UK: Trading Places - How Globalisation Will Drive Future UK Competitiveness - Part One

Last Updated: 30 November 2005
Most Read Contributor in UK, August 2017


Globalisation is quickening its pace. If the UK is to remain competitive in the battle for investment and wealth creation, business and government need to take action.

Nation is increasingly pitted against nation. As a result, the UK needs to benchmark itself against the best in the world to define where its comparative advantage lies. The new Deloitte Competitiveness Index is a unique attempt at capturing where the UK ranks today and enables a direct comparison between nations. It places the UK sixth amongst 25 world economies. However, by 2010, and assuming the continuation of trends of the last 20 years, our model suggests the UK will slip outside the top ten.

This is a clarion call that we must answer urgently. The speed and energy with which emerging economies are increasingly competing on an equal footing means there is no place for prevarication.

In order to take the pulse of British industry on this issue we surveyed UK business leaders. They identified that improvements in innovation and skills had and would be made. Similarly, concerns about the direction of the tax and regulatory systems should be addressed.

Globalisation presents an exciting opportunity that UK business and policy makers are well placed to address. We believe this should be at the top of boardroom and government agendas.

We trust this report will engage much-needed debate around how the UK maintains and enhances its comparative and competitive edge.

John Connolly
Senior Partner and Chief Executive
Deloitte & Touche LLP

Executive Summary

1. The Deloitte Competitiveness Index ranks the UK sixth out of 25 countries for its capacity to support wealth creation. We have developed a new index of competitiveness based on the key drivers of wealth creation – innovation, enterprise, investment and macroeconomic stability – and their impact on productivity in an economy. The UK is performing particularly well on macroeconomic and enterprise indicators, but less well in innovation and the business/corporate investment climate. In contrast, the US performs well in all of these areas and is ranked first by the Deloitte Competitiveness Index. Unlike other G7 countries, the US is likely to retain its position.

2. Business leaders need to inject urgency into the debate about how the UK creates the next generation of knowledge based wealth. Change in the global business operating environment has accelerated over the past five years, compelling businesses to adapt rapidly and flexibly to the new challenges and opportunities they face. Unless the pace of policy change is similarly stepped up, the UK, along with other G7 countries, will slip down the rankings. For instance, only a third of business leaders feel the UK is the best place in the world to run a business. Nearly half of UK businesses report they would relocate headquarters in the future if domestic conditions made it difficult to operate. Policy makers must ensure such a situation does not arise. If the UK is to maintain or better its position, areas to be addressed should include innovation and business investment.

3. Rapidly accelerating globalisation should be high on boardroom agendas and the CEO must take ownership. UK business needs to fashion a new business model and operating processes that use the whole world for wealth creation. This fundamental change in mindset needs to be focused around three factors. First, reshaping operations by relocating business processes – within and beyond the UK – to their best possible home. These decisions are increasingly driven by abundant pools of skills such as the surplus of engineering graduates in India, accountants in the Philippines or call centre agents in Scotland. Our research shows this process is very much underway with UK-based companies having more than one-fifth of all non-customer operations located outside the UK. Second, UK businesses must build a capability within the organisation to evaluate constantly and optimise the network of operations. Just 3% of UK companies consider relocating their headquarters on a regular basis, according to our research. Finally, given the speed of change, we would urge businesses to press harder on the accelerator. CEOs need to take responsibility for oversight of the impact of globalisation on their business and play an active role in shaping the broader policy agenda.

In building a new operating model we identify seven critical factors:

  • Reduce organisational layers across (international) operations.
  • Delegate to empower local decision making, but retain accountability.
  • Empower local operations on issues such as pricing and cost structures to reflect local markets’ conditions.
  • Centralise non-core processes into lower-cost jurisdictions.
  • Form partnerships with local stakeholders to build reputation before moving into an area and once established build trust through a strong ethical stance.
  • Work with government to build understanding around the business requirements and to articulate the business impact of any policy changes on skills, tax and regulation.
  • Clarification of the role of headquarters in this model and how it oversees its distributed operating model.

