Economic_Performance

Economic PerformanceEvidence Base RS2010

Regional Intelligence Unit NWDA

Renaissance House Centre Park Warrington

WA1 1XB

Tel: 01925 400 291

This report is published by the Regional Intelligence Unit as part of its continuing commitment to inform the sustainable economic development of the Northwest of England. It has been produced by the NWDA Research Team, and whilst ever effort has been made to ensure the accuracy of the material in this report the NWDA or the RIU cannot accept any responsibility for decisions based on the material that follows Further Information If you require further information on this report, please contact: Nicola Christie Economist [email protected] 01925 400 293

mailto:[email protected]

Economic Performance

Contents Current Economic Recession ...........................................................................................................................................6 SECTION ONE: Economic Performance..........................................................................................................................7

GVA per capita differentials .......................................................................................................................................11 Assessing the GVA per capita Gap ...........................................................................................................................13

SECTION TWO: Productivity..........................................................................................................................................15 SECTION THREE: Gross Disposable Household Income.............................................................................................17 SECTION FOUR: Productivity Drivers............................................................................................................................19

Skills...........................................................................................................................................................................19 Enterprise ..................................................................................................................................................................24 Investment .................................................................................................................................................................29 Innovation ..................................................................................................................................................................31 Competition................................................................................................................................................................33

SECTION FIVE: Differences in Regional Economic Performance.................................................................................37 Market Failures in the Five Drivers of Productivity ....................................................................................................37

SECTION SIX: Structure of the Northwest Economy and Industry Productivity Levels.................................................40 Manufacturing ............................................................................................................................................................42 Industrial Structure.....................................................................................................................................................43 Sector labour productivity ..........................................................................................................................................46 Manufacturing sub-sector labour productivity............................................................................................................48

SECTION SEVEN: The Changing Global Economy and Potential Threats to Regional Economic Performance.........49 References......................................................................................................................................................................52

Data: ..........................................................................................................................................................................52 Reports: .....................................................................................................................................................................52

Index of Figures Figure 1: Regional GVA per capita – 2007.......................................................................................................................7 Figure 2: Regional GVA and GVA per capita comparisons – 2007..................................................................................8 Figure 3: Northwest GVA per capita index 1990 – 2007, Eng = 100 ...............................................................................8 Figure 4: Share of total regional GVA at sub-regional level, 2006 ...................................................................................9 Figure 5: Sub-regional GVA per capita, 2006.................................................................................................................10 Figure 6: Sub-regional GVA per capita 1997-2006, Eng = 100......................................................................................11 Figure 7: Working-age population trends, England and Northwest, 1990 – 2007..........................................................12 Figure 8: Regional employment and economic inactivity rates ......................................................................................13 Figure 9: Average per annum growth rate of GVA per capita gap .................................................................................14 Figure 10: Comparison of regional economic performance indicators ...........................................................................15 Figure 11: Change in output and productivity indicators in the Northwest, 1997-2007..................................................16 Figure 12: Comparison of Gross Domestic Household Income, 1997-2007, Eng = 100 ...............................................17 Figure 13: Comparison of NUTS 2 Gross Domestic Household Income, 1997-2007, Eng = 100 .................................18 Figure 14: Highest qualification attained.........................................................................................................................20 Figure 15: Percentage in employment by educational attainment, 2008 .......................................................................21 Figure 16: Percentage of employees & self-employed having undertaken training in the previous 4 & 13 weeks, 2008........................................................................................................................................................................................22 Figure 17: Occupation by occupational category in 2001 and 2008 (% of total jobs) ....................................................23 Figure 18: Earnings by occupational category, 2008 .....................................................................................................23 Figure 19: Total entrepreneurial activity in the UK, 2008 (% of adult population) ..........................................................25 Figure 20: Business start-ups per 10,000 resident adults by region, 2007 ....................................................................26 Figure 21: Change in business start-up rates per 10,000 resident adult population 1997-2007....................................28 Figure 22: Three year survival rate for business start-ups in 2004 (%)..........................................................................29 Figure 23: Investment by UK and foreign owned businesses in Northwest and England as a percentage of GVA ......30 Figure 24: Investment by UK and foreign owned businesses in the Northwest and England as a percentage of GVA, 1998-2006.......................................................................................................................................................................30 Figure 25: Business enterprise research & development as a percentage of GVA .......................................................32 Figure 26: Total expenditure on research & development as a percentage of GVA, 2007............................................33 Figure 27: Trade exports and imports as a percentage of GVA.....................................................................................34 Figure 28: Stock of VAT registered businesses per 10,000 16+ population, 2008 ........................................................35 Figure 29: Stock of VAT registered businesses per 10,000 16+ population 2008 .........................................................36 Figure 30: Number of fewer businesses in Northwest compared with England per 10,000 16+ population..................36 Figure 31: Share of total GVA by broad sector 2006......................................................................................................40

3 Regional Intelligence Unit



Figure 32: Sectoral contributions to total regional GVA, 1989 to 2006 ..........................................................................41 Figure 33: Sectoral share of GVA growth between 1989 and 2006 ...............................................................................41 Figure 34: Change in regional contributions to manufacturing GVA in England ............................................................42 Figure 35: Share of regional manufacturing GVA 2006..................................................................................................43 Figure 36: Industry share of manufacturing GVA growth between 1989 and 2006 .......................................................43 Figure 37: Northwest GVA location quotients by broad industry 1998 and 2006...........................................................44 Figure 38: Northwest employment location quotient by broad industry 1998 and 2006 ................................................45 Figure 39: Northwest GVA location quotients by manufacturing sub-sector 1998 and 2006.........................................45 Figure 40: Northwest employment location quotients by manufacturing sub-sector 1998 and 2006.............................46 Figure 41: Labour productivity, GVA £000’s per full-time equivalent by broad sector, 2006 .........................................47 Figure 42: Change in labour productivity in broad sectors in the Northwest (Eng = 100), 1998 and 2006....................47 Figure 43: Labour productivity GVA £000’s per full-time equivalent by manufacturing sub-sector, 2006......................48 Figure 44: Change in labour productivity in manufacturing sub-sectors in the Northwest (Eng = 100), 1998 and 2006........................................................................................................................................................................................49 Map 1: VAT registration rates per 10,000 resident adult population by district, 2007....................................................27


NB: Please note that all data provided by Office for National Statistics is Crown copyright material and is reproduced with the permission of the Controller of HMSO. Maps produced by the Regional Intelligence Unit have been created using Ordnance Survey data and comply with copyright and licensing restrictions. © Crown Copyright and database right 2009. Ordnance Survey Licence OS number GD 021102. Please Note:

The evidence in this paper is deemed to be the most statistically reliable and regionally consistent which generally means it is quantitative in nature and can be applied across the region;

The data used in this paper is the most up to date at the time of writing;

Aside from the brief section below the purpose of this paper is to collect statistical evidence for a range of factors concerning quality of life – its purpose is not to list policy, strategy or projects in this area;

This paper is not an exhaustive evidence base – there will be areas that have not been touched upon in significant detail. It includes evidence from internal expertise in the NWDA, through consultations with regional stakeholders and finally through a steering group comprised of a number of regional stakeholders.




Current Economic Recession

i.i In 2008 the global economy entered recession as the crisis in the banking and financial markets spread to the real economy. This has led to an unprecedented level of policy stimulation around the globe in an attempt to stabilise the banking system and combat the recession; governments have initiated tax cuts and additional spending to boost demand within economies.

i.ii The latest Regional Economic Forecasting Panel report highlights that as a result of the sharply weakened economic environment in 2008 the Northwest economy grew by just 0.6% compared to UK growth of 0.8%. In 2009 the panel expects that output in the region will shrink by 4.2% less severe than the likely outturn for the UK as a whole. Sharp declines are expected in the manufacturing and construction sectors. It is expected that the strength of the initial recovery will be weak, with growth in 2010 for the Northwest forecast to be just 0.2%. Like the UK as a whole the Northwest economy is forecast to grow at rates below historical trend through to 2012.

i.iii The panel believes that in 2009 the recession in the Northwest will be less severe than in the UK overall, however recovery over the forecast period is expected to be weaker in the region than nationally. Financial and business services in the Northwest are forecast not to be as badly effected by recession as the UK overall, however the panel expects that the sector will not benefit as much from the recovery as nationally Expectations are that the decline in output from the region’s manufacturing sector will be less severe than for other regions, with defence related business supporting the sector through the recession. Stimulus from global restocking is forecast to continue throughout 2010 sustaining recovery in manufacturing output. The collapse in construction activity in the Northwest is expected to be slightly less severe than for the UK overall; however prospects for the sector remain weak in the short-term with year-on-year growth not likely to occur until 2011. Prospects for consumer spending are likely to remain weak throughout the recovery in 2010 and 2011, the impact being only modest growth for distribution, hotels and catering. Government and other services is forecast to be the only sector to see modest growth in 2009, looking forward over the remainder of the forecast period expected cuts in public spending will result in falls in output in 2010 and 2011. The scale and nature of the public sector in the region may mean that it is disproportionately affected by public spending cuts in the future.

i.iv The panel forecasts that Northwest employment will fall in 2009 with all broad sectors experiencing a decline, the largest of which are expected in manufacturing, financial and business services, transport and communications and distribution, hotels and catering. Employment is expected to continue to fall year-on-year through to 2012 as a lagged response to the prolonged economic downturn and subsequent cuts in government spending. Government and other services has been a major source of employment growth in the region, however prospects are that employment will now fall over the medium-term as public spending is reined in. Unemployment has continued to rise throughout 2009. Although the rate of unemployment growth has slowed the outlook is for unemployment to continue to rise over the forecast period. The unemployment rate is forecast to reach 7.5% by 2012 and will remain above the UK average.

i.v Current data indicates a strengthening in global and UK economies with rising activity highlighted by a turnaround in the global inventory cycle. However uncertainty remains as to the strength and sustainability of the recovery. Whilst confidence has improved throughout 2009 the panel sees this as typically reflecting a stabilising in demand at low levels rather than any sustained recovery. The underlying problem of levels of indebtedness within the economy remains a considerable risk. The panel is concerned over the number of companies that may currently be able to trade because of low debt interest costs and the accommodating actions of the financial sector, but which may find it hard to continue when the current policy stimulus is withdrawn and the cost of finance increases. Furthermore there remains little evidence that businesses have started to re-invest, this could hinder the capacity to take advantage of opportunities presented by the recovery. Consumer confidence in the region remains fragile with concerns continuing about unemployment; whilst cuts in public spending and increases in taxation are expected to restrict growth.1.

