Hopley: I think they will be successful eventually, but perhaps the prospects for the Czech Republic, or the Slovak Republic, will be faster than Bulgaria or Romania. If you look back at previous enlargements, such as Spain and Portugal, which were relatively low-cost compared with existing Members at the time, they still have not achieved the sort of innovation-led growth that France and Germany have, and they have been members of the EU since the late-80s, early-90s. So I think success will come but it is a question of timescales, and it will be different for each of the A8. There are issues, particularly for some of the smaller economies, in just having the critical mass of talent to engage in basic scientific research.

Q18 Judy Mallaber: How much information do you have from your surveys and data of where different countries are at in terms of making those developments? Do you feed that back to your own members?

Ms Hopley: Yes, our study was actually carried out by the World Economic Forum looking at innovation in the EU25. On every case, all the accession countries came lower than the EU average and Western European economies. That is something that we highlight to members, with a footnote that this is going to change because they are putting efforts into attracting international R&D investments, and they are putting money into their science base and their infrastructure.

Q19 Judy Mallaber: Which particular sectors are we looking at? Do some stand out more than others?

Ms Hopley: Different countries are focusing on different sectors. I would have to get back to you, but Hungary have outlined which particular sectors they are interested in in attracting R&D. I think biosciences is one of them and electronics maybe as well, but I would need to double-check that.

Chairman: That would be helpful because we are going to Hungary in a couple of weeks' time, so it would be nice to have information before we go, so we can talk about it with more knowledge. I think I have committed the unforgivable sin of rather anticipating my colleagues' questions, but Brian Binley is next.

Q20 Mr Binley: I have just returned from three days in Romania - 22.3 million people, a growth rate of 8% and a traditional trading partner with Britain before the War, actually - and they say they are crying out for Britain to be involved. My question, really, is about how you see that sort of involvement, because we have heard some stuff from you but why are we not there in greater force? Why were we not there in greater force ten years ago?

Ms Hopley: In Romania?

Q21 Mr Binley: Yes. The same could be said for a number of other Eastern European countries. The question is just the same: why were we not there?

Mr Radley: I think quite a lot of the answer relates back to what we have been saying already, that much of the support of information and advice from UKTI or (its previous name) British Trade International under-emphasised the opportunities that there were in many parts of Eastern Europe. There may also have been an issue, certainly in the early part of this decade, that because of the many pressures that manufacturers are under, in terms of recessions in the markets that we are selling into, and also cost pressures caused by currency, for many companies it was a fight for survival in the early years of this decade, and that may mean that they were not able to pay sufficient attention to investing in some of these new opportunities.

Q22 Mr Binley: If I gave you the name of the economic adviser to the Prime Minister, who said: "Please pass this message on to people in England", would you take it up?

Mr Radley: As part of what we do, we are just publishing a report for companies about both the trade pressures and, also, the investment opportunities around the world presented by these emerging economies, and we are actually running a number of seminars and events for them as well. So it is something we could look at.

Q23 Mr Binley: I am going to send you his name and see what happens. We will have a look at what happens in three months' time. Let me come on to what people say. The London Chamber of Commerce suggested, in relation to not exploiting our opportunities: "The UK needs more missions to these markets, especially for potential new exporters, but they are also needed for manufacturing too." The Edinburgh Chamber of Commerce said: "The correct type of market information is what we are often told is missing and maybe we should be structuring our market information in a format that meets the needs of specific economic ambitions rather than a holistic presentation". That leads me on to the question of whether UKTI should be prioritising these in a much more robust way and whether the information that you are getting as a feedback from that whole process is simply good enough.

Mr Radley: I think we have already said that, perhaps, we have in this country neglected some of these market opportunities in the past, but I think it is not that healthy to keep dwelling on the failings of the past, and we should look at what we need to do in the future. Certainly what we find from our own research and talking to companies is that the things that are really valued include the specialist knowledge that the consulates and embassies have on the ground and that they are able to provide to companies. We really need to ensure that we continue to invest in them. What is very helpful from what UKTI are seeking to do now is actually put more resources on the ground rather than having people located in the UK shift that balance. What else companies say is an absolute priority is good quality information and research. Companies are willing to pay for this if it is provided and it is of good quality. Again, it is sensible that UKTI are moving to a strategy of actually charging for some of this information. That will be helpful, it will enable them to invest in and expand the quality of what they do. Looking into the medium term, you have to look at whether the private sector should be playing a greater role in providing some of this information and advice, and I think we need to look at ways to do that.