4. Governments must address the competitiveness policy dilemma. To be fit for the future, governments must balance the short-term need for agility and flexibility with the long-term need for macroeconomic stability. This report suggests government should pursue a dual agenda based on macroeconomic stability alongside continuous incremental improvements around the innovation, tax and regulatory regimes. There are three priorities to be addressed. First, the amount of research and development (R&D) conducted by firms needs to be increased. This may mean re-evaluating the scope of the R&D tax credit system and improving its application to ensure greater simplicity and consistency. Second, the tax system is too complex and the costs of compliance too high for large and small businesses alike. We need a period of stability in the tax system, as well as a clear commitment to align growth in tax revenues with a growth in corporate profitability. Third, while many businesses understand the rationale for a robust regulatory system, many still do not consider the regulations sufficiently ‘smart’ to represent anything other than an additional cost. The Better Regulation Executive should redouble its efforts to ensure any regulation is good regulation.

5. The competitiveness agenda is a joint one between government and business. Business and government often see themselves as separate champions of the competitiveness cause with little in common. In the UK, it is important not to allow globalisation to drive business and government apart, rather it should be used as an agenda to tie both parties together. A joint agenda must be recognised and binding actions placed against it, if the UK is to retain its position in the world rankings and not slide to 12th by 2010 (see Exhibit 3). Governments need to provide the policies which make the UK an attractive place to do business. CEOs need to benchmark themselves against the best in the world and keep the pressure on governments by challeging the status quo. It is vital that the UK rises to the challenge.

Comparative Advantage In A Competitive World

Globalisation is quickening its pace. The last five years have seen a new era for business with seismic shifts in technology, capital flows and trade liberalisation, which impacts business practices. Knowledge workers from across the world can engage in the global labour market. New world-class research and development hubs in emerging economies provide support for businesses in the developed world. Products launched on the market today have ever shorter life spans. Proximity no longer has to be geographical.

Against this background, companies want to know the best places in the world to operate, while policy makers need to benchmark themselves against the best in the world. This report attempts to establish the connections between these two interdependent agendas by fusing two research methods.

First, to benchmark the UK’s competitiveness position we identified the drivers of wealth creation and productivity (see Exhibit 1). By comparing these key drivers – innovation, investment, enterprise, human capital and macroeconomic stability – within an economy with the overall rates of productivity in 25 countries, we developed the Deloitte Competitiveness Index. This index provides a ranking of countries in terms of their capacity to support competitive and productive businesses.1.

Second, to understand how UK-based companies best align operational and locational decisions we surveyed business leaders on: why they retain their headquarters in the UK; what drives decisions to move functions abroad; what are the key criteria in aligning operations and location (Exhibit 1). Three hundred business leaders participated in a telephone survey and ten case study companies participated in in-depth interviews.

As one of the world’s most open economies, the UK will face greater demands in defining its competitive advantage. The remainder of this report sets out to address four key questions:

  1. How does the UK rank as a place to support competitiveness? How do countries score on different drivers of competitiveness such as the macroeconomic climate, enterprise, human capital, competition and innovation?
  2. How do UK businesses create value by utilising the comparative advantages of their UK and overseas locations – today and in the future?
  3. How can policy better support UK competitiveness?
  4. How do policy makers and businesses work together to drive forward their shared interest?

The speed of change means that the UK has a major challenge ahead, requiring vision from both business and policy communities. This report lays out an agenda for both.

How Does The UK Rank As A Competitive Location?

As companies trade places, governments are taking a keen interest in international rankings and performance indicators as measures of their success in improving economic performance by closing the productivity (or wealth creation) gap.

Against this backdrop, the UK needs to benchmark itself against the best in the world. The Deloitte Competitiveness Index gauges the potential of nations to create wealth, measured through productivity (see the Appendix for the full approach taken). The advantages of this model are:

  • It uses established European Union and UK government supply-side indicators as a base for the sub-indices.
  • It does not incorporate qualitative views into the model itself.
  • It is based on a 20-year data panel allowing a long-term view to be taken.
  • It has a strong, positive correlation with Gross Domestic Product (GDP) growth.

The UK productivity gap

The UK’s productivity gap with the US, measured as GDP per employee, is around 25%. Further, with France the gap is 11% and with the G7 economies it is 10%, although the level is similar to Germany and above Japan. Using GDP per hour worked, the UK is ahead of Japan but behind Germany, the US and France.

The UK’s gap with Germany and France emanates from differences in capital intensity and labour force skills (specifically intermediate skills). It lags the US mainly on Total Factor Productivity (TFP), the residual left over after all capital and labour have been incorporated into growth accounting models. This residual is important as an indicator of the business base of competitiveness.

