City & Business: British companies just need self-belief

LAST week, as Tony Blair prepared for talks with the sex fiend in the White House and Robin Cook got his knickers in a twist over his lover, the business pages reported a merger between two US computer companies.

For the information technology world the purchase of Boston-based Digital Equipment Corp by Texas-based Compaq for pounds 5.3bn marked the end of an era. In its heyday, when computers were about mainframes and the Internet was the secret of the US defense department, DEC was second only to IBM. Now it has become chattel. It is the property of an upstart desktop computer company with close links to the despised Microsoft and Intel.

Joe McNally, managing director of Compaq UK, explains the difference this makes locally. UK businessmen, he says, now have more choice when going shopping for computer products because Compaq-Intel will be a growing, thriving operation. Since Compaq plans to go from being a company turning over pounds 100m in the UK to one turning over pounds 5bn, he adds, the result is likely to be significant inward investment. "Believe me," Joe says, "we don't have the infrastructure to support that kind of growth."

Despite Joe's good news, the Compaq-DEC merger could be interpreted differently. The deal dredges up memories of what Labour used to say in opposition - that Britain has been reduced to taking the crumbs from the high table of global economic consolidation.

There is a home-grown British information technology industry. It is tiny but kicking. Last autumn Bill Gates invested in a Cambridge-based venture capital fund specialising in IT. At the turn of the year a separate IT sector was set up on the stock market index. Still, the question remains: how can British computer companies achieve the critical mass to compete against US high-tech giants like Compaq, Microsoft, and Intel?

The knee-jerk answer will be: they can't. But why not? Japan came from nowhere in technology 25 years ago. We can come from nowhere starting now.

Economists may have all sorts of arguments to undercut such a dreamy notion. But from a journalist's standpoint the main stumbling block is the bad flow of information. Journalism is not going to explain what is happening in the world of British information technology. It would cost too much. Only money will buy the time and effort to tell illuminating stories about fledgling British Bill Gateses.

Slightly more surprising, however, is the news from a friend who quit as a fund manager specialising in small high-tech companies two months ago. Despite the fact that IT is one of the world's great growth areas, he says, the City is doing a lousy job allocating capital to British IT companies with a shot at competing internationally. This, he suggests, is because there is no nationally shared sense of - or conviction in - the economic potential of the British IT industry. In the vacuum created, investors fall back on buying and selling technology funds which, according to market rumours, are hot at the moment.

Moving in and out of high-tech stocks in nano-seconds is a game perfected on Wall Street.

The difference is that on Wall Street the fickleness of fund managers is underpinned by the research of investment banks and the journalism of magazines like Fortune.

Another fine mess

WHILE the Blair government fumbles for policies boosting Britain abroad, it might also want to take a look at what is happening at home. It is received wisdom that Britain has benefited from privatisation and deregulation. It is received wisdom that we have a more flexible economy than Germany and France, and that if Blair can build a fairer, more educated society, we are set to steam ahead. But is this so?

The first round of winners in the privatisation game were the City merchant banks handling the sale of government property. Second-round winners were former state apparatchiks, like Cedric Brown of British Gas, transformed into private sector biggies earning obscenely swollen salaries on the untested assumption they would jump to other jobs if they were not. Third- round winners appear to be foreign companies playing the cleverest hands in the restructuring of the former public sector industries. Electric utility Eastern Group is currently the target of three warring bidders: two US companies, PacifiCorp and Texas Utilities, and the Japanese bank Nomura.

"I love privatisation," says Eric Drewery, UK chief of the Swedish-Swiss industrial giant ABB. Through the judicious acquisition and adroit makeover of a half-dozen brain-dead British companies in such sexless industries as water and electrical metering since 1989, Mr Drewery has built ABB UK from a company reporting annual sales of $250m to one generating $3.6bn.

More power to Mr Drewery and ABB for exploiting the opportunities created. But why haven't British competitors to ABB done the same?

No doubt GEC has its reasons for not flourishing on the back of the massive sell-off of state assets. No doubt the new owners of the privatised rail companies have their reasons for making what appears to be an almighty hash of their businesses.

The danger is that the more Labour settles into power the more it will become inclined to turn away from facing such basic questions. Between now and March we shall be hearing a great deal about how Gordon Brown is hanging tough with his Budget. But what will we hear about the realities of economic life as opposed to the neat abstractions?

If Mr Brown is not careful he will sink to the level of rhetoric that belongs to old men and women whatever their political stripe. Our children are disgusted, outraged, reduced to tears, laughter and boredom by the mess we who specialise in economic discourse have made of the world.

No amount of analysis can hide from them the fact that our economy is mass-producing poverty while providing custom-tooled wealth and hope for a charmed few. Despite the good intentions, Labour and its supporters risk becoming part of the problem rather than the solution.