1 Regional Economic Forecasting Panel Business Forecast Autumn 2009



SECTION ONE: Economic Performance 1.1 Significant and persistent differences in economic performance exist between and within UK regions.

Regional policy must be focused on raising the performance of the weakest regions rather than simply re-distributing existing economic activity. Policy must be designed to build on the indigenous strengths in each locality and region. Unless unfulfilled potential in every area is released the UK will not meet the challenge of increasing its long-term economic growth rate.

1.2 The broadest indicator of economic performance is Gross Domestic Product per capita, the total output of the economy relative to the total population; regionally this equates to Gross Value Added (GVA) per capita.

1.3 Within the UK there are persistent differences in GVA per capita performance. The latest official figures available at the regional level are for 2007 and show that although the Northwest has the third largest population (6.9million) and the third largest economy (£119bn), in GVA per capita terms it is ranked sixth out of the nine regions; at £17,433 it is 15% below the England average. London is the leading region with GVA per capita 48% above the England average whilst the North East has the lowest level of GVA per capita 23% below the England average. The Northwest is not punching its economic weight, its relative performance compared to the East of England highlights this fact, the East of England has an economy worth £116bn (ranked 4th) however has a level of GVA per capita 15% above that of the Northwest.

Figure 1: Regional GVA per capita – 2007

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Source: ONS Regional Accounts

1.4 Over the period 1997 to 20072 average annual GVA per capita growth in the Northwest of 4.7% lagged the England average of 4.9%. The best performing region over the period was London (5.9%) followed by the South East (4.9%) and the South West (4.7%). Over the economic cycle as a whole the Northwest considerably outperformed its comparator regions in terms of GVA per capita growth (Yorkshire and the Humber 4.3% pa and the West Midlands 4.1% pa).

2 HM Treasury estimate of the latest UK economic cycle


Figure 2: Regional GVA and GVA per capita comparisons – 2007

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1.5 Figure 3 shows that over the period 1995 to 1999 GVA per capita fell considerably from 88.6% of the England average to 85.9%, although GVA per capita continued to decline relative to the England average until 2004 the rate of decline slowed significantly reduced. Since 2005 the Northwest has experienced an increase in relative GVA per capita as GVA growth has picked up whilst population growth has marginally declined.

Figure 3: Northwest GVA per capita index 1990 – 2007, Eng = 100

83%

84%

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87%

88%

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90%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Eng

=10

GVA per capita




1.6 Economic performance across the region varies considerably, the latest sub-regional GVA data for 2006 shows that 40% of Northwest GVA originates from Greater Manchester followed by 19% from Lancashire, 18% from Cheshire, 16% from Merseyside and only 6% from Cumbria.

Figure 4: Share of total regional GVA at sub-regional level, 2006

6%

18%

40%

19%

16%

Cumbria

Cheshire

Greater Manchester

Lancashire

Merseyside


1.7 Sub-regional GVA per capita is a workbased measure, and at the level of sub-regions (NUTS 2) commuting patterns skew the data. Essentially this leads to an overstatement of GVA per head in areas that encompass larger proportions of workplaces relative to resident populations. However, taking this into consideration, the data provides a useful indication of differing levels of economic activity and performance in the region.

1.8 GVA per capita is highest in Cheshire, £20,822; it is the only sub-region above the England average of £19,413. Merseyside has the lowest level of GVA per capita in the region £13,615, and along with Cumbria (£14,044) and Lancashire (£15,145) is in the bottom 10 NUTS 2 areas in England.



Figure 5: Sub-regional GVA per capita, 2006

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1.9 Data for the sub-regions covering the period 1997-2006 shows that GVA per capita growth was highest in the urban centres of the region with growth of 5.0% pa for Merseyside and 4.8% pa for Greater Manchester; Cheshire experienced growth of 4.6% pa followed by 4.1% pa growth for Lancashire. Cumbria experienced the lowest per annum growth (3.1% pa) substantially below the other areas of the region; however this is a result of lower growth rates during the late 1990’s and early 2000’s, in recent years Cumbria has posted growth rates in line with the other sub-regions of the Northwest.

1.10 Over the period 1997 to 2006 Cheshire, Cumbria and Lancashire experienced a decline in GVA per capita relative to the England average. The largest decline being in Cumbria were GVA per capita fell from 84.2% to 72.3% of the England average. Over the last couple of years GVA per capita in Cumbria and Lancashire has stabilised relative to the England average, whilst Cheshire has seen a small pick-up. GVA per capita in Greater Manchester and Merseyside remained relatively unchanged over the period of the last economic cycle. Changes in the labour market and demography of the sub-regions will have, to a certain extent, impacted on of GVA per capita trends (See Demography and Labour Market chapters for further details).



Figure 6: Sub-regional GVA per capita 1997-2006, Eng = 100

65%

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Cumbria Cheshire Greater Manchester Lancashire Merseyside


GVA per capita differentials

1.11 At the most fundamental level regional and sub-regional differentials in GVA per capita will be a function of variations in:

Employment; the number of people who are working depending on; Demographics (the working age population) Labour market participation rates Unemployment Productivity; the output each worker produced

1.12 Essentially there are two ways of increasing GVA per capita:

To increase the total labour input in the economy by having a higher level of employment by hours worked.

To increase productivity by increasing the amount of output each person produces.

1.13 Analysis of labour input in the economy indicates that whilst the working-age population in England increased by 8.3% between 1990 and 2007, equivalent to an average annual growth rate of 0.5% per annum; growth in the Northwest was far more modest at 2.2% (or 0.1% per annum). However this period as a whole conceals distinct trends; generally during the 1990’s the region experienced working-age population decline, in contrast since 2001 there has been recovery. Analysis suggests recent growth in the region’s working-age population has been the result of net immigration. A reliance on immigration for regional population growth is a risk in terms of the growth potential of the region, highlighted by the slowdown in population growth since 2004 as net immigration has fallen back; a result of falling job opportunities in the region attracting fewer workers in the last few years. This can be seen in Figure.7.



Figure 7: Working-age population trends, England and Northwest, 1990 – 2007

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1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

England Norhtwest

Source: ONS Population Estimates

1.14 Whilst the Northwest, in line with England as a whole has been reliant on immigration for working-age population growth, total population has been increasing due to growing numbers of older individuals. This not only posses a risk to future economic growth performance in the region, due to a larger number of dependent individuals relative to fewer economically active individuals; the trend could also provide an opportunity for the region if we can successfully implement plans to keep older workers and their skills in the workforce.

1.15 Examining the latest employment rate figures indicates that 71.3% of the working-age population in the Northwest are in employment compared with 78.5% for the region with the highest figure, the South East, 78.3% for the South West and 77.2% for the East of England. In terms of economic inactivity the Northwest is ranked second behind London; the regions with the lowest levels of inactivity are the South East, South West and East of England. Significantly comparator regions in terms of GVA per capita exhibit similar employment and economic inactivity rates to the Northwest (Yorkshire and the Humber 73.0% and 21.9% and the West Midlands 71.7% and 22.7&).



Figure 8: Regional employment and economic inactivity rates

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Source: ONS Annual Population Survey

1.16 These datasets highlight the link between regional working-age population shares, employment and participation rates and regional productivity levels. Highly productive regions attract more people who wish to participate in the labour market, whilst a high proportion of these workers leave the labour force in low productivity regions. Therefore to successfully impact regional economic performance and GVA per capita, policies need to tackle both labour market and productivity weaknesses.(See Labour Market evidence papers).

Assessing the GVA per capita Gap

1.17 The Northwest’s GVA per capita gap with England is the largest of any English region at £19.9bn, Yorkshire and the Humber has the second largest gap (£18.6bn followed by the West Midlands (£17.9bn). Only London and the South East create a GVA per capita surplus with England.

1.18 Whilst the Northwest has the largest GVA per capita gap of all English regions, in 2007 it was the only region to experience a gap reduction. Over the period 1997 to 2007 the average rate of growth of the GVA per capita gap in the Northwest has been one of the lowest of any region, 6.0% pa compared with 11.1% pa for the West Midlands and 9.1% pa for Yorkshire and the Humber.



Figure 9: Average per annum growth rate of GVA per capita gap

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

North East

North West

East of England

South West

Yorkshire & the Humber

East Midlands

West Midlands


1.19 Analysis of the contributory factors to the GVA per capita gap shows that even though on average the Northwest suffers from relatively poor labour market performance (low participation rates and high unemployment) as well as a smaller working age population, lower productivity accounts for approximately 70% of the gap with England (£14bn).



SECTION TWO: Productivity

2.1 The main ways of measuring the productivity of an economy are:

Total Factor Productivity (TFP) Labour Productivity

2.2 Total Factor Productivity is the rate of productivity controlling for both labour and capital inputs into

the production process, and seeks to isolate factors such as quality of capital investments, land use, the availability of infrastructure, innovations and new technology, and improved skills of workers. Growth in TFP can only be achieved through improvements in how the inputs to the production process are used, particularly the efficiency with which they are combined together.

2.3 Regional analysis of Total Factor Productivity is difficult due to limited data availability and measurement issues. However by analysing the different measures of labour productivity it is possible to strip out variation in GVA per capita performance due to differences in population and labour market structures across the regions.

2.4 GVA per filled job (approximately output per worker) strips out differences in dependency ratios between regions. Comparing economic performance indicators for the Northwest in 2007 show that GVA per filled job in the region is closer to the national average than GVA per capita; 90% compared to 86%. This highlights the negative impact high levels of inactive people in the region have on its economic performance relative to England overall.

