West Midlands Futures Green Paper

Our theory of growth recognises the West Midlands economy as a system made up of distinctive, but highly interconnected parts. This system is the product of many different forces, factors and behaviours, which, taken together, are the economy. An effective strategy needs to respond to all of them in the round, but be clear – as our Theory of Growth aims to be – about what the priorities are. Below, and with further detail in our supporting evidence base, we break down the economic system into a series of ‘subsystems’, to help our understanding of what our challenges and opportunities are and what needs to change. Making progress in one area should generate positive knock-on effects in another, but won’t be enough on its own to deliver systemic change.

Our economic geography. The West Midlands has the characteristics of a ‘polycentric’ region. This means people and businesses coalesce around, in our case, three strategic centres, which Birmingham is the largest of. International evidence suggests that polycentric regions are generally less productive: they have ‘less agglomeration’. But if we can enhance the degree of functional integration between our three strategic economic centres and strengthen their linkages to our boroughs, we will unlock a ‘goldilocks’ combination of scale, location and place diversity, underpinning residents’ quality of life and inclusive growth.

Our industry and sectoral profile. Evidence shows that the industrial composition, or sectoral mix, of the West Midlands is not a problem in itself and is in fact a slight advantage. Chapter 1 outlined our cluster strengths, which will be a central feature of the West Midlands Growth Plan. Our productivity challenge lies more in within-sector productivity and the need to move businesses ‘up the value chain’ into higher productivity economic activities. Within this, we also face the challenge of widening the spread of more productive knowledge intensive services and manufacturing firms, addressing lower productivity in older firms and increasing the number of micro-sized businesses in the manufacturing sector.

The quality of business leadership and management. The ability for businesses to increase profits, adopt new technologies, export into new markets and develop new product lines largely rests on the quality of their internal leadership and management. The West Midlands performs poorly on a number of indicators of business leadership and management and has the lowest ranking of English regions on this metric – itself a low bar compared to our competitors in Europe, North America, Japan and South Korea. Analysis by The Productivity Institute finds that weakness in management competencies accounted for 30% of the international difference in productivity across the East and West Midlands.

Research, development, innovation and adoption. Innovation is a key driver of improving business productivity. The West Midlands leverages more private investment in research and development (R&D) on the back of public funding than any other region bar one, showing high market confidence in our economy and cluster strengths, however this investment tends to be focused in a limited number of sectors and is not widely spread across the economy. An increase in public R&D – especially in translational research and technology adoption by businesses – is critical to raising regional productivity.

Business investment. The evidence suggests the supply of finance to enable businesses to expand is less of an issue in the West Midlands, with the exception of venture capital investment. Our strong performance in relation to foreign direct investment and R&D also suggests our investment challenges are quite specific. Our assessment is that poor business leadership and management is likely the key driver of the West Midlands’ business investment challenge.

Skills. Our top growth priority for productivity growth is to move people up the skills ladder towards higher level skills – 55% of roles in the WMCA area will require a Level 4 qualification by 2035 – for those currently inside the education system, and for the majority of residents who are outside of it. Our focus though is on Level 3 skills because this is the rung of the skills ladder where the West Midlands clearly struggles and where our residents are likely to see the greatest immediate benefits.

Life chances. Skills and training are only part of what our residents need to lead fulfilling lives. In the West Midlands, disproportionately high numbers of children experience a poor start in life, with knock on consequences for their years to follow, and women are economically inactive because they are looking after others.

Housing, regeneration and place development. In the West Midlands, housing constrains productivity through reducing the supply of workers and dampening productive investment. We face particular challenges relating to the low density of housing and the lack of development around transport hubs, particularly within the region’s strategic economic centres. The lack of the right supply and mix of housing is also a challenge because it reduces household’s disposable income – when regeneration becomes gentrification. This means we need to build more densely across the region while also increasing the supply of social housing.

Connectivity. Transport is well recognised as a key driver of regional economic growth and is a key enabler of our inclusive growth and net zero ambitions, providing access to opportunities and journeys for everyone. On account of our polycentricity, we need to strengthen mass public transport connectivity, including bus, to better connect our boroughs to our cities and our cities to each other and, as a national priority, address Birmingham’s transport constraints in particular. But as well as bigger investments in public transport infrastructure, we will need to look at how we manage the transport system as part of our approach place making to help create better local places, healthier communities and encourage sustainable travel behaviours, particularly by making our roads safer and improving air quality. This will still continue to matter in the years to come against the backdrop of greater levels of working from home – digital connectivity is more of a strength than a challenge in the West Midlands.

Energy infrastructure. The West Midlands energy system is a constraint on productivity due to the disproportionate number of manufacturing businesses running high temperature processes across dispersed sites; and the uncertainty and delays associated with getting distribution network connections. While the West Midlands is not a leading region for energy generation, we will use our specialism in smart energy systems to connect our businesses and places to green energy created elsewhere while reducing demand for it.

Regional institutions. Devolution enables regions to develop and deliver economic transformation, and it is well-established that more decentralised sub-national governance systems are more conducive to more balanced growth. Despite our progress towards greater devolution over the past decade, the West Midlands suffers from relatively weak horizontal linkages between firms and public institutions within the region and vertical linkages between local, regional, national and global actors.

The external perception and attractiveness of the region. Economic transformation is part science, reliant on understanding and addressing the drivers of growth, and part art, dependent on inspiring residents, businesses and stakeholders to get behind an inspiring, credible vision of the future. The importance of vision, leadership and external perceptions in attracting talent, investment and visitors cannot be underestimated in this context. This is not a narrow branding issue and recent successes represent a foundation of how we will realise economic transformation.