Commission of Inquiry Vision for Hampshire 2050

Core Evidence Base Hampshire County Council

Economy August 2018

Contents

Foreword 3 Executive Summary 4 List of Tables and Figures 12

1. ECONOMY & BUSINESS 15 1.1 Economic activity across Hampshire 16 1.2 Economic growth and contribution to growth over time 18 1.3 Economic prosperity across Hampshire 22 1.4 Shift to services and the rise of knowledge-intensive services 28 1.5 Industrial specialisation 32 1.6 The labour market, competitiveness and productivity challenge 37 1.7 Hampshire businesses 46 1.8 High-growth businesses 61 1.9 Internationalisation 66 1.10 The outlook for Hampshire’s economy 78

2. INFRASTRUCTURE & INVESTMENT 87

2.1 Physical infrastructure 87 2.2 Digital infrastructure 91 2.3 Business space 95 2.4 Housing 101 2.5 Inward investment and foreign owned businesses 105

3. INNOVATION & SKILLS 110

3.1 Expenditure on Research & Development (R&D) 110 3.2 Patents 114 3.3 Knowledge Intensive Sectors 116 3.4 Science & Technology Sectors 122 3.5 Skills 129

Further information 132 References 133 Endnotes 137

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Foreword

Hampshire County Council has established a Commission of Inquiry to inform a Vision for Hampshire 2050 which will contribute to the future prosperity, quality of life, and protection and enhancement of the character and environment of Hampshire.

The Commission is being undertaken under the following 6 themes:

1. Demographic and societal challenges 2. Economy 3. Work, skills and lifestyle 4. Environment and quality of place 5. Mobility, Connectivity and Energy 6. Rural Hampshire

For each theme we are considering:

 Macro global and national trends and how these might represent threats and opportunities for Hampshire;  What impacts we might be able to influence;  Any specific actions or interventions which the public sector might have to consider to best prepare Hampshire for such trends/impacts.

Evidence is being gathered through a targeted call for evidence from specified experts and an open call for evidence. Evidence will be considered at hearings for each theme by selected Commissioners.

This report represents evidence prepared and evaluated by the Economic and Business Intelligence Service (EBIS), part of Hampshire County Council’s Research & Intelligence function, to support the Economy theme of the Commission. It primarily focuses on the current profile of the Hampshire economy and trends associated with key measures of the economy.

David Fletcher, Assistant Director of Economic Development, Hampshire County Council

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Executive Summary

Using any conventional measure, Hampshire has one of the most successful economies in the UK. In 2016 Hampshire’s economic output (Gross Value Added) totalled almost £50bn. Close to one in every five pounds of economic output is generated in Hampshire making it the largest sub-regional economy in the South East. Economic output in Hampshire has increased by over 90% in nominal (inflation unadjusted) terms between 1998 and 2016.

Hampshire Economy…Today

£

largest sub regional best performing most export relatively high business sector strengths in economy in the South labour market in the intensive county in survival rates, relatively ICT & digital media, East of England country the country high business and jobs aerospace & defence, density marine/maritime

Economic growth in Hampshire, like the rest of the country has been characterised by two distinctive phases - the pre-recession period, from 1998 through to 2007 and the post-recession period. The real (inflation adjusted) growth in the economy was 1.6% per annum (p.a.) since 2009 compared to 2.3% p.a. before the recession. Over the long run faster growth in economic output in Hampshire was held back by sluggish performance in the two cities.

Average incomes per head of population in Hampshire are higher than the UK average, but on this measure Hampshire is less prosperous than the South East economy. It is important to note there are differences in performance between Hampshire and the County area, with the County area generally performing better. The relative decline of Southampton and Portsmouth has constrained the relative growth in economic prosperity in Hampshire since 1998. Just like the rest of the country the distribution of economic activity and economic prosperity within Hampshire is not uniform – there are spatial disparities in economic performance in Hampshire. Significant interdependencies between the areas within Hampshire

Page | 4 characterised by significant levels of commuting imply that the relative levels of household incomes per head of population in many areas are relatively high.

In common with the rest of the South East and the UK economies, a marked shift in the structure of the Hampshire economy has continued over the past two decades for which we have local data. Economic activity has continued to shift away from manufacturing and towards services. Hampshire has seen a relatively strong growth in a number of consumer services activities and in several business-to-business knowledge intensive services such as information & communication and professional services. The rise of finance has been more muted but insurance was another sector that has performed strongly over the long run. The spatial distribution of high- productivity knowledge intensive services is one of the main factors that help to explain spatial differences in economic performance within Hampshire.

Rise of consumer service and knowledge-intensive services in Hampshire

In its simples form, economic growth is driven by two factors; how many people are in work and their productivity. Hampshire’s labour market has performed exceptionally well. In 2017 the employment rate in Hampshire reached 79.8% of all people of working age, above the national and the South East averages. The rate in the County Area reached 82%, the highest shire authority rate in the country.

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Labour productivity in Hampshire is slightly above the national average but below the South East average. Labour productivity in Hampshire has increased relative to the national and the South East averages but Hampshire has a large productivity gap with some of the best performing economies in the South East and its global competitors.

Hampshire exported around £15.6bn of goods and services in 2015 and Hampshire appears to be the largest exporting region in the South East. Over a fifth of all South East exports come from Hampshire (around 19% of service exports and close to 23% of goods exports). The openness of the Hampshire economy is illustrated by the fact that exports accounted for about 32% of its GVA in 2015. Independent research by Oxford Economics suggests that exports accounted for 37.8% of the County area GVA in 2014 and on this measure the County area was the most export intensive county in the UK. Information & communication are the largest export category in Hampshire but other high-productivity categories such as finance & insurance are not far behind.

A large and diverse business population is one of the main factors that contributed to Hampshire’s success over the long-run. There are nearly 86,000 businesses in Hampshire, or 18.4% of all businesses in the South East. However, business density in Hampshire is below the South East and the national average, but this is primarily down to the performance of Southampton and several smaller local authorities. Labour demand in Hampshire is marginally below the South East average but above the national average.

The vast majority of businesses in Hampshire are micro businesses yet large businesses and SMEs make a disproportionate contribution to the economy in terms of output (GVA) and jobs. Hampshire has between 400 and 805 high-growth businesses, or over a fifth of all high-growth businesses in the South East. Hampshire is over-represented amongst high-growth firms in the South East as it has a higher proportion of high-growth firms relative to its share of all firms in the South East. Between 2011 and 2015 the number of high-growth businesses in Hampshire increased much faster than both the regional or national averages. Future growth in Hampshire is likely to be driven by high-growth indigenous firms as well as foreign investment. This will not only create employment opportunities but

Page | 6 also contribute to productivity growth through the inflow and better use of knowledge and new technologies.

Firm level data suggests that there are about 1,200 foreign owned businesses in Hampshire. About one in three foreign owned businesses comes from an EU member state but the US accounts for the largest single share of foreign owned companies in Hampshire.

New businesses (business births) contribute not just to job creation and economic growth, but newly born businesses often stimulate innovation and facilitate the adoption of new technologies. Business births therefore increase the competitiveness of Hampshire’s business population and this helps to boost productivity and economic performance across the wider economy. Business births in Hampshire are above the South East average but below the national average. While business birth rates provide useful information on dynamism in the economy, the ability to survive and grow for up to five years after creation matters more. Hampshire has a high business survival rate with economically more prosperous sub-areas and districts across Hampshire having higher survival rates.

Hampshire has a relatively large number of businesses in several higher value- added and/or strategically important sectors, but these higher value-added activities are often concealed within the existing Standard Industrial Classification (SIC) of economic activity. Financial & business services, ICT & digital media, aerospace & defence, logistics and marine and tourism are some of the most productive and/or strategically important sectors for the Hampshire economy. These sectors are either scattered in a number of locations or more concentrated in one or two locations and they have one thing in common - these high-productivity sectors account for a relatively small share of Hampshire’s employment. The traditional broad industrial sectors account for the lion’s share of both output and employment in Hampshire.

It is important to note that in addition to these mostly higher value-added activities (sectors), there are several other activities and sectors that are not readily defined in national accounts. These activities span across a number of ‘traditional’ sectors and they increasingly use knowledge in their production process. Such activities are of

Page | 7 strategic importance to Hampshire today, and these activities and sectors will be key to the future competitiveness of Hampshire’s economy.

Hampshire has a substantial number of businesses in a number of export intensive sectors that span across both manufacturing and services. There are over 14,000 businesses with 125,000 employees in export intensive sectors in Hampshire. Hampshire accounts for about 18% of all export intensive businesses and over a fifth of all export intensive employment in the South East. Since 2010 Hampshire has seen growth in both the number of businesses and employment in export intensive services but export intensive manufacturing has seen little or no growth. This finding reaffirms the earlier findings pointing to the rise of the service economy in Hampshire.

Knowledge is increasingly seen as the key to making more effective use of the traditional factors of production such as labour and physical capital. The strength of Hampshire’s knowledge industries and its capacity to diffuse knowledge across the economy as a whole and not just a handful of sectors is the vital to boosting productivity growth in Hampshire and across the country. However, knowledge is not restricted to ICT since knowledge intensive activities span across both services and production activities. Large parts of professional, scientific & technical and finance & insurance activities form part of the broad knowledge intensive sector in Hampshire.

Hampshire has close to 25,000 businesses in knowledge intensive sectors employing 163,000 workers. About 29% of all businesses in Hampshire are found in knowledge intensive sectors and 1 in 5 of all employees work in knowledge intensive firms. It is difficult to overstate the importance of science & technology (technological progress) for living standards. Empirical evidence suggests large disparities in living standards (per capita incomes) are due to the ways that economies use their resources and not just the quantities of labour and capital. There are some 17,000 Hampshire businesses in the Science and Technology sector (digital technologies, life sciences & healthcare, publishing & broadcasting, other scientific/technological manufacture, and other scientific/technological services) employing 191,000 workers. This sector represents one in five of all Hampshire businesses and close to one in four of all Hampshire employees.

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Hampshire does not have large amounts of natural capital nor does it have a large low-cost labour force that would give it a competitive edge in the future. Hampshire will therefore have to compete in an increasingly globalised world and its ability to compete will increasingly depend on its ability to change and adapt to global challenges and harness innovation as a major driver of business competitiveness and growth. Innovation, alongside skills is one of the most important drivers of competitiveness and economic growth over the long-run. The Research & Development (R&D) intensity of an economy is what matters for innovation, competitiveness and growth. The R&D intensity of Hampshire’s economy is similar to the South East average and above the UK average. However, gross expenditure on R&D as a percentage of Hampshire’s economy has been falling since 2005.

The available evidence suggests that the availability of a high quality office space has likely constrained economic growth in several places. Therefore, to attract high- productivity businesses and to boost economic growth it may be necessary to increase the supply of high-quality office space in several places in Hampshire and especially in Hampshire’s coastal cities.

Like the rest of the country the economy of Hampshire and its businesses will face some stark challenges and opportunities over the short-to-medium and long-term. Some of these may pose a risk to the economic outlook but could equally represent opportunities.

Economic activity and employment rates in Hampshire are already very high and there is limited scope to increase employment rates beyond their current level. The main reason behind this is found in an ageing population. Ageing populations tend to constrain economic activity and the growth in employment, which in turn constrains growth in economic output. Hampshire may therefore need to attract people from elsewhere in the UK and to be able to compete with the rest of the country Hampshire will need a well functioning housing market. This is of paramount importance to the labour supply and the future wellbeing of the Hampshire economy.

Brexit may pose a risk to the economic outlook, but it could equally represent opportunities, especially to a highly open economy like Hampshire. A few studies have looked at the local economic effects of Brexit and the evidence is inconclusive.

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One of the first studies suggested that the impact would be mostly felt outside the Greater South East (GSE) but a recent study suggest that London and the South East could be affected the most, although they are more likely to recover faster than the rest of the country.

Hampshire Economy…On the Horizon

Aging workforce

Business space: Aging population: Brexit: what deal and Global trade deals: Technology: AI and more high grade older workforce access to markets exploit opportunities Automation – what offices needed and workers by new trade deals & impacts on jobs & markets economy

Rapid technological progress that is sweeping the global economy is probably the most important factor that could pose both a risk as well as an opportunity to the economy of Hampshire. The huge wage gap between industrialised and developing countries (also known as labour arbitrage) has played an important role in offshoring of manufacturing from the UK and other industrialised nations over the past three decades. Hampshire has a comparative advantage in several higher value-added services and it could be argued that these activities are at a lower risk of offshoring. However, over the past decade we have seen exponential growth in chip processing speed and memory capacity. Some now fear that impressive advances in computer technology (i.e. from improved industrial robotics to automated translation) are going to have a significant impact on service sector jobs in industrialised economies

Whilst technological advances could threaten existing jobs, technology also offers vast opportunities to businesses and consumers. Exponential growth in technological power implies that it is becoming easier than ever to start up a business, bring new product to market and sell to hundreds of million people. Automation is generally used to make firms and industries more efficient, not necessarily to replace them. For instance, the relatively large logistics sector in Hampshire has benefited from technological advances and is likely to benefit in years to come. Over the short-term some jobs could be under threat as machines replace some human activities.

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However, it is likely that this will create opportunities elsewhere, but those opportunities are likely to require different skills sets. Hampshire will have to harness and embrace its strength in digital technology and the development and application of that technology in order to underpin a future knowledge based economy for Hampshire.

With the advent of the 4th Industrial revolution, characterized by a fusion of technologies, a robust and innovative digital infrastructure will underpin the United Kingdom’s and Hampshire’s need to stay competitive in a global market. Therefore to remain competitive in the new technological age will require investment in ICT infrastructure. Adopting technologies like web artificial intelligence (AI), big data and improved analytics will also be impossible without superfast broadband networks in Hampshire.

Since Hampshire is not endowed with large amounts of natural resources or a large pool of low-cost labour force, Hampshire will need to have the ability to adapt and change when faced with rapid technological progress that is changing the way we not just do business but also the way we live. This process will involve harnessing its strength (comparative advantage) in several important sectors such as information & communication/digital technologies, aerospace & advanced manufacturing and professional services.

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List of Tables and Figures

1. Economy & Business Page

Tables

Table 1.1: Gross Value Added (GVA) – levels, shares and growth rates 20 Table 1.2: Industry specialisation by sub-sector – Hampshire 2016 35 Table 1.3: Hampshire businesses by sub-area – 2017 46 Table 1.4: Business growth, 2010 – 2017 48 Table 1.5: Hampshire business by size – 2017 49 Table 1.6: Business growth by size, 2010 – 2017 50 Table 1.7: Hampshire business by broad industry – 2017 55 Table 1.8: High-growth businesses in Hampshire 62 Table 1.9: High-growth businesses in Hampshire 63 Table 1.10: Probability that computerisation will lead to job losses within 85 the next two decades

Figures

Figure 1.1: Economic output (GVA) by sub-area – 2016 16

Figure 1.2: Gross Value Added (GVA) by district – 2016 17 Figure 1.3: Gross Value Added (GVA) – 1998 to 2016 18 Figure 1.4: Gross Value Added (GVA) by sub-area – 1998 to 2016 19 Figure 1.5: Economic prosperity across Hampshire - GVA per head, 2016 24 Figure 1.6: Commuter Flows within Hampshire 25 Figure B1: Commuting patterns in Winchester 26 Figure 1.7: Commuter Flows outside Hampshire 27 Figure 1.8: Gross Disposable Household Income per head – 2016 27 Figure 1.9: Output (GVA) & employment share by broad industrial sector: Hampshire 1998-2016 29 Figure 1.10: Rise of consumer service and knowledge-intensive in Hampshire (HEA) (share of 30 GVA in 1998 and 2016) Figure 1.11: Output (GVA) and employment share by broad industrial sector – Hampshire, 2016 33 Figure 1.12: Industry specialisation – Hampshire 2016 (output share, employment and index of 34 industry specialisation) Figure 1.13: GVA growth over time decomposed into structural and competitive effects 36 Figure 1.14: Employment rates in Hampshire – 2017 38 Figure 1.15: Labour productivity across Hampshire – 2016 40 Figure 1.16: Employment, knowledge intensive employment & labour productivity in Hampshire 41

Figure 1.17: Productivity, labour market outcomes and demographics in Hampshire 42 Figure 1.18: Competitiveness across Hampshire – 2016 44

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Figure 1.19: Business and jobs density across Hampshire – 2017 47 Figure 1.20: Share of enterprises, employment and turnover South East England, 2017 51 Figure 1.21: Business births, deaths & the net business formation rates Hampshire, 2010–2016 54 Figure 1.22: Business survival-rates matter (business births and survivals in Hampshire 55 economic sub-areas) Figure 1.23: Key Hampshire sectors – 2017 Businesses and district concentrations 57 Figure 1.24: Key Hampshire sectors – 2017 Employees in employment and district 58 concentrations Figure 1.25: Productivity matters but sector size is equally important (Productivity & Employment 60 share in Hampshire) Figure B2: . High/potential high-growth firms in the four ‘cluster’ areas, 2016 64 Figure 1.26: Relative concentrations of high-growth businesses – 2016 65 Figure 1.27: Exports of goods and services – South East England, 2016 68 Figure 1.28: Value of exports of goods and services in Hampshire – 2015/16 69 Figure 1.29: Value of exports of services by sector and sub-area – 2015 70 Figure 1.30: EU destination of exports – Hampshire and the Isle of Wight, 2016 72 Figure 1.31: Non-EU destination of exports – Hampshire and the Isle of Wight, 2016 73 Figure 1.32: Businesses and employees in export intensive sectors – 2017 74 Figure 1.33: Distribution of businesses and business density in export intensive sectors 75 Figure 1.34: Growth in business and employment in export intensive sectors 76 Figure 1.35: Growth in business and employment in export intensive sectors across Hampshire 77 Figure 1.36: The economy of Hampshire in 2050 (A hypothetical scenario) 78 Figure 1.37: Local economic impact of Brexit – Hampshire 82

2. Infrastructure & Investment

Tables

Table 2.1: Foreign owned companies in Hampshire by major trading block countries 107

Figures

Figure 2.1: Physical infrastructure network in Hampshire 88 Figure 2.2 Strategic transport infrastructure needs in Hampshire 90 Figure 2.3: Completed and proposed major transport schemes in Hampshire 90 Figure 2.4: Digital Evolution Index – 2017 (where the digital economy is moving fastest and 92 where it is in trouble) Figure 2.5: Superfast broadband in Hampshire 93 Figure 2.6: Approximate Superfast Broadband Coverage across Hampshire 94 Figure 2.7: A typology of selected city centres 96

Figure 2.8: Density of prime office completions across Hampshire, 2005 - 2018 98 Figure 2.9: A typology of selected city centres – high-street services vacancy rates 99

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Figure B3: Business space by major use category 100 Figure 2.10: Housing affordability ratios and net dwelling completions in Hampshire 102 Figure 2.11: Housing affordability in the Hampshire relative to the South East and England, 103 Figure 2.12: Foreign owned companies in Hampshire by major trading block countries 108 Figure 2.13: Distribution of Foreign Owned Companies in Hampshire – 2018 109

3. Innovation & Skills

Tables

Table 3.1: Science & Technology Businesses and Employees in Hampshire 123

Figures

Figure 3.1: Gross domestic expenditure on R&D (GERD) in Hampshire 111 Figure 3.2: Composition of R&D expenditure in Hampshire & Isle of Wight 112 Figure 3.3: Composition of R&D expenditure as a percentage of GDP - 2015 114 Figure 3.4: Patent applications in Hampshire 115 Figure 3.5: Businesses and employees in knowledge Intensive sectors 117 Figure 3.6: Businesses and employees in knowledge intensive sectors across Hampshire 118 Figure 3.7: Density of businesses in knowledge intensive services – 2018 118

Figure 3.8: Growth in businesses and employees in selected Knowledge Intensive Sub-sectors 119 Figure 3.9A: Share of all Science & Technology Businesses by sub-sector - 2017 124 Figure 3.9B: Share of all Science & Technology employees by sub-sector – 2017 124 Figure 3.10: Relative concentrations of Science and Technology in Hampshire and its subareas 125 (relative to the national average) Figure 3.11: Relative concentrations of Science and Technology across Hampshire 126 Figure 3.12: Relative concentrations of Digital Technology sub-sector across Hampshire 126 Figure 3.13 Relative concentrations of Health & Lifesciences sub-sector across Hampshire 127 Figure 3.14: Relative concentrations of other scientific & Technical Services sub-sector across 128 Hampshire Figure 3.15: Relative concentrations of other scientific & Technical Manufacture sub-sector 128 across Hampshire Figure 3.16: Skills distribution and economic prosperity in Hampshire 130

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1. ECONOMY & BUSINESS

Using any conventional measure, Hampshire has one of the most successful economies in the UK. It has relatively high business formation rates, relatively high business and jobs density and, as of 2017, the best performing labour market in the country. The levels of economic prosperity and household incomes per head of population in Hampshire are on average above the national average.

However, the levels of economic prosperity and labour productivity are well below the best performing economies in the South East. Furthermore, the distribution of economic activity and economic prosperity within Hampshire is not uniform - there are spatial disparities in economic performance across Hampshire.

The Hampshire evidence base comprises of three broad sections – the economy & business, infrastructure & investment and innovation & skills. The first part of the Economy & Business section covers the economy of Hampshire – its structure, the spatial distribution of economic activity, economic prosperity and the performance of the economy and its broad industrial sectors over time.1 The second part covers enterprise (Hampshire business), one of the main drivers of productivity and competitiveness. The focus is on high-growth businesses, the distribution of high- growth businesses across Hampshire and on internationalisation with a focus on exports.

Like the rest of the country the economy of Hampshire and its businesses will face some stark challenges and opportunities over the short-to-medium and long-term. The productivity challenge is arguably one of the most pressing issues for Hampshire and the UK economies over the medium-to-long term. The section concludes by looking into some of the main challenges and opportunities that Hampshire and its businesses will face over the short-to-medium and the long-term to 2050 and beyond.

To avoid confusion throughout the report, Hampshire refers to the Hampshire Economic Area which comprises the three upper tier authorities of Hampshire County Council, Portsmouth City Council and Southampton City Council. When the focus is on the Hampshire County Council area it is referenced as the County area.