2.5 GVA per hour worked is considered the most appropriate measure of labour productivity as it takes into account the possible mix of full-time and part-time workers as well as job sharing levels; therefore taking account of the actual hours worked to produce regional output. A comparison of GVA per filled job and GVA per hour worked highlights that the region’s mix of jobs is not considerably different to the England average as to have a significant impact on the relative economic performance of the region. The analysis shows that after taking into account the dependency rate and job structure of the region, the relative economic performance of the Northwest compared with England is improved however labour productivity remains 9% below the England average.

Figure 10: Comparison of regional economic performance indicators

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GVA per capita

GVA per filled job

GVA per hour worked

Source: ONS



2.6 In the Northwest over the period 1997 to 2007 until 2004, output and productivity indicators relative to England declined. Productivity indicators declined at a faster rate than GVA per capita. Since 2004 all three indicators relative to the England average have stabilised, with GVA per capita and GVA per filled job increasing in 2007. This could well be the result of employment growth in the region in the first half of the decade; increased employment lowering productivity because new workers can be less productive as they attempt to gain new skills.

2.7 Between 1998 and 2007 only two regions experienced growth in GVA per filled job relative to the England average; London and the South East. In terms of GVA per hour worked four regions experienced relative growth, London, the South East, East of England and the South West. Since 1997 the Northwest has declined in ranking in terms of GVA per filled job, moving from 5th highest ranked region to 6th. For GVA per hour worked the Northwest moved from 7th to 6th ranked region, a result of other regions experiencing greater rates of decline for this productivity indicator.

Figure 11: Change in output and productivity indicators in the Northwest, 1997-2007

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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GVA per capita GVA per filled job GVA per hours worked

Source: ONS



SECTION THREE: Gross Disposable Household Income 3.1 Gross disposable household income (GDHI) represents the amount of money available to

households after taxes; national insurance, pension contributions and interest have been paid. The dataset highlights how much disposable income households have to spend or save.

3.2 In 2007 the Northwest ranked 6th out of the nine English regions in terms of GDHI per capita, with a figure of £13,038. London is the leading region with GDHI per capita 23% above the England average whilst the North East was 16% below the England average. Over the period 1997 to 2007 average annual GDHI per capita growth in the Northwest matched the England average rate of 3.8%. GDHI in the region has remained relatively stable, around 90 and 89% of the England average. Over the 1997 to 2007 period as a whole only two regions experienced GDHI per capita growth relative to the England average, London 3.3 percentage points and the East Midlands 0.5 percentage points.

Figure 12: Comparison of Gross Domestic Household Income, 1997-2007, Eng = 100

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

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East of England

London

South East

South West


3.3 Data for NUTS 2 areas shows that there are large sub-regional disparities in GDHI. In 2007 there was a 17.5% difference between the best and worst performing NUTS 2 areas in the Northwest. In 2007 only Cheshire had GDHI per capita above the England average, Cumbria had GDHI per capita 95% of the England average, whilst Greater Manchester, Lancashire and Merseyside recorded levels below 90%. Over the period 1997 to 2007 only two NUTS 2 areas in the Northwest experienced GDHI per capita growth relative to the England average, Cheshire and Cumbria; all other areas experienced small declines.



Figure 13: Comparison of NUTS 2 Gross Domestic Household Income, 1997-2007, Eng = 100

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105.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Cumbria

Cheshire

Greater Manchester

Lancashire

Merseyside





SECTION FOUR: Productivity Drivers 4.1 It is recognised that higher rates of productivity growth are essential to the growth and stability of the

UK economy. Improvements in productivity benefit individuals in the form of lower prices, higher quality and innovative goods and services3. Productivity differences are driven by the size and structure of an economy, the levels and quality of its factors of production including capital investment, skills and infrastructure, as well as how efficiently such factors are utilised.

4.2 The Government’s approach to enhancing regional economic performance involves:

Maintaining macroeconomic stability to help businesses and individuals plan for the future. Implementing microeconomic reforms to tackle market failures in the underlying drivers of growth.

4.3 The Government’s framework for tackling the productivity challenge has identified five key drivers that

underpin long-term economic performance and productivity. The five drivers are:

Skills Investment Innovation Enterprise Competition

4.4 Differences in regional performance against each of these factors relative to the national and

international comparators will have an impact on the region’s relative economic performance, and may give some indications as to why the region falls short of its productive potential. This section will look at the five drivers of productivity.

Skills

4.5 The overall level of education and skills in the workforce can have a critical impact on the output and productivity levels of an economy. Individuals can develop their skills through education, training and experience. Improved levels of skills enable individuals to utilise capital and advanced production techniques, facilitate new innovative ideas and adapt to changes in the economic environment including adopting new business practises. Skilled workers play a key role in knowledge creation and are more able and likely to receive training at work. An increasing proportion of jobs in the economy require a higher level of skills.

4.6 The acquisition of new skills helps individuals to find employment, especially those with limited formal education and training, as well as enabling individuals to progress in the labour market. Increases in employment or hours worked raise the total output of the economy and contribute to growth. However due to the finite nature of labour supply continued improvements to economic growth and living standards are largely dependent on increases in productivity

4.7 Significant research has been undertaken which highlights the positive relationship between skills and productivity. Mankiw et al (1992) found that human capital, measured by years of schooling had a positive impact on the growth in income per capita across a range of countries between 1960 and 19854. Therefore understanding how and why regions and their localities vary in their skills composition is central to understanding regional and local economic performance.

4.8 The skills levels of the workforce depend on:

Production of skills in the region through education and training. Movement of workers into and out of the region.

4.9 The Northwest has tended to have relatively low recorded skills levels. In 1999/00, 19.1% of the

working age population had no qualifications compared to 16.5% for England and Wales. The

3 Office of Fair Trading, “Productivity and Competition: An OFT perspective on the productivity debate” 4 BERR Nov 2001 “Productivity in the UK – The Regional Dimension”



comparative proportion with the highest level qualifications (NVQ4+) was 19.6% in the Northwest and 22.4% in England and Wales. However skills in the region have improved in recent years, there are now more individuals holding NVQ4+ qualifications in the region and fewer individuals with no qualifications.

Figure 14: Highest qualification attained

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Northwest England

%

No Quals NVQ1 NVQ2 NVQ3 NVQ4+

Source: ONS Local Areas Labour Force Survey & Annual Population Survey

4.10 Evidence indicates that the average educational attainment of those in lagging regions falls behind during compulsory education. These differentials are then reinforced after students graduate from university; highly skilled labour especially recent university graduates are relatively mobile and will often relocate to regions and localities with more job opportunities and higher paid jobs5. A large number of graduates move from poorer regions to wealthier regions in particular the Wider South East (London, the South East and East of England).

4.11 The take-up of skills is influenced by a number of factors:

An individuals investment Government investment Business investment

4.12 For individuals the decision to invest in skills is based on an assessment of the balance between the

costs and benefits of gaining skills. Data shows that the employment rate is higher for individuals holding higher levels of qualifications, compared to those with fewer qualifications

5 BERR Nov 2001 “Productivity in the UK – The Regional Dimension”



Figure 15: Percentage in employment by educational attainment, 2008

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NVQ 4+ in employment NVQ 3 in employment NVQ 2 in employment NVQ 1 in employment No qualifications inemployment

Northwest England


4.13 An individual’s decision about whether to invest in skills is influenced by the availability of and access to education and training including factors such as public transport, availability of training opportunities and future potential benefits. There is the potential for public policy decisions to influence these factors.

4.14 Firms benefit from workers with higher skills, who are generally more efficient and able to adapt to changes in the economic environment. Skilled workers enable firms to engage in sophisticated production processes through their ability to handle innovations and generate innovative ideas. Conversely firms can be detrimentally affected by skill deficiencies in the workforce, constraining both investment and the ability of firms to innovate.

4.15 Research by the London School of Economics’ Centre for Economic Performance and McKinsey & Company (2007) indicates that higher levels of management capability within firms are positively associated with performance increases in areas such as sales, labour productivity and return on capital employed6. The management of a firm can influence productivity outcomes, directly and indirectly through its role in determining innovation, workforce skills, investment and enterprise outcomes as well as a firms ability to exploit new market opportunities. The business strategies that managements choose to adopt shape the skills profile of a firm’s workforce, its efficient utilisation, and influence the level and type of skills investment undertaken. Thus strong leadership and management skills are critical in terms of resource management, achievement of business success and productivity growth. For more on Leadership and Management and skills in general see the portfolio of skills evidence papers.

4.16 Analysis of current and future skills needs is required to ensure that the region invests in the skills required for economic/productivity growth7. Government policy has attempted to address under investment in skills which can result from employers reduced incentive to invest, insufficient access to finance and lack of knowledge of the true benefits that result from skills acquisition.

4.17 Evidence suggests that increases in the amount of workforce training undertaken is associated with higher levels of productivity8. Annual population survey data shows that in 2008 the proportion of employees and self-employed individuals having under-taken job-related training in the previous

6 BERR 2009, “The 2008 Productivity and Competitiveness Indicators” 7 The NWDA is currently undertaking a research project investigating future labour market and skills demand and supply, the findings of which will be included in the evidence base once the project reports. 8 BERR 2009, “The 2008 Productivity and Competitiveness Indicators”


Figure 16: Percentage of employees & self-employed having undertaken training in the previous 4

& 13 weeks, 2008

0

5

10

15

20

25

30

35

Mar 2001-Feb 2002 Jan 2008-Dec 2008 Mar 2001-Feb 2002 Jan 2008-Dec 2008

Northwest England

%

4 Weeks 13 Weeks


4.18 More highly educated/skilled individuals are associated with higher-level occupations and increased productivity, for which wage levels are often used as an indicator. Analysis shows that there remain significant differences in occupational structures across regions. Compared with England, and especially with the “Wider South East” (East of England, London and the South East), the Northwest has a relatively low proportion of high-level occupations. Similarly, the region, along with comparator regions, Yorkshire and the Humber and the West Midlands, continues to have a higher share of low-level occupations than in England and the Wider South East.



