ISCF Foundation Industries - baseline insights

Lead Research Organisation: University of Warwick
Department Name: Warwick Business School

Abstract

Foundation industries (pulp and paper, bulk chemicals, glass, ceramics, cement and metals) are seen as underpinning vital supply chains across UK industry. Interest in ensuring that the UK has sufficient domestic capacity in these sectors has increased due to the potential for disruption to global value chains and the consequences for production across other production sectors. The foundation industries have, however, been faced with a range of challenges related to policy decisions which have impacted on the UK cost base, movements in international commodity prices and firm-level decisions on investment priorities.

Recent efforts to agree sector deals across a number of foundation industry sectors confirms the appetite and requirement to boost the productivity and competitiveness of companies in these industries. It is thought that this will strengthen domestic supply chains and contribute to raising aggregate productivity levels across wider UK industry.

This research will provide a comprehensive understanding of the innovation readiness of the six foundation industries and their evolution over the past decade. This will include a comparative analysis with appropriate competitors in the OECD to determine how the UK sector compares in terms of size, economic contribution, ownership, investment and innovation performance and recent productivity levels and performance. It will assess the relative strengths and weaknesses of UK-based companies in this sector.

A review of academic and grey literature will explore developments in new product, process and service innovations across foundation industries globally and the extent to which these are being developed and, for international innovation, whether these are being adopted by UK firms.

Additionally, engagement directly with businesses - both SMEs and large companies - , their representative organisations (if appropriate) and research institutions will build greater insights into firm-level drivers of and barriers to innovation and technology investment, the challenges facing businesses in implementing them or bringing them to market and establish which hurdles and barriers present the greatest challenges to business success.

This research is primarily intended to inform future decisions on the deployment of the next waves of the Industrial Strategy Challenge Fund. Policy makers have identified a number of grand challenges facing the UK economy and our research will help inform the extent to which UK-based foundation industries are equipped to contribute to help address the challenges and the innovation and investment priorities which will support greater dynamism and productivity in the sector as a whole. Project outcomes will provide the evidence base in support of these future decisions on public spending.

Publications

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Description What are the UK's Foundation Industries?
The UK's foundation industry is comprised of six manufacturing sector - cement, ceramics, chemicals, glass, paper and metals.

KEY STATISTICS:

• Over 7,000 businesses
• A workforce of over a quarter of a million
• A combined turnover of over £67.5 billion

KEY CHARACTERISTICS:

• Similar to the wider economy, majority of businesses in the foundation industries are relatively small with almost nine in ten employing less than 50 people.
• These sectors underpin activity across a wider segment of the economy with two-thirds of output sold to other UK businesses.
• Nearly nine in ten foundation industry businesses reported competing on product quality and customer service with six in ten competing on price.
• Foundation industry businesses tend to be energy intensive, which means they face profound pressures to reduce their carbon emissions.
• There are very few new entrants to these sectors, which leads to exceptionally low levels of churn and little new competition for incumbents.

The performance of the UK's foundation industries
The UK's foundation industries have under-performed the rest of manufacturing and international competitors in the decade following the 2008/09 recession. This has left the UK with one of the smallest foundation industry sectors relative to GDP in the OECD.

Like other sectors of the economy, foundation industry businesses have experienced a severe reduction in turnover and employment as a result of the COVID-19 pandemic and many have adjusted their future growth forecasts accordingly. A net balance of foundation industry businesses expects capital investment and R&D budgets to be lower even as more 'normal' trading conditions resume.
Discussions with industry representative bodies confirmed findings in the literature that the two most significant challenges facing the foundation industry sectors are increased international competition and high energy costs alongside associated regulatory pressures to reduce emissions and environmental impacts.

Despite the challenges faced by foundation industries in recent years, there are nevertheless opportunities for future growth from investment in infrastructure, demand for high-performance materials, improvements in productivity and further progress towards more resource efficient production processes.

Innovation activity in the UK's foundation industries
• Innovation intensity in the UK's foundation industries is generally lower than that in key competitor countries.

• Innovation is uneven throughout the UK's foundation industries: well over a third of businesses in these sectors had not introduced new products in the last three years and a similar proportion had not introduced new processes.