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1.1 Economic Activity in Hampshire

 With total economic output or Gross Value Added (GVA) of almost £50bn in 2016 Hampshire had the largest sub-regional economy in the South East, which is also the largest economy in the country after London.2

 Almost one in every five pounds of economic output in the South East is generated in Hampshire. In terms of the size of its economy as measured by GVA, Hampshire is as large as the North East economy and much larger than Northern Ireland.

 The County area contributed some £37.8bn to the total economic output of Hampshire or almost four in every five pounds of economic output. The County area is the second largest county economy (after Surrey) in the South East.

Figure 1.1: Economic output (GVA) by sub-area - 2016

Source: ONS (2017)

 Hampshire is comprised of five sub-area economies: North Hampshire, Central Hampshire and South Hampshire economies that constitute the County area plus the two cities of Portsmouth and Southampton. As shown in Figure 1.1 economic performance is not evenly spread across Hampshire. Outside the main cities, each of the three County area economic sub-areas has both relatively large and relatively small local economies.

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 The predominantly rural economy of Central Hampshire is the largest economy in Hampshire. It accounted for about £15.7bn of economic output in 2016, almost a third (31.5%) of Hampshire’s output or around 40% of total GVA in the County area (Figure 1.1)

 North Hampshire and Central Hampshire are of similar size, where both economies each accounted for about £11bn in GVA or approximately twice the size of the economy of Portsmouth (£5.7bn). Total annual output in Southampton was about £0.5bn larger than in Portsmouth in 2016.

 The economy of Hampshire is not characterised by a large dominant city like many sub-regional economies in for example the Midlands or Yorkshire. Portsmouth and Southampton are the largest of the local authority economies within Hampshire, but in terms of economic output each of the two cities is about double the size of the ‘average’ local district economy in the County area (Figure 1.2).

Figure 1.2: Gross Value Added (GVA) by district - 2016

North Hampshire districts Central Hampshire districts South Hampshire districts Source: ONS (2017)

 With total economic output of around £5.1bn, Basingstoke & Deane was the largest economy within the County area in 2016 but its economic output is only marginally larger than in Winchester, which is predominantly rural outside

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of Winchester city. At the district level, Gosport is the smallest local economy, comprising around £1.3bn of economic output (GVA).

1.2 Economic growth and contribution to growth over time

 There are several different ways of measuring economic performance at sub- regional level. Changes in aggregate GVA and GVA per head over time are two of the most widely used approaches.

 In nominal (inflation unadjusted) terms economic output (GVA) in Hampshire increased from £26.1bn in 1998 to £49.7bn in 2016, an increase of over 90% in nominal terms (Figure 1.3).

 On the other hand, the economic output of the County area has almost doubled over this period, from just over £19bn in 1998 to over £37.7bn in 2016 according to the latest estimate from the UK Office for National Statistics (ONS).

Figure 1.3: Gross Value Added (GVA) – 1998 to 2016

50 200 Output (GVA), £bn Output (GVA) relative to 1998

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Source: ONS (2017)

 Nominal growth in economic output in the County area over the long term was faster than in both the UK and the South East. Although, faster growth in the area as a whole was held back by the sluggish performance of the two cities and Southampton in particular (Figure 1.3 and Table 1.1).

 Over the past 18 years for which we have data the economy of Southampton increased by some 64% in nominal terms (Figure 1.3 and Table 1.1). Nominal economic growth in Southampton was slower by more than a third on average

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than the average growth in the County area, or by over a fifth slower than in Hampshire as a whole.

 Southampton was affected by the last recession more than any other economic sub-area in Hampshire and its consumer lead economy took longer to recover than elsewhere in Hampshire. For the first few years following the recession its nominal output was broadly flat, but relatively strong growth in GVA was observed over the past few years.

Figure 1.4: Gross Value Added (GVA) by sub-area – 1998 to 2016

16 220 Output (GVA) relative to 1998 Output (GVA), £bn Central

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Source: ONS (2017)

 Economic output in Central and North Hampshire more than doubled between 1998 and 2016 (Figure 1.4). However, whereas growth in North Hampshire slowed sharply over the past few years Central Hampshire has continued to record relatively strong growth in GVA.

 South Hampshire expanded by about 88% in nominal terms, slower than Central and North Hampshire (about 103% respectively) but South Hampshire nevertheless performed better than Portsmouth and Southampton whose economies are some 75% and 64% larger than back in 1998 respectively.

 Economic growth in Hampshire like in the rest of the country has been characterised by two distinctive phases. The pre-recession period, from 1998 through to 2007 and the post-recession period, from 2009 through to 2016. As indicated in Table 1.1, nominal economic growth has undoubtedly slowed across Hampshire since the recession.

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 Before the 2008/9 recession nominal (i.e. without taking account of inflation) economic growth in Hampshire averaged 4.7% per annum (p.a.) but since 2009 growth has on average slowed to 3.1% p.a. Despite the record growth in economic participation and employment nominal growth in the economy since the recession has been on average about a third slower than before the recession.

Table 1.1: Gross Value Added (GVA) – levels, shares and growth rates

1998 share 2016 share 1998-2016 1998-2016 1998-2007 2009-2016 £ % £ % cumulative p.a. p.a. p.a. Hampshire EA £26,088 100.0 £49,705 100.0 90.5 3.6 4.7 3.1 Hampshire CC area £19,031 72.9 £37,764 76.0 98.4 3.9 5.0 3.2 North Hampshire £5,451 20.9 £11,093 22.3 103.5 4.0 5.8 2.8 Central Hampshire £7,728 29.6 £15,676 31.5 102.8 4.0 4.7 3.5 South Hampshire £5,853 22.4 £10,993 22.1 87.8 3.6 4.7 3.1 Portsmouth £3,268 12.5 £5,719 11.5 75.0 3.2 3.8 2.7 Southampton £3,789 14.5 £6,222 12.5 64.2 2.8 4.0 2.9 South East £134,251 19.4 £258,902 19.2 92.8 3.7 4.5 3.4 United Kingdom £877,639 3.0 £1,729,082 2.9 97.0 3.8 4.9 3.4 Source: ONS (2017)

 Growth in the County area has been on average marginally higher than in Hampshire. Faster growth in the County area was held back by a slowdown in North Hampshire. In this sub-area nominal economic growth has effectively halved compared to the pre-recession average.

 Economic growth in Central Hampshire has been slower by about a quarter p.a. than before the recession. Nevertheless, this sub-area economy has been more resilient to a slowdown in output relative to its pre-recession trend when compared to the other economies in Hampshire.

 The slowdown in South Hampshire was on average similar to the Hampshire average but with growth in GVA of around 3.1% p.a. since 2009, South Hampshire has performed better than the two cities and the economy of North Hampshire.

 At local authority district level, Winchester, Hart and Rushmoor were the fastest growing economies within the County area before the recession.

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Winchester remains the fastest growing economy following the recession, followed by Test Valley and Eastleigh. Hart and Rushmoor who have remained in the top five district economies in the County area.

 Test Valley, Havant and Eastleigh have seen the sharpest improvement in their relative growth performance since the recession. East Hampshire and Basingstoke have on the other hand slipped down the growth table faster than other local economies in the County area according to the latest experimental GVA estimates from ONS.

 The differences in growth rates across several districts in the County area are small. In the absence of information about the accuracy of GVA estimates and due to the relatively large data revisions that frequently occur to sub-regional and local GVA estimates, undue importance should not be given to small differences in GVA or small changes over time, as these changes may be attributable to statistical noise.

 In terms of the contribution to economic growth, Central Hampshire contributed on average about one in every three pounds of economic output of Hampshire since 1998. This is much higher than its share of the economy.

 North Hampshire contributed almost a quarter (24%, higher than its output share) and South Hampshire contributed over a fifth (21.9%, marginally below its share of economic output). The two cities contributed just over 10% each, below their share in the economy with Portsmouth performing better over the period than Southampton.

 The spatial distribution suggests that several local economies in all three sub- areas (North, Central and South Hampshire) have increased their share in GVA in the economy – Rushmoor, Test Valley, Winchester, Eastleigh and Hart. In a number of other local economies, the share has remained broadly stable. The industrial structure and in several instances dependence on large cities were some of the most important factors behind the differences in growth rates within the area.

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 Economic growth across Hampshire and the rest of the country has undoubtedly slowed since the recession but it is important to note that economic growth at sub-regional level is expressed in nominal (inflation unadjusted) terms. Given that inflation has been on average much lower in the post-recession period than before the 2008/9 recession the gap in the real (inflation adjusted) growth rates between the two period in Hampshire and its sub-areas is likely to be much smaller than indicated in Table 1.1.

 Experimental data from ONS suggests that real (inflation adjusted) GVA in the Hampshire & Isle of Wight expanded by about 2.3% p.a. before the recession. Since 2009 growth has averaged 1.6% p.a. The economy has underperformed in 2016 according to a preliminary estimate from ONS and this has constrained the average rate since 2009.

1.3 Economic prosperity across Hampshire

 GVA per head of population (total population and not just the economically active population or those in employment) is another measure of economic performance, but it is also used to measure economic prosperity (living standards). GVA per head provides a full picture of performance that implicitly includes employment effects and productivity. This measure is used here to consider economic prosperity and the relative differences in economic prosperity across Hampshire.

 With GVA per head of around £27,200 Hampshire is about 3% more prosperous than the UK average but the area is about 5% less prosperous than the South East average. The County area on the other hand is about 5.5% more prosperous than the UK average but nonetheless about 3% less prosperous than the South East economy.

 Of the three large sub-areas, North Hampshire is the most prosperous on this measure being about 15% more prosperous than the UK average. Central

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Hampshire is about 10% more prosperous than the national average, while its levels of economic prosperity are similar to the South East average.

 GVA per head in South Hampshire is about 8% below the national average. Portsmouth is similar to the national average (about 1% higher) and Southampton is about 7% below the national average.

 Since 1998, economic prosperity in the County area has increased relative to the regional and the national average. However, Hampshire has lost ground relative to both the UK and the South East average.

 The main reason is found in relative decline of the two cities. GVA per head in Portsmouth decreased from 15% above the UK average in 1998 to about 1% above the UK average in 2016 but the greatest change has been in Southampton. GVA per head in Southampton relative to the national average decreased from 17% above the average to about 7% below the average by 2016.

 The economic pull of the large cities has affected South Hampshire but the area was more resilient than the two cities. GVA per head in the area relative to the national average saw little change, from 95% of the UK average in 1998 to 92% of the UK average in 2016. As stated earlier small changes could be due to statistical noise in the data.

 Economic prosperity in North Hampshire and Central Hampshire has increased relative to both the national and the South East averages. Central Hampshire saw the sharpest growth in relative GVA per head between 1998 and 2016. Over this time Central Hampshire closed its relatively large GVA per head gap (7%) with the South East average.

 Local data suggests that the more rural Winchester district is the most prosperous area in Hampshire with GVA per head about 50% above the UK average, about 46% above the Hampshire average and about 38% above the South East average (Figure 1.4).

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 Gosport on the other hand was at about 55% of the UK average in 2016. As shown in Figure 1.5 the levels of economic prosperity on this measure are generally higher in northern and central parts of Hampshire than along the Solent coast.

Figure 1.5: Economic prosperity across Hampshire - GVA per head, 2016

Source: ONS (2017)

 GVA per head as a measure of economic prosperity relates the value of total output (GVA) in a region or area to the resident population of the area. GVA per head can therefore be subject to distortions correlated to the effect of commuting patterns and differences in demographics (age distribution and economic participation) of the population. This is especially so at the local level where such distortions can be particularly large.

 The sub-area economies within Hampshire and the local labour markets are highly interconnected. As shown in Figure 1.6 there is a high degree of commuting between South and Central Hampshire and between Central and North Hampshire.

 Over 50,000 people commute daily from the rest of the County area into the cities of Southampton and Portsmouth while over 60,000 people from the two cities commute to the areas outside the cities, mostly to the rest of the County

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area. Furthermore, the economy of Winchester is highly interconnected with the rest of Hampshire (Box 1).

Figure 1.6: Commuter Flows within Hampshire

Source: ONS (2011)

 According to Communities and Local Government (CLG 2010) the most widely accepted approach to define Functional Economic Market Areas (FEMAs) is by reference to Travel to Work Areas (TTWAs), which are relatively self-contained labour market areas where at least 75% of the resident economically active population live and work in the area.

 With close to three quarters (73%) of all employed residents and 78% of the labour force working in the area, it could be argued that Hampshire closely resembles a functional labour market area.

 Furthermore, as shown in Figure 1.7, a significant number of people commute to work outside Hampshire. GVA pear head estimates are based on resident population and workplace incomes (commuter income is not included in GVA data).

 Therefore, significant interdependencies between the areas within Hampshire characterised by significant levels of commuting and their population profiles implies that large distortions are found in GVA per head estimates.

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Box 1. Case Study: Commuting patterns in Winchester

Winchester, located in mostly rural economy of Central Hampshire, has one of the largest and the most diverse economies in Hampshire. The latest UK Competitiveness Index (UKCI 2016) suggests that Winchester is the second most competitive city in the UK.

A diverse nature of the local economy implies that Winchester is a major employment centre in Hampshire. In 2011 Winchester had about 48,000 resident workers, about 29,800 of which live and work in district but 23,600 of which commute to work outside Winchester, mostly to other parts of Hampshire. At the same time Winchester had over 76,000 workplace workers, 42,000 of which commute for work into Winchester.

Figure B 1. Commuting patterns in Winchester

Source: ONS (2011)

The top five destinations of out-commuters are Eastleigh, Southampton, London, Portsmouth and Fareham and the top five in-commuting areas are Eastleigh, Southampton, Fareham, Test Valley and Portsmouth.

Car is the main method of Travel to Work (57.4%) but homeworking accounted for 15.3% of the total in Winchester.

For further information about Winchester and other local authorities in Hampshire see Commuter Factsheets available on Hampshire County Council (Economic & Business Intelligence Service) Website.

 GVA per head could therefore be a misleading measure of economic prosperity at the local level. Household incomes are an alternative and arguably better measure of economic prosperity at local level.

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Figure 1.7: Commuter Flows outside Hampshire Berkshire 25,900 London 26,300

806,000 Surrey Wiltshire ‘Live & Work In’ & 33,700 7,300 ‘No Fixed Place’

West Sussex 10,900

Dorset 10,800

Source: ONS (2011)

 As shown in Figure 1.8, gross disposable household incomes per head in most local areas (districts) in Hampshire are above both the UK and the South East average. Furthermore, the spatial differences between local authorities remain, but such differences are less stark were we to simply look at GVA per head data.

Figure 1.8: Gross Disposable Household Income per head – 2016

Source: ONS (2017)

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1.4 Shift to services and the rise of knowledge-intensive services

 In common with the rest of the South East and UK economies, a marked shift in the structure of the Hampshire economy has continued over the past two decades for which there is local data. Economic activity has continued to shift away from manufacturing and towards services.

 As shown in Figure 1.9 the broad production sector, that includes manufacturing, is now much smaller than in 1998. In 2008 production accounted for 20% of output but by 2016 this share had fallen to 13%. South Hampshire saw its production sector decreasing as a share of total output from about a quarter of total output in 1998 to about 17% in 2016. The share of North and Central Hampshire decreased from around 19% to about 11% to 12% today.

 The proportionate decrease in the share of production output in the three sub- area economies in the County area has been similar. Production activities in Southampton decreased from 19% of total GVA in 1998 to just 6.4% by 2016. Portsmouth on the other hand saw a small growth, from 16.9% to 18.8% by 2016.

 This shift has been driven entirely by the manufacturing sector. In 1998 manufacturing accounted for almost 90% of total GVA in production but by 2016 its share had decreased to about 70%. Manufacturing output as a share of total output in Hampshire decreased from 18% of GVA in 1998 to about 9% by 2016.

 At the sub-area level the greatest share of manufacturing output is found in Portsmouth at over 14%, followed by South Hampshire (13%). Manufacturing output in the economies of Central and North Hampshire accounts for about 8% of GVA or almost double the share in Southampton (4.5%).

 The falling share of manufacturing output in the economy has been driven by the rapid pace of globalisation and technological progress. Increased

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competition from low-wage economies and technological advances such as the increased use of automation in production processes, has led to continuing falls in global prices of manufactured goods relative to services. Alongside offshoring of jobs to low-cost locations, this process has driven down the manufacturing share in the economy.

Figure 1.9: Output (GVA) and employment share by broad industrial sector (Hampshire, 1998 to 2016)

Source: ONS (2017)

 At the local authority district level manufacturing still accounts for between 10% and 16.7% of the economy in Test Valley, Eastleigh, Gosport and Havant. On the other hand, its share in the economy of Winchester is negligible at less than 5%.

 The share of construction in the economy of Hampshire has increased from 5.8% to 6.7% but it is the service sector that has seen a continuing rise in its share of the economy. In 1998 services accounted for about 74% of the economy but by 2016 their share had increased to 80%. The rise in service activities has been driven by private services whereas the broad public sector shrank from about 18% of GVA to 16% of GVA.

 Hampshire has seen a relatively strong growth in knowledge intensive services such as information & communication and professional services. The rise of finance has been more muted than for example in London or parts of Surrey, but insurance was another service sector that has performed strongly over the long term.

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 The changing nature of the economy and the rise of consumer services and business-to-business (B2B) knowledge intensive services as a share of the economy can be seen in Figure 1.10. The share of the broad distribution & retail sector that includes transport and accommodation increased to 21% of GVA in 2016 from about 18.4% in 1998.

Figure 1.10: Rise of consumer service and knowledge-intensive services in Hampshire (share of GVA in 1998 and 2016)

Source: ONS (2017)

 Professional & business services increased from about 10% of GVA to about 13% of GVA by 2016. Proportionally this was a similar increase to the broad distribution sector. Information & communication (ICT) was the sector that saw a marked rise in its share of the economy, from 4.5% to around 8%. This sector is now just marginally smaller than manufacturing. Just two decades ago manufacturing output was about three and a half times larger than ICT

 Finance & insurance has remained broadly stable as a share of total output. Finance has continued to restructure since the recession with insurance being far more resilient to outside shocks. The real estate, manufacturing and the broad public sector are now smaller as a share of the Hampshire economy than in 1998 (Figure 1.10).

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 The spatial distribution of high-productivity knowledge intensive services is one of the main factors that help to explain spatial differences in economic performance within Hampshire. For instance, ICT accounts for about one in every eight pounds of economic output in North Hampshire. Its share in the local economy is more than twice as large as in South Hampshire.

 At the local level the highest share in ICT is found in Rushmoor, Hart and Winchester which are economically the most prosperous districts in Hampshire. In Rushmoor alone the ICT sector accounts for about 17% of total GVA. On the other hand in New Forest, Southampton, Gosport, Havant and Fareham the ICT sector accounts for less than five percent of their economies.

 Nevertheless, several coastal economies in Hampshire saw the sharpest increase for this sector in their economies over the past decade, albeit from a low base. Gosport saw the largest growth in the ICT sector over the period but from a low base, from just 1.1% of GVA in 1998 to 4.7% in 2016.

 The ICT share in Portsmouth is around 9% or double the share in Southampton. Southampton tends to rely more on the consumer services economy which is one of the factors that helps to explain its performance in terms of economic growth and growth in GVA per head over the past two decades.

 North Hampshire had a relatively high share of ICT in their economies to start with but their recent performance lagged behind the rest of Hampshire. Relatively sluggish growth in this sector in North Hampshire is a factor that accounts for the sluggish growth in the economy over the past couple of years.3

 All local authority districts in Central and South Hampshire saw relatively a strong increase in the ICT sector as a share of their economies. The ICT share in all other districts has more than doubled between 1998 and 2016, but the performance of the two cities was more muted.

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 The relative concentration of professional & business services is another factor that explains spatial differences in economic performance within Hampshire. Rushmoor, Hart, Test Valley and Winchester have the highest share in Hampshire with Portsmouth and Gosport having the lowest share of professional & business services in their economies.

 Differences in productivity within the same sector are one of the main causes of differences in GVA at the local level within Hampshire and elsewhere in the country. Professional & business services in North Hampshire are overrepresented by the high productivity professional, scientific and technical activities while professional & business services in many coastal economies tend to be characterised by business administrative & support activities. Such activities are on average low wage, low productivity activities.

 Many coastal areas still have manufacturing activities that have been in decline for the past two decades while manufacturing activities in other parts of Hampshire, such as Rushmoor or Hart is significantly different and on average more innovative, and thus more resilient to external shocks.

 Central Hampshire which is mostly rural by ONS classifications has a lower share of information & communication and professional & business services than North Hampshire, but its economy benefits from higher labour market participation and employment rates.

1.5 Industrial Specialisation

 Several high-productivity knowledge intensive services have expanded as a share of the economy, but it is equally true that several other high-productivity sectors such as manufacturing or real estate are less important to the economy today than they were in the 1990’s. In nominal terms (not adjusting for inflation) GVA today in those sectors is much larger than two decades ago but as a share of the economy they have shrank.

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 Figure 1.11 depicts sectoral share of both output (GVA) and employment. In several sectors (those highlighted in green) GVA accounts for a higher share of the economy than employment which implies that they are relatively productive sectors, as the larger the gap between the shares of GVA versus the share of employment the more productive the sector is.

Figure 1.11: Output (GVA) and employment share by broad industrial sector – Hampshire, 2016

Real Estate Production % of employees % of GVA Information & Communication Manufacturing Construction Finance & Insurance Other Services Professional Services Distribution Public 0 4 8 12 16 20 24 28 32

Source: ONS (2017)

 Some of the sectors in Figure 1.11 have been in relative decline, and although when combined these sectors account for a rising share of the economy they nonetheless remain relatively small. This has constrained faster growth in the economy over the past two decades.

 The top three sectors, the broad distribution, professional & business services and public sectors account for over 50% of economic output in Hampshire. Each of these sectors account for a higher share of employment than GVA which implies that they are relatively unproductive, although the aggregate productivity of the broad professional & business services is masked by business (and administrative) services.