Figure 17: Occupation by occupational category in 2001 and 2008 (% of total jobs)

0%

10%

20%

30%

40%

50%

60%

Mar 2001-Feb 2002 Jan 2008-Dec 2008 Mar 2001-Feb 2002 Jan 2008-Dec 2008 Mar 2001-Feb 2002 Jan 2008-Dec 2008

Northwest England Wider South East

Higher Level Skills Medium Level Skills Low Level Skills


4.19 In addition to a smaller share of high-level occupations in the Northwest, earnings in these occupations are significantly lower than in England and the Wider South East. Differentials in occupational structure and earnings between the Northwest and the England average as well as the Wider South East; go some way to explain maintained productivity differentials between regions.

Figure 18: Earnings by occupational category, 2008

0

100

200

300

400

500

600

700

Higher Level Skills Medium Level Skills Lower Level Skills

Northwest Yorkshire & the Humber West Midlands


4.20 The importance of skills to regional economic performance indicates that:




Improving the human capital in under-performing regions and localities is a key factor in improving the economic performance of these areas.

It is crucial that measures to increase educational attainment and skills are undertaken in conjunction with measures to sustain high-wage jobs as a means of retaining and attracting high-skilled workers in the region or locations.

Enterprise

4.21 Enterprise is a key driver of productivity growth in the economy; it refers to the seizing of new business opportunities by both start-ups and existing firms. It stimulates dynamic competition or creative destruction9 whereby firms enter a market introducing new technology, processes or business practices and compete with existing firms, forcing the incumbent firms to increase efficiency to survive.

4.22 Enterprise increases productivity through new firms entering markets which can increase competitive pressures and lead to the introduction of new technologies, ideas, knowledge and skills as firms attempt to compete more effectively. Enterprise also stimulates the process of “churn”, were new firms in the market drive out inefficient firms unable to compete resulting in the average productivity level of the economy increasing.

4.23 Ahn (2002) suggests that up to 50% of a country’s growth is derived solely from this firm-level churn in which the process of entry, exit and changing market shares increases economic growth. In their review of UK manufacturing firms during 1980-1992, Disney et al (2003) show that 80-90% of TFP growth comes from entry and exit of establishments, with 30% of TFP growth coming from highly productive new firms and 50% coming from the exit of the least productive firms10.

4.24 HM Government’s Enterprise Strategy identified five key enablers of enterprise. These enablers are the underlying factors which, in their absence, have the potential to limit the level and quality of enterprise.

Culture of enterprise Knowledge and skills Access to finance Business innovation The regulatory framework

4.25 Important drivers to an enterprising economy are individuals’ attitudes to and experience of

enterprise. “A positive enterprise culture increases willingness to develop entrepreneurial skills and impacts positively on the actual development of such skills. A positive culture also influences business innovation by providing the environment where people want to take risks and advantage of potentially viable business opportunities.”11

4.26 Knowledge and skills are important for creating entrepreneurial ambition and driving entrepreneurial performance. “Entrepreneurs need to posses a personal skill set that includes the management, financial, business and communications skills required to identify opportunities and succeed.”12

4.27 Access to finance has been highlighted as an enabler of enterprise, the creation, survival and growth of a business can depend on the availability and accessibility of finance.

4.28 Evidence from a number of business surveys has highlighted the negative impact that the current recession has had on the ability of firms to access finance. The ability and willingness of banks to lend has been greatly reduced impacting on the cost of many types of finance and therefore firms’ investment and growth decisions.

9 Schumpter 1942, “Capitalism, Socialism and Democracy” 10 BERR 2009, “The 2008 Productivity and Competitiveness Indicators” 11 BERR 2009, “The 2008 Productivity and Competitiveness Indicators” 12 BERR 2009, “The 2008 Productivity and Competitiveness Indicators”



4.29 “Business innovation is an enabler of enterprise and is a key motivation, for many entrepreneurs. Innovative businesses are more likely to achieve growth, and businesses which have experienced recent growth are more likely to introduce new or improved products and services or new ways of working.

The regulatory framework can impact on market outcomes by influencing the decisions of firms and individuals and the way markets operate. Regulation has implications in relation to the availability of business opportunities, the costs of pursuing these opportunities and the returns from doing so.”13

4.30 The Global Entrepreneurship Monitor (GEM) creates an index of early stage entrepreneurial activity (TEA). It measures the characteristics of entrepreneurial individuals and types of entities they establish. At the regional level TEA in the Northwest was 5.5% in 2008, the same as the overall UK rate. “The level of early stage entrepreneurial activity in the Northwest has tracked the UK trend very closely from 2002 to 2005, since when there has been a convergence as the UK rate has declined.”14

4.31 In 2008 the East of England had the highest rate of TEA 7.3% followed by the West Midlands 6.4% and the South West 5.9%. In comparison Yorkshire and the Humber had the lowest level of TEA with 4.2% of the adult population involved in entrepreneurial activity.

Figure 19: Total entrepreneurial activity in the UK, 2008 (% of adult population)

0%

1%

2%

3%

4%

5%

6%

7%

8%

Yorks &Humber

North East EastMidlands

Northwest South East London South West WestMidlands

East ofEngland

UK

%

Source: Global Entrepreneur Monitor

4.32 Business start-ups are used as an indication of the level of entrepreneurial activity in an area; the most widely used proxy for rates of business start-ups in an areas is the number of new firms registering for VAT per 10,000 of the resident adult population. In the Northwest there were 37 business start-ups per 10,000 adult population in 2007, below the UK average of 42. London had the highest rate of business start-ups in 2007 with 68 whilst the North East had the lowest rate at just 28 start-ups per 10,000 resident adult populations.

13 BERR 2009, “The 2008 Productivity and Competitiveness Indicators” 14 GEM UK, Northwest Summary 2008



Figure 20: Business start-ups per 10,000 resident adults by region, 2007

0 10 20 30 40 50 60 7

North East


West Midlands

Northwest

East Midlands

South West

England

East

South East

London

Start-up rate per 10,000 resident adults

0

Source: Department of Business, Enterprise and Regulatory Reform, 2008

4.33 Map 1 shows that there are large differences in business start-up rates between districts in the Northwest. The highest start-up rates can largely be found in the south of the region. Macclesfield and Trafford have start-up rates of 58 per 10,000 resident adult population, followed by Congleton with 54 and Warrington with 49. Exceptions to this trend are Ribble Valley with a start-up rate of 58 per 10,000 resident adults and Copeland with 50. Districts in the region with the lowest business start-up rates in 2007 were Knowsley 21, Lancaster 22, Blackpool 26 and Burnley 27.


Map 1: VAT registration rates per 10,000 resident adult population by district, 2007

8

9

10

7

6

0

2

1

5

21

13

4

12

19

14

37

42

20

3

17

30

38

32

18

2924

1639

34

11

33

28

15

27

23

36

35

25

31

22

26

41

40

19

41

0 = Macclesfield1 = Crewe and Nantwich2 = Chester3 = Ellesmere Port and Neston4 = Congleton5 = Vale Royal6 = Copeland7 = Carlisle8 = South Lakeland9 = Allerdale10 = Eden11 = Barrow-in-Furness12 = West Lancashire13 = Lancaster14 = Chorley15 = South Ribble16 = Rossendale17 = Fylde18 = Preston19 = Wyre20 = Pendle21 = Ribble Valley22 = Hyndburn23 = Burnley24 = Bolton25 = Bury26 = Knowsley27 = Liverpool28 = Manchester29 = Oldham30 = Rochdale31 = Salford32 = Sefton33 = Stockport34 = St. Helens35 = Tameside36 = Trafford37 = Wigan38 = Wirral39 = Blackburn with Darwen40 = Blackpool41 = Halton42 = Warrington

VAT Registration per 10,000 resident adult population21 - 27

28 - 33

34 - 39

40 - 45

46 - 58

Source: Department for Business, Enterprise and Regulatory Reform, VAT Registrations 2007, November 2008Ordnance Survey Crown Copyright All Rights Reserved GD021102

4.34 Map 1 highlights that the districts of Merseyside and the northern Greater Manchester have relatively low business start-up rates especially when compared with their neighbouring areas of south Greater Manchester and Cheshire. More than a quarter of VAT registrations in 2007 were in Manchester 1,615, Liverpool 1,055, Trafford 1,000, Stockport 980 and Wigan 820, analysis suggests that start-up rates in these areas are to an extent depressed due to their high resident populations.

4.35 Over the period 1997 to 2007 the number of business start-ups in the Northwest remained broadly stable, around 33 per 10,000 resident adult population; only in 2007 was there a significant increase



to a rate of 37. The same broad trend occurred in England as a whole, however the Northwest experienced some improvement in its start-up rate compared with England, the Northwest start-up rate increased from 48% of the England average in 1997 to 64% in 2007.

Figure 21: Change in business start-up rates per 10,000 resident adult population 1997-2007

0

5

10

15

20

25

30

35

40

45

50

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Sta

rt-u

p R

a

England Northwest

Source: Department of Business, Enterprise and Regulatory Reform

4.36 Business survival rates provide an indication of how successful areas are in ensuring that new business start-ups survive. It is in the first few years that a business is considered to be at most risk of failure with the likelihood of survival increasing with time. The Northwest performs relatively well with regard to three year survival rates; of those businesses started in 2004 66.2% remained active three years later, above the England average of 65.2%. Three year survival rates are highest in the South West at 68.9% and lowest in London at 60.0%. The Northwest has experienced an increase in the three year survival rate over the last couple of years, other regions have experienced similar trends.




Figure 22: Three year survival rate for business start-ups in 2004 (%)

54% 56% 58% 60% 62% 64% 66% 68% 70%

London

North East


England

West Midlands

Northwest

East Midlands

South East

East of England

South West

Three year survival rate (%)

Source: ONS Business Demography: Enterprise, Deaths and Survival, 2008

Investment

4.37 Investment is a key driver of productivity, mainly through increasing the amount, quality and use of capital and the incorporation of new technology. Investment allows a greater level of output to be produced from the same level of inputs i.e. increasing output per worker. Recent research has highlighted the importance of investment in intangibles for example intellectual property (R&D), software, branding, process improvements and human capital.

