The real reason investment in Britain is low

And why the success of the knowledge economy requires us to build things

Here’s a story that illustrates what’s fundamentally wrong with the British economy. 

Britain’s film industry is a national success story, but demand for studio space is fast out-stripping supply. In fact, estate agents Knight Frank estimate Britain will need an additional 2.6m sq ft of studio space to keep up with demand.

Yet, planning permission has been refused for a scheme to build a new £750m state-of-the-art film studio on the site of an old quarry next to the A404. Despite backing from big-name directors James Cameron, Sam Mendes, and Paul Greengrass plus a commitment to invest £20m into the local road network, the project was rejected by Buckinghamshire Council. Joy Morrissey, who was the local MP before Parliament was dissolved and ironically once starred in a B-movie alongside Oscar winner Marisa Tomei, told a local paper that she was ‘delighted’ by the news.

It’s an interesting (and depressing) story for a couple of reasons.

To start with, there’s the investment angle. Policymakers constantly fret about why investment levels in the UK are so low and why fast-growing firms are selling up to US competitors. Is it the tax system? Are our pension funds broken in some way? Should we create some sort of new BritISA to invest in British businesses?

BritISA aside, these are mostly not silly questions. For example, up until full expensing was brought in, the UK had the stingiest capital cost recovery rules in the OECD meaning corporation tax was particularly punishing to business investment. And we still have a business rates system that punishes investments in business property. Plus, our pension funds do seem to invest a lot less in infrastructure and unlisted businesses than their international counterparts.

Yet, I can’t help but think this is all a bit peripheral when a three-quarter of a billion pound investment in one of the UK economy’s real strengths is just refused planning permission outright.

And it isn’t just £750m film studios that you can’t build on disused quarries next to major roads in Buckinghamshire either. The same council rejected the construction of a £2.5bn data centre on another quarry near the M25. One of the reasons cited for rejecting the project, which would have created 370 jobs and helped the UK’s AI sector, was that the buildings could be seen from nearby motorway bridges. That was not the only massive investment in data centres to be refused recently. A £1bn investment in a new data centre next to the M25 near Watford was blocked by Three Rivers council.

It is perfectly worthwhile to try to improve investment incentives and increase the supply of capital, but for that to have an effect we still need investable projects in the first place. In other words, planning reform comes first.

There’s another angle worth discussing. I think it’s fair to say there’s been an over-emphasis on manufacturing in policy debates recently. Biden, for instance, has repeatedly bragged about record levels of factory construction. Rachel Reeves’ securonomics agenda can be seen as another example of this. 

Yet the simple truth is most of the economy isn’t manufacturing – it is services. And the UK has real strengths in a wide range of service categories from finance to AI. If you want to lift growth in the UK, then you need to improve productivity in services.

Some people take the fact that Britain’s biggest strengths (and opportunities) are in services as a reason to focus on things like education and skills over how to make it easier to build stuff. I think that’s a mistake and here’s why.

How productive sectors like life sciences, AI, and film are depends upon what we’ve built.

It’s not just that you need labs and film studios to have a life sciences sector or a film industry, though admittedly it helps. It is also about where your labs and your film studios are. One of the reasons why Marlow quarry was an attractive place to invest £750m in a film studio is that it is near lots of other film studios.

If built, Marlow Film Studios would have been able to benefit from an existing pool of specialised labour. It’s the same reason why US film studios cluster in Hollywood and why tech companies cluster in Silicon Valley.

In the bits of economy where value comes from having ideas rather than making physical objects, location matters more than ever. For example, US economist Enrico Moretti’s research found that a coder moving from the median software cluster in the US (Gainesville, Florida) to the 75th percentile cluster (State College, PA) would become 12% more productive.

Not only does this mean we need to make it easier to build new labs, data centres, and film studios in or near existing clusters, it also means making it easier to live near them too.

Creating an industry cluster from scratch is notoriously hard and many of the world’s most famous clusters are accidents of history.  A successful cluster is a bit like a fire: easy to snuff out but hard to pick up and move elsewhere. When you are fortunate enough to have a cluster like Cambridge and Oxford do in life sciences or Buckinghamshire and West London do in film, then it is crucial you don’t snuff by making it too hard to build.