The knowledge-based economy: Blueprint for British prosperity

A preview of the White Paper for improving competitiveness; Peter Mandelson, Secretary of State for Trade and Industry, says know- how and innovation are vital to industrial growth

BRITAIN'S economic performance has lagged behind the other leading industrial economies for too long. A century ago we were the richest country in the world. Now we are in the second division. The Tories told us not to worry. Productivity, they said, was catching up with the French and Germans. So it had been in manufacturing, where employment was slashed in two deep recessions. But across the whole economy the productivity gap has not closed. And even in manufacturing it remains wide, as Rover's problems at Longbridge show.

My task is to create a new industrial policy that will help put Britain firmly on the road to closing the performance gap. The White Paper I will present to Parliament this week sets out New Labour's approach to the modernisation of the economy.

We have already put in place two essential building blocks for sustainable economic growth: the independence of the Bank of England as the foundation of macro-economic stability; and a crusade to raise educational standards. But much more remains to be done to modernise the supply side of the economy. Only business can do this; but government can help.

Knowledge is the key to competitive advantage in the global economy. Business cannot win overseas markets with unsophisticated products that can be made by cheap labour and raw materials available anywhere in the world. But our know-how and ability to innovate can give us real advantage. And we will not maintain our home market - by which I mean all of Europe as well as the UK - if we do not learn how to make the most of electronic commerce. We have the opportunity to take a lead in e-commerce, which I am determined we will not miss.

Businesses have to make much more of the knowledge generated in our universities, develop and use the skills of the workforce, and improve their business processes by learning from other companies. This is true for all business: manufacturing and services; new hi-tech and traditional companies; big corporations and small traders.

Creating such a knowledge-driven economy is for business, not government. But there is an important role for government. This is emphatically not to recycle the failed corporate policies of the 1960s and 1970s when planning and nannyism stifled business. But neither is it just to stand back from business needs and hope for the best, as the last government did in the 1980s. The Tories' industrial policy amounted to privatisation and little more.

Our job is not to plan the outcome of markets - a forlorn quest - but to make markets work well, make them open, robust and effective, so ensuring that competition spurs innovation. That is why one of our first steps was to pass legislation to crack down on anti-competitive behaviour.

But we also have to invest in Britain's capabilities. Few companies will spend much money on long-term scientific research. So the Government has a vital role in building and maintaining a powerful knowledge base in our universities. That is why we are putting an extra pounds 1.4bn, with the Wellcome Trust, into upgrading Britain's science, reversing years of neglect.

We also have to invest in creating a much stronger spirit of enterprise in the UK. Entrepreneurial drive is not in short supply in Britain. But entrepreneurial skills are often lacking. And the people with knowledge and ideas in our universities are not sufficiently encouraged to commercialise their work. Here the Government can make the difference, for example by setting up a chain of Enterprise Centres in our universities. We need to encourage more ideas into the market place, and then let the market take over, enabling our inventiveness to earn profits.

Finally, government can do more to help firms collaborate to compete: not in an anti-competitive way, but to learn from each other's success. Such business-to-business learning is already growing in supply chains, between joint venture partners and in a whole range of partnerships. But smaller firms rarely have the time or resources to make collaboration work. That is why the DTI already helps the motor industry bring top Japanese engineers to the UK to help our automotive suppliers - with a dramatic impact on performance. The White Paper will set out a programme for facilitating this kind of change much more widely in the economy regionally, locally and sectorally.

New Labour's industrial policy is built on these principles: investing in capabilities, encouraging business collaboration and promoting competition. They underpin effective markets and will help put the future on Britain's side.