4.38 Investment decisions are influenced by a number of factors including investment timescales, expected returns and associated risk; the current recession is likely to impact these factors. The business environment in which firms operate will also impact on levels of investment including “the quality of infrastructure, the cost of doing business, the taxation system and macroeconomic, political and policy stability as well as domestic and international competition and opportunities.”15

4.39 Agglomeration benefits can influence investment decisions. Firms are attracted to areas which can provide increasing returns to scale, gained from locating near to competitors, customers and employees. Agglomeration benefits include accumulation of information including new and innovative ideas, access to dense labour markets – a pool of skilled labour and proximity to inputs and customers. Research highlights that firms in the Greater Manchester and Liverpool areas have higher productivity than firms elsewhere in the Northwest16. Investment in infrastructure can improve the gains from agglomeration, for example, by providing greater connectivity and relieving congestion.

4.40 Foreign Direct Investment is a significant source of investment; there are a number of factors identified by UK Trade and Investment (UKTI) that can influence investment location decisions by foreign firms.

General business environment Availability of skilled labour R&D base Tax and regulatory environment Culture, lifestyle and education system

15 BERR 2009, “The 2008 Productivity and Competitiveness Indicators” 16 Manchester Independent Economic Review 2009, “The Case for Agglomeration Economies” & Pion Economics 2009, “Places Study”


4.41 A significant amount of research has highlighted that foreign owned firms are generally more productive than domestic firms. Moreover they can provide positive spill-over benefits to firms located in the same areas by introducing new technologies and business practises, as well as intensifying competitive pressures.

Figure 23: Investment by UK and foreign owned businesses in Northwest and England as a percentage of GVA

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Manufacturing Services Other Total Manufacturing Services Other Total

England Northwest

%

Foreign Owned UK Owned

Source: ONS Annual Business Inquiry

4.42 In 2006 total investment by UK owned firms was equivalent to 7.4% of regional GVA, the highest proportion of any English region, and compared with an England average of 5.9%. Total investment by foreign owned firms equated to 1.0% of regional GVA, the lowest of all regions and compared with an England average of 1.7%. Levels of investment by foreign owned companies as a proportion of GVA has been more stable than investment from UK owned companies; the Northwest has experienced decline in manufacturing and services investment over the period 1998 to 2006 as shown in Figure 24.

Figure 24: Investment by UK and foreign owned businesses in the Northwest and England as a percentage of GVA, 1998-2006

0.0

2.0

4.0

6.0

8.0

10.0

12.0

UK Owned ForeignOwned




Manufacturing Services Other Total

%

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: ONS Annual Business Inquiry




4.43 Evidence suggests that investment to raise levels of capital and technology, for example ICT, has greater impact on productivity when undertaken along with investment in skills and changes in firm organisation structures.

4.44 The macroeconomic stability, consistent output growth and stable interest rates which the UK has experienced between 1997 and 2007 has facilitated increased levels of investment. “Economic theory suggests that business investment is procyclical (declines during a recession) as a result of weaker demand, increased risk, tighter cash flow, the deteriorating quality of trade credit assets and reduced lending by banks seeking to reduce their exposure to risk. Analysis suggests that the current recession will have a negative impact on business investment, through the tightening of credit conditions and opportunities as well as instability in relative UK macroeconomic conditions.”17

Innovation

4.45 Innovation is the successful exploitation of new ideas. Innovation incorporates new or improved goods or services, new methods of working including new processes as well as business practices and workplace organisation and their commercial exploitation and diffusion throughout the economy. Figures suggest that innovation has accounted for around two thirds of UK economic growth in the post World War Two period. The future ability of UK business to compete with firms based in lower-cost economies will be dependent upon developing strong innovation processes.

4.46 ICT investment is a significant support to innovation development and implementation, facilitating communication and development of new products, processes and services. The development of innovations and their successful utilisation also requires individuals to hold appropriate skills and knowledge. “The lack of qualified personnel has been identified in the UK Innovation Survey as the sixth main barrier to innovation, emphasising the importance for firms of employing people with the necessary skills and ensuring their capabilities evolve in line with changing business needs.”18

4.47 Genuinely new technologies and cutting-edge production processes are generally produced by a few world-leaders in relatively few countries. However not only does successful innovation benefit those firms undertaking it, it also tends to have spillover effects that create wider benefits to the overall economy. These spillovers can increase the productivity of all firms as new processes and ideas are emulated. Some new innovations are generated directly by firms; others particularly in completely new fields have their roots in research undertaken in universities and institutes. The commercial development of such research is another powerful example of a spillover.

4.48 Barriers can exist which limit the effective dissemination of technology and result in the spread of more innovative and efficient products and processes becoming localised. Under-performing regions and localities can experience particular problems in absorbing new technologies, businesses need to be able to adapt new innovations to industry and region specific circumstances, such problems are likely to be key to determining regional variations in innovation performance.

4.49 Expenditure on research and development (R&D) has been used as an indicator of how much investment in the production or adoption of innovation is taking place in an economy. It is acknowledged that R&D expenditure is an imperfect measure of innovation, measuring approximately only 40% of all innovation-related expenditure.”19

4.50 Business enterprise R&D expenditure in the Northwest as a proportion of total expenditure on R&D was 76.7% in 2007, higher than the England average of 68.1%; the region has the second highest proportion of business R&D expenditure behind the East of England. Business enterprise R&D (BERD) measured as a percentage of GVA has been consistently higher in the Northwest than in England or regional comparators over the period 1997 to 2007. This, to a certain extent, is the result of the continuing relative importance of the manufacturing sector; however this expenditure is largely

17 BERR 2009, “The 2008 Productivity and Competitiveness Indicators” 18 BERR 2009, “The 2008 Productivity and Competitiveness Indicators” 19 BERR 2009, “The 2008 Productivity and Competitiveness Indicators”


concentrated in a few industries, aerospace and pharmaceuticals, whilst other parts of the region’s manufacturing sector may be under investing.

Figure 25: Business enterprise research & development as a percentage of GVA

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

England North West

Source: ONS Business Enterprise R&D Survey and Regional Accounts

4.51 In 2007 BERD in the Northwest was equal to 1.8% of GVA compared with 1.5% for England. Regions with the highest level of BERD in 2007 were the East of England 3.7% and the South East 1.9%, the Northwest was ranked third.

4.52 Public sector spend via government and higher education contributes to the total level of spend on R&D in an economy. In the Northwest in 2007 higher education contributed 20.5 of total R&D expenditure, marginally below the England average (and significantly below the highest regions of London and Yorkshire and the Humber 52.8% and 51.4% respectively). Government expenditure represented 3.3% of total R&D expenditure, below the England average of 8.3% (and significantly below the 15.9% in the South West and 12.3% in the South East). In 2007 the level of spending on R&D from higher education in the Northwest was equal to the England average of 0.5% of GVA. Levels of government R&D remain low in the Northwest, currently equivalent to just 0.1% of GVA, and half the national average of 0.2% of GVA. The East of England, South East and South West remain the areas where government R&D expenditure is concentrated.




Figure 26: Total expenditure on research & development as a percentage of GVA, 2007

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2005 2007 2005 2007

Northwest England

Business

Government

Higher Education

Source: ONS Business Enterprise R&D Survey and Regional Accounts

4.53 Improving the region’s ability to adopt new production or process innovations is crucial to improving productivity levels the key factors which will enable this include the skills of the workforce and investment in appropriate R&D and physical capital including information and communication and new machinery (see innovation chapter for further details).

4.54 The current recession may have a mixed impact on innovation levels, with reduced demand in the economy dampening levels of investment and thus innovation especially for small firms (innovation classes as an expenditure to cut back on); whilst other firms see innovation as a means of competing/surviving in the difficult market conditions. International competition impacts on level of innovation undertaken in an economy as firms decide where they want to locate different parts of their production process. The current recession is likely to heighten this trend. In recent years industrial R&D has become more internationalised with global supply-chains and customer bases. Over the same period skilled individual have become increasingly mobile. In a time of increasing globalisation collaborative innovation should be encouraged in the Northwest to ensure that the region continues to be internationally competitive and benefits from innovation/knowledge exchange.

Competition

4.55 Competition plays a central role in driving productivity growth. In a competitive market customers are able to choose from whom and what they purchase. Firms compete for new customers by offering lower prices, a wider range and higher quality of products or services to increase profitability, sales or market share.

Competition impacts on productivity through several routes:

Higher levels of competition can lead to reduced market prices increasing pressure on firms to reduce costs and increase efficiency.

Competition can increase the incentive for firms to innovate in an attempt to gain competitive advantage on rivals.’

Competition increases resource allocation efficiency as more productive firms gain and less efficient firms lose market share. This form of “churn” is a significant contributory factor in raising productivity levels in an economy.20

20 BERR 2009, The 2008 Productivity and Competitiveness Indicators”


4.56 Low barriers to entry are a key factor in driving competitive pressures, speeding up the reallocation of resources between firms and thus the process of “churn”. This highlights that regulation and government competition policy can raise productivity however these apply equally to all regions within the UK economy, making analysis at the regional level of limited use.

4.57 Openness to international trade and investment can be used as an indicator of the state of the competitive environment; openness to international product and capital markets implies exposure to competitive pressure from abroad. On a measure of the value of exports and imports as a proportion of total GVA the Northwest has a relatively open economy, exports and imports represented 36% of GVA in 2007, equating to 89% of the England average and ranking the region 6th out of nine regions. Apart from 2006 the levels of exports and imports as a proportion of GVA in the Northwest relative to the England average has been stable at 89%. This illustrates that there is room for improvement in the Northwest performance.

4.58 The current economic downturn has mixed implications for trade in the UK and Northwest. The UK has experienced a reduction in the value of sterling, significantly relative to the dollar and euro, this has resulted in UK products becoming cheaper to purchase from abroad. However at the same time the cost of raw materials has increased offsetting some of the benefits from the fall in sterling (the eurozone and US are the UK’s major trading partners). Between 2007 and 2008 the value of Northwest exports increased by 12.2% compared with an England average of 11.8%; in contrast the value of Northwest imports between 2007 and 2008 declined by 1.0% compared with an increase of 4.5% for England overall.