Sources:; Porter, M. and Ketels, C. (2003): UK Competitiveness: moving to the next stage DTI economics paper No. 3 (DTI/Pub 6580/5.5k/05/03/NP URN 03/899).

The Deloitte Competitiveness Index

Our approach takes the areas that are acknowledged company-level performance drivers as well as indicators of national competitiveness: macroeconomic stability, enterprise, innovation, business investment, competition (or openness) and human capital – to determine the overall competitiveness of a nation. These are also the areas covered by the UK government’s own competitiveness indicators and are also similar to the Lisbon Agenda targets. The Deloitte Competitiveness Index amalgamates these variables into a general index that shows the capacity of a particular economy to generate and support wealth creation (in other words, productivity growth) through competitive businesses.

The Deloitte Competitiveness Index measures TFP, making it quite different to other international rankings. We took a basket of indicators for each of macroeconomic stability, enterprise, innovation, business investment, human capital and competition. We created a sub-index for macroeconomic stability, enterprise, innovation and business investment. The indicator for competition is a proxy for the openness of the economy (imports and exports divided by GDP) and human capital is proxied through years of schooling. Any interdependencies between sub-indices are incorporated into the model (see Appendix). A total index from the four sub-indices and two variables was calculated and compared to the wealth creation potential of a country measured through TFP.

It is important to note the difference between the Deloitte Competitiveness Index and its sub-indices can be very marked. This is because the total model captures the underlying rates of change in the sub-indices and their impact on TFP. For example, Finland has low rankings for innovation, macroeconomic stability and enterprise yet comes out third overall. What this means is that within Finland the index factors are strong drivers of wealth creation.

The Deloitte Competitiveness Index places the UK sixth in the world as a competitive location, made up of the following:

  1. Fifth for macroeconomic stability: low inflation, consistent growth and stable employment provide firms with the security they need to make long-term decisions about their business. This ranking has improved from 19th in 1984.
  2. Fourth for enterprise: a pro-risk culture, combined with relatively easy access to capital and a strong and dynamic business base ensures that there is a supply-chain of creativity and new ideas in the economy. This ranking has improved from sixth in 1984.
  3. 12th for innovation: R&D is the life-blood of business competitiveness through the generation of new products, new processes and new markets. This ranking has deteriorated from sixth in 1984, although this may be because of a comparatively low propensity to patent in the UK.
  4. 12th for investment: effective regulatory, tax and interest rate regimes are preconditions for corporate/business investment. This ranking has improved from 14th since 1984, but, assuming the pattern of the last 20 years holds, may deterioriate to 16th by 2010.

The US scores highly as a location for business competitiveness overall and through each of the competitiveness drivers. Similarly, in line with other international rankings, the Nordic countries also do well with Sweden, Finland and Denmark coming second, third and fourth respectively. In all these cases, productivity growth is strongly fuelled by the Deloitte Competitiveness Index’s four sub-indices.

This should come as little surprise and demonstrates that there is no one policy panacea to be competitive given the different approaches amongst these nations:

  • The US had strong productivity growth during the 1990s on the back of an innovation and entrepreneurship boom and a strong investment climate, particularly in the area of access to finance. Although its growth has subsequently slowed, the US still has the largest flow of inward and outward Foreign Direct Investment (FDI). Many US businesses are globally competitive and are supported by government investment at levels in excess of those in other countries.2
  • The Nordic countries have put in place policy mechanisms to link innovation with entrepreneurship and investment to produce strong productivity growth. This is combined with substantial public investment in the innovation infrastructure and some of the highest business expenditure on R&D in the world.
  • Germany performs well in relation to other European and G7 countries because innovation and skills are the main drivers of wealth creation. Interestingly, Germany ranks highly for its stable economy. Despite sluggish performance in growth and employment, the economy has continued to maintain strong export performance.

2010 and the challenge ahead

The next five years could bring a shift in the global balance of national competitiveness. Assuming that changes continue at the pace of the last 20 years, the Deloitte Competitiveness Index forecasts the US is likely to remain the most competitive nation. Further, only Italy of the G7 nations will retain the same position (20th). All mature economy Deloitte Competitiveness Index rankings are forecast to deteriorate with the UK likely to slip from currently being sixth to 12th (see Exhibit 2).4

By contrast, emerging economies are likely to fare much better, notably South Korea, China and India. South Korea’s competitiveness is forecast to rise from 14th to fifth in 2010, with substantial increases in all sub-indices. China’s rise from 24th to 23rd will be driven largely by an improvement in its enterprise sub-index.

