Strategy or statecraft?

When you set any future public-funding interventions from the multi-year review now set to happen alongside the Budget on 30th October in the context of the cuts announced today it brings the consideration of value-for-money into sharper-than-ever focus.?Funding for games support interventions is (like many SME-support initiatives) usually predicated on a requirement for growth as an impact and for the return on the public investment. The consideration of possible business support measures as re-stated today are growth-led in terms of impact expectations.?True value-for-money from such investments will need to be clearly demonstrated for that spending review.

Some observers have been pointing out the challenges of the time lag before downstream, positive economic impact from growth interventions. Essentially, investing now takes a while to pay back, so it doesn't help the current situation. That’s certainly what we’ve seen over the past decade with the recipients of our support. Some companies we funded?five years ago are only just gaining traction now.?

Business boost measures like ours can deliver new jobs, returning some additional PAYE revenues back to the exchequer - although sometimes (and often in the tech sector) that's really just?displacement between different employers, rather than reducing unemployment. So we need much more happening to open inclusive and representative pathways into games jobs so that our employment impacts go beyond displacement.?And we now know the scale of the fiscal and societal challenges that the government's growth investment ambitions will be set against.

A further issue is that the downstream investment ultimately attracted by growing games businesses?is often non-UK and leads to an eventual loss of UK ownership and dilution of corporation tax returns from growth.?I've discussed this before here.

The BFI / PEC mergers and acquisitions report for the games sector identified four market failures as a result M&A driven inward investment:

? reduced innovative activity;

? overseas relocation of production and intangibles reducing scope for positive spillovers on the wider video games development ecosystem;

? value-reducing M&As where frictions between the acquirer and the acquired games development studio reduce profitability; and

? overseas transfer of sales and profits due to changing accounting practices, resulting in losses to the UK Exchequer.

The report also alluded to a possible upstream market failure in the provision of domestic sources of finance for UK games development studios, noting that may explain why some overseas M&A activity occurs in the first place. The lack of domestic sources of finance may force owners of studios to sell under disadvantageous circumstances if they are unable to raise the necessary capital through domestic?means to continue running their business independently.?

The Scale Up institute has also reported growth of less than 5% in growth-achieving creative and arts businesses over the past ten years – but bear in mind the increase in all growth businesses over that period is only around 5% despite the supposedly high focus there has been on such interventions.?

So the growth trajectory a) takes some time to be impactful but b) also leads to erosion of intellectual assets etc and essentially a value drop-off where the CT revenues from the fully grown entity are wholly or partially lost to the UK. It seems that this is potentially a bigger problem than just the time-lag. Growth-stimulating interventions for business need a broader perspective alongside them, to retain the grown value for the UK.??

Patrick Bradley made an interesting and relevant comment (this observation made by Patrick in the context of the Vassal State book by Angus Hanton):

"In my experience politicians here have long failed to grasp that having a fully open market, where there are no structural incentives to own, retain, and preserve key industries here, has allowed our best businesses to be harvested by overseas buyers. We must recognise that there is a market imbalance in size, which requires structural remedy - this is not anti -American but a realistic recognition of what is in our national interest, to preserve national assets, to retain their wealth for this country. We need to attract more capital to businesses here to allow them to independently scale internationally, but ensuring majority ownership remains vested in the UK."

This problem is steadily gaining wider recognition. As I mentioned in my last article, Lisa Nandy refers to the need for?“a new economic statecraft” to address such issues (and many others beyond the scope of this article). What economic statecraft will we need to see in our sector to truly create sustainable business growth impacts from any public investment??Can an expectation of such statecraft be embedded in future intervention approvals?

Mark Carney made several interesting and relevant points in his book, Values: An Economist's Guide to Everything That Matters. One of his ideas that struck me in the context of defining statecraft was the notion of thinking about how the necessary dynamism is created in the economy during the journey, rather than just the growth end-point outcomes. According to Carney, dynamism thrives when government pursues decentralisation and encourages new UK entrants. That means protective (for the UK) policy priorities regarding competition, particularly in digital; secondly ensuring?that intangibles are properly shielded from appropriation from the UK; thirdly that there are tax incentives for those taking dynamic actions in the UK’s interest; fourthly, new forms of financing and investment that support UK SMEs and intangible creation; fifthly, building value in (safe) UK platforms and finally a recognition that social cohesion is essential to competitiveness. The notion of valuing dynamism that is channeled towards UK societal values would also be an important concept to support games in a public service context. Regular readers will know that represents a major area of opportunity. So perhaps economic statecraft should seek dynamism à la Carney. In that world, the dynamic statecraft approach would filter inward investments to ensure that they will contribute to the right kind of UK dynamism rather than inhibit it. It would also ensure that non-UK investors were acting ethically and responsibly elsewhere in the world.

So, as the spending review is announced against a background of cuts, and expectations turn towards a new industrial strategy, can those who value UK statecraft shape it towards a new UK dynamism?

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