• Smaller businesses are markedly less likely than larger ones to be innovation active. This is important because approximately 98 per cent of businesses in these sectors are SMEs.

• Most reported innovation results in new to firm rather than new to market products and processes, indicating a reluctance to adopt novel, unproven technologies.

What drives innovation in foundation industries?
• The research findings show that innovation in the foundation industries is driven by a number of factors. The most commonly reported drivers were: Increasing sales and market share, improving quality, maintain competitive advantage, reducing costs, increasing production capacity.

• There is also a strong correlation between growth ambition and innovation.


• Innovation in foundation industry businesses often occurs in response to 'crises' rather than systematically or proactively.

How do foundation industry business innovate?
• There is some reported innovation engagement with other businesses in the supply chain but this is less common with businesses outside the supply chain and with universities and research institutions. Overall, innovation collaboration in foundation industry sectors is not widespread

• The use of external business advice is limited but does yield reported benefits in terms of overcoming technical issues and meeting objectives more quickly.

• Industry representative bodies and trade associations vary in the extent to which they actively encourage and support innovation throughout their sectors.

• Around half of FI businesses had applied for or received R&D tax credits, innovation loans or other innovation support during the last three years, higher than that reported in the wider manufacturing sector.

Energy and resource efficiency in foundation industries
• Despite the energy intensive nature of foundation industry businesses, the drive to increase energy and resource efficiency is not a common motivation for innovation.

• However, around half of foundation industry businesses reported making some investment in technology to improve energy or resource efficiency in the past three years, with these investments more likely to have occurred in larger businesses.

• Business also report financial constraints in adopting new technologies to improve resource efficiency, with some also noting that they have achieved all the gains possible with existing technology.

What is holding back non-innovators?
• For non-innovating foundation industry businesses the most reported constraints to innovation were risk, the high costs of innovation and uncertainty around the UK's relationship with the EU.

• There is a widespread perception across surveyed businesses that under-developed management and leadership skills in foundation industry businesses act as a constraint on innovation activity

Structural barriers to innovation in the UK's foundation industries.
Innovation in the UK's foundation industries is also constrained by a number of structural factors. These barriers are important, not just because they constrain innovation directly, but also indirectly because they undermine the effectiveness of more focussed policy measures.

STRUCTURAL BARRIERS:
• High entry barriers and associated very low levels of churn.
• Under-developed management and leadership skills.
• Dispositions and mindsets resistant to innovation.
• Widespread reluctance to collaborate.
• Regulatory and other pressures to achieve profound reductions in carbon emissions.


Can policy support higher levels of innovation in UK Foundation Industries?
There is evidence and a powerful rationale for policy development in this area. There are clear market failures affecting the innovation performance of the UK's foundation industries. In addition, there are a number of distinctive features of these sectors that need consideration when developing policy solutions. The very low levels of new entrants to these sectors limit churn and thereby constrain competition, dynamism, and innovation activity. Beyond this, there are also widespread information failures, which result in exaggerated perceptions of the costs and risks associated with innovation.

Policy options
There is a range of possible policy solutions to drive higher levels of innovation activity across foundation industry businesses. Implementation is likely to require action across a range of government departments and agencies and as well as industry stakeholders.

POLICY OPTIONS:
• Funding and partnerships: focus on collaborative ventures and consortia, which include smaller businesses. Develop a more strategic engagement framework for collaboration between the foundation industries and the research base.
• Firm-level capabilities: Tailoring existing management support programmes to foundation industries, with more encouragement for networking and peer-to-peer learnings.
• Industry representative bodies: An increased role for trade associations in promoting innovation and identifying businesses that would benefit from additional support.
• Foster competition: Encourage and support new entrants to sectors where entry costs can be prohibitive.
• A convening role for UKRI. Engaging businesses, sectors, end-users and the science base to inform innovation and technology priorities, identify barriers and tailor funding solutions accordingly.
Exploitation Route This project was intended to inform the next stage in the Industrial Strategy Challenge Fund relating to the Foundation Industries.
Sectors Chemicals,Energy,Manufacturing, including Industrial Biotechology,Other

 
Description EDI in Foundation industries
Amount £20,000 (GBP)
Organisation Innovate UK 
Sector Public
Country United Kingdom
Start 01/2020 
End 05/2021