 As a result of globalisation, rising trade and technological progress, Hampshire’s economy has evolved in such a way that it has developed specialisms in certain activities.

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 From a wider national perspective some sectors are particularly concentrated in Hampshire. One way of assessing the degree of industrial specialisation in Hampshire is through the use of the index of specialisation.

 Figure 1.12 shows industry specialisation in Hampshire based on jobs plus the share of GVA and the relative number of jobs by broad industrial sector. An index of specialisation of ‘1.0’ means the same proportion of jobs occurs in Hampshire as in the rest of Great Britain. A higher index score implies a higher degree of specialisation, that is, a higher share of jobs in that sector relative to the national average.

Figure 1.12: Industry specialisation – Hampshire 2016 (output share, employment and index of industry specialisation)

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Source: ONS (2017) and Hampshire County Council (2017)

 The Information & communication sector stands out above all the other sectors, being about one and a half times as concentrated in Hampshire as in Great Britain. Construction is another sector that is overrepresented in both Hampshire and the County area.

 Professional & business services accounts for about 15% of GVA in Hampshire and in terms of its industry concentration this broad sector is similar to the national average. The high-productivity professional scientific & technical sub-sector is about 10% under-represented in Hampshire as a whole relative to the national average, but this sector is marginally larger in the County area than nationally.

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 Manufacturing in Hampshire is marginally underrepresented compared to the national average, but this sector is about a fifth overrepresented in Hampshire compared to the South East average. Hampshire is not known for mass manufacturing production, instead there is a concentration of higher value- added activities such as research & development (R&D) in many areas, for example in aerospace or engineering.

 The presence of two large cities (Portsmouth and Southampton) implies there is a concentration of large hospital and education establishments in the area. The broad public sector in Hampshire is underrepresented relative to the national average but this sector is overrepresented relative to the South East average. The public sector in the County area is about a quarter smaller than nationally.

 Aggregate sectoral data helps to shed light on some broad sector specialism in Hampshire but fails to show real sector strengths. Table 1.2 shows the index of specialism (GVA) alongside total GVA and the share of GVA in 2016.

Table 1.2: Industry specialisation by sub-sector – Hampshire 2016 Index of Sub-sector GVA share Specialisation Manufacture of computer, electronic and optical products 743 1.4% 3.1 Manufacture of petroleum, chemicals and pharmaceuticals 956 1.8% 2.1 Manufacture of electrical equipment 235 0.4% 1.6 Other manufacturing, repair and installation 820 1.6% 1.6 Electricity, gas, steam and air-conditioning supply 1,212 2.3% 1.4 Activities of households 323 0.6% 1.3 Transportation and storage 3,084 5.9% 1.3 Information and communication 4,016 7.7% 1.2 Other service activities 1,412 2.7% 1.2 Wholesale and retail trade; repair of motor vehicles 6,417 12.2% 1.1 Construction 3,482 6.6% 1.1 Real estate activities 7,780 14.8% 1.1 n/a TOTAL 30,480 58.1%

Source: ONS (2017); * Hampshire and the Isle of Wight

 The top four sub-sectors with the highest index of specialisation are all manufacturing sectors, but as already stated above, much of this activity is in

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high-end manufacturing. Manufacture of computer, electronics and optical products is three times as concentrated in Hampshire as in Great Britain. However, despite its relatively high concentration this sub-sector accounts for a low share of the economy.

 The growth in the information economy in Hampshire is better reflected in its information & communication sector. This sector in the Hampshire and the Isle of Wight accounts for over £4bn in GVA.

 As shown in Table 1.2 industry specialisation in Hampshire broadly reflects the rise of the information economy over the past two decades as well as strong growth in several consumer service activities.

 A sectoral decomposition procedure can be used to split out economic growth at subnational level into three additive components: growth effect (national share), structural effect (industry mix) and competitive effect (Figure 1.13). Competitive effect is arguably the most important factor since it highlights the local areas’ economic strength by identifying its competitive industries.

Figure 1.13: GVA growthFig uoverre 1: Ctimeomp edecomposedtitive and struc tintoural estructuralffects - sele andcted Ccompetitiveounties effects

1A: 1997 - 2011 1B: 1997 - 2007

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 According to the ONS, regions that have positive competitive effects have local advantages for particular industries. It is difficult to pin down these strengths but they tend to be affected by technology, labour productivity, skills, management, market access etc.4

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 As shown in Figure 1.13 the structural effect in Hampshire was around the UK average over the long term but between 1998 and 2011 Hampshire had the largest competitive effect in the South East (the largest share of its overall GVA growth was explained by its competitive effect). This is due to several important sectors (information & communication, the broad distribution sector, business services and manufacturing) growing faster in Hampshire than their national counterparts.5

1.6 The labour market, competitiveness and productivity challenge

 In its simplest form, economic growth is driven by two factors; how many people are in work and how productive these people are in their work. It is equally true that employment growth can drive economic growth over the short to medium term, but productivity growth is the main driver of competitiveness, economic growth and economic prosperity over the long run.

 The number of people in work within Hampshire has reached a record high level while the number of residents of working age in employment and employment rates in both Hampshire and the County area stand at their highest since comparable records began in 2004.

 Over 900,000 residents of working age were in employment in Hampshire in 2017, or 70,000 more than in 2004. The employment rate in Hampshire stood at 79.8%, above the national (74.7%) or the South East (78.8%) averages.

 Some 673,000 residents of working age were in employment in the County area or 44,000 more than in 2004. The employment rate reached 82% in 2007, the highest Shire authority rate in the country.

 At 86.8% North Hampshire had the highest employment rate in Hampshire, followed by Central Hampshire with 80.7% of people of working age in employment. The employment rate in South Hampshire stood at 79.7%, well above Southampton (74%) and Portsmouth (73.7%).

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 As shown in Figure 1.14 the employment rates in most local authority districts in Hampshire compare favourably with both the national and regional average. Portsmouth, Southampton and Gosport were the only local authorities with rates below the national average in 2017, and all but four local authorities had the rates above the South East average.

Figure 1.14: Employment rates in Hampshire – 2017

Source: ONS (2017)

 The gap in employment rates between local authorities in Hampshire (measured as a standard deviation) appears to be slightly higher than before the recession, and it seems to have edged higher over the past couple of years. Despite the variation in employment rates local labour markets in Hampshire have performed exceptionally well in recent years.

 Workplace employee numbers are equally at record highs. Hampshire had approximately 820,000 employees in 2016, up 7,000 on the year. With 30,000 jobs created between 2010 and 2015 the overall gain is close to 40,000. The county had 600,000 employees, up 2,000 on the year. The number of ‘employee jobs’ increased by 25,000 between 2010 and 2015.

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 Hampshire and the County area have both seen growth in workplace employee numbers, but annual growth and cumulative growth since 2010 has been slower than in most other economic areas and counties in the South East, and slower than the national average.

 The main factor that explains much of the differences in economic performance between areas is the productivity of people in employment. Large differences in labour productivity are found within Hampshire and Hampshire has a large gap in labour productivity against the best performing economies in the South East.

 Productivity per filled job in Hampshire in 2016 was about £53,200; marginally higher than the UK average but about 4.5% below the South East average. There are significant disparities in labour productivity within Hampshire. On this measure South Hampshire (£54,900) and North Hampshire (£58,400) are about 4.4% and 11% more productive than the national average respectively.

 Labour productivity in Central Hampshire, the largest sub-area economy within Hampshire is slightly below the UK average on the output per filled job measure. However, on the alternative output per hour worked measure Central Hampshire is about 5.6% more productive than the UK economy. The cities of Portsmouth and Southampton have productivity per job some 9% below the Hampshire and the UK average.

 On the alternative output per hour worked productivity measure, Hampshire is about 6% more productive than the UK average but Hampshire is marginally below the South East average. On this measure South Hampshire and North Hampshire are about 9.4% and 13% more productive than the national average respectively. Southampton on the other hand is about 5% less productive than the UK economy as a whole but Portsmouth is marginally more productive than the national average.

 Regardless of which measure is used, the evidence suggests that there are significant disparities in labour productivity within Hampshire. The two cities

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and Southampton in particular have a large productivity gap with the UK average but Central Hampshire also has a small gap with the South East average. North and South Hampshire are more productive than both the UK and the South East average.

 At the local level, productivity differences are even more pronounced. Figure 1.15 shows productivity per employee job measure relative to the national and the South East average. Portsmouth, Southampton and Fareham are less productive than the national average. On the other hand, Hart is the most productive local economy within Hampshire, about 30% more productive than the UK average but it is perhaps surprising to see productivity levels in the more rural New Forest and East Hampshire above the South East average.

Figure 1.15: Labour productivity across Hampshire - 2016

Source: Hampshire County Council (2017) estimate based on ONS data

 The New Forest and East Hampshire have a smaller proportion of employees in employment than other districts in Hampshire, and a relatively high share of self-employment workers. Since labour productivity measure is based on total output (which includes incomes from self-employment) and employee jobs this has boosted labour productivity per employee job in the two districts.

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 Since 2004 (the earliest year for which there is comparable data) labour productivity in Hampshire has increased relative to the national and the South East average. However, productivity performance of the UK economy relative to the G7 (seven largest advanced economies in the world) has declined since the recession which suggests that Hampshire’s relative performance has also slipped relative to its main competitors within the G7 economies. Furthermore, according to research done by the Office for Budgetary Responsibility (OBR), productivity in the UK today is about 20% lower than the pre-recession trend.

 There is still much ongoing debate about the reasons for the UK’s productivity woes and for significant disparities in sub-regional labour productivity. Empirical evidence points to differences in investment (especially investment in new machinery and technology), skills, innovation and entrepreneurial activity such as business formation and management practices.

Figure 1.16: Employment, knowledge intensive employment and labour productivity in Hampshire

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Source: ONS (2017) and Hampshire County Council (2017) estimate based on ONS data Note: knowledge intensive employment = selected activities in information & communication, digital media, finance & professional services and advanced engineering.

 Within Hampshire the same sub-areas tend to have high employment rates and relatively high labour productivity (Figure 1.16). Furthermore, there is a high degree of correlation between the concentration of knowledge intensive activities and labour productivity, which then leads itself to differences in earnings, growth rates and differences in economic prosperity.

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 There are relatively large disparities in the concentration of knowledge intensive activities within Hampshire (Figure 1.16). About one in five of all employee jobs in North Hampshire are found within knowledge intensive sectors, well above the 15% found in the two cities. About one in five of all jobs in the County area are found in knowledge intensive sectors, which is above the Hampshire average (18.6%).

 When the economic performance of Hampshire is decomposed into productivity, demographics and labour force utilisation measures, as shown in Figure 1.17, the relative importance of productivity differentials is apparent.

 The employment rates are similar across the three sub-areas within the County area but there is a relatively large gap with the two cities. The labour market outcomes in general are similar within the County area but economic activity in the two cities is lower than the national average.

Figure 1.17: Productivity, labour market outcomes and demographics in Hampshire

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Source: Hampshire County Council (2017) estimate based on ONS data Note: the chart shows productivity (per job), labour market and demographic outcomes relative to the national average

 The share of working age population (demographics) is the only area where the two cities alongside North Hampshire outperform the rest of Hampshire. As shown in Figure 1.17, the majority of the performance difference from the national average is due to variation in productivity. Relatively large productivity differential between the two cities and the rest of the County area is the main factor that accounts for differences in economic performance.

 Higher economic activity and employment rates in Central Hampshire effectively compensate the area for lower levels of productivity relative to

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other areas. The opposite is true in Portsmouth and Southampton where lower economic activity amongst people of working age implies their labour market performance is weaker than is indicated by their employment rates.

 Labour productivity in Hampshire as a whole is slightly above the national average and below the South East average. Furthermore, Hampshire has a large productivity gap with the most productive economies in the South East.

 For instance, Berkshire is between 20% and 30% more productive than Hampshire depending on which measure (per hour or per job) is used. This implies that it takes Hampshire workers five days to produce what workers in Berkshire make in four or possibly even fewer days.

 The causes of the productivity gap at local level are complex but mostly associated with differences in industrial structure and differences in productivity in the same sectors as well as skills and levels of investment.

 If Hampshire were to close its labour productivity gap per job with Berkshire this would boost its economy (GVA) by about £13.7bn annually (based on 2016 data), or more than the combined output of the two cities.6 The effect on the County area would be some £9.1bn annually.

 Hampshire, and the County area in particular already benefit from better labour market outcomes (higher employment and lower economic inactivity and unemployment) than almost all sub-national economies in the UK or globally. However, the contribution that higher participation and employment rates could make to economic growth is constrained by the fact that there is limited scope to increase employment rates beyond their current level.

 Remaining at current levels is going to be challenging primarily because of an ageing population. It is quite possible that even if for example the County area could keep its employment rate at 82%, the demographic factor will probably affect the number of hours worked i.e. people remain employed but do fewer

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hours, and this would in turn affect the growth in aggregate demand and output.

 As shown in previous sections disparities in economic growth rates (economic performance) are affected by labour market utilisation rates (economic activity and employment rates) but disparities are primarily caused by sector shape and subnational competitiveness.

 Labour productivity is the main driver of competitiveness but defining and measuring competitiveness is no easy matter since this can refer to the competitiveness of firms as well as the competitiveness of localities. Place competitiveness cannot be reduced (measured) to a single indicator such as labour productivity since the competitiveness of a place is a result of complex interactions between economic input, output and outcome factors and other factors e.g. political, social and cultural.

 Composite indices based on a number of input, output and outcome factors have been designed to overcome this problem. Figure 1.18 shows place competitiveness across Hampshire relative to the national average.7

Figure 1.18: Competitiveness across Hampshire - 2016

Source: Hampshire County Council (2017) estimate based on ONS data

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 Winchester and Hart have the most competitive local economies in Hampshire according to the latest UK Competitiveness Index (2016), followed by Basingstoke, Test Valley, Rushmoor and Eastleigh. Several coastal economies including Portsmouth and Southampton lag behind the national average.

 Gosport is the least competitive economy in Hampshire, but the latest report shows Gosport experienced the fastest improvement in competitiveness in the country between 2013 and 2016. Gosport was ranked 310th most competitive local economy in 2013, but by 2016 this improved 102 places to 208th most competitive economy in the UK.8

 Winchester remains the second most competitive city in the country after Aberdeen. The latest report suggests that on average, major urban areas are more competitive than large urban areas, which are in turn more competitive than rural areas. The more rural the area is the least competitive the local economy appears to be. However, as indicated in Figure 1.17 this is not the case in Hampshire. The largest cities, Portsmouth and Southampton are ranked 24th and 27th most competitive cities in the country.9

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1.7 Hampshire Businesses

 Enterprising activity refers to the seizing of new business opportunities by both existing firms and start-ups that bring new ideas, knowledge and skills into an economy. 10 Enterprise is an important driver of productivity since it leads to higher levels of competition, innovation and investment in both physical capital and skills.

 There are nearly 86,000 businesses in Hampshire, 18.4% of all businesses in the South East. The County area accounts for about 81% of all Hampshire businesses or some 70,000 businesses (15% of the South East total). Table 1.3: Hampshire businesses by sub-area – 2017

Area Total % of Hampshire

Hampshire 86,000 100.0 County area 70,000 81.2 North Hampshire 18,000 21.5 Central Hampshire 32,000 36.8 South Hampshire 20,000 23.0 Portsmouth 7,000 8.7 Southampton 9,000 10.1

South East 466,000 n/a United Kingdom 3,129,000 n/a

Source: ONS (2017)

 The mostly rural Central Hampshire sub-area accounts for the largest share of businesses in Hampshire, about 37%, followed by South Hampshire, almost a quarter and North Hampshire with over a fifth of all businesses. Central Hampshire accounts for 45% of all businesses in the County area. The cities of Southampton and Portsmouth account for 10% and about 9% of all Hampshire businesses respectively (Table 1.3).

 At local authority level the New Forest and Southampton have about 9,100 and 9,000 businesses respectively, or about 10.5% each of all Hampshire businesses. Four large cities in Hampshire account for about four in every ten businesses in Hampshire.

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 Business density in Hampshire is below both the South East and the national average but this is primarily down to the performance of Southampton and several smaller local authorities in South Hampshire.

 In 2017 Hampshire had 748 businesses per 10,000 residents of working age, compared to 839 in the South East and 761 in the UK. The County area on the other hand had 841 businesses per 10,000 residents of working age

 With a job density ratio of 0.87 jobs per resident of working age, labour demand in Hampshire is marginally below the South East (0.88), but above the national average (0.84). The County area on the other hand had job a density of 0.89 that is above the South East average. Job density in the County area does not match its working age population, but not all of its residents are economically active and there is some frictional unemployment in the area.

Figure 1.19: Business and jobs density across Hampshire – 2017

Business density Jobs density

Source: ONS (2017)

 As shown in Figure 1.19, Portsmouth and Southampton and most coastal districts tend to have below the UK average concentration of both businesses and employment. Central Hampshire scores well on business density (above the South East average) but job density in East Hampshire and New Forest is below the national average. This suggests that the two districts have a concentration of smaller businesses.

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 The opposite is true in Rushmoor, which has below the national average concentration of businesses but has more jobs per resident of working age than the South East economy as a whole.

 Labour demand within Hampshire is greatest in Winchester, 1.28 jobs per resident of working age, or more than double the demand in Gosport (0.53 jobs per resident of working age).

 Portsmouth and Southampton have 524 and 503 businesses per 10,000 residents of working age respectively. Business density in the two cities is about 40% below the County area average.

 Despite the fact that Portsmouth and Southampton have a higher concentration of large businesses, labour demand, as measured by job density, stands at 0.87 jobs per resident of working age in Portsmouth (above the UK average, but below Hampshire) and 0.78 in Southampton. On this measure Southampton has the third lowest job density in Hampshire.

Table 1.4: Business growth, 2010 – 2017

2010-17 cumulative 2010 % 2017 share % change 2010-17

Hampshire 73,200 100.0 85,800 100.0 12,600 100.0 17.2 County area 59,600 81.4 69,700 81.2 10,100 80.1 17.0 North Hampshire 15,700 21.5 18,400 21.5 2,700 21.5 17.2 Central Hampshire 27,700 37.8 31,500 36.8 3,900 30.7 14.0 South Hampshire 16,200 22.1 19,700 23.0 3,500 27.9 21.8 Portsmouth 6,400 8.8 7,500 8.7 1,000 8.1 15.8 Southampton 7,200 9.8 8,600 10.1 1,500 11.8 20.7 South East 394,500 465,600 71,100 18.0 United Kingdom 2,574,200 3,129,400 555,200 21.6

Source: ONS (2017)

 In 2017 Hampshire had about 12,600 additional businesses compared to 2010, an increase of 17.2%. Business growth in Hampshire lagged behind both the regional and national average (Table 1.4).

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 About 80% of the increase in businesses in Hampshire was accounted for by the County area; although the relative growth in the County area was similar to Hampshire. The mostly rural Central Hampshire, the largest sub-area in the Hampshire, saw relatively sluggish business growth, 14% between 2010 and 2017.

 Business stock in South Hampshire and Southampton has increased by more than a fifth since 2010, faster than in other sub-areas and similar to the national average.

 Some 72,100 micro businesses employing between 0-9 employees in Hampshire account for 84.1% of all businesses in Hampshire. There are about 13,350 small and medium sized business (SMEs) employing between 10-249 employees, and 315 large businesses with 250 or more employees (0.4%).11 Hampshire has a slightly greater proportion of SMEs and large businesses than the South East economy (Table 1.5).

Table 1.5: Hampshire business by size – 2017

Total % Micro % SME % Large % Hampshire 85,770 100 72,100 84.1 13,355 15.6 315 0.4 County Area 69,665 100 59,115 84.9 10,320 14.8 225 0.3 North Hampshire 18,430 100 15,730 85.3 2,620 14.2 80 0.4 Central Hampshire 31,540 100 26,770 84.9 4,695 14.9 75 0.2 South Hampshire 19,690 100 16,615 84.4 3,005 15.3 75 0.4 Portsmouth 7,465 100 5,980 80.1 1,440 19.3 40 0.5 Southampton 8,645 100 7,005 81.0 1,585 18.3 50 0.6

United Kingdom 3,129,385 100 2,643,635 84.5 473,520 15.1 12,230 0.4 South East 465,560 100 397,930 85.5 66,015 14.2 1,610 0.3

Source: ONS 2018

 Rural areas of Central and North Hampshire have a higher proportion of micro business than in the more urban South Hampshire and two cities. The opposite is true for SMEs and large businesses. South Hampshire and the two cities have a higher concentration of both SMEs and large businesses.

 Almost one in five of all businesses in Portsmouth are SMEs compared to 14.2% in North Hampshire. The concentration of large businesses in Southampton is three times as large as in Central Hampshire (Table 1.5).

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 Almost one in five of all businesses in Portsmouth are SMEs compared to 14.2% in North Hampshire. The concentration of large businesses in Southampton is three times as large as in Central Hampshire (Table 1.5).

 Central Hampshire accounts for about 37% of all micro businesses in Hampshire but this is hardly surprising given the size of its economy. Over a third (35.2%) of all SMEs in Hampshire can be found in North Hampshire. Southampton and Portsmouth account for 15.6% and 12.5% of all large business in Hampshire, which is smaller than in Central or North Hampshire (23.4%) but proportionally larger than their share of all Hampshire businesses.

 At local authority district level Rushmoor and Southampton have high concentrations of large businesses in Hampshire, while East Hampshire has the lowest. Portsmouth and Southampton also have the highest concentrations of SMEs (ranked 3rd and 4th highest in the South East), but Hart has the lowest in Hampshire.

 Hart has the highest concentration of micro businesses in Hampshire (88.5%), followed by East Hampshire and Basingstoke & Deane. The 2011 Census suggests that Hart has one of the highest proportions of people working from home, which implies more singleton self-employers than other districts.