Figure 27: Trade exports and imports as a percentage of GVA

0%

10%

20%

30%

40%

50%

60%

South East East ofEngland

North East WestMidlands

East Midlands Northwest Yorkshire &the Humber

London South West England

2004

2005

2006

2007

Source: UK Regional Trade in Goods Statistics, HM Revenue & Customs and ONS Regional Accounts

4.59 The level of competition in regional economies can vary. Firms in large densely populated regions with good access to markets are more likely to experience higher levels of competition. Business stock per head of 16+ population gives some indication of competitive pressures in an economy. Differences in competitive pressures can be a factor in determining variations in economic growth performance between regions. At the beginning of 2008 the Northwest had 349 VAT registered businesses per 10,000 16+ population, this compared with an average for England of 415. The Northwest is ranked 7th of the nine English regions, London is the top performing region with 523 VAT registered businesses per 10,000 16+ population whilst with 247 the North East is the lowest performing region.



Figure 28: Stock of VAT registered businesses per 10,000 16+ population, 2008

0 100 200 300 400 500 600

England

London

South East

South West

East of England

East Midlands

West Midlands

Northwest


North East

Businesses per 10,000 16+ population


4.60 At the sub-regional level in 2008 Cumbria had the highest number of businesses per 16+ population, 479, approximately 1.4 times higher than the regional average and 1.2 above the national level. Merseyside (inc Halton) had the lowest number of businesses per 10,000 16+ population, 244, 70% of the regional average and 59% of the national average. Between 1997 and 2008 the stock of business per 10,000 in the region increased by 16.7% marginally above the England average of 16.3%. At the sub-regional level Merseyside (inc Halton) experienced the largest growth 24.8% (although from a low base), followed by Cheshire & Warrington 20.5%, Cumbria and Greater Manchester both 13.8% and finally Lancashire 11.5%. This suggests that there are parts of the region that are not punching their weight in terms of business stock, if the varying reasons for this can be addressed it will have an impact on the overall economic performance of the region.



Figure 29: Stock of VAT registered businesses per 10,000 16+ population 2008

0

50

100

150

200

250

300

350

400

450

500

England Northwest Cumbria Cheshire &Warrington

Lancashire GreaterManchester

Merseyside (incHalton)

Bus

ines

ses

per 10

,000

16+

pop

u


4.61 At the beginning of 2008 the Northwest had approximately 37,000 fewer VAT registered businesses per 10,000 16+ population than found in England overall. Between 1997 and 2004 the gap with the England average rapidly increased from 31,000 fewer businesses to a peak at 38,300 in 2004, this trend has since reversed, although at a slower rate. Significantly analysis shows that strong economically performing regions such as London, the South East and the East of England have higher densities of businesses relative to the national average.

Figure 30: Number of fewer businesses in Northwest compared with England per 10,000 16+ population

25,000

27,000

29,000

31,000

33,000

35,000

37,000

39,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Num

ber

of f

ewer

bus

ines

Source: Department of Business, Enterprise and Regulatory Reform, 2008



SECTION FIVE: Differences in Regional Economic Performance 5.1 The efficient functioning of all markets, product, labour and capital markets, are essential to high

levels of productivity and employment; economic theory would suggest that the effective working of market forces should result in the convergence over time of economic performance in the regions, and as such GVA per capita. The process occurs through:

Developments of new technologies and production processes and best practice being dispersed from leading regions to other regions.

Firms discovering new investment (human and physical capital) opportunities in lagging regions.

Working to generate relatively faster growth in lagging regions stimulating a catch-up process.

5.2 The lack of significant convergence to date in economic performance goes some way towards indicating the existence of market failures, barriers to labour mobility and failures that impact the clustering of economic activity.

Market Failures in the Five Drivers of Productivity

5.3 Market failures may lead to shortfalls in investment in human and physical capital, the adoption and creation of new technologies and best practices. They may also lead to sub-optimal levels of enterprise and competition.

Skills

5.4 Incentives to acquire human capital can be reduced in low growth regions by the lack of high-skilled jobs in such regions. In addition market failures may exist in the matching of workers and their skills in specific localities; these may be compounded by constraints on labour mobility.

Investment

5.5 Under performing regions may suffer from poor access to capital on account of a lack of information and uncertainty about investment opportunities in them. In low-growth regions investment may be under-supplied due to difficulties in distinguishing good and bad investment opportunities.

Innovation

5.6 Evidence suggests that the dissemination of knowledge regarding best-practice and new technologies decreases with distance, this highlights the requirement to stimulate regional and local innovation. Market failures in the adoption and creation of new technologies and best-practice techniques can be due to inadequate product market competition or information failures and can significantly impact productivity growth.

Enterprise

5.7 The size of labour, capital and product markets is constrained by geography. High levels of entrepreneurial activity in regions and localities are essential for high levels of competition, innovation, investment and skills in an area. Market failure can occur for a number of reasons, including imperfect information, (firms lack knowledge of markets for output sales and input purchases) and lack of competition (enterprises unable to enter new markets due to costs).

Competition

5.8 Markets can have important regional and local dimensions as they are segmented by transportation costs and consumer tastes. Markets need to be competitive in every region if firms are to innovate, keep prices down and minimise their costs of production.

Firms and Workers

5.9 The location decisions of firms and workers is a key factor in determining the extent to which productivity and employment levels between regions converge or diverge. Theory suggests that in



smoothly functioning markets the movements of firms and workers should tend to equalise productivity and employment.

5.10 Workers move away from depressed low-wage regions to high-growth, high-wage regions in response to differentials in wage-levels and employment opportunities. The result being increased labour supply and a depression in wages in high-performance regions (the opposite of what happens in under-performing regions). This process should lead to a convergence in regional wage differentials.

Firms may be influenced to locate away from regions with high levels of economic activity into relatively under-performing regions due to factors such as:

Wages, prices and competition Land, natural resources and low worker mobility Congestion and pollution

However the willingness of firms to move away from high-growth regions can be constrained by the benefits they receive from clustering together.

Labour Mobility

5.11 High levels of productivity and employment require the efficient matching of workers and jobs at the regional level, as well as between regions. As indicated economic theory suggests workers tend to move from economically under-performing regions to higher-performing regions. However labour market friction may reduce the effectiveness of labour mobility as a regional adjustment mechanism; the result being low productivity as workers skills and jobs are inadequately matched and high unemployment as vacancies and workers are poorly matched.

5.12 Throughout the region there are localities with relatively high levels of unemployment where poor labour mobility could be a contributory factor. The following labour market failures can act as significant barriers to labour mobility:

Inflexibilities in the housing market Imperfect information Low skill levels

5.13 Poor labour mobility can be compounded by the fact that whilst skilled workers seem to operate in a

national labour market, low-skilled workers are less mobile and generally seem to look for work in local labour markets. This phenomenon constrains the efficient functioning of labour markets and contributes to the significant regional and sub-regional variations in long-term unemployment; and as a result the employment element of the regional output gap.

Firm Mobility

5.14 Recent economic research suggests that agglomerations, or clusters of firms and skilled workers may be one of the key drivers of economic growth in localities and regions. Agglomeration is the presence of beneficial externalities between firms and between firms and workers. Successful clusters may be crucial to a region’s success in attracting and retaining high productivity firms and workers.

Agglomerations of activity emerge in a region or locality as firms exploit one or more of the advantages that location near their competitors can bring:

Knowledge spillovers (disseminating best-practice techniques and tacit knowledge) Market size and linkages (close to consumers and suppliers) “Think” labour markets (an abundant labour market with the skills they require)



5.15 Due to the established presence of advantages from clustering in the Wider South East compared to the Northwest, relative economic performance in the regions may well diverge with successful clusters in high-performing regions attracting larger amounts of firms and workers.

5.16 Whilst agglomeration effects can benefit regional economic growth performance, without sufficient flexibility and depth of resources to restructure the economy and take advantage of new opportunities and technologies after a negative economic shock, cluster effects can potentially lock-in the negative impact to the detriment of relative GVA per capita. This can further increase incentives for firms and workers to leave the region with frequently the most skilled workers and highest value-added jobs lost first.

5.17 This suggests that there is the potential for regions or localities to become locked into vicious or virtuous cycles, impacting on the potential of poorly-performing regions to reduce gaps in economic performance.



SECTION SIX: Structure of the Northwest Economy and Industry Productivity Levels 6.1 Latest industrial GVA data (2006) shows that the real estate, renting and business activities sector is

the largest contributor to Northwest GVA equating to 21.0%, this is followed by manufacturing (18.0%) and Wholesale, retail etc (12.5%). The industrial structure of the region in GVA terms is broadly similar to the England average; however there is a greater concentration of GVA in production industries in the Northwest, whilst in England the financial intermediation and real estate, renting and business activities sectors contribute a greater proportion of GVA than regionally.

Figure 31: Share of total GVA by broad sector 2006

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Agr

icul

ture

,For

estr

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Fis

hing

Min

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Man

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Con

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Pub

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Edu

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Hea

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Northwest England


6.2 In terms of contribution to total GVA by sector the Northwest, like England overall, has experienced a significant shift from production industries to service industries over recent years. Since 1989, the earliest date for which consistent data is available, the contribution to total GVA in the region from manufacturing has fallen from 31.5% to 18.0% in 2006. Over the same period the gap between GVA accounted for by manufacturing in the Northwest and in England narrowed from 8% to 5%, highlighting that the region’s economic structure is becoming more like the “average”. The share of regional GVA from service sectors has increased with real estate, renting and business activities, health and social work and education all experiencing significant growth in GVA share over the period. Impacts from the current recession are likely to have short to medium-term implications for this trend.



Figure 32: Sectoral contributions to total regional GVA, 1989 to 2006

0%

5%

10%

15%

20%

25%

30%

35%

Ag

ricu

lture

,Fo

rest

ry&

Fis

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Min

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& Q

ua

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Ma

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Ele

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, Ga

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Su

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1989 2006


6.3 Analysing the split of total GVA growth between 1989 and 2006 highlights which broad sectors of the

economy have been growth drivers. The Northwest has experienced both similarities and differences to England overall. For both the region and England overall, real estate, renting and business activities contributed the largest share of GVA growth, nearing 30%. Similar contributions to GVA growth in percentage share terms were experienced both regionally and nationally for education, public administration, hotels and restaurants, wholesale, retail trade etc and other services. The importance of GVA contributions from these sectors varies considerably.