Q24 Mr Binley: I am glad you have turned to that, because it seems to me that British industry has lost all the entrepreneurial flair that it used to have when it went out and conquered the world. I think we got boring, I think we got complacent, and I feel that in the papers I have received here there is a moaning about everybody else but no responsibility placed on the manufacturers and the commercial enterprises themselves. Is that fair?

Mr Radley: I think some of those criticisms may have had some degree of truth in the past, but what you have seen in the last four or five years is that manufacturing has changed significantly. Those companies that went through the horrendous experience of the early decade and have come out of it the other end have realised they have needed to change, and they are doing a range of different things now, putting more emphasis on innovation, developing niche products, earning more revenue from services, but also they are being forced to look at developing a greater range of markets abroad. Our most recent evidence suggests that for 37% of companies in our membership exports are more than half of their markets. Clearly, if you are going to be that dependent on exporting you cannot just rely on the mature markets of the United States and Western Europe; you have to look all around the world to develop all the different market opportunities that are there, if you are going to see growth in your companies. That is what we are finding the majority of our members are doing now.

Q25 Chairman: What you have actually said, I think, in part, in answer to Mr Binley's challenging questions is that actually British business does, to a significant degree, take its lead from UK Government advice as to what markets it should exploit. I find that genuinely fascinating and, actually, rather surprising. It proves you need UKTI but it rather suggests that Mr Binley is right, that perhaps we are not being quite entrepreneurial enough in our relationship with the world.

Mr Radley: What you probably need to look at is how this differs by size and type of company. The issue is that for the smaller companies - and there are a lot of them now - it can be difficult for them. They can get some information but it can actually be difficult for them to get the specialist information that Governments are offering in a privileged position.

Q26 Chairman: So small businesses trust government - shock, horror.

Mr Radley: On this issue they do.

Chairman: I will not pursue it. It is very interesting. Thank you.

Q27 Mr Bone: What I do not understand is why we are investing and training heavily with China, which is a long way away and has a Communist regime, so who knows what is going to happen, yet we have these countries in Central and Eastern Europe who are right on our doorsteps, which are democracies and where economically there are no trade barriers. I cannot understand why we are not doing better, relative. Is it the fact that there still is the concern of the Russian Bear or the fact that their energy supplies can be switched off? Logically, we should be much, relatively, stronger in Europe than we are investing all that many thousands of miles away in China.

Ms Hopley: Exports to China account for 1.5% of total UK exports. I do not think that should be overstated, but I think companies are taking out ----

Q28 Mr Bone: I am sorry, I meant it the other way round. We are investing in China, for instance, and importing back to us. More logically, we should be investing in Central Europe, part of the EU. There does not seem a logic why it is the other way round.

Ms Hopley: I guess that very much depends on the product. In some cases it is just as cheap to source from Central and Eastern Europe once you have factored in things like lead times, transport costs and logistics, and in other cases it is not. Labour costs in China are a mere fraction of even what they are in Eastern Europe. So I guess it depends on the product strategy. In some cases it may make sense to go to somewhere like China, India or Vietnam, and in others, where there is, perhaps, a higher specification, or where you have concerns over intellectual property protection, Central and Eastern Europe does make more sense.

Q29 Mr Bone: With the single market and the fact that all the economic advantages are there, we are not using the EU to our greatest benefit whereas some of our continental cousins are much better at it.

Mr Radley: If you look at the statistics, combining the accession Members of the EU and, also, other parts of Eastern Europe that are outside the EU, our exports to those markets are over two times our exports to China and India combined, so it is not as though we are neglecting those markets. Also, when you talk about investing abroad, as I said earlier, it is not just about sourcing low-cost products, it is also about investing in these markets to be well-placed as they show strong growth. I think for many companies China is going to be one of the most exciting markets. It is a huge population with very rapid economic growth, so for many of them it would be an absolute mistake not to be in China.