Table 1.6: Business growth by size, 2010 - 2017

Micro % growth SME % growth Large % growth

Hampshire 11,500 19.0 1,095 8.9 5 1.6 County Area 9,175 18.4 920 9.8 0 0.0 North Hampshire 2,515 19.0 195 8.0 0 0.0 Central Hampshire 3,360 14.4 505 12.1 0 0.0 South Hampshire 3,295 24.7 220 7.9 5 7.1 Portsmouth 885 17.4 130 9.9 0 0.0 Southampton 1,435 25.8 35 2.3 5 11.1

United Kingdom 513,960 24.1 40,780 9.4 415 3.5 South East 65,700 19.8 5,255 8.6 95 6.3

Source: ONS 2018 Note: figures may not add up due to rounding

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 The number of micro businesses in Southampton and South Hampshire increased by about one quarter since 2010. Central Hampshire saw the slowest growth in micro businesses, but instead saw the sharpest increase in SMEs (12.1%), Table 1.6.

 South Hampshire and Southampton were the only sub-areas that registered growth in large businesses in Hampshire between 2010 and 2017. At the local level Fareham saw little growth in the SME population since 2010, but neighbouring Winchester saw the sharpest growth in SMEs in Hampshire.

 The vast majority of businesses in Hampshire are micro businesses but they account for a relatively small share of employment (Figure 1.20). Large and SMEs businesses on the other hand account for a relatively small share of business population but they make disproportionate contribution to the economy in terms of output (GVA) and jobs.

Figure 1.20: Share of enterprises, employment and turnover South East England, 2017

Source: ONS 2018 Note: business estimates from Office for National Statistics. The estimate for the number of businesses is based on enterprise data. Thus they are slightly different from local units data used in this section.

 In the South East economy as a whole large businesses account for 0.4% of all businesses yet they account for 38% of all employment and 57% of total turnover (Figure 1.19). The contribution that large businesses made to total turnover (output) in the South East is greater than nationally.

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 Amongst the group of large businesses, some 575 very large businesses (those that employ at least 500 people) constitute just 0.1% of all businesses yet account for about 51% of turnover and about a third of all employment in the South East.

 Comparable data for Hampshire is not available, but the contribution of large businesses to the Hampshire economy is likely to be similar to the South East average. Some 265 large businesses (0.4% of all businesses in Hampshire) account for about 38% of all employment and about 57% of total turnover.

 It is also highly likely that approximately 125 very large businesses (those that employ at least 500 people) that constitute less than 0.2% of all Hampshire businesses could account for about a half of the total turnover and about a third of all employment in Hampshire.

 The concentration of large enterprises in North Hampshire is higher than in Central Hampshire and double the concentration in South Hampshire. Portsmouth and Southampton have similar concentrations of large enterprises to North Hampshire but they have above the average concentrations of large business in the public sector. This is another factor that accounts for differences in economic performance within Hampshire.

 SME businesses in the South East account for about one in ten businesses but they account for about a quarter of total turnover and about 27% of employment (Figure 1.19).

 Comparable data for Hampshire is not available, but Hampshire has a higher concentration of SMEs (10.5% of all enterprises) than the South East economy and this would suggest that the contribution SMEs make to the total turnover and employment in Hampshire is likely to be at least a quarter of total turnover and more than a quarter of total employment.

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 The turnover estimates imply that large and SME businesses in Hampshire contributed around £67bn and £30bn respectively to the total turnover (£117bn) in Hampshire in 2016.

 New businesses (business births) contribute not just to job creation and economic growth, but newly born businesses often stimulate innovation and facilitate the adoption of new technologies. Business births therefore increase the competitiveness of Hampshire’s business population and this helps to boost productivity and economic performance across the wider economy.

 In 2016 Hampshire had 10,800 new businesses (business births). The proportion of new businesses that began trading in that year within Hampshire was 13.5%. This is above the South East average (12.8%), but below the national average (14.6%).

 Business births in Portsmouth, Southampton and South Hampshire (around 16%) are higher than in North Hampshire (12.3%) and Central Hampshire (12.3%). At the local level Eastleigh with 20% had the highest 2016 business birth rate in Hampshire, followed by Portsmouth, Gosport and Southampton with around 17% respectively. East Hampshire and New Forest had the lowest birth rates in Hampshire at around 10% respectively.

 In 2016, nearly 9,000 businesses in Hampshire ceased trading (business deaths) representing 11.2% of all active businesses in Hampshire (Figure 1.20). On this measure Hampshire is comparable to the South East average and performs better than the UK average.

 Portsmouth, Southampton and South Hampshire had the highest proportion of businesses that ceased trading in 2016 in Hampshire. The gap between Southampton and the best performing sub-area (Central Hampshire) was substantial at five percentage points. At the local level, Portsmouth and Gosport have relatively high business death rates. On the other hand less than 10% of active businesses in Winchester ceased trading in 2016.

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 Following the end of the 2008/9 recession all local authorities in Hampshire posted a gradual increase in the net business formation rate (the difference between business births and business death rates). However, in Hampshire and several of its sub-areas, the net rate peaked in 2014 and 2015 (Figure 1.21).

 In 2016 the net rate in Hampshire stood at 2.3% compared to 3.3% in the previous year (Figure 1.21). The rate in Hampshire was nevertheless higher than in the South East (1.7%) but below the UK average (3.1%).

Figure 1.21: Business births, deaths and the net business formation rates Hampshire, 2010 - 2016

14 4 business births net (%) business deaths

s 13 3

e

s s

e 2 n

i 12

s

u b

1

e v

i 11

t c

a 0

f o 10 % -1

9 -2 2010 2011 2012 2013 2014 2015 2016 10 11 12 13 14 15 16

Source: ONS 2018

 Within Hampshire the net rate in Central Hampshire slowed to just 0.7% from 2.8% in the previous year. The rates in North Hampshire and Southampton were sluggish at 1.7% but net business formation rates in South Hampshire and Portsmouth increased to 4.8% respectively.

 While business birth rates provide useful information on dynamism in the economy, as shown in Figure 1.22 the ability to survive and grow for up to five years after creation matters more. Those economically prosperous sub-areas and districts across Hampshire tend to have higher five year survival rates.

 Some 48.8% of businesses created in 2011 the County area survived for at least five years compared to 46% in the South East and 44.1% in the UK. There are significant differences in the five-year business survival rates within Hampshire.

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 The five-year survival rates in Winchester, Hart and Basingstoke & Deane stand at 52.8%, 52.0% and 51.6% respectively. On the other hand the five- year survival rates in Southampton, Portsmouth and Gosport are lower than 40%, with Southampton the lowest rate in Hampshire at 38.7%.

Figure 1.22: Business survival-rates matter (business births and survivals in Hampshire economic sub-areas)

17 22 Portsmouth

16 Southampton South 20

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10 South Hampshire 8 East Hampshire New Forest 38 39 40 41 42 43 44 45 46 47 48 49 50 51 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 5-year business survival rate 5-year business survival rate

Source: ONS (2017)

 Several rural districts also have relatively large five-year survival rates. The rate in the New Forest is 51.1%, while some 50.5% of newly formed businesses in Test Valley survive for at least five years.

 This suggests that whilst the economically more prosperous areas in Central and North Hampshire have on average lower business formation rates than for example Portsmouth, Southampton and most districts in South Hampshire, their five-year survival rates are on average much higher. This is another factor that accounts for discrepancies in economic performance within Hampshire.

 Looking at business distribution by broad industrial sector, Hampshire is similar to the South East average. Services account for 79% of all businesses in Hampshire and the County area and as much as 82% in North Hampshire and Southampton, and 80% in Portsmouth.

 The three largest sectors (professional & business services, the broad distribution, transport & accommodation sector and construction account for over 50% of all businesses in Hampshire and all its sub-areas (Table 1.7).

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Table 1.7: Hampshire business by broad industry – 2017

North Central South number Hampshire County Area Hampshire Hampshire Hampshire Portsmouth Southampton South East Professional & Business services 21,870 18,430 5,395 8,450 4,585 1,595 1,850 126,345 Wholesale, Transport, Accommodation, & Food 21,685 16,570 3,830 7,345 5,395 2,355 2,755 110,765 Construction 10,785 8,655 2,030 3,630 3,000 1,035 1,095 54,040 ICT 7,355 6,430 2,515 2,500 1,415 425 500 45,370 Public admin, Education & Health 7,325 5,645 1,395 2,575 1,675 720 960 38,955 Other services 5,275 4,185 1,095 1,895 1,195 550 545 30,105 Manufacturing 4,395 3,600 775 1,595 1,230 380 415 19,810 Real estate 2,780 2,265 520 1,195 550 235 280 15,320 Agriculture, forestry & fishing 2,085 2,060 400 1,510 145 10 15 12,265 Finance & insurance 1,785 1,470 385 660 425 125 195 10,155 Production 430 360 95 190 75 35 35 2,430 Total 85,770 69,670 18,435 31,545 19,690 7,465 8,645 465,560

North Central South share (%) Hampshire County Area Hampshire Hampshire Hampshire Portsmouth Southampton South East Professional & Business services 25.5 26.5 29.3 26.8 23.3 21.4 21.4 27.1 Wholesale, Transport, Accommodation, & Food 25.3 23.8 20.8 23.3 27.4 31.5 31.9 23.8 Construction 12.6 12.4 11.0 11.5 15.2 13.9 12.7 11.6 ICT 8.6 9.2 13.6 7.9 7.2 5.7 5.8 9.7 Public admin, Education & Health 8.5 8.1 7.6 8.2 8.5 9.6 11.1 8.4 Other services 6.2 6.0 5.9 6.0 6.1 7.4 6.3 6.5 Manufacturing 5.1 5.2 4.2 5.1 6.2 5.1 4.8 4.3 Real estate 3.2 3.3 2.8 3.8 2.8 3.1 3.2 3.3 Agriculture, forestry & fishing 2.4 3.0 2.2 4.8 0.7 0.1 0.2 2.6 Finance & insurance 2.1 2.1 2.1 2.1 2.2 1.7 2.3 2.2 Production 0.5 0.5 0.5 0.6 0.4 0.5 0.4 0.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: ONS 2018

 The distribution of the broad business sectors is similar to the distribution of economic activity (GVA) across Hampshire. Those better performing sub- areas tend to have a higher proportion of high value-added services and the composition of the largest sector, professional and business services, also differs between sub-areas.

 Between 2010 and 2017 all sub-areas within Hampshire saw relatively strong growth in professional and business services, but business growth lagged behind the national average. The same is true of ICT with relatively strong growth in business stock yet slower than the UK average in all but one sub- area. Business growth in Southampton was slightly faster, albeit from a low base.

 South Hampshire and Southampton saw relatively strong growth in the largest broad distribution sector while South Hampshire, Portsmouth and Southampton saw faster business growth in construction than was the case nationally.

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 Most of the large sectors shown in Table 1.7 are fairy evenly spread around Hampshire, with a similar concentration of activity in most sub-areas. These sectors, such as the largest distribution, transport, accommodation & food, often provide services or products that are sold locally.

 Hampshire has a relatively large number of businesses in several higher value-added and/or strategically important sectors, but these higher value- added activities are often concealed within the existing Standard Industrial Classification (SIC) of economic activity.

 Financial & business services, ICT & digital media, aerospace & defence, logistics and marine are some of the most productive and/or strategically important sectors for the Hampshire economy. These sectors are either scattered in a number of locations or more concentrated in one or two locations (Figure 1.23 and Figure 1.24).

Figure 1.23: Key Hampshire sectors – 2017 Businesses and district concentrations

Source: ONS (2017) Note: narrow (higher value added) industry/sector activities; dotes refer to district level concentrations

 The narrowly defined financial & business services sector is the largest of these sectors with approximately 11,800 businesses, mostly micro and small, and 55,000 employees. These narrowly defined higher value-added activities

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account for less than 7% of employees in Hampshire but account for over 10% of Hampshire’s output (GVA).12

 ICT & digital media is one of the most important sectors in Hampshire with over 8,000 businesses and 62,000 employees. This sector accounts for 7.6% of all employees in Hampshire but its contribution to Hampshire’s economic output (GVA) also appears to be greater than 10%.

 The aerospace & defence sector as defined by the standard SIC definition is a relatively small sector in the economy, with just 0.5% of mostly medium and large businesses but accounts for about 2% of all employees in Hampshire, and over 2.5% of its GVA. However, if the sector were include the aerospace & defence related activities such as aerospace related engineering, technical & research and other aerospace related activities its contribution would be significantly higher.13

Figure 1.24: Key Hampshire sectors – 2017 Employees in employment and district concentrations

Source: ONS (2017) Note: narrow (higher value added) industry/sector activities; dotes refer to district level concentrations

 Marine and logistics are two other sectors of strategic importance to Hampshire. Logistics is a relatively mature sector that has been affected to a great extent by technological innovation, while marine is an important emerging sector. The composition of business population in these sectors is

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different. Micro and small firms tend to be found in the marine sector but logistics has a higher proportion of larger businesses.

 Tourism is another important sector for Hampshire’s economy. It is less productive than these sectors but tourism activities generated over £3 billion to the Hampshire economy in 2016.14

 In 2017 there were almost 6,000 businesses in Hampshire engaged in the tourism sector, 7.0% of all Hampshire businesses and employing close to 70,000 people. In the County area the number of businesses is over 4,300 (6.3% of all businesses in the County area) and employing 50,000 people. The share of businesses in Hampshire is slightly lower than in the UK (8.0%), Southampton (8.8%) and Portsmouth (11.5%).

 Since 2010 there have been over 500 more tourism businesses in Hampshire, giving an average annual growth rate of 1.3% per annum (p.a.). This is slower than the national rate (1.7% p.a.) but above the South East average (1.2% p.a.). Business growth in both Portsmouth (2.0% p.a.) and Southampton (1.8% p.a.) outperformed the national average.

 Tourism employee growth between 2010 and 2016 saw 8,000 more workers in Hampshire, and 6,000 more in the County area. Average annual employee growth in Hampshire was 2.1% p.a., and 2.2% p.a. in the County area. This is slower than the UK average (3.2%), but marginally above the South East average (2.0%).

 Most of these priority and /or strategic sectors are high-productivity sectors and most have seen strong growth in productivity over time. Research suggests that productivity more than doubled in the manufacture of computer and electrical equipment and information & communication between 1990 and 2016.15

 However, as shown in Figure 1.25 these high-productivity sectors account for a relatively small share of Hampshire’s employment. The broad retail,

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distribution, accommodation & food, the broad public sector (public administration, education, health & defence) and the broad professional & business services account for 70% of all employees in employment in Hampshire.

 Relatively low productivity in professional & business services may appear surprising, but this is down to low productivity in business services while the professional services sub-sector is far more productive than business services.

Figure 1.25: Productivity matters but sector size is equally important (Productivity and employment share in Hampshire) 100 marine 90 Finance & insurance finance & professionaal services 80

6 Manufacturing 1

0 70 Construction aerospace & defence*

2 ICT

,

d logistics

n 60 a

s Hampshire average Public u

o 50 Other services sector h

t 27.9%

£ Retail, distribution 16.9% 40 accomodation & food 26.1% 30 Professional & Bubble=% employees business services 20

Source: ONS (2017) and Hampshire County Council (2018) Note: broad industrial sectors; blue = sectors from Figure *

 It is important to note that in addition to these mostly higher value-added activities (sectors), there are several other activities and sectors that are not readily defined in national accounts. These activities span across a number of ‘traditional’ sectors and they increasingly use knowledge in their production process. Such activities are of strategic importance to Hampshire today. and these activities and sectors will be key to the future competitiveness of Hampshire’s economy.

 Export Intensive Sectors are covered in section 1.9; Knowledge Intensive Sectors covered in section 3.3; and Science & Technology Sectors in section 3.4.

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1.8 High-growth Businesses

 As shown in the previous section Hampshire has a large business population that is predominantly composed of micro businesses. Hampshire’s business start-up rates are high but almost a half of its businesses do not survive beyond five years. Furthermore, most of its micro businesses stay micro - they create little employment opportunities.

 Future growth in Hampshire is likely to be driven by high-growth indigenous firms as well as foreign investment, which will not only create employment opportunities but also contribute to productivity growth through the inflow and better use of knowledge and new technologies.

 The importance of high-growth businesses to employment growth and job creation in particular is emphasised in several influential reports by the Organisation for Economic Cooperation and Development (OECD) and the UK innovation based foundation the National Endowment for Science, Technology and the Arts (NESTA).

 The 2007 OECD country study showed that between three percent and six percent of all firms with at least ten employees contribute to a large share of the employment created.16

 In the UK NESTA’s 2009 report, ‘The Vital 6 per cent’, showed that just six per cent of high-growing businesses generated half of the net job creation in the UK between 2002 and 2008. 17

 NESTA’s research shows that firms that are less than five years old are over- represented among high-growth businesses but the majority of high growth businesses are over five-years old. Furthermore firms that innovate are more likely to be high-growth.

 There is a lot of churn among high-growth firms – only a third of firms which achieve high-growth in one year achieve second year of high-growth within a

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ten year period. Nevertheless, the UK performs well in terms of the percentage of high-growth firms. It outperforms most European countries but it lags behind the US economy.18

 High-growth businesses can be found across all sectors, and they span established firms and start-ups, small businesses and large organisations alike. However, they are over-represented in the services sector and especially in business services.

 Little is known about high-growth businesses at the sub-national level but recent experimental data from ONS sheds some light about the number of high-growth businesses in Hampshire and their distribution across the area.

 In 2016 Hampshire had over 400 high-growth businesses (businesses that registered average annualised growth in employment of at least 20% per annum over a three year period), Table 1.8.19 The alternative but less reliable measure based on turnover suggests that Hampshire had some 805 high growth businesses in 2016.

Table 1.8: High-growth businesses in Hampshire

Sub-Areas 2011 % of Hampshire 2016 % of Hampshire Hampshire EA 255 100.0 405 100.0 Hampshire CC 215 84.3 320 79.0 North Hampshire 70 27.5 80 19.8 Central Hampshire 95 37.3 170 42.0 South Hampshire 50 19.6 70 17.3 Portsmouth 20 7.8 45 11.1 Southampton 20 7.8 40 9.9

South East 1,445 17.6 1,990 20.4 UK 9,765 2.6 13,665 3.0

Source: ONS (2017) Note: experimental data based on employment measure

 Between 2011 and 2015 the number of high-growth businesses in Hampshire increased by almost 60%. Growth in the number of high-growth businesses in Hampshire and in the County area was faster than both the regional and national averages at less than 40% respectively.

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 Hampshire accounts for over a fifth of all high-growth businesses in the South East and Hampshire is over-represented amongst high-growth firms in the South East, as it has a higher proportion of high-growth firms relative to its share of all firms in the South East (18% of all firms versus over 20% of high- growth firms). Between 2011 and 2016 Hampshire had increased its share of both high-growth businesses in the South East and the UK (Table 1.8).

 Over four in every ten high-growth businesses in Hampshire are found in Central Hampshire, about a fifth in North Hampshire and almost one in six in South Hampshire (Table 1.8).

 Central Hampshire is over-represented amongst high-growth firms, that is to say it has a higher proportion of high-growth firms relative to its share of all firms in Hampshire, but North Hampshire and South Hampshire are under- represented.

 With about 11% of all high-growth businesses in Hampshire, Portsmouth is over-represented amongst high-growth businesses in Hampshire but the opposite is true of Southampton, where it accounts for a higher share of Hampshire businesses than its high-growth businesses. Nevertheless, the share of high-growth businesses in the two cities had increased between 2001 and 2016 with Portsmouth registering faster growth.

Table 1.9: High-growth businesses in Hampshire

Districts 2011 % of Hampshire 2016 % of Hampshire Winchester 25 9.8 50 12.3 Portsmouth 20 7.8 45 11.1 East Hampshire 20 7.8 40 9.9 New Forest 30 11.8 40 9.9 Test Valley 20 7.8 40 9.9 Southampton 20 7.8 40 9.9 Basingstoke and Deane 35 13.7 30 7.4 Eastleigh 15 5.9 25 6.2 Hart 10 3.9 25 6.2 Rushmoor 25 9.8 25 6.2 Fareham 15 5.9 20 4.9 Havant 10 3.9 20 4.9 Gosport 10 3.9 5 1.2

Source: ONS (2017) Note: experimental data based on employment measure

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Box 2. Case Study: High-growth businesses in the aerospace and defence sector in Hampshire 1.9 Internationalisation A recent study* has suggested that there are two areas in Hampshire that have a relatively high concentration of aerospace & defence businesses and employment. Firm-level data suggest that the area is home to a substantial number of high-growth firms and firms that may have a potential to become high growth.

Firm-level data suggest that there are some 140 high-growth firms (including firm subsidiaries) in the area and that a further 160 have a potential to become high-growth firms. Close to seven out of every ten high-growth aerospace & defence firms are located in the Wider Farnborough area (69%). Rushmoor (Farnborough) has more high growth firms than elsewhere in the area although some of these firms are subsidiaries of larger enterprises.

Figure B2. High/potential high-growth firms in the four ‘cluster’ areas, 2016

Source: Hampshire County Council (2018)

In Solent relatively high number of high-growth firms in this sector is found in Eastleigh and Portsmouth. Traditional aerospace & defence activities are concentrated in Solent while Farnborough has higher concentration of R&D, engineering and company HQ activities.

*EBIS (2018), The Farnborough & the Southern Aerospace & Defence Cluster Study: Stage II – Firm- Level (Micro) Report.

 At local level those economically better performing parts of Hampshire also tend to be over-represented amongst Hampshire’s high growth businesses. Winchester accounts for about one in eight of all high-growth businesses in Hampshire (Table 1.9 and Figure 1.26). Winchester is over-represented

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amongst high-growth businesses in Hampshire and its share of high-growth businesses has increased over time.

Figure 1.26: Relative concentrations of high-growth businesses - 2016

Source: ONS (2017) Note: narrow (higher value added) industry/sector activities; dotes refer to district level concentrations

 The same is true of Rushmoor and Test Valley, while the opposite is true of a number of areas in South Hampshire (Gosport, Havant, Fareham) that tend to have a relatively low share of high-growth businesses.

 As shown in Table 1.9 several of the mostly rural districts account for a relatively large share of high-growth businesses in Hampshire. For instance, East Hampshire accounts for 10% of high-growth businesses and East Hampshire is over-represented amongst Hampshire businesses. Its share of all high-growth businesses in Hampshire increased between 2011 and 2015.