World rankings from a business perspective

China is a growing market with a strong entrepreneurial and risk taking culture and 15% of UK business leaders we surveyed felt that it was a good place to locate business functions. India will likely rise from 22nd to 19th with a particularly noticeable improvement in innovation.

Business leaders we spoke to were swift to point out that, by moving some business functions and R&D to India, they were benefiting from lower labour costs and stronger capabilities. One company highlighted the intermediate skills based in India particularly suited products that required constant, incremental innovation but maybe did not require substantial ‘blue sky’ research. This is further supported by our work showing UK financial institutions employing global best practice in offshoring.5

The potential drop in the overall rankings of the UK over the next five years must be of concern to policy makers. Our model exhibits a strong, significant and positive correlation between growth in the Deloitte Competitiveness Index and growth in GDP. Any drop in the rankings must therefore translate into a potential deceleration in wealth creation.

Exhibit 4 – Countries which CXOs ranked the best to run a business, by sector





Financial & Business Services





Europe (inc. UK)





  • Western Europe (inc. UK)





  • UK





  • Eastern Europe





North America





  • US










  • Far East (inc. China)





  • China





  • Middle East










  • Australia





South America










"Don’t know"





Source: Deloitte Research UK, 2005.

If business really is as globally mobile as business leaders argue, then this points potentially to fragility in the developed world’s business base. The exposure of the UK economy to global dynamics is emphasised by the fact that only one-third of UK business leaders surveyed feel that the UK is a good place to run a business (see Exhibit 4). Further, as we discuss in the next section, a dynamic business model is emerging that is not constrained within national borders. This model uses the resources and capabilities from around the world to build and sustain competitive advantage. The warning signs are there: the UK needs to respond. The next section explores the issues for business and is followed by the challenges for government.

Does London drive UK competitiveness?

Most of the business leaders with whom we held in-depth interviews were based in London and argued forcefully that the benefits of the capital – access to clients, highly skilled labour, innovation networks and finance – far outweighed the costs. It was seen as key to competitive advantage for their business. One pointed out that the costs of moving headquarters away from London were simply too high to contemplate; another said London was the only place in the world where there was such a rich supply of talent, culture, networks and finance all in one place.

How important is the City of London as a place to do business?

We asked all the business leaders based in London from our survey how important the City was to their business. Nearly 60% reported it was critical or very important. Over a third of finance respondents and a half of manufacturing companies thought that the City was critical or very important. Over 50% of service companies view the City as critical or very important.

Why is it so important to be located in London?

The City of London has a unique combination of factors that businesses tap into to drive competitiveness and was ranked top by a recent survey of European cities:6

  • Access to growth finance.
  • Cluster of supporting businesses and complementary skills/assets.
  • Active government policy supported by strong investment in new sectors and markets.
  • Pool of talent and capital.

Reason for staying in London (verbatim responses)

% of those based in London

Access to clients


Easy access to networks and infrastructures


Access to highly skilled potential employees


Nature of business


Access to supply chain


Capital city (quality of life, culture, dynamics, knowledge capital)


Financial centre


Source: Deloitte Research UK, 2005.


1 Our approach, discussed in some detail in the Appendix, is just one way of developing such an index. Others include the World Economic Forum’s Global Competitiveness Index and the IMD’s World Competitiveness Yearbook rankings.

2 For example, the US government spends the highest percentage of GDP on R&D in the world at some 3.2% of GDP.

3 See the Appendix for components of sub-indices and construction of index.

4 This forecast is based on assumptions that the trends and policies continue on the trajectory of the last 20 years.

5 Global Financial Services Offshoring. Deloitte. Global Financial Services Industry. Nov 2005

6 The Competitive Position of London as a Global Financial Centre. Corporation of London. November 2005. Financial Times, 6 October 2005, "London still top city for European execs" reports on a survey produced by the European Cities Monitor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To view the next section of this article, please click on the "next page" link below

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

This article is part of a series: Click Trading Places - How Globalisation Will Drive Future UK Competitiveness - Part Two for the next article.
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.