Figure 33: Sectoral share of GVA growth between 1989 and 2006

-5% 0% 5% 10% 15% 20% 25% 30% 35%

Agriculture,Forestry & Fishing

Mining & Quarrying

Manufacturing

Electricity, Gas & Water Supply

Construction

Wholesale, Retail etc

Hotels & Restaurants

Transport, Storage & Communications

Financial Intermediation

Real Estate, Renting & Business Activities

Public Admin etc

Education

Health & Social Work

Other Northwest England


6.4 Key differences to highlight are that financial intermediation in England has been a greater driver of

GVA growth over the period than in the Northwest. In comparison manufacturing, transport and



communications, construction and health and social work were relatively bigger drivers of GVA growth regionally than nationally.

Manufacturing

6.5 The Northwest was the largest contributor to total manufacturing GVA in England in 1989, providing 17%, the West Midlands was second largest (13.6%) followed by the South East (13.5%). Four regions experienced a reduction in manufacturing GVA share between 1989 and 2006; the largest reductions were experienced by the West Midlands followed by the Northwest. In comparison five regions increased their contribution to total manufacturing GVA over the period, the largest increases occurred in the South West and South East.

Figure 34: Change in regional contributions to manufacturing GVA in England

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

North West South East WestMidlands

Yorkshire &the Humber

EastMidlands

East ofEngland

London South West North East

1989 2006


6.6 Whilst the Northwest has experienced a shift in its economic structure, away from production

industries, manufacturing remains a sector of significant importance to the regional economy. In 2006 manufacturing accounted from 18% of regional GVA, second only to real estate, renting and business activities.

6.7 Within the sector the manufacture of chemicals, chemical product and man-made fibres, food products; beverages and tobacco and transport equipment accounted for 50% of manufacturing GVA in 2006. Impacts from the current recession are likely to have short to medium-term implications for this trend.



Figure 35: Share of regional manufacturing GVA 2006

0% 5% 10% 15% 20% 25%

Food Products; Beverage and Tobacco

Textiles and Textile Products

Leather and Leather Products

Wood and Wood Products

Pulp, Paper and Paper Products Publishing and Printing

Coke, Refined Petroleum and Nuclear Fuels

Chemicals, Chemical Products and Man-made Fibre

Rubber and Plastic Products

Other Non-metallic Products

Basic Metals and Fabricated Metal Products

Machinery and equipments not elsewhere classified

Electrical and Optical Equipment

Transport Equipment

Manufacture not elsewhere classified

%


6.8 Between 1989 and 2006 four manufacturing industries experienced growth in GVA of above £500 million, contributing the most to the increase in overall manufacturing GVA; manufacture of basic metals and fabricated metal products, manufacture not elsewhere classified, manufacture of food products, beverage and tobacco and manufacture of chemicals, chemical products and man-made fibre.

Figure 36: Industry share of manufacturing GVA growth between 1989 and 2006

-10% 0% 10% 20% 30% 40% 50%

Food Products; Beverage and Tobacco

Textiles and Textile Products

Leather and Leather Products

Wood and Wood Products

Pulp, Paper and Paper Products Publishing and Printing

Coke, Refined Petroleum and Nuclear Fuels

Chemicals, Chemical Products and Man-made Fibre

Rubber and Plastic Products


Basic Metals and Fabricated Metal Products

Machinery and equipments not elsewhere classified

Electrical and Optical Equipment

Transport Equipment

Manufacture not elsewhere classified


Industrial Structure

6.9 The industrial structure of the region has an impact on its economic competitiveness. Undertaking a location quotient analysis highlights the relative importance of each industry in the Northwest



compared to England overall in terms of GVA and employment.

6.10 The Northwest is characterised by the importance of manufacturing to the regional economy in both GVA and employment terms. In 2006 the manufacturing GVA location quotient was 1.22 whilst the employment location quotient was 1.14, significantly more important to the Northwest economy than the England economy overall.

6.11 Figures 37 highlights that the significance of manufacturing in GVA terms has decreased over the period 1998 and 2006 in the Northwest relative to England; however figure 37 indicates that in employment terms the sector has remained at broadly the same level of relative importance.

6.12 Figure 37 shows that the Northwest also has strengths in terms of GVA in Health and social work (1.16), education (1.10), and to a lesser extent wholesale and retail etc (1.04), construction (1.07) and transport, storage and communication (1.02).

Figure 37: Northwest GVA location quotients by broad industry 1998 and 2006

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

0.60 0.70 0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50

1998

20

06

Agriculture, Forestry & Fishing

Mining & Quarrying

Manufacturing


Construction

Wholesale, Retail Trade etc

Hotels & RestaurantsTransport, Storage & Communication


Real Estate, Renting etc

Public Adminstration etc

Education


Source: ONS Annual Business Inquiry and Regional Accounts 6.13 Figure 38 shows that the Northwest strengths in employment terms relative to England,

manufacturing (1.16) health and social work (1.09), public admin (1.09), construction (1.08) and education (1.04); of these only construction and public admin experienced growth in their relative importance over the period 1998 to 2006.



Figure 38: Northwest employment location quotient by broad industry 1998 and 2006

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20

1998

20

06


Mining & Quarrying

Manufacturing


Construction

Wholesale, Retail Trade etc

Hotels & RestaurantsTransport, Storage & Communication


Real Estate, Renting etc

Public Adminstration etc

Education


Source: ONS Annual Business Inquiry and Regional Accounts

6.14 Figures 37 and 38 also highlight that the financial intermediation and real estate, renting and business activities sectors are relatively smaller in the Northwest than nationally with location quotients of 0.70 and 0.85 respectively for GVA and 0.87 and 0.88 respectively for employment. Between 1998 and 2006 the significance of financial intermediation in GVA terms has fallen whilst it has become more significant in employment terms; this difference in output and employment trends suggests a productivity loss in the region over the period. Real estate, renting and business activities have experienced the same trends in terms of both GVA and employment over the period.

Figure 39: Northwest GVA location quotients by manufacturing sub-sector 1998 and 2006

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 220,000

Electricity, Gas and Water Supply

Mining & Quarrying



Construction

Transport, Storage & Communication

Manufacturing

Public Administration etc

Wholesale & Retail Trade etc

Education







6.15 Looking in more detail at the manufacturing sub-sectors reveals that more than half are larger in the Northwest than in England in terms of both GVA and employment. In terms of GVA coke, refined petroleum and nuclear fuels (2.84), chemicals, chemical product and man-made fibres (2.57), textiles and textile products (2.13), transport equipment (1.60), food and food products (1.50) and rubber and plastic products (1.48) are all of significantly greater importance in the region than nationally. Of these sub-sectors all have increased in relative importance apart from coke, refined petroleum and nuclear fuels, its location quotient fell from 4.29 in 1998 to 2.84 in 2006.

6.16 In employment terms coke, refined petroleum and nuclear fuels (4.81), textiles and textile products (1.94), chemicals, chemical product and man-made fibres (1.82), transport equipment (1.27), rubber and plastic products (1.26) and food and food products (1.22) are all of significantly greater importance in the region than nationally. Of these sub-sectors all increased in relative importance apart from food and food products and chemicals, chemical products and man-made fibres between 1998 and 2006.

Figure 40: Northwest employment location quotients by manufacturing sub-sector 1998 and 2006

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00

1998

20

06

Food Products etc

Textiles & Textile Products

Leather & Leather Products

Wood & Wood Products

Pulp, Paper & Paper Products etc

Coke, Refined Petroleum & Nuclear Fuels

Chemicals, Chemical Products etc

Rubber & Plastic Products


Basic Metals & Fabricated Metal Products

Electrical & Optical Equipment

Transport Equipment

Manufacture nec

Machinery & Equipment nec


Sector labour productivity

6.17 Analysis of labour productivity by sector provides further analysis of the relative strengths and weaknesses in the Northwest economy. In 2006 the region was more productive than England in only three sectors, agriculture, forestry and fishing electricity, gas and water supply and manufacturing. Figure 40 highlights that full-time employees in the financial intermediation sector in the region are significantly less productive than nationally; to a lesser extent this is also true for real estate, renting and business activities and public admin.



Figure 41: Labour productivity, GVA £000’s per full-time equivalent by broad sector, 2006

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 220,000

Electricity, Gas and Water Supply

Mining & Quarrying



Construction


Manufacturing

Public Administration etc

Wholesale & Retail Trade etc

Education





6.18 Figure 42 highlights that for the majority of sectors in the Northwest the productivity gap with the England average has widened between 1998 and 2006. Between 1998 and 2006 only in the agriculture, forestry and fishing, manufacturing and electricity, gas and water sectors did the Northwest increase its productivity advantage with England; whilst transport, storage and communications was the only sector to reduce its productivity deficit with England. Financial intermediation, mining and quarrying, real estate, renting and business activities and wholesale, retail etc all experienced significant increases in their productivity deficits relative to England; largely a result of movements in price levels and shifts in where higher and lower level jobs are undertaken.

Figure 42: Change in labour productivity in broad sectors in the Northwest (Eng = 100), 1998 and

2006

60

70

80

90

100

110

120

130

60 70 80 90 100 110 120 130

1998

2006


Mining & Quarrying

Manufacturing


ConstructionWholesale & Retail Trade etc




Real Estate, Renting & Business ActivitiesPublic Administration etc


Source: Annual Business Inquiry and Regional Accounts



Manufacturing sub-sector labour productivity

6.19 Looking in more detail at the manufacturing sub-sectors reveals that in 2006 only five sectors were more productive in the Northwest than England overall. Figure 42 shows that GVA per full-time equivalent employee is significantly higher in the Northwest than nationally in the chemicals, chemical products and man-made fibres sector. Labour productivity differentials are significantly smaller for transport equipment and food products, beverages and tobacco and wood and wood products. Comparing these results with Figure 39 highlights that for each of the sectors apart from leather and leather products and wood and wood products, the Northwest has a relative employment concentration in these sectors; suggesting that these sectors are important drivers of regional economic performance also being the three largest contributors to total manufacturing GVA.