 Hart increased its share of high-growth businesses in Hampshire but the share of high-growth businesses in Rushmoor and Basingstoke in particular decreased between 2011 and 2016. The relative underperformance in this area and in some of its key sectors such as ICT is a factor that has most likely contributed to the sluggish performance of the North Hampshire economy over the past two years for which we have data and especially in 2016.20

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1.9 Internationalisation

 The performance of the UK economy prior to the 2008/9 recession was on average respectable, both compared to its long-trend average and compared to its main international competitors. The UK made significant progress in closing the productivity gap with the main G7 economies. However, the evidence suggests that growth was unbalanced, driven by consumer spending and unsustainable accumulation of both private and public debt.21

 Productivity growth has been largely subdued since the recession and the evidence suggests that the UK productivity gap with the G7 economies has widened. Recent research by ONS suggests that the UK has the largest ‘productivity puzzle’ - the difference between post-downturn productivity performance and the pre-downturn trend in the G7. This was 15.6% in 2016, around double the average of 8.7% across the rest of the G7.22

 Economic growth has to be sustainable if both the central and local governments are to deliver their long-term economic, social and environmental objectives. Rebalancing the economy away from domestic consumption towards business investment and exports is a step that would make economic growth more sustainable. Faster growth in internationalisation of Hampshire businesses would be a step in the right direction.

 The evidence points to significant and positive productivity and economic development impacts resulting from firm internationalisation. For instance, firms that export are more productive than firms with a domestic focus. Available evidence suggests a focus on improving productivity and increasing firm size as a route to increasing internalisation and export-capability of firms within an economy.23

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 The shift away from an export orientated manufacturing base in 1980s onwards to a more services driven consumer economy has resulted in large trade deficits in the UK.

 UK exported £341bn of goods in the year to May 2018 but larger imports of goods has resulted in a trade in goods deficit of £138bn. Service exports were £279bn and in services the UK had a trade surplus of £111.5bn.

 The stronger trade balance in services is perhaps not surprising given the shift to service led activities over the past three decades and in particular relatively strong growth in several knowledge intensive services over the past two decades. Trade in goods deficit in the UK has been affected by the strong growth in cheap imports driven by the UK’s consumer led economy while the performance of the manufacturing sector has been affected by a large share of imports. The supply chains tend to be highly integrated across Europe which complicates the true trade picture (UK trade is distorted through what is known as the Rotterdam effect).24

 Following the referendum to leave the EU there was a sharp depreciation of sterling against both the US dollar and the euro. A depreciation of a currency reduces its purchasing power and increases the cost of imported goods for domestic firms and consumers. This should lead to a fall in the volume of imports.

 Depreciation should have the opposite effects on exports – it reduces the cost of UK goods and services for foreign firms and consumers. In theory the two effects should boost the domestic trade balance. The relative prices will immediately change following currency depreciation but it will take some time for firms to adopt which implies that the full impact of currency depreciation comes with a time lag.

 The latest data from ONS points to a faster growth in exports of both goods and services than in imports but the UK is still running a large trade deficit which is driven by the sheer size of imports (close to £0.5 trillion).

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 Furthermore, the trade and competitiveness effect that comes as a result of sharp currency depreciation tends to be short lived. The currency recovers over the medium term as was the case following the 2008/9 depreciation of sterling, and international evidence suggests that large developed economies tend to compete on the basis of quality and not just price.

 The EU markets account for £274 billion of UK exports or 45% of all exports while imports from the EU were £341 billion or 55% of all UK imports. The UK economy had an overall trade deficit of £67 billion with the EU in 2017. The surplus of £28 billion on trade in services is outweighed by a deficit of £95 billion on trade in goods. Nevertheless, the UK had a trade surplus of £41 billion with non-EU countries, with a surplus of £83 billion on trade in services outweighing a deficit of £42 billion on the trade in goods.

 Using regional trade statistics the South East exported close to £75 billion of goods and services in 2016. Of this, exports of goods accounted for £40 billion or 54%, with an approximately 50/50 split between the EU and non-EU markets (Figure 1.27).

Figure 1.27: Exports of goods and services – South East England, 2016

Goods Services

£40.8 billion £34.1 billion

£20.9 billion* £20.3 billion £20.5 billion £9.3 billion £11.6 billion

European Union Non- EU European Union Non- EU

*total service exports by destination data currently excludes finance, travel and transport because of data limitations Source: HMRC (2017) and ONS (2017)

 The South East export of services (£34 billion or 46% of all exports) was slightly smaller and skewed more to non-EU countries (£11.6 billion compared

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to £9.3 billion). Experimental data from ONS suggests that 15% of UK services exports come from the South East, second only to London (45%), and twice that of Scotland (7%) the next largest export region.

 Official trade data at sub-regional level is not available, but a proxy estimate based on weighted regional data, would suggest Hampshire exports totalled around £15.6bn in 2015.25 Goods exports accounted for about £9.3bn or 59% while services accounted for £6.4bn or 41% of all exports in Hampshire (Figure 1.28). However, there appears to bee significant differences in the composition of exports between Hampshire and the South East and within Hampshire.

 The County area exports approximately 12.5bn or 80% of the Hampshire total with exports of goods accounting for about £7.6bn or 61% and against £4.9bn in service exports.

 This data suggests that Hampshire is the largest exporting region in the South East. Over a fifth of all South East exports come from Hampshire (about 19% of service exports and close to 23% of goods exports).26

Figure 1.28: Value of exports of goods and services in Hampshire – 2015/16

Source: Hampshire County Council (2018) proxy estimate derived from HMRC and ONS data

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 Proxy data also suggests that exports of goods and services in Hampshire accounted for about 32% of its GVA in 2015. Research by Oxford Economics suggests that exports of goods and services accounted for 37.8% of the County area GVA in 2014. On this measure The County area was ranked as the most export-intensive county within the country. The share of exports in its Gross Value Added (GVA) was well above the county average (29.1%) and well above England average (30.3%).27

 Research suggests that the UK has consistently been a net exporter across all categories of commercial services since 2001.28 The largest net exports are found in finance and professional & business services followed by pharmaceuticals, insurance and ICT services.

 Relative to its global competitors the UK economy has a revealed comparative advantage in finance & insurance, ICT, pharmaceuticals and aerospace, the sectors that are also concentrated in Hampshire.29

Figure 1.29: Value of exports of services by sector and sub-area - 2015 Hampshire (£ billions) County Council & Sub-Areas (%) £0.51 £1.53bn £1.33bn Information and communication

Council Area 22 22 21 20 8 63 Real estate, professional, scientific and technical Financial Manu. Services & ICT Insurance Pe P Financial & Insurance and £0.4 C pension services £1.38bn £1.31bn £0.06 Transport & travel Re £0.2 Real Estate, North Hampshire 38 24 19 18 664 Professional, Manufacturing Transport Scientific & & Travel technical WS AS

South East (£ billions) Wholesale and motor trades £2.0 £7.67bn £6.79bn Administrative and support Central Hampshire 17 21 20 22 7 62 services £ value not shown for these Real Estate, sectors (see Appendix Manu. Professional, Retail (excluding motor trades) Scientific & Transport £0.3 £0.1 & Travel technical Pe P C £1.9 £0.3 Public admin, health and £7.51bn £6.32bn Re education; arts, entertainment £1.1 and recreation; other services South Hampshire 16 20 21 19 1053 Primary and utilities (agriculture, mining, utilities) Financial Services & ICT Insurance WS AS Construction 0% 25% 50% 75% 100% Manu (Manufacturing), WS (Wholesale), AS (Admin Support), Re (Retail), Pe (Public admin etc.), P (Primary) C (Construction) Source: Hampshire County Council (2018) proxy estimate derived from HMRC and ONS data.

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 At the sub-national level there appears to be significant differences in the composition of estimated (proxy) exports of services between Hampshire and the South East economies and within Hampshire (Figure 1.29). Exports of goods are mostly manufacturing exports.

 Four of the same services driven sectors account for the lion’s share of the South East and Hampshire exports, but the rankings differ. Hampshire has a larger proportion of information and communication (ICT) exports compared to the South East, but proportionally less real estate and professional, scientific and technical exports.

 The broad transport and travel category is proportionally larger in Hampshire than in the South East. This in part reflects the concentration of certain activities around Hampshire’s main transport hubs and the two ports in particular.

 Exports of financial services & insurance appear to be more important to the economy of Hampshire than exports of real estate, professional, scientific and technical services. The importance of ICT exports is in line with the earlier findings that showed the strong growth in knowledge intensive services and ICT in particular across much of Hampshire.

 Variations in the sub-area employee numbers by sector reflect exports of services by sector and sub-area. As such, North Hampshire has a concentration of ICT exports (about one in four of its exports of services) followed by about one in five in professional, scientific and technical. In Central Hampshire and South Hampshire the share of exports is similar between finance & insurance and professional, scientific & technical and transport & travel (Figure 1.28).

 HMRC data provides the destination of exports of goods data to both the EU and the non-EU countries for Hampshire (including the Isle of Wight). The EU market accounts for 44% of exports while the non-EU market accounts for 56% of all exports of goods. With reference to figure 1.30, within the EU,

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Germany is by far the most important trading partner for Hampshire as it accounts for more than a fifth of its exports to the EU (about £850m).

Figure 1.30: EU destination of exports – Hampshire and the Isle of Wight, 2016

89% Sweden £112 Rest of EU Germany Denmark million £441 £223 million million £848 2.7% 10% Italy 5.4% million £237 5.8% million Spain 20.7% £288 7.0% million £4.1 billion France

Irish Rep. 8.4% 14.3% £588 £343 million million 12.4% 12.5%

Netherlands Belgium £508 £512 million million

Source: Hampshire County Council (2018) proxy estimate derived from HMRC and ONS data

 France accounts for 14.3% of exports of goods and Belgium and Netherlands for about 12.5% respectively. In the case of the Netherlands and to some extent Belgium, the Rotterdam (- Antwerp) effect may have some bearing on the values. The eight EU countries shown in Figure 1.29 account for 89% of Hampshire’s exports to the EU market.

 The USA is by far the most important non-EU market for Hampshire goods and the most important market overall. A third of Non-EU exports is with the USA, and estimated to be worth over £1.8 billion (Figure 1.31). Taken as a percentage of EU and Non-EU exports, the USA is the single largest trading partner for Hampshire businesses. It accounts for approximately 20% of all export of goods in Hampshire, more than twice as large as Germany.

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Figure 1.31: Non-EU destination of exports – Hampshire and the Isle of Wight, 2016

Rest of 75% Non- EU Turkey £1,339 million USA £106 million Canada 2.0% £1,824 £109 million million 2.1% India £112 million 2.1%

Singapore 2.1% 34.7% £137 million £5.2

Hong Kong 2.1% billion UAE 8.4% £173 million 2.6% Qatar £444 3.3% 7.4% million £139 million 3.4% 3.5% Saudi Arabia Switzerland £387 £173 million China Japan. million £179 £184 million million Source: Hampshire County Council (2018) proxy estimate derived from HMRC and ONS data

 The UK overall has a net trade surplus with the US but Hampshire has a small deficit (imports from the US in Hampshire are estimated at about £1.9bn). The UAE and Saudi Arabia are the next largest export markets for Hampshire businesses, most likely linked to Hampshire’s strong aerospace and defence industry (Figure 1.31).

 Exports to China are smaller than to Denmark, and Hampshire has a large trade deficit with China as a result. However, rising incomes alongside the emergence of the middle class in China will create opportunities for exporters of goods and especially the exporters of services in Hampshire.

 Hampshire has a substantial number of businesses in a number of export intensive sectors. Such sectors span across both manufacturing and services.30 There are over 14,000 businesses with 125,000 employees in export intensive sectors in Hampshire (Figure 1.32). Hampshire accounts for about 18% of all export intensive business in the South East and export intensive employment in Hampshire accounts for over a fifth of the South East employment.

 The County area alone has over 12,000 businesses in export intensive sectors with 94,000 employees. It accounts for about 15% of all business in

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export intensive sectors and a similar share of the regional employment in export intensive businesses. Services make up the overwhelming share of both businesses and employees in export intensive sectors. In both areas services account for about 85% of all businesses in export intensive sectors.

 Businesses in export intensive sectors are found across Hampshire but unsurprisingly they tend to be located in or close to major employment centres and along the M27 corridor in South Hampshire and in Basingstoke and Farnborough/Fleet in North Hampshire (Figure 1.33).

Figure 1.32: Businesses and employees in export intensive sectors - 2017

Export Intensive Businesses 2017 HEA HCC South East Great Britain 14,600 12,200 83,450 504,850 12,340 10,330 72,990 424,470 Services Services Services Services

2,260 Manufacturing 1,870 Manufacturing 10,470 Manufacturing 80,380 Manufacturing

Export Intensive Employees 2016 HEA HCC South East Great Britain 125,000 94,000 613,000 4.53 million 85,000 61,000 437,000 2.80 million Services Services Services Services

40,300 32,300 1.73 million Manufacturing 176,000 Manufacturing Manufacturing Manufacturing

Source: Hampshire County Council (2018) proxy estimate derived from ONS data

 As there are fewer major employment centres in the more rural Central Hampshire the area sees relatively little density of such firms. Nonetheless, there is evidence of pockets of high density manufacturing in Andover and Winchester, and a notable arm extending northward to Winchester for services.

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Figure 1.33: Distribution of businesses and business density in export intensive sectors

Export Intensive: Export Intensive Manufacturing Services Business Distribution Heat Map (Density) Business Distribution Heat Map (Density)

Business Distribution Map: each dot represents a business postcode (additional businesses at same postcode hidden behind a single dot). Heat Map (Density): the darker the colour the greater the business density. Takes into account multiple businesses at the same postcode

Source: Hampshire County Council (2018) estimate derived from Bureau van Dijk (2018) data

 Since 2010 Hampshire has seen growth in both the number of businesses and employment in export intensive sectors within the services group but manufacturing has seen little or no growth. This finding reaffirms the earlier findings that point to the rise of the services economy in Hampshire. It also suggests that a large currency depreciation observed in the aftermath of the last recession had little effect on the manufacturing sector.

 Business growth amongst businesses in export intensive sectors was generally strong but employee growth has been generally more subdued. Hampshire and the County area have seen slower growth than the national and South East averages.

 Between 2010-2017 Hampshire has seen over 3,000 additional businesses in export intensive sectors (more than 2,500 of these were in the County area), with all growth in export intensive services. Manufacturing numbers are down on 2010.

 Hampshire has seen 1,000 net additional employees in export intensive businesses but the estimate for the County area stands at over 4,000. All of this growth can be attributed to services (up 8,000) but manufacturing employment in export intensive businesses decreased by 7,000 in Hampshire and by 5,000 in the County area. The South East and the UK have seen similar trends.

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 Within Hampshire strong growth in the number of business in export intensive services was observed in Southampton and North Hampshire with Central and South Hampshire registering relatively sluggish growth (Figure 1.34).

 However, the opposite is true for employment. Central and South Hampshire saw the sharpest growth in employment in export intensive sectors while Southampton and North Hampshire both saw falling employment or the sluggish growth in employment. As shown in Figure 1.34 employment in export intensive manufacturing in Southampton, Portsmouth and North Hampshire fell sharply. In Central Hampshire it remained broadly unchanged since 2009.

Figure 1.34: Growth in business and employment in export intensive sectors

Export Intensive Average Annual Business Export Intensive Average Annual Employee Growth Rates (2009-2016) Growth Rates (2009-2016)

7.6 1.7 Southampton 9.5 South East 3.0 0.0 -1.0 6.1 1.6 Great Britain 7.6 Central Hampshire 3.2 0.1 -0.1 6.0 1.5 North Hampshire 7.0 Great Britain 2.6 -1.0 -0.2 5.6 1.2 South East 6.5 South Hampshire 3.8 0.4 -2.3 4.9 0.7 HEA 6.0 Hampshire CC area 2.4 -0.2 -2.4 4.7 0.1 Hampshire CC area 5.7 HEA 1.7 0.0 -2.7 4.5 0.0 Portsmouth 6.5 Portsmouth 1.6 -2.6 -3.1 4.4 -0.5 South Hampshire 5.3 North Hampshire 0.7 1.0 -3.8 3.9 -1.9 Central Hampshire 4.8 Southampton -1.2 -0.2 -7.3

-10.0 -5.0 0.0 5.0 10.0 -10.0 -5.0 0.0 5.0 10.0 Export Intensive (EI) (EI) Services (EI) Manufacturing Export Intensive (EI) (EI) Services (EI) Manufacturing

Source: Hampshire County Council (2018) estimate derived from ONS data

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Figure 1.35: Growth in business and employment in export intensive sectors across Hampshire

Business Growth 2010-2017

Manufacturing Other Production Services

Decline > -5 businesses -5 to +5 businesses Growth > +5 businesses

Employee Growth 2009-2016

Manufacturing Other Production Services

Decline > -50 employees -50 to +50 employees Growth > +50 employees

Source: ONS (2018) estimate derived from ONS data

 At district level the picture is broadly consistent with the overall trends at the sub-area level (Figure 1.35). All districts saw growth in businesses amongst export intensive services of at least five firms, and the majority also saw employee growth of at least 50 workers. Likewise, manufacturing has been in decline in most areas except in two districts in Central Hampshire where it has been broadly stable and in Hart where employee numbers were higher in 2016 than in 2009.

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1.10 The outlook for Hampshire’s economy

 Economic growth over the long-term is driven by demographics and productivity. Economic activity and employment rates are the main demographic factors that affect economic growth, but productivity is the main driver of competitiveness and economic growth over the long-run. Productivity is driven by the key drivers of productivity: investment, innovation, enterprise, skills and competition. However, innovation and technological progress is often seen as the single most important factor for long-run growth.

 It is important to take a longer term view of Hampshire’s economic prospects that looks beyond the short-term ups and downs of the economic cycle. Forecasting these drivers and economic growth over any time horizon is very difficult, but one simple way is to assume that over the long-term horizon the economy will expand at a steady pace similar to the recent past. A hypothetical scenario for the Hampshire and the Isle of Wight economy is shown in Figure 1.36.

Figure 1.36: The economy of Hampshire in 2050 (A hypothetical scenario)

120 110

) forecast horizon

s 100

e

c

i

r p

90

t

n

a t

s 80

n

o c

( Hampshire*

70

n o

i GVA

l l

i 60

b

£ 50 40 2010 2020 2030 2040 2050

Source: HCC (2018_ estimate; Note: *Hampshire = Hampshire and the Isle of Wight

Source: Hampshire County Council (2018) estimate derived from ONS (2018) data

 The ‘fan chart’ shows output (GVA) forecast for Hampshire and the Isle of Wight plus a graphical representation of forecast uncertainty around it. The darkest line corresponds to the mode. The darkest area corresponds to the

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30% confidence interval. This implies that there is a 30% chance that GVA in Hampshire will fall within this range. The green area as a whole represents a 90% confidence interval – there is a 90% chance that GVA will be in this area over the forecast horizon.

 Total economic output of Hampshire and the Isle of Wight is projected to double by 2050 or to reach about £106bn. A simple model suggests that there is a 90% chance that GVA will fall between £98.5bn and £113.1bn by 2050. As indicated by equal width of the same colour bands the risks are balanced (not on the upside or downside) in Figure 1.36.

 However, the risks may be more skewed to one side. The UK economy and the economy of Hampshire are facing several challenges that may pose a risk to the economic outlook, but could equally represent opportunities. An in- depth analysis of risks and opportunities is beyond the scope of this section. The focus is instead on a handful of the most important developments.

 The first of those is Brexit. The main arguments in favour of remaining in the EU were economic while the arguments in favour of Brexit were centred around the costs of the EU budget, the EU becoming too large (which has lead to encroachment into domestic policies that is believed to have eroded national security), and in some instances business competitiveness through for instance overregulation.

 The decision to leave the European Union (EU) will have a profound impact on the UK’s relationship with its main trading partner that accounts for over 40% of its trade. As shown in section 2.5 a large number of FDI investors in Hampshire come from the EU and Hampshire has extensive trade links with the EU. Part of Hampshire’s attractiveness to investors outside Europe is access to the EU Single Market which may suggest that higher trade costs with the EU could depress FDI inflows into Hampshire.

 There are other areas where Hampshire is exposed to the potential negative effects of Brexit such as labour supply, residential and commercial property

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investment and the higher education sector (research funding and university students and tuition fees).

 Hampshire is unlikely to see a dramatic fall in the number of EU workers but the inflow of new workers is likely to be reduced. A slower inflow of EU workers and an ageing population in Hampshire could constrain the supply of workers to the economy, which in turn could constrain economic growth. Some sectors (agriculture, hospitality and care sectors) are likely to be more exposed than others but there are several different labour migration models that could be used after Brexit to mitigate for this.

 Economically diverse and buoyant local economies are likely to be more resilient than those that are highly dependent on single sectors or firms. Place dependency on a single industry implies those industries may be more vulnerable to changes in trading relationships or changes in demand.

 The Hampshire economy has a relatively diverse industrial structure and a relatively high concentration of knowledge intensive services which makes the economy more resilient to external shock.

 A number of empirical studies have examined the potential consequences of Brexit for the UK economy. Most studies predict that Brexit will have a negative impact on the economy (the rate of economic growth) but there are also studies that suggest any impacts could be positive.

 The impacts vary depending on the type of the trade deal that the UK will secure with the EU after leaving the EU and the modelling approach. Much of the scenario work is based on the following trade relationships between the UK and the EU:

a) Membership of the European Economic Area (EEA) or the ‘Norwegian’ model. b) Free Trade Agreement (FTA) with the EU or the ‘Canadian’ model c) World Trade Organisation (WTO) model – the UK trades with the EU under WTO rules.

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 The analysis by the UK Treasury suggests that Brexit could lead to a long-run decrease in UK GDP of 3.8% under the EEA option, 6.2% under the FTA option and 7.5% under the WTO options.31 The negative impact on UK GDP growth is found in several other studies, for example Dhingra et al, (2016), NIESR (2016), OECD (2016) and PWC (2016).