Chairman: Was I not concentrating properly? Did we ask about energy security?

Mr Binley: Well, I dropped it in and it was rather rolled over. I suggested was it the fear of Russia, the fact that they can turn the energy supplies off, and it was sort of brushed past really.

Q30 Chairman: Exactly.

Mr Radley: I think for some manufacturers the fear of energy security in the UK has actually been affecting their investment decisions in the last few years, but hopefully that has been addressed now. We have not asked any specific questions in any of our surveys about whether energy security has affected companies' attitudes towards investing in Eastern Europe, but I think a parallel question which was actually asked about export opportunities to Eastern Europe has actually shown growing interest in selling to Eastern Europe over the past few years at a time when clearly worries about energy security have grown, so it does not seem as though our member companies are viewing concerns over energy security as something that is actually going to undermine the dynamism of economies in Eastern Europe.

Q31 Mr Binley: Or the influence of Russia?

Mr Radley: No.

Q32 Mr Clapham: Could I just refer to your submission because there is a very interesting point and I want to develop it. In paragraph 7, you say, "Nevertheless, our survey earlier this year showed that more companies see the potential for growth further east. Almost 40% of respondents cited the non-EU countries of Eastern Europe (including Turkey, Russia and other EU applicants)", and that compared with 30% of companies seeing future growth in the new EU members. Then at paragraph 10, you say, "Interestingly, these smaller companies expressed more interest in the growth potential of Eastern European economies outside the EU", so your submission tends to suggest that the smaller companies are looking for growth outside the new EU entrants. There is there an indication of entrepreneurship and they are looking at Russia and at Turkey. Why is it that it is the smaller companies that are looking at that kind of expansion?

Mr Radley: If you look at the responses to the survey, the high level of interest in Eastern European countries outside the EU is across the board of all firm sizes. All firm sizes see more opportunities outside the EU than within the EU. I think there is probably an issue for smaller companies in that they are seeing that perhaps some of their larger, more established competitors have got into the new EU countries already, so they are looking a bit further, saying, "Well, where are the big opportunities for us to get into which have not been covered adequately by other companies already?", and they are looking a bit further afield at Eastern European countries that are outside the EU.

Q33 Mr Clapham: Is there any indication that UKTI, for example, is assisting those companies that want to explore the market, shall we say, outside the EU?

Mr Radley: Yes, there is. Are you talking about small companies here?

Q34 Mr Clapham: Well, the smaller companies.

Mr Radley: UKTI provides a lot of help within the UK in terms of helping these companies become export-ready and it provides sort of fairly general information, but then there is specialist information ----

Q35 Mr Clapham: But are they giving direction to Eastern Europe outside the EU?

Mr Radley: No, I do not think there is any specific assistance, saying, "Don't think of the EU, think outside the EU". I do not think there is any specific direction that has been given.

Q36 Mr Clapham: So what we are saying is that there is the potential for growth there and companies see that, and UKTI is encouraging, but yet there is more needed to give those companies a push to get into those new markets?

Mr Radley: I think the thing is that a significant minority of companies are doing this for themselves and they are being forced to look at a range of different growth markets around the world because the opportunities to sell to major customers in the UK are less than they were before, so the process is already happening. I think probably what can happen is that UKTI, by providing good-quality, specialist information, helping companies developing contacts, can give this a further push and add a little bit more momentum to it.

Q37 Mr Hoyle: My good friend next to me, Mr Clapham, did mention countries like Turkey which are probably into the next EU enlargement, and there are a lot of aspirant countries out there who still wish to join. Can UK business and the Government learn anything from the 2004/07 enlargement when we are looking forward for business? What lessons can we learn from the failings we have previously had?

Mr Radley: Can you be a bit more specific? Are you thinking in terms of advice?