Figure 43: Labour productivity GVA £000’s per full-time equivalent by manufacturing sub-sector, 2006

0

20,000

40,000

60,000

80,000

100,000

120,000

0 20,000 40,000 60,000 80,000 100,000 120,000

England

Nor

thw

es



Food Products; Beverage & Tobacco

Pulp, Paper & Paper Products etc


Machinery & Equipments nec



Textiles & Textile ProductsManufacture nec



Transport Equipment

Coke, Refined Petroleum & Nuclear Fuels


6.20 Figure 43: highlights that half of all manufacturing sub-sectors in the Northwest experienced an increase in productivity relative to the England average between 1998 and 2006 significantly including chemicals, chemical products and man-made fibres, transport equipment and food products, beverage and tobacco. Of those sectors in the Northwest that experienced labour productivity growth over the period 1998 and 2006, four had greater concentrations of employment than the England average which also increased over the period highlighting their significance to productivity growth in the Northwest economy.



Figure 44: Change in labour productivity in manufacturing sub-sectors in the Northwest (Eng = 100), 1998 and 2006

60

80

100

120

140

160

180

60 80 100 120 140 160 180

1998

20

06

Food Products; Beverage & Tobacco

Textiles & Textile Products



Pulp, Paper & Paper Products etc Coke, Refined Petroleum & Nuclear Fuels





Machinery & Equipments nec


Transport Equipment

Manufacture nec


SECTION SEVEN: The Changing Global Economy and Potential Threats to Regional Economic Performance 7.1 The Northwest economy does not perform in isolation new threats emerge, disappear or change on

an almost daily basis. Of a wide range of potential threats to the regional economy some are unique to the Northwest but many are generic to the wider UK and global economies.

7.2 The global economy is experiencing far-reaching and fundamental changes in terms of technology, production and trading patterns. The global market is encompassing ever-greater numbers of goods and services. Advances in transport and communication technologies have extended the geographical reach of firms by making new markets accessible on a cost-effective basis; whilst major communication improvements have facilitated global transactions and information flows. These changes have, and will continue, to influence the structure of firms as well as the location, ownership and management of productive activity; and have enabled the division of labour on global scale.

7.3 These fundamental changes not only provide opportunities to drive growth, employment and productivity but also bring new challenges for government, businesses and individuals. As the balance of economic activity in the global economy changes further it increases the requirement for economic flexibility, dynamism and entrepreneurship. The increasing proportion of global output produced by emerging economies not only provides new opportunities to trade and invest for the region, but also challenges to industries and sectors that have traditionally been dominated by advanced economies.

7.4 Large labour forces and low labour costs have given emerging economies a comparative advantage in labour intensive production; however these economies are increasingly moving into high value-added activity and providing increased competition for advanced economies.

7.5 The continued improvement in communications and technology will further increase the flexibility of production chains with specialisation and dispersion across continents. The rapid movement of resources, technology and ideas to the most productive location requires that enterprise and



productivity be promoted in the region to ensure businesses can compete effectively in the global market place. Firms and individuals need to be encouraged to move into new markets.

7.6 Further global competition and technological change increases the need for innovation in the regional economy. Businesses at the forefront of research and innovation will be best placed to move into high value-added, technology driven areas which can provide new sources of growth. The region requires its businesses to effectively apply new technologies to existing processes to expand production possibilities and improve efficiency resulting in increased regional economic activity and attractiveness.

7.7 To successfully harness the opportunities that developments in the global economy provide will require increased skill levels in the regions workforce. The relative skills of the labour force will be an increasingly important factor in determining where businesses locate different parts of the production process; therefore investment is needed in the skills of the workforce.

7.8 In recent years the region has benefited from the sustained growth in foreign direct investment (FDI). Whilst growth in FDI is expected to continue the sources and destinations of it are predicted to become increasingly diverse. Major emerging economies are attracting increasing inflows of global FDI requiring the region to further develop so as to remain attractive to mobile investment; a crucial driver of an economy’s productivity performance.

7.9 To address the opportunities and challenges that developments in the global economy presents the region needs to continue to develop an enterprising and flexible business sector that is able to react to change and seize opportunities in the global economy through the promotion of an enterprise culture.

7.10 The region needs to increase its ability to turn academic research into commercial innovation by increasing the level of research and development (R&D) undertaken in the economy and increasing partnership between industry and researchers. This will enable the region to capture the increasing rewards available from innovation, knowledge-driven sectors and high value-added business.

7.11 The region requires a skilled labour force. Higher skill levels increase the ability to harness technological improvements and become more productive. The need for a highly skilled workforce is reinforced by the rapidly rising skill levels in emerging economies (if from a lower base). In the next decade emerging economies are likely to experience significant increases in human capital, which will spur their productivity growth and enable movement up the value chain.

7.12 Population ageing will be one of the most significant economic developments over the coming decades. The global trend in ageing population and projected changes to population sizes are likely to have significant effects on economic performance and the balance of global economic activity. Different growth rates in working age populations will result in different trend growth rates across areas. Those areas with declining workforces are likely to grow more slowly than other areas therefore to sustain rates of growth the region will require structural reform to counter the effect of its ageing population.

7.13 International migration will represent another significant demographic trend, as international migration flows substantially increase. Migration of highly skilled workers will increase as competitiveness is increasingly defined by an areas ability to attract and retain a skilled workforce. Competition for high-skilled workers is likely to continue to increase in the future.

7.14 The global economy is experiencing far-reaching and fundamental changes in terms of technology, production and trading patterns. The global market is encompassing ever-greater numbers of goods and services. Advances in transport and communication technologies have extended the geographical reach of firms by making new markets accessible on a cost-effective basis; whilst major communication improvements have facilitated global transactions and information flows. These changes have, and will continue, to influence the structure of firms as well as the location, ownership and management of productive activity; and have enabled the division of labour on global scale.

7.15 These fundamental changes not only provide opportunities to drive growth, employment and productivity but also bring new challenges for government, businesses and individuals. As the balance of economic activity in the global economy changes further it increases the requirement for



economic flexibility, dynamism and entrepreneurship. The increasing proportion of global output produced by emerging economies not only provides new opportunities to trade and invest for the region, but also challenges to industries and sectors that have traditionally been dominated by advanced economies.

7.16 Large labour forces and low labour costs have given emerging economies a comparative advantage in labour intensive production; however these economies are increasingly moving into high value-added activity and providing increased competition for advanced economies.

7.17 The continued improvement in communications and technology will further increase the flexibility of production chains with specialisation and dispersion across continents. The rapid movement of resources, technology and ideas to the most productive location requires that enterprise and productivity be promoted in the region to ensure businesses can compete effectively in the global market place. Firms and individuals need to be encouraged to move into new markets.

7.18 Further global competition and technological change increases the need for innovation in the regional economy. Businesses at the forefront of research and innovation will be best placed to move into high value-added, technology driven areas which can provide new sources of growth. The region requires its businesses to effectively apply new technologies to existing processes to expand production possibilities and improve efficiency resulting in increased regional economic activity and attractiveness.

7.19 To successfully harness the opportunities that developments in the global economy provide will require increased skill levels in the regions workforce. The relative skills of the labour force will be an increasingly important factor in determining where businesses locate different parts of the production process; therefore investment is needed in the skills of the workforce.

7.20 In recent years the region has benefited from the sustained growth in foreign direct investment (FDI). Whilst growth in FDI is expected to continue the sources and destinations of it are predicted to become increasingly diverse. Major emerging economies are attracting increasing inflows of global FDI requiring the region to further develop so as to remain attractive to mobile investment; a crucial driver of an economy’s productivity performance.

7.21 To address the opportunities and challenges that developments in the global economy presents the region needs to continue to develop an enterprising and flexible business sector that is able to react to change and seize opportunities in the global economy through the promotion of an enterprise culture.

7.22 The region needs to increase its ability to turn academic research into commercial innovation by increasing the level of research and development (R&D) undertaken in the economy and increasing partnership between industry and researchers. This will enable the region to capture the increasing rewards available from innovation, knowledge-driven sectors and high value-added business.

7.23 The region requires a skilled labour force. Higher skill levels increase the ability to harness technological improvements and become more productive. The need for a highly skilled workforce is reinforced by the rapidly rising skill levels in emerging economies (if from a lower base). In the next decade emerging economies are likely to experience significant increases in human capital, which will spur their productivity growth and enable movement up the value chain.

7.24 Population ageing will be one of the most significant economic developments over the coming decades. The global trend in ageing population and projected changes to population sizes are likely to have significant effects on economic performance and the balance of global economic activity. Different growth rates in working age populations will result in different trend growth rates across areas. Those areas with declining workforces are likely to grow more slowly than other areas therefore to sustain rates of growth the region will require structural reform to counter the effect of its ageing population.

7.25 International migration will represent another significant demographic trend, as international migration flows substantially increase. Migration of highly skilled workers will increase as competitiveness is increasingly defined by an areas ability to attract and retain a skilled workforce. Competition for high-skilled workers is likely to continue to increase in the future.




References Data:

1.1 ONS Regional Accounts

1.2 ONS Population Estimates

1.3 ONS Annual Population Survey

1.4 ONS Labour Productivity Indicators

1.5 ONS Local Area Labour Force Survey

1.6 ONS Annual Survey of Hours & Earnings

1.7 Global Entrepreneur Monitor

1.8 BERR VAT Business Statistics

1.9 ONS Business Demography Enterprise Births, Deaths & Survival, 2008

1.10 ONS Annual Business Inquiry

1.11 ONS Business Enterprise R&D Survey

1.12 Trade in Goods Statistics, HM Revenue & Customs

Reports:

1.0 Regional Economic Forecasting Panel Autumn 2009 Report

1.1 Office of Fair Trading, “Productivity and Competition: AN OFT perspective on the productivity debate”

1.2 BERR Nov 2001, “Productivity in the UK – The Regional Dimension”

1.3 BERR 2009, “The 2008 Productivity and Competitiveness Indicators”

1.4 GEM UK: Northwest Summary 2008

1.5 Manchester Independent Economic Review 2009, “The Case for Agglomeration Economies”

1.6 Pion Economics 2009, “Places Study”

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