 ‘Economists for Brexit’ on the other hand argue that the effect of leaving the EU and trading under the WTO rules would be positive and that this could amount to as much as 4% of GDP by 2020.32

 One of the main reasons behind the stark difference in the estimated impacts is found in the differences in the modelling approaches. Much of the modelling is based on the use of ‘gravity’ models of international trade flows. In those models geography matters – the further apart countries are, the less they trade. Those models therefore tend to produce the negative effects of Brexit.33

 A few studies have looked at the local economic effects of Brexit. The study by Los et. al (2017) suggests impacts are likely to be biggest outside the South East. However, the study was based on measures of trade exposure to the EU (which is the largest for areas outside the South East) and the study underestimated the importance of increases in non-tariff barriers.

 A more recent study by Dhingra et al. (2017) suggests that the impact of Brexit could be bigger in London and the South East than elsewhere in the country. The soft scenario is based on a FTA trade relationship - no tariffs but it assumes growth in non-tariff barriers. The hard Brexit scenario is modelled on the WTO trade relationship between the UK and the EU – tariffs are charged under the WTO rules and there are non-trade barriers. The study suggests that the average local authority district decrease in GVA in the UK is predicted to be -1.14% under the soft Brexit and -2.12% under the Hard Brexit.

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 The impact of the soft and hard Brexit scenarios on local authority districts in Hampshire is shown in Figure 1.37. The study suggests that several local authorities in South Hampshire are exposed more to the effect of soft Brexit than other districts in Hampshire.

Figure 1.37 Local economic impact of Brexit – Hampshire

Source: London School of Economics – CEP (2017)

 However, the impact of the hard Brexit is projected to be felt the hardest in North Hampshire. These areas tend to have high employment shares in professional & business services and finance and are therefore expected to be badly hit by the large negative effects predicted for those sectors under the hard Brexit scenario.

 The local impacts of Brexit from the ‘Economists for Brexit’ group are not available but they would undoubtedly show the positive effects of leaving the EU across local authority districts in Hampshire.

 Rapid technological progress that is sweeping the global economy is probably the most important factor that could pose both a risk as well as an opportunity to the economy of Hampshire.

 Over the past 200 years there have been rapid advances in technology which have generally boosted productivity, living standards and opportunities in

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developed and developing economies. However, thanks to the ever increasing integration of the global economy and rapid technological progress (automation in particular) over the past 40 years there have been in some cases significant offshoring of jobs from developed to developing economies.

 The huge wage gap between industrialised and developing countries (also known as labour arbitrage) has played an important role in offshoring of manufacturing from the UK and other industrialised nations over the past three decades. The first to leave were some relatively basic manufacturing activities followed by some knowledge intensive and often automated manufacturing activities.

 Services are far more labour intensive than manufacturing which makes human capital (mostly wages) the highest cost factor in the production process. Given that manufacturers have benefited from offshoring there are few reasons to believe that some firms in the service sector wouldn’t benefit from offshoring/outsourcing.

 Over the past 25 years there has been an increase in offshoring and outsourcing of services to India and other developing economies. In general there have been three distinct waves of offshoring from the UK mostly covering lover value added services. The first wave in the early 1990s affected mainly IT, testing and network support. The second phase in the late 1990s manifested itself through offshoring of call centres and other back office functions. The third phase from the early 2000s involved creation of multi/full- service centres covering wide range of administration, process, contact and support functions.

 According to Experian between 2001 and 2004 around 3,000 to 4,000 jobs per annum moved overseas from the South East. However, according to another estimate in 2005 just 3.4 per cent or 6,800 of all jobs lost in the UK was due to offshoring.34

 As shown in this paper, Hampshire has a comparative advantage in several higher value-added services and it could be argued that these activities are at

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a lower risk of offshoring. However, over the past decade we have there has been exponential growth in chip processing speed and memory capacity. Some now fear that impressive advances in computer technology (i.e. from improved industrial robotics to automated translation) are going to have a significant impact on service sector jobs in industrialised economies.

 Thomas Friedman in his well known book ‘The World is Flat: A Brief History of the 21st Century’ argues that because of the development of global supply chains and technological advances “the danger is that a tidal wave of offshoring will sweep away high quality knowledge intensive jobs in the developed world”.

 These new technologies are increasingly adopted not only in manufacturing, clerical and retail work but in other service professions such as financial services, law, education or medicine. Carl Benedict Frey and Michael Osborne from the University of Oxford argue that ‘jobs are at high risk of being automated in 47% of the occupational categories into which work is customarily sorted’.35 As shown in Table 1.10 this includes accountancy, legal work, technical writing and several other white-collar occupations.

 The OECD argues that financial, insurance and computer and information services are the services most likely to be moved abroad.36 Since Hampshire has a relatively large insurance and ICT sectors in the area, it could be argued that Hampshire is exposed to future offshoring and/or outsourcing of service jobs.

 The rapid technological change is perhaps the most evident in our high streets. Self-service machines in our supermarkets have been around for over a decade and retail banks have been replacing counters in their branches with computers. This move will impact on employment as well as on the level of service that could have different impacts on different segments of population (elderly and people living in rural areas in particular).

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Table 1.10: Probability that computerisation will lead to job losses within the next two decades (1 = certain)

Job Probability Recreation therapists 0.003 Dentists 0.004 Athletic trainers 0.007 Clergy 0.008 Chemical engineers 0.02 Editors 0.06 Firefighters 0.17 Actors 0.37 Health technologists 0.4 Economists 0.43 Commercial pilots 0.55 Machinists 0.65 Word processors and typists 0.81 Real estate agents 0.86 Technical writers 0.89 Retail salespersons 0.92 Accountants and auditors 0.94 Telemarketers 0.99

Source: Frey and Osborne (2013)

 Whilst technological advances could threaten existing jobs technology also offers vast opportunities to businesses and consumers. Exponential growth in technological power implies that it is becoming easier than ever to start up a business, bring new product to market and sell to hundreds of million people.

 Hampshire will have to harness and embrace its strength in digital technology and the development and application of that technology in order to underpin a future knowledge based economy for Hampshire.

 However, to remain competitive in the new technological age will require investment in ICT infrastructure. Adopting technologies like web artificial intelligence, big data and improved analytics will be difficult without superfast broadband networks in Hampshire.

 Technological advances are likely to offer new opportunities but at the same time the transition to new ways of working will have different impacts on the population. ICT has the potential to transform the relationship between

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citizens and public services and how public services are delivered. At local level this could take many forms, the most obvious of which are the use of ICT in schools, care homes and among older people in rural communities.

 Automation is generally used to make firms and industries more efficient, not necessarily to replace them. The relatively large logistics sector in Hampshire has benefited from technological advances and is likely to benefit in years to come. Over the short-term some jobs could be under threat as machines replace some human activities. However, it is likely that this will create opportunities elsewhere, but those opportunities are likely to require different skills sets.

 Mobile hardware and software services will continue to rapidly evolve. Remote visual communication is becoming a primary relationship-building tool for business but it also offers opportunities elsewhere i.e. social care being one of the areas. In addition, 3-D printing and additive manufacturing could create many new opportunities in manufacturing. Big data and use of chips and micro sensors to link buildings, roads and homes is another area that will create opportunities to Hampshire’s digital, ICT and professional service industries.

 Hampshire will also benefit from flows of highly skilled people who want to live near London. Firms in Hampshire are likely to reflect the close presence of London but not necessarily the need to be co-located in London (i.e. data storage and insurance firms).

 Since Hampshire is not endowed with large amounts of natural resources or a large pool of low-cost labour force, Hampshire will need to have the ability to adapt and change when faced with rapid technological progress that is changing the way we not just do business but also the way we live. This process will involve harnessing its strength (comparative advantage) in several important sectors such as information & communication/digital technologies, aerospace & advanced manufacturing.

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2. INFRASTRUCTURE & INVESTMENT

The provision of physical infrastructure is a vital ingredient of regional and local competitiveness which is needed to boost productivity growth and achieve sustainable rates of economic growth. Transport infrastructure plays a crucial role in facilitating productivity and economic growth as it connects workers with businesses, business with customers and goods with consumers. Strong links between transport infrastructure, housing and business parks are essential for the business environment and the economy to function successfully, but in the 21st century digital infrastructure is going to be one of the main drivers of competitiveness and productivity growth.

Investment in physical capital is one of the five drivers of productivity. To remain competitive Hampshire will require investment in both traditional and new (digital infrastructure). Future economic growth in Hampshire is likely to be driven by high- growth indigenous firms as well as foreign investment, which will not only create employment opportunities but also contribute to productivity growth through the inflow and better use of knowledge and new technologies.

2.1 Physical infrastructure

 Physical infrastructure is essential for a competitive modern Hampshire economy. Research has shown that well-designed infrastructure investments have long-term economic benefits raising economic growth, productivity and land values, while providing significant positive spillovers.

 Physical infrastructure encompasses both social (schools and hospitals) and economic infrastructure. The later broadly covers the main transport networks such as roads and rail, alongside air and water transportation. The structure and effectiveness of the transport system in Hampshire will determine the size of its labour and productive markets and the depth of agglomeration economies.

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 Hampshire is relatively well connected with an international airport, the UK’s main business airport, two major ports and thousands of miles of roads and railway tracks (Figure 2.1).

Figure 2.1: Physical infrastructure network in Hampshire

Hampshire Physical Infrastructure

Over 5,000 miles of 193 miles of railway road. Transport scheme track, incorporating capital programme of 49 stations £90m in 2017

Number one vehicle International airport handling port and UK's (Southampton) and most productive container the UK’s only prime port. Naval base home to business/ executive almost two-thirds of the airport at Farnborough Royal Navy's surface ships

Source: Hampshire County Council (2018)

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 Hampshire County Council area has 5,300 miles (8,600 kilometres) of road and 193 miles (310 kilometres) of railway track, incorporating 49 stations. Approximately £60 million a year is spent maintaining Hampshire’s highways and pavements with the transport scheme capital programme of £90m in 2017.

 The County Council maintains 150,000 street lights which have been either replaced or upgraded with new technology and energy saving lamps, reducing energy consumption and CO2 emissions. According to the 2011 Census, Hampshire has more cars than any other English county and two-thirds of commuters in Hampshire travel by car, with 450,000 driving to work every day.

 As shown in the previous section, significant commuting takes place within Hampshire and but also to West Surrey, Berkshire and London. In each of those cases Hampshire is a net exporter of labour. In contrast, Hampshire is a net importer of labour from the South West with greater worker inflows from Dorset and Wiltshire.

 A growing population in Hampshire and increased car usage has led to growth in congestion, which in turn can restrain economic growth. There is a growing need to maintain and improve connectivity (road and rail bottlenecks) both within the county and international links to external markets to encourage sustainable economic growth.

 Strategic transport infrastructure needs in Hampshire are outlined in Figure 2.2, while completed and proposed major transport schemes can be seen in Figure 2.3. Seven new major transport schemes are due to begin by 2020, with infrastructure needed to support the 76,000 new homes proposed to be built-out by 2026. This includes improvements to rail freight capacity improvements, upgrades to roads and port expansion.

 Furthermore, the Highways Agency are upgrading the M27 between junction 4 (M3 interchange) and junction 11 (Fareham) by turning the hard shoulder

Page | 89 into a permanent running lane making a dual four lane, smart motorway. This is scheduled for completion in 2020-2021.

Figure 2.2 Strategic transport infrastructure needs in Hampshire

Source: Hampshire County Council (2017)

Figure 2.3: Completed and proposed major transport schemes in Hampshire

Source: Hampshire County Council (2017)

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 The Port of Southampton is a key transport hub and a major gateway to global markets for Hampshire’s businesses and for businesses in the rest of the country. Some £40 billion in UK exports go though Southampton every year with port activity contributing around £1 billion to the UK economy and supporting 15,000 jobs across the region.

 The port handles over £71 billion of international trade every year and over one quarter of the UK’s seaborne trade with non-EU countries by value. The other major port in Hampshire is Portsmouth, home to the naval base where almost two-thirds of the Royal Navy's surface ships are based, while the port also operates departures and arrivals for cruise ships, cargo ships and passenger ferries.

 According to the latest data from the UK Civil Aviation Authority (CAA) Southampton Airport in the Borough of Eastleigh handled more than two million passengers in the twelve months to May 2018, representing 1.5% increase compared with May 2017. The airport serves around 40 direct European destinations. In North Hampshire, Farnborough Airport is dedicated exclusively to business aviation, and is home to the Farnborough International Air show.

2.2 Digital Infrastructure

 The domain name for Google was registered barely 20 years ago while the iPhone was only introduced a decade ago. Today there are more mobile connections than people on the planet and cross-border flows of digitally transmitted data have accounted for more than one-third of the increase in global GDP in 2014.37

 The main digital players Apple, Google, Microsoft, Amazon and Facebook are already the most valuable companies in the world. Automation, big data and artificial intelligence (AI) enabled by the application of digital technologies are poised to have a significant impact on the way we live and work in the 21st century.

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 As shown in Figure 2.4, the UK is one of the most advanced digital economies in the world. It is ranked next to the ‘stand out’ group of highly digitally advanced countries that exhibit high momentum. The UK is ahead of most developed economies in Europe that enjoy a high-state of digital advancement but these countries exhibit slowing momentum.

Figure 2.4: Digital Evolution Index – 2017 (where the digital economy is moving fastest and where it is in trouble)

Source: Harvard Business Review (2017)

 With the advent of the 4th Industrial revolution, characterized by a fusion of technologies, a robust and innovative digital infrastructure will underpin the United Kingdom’s (UK) and Hampshire’s need to stay competitive in a global market.

 A strong digital infrastructure is a key factor in promoting business growth regardless of location, and this in turn, helps to support strong local economies and sustainable economic growth. Furthermore, fast internet links provide access to specialist services and remote working, which in turn can reduce travel costs, improve productivity and increase business agility. As a consequence, the internet opens up global markets for both large and small enterprises.

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 Superfast broadband is currently available to more than 90% of premises in Hampshire, and that number is increasing rapidly thanks to a £28million investment from the public sector. As at July 2018, 94% of the County area can access speeds of 24 megabits per second (Mbps) or more (Figure 2.5).

Figure 2.5: Superfast broadband in Hampshire

Hampshire Superfast Broadband

5G £28 94% 97.4% 5G million spent Coverage as at Scheduled coverage UK roll-out from July 2018 By end 2019 2020

Source: Hampshire County Council (2018)

 A strong digital infrastructure is a key factor in promoting business growth regardless of location, although in Hampshire the more rural areas are at a disadvantage due to the costs of investment.

 Hampshire County Council is currently on track to reach 97.4% of premises with superfast broadband by the end of 2019 – exceeding government targets. However, a small percentage of people are outside of the rollout area for superfast broadband, and for those affected other options such as Community Match Funding or the Better Basic Broadband Scheme are available.

 The coverage of superfast broadband across Hampshire County Council area is shown in Figure 2.6, although this should be read as broadly illustrative rather than a precise representation. The Community Match Funding Scheme has £1 million to help communities that are considering a self-funding route to get superfast broadband, with the scope to offer support to communities in the last 2.6% of properties in Hampshire that are not currently expected to be covered by the Hampshire Superfast Broadband Programme.

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Figure 2.6: Approximate Superfast Broadband Coverage across Hampshire

Source: Hampshire County Council (2018)

 Better Basic Broadband is a Government voucher scheme for residents with broadband connections of less than 2Mbps to put towards the installation and set up of a satellite or fixed wireless broadband solution for their property, either as individuals or collectively as groups or villages by combining vouchers. There is also self-funding whereby a BT Openreach scheme allows communities to enter into direct contracts provided that they meet specific criteria.

 For certain businesses there is support in the form of the Gigabit Broadband Voucher Scheme. Small-to-medium sized business in Hampshire can apply for £3,000 towards the cost of upgrading their broadband to a ‘gigabit connection’. The full fibre solution is fast and reliable, providing superior speeds of up to 1,000Mbps.

 5G (fifth generation) is the next major digital development on the horizon with the UK set to roll-out the technology scheduled from 2020, although EE has

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reported a potential start in late 201938. However, like broadband the roll-out will take time.

 The technology has wider applications and is expected to be fundamental to the development and growth in the autonomous car market as such vehicles will need a constant and guaranteed connection.

 Hampshire based Ordnance Survey (OS) has been appointed by the Government to lead on the E-CAVE initiative, aimed at better understanding the infrastructure required to support a nationwide network of connected and autonomous vehicles (CAVs)39. The OS had previously worked on the Atlas project that studied and identified data critical to the efficient operation of autonomous vehicles. Other potential sectors benefiting from 5G are likely to include connected factories and digital health.

 Locally, through Basingstoke and Deane Borough Council and the University of Surrey’s 5G Innovation Centre, a £75 million research and development facility for 5G, opened a new 5G testbed was in 2017 at the Innovation Centre in Basing View. This will enable local businesses and entrepreneurs to get a head start on 5G implementation.

2.3 Business space

 The structure of the economy in Hampshire has undergone significant changes in recent decades. Economic activity has continued to shift away from a relatively large manufacturing base to a service economy and in particular a knowledge-based service economy.

 The continued pattern of globalisation suggests that there is limited scope to grow Hampshire’s manufacturing base, except the high-end (mostly R&D) part. Hampshire has comparative advantage in services and the economy is likely to specialise further in higher-value added (office-based) service activities.

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 Relatively strong demand for office-based employment suggests that the provision of office space is very important for the future economic growth across Hampshire and especially in its large cities. Smaller towns and cities may be seen as too risky to invest and may lead to a bias toward larger cities in the office development industry. However, the patterns of office developments suggest that this may not be the case in Hampshire.

 The available evidence suggests that there appears to be a mismatch in the supply and demand of office and retail space in the two coastal cities in Hampshire, and in Southampton in particular. This mismatch has probably constrained growth in the past and it may constrain future growth.

 As shown elsewhere in this document, high-skilled services firms such as in information & communication and professional services sectors are major contributors to both employment and output (GVA) in Hampshire. Areas with concentrations of ICT and professional services firms tend to have relatively high levels of employment and wages and high living standards as measured by GVA per head.

 Recent research by the Centre for Cities suggests that high-skilled service firms show a clear preference for city centres.40 This is because of the benefits that agglomeration offer, namely access to high-skilled workers and a network of highly-skilled businesses.

Figure 2.7: A typology of selected city centres

A. Strong and weak city centres B. Office stock quality and quantity

Source: VOA (2018) and Centre for Cities (2018)

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 As shown in Figure 2.7A most cities in the South East have strong city centres – they have a higher than average share of jobs in high-skilled services (referred here as businesses that export to both domestic and international markets) and a higher than average share of these jobs are high-skilled.

 Southampton and Aldershot/Farnborough are classified as ‘moderately strong’ cities, that is they have a lower than average share of jobs in high-skilled service firms but a higher than average share of these are highly skilled. The strength of the Aldershot/Farnborough is found away from its city centre and in the suburbs.

 Portsmouth on the other hand is classified as a ‘moderately weak’ city centre, that is it has a higher than average share of jobs in high-skilled service firms but a lower than average share of these are high-skilled.

 Research suggests that in strong city centres 62% of all commercial office space is occupied by offices and that 27% of offices in the most successful city centres are of high-quality (Figure 2.7B).

 Over a third of city centre office stock in both Southampton and Portsmouth is high quality and on this measure they compare favourable to most cities in the South East. However, the share of Southampton’s city centre accounted by offices is less than 25% and it is less than 30% in Portsmouth, which is well below the best performing cities in the South East (Figure 2.7B).

 The supply of suitable office space and the prime office space is the most important factor that has contributed to these disparities. As indicated in Figure 2.8, the density of prime office (B1a and B1b) completions between 2005/6 and 2017/18 was the highest in several large urban areas in Hampshire.41

 The highest density of prime B1a office completions is found in Rushmoor, Winchester and Southampton, while the highest but relatively small density of B1b developments (completions) is found in Test Valley and Eastleigh.

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 Density-based analysis on its own could be misleading because of the differences in the size and the composition of local authorities in Hampshire. The relative size and share of B1a/b prime office completions are therefore equally important.

Figure 2.8: Density of prime office completions across Hampshire, 2005 - 2018

B1a completions B1b completions

Source: Hampshire County Council (2018)

 Some of the most successful parts of Hampshire have seen relatively strong growth in prime office completions between 2005/6 and 2017/18. Almost 54,000 sqm of B1a office space in Winchester was completed over this time, 31% of all B-type commercial land completions in Winchester or 21% of the prime B1a Hampshire total.42 Rushmoor saw approximately 50,500sqm of B1a completions or 50.7% of all B-type commercial land completions in Rushmoor and about a fifth of the prime B1a Hampshire total.

 A number of larger towns and cities in Hampshire saw a much lower level of prime B1b completions compared to Winchester and Rushmoor districts. Some 16.7% of all B-type commercial land completions in Basingstoke were B1a and this represents some 13% of the B1a Hampshire total. B1a office completions accounted for about a quarter of all B-type office completions in Portsmouth or 10% of all B1a office completions in Hampshire.

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 Some 26% of all B-type commercial land completions in Southampton were B1a and 17% of the Hampshire total. On this measure Southampton may appear to be performing well but as shown in Box 3 Southampton saw a relatively sharp fall in office space between 2000/1 and 2015/16.

 The composition of office space in Southampton and other areas has changed due to a number of factors. The rise of the consumer driven economy and the retail sector is one of the factors, but changes in land use and redevelopments of office space to residential, student flats and retail has also contributed to the change in the composition of office space.

Figure 2.9: A typology of selected city centres – high-street services vacancy rates

Source: Centre for Cities (2018)

 Retail space prevails in weaker cities but evidence suggests that there is often not enough local demand to sustain the existing supply of retail space. As shown in Figure 2.9, high street services vacancy rates in Southampton and Portsmouth are between 14.7% and 17.3%, the highest in the South East.

 The internet is fast becoming the destination of choice for shoppers and this online trend places traditional bricks and mortar retailers under strain. All the evidence suggests that this process will intensify further in the future and this will have a greater impact on large cities that have a concentration of retail space. The challenge for all areas and large cities in particular will be to attract the high-skilled services firms, the type of firms that are expected to drive future growth. The availability of good quality office space in city centres is one of the pre-condition for making the area attractive to both domestic and foreign investors.

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Box 3. Case Study: Business space in Southampton

Large cities benefit from agglomeration economies - the benefits that come when firms and people locate near one another together in cities and industrial clusters. This is one of the main reasons why economic growth tends to be driven by large urban areas – large areas attract more productive (higher-value added) activities and highly skilled people.

People tend to commute for work into large urban areas but in the case of Southampton the proportion of out and in-commuters is the same (37%). While some 2,900 people commute daily for work from Winchester to Southampton almost 5,400 Southampton residents commute to work to Winchester district. As shown in Figure * (section *), business and job density in Southampton are below the national average and well below most local authority districts in Hampshire while economic growth has been on average well below the Hampshire average over the long term.

Southampton added about 43,600 sqm of prime (B1b) office space to its overall stock of office space between 2005/6 and 2017/18. The density of office developments appears to be high as shown in the pie charts below, but Southampton lagged a number of areas in Hampshire and Winchester and Rushmoor in particular.

Figure B 3: Business space by major use category

Southampton 2000/1 Southampton 2015/16

South East 2000/1 South East 2015/16

Source: VOA (2018)

The flow of the prime office space has increased in Southampton over time but the total office stock has decreased. Between 2000/1 and 2015/16 total office floorspace in Southampton was reduced by -20.8% against a growth of 20% in the County Area, 16.4% in Winchester, 12.8% in Portsmouth and 12% in Rushmoor. Basingstoke saw sluggish growth (+3.6%) while Farnham was the only district in Hampshire that saw a fall in office space over this period.

Total retail sector floorspace in Southampton increased by 0.5% compared to a fall in Portsmouth (-0.7%) and strong growth in the County Area and Basingstoke (16.5% and 43% respectively). As shown in Figure B* the composition of business space in Southampton has declined relative to the South East economy as a whole.

Page | 100 insert 2.4 Housing

 Housing supply and affordability of housing has long been a key concern both economically and socially. However, it is important to distinguish between affordable housing and housing affordability. Affordable housing often relates to subsidised housing while housing affordability refers to the wider housing market and what current and prospective house-buyers can realistically afford to purchase.

 A well functioning housing market is of paramount importance to the labour supply and the future wellbeing of the economy. Housing is a key factor needed to attracting and retaining skilled employees and is an influence on inward investment. This is true for any economy and especially an economy characterised with an ageing population and near full employment like Hampshire. Furthermore, the high cost associated with housing is an important cause of poverty that can occur across all tenures.

 There is currently no statutory definition of affordable housing, although for local planning authority developments they may be required to deliver a certain percentage of ‘affordable housing’ as defined in National Planning Policy Frameworks.43 However, a good general indicator of whether house prices are affordable is the relation to incomes, or more specifically where particular housing is considered affordable to certain groups such as low earners, first time buyers or key workers.

 One key indicator for assessing the relative affordability of housing for low earners and by proxy first time buyers is based on a ratio of lower quartile earnings to lower quartile house prices.44 A lower ratio indicates greater affordability in a local authority, or other housing market area, and a higher ratio infers on average that properties are less affordable to purchase.

 As shown in Figure 2.11, the lower quartile housing affordability ratio in Hampshire was 10 in 2017. This implies that people in the bottom quarter of the income distribution need to find ten times their annual income in order to

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buy an average house that falls within the 25% of the cheapest houses available in the County area.

 Housing affordability in the County area is slightly better than the South East average but house prices for County area residents that fall within this income distribution are about 27% less affordable than in England (affordability index of 7.3). Figure 2.10: Housing affordability ratios and net dwelling completions in Hampshire

11 8 A. affordability ratios B. net dw elling completions

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 Housing affordability in the County area and across the country has worsened over the past 15 years. In 2002, County area residents in the bottom quarter of the income distribution need to spend out seven times their annual income in order to buy an average house that falls within the 25% of the cheapest houses in the County area.

 Demand for housing in Hampshire is a function of its demographics, incomes as well as the financial costs and benefits in owning and investing in houses. As shown in Figure 2.10 the 2008/09 recession has had a little effect on housing affordability in Hampshire, the South East or England.

 Housing affordability within Hampshire is most acute in North Hampshire where ratios broadly average around 11.3, compared to 10.7 in Central Hampshire and 9.6 in South Hampshire. In South Hampshire, only Eastleigh (10.2) is above the Hampshire average, while Gosport (7.4) is the most affordable district and closely in line with the national average (7.3).

 The cities of Southampton (7.9) and Portsmouth (8.2) are reasonably affordable in comparison to most Hampshire districts and in terms of

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affordability only marginally below the national average. Basingstoke & Deane is similar to the Hampshire average (Figure 2.11).

Figure 2.11: Housing affordability in Hampshire relative to the South East and England, 2002 and 2017

Source: ONS (2017)

 Housing affordability across Hampshire has worsened over the past 15 years. (Figure 2.11). North Hampshire has on average become less affordable with all three districts seeing percentage point rises in the ratio of house prices to income ranging between 3.9 in Basingstoke & Deane to 5.7 in Hart.

 In Central Hampshire the four district changes range between +2.6 percentage points in Test Valley to +4.0 percentage points in East Hampshire. This compares across the four South Hampshire districts to +1.9 percentage points in Gosport to +3.2 percentage points in Havant +3.2. Portsmouth saw an increase in affordability between 2002 and 2017 of 2.8 percentage points, greater than 2.4 percentage points in Southampton.

 The NPPF places three overarching interdependent objectives for sustainable development: an economic objective (ensuring sufficient land of the right types is available to boost productivity and economic growth); a social objective (ensuring a sufficient number and range of homes can be provided to meet present and future generations); and an environmental objective (protecting and enhancing natural, built and historic environment).

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 One way to make housing more affordable is to expand supply, although increasing supply may not simply lead to increased affordability since as already stated, the demand for housing is a function of incomes, demographics, the cost of financing and the benefits associated with investing as well as in owning homes.

 Following the end of the last recession the financial costs, such as the cost of a mortgage have fallen to historic lows. Furthermore, in the era of historically low interest rates and relatively high returns from housing, investment in housing in the UK remains attractive relative to holding investment in other more risky types of investment.

 Hampshire County Council’s Land Supply Monitoring System collects data that feed into the sustainable development objectives. The measure most commonly used is ‘net additional dwellings’, or local authority estimates of the difference between the gains and losses during each financial year45.

 Over the period 2002-03 and 2016-17 Hampshire has seen over 88,500 net dwelling completions (Table 2.1). Of this, the County area accounted for over 67,700 (76.5% of the total). Net additional dwellings peaked in 2004-05 with over 7,600 net additions to the housing stock and hit a low of approximately 3,700 in 2012-13 as the housing market effectively flat-lined following on from the economic downturn. Since then, net additions have increased to over 6,500 in 2016-17. Data suggests that relatively robust increases observed between 2013 and 2015 have since plateaued as they near house building levels seen immediately before the economic downturn (Figure 2.10).

 Within the Hampshire 29.0% of net dwellings since 2002-03 occurred in Central Hampshire, 25.2% in North Hampshire, 22.4% in South Hampshire, 14.2% in Southampton and 9.3% in Portsmouth. The Southampton figure is the highest in Hampshire, while Gosport was the lowest with 4.3%. Availability of land in Portsmouth, Southampton and Gosport is a likely contributing factor.

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2.5 Inward investment and foreign owned businesses

 Foreign direct investment (FDI), or the capital investment by companies into foreign markets, is the second channel (or mode) of internationalisation that can boost the competitiveness and the overall performance of the Hampshire economy.

 A substantial body of empirical evidence shows that there is a strong positive relationship between FDI and economic performance. In other words foreign direct investment on average delivers a real and direct impact on economic performance to a recipient country.

 Foreign-owned firms tend to be more productive and they tend to pay higher wages in the UK, on average about 30% higher than domestic firms and about 12% when we compare workers with similar characteristics.46

 Domestic firms benefit from technological transfer and knowledge spillovers from FDI firms. Local firms have been found to increase higher productivity as a result of FDI in their region.47

 As shown in the previous section SME and large businesses in particular make a disproportionally large contribution to both output (GVA) and employment in the UK and Hampshire. Foreign firms in the UK are on average 87% larger than the average domestic firm in terms of the number of employees, although smaller than UK owned businesses. Furthermore, inward investment tends to increase demand for skilled labour while reducing demand for unskilled labour. Thus, FDI has been leading to a change in the structure of labour demand in the UK.48

 Overall global foreign direct investment stood at $1.52 trillion in 2017 according to the United Nations and although down on the previous year the expectation is for a bounce back in 2018 to a figure closer to $1.8 trillion.49

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 The UK is the number one destination for inward investment in Europe with the EU and the US companies being the main sources of FDI to the UK. The value of inward investment from the six main EU European FDI partners increased between 2007 and 2015 although this precedes the Referendum and Brexit.50 The largest share of inward FDI is found in green-field investment (where the company opts to build its own new facility) for both services and manufacturing but brown field investment (the building is already constructed, and so start-up costs may be greatly reduced) is more common among FDI investors from outside the EU and USA.

 According to some estimates foreign‐owned affiliates accounted for 14% of private sector employment in the UK in 2014.51 Although very much a broad estimate, applying the national FDI employment proportion to 2016 private sector employee data for Hampshire, would equate to approximately 100,000 FDI affiliated employees for Hampshire and 72,000 for the County area.

 London unsurprisingly dominates as the primary location for investment in the UK, with 35.7% of all FDI projects in 2017/18. Outside the Capital the South East region had the most investment projects, 294 projects in 2017-18. The South East share of all projects was 14.2% in 2017/18 compared to 11.4% in 2015/16.

 When compared to two years ago the South East has seen the largest increase in the number of projects, +41 compared to fewer in most regions – including London (-141). In terms of jobs the South East saw over 7,000 jobs created or safeguarded in 2017-18, fewer than in 2015/16 which is also the case for most regions. The evidence suggests that green-field inward investment have a net positive effect on employment but mainly for skilled labour. Foreign merger and acquisition are associated with a fall in overall employment at firm level.52

 Official data on FDI at local level is not available, but in lieu this a proxy indicator of foreign business activity in Hampshire can be taken using the number of foreign owned businesses operating or registered locally. This is a

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proxy estimate since data often include several separately registered divisions of a parent company and so numbers should be read as indicative rather than precise.

Table 2.1: Foreign owned companies in Hampshire by major trading block countries

Broad Area County Hampshire Portsmouth Southampton Group Area EU 27 448 377 25 46 USA 339 272 21 46 Asia 143 119 6 18 EFTA 115 105 2 8 Rest of 60 53 2 5 Americas BOT 52 42 3 7 Rest of 41 34 0 7 World Total 1,198 1,002 59 137

Source: Bureau Van Dijk (2018) Note: BOT (British Overseas Territory), EFTA (European Free Trade Association)

 Firm level data from private databases suggest there were about 1,200 foreign owned businesses in Hampshire in 2018. However, in the wider South East area both Berkshire (1,900) and Surrey (1,700) have more foreign owned businesses than Hampshire. This reflects closer proximity and access to London along the M4 and upper M3/M25 corridors, in particular for Reading. In contrast, Hampshire has far more foreign owned businesses than neighbouring Dorset (219), Wiltshire (192) and West Sussex (564).

 In terms of major trading blocks, the European Union member states (EU27) is the main place of origin for investment with over one in three foreign owned businesses (37%) coming from an EU member state (Figure 2.1). Of this proportion, over 70% come from five EU member states: Germany (18%), Ireland (15%), Luxembourg (15%), Netherlands (12%) and France (11%) – which ties in with the six main EU FDI partners identified by the Office for National Statistics (ONS).53

 With about 340 companies or 28% of the Hampshire total the US accounts for the largest share of foreign owned companies in Hampshire. After the EU and US the numbers drop off sharply, with Asia and European Free Trade

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Association (EFTA) accounting for about one in eight and 10% of all foreign firms in Hampshire.

Figure 2.12: Foreign owned companies in Hampshire by major trading block countries

Source: Bureau Van Dijk (2018) Note: BOT (British Overseas Territory), EFTA (European Free Trade Association)

 Japan with around 50 businesses is the largest Asian investor, and accounts for just over one third (36%) of all Asian owned companies in Hampshire. China (including Hong Kong) and the Indian sub-continent account for a further 24% and 20% of Asian businesses respectively.

 Switzerland accounts for almost all of the EFTA presence (some 100 Swiss owned businesses). For the Rest of Americas the majority of businesses are Canadian and Panamanian, the later most likely linked to special purpose entities54 (SPEs) and tax regime related. Likewise, British Overseas Territories (BOT) that includes inter alia Gibraltar and Bermuda most likely represents preferable tax regimes and SPEs that form part of corporate structures. This also applies in particular to some EU member states, notably Luxembourg.

 Some 84% of foreign firms in Hampshire are located in the County area. Therefore, the County area accounts for a larger share of foreign businesses than for all Hampshire businesses. The share of EU and US firms in the County area is similar to the Hampshire average, while Portsmouth has a higher share of both the EU and US firms and Southampton has a higher share of US firms and Asian firms than the Hampshire average (Figure 2.12).

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Figure 2.13: Distribution of Foreign Owned Companies in Hampshire – 2018

NH NH

NH

NH – North Hampshire CH CH – Central Hampshire CH SH – South Hampshire CH

CH SH

SH

SH SH

395 305 301 Foreign Owned 137 Companies 60

North Central South Southampton Portsmouth Hampshire Hampshire Hampshire Source: Bureau Van Dijk (2018) Note: BOT (British Overseas Territory), EFTA (European Free Trade Association)

 With reference to Figure 2.13, within Hampshire the distribution reflects the major employment centres with particular concentrations of foreign owned businesses in Basingstoke and Farnborough in North Hampshire, the sub- area with the most foreign owned businesses in Hampshire (close to 400 businesses). With approximately 300 businesses Central Hampshire and South Hampshire have similar numbers although concentrations differ. In Central Hampshire there are fewer major employment centres and so the distribution is inherently more disparate, although concentrations are evident in Andover, Alton and Winchester. As a more compact urban geography South Hampshire has concentrations along the M27 corridor including in Eastleigh and Fareham, and also in the two cities. Besides good infrastructure and labour supply, the distributions here would also suggest an agglomeration effect that arises from proximity to other firms.

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3. INNOVATION & SKILLS

Over the longer term, economic growth will be determined primarily by the factors that determine productivity, and secondly those which improve labour force participation. The drivers of productivity growth are factors that either improve the quality of outputs or the efficiency with which inputs (such as capital, labour and materials) are transformed into outputs.55

Innovation and skills are arguably the most important drivers of productivity and economic growth over the long run. Much of the rise in living standards is due to innovation - this has been the case since the emergence of Industrial Revolution in Britain and its spread throughout the world. Over the past fifty years a number of developed economies such as Germany, Japan or South Korea provide excellent case studies of the role that innovation and especially technological innovation can play with regard to economic growth. The importance of innovation has been reinforced both by globalisation and by rapid advances in new technologies, notably ICTs, which have enabled new forms of competition and opened new markets for the creation and delivery of innovative products and services.56

Hampshire does not have large amounts of natural capital nor does it have a large low-cost labour force that would give it competitive edge in the future. Hampshire will therefore have to compete in an increasingly globalised world and its ability to compete will increasingly depend on its ability to change and adapt to global challenges and harness innovation as a major driver of business competitiveness and growth. Improvements in the skill composition of the local labour force will play an important role in the innovation process and in boosting long-run competitiveness of Hampshire businesses.

3.1 Expenditure on Research & Development (R&D)

 Expenditure on research & development (R&D) is one of the most widely used measures of innovation input. R&D spending is often seen as a major factor behind technological change and long-run economic performance.57

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 Gross expenditure on research and development (GERD) in Hampshire & Isle of Wight was £1.24 million in 2015, the second lowest level on record since comparable records began in 2005 (Figure 3.1). In 2015 nominal expenditure on R&D in the Hampshire and the Isle of Wight decreased by 9.8%.

 In 2015 the economy of Hampshire was in nominal terms about 37% larger than in 2005 but the gross expenditure on R&D in the area was about 4% lower in 2015 than in 2005. R&D expenditure in the UK and South East was 45.9% and 43.5% respectively higher in 2015 than in 2010.

Figure 3.1: Gross domestic expenditure on R&D (GERD) in Hampshire*

£1,500 3.50 Gross expenditure on R&D - Hampshire* Hampshire* Gross expenditure on R&D - % of GDP 3.25 £1,450

r 3.00

e

c

£1,400 e

s

2.75 r

s

e P

i

c n

o

e

D o

n i

s

l

l

G i

£1,350 2.50 s

f

i

o

m

o

n £

% 2.25 £1,300 South East 2.00 £1,250 1.75 UK

£1,200 1.50 2005 2007 2009 2011 2013 2015 2005 2007 2009 2011 2013 2015

Source: Eurostat (2018)

 R&D intensity of an economy is what matters for innovation, competitiveness and growth. As shown in Figure 3.1, R&D intensity of Hampshire’s economy is above the UK average and similar to the South East average.

 Eurostat data suggests that some 2.2% of Hampshire’s Gross Domestic Product (GDP) was spent on R&D in 2015. The relative expenditure on R&D in Hampshire was marginally below the South East average (2.3%) but higher than the national average (1.7%).

 However, as shown in Figure 3.1 gross expenditure on R&D as a percentage of Hampshire’s economy has declined from 3.1% in 2005 to 2.2% in 2015. Hampshire is therefore a less R&D intensive economy today than back in 2005. Over this period expenditure on R&D as a proportion of GDP remained broadly stable in both the South East and the UK. As shown in Figure 3.1 a decade ago Hampshire was a far more R&D intensive economy than the

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South East economy but it has now fallen slightly below the South East average.

 Expenditure on R&D in Hampshire & the Isle of Wight compares favourably with Surrey, East & West Sussex (1.5%) but it is likely that the relative R&D expenditure in Surrey is significantly higher than in Sussex. R&D spending in Berkshire, Oxfordshire & Buckinghamshire was 3.6% of its GDP, well above Hampshire.

 Since 2005 R&D spending as a proportion of GDP in Surrey, East & West Sussex increased from 1.2% to 1.5%, and in Berkshire, Oxfordshire & Buckinghamshire it increased from 2.7% (below Hampshire) to 3.6%, well above Hampshire.

 Gross expenditure on R&D per head of population in Hampshire was almost double the UK average in 2005, but by 2015 it fell to 30% above the national average. Given the size of Hampshire’s economy a one percentage point reduction in gross expenditure on R&D equates to more than £500 million per annum.

Figure 3.2: Composition of R&D expenditure in Hampshire & Isle of Wight 2005 2015 Private Non- Private Non- Government Profit Government Profit 13.9% 0.0% 7.6% 0.4% Higher Education Higher 12.2% Education 12.2%

£1,291 £1,239 million million

Business 73.9% Business 79.8%

Source: Eurostat (2018)

 Gross expenditure on R&D is comprised of R&D expenditure by Hampshire businesses, higher education, government (including research councils) and private non-profit organizations. Figure 3.2 shows the share of each category in 2005 and 2015.

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 The business sector accounts for most spending on R&D in the Hampshire & Isle of Wight, about 80% of the total. In 2015, Hampshire businesses spent some £989 million on R&D and a similar amount in 2015 (£964 million or 3% more than in 2005). Business expenditure on R&D in the UK and the South East over this time increased by 57% and 44% respectively.

 EU Eurostat data suggests that R&D expenditure in the Hampshire & Isle of Wight performed by the government declined by nearly half (48%) from £182 million in 2005 to £94 million in 2015, while in the UK it fell by 8% but it increased by 6% in the South East.

 The higher education (HE) sector, which includes universities and higher education institutes, is the second largest component of gross expenditure on R&D. It accounted for 12% (£151 million) of total Hampshire & Isle of Wight R&D expenditure in 2015. Expenditure on R&D by the HE sector in 2015 was down 5% on 2005 but in the UK and the South East it was higher by 44% and 51% respectively than in 2005.

 As shown in Figure 3.2 the share of business R&D in total R&D in Hampshire has increased between 2005 and 2015 but this is primarily due to the fall in government spending on R&D.

 R&D expenditure by Hampshire businesses was 1.7% of its GDP in 2015, higher than in a number of neighbouring economies but below Berkshire, Buckinghamshire and Oxfordshire (Figure 3.3). The difference is mostly down to differences in industrial structure and differences in firm size (large firms have a higher propensity to spend on R&D).

 However, whereas Berkshire, Buckinghamshire & Oxfordshire and Surrey, East & West Sussex have seen growth in R&D expenditure by business as a percentage of GDP, in Hampshire it decreased from 2.3% of its GDP in 2005 to 1.7 in 2015.

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Figure 3.3: Composition of R&D expenditure as a percentage of GDP - 2015

Source: Eurostat (2018)

 R&D expenditure on R&D performed by government in Hampshire stood at 0.17% of its GDP compared to 0.42% in Berkshire, Buckinghamshire & Oxfordshire (Figure 3.3). Hampshire has seen a decrease in government R&D spending as a proportion of its GDP, from 0.44% of its GDP in 2005 to 0.17% in 2015.

 Empirical evidence from the International Monetary Fund (IMF) suggests that low levels of investment in R&D at micro level could severely constrain innovation activity and competitiveness of Hampshire businesses, and at macro level constrain economic growth and economic prosperity in the future.58

3.2 Patents

 Patent counts are another way to measure innovation activity. The idea of the patent system is to grant the original inventor a property right which would then encourage people and businesses to innovate and invent. However, patents are an imperfect measure of innovation because patents vary in importance and some might be low quality.

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 The total number of patent applications to the European Patent Office (EPO) in the South East was nearly 1,000 in 2012, with more than a fifth of all patent applications (22.2%) recorded in the United Kingdom. Patent applications from Hampshire reached 168, more than one in six patent registrations from the South East. The County area accounted for 137 patent applications or 81.5% of all Hampshire applications.

Figure 3.4: Patent applications in Hampshire

A. patent applications to EPO B. patents per million inhabitants 240 Hampshire 220

200 County Area 180 Hampshire 160 Southampton 140 Portsmouth 120 100 South East

80 1991 UK 2012 60 1991 1994 1997 2000 2003 2006 2009 2012 0 10 20 30 40 50 60 70 80 90 100 110 120 patents per million inhabitants Source: Eurostat (2016)

 The number of patents in Hampshire has steadily increased since 1991. In 2012 Hampshire had nearly 40% more patent applications than in 1991 (Figure 3.4). Growth in patents application in Hampshire was much faster than the UK average but slower than the South East average. Nevertheless, this trend of rising number of patents applications over time is observed across most developed economies.

 Hampshire had 95 patents per million inhabitants in 2012, larger than the UK (67 patents), but some 13% fewer than the South East (109 patents). At the local level Southampton had 114 patents per million inhabitants compared to 19 in Portsmouth (Figure 3.4). The presence of a research intensive Russell Group university in the University of Southampton is mostly likely a major factor that has contributed to this.

 In 2012 Hampshire had some 1.2 times more patents per head of population than in 1991, compared to 1.4 times more in the South East as a whole. The

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number of patents in Southampton doubled over this time. Portsmouth saw a fourfold increase in the number of patents per head of population albeit from a low base.

 Patent application data is volatile but the latest data suggests the number of patent application from Hampshire has been decreasing since about 2006/7. This decrease in the number of patents in Hampshire could be associated with falling expenditure on R&D as a proportion of its economy. Cross-country evidence suggests that countries that invest more in R&D tend to produce more high-quality patents.59

3.3 Knowledge Intensive Sectors

 Knowledge is increasingly seen as the key to making more effective use of the traditional factors of production such as labour and physical capital. The strength of Hampshire’s knowledge industries and its capacity to diffuse knowledge across the economy as a whole and not just a handful of sectors is the key to boosting productivity growth in Hampshire and across the country.

 The Information & communication technologies sector (ICT) is one such knowledge intensive sector in Hampshire. The ICT sector continues to exert increasing competitive pressures by shortening the life cycles of new products, making it more imperative for firms to operate at the technological frontier.60

 However, knowledge is not restricted to ICT since knowledge intensive activities span across both services and production activities.61 Large parts of professional, scientific & technical and finance & insurance activities form part of the broad knowledge intensive sector in Hampshire

 Research by Centre for Cities suggests that at a local level there is a strong correlation between concentrations of knowledge intensive activity with

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access to skilled workers, knowledge agglomeration and spill-over, which in turn affects firm location.62

Figure 3.5: Businesses and employees in knowledge Intensive sectors

24,700 [29%] 163,000 [20%]

Enterprises Employees

Source: Hampshire County Council (2018) derived from ONS data

 Hampshire has close to 25,000 businesses in knowledge intensive businesses employing 163,000 workers (Figure 3.5). About 29% of all businesses in Hampshire are knowledge intensive and 1 in 5 of all employees work in knowledge intensive firms. The County area with 21,200 businesses makes up 30% of all businesses, while 122,000 workers in knowledge intensive employment also account for 1 in 5 of all employees.

 Knowledge intensive sub-sector business shares in Hampshire and the County area are broadly consistent with the South East and national averages, although nationally there is proportionately fewer ICT knowledge intensive businesses than in Hampshire. The employee distribution is more mixed, with Hampshire exhibiting a closer profile to the South East, while the County area has a greater concentration in ICT and financial services.

 Businesses in knowledge intensive services are found across Hampshire but unsurprisingly they tend to be located in or close to major employment centres and along the M27 corridor in South Hampshire and in Basingstoke and Farnborough/Fleet in North Hampshire (Figure 3.6).

 As there are fewer major employment centres in the more rural Central Hampshire the area sees relatively little density of such firms. Nonetheless, as

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shown in the high-growth section rural areas in Hampshire have a relatively high share of high-growth businesses.

Figure 3.6: Businesses and employees in knowledge intensive sectors across Hampshire

Source: Hampshire County Council (2018) derived from ONS data

Figure 3.7: Density of businesses in knowledge intensive services – 2018

ICT

Central heat map: the darker the colour the greater the business density. Takes into account multiple businesses at the same postcode Surrounding sub-sector maps: each dot represents a business postcode (additional businesses at same postcode hidden behind a single dot).

Professional, scientific & technical Financial & Insurance

Source: Hampshire County Council (2008) based on Bureau van Dijk (2018) data

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 The absolute concentration of knowledge intensive businesses in the two cities is high (Figure 3.7) but the relative concentration is below the UK average (Figure 3.6). Local authority districts in North Hampshire and Central Hampshire tend to have concentrations of both businesses and employment in knowledge intensive sectors above the South East average.

 Overall, Hampshire and the County area have both seen slower growth in businesses in knowledge intensive sectors than both the South East and the UK averages since 2010.

 Business growth in North Hampshire was strong (6.2% p.a.), notably in the ICT and professional, scientific and technical sectors sector but North Hampshire saw slower or falling growth in employment and this has constrained the growth in its economy.

Figure 3.8: Growth in businesses and employees in selected Knowledge Intensive Sub-sectors

Business Growth 2010-2017 Professional, Financial & Insurance ICT scientific & technical

Decline > -5 businesses -5 to +5 businesses Growth > +5 businesses

Employee Growth 2009-2016 Professional, Financial & Insurance ICT scientific & technical

Decline > -50 employees -50 to +50 employees Growth > +50 employees

Source: ONS (2018)

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 Central and South Hampshire perform less well on businesses growth but are stronger on employee growth, which in turn has helped to boost the growth rates over the past couple of years.

 Across the districts (Figure 3.8), business growth was strong in ICT and professional, scientific & technical with growth in the broad financial & insurance sector more mixed. Employee growth is generally far more mixed but stronger in ICT and in professional, scientific & technical.

 The ICT sector saw business growth in the knowledge intensive sector across all areas in Hampshire. However, since 2010 Southampton saw the sharpest growth (8.7% p.a. and 165 business), albeit from a low base. Rushmoor is much smaller than Southampton but Rushmoor observed a growth rate of 8.6% p.a., adding 155 businesses to its economy.

 Basingstoke also saw relatively strong growth compared to the rest of Hampshire, but Southampton and Rushmoor were the only local authorities to outperform the UK average. All three outperformed the South East average. The slowest growth was in East Hampshire, with 70 additional businesses or 2.5% p.a.

 Employment growth is again mostly positive, with strongest growth since 2009 is in Gosport, Southampton, Fareham and Winchester. Employment in Southampton increased by 2,000 or by over 200%, albeit from a low base. About a half of all Hampshire districts outperformed both the regional and national averages

 Basingstoke and Deane and Portsmouth both saw no growth in employment in knowledge intensive sectors while Hart saw a decline of around 1,000. Flat growth or falling employment in Basingstoke and Hart has contributed to a slowdown in economic growth in the area since the recession. Business specific data have been pointing for some time to several large businesses relocating from North Hampshire and West Surrey to Reading.

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 The Professional, scientific and technical sector saw business growth in the knowledge intensive sector across all areas, but was strongest since 2010 in Test Valley, Portsmouth (albeit from a small base), Basingstoke & Deane and Winchester, while the weakest growth was in the New Forest. Test Valley was the only district to outperform the national average while all four outperformed the regional average.

 Employment growth in professional, scientific and technical sector is mostly positive, with strongest growth since 2009 in Test Valley and Portsmouth (although Test Valley added three times as many employees in this sector as Portsmouth), Employment growth in Winchester and Basingstoke & Deane was relatively strong but below the regional and national average. Fareham and Rushmoor both saw no growth while only Southampton saw a decline in employment in the professional, scientific and technical sector since 2010.

 Winchester saw the strongest growth in financial & insurance, followed by Basingstoke & Deane but growth in Winchester was twice as fast as in Basingstoke & Deane. Business growth in Basingstoke & Deane lagged the national average and it also lagged East Hampshire and Eastleigh. Portsmouth and Southampton saw a fall in their business stock in this sector since 2010.

 Continuing restructuring of the financial sector since the 2008/9 recession implies that employment growth is more mixed with fewer growth areas. East Hampshire and Rushmoor saw growth in employment. New Forest saw no growth and the remaining districts saw a decline in employment to varying degrees. Hart and Basingstoke & Deane saw the fastest decreases in employment in this sector in Hampshire.

 Sectors evolve over time due to scientific and technological progress and official statistics are generally slow to keep pace. New sectors that emerge as a result of the scientific and technological progress cut across many different industries which imply that official statistics may not accurately reflect economic activity in certain sectors.

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 Science & Technology is one of those sectors that is hard to define using the Standard Classification (SIC) system of defining economic activity. Recent research by the Office for National Statistics (ONS) and Greater London Authority (GLA) has mapped the Science and Technology sector using the standard SIC-based approach.63 However, it is important to note that there are new industries that are emerging within the sector that are not currently captured by the SIC codes such as automation or cyber-security.

3.4 Science & Technology Sectors

 It is difficult to overstate the importance of science & technology (technological progress) for living standards. For instance, Argentina and Austria, have roughly the same level of per capita inputs (labour and capital), but there is a vast gulf between them in terms of economic prosperity (living standards), with per capita income in Austria more than double Argentina. Empirical evidence suggests that large disparities in living standards (per capita incomes) are due to the ways that economies use their resources and not just the quantities of labour and capital.64

 The Science and Technology classification is a single overarching broad definition which comprises five sub-sector categories: digital technologies, life sciences & healthcare, publishing & broadcasting, other scientific/technological manufacture, and other scientific/technological services.

 There are just over 17,000 Hampshire businesses in the Science and Technology sector employing 191,000 workers, of which over 14,400 businesses and 124,000 employees are in the County area (Table 3.1).

 The sector represents 1 in 5 of all Hampshire businesses and close to 1 in 4 of all Hampshire employees. Both areas have seen growth in business and employee numbers since 2009/2010, although average annual growth rates have been higher for businesses than for employees.

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 However, average annual growth rates for both businesses and employees in Hampshire and the County area have been slower than the regional and national averages, but there are difference at the sub-sector level in share, concentrations and performance.

 One in four businesses and employees in North Hampshire are in the broad science & technology sector, much higher than either Central or South Hampshire. In contrast, Portsmouth and Southampton both have a relatively low share of science & technology businesses, but a far higher share for employees. This would suggest the two cities have fewer businesses in the sector but that these are generally larger employers, and vice versa for the three Hampshire sub-areas.

Table 3.1: Science & Technology Businesses and Employees in Hampshire

Average annual % of all Number Change 2010-2017 growth rate (p.a.) businesses Businesses 2017 2010-2017 Hampshire 17,060 20 115 3.9 County Area 14,420 21 2,155 3.8 North Hampshire 4,540 25 1,130 4.2 Central Hampshire 6,090 19 1,275 3.4 South Hampshire 3,785 19 895 3.9 Portsmouth 1,175 16 280 4.0 Southampton 1,465 17 390 4.5 South East 96,015 21 620 4.4 United Kingdom 547,865 18 10,335 4.9 Average annual Number % of all growth rate (p.a.) Employees 2016 employees Change 2009-2016 2009-2016 Hampshire 191,000 23 12,000 0.9 County Area 124,000 21 7,000 0.8 North Hampshire 41,000 24 0 0.0 Central Hampshire 49,000 20 4,000 1.2 South Hampshire 34,000 19 3,000 1.3 Portsmouth 32,000 30 2,000 0.9 Southampton 35,000 30 3,000 1.3 South East 933,000 22 100,000 1.6 Great Britain 6,050,000 21 763,000 1.9

Source: ONS (2018)

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 Of the five sub-areas in Hampshire, Southampton has had faster business and employer growth but is starting from a smaller base. All three of the Hampshire sub-areas each have more science & technology businesses than the two cities combined, while employee differences are less stark.

 The distribution of industry share by sub-sector is markedly different with digital technology dominant on both business and employment in North Hampshire and relatively small in Southampton (Figures 3.9A & 3,9B).

Figure 3.9A: Share of all Science & Technology Businesses by sub-sector - 2017

Hampshire 38 15 23 8 17 Digital Technologies County Area 39 13 23 8 17

North Hampshire 51 9 19 5 16 Life Sciences & Healthcare Central Hampshire 34 15 25 7 19

South Hampshire 33 15 25 12 15 Other scientific & technical services Portsmouth 33 20 23 10 15 Other scientific technical Southampton 28 25 21 10 16 manufacture South East 40 14 21 5 20 Publishing & United Kingdom 33 17 23 7 20 Broadcasting

0% 25% 50% 75% 100%

Figure 3.9B: Share of all Science & Technology employees by sub-sector - 2017

Hampshire 21 33 20 14 12 Digital Technologies County Area 27 29 19 15 11

North Hampshire 34 24 17 10 12 Life Sciences & Central Hampshire 20 33 20 16 10 Healthcare

South Hampshire 24 29 15 21 10 Other scientific & technical services Portsmouth 19 38 19 19 6 Other scientific technical Southampton 6 43 29 4 17 manufacture South East 22 33 22 10 12 Publishing & Broadcasting Great Britain 14 40 21 12 12

0% 25% 50% 75% 100%

Source: ONS (2018)

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 Healthcare and life sciences is higher in Portsmouth and Southampton, which reflects a strong NHS employee presence (Figure 3.9B). The two smaller sub- sectors, other scientific and technical sub-sectors covering services and manufacture are diverse, with manufacture important in South Hampshire and Portsmouth, particularly on employment, while services is weaker in North Hampshire for business share, but stronger in the south.

 Publishing and broadcasting is very much a London centric sector, but Southampton has above the regional and national average of employment, perhaps reflecting the presence of BBC South and BBC Radio Solent studios.

 With reference to Figure 3.10, compared to the national average North Hampshire has over two times the local concentration in businesses and employment in the digital technology sub-sector. The same is true for other scientific and technical manufacture in South Hampshire (businesses) and Portsmouth (employees).

Figure 3.10: Relative concentrations of Science and Technology in Hampshire and its subareas (relative to the national average)

Business Concentration Employee Concentration

1.14 1.13 STC total 1.69 STC total Hampshire Hampshire

1.18 1.86 County Area Digital Technologies County Area Digital Technologies 1.41 1.17 2.17 2.80 North Hampshire North Hampshire Life Sciences & Life Sciences & Healthcare 1.10 Healthcare Central Hampshire Central Hampshire Other scientific & Other scientific 1.10 technical services & technical South Hampshire South Hampshire services 2.09 Other scientific 1.46 Other scientific technical manufacture technical Portsmouth Portsmouth 2.19 manufacture 1.47 Publishing & Publishing & Southampton Broadcasting Southampton Broadcasting

1.00 1.50 2.00 2.50 3.00 1.00 1.50 2.00 2.50 3.00

Source: ONS (2018)

 At the district level percentage shares of businesses and employees will reflect business size, with generally larger businesses in Portsmouth and

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Southampton and smaller business in the more rural Hampshire districts. As such, a district may be above the South East or national average on businesses but lower on employees, and vice versa in the following maps in Figures 3.11-3.15.

 Overall, science and technology is concentrated more in North Hampshire on businesses and in employment, whereas Portsmouth and Southampton are only above the regional average on employees, suggesting fewer but larger businesses.

Figure 3.11: Relative concentrations of Science and Technology across Hampshire

Science & Technology Sector Businesses Science & Technology Sector Employees

Figure 3.12: Relative concentrations of Digital Technology sub-sector across Hampshire

Digital Technology Sector Businesses Digital Technology Sector Employees

Source: ONS (2018)

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 Digital technology (Figure 3.12) is concentrated in North Hampshire on businesses and in employment, whereas Portsmouth and Winchester are only above the regional average on employees, suggesting fewer but larger businesses e.g. major IBM sites in Portsmouth and Hursley (Winchester).

Figure 3.13 Relative concentrations of Health & Lifesciences sub-sector across Hampshire

Healthcare & Life Science Sector Businesses Healthcare & Life Science Sector Employees

Source: ONS (2018)

 Healthcare and life sciences (Figure 3.13) is concentrated in Portsmouth and Southampton on businesses and in employment, and in employment in Winchester and Basingstoke suggesting the influence of NHS facilities.

 Other scientific and technical services (Figure 3.14) are concentrated in East Hampshire and in Hart on businesses, and in most areas on employment (except Hart, which suggests numerous small businesses).

 Other scientific and technical manufacture (Figure 3.15) is concentrated across most of Hampshire on businesses (albeit from a low base), reflecting the presence of small advance engineering firms, but less so on employment. Portsmouth is the exception with above regional and national averages on both businesses and employees.

 Publishing and Broadcasting is more concentrated in East Hampshire and Hart on businesses, and across North Hampshire on employment.

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Southampton and Portsmouth are weaker on businesses but stronger on employment, perhaps reflecting a few larger businesses such as the BBC.

Figure 3.14: Relative concentrations of other scientific & Technical Services sub-sector across Hampshire

Other Scientific & Tech. Services Sector Businesses Other Scientific & Tech. Services Sector Employees

Source: ONS (2018)

Figure 3.15: Relative concentrations of other scientific & Technical Manufacture sub-sector across Hampshire

Other Scientific & Tech. Manufacture Sector Businesses Other Scientific & Tech. Manufacture Sector Employees

Source: ONS (2018)

 As shown in Section 1.9 (internationalisation) the UK economy appears to have specialised in several important industrial sectors and the economy has

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revealed comparative advantage in these sectors. Most of these sectors also tend to be concentrated in the Hampshire economy.

 An alternative approach to revealed comparative advantage is to look at which technologies the UK appears to specialise in relative to its competitors, known as Revealed Technological Advantage.

 The analysis is based on patents data and suggests that the economy is relatively specialised in organic chemistry, biotechnology/pharmaceuticals, civil engineering and medical technology but the economy appears to be less specialised in optics, electronics and nano-technology and information technology.65

 The results for information technology and electronics are perhaps surprising but they perhaps reflect the UK’s historically weak record in commercialising its R&D research.

 Nevertheless, the Science and Technology sector is a key element of the Hampshire economy, notably in the digital technology sub-sector and this sector will become more important in the future.

3.5 Skills

 From the industrial revolution to the knowledge based digital economy of the 21st Century, accumulation of knowledge and technological progress has played a central part in the process of economic development.

 Economic development is a matter of growth and growth depends on the productivity enhancing skills of the population.66 Therefore, in this new, knowledge-based economy, human capital (knowledge and skills), rather than natural resources is the main driver of competitiveness and productivity growth.

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 The skill level of the labour force is a key determinant of productivity for several reasons. Skills may have a direct effect on productivity because skilled workers will generally be more productive in carrying out a particular task than less-skilled workers. Furthermore, the availability of skilled workers may also indirectly affect productivity by increasing the incentives of firms to invest in new technologies that require a skilled workforce.67

Figure 3.16: Skills distribution and economic prosperity in Hampshire

A. % of economically active population with different levels of qualification B. High-level skills and economic prosperity 31 Hampshire

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Proportion at level 4+ Level 3+ Level 2+ Below NVQ2 Economically active population (% with Level 4+), 2017

Source: ONS (2018)

 Figure 3.16A shows the share of economically active adults with different levels of qualifications by economic sub-area in Hampshire. The graph indicates that a significant proportion of economically active population in Hampshire, about 40%, have relatively low skills (NVQ2 and below).

 Those economically more prosperous areas within Hampshire such as North Hampshire and Central Hampshire tend to have a higher proportion of their economically active population with high-level (NVQ4+) qualifications (Figure 3.16B).

 Hampshire is often viewed as highly skilled economy but at the top of the skills distribution Hampshire appears to have a skills deficit with both the South East and the UK economies. The proportion of economically active population with high-level skills (NVQ4+) in both Hampshire and the County area is below both the South East and the UK averages. Central Hampshire is the only sub-region in Hampshire with a higher proportion than the South East and the UK averages.

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 Knowledge-based businesses are reliant on high-skilled workers, which imply that places with greater concentrations of highly-skilled (qualified) individuals are more likely to attract and retain knowledge focused businesses.

 The rise of the knowledge-based economy that relies on innovation and technological progress implies that future demand for skills will be somewhat different from what we had in the past.

Skills evidence base will be covered in greater detail in the forthcoming Commission of Inquiry Vision for Hampshire 2050 Theme on Work, Skills and Lifestyle.

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Further information:

Produced by the Economic & Business Intelligence Service (EBIS), Economy, Transport & Environment Department, Hampshire County Council, The Castle, Winchester, Hants SO23 8UD

For further information on this report contact Economic & Business Intelligence Service (EBIS) at:

Email: [email protected] Telephone: 01962 847 520

Disclaimer: The information and views set out in this report are those of the authors and do not necessarily reflect the opinion of Hampshire County Council. The Council nor any person acting on their behalf may not be held responsible for the use of the information contained therein. © Economic & Business Intelligence Service (EBIS), Hampshire County Council.

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Endnotes

1 Hampshire refers to Hampshire Economic Area, which consists of the Hampshire County Council Area and the two cities, Portsmouth and Southampton. The County area refers to the Hampshire County Council Area 2 Gross Value Added (GVA) is used to measure output at regional and sub-regional in the UK. GVA represents the value of all goods and services produced in an area or industry/sector in a given year. The sub-national GVA estimates measured by the income approach are workplace-based, which implies that GVA is allocated to the area in which the economic activity takes place 3 EBIS (2018) Economic growth in Enterprise m3 - the main factors behind the decline in nominal growth in North Hampshire in 2016, EBIS Policy & Research Note 24 , Economic & Business Intelligence Service (EBIS), Hampshire County Council 4 Oguz, S. and Knight, J. (2011) Regional Economic Indicators: with a focus on sub-regional Gross Value Added using shift-share analysis, Economic & Labour Market Review, November 2011. 5 Sectoral decomposition is a ‘snapshot’ between two particular time periods and as such it can be sensitive to the time period chosen. For further information see Economy & Business Snapshot (2014) The focus on sub-regional growth and competitiveness – Part 2, Economic