Q38 Mr Hoyle: Advice and how we can make benefits. What we have said is that we have already been through the issues and previously we missed out, did we not, and we did not invest when we should have done, did not take up the opportunities that were there, so what can we do next time round when we have an EU enlargement? Is there anything that we can learn from our previous mistakes, just generally?

Mr Radley: I think one thing to learn would be to act absolutely now because a lot of the restructuring and privatisation and all the opportunities that will be created are happening now and they happen well in advance of any countries joining the EU, so I think that would be the key point we would want to make.

Q39 Mr Hoyle: So get in now?

Mr Radley: Yes.

Q40 Mr Hoyle: Is that fair to say?

Mr Radley: Yes.

Q41 Mr Hoyle: Is that the same for Turkey?

Ms Hopley: I think there is already quite a lot of UK firm activity in Turkey at the moment. There are still many opportunities to highlight and in many industries they are going through the privatisation process at the moment, so that is an area that UKTI should be aware of and making firms aware of.

Q42 Mr Hoyle: So you accept that Turkey will actually get into the EU?

Ms Hopley: Well, I think whether it does or does not, it is the fastest-growing OECD country at the moment. It is in a good location, bridging Europe and Asia, and there are opportunities there. It has a large, fast-growing, young and low-cost labour force, so whether it becomes an EU member over the next couple of years or further out, it is still a location that our firms should be aware of.

Q43 Mr Hoyle: With or without joining the EU?

Ms Hopley: I think it is potentially an important market, yes.

Mr Hoyle: I agree with you.

Chairman: I am surprised Mr Bone is not challenging you on how British businesses are much more into the non-EU members than the EU members!

Mr Bone: It is obvious!

Q44 Chairman: You put at the end of your submission to us a very helpful chart about corporate tax rates, but you do not say a great deal about it in your written submission. In the political debates within the UK, a lot of attention is often paid to Britain's competitiveness in terms of corporate tax rates. We heard when we were in Lithuania that they are modelling themselves on Ireland's policy of low corporate tax rates. This inquiry is about the impact on the UK of the new Member States, the eight or the two, the recent ones. How concerned should we be about the fact that, according to that schedule, the UK is unique in not having reduced its corporate tax rates or is it not a matter of concern?

Mr Radley: Clearly more recently it has. I think what we would want to stress is that it is not just the corporation tax rates that we need to look at, but it is the overall tax burden on business and certainly for manufacturers a big issue in recent years has been the rise in taxation that adds to their costs before making profits, so those would cover national insurance, business rates and environmental taxation, so we want to address taxation in the round rather than just looking at corporation tax. I think on corporate rates in particular, there is clearly evidence that it does affect international decisions and it certainly would be a significant concern if our corporation tax rates were to get out of line with many of our competitors'. I think in terms of offering any more definite conclusions than that, I would draw your attention to the fact that we are actually doing a piece of work at the moment that we will be publishing ahead of the pre-Budget, and I would like to slightly hold our fire on that one.

Q45 Chairman: Finally, I have heard some British businesses in the Midlands, manufacturers, who have said that they would actually rather we deregulated than cut tax rates to make us competitive with these new economies. For them, regulation is more important. Within the European Union, is there scope for significant deregulation or should we actually look to be racking up the regulatory burden on these Member States to counterbalance competitive issues that way?

Mr Radley: I think the ultimate issue is not either/or, but we have to pay attention to producing regulation and producing better-quality regulation just as much as paying attention to the competitiveness of our tax system. I think also what we are finding from our research on tax is that it is not just the issue about the level of taxation, but it is the level of regulatory burden that is associated with taxation.

Q46 Chairman: The complexity of the tax system?

Mr Radley: Yes.

Q47 Chairman: Well, we could explore this at great length, but my colleagues on the Labour side of the House are flying away to a hustings meetings for the deputy leadership of their Party, so we must draw matters to a conclusion here, but we really are extremely grateful to you for your very clear evidence and some very helpful insights during this oral session. If there are things that you would like to tell us on reflection, please get in touch with us, and we are waiting for the new survey which comes out in about a month or so's time. That would be very helpful.

Mr Radley: We will give you that.

Chairman: Thank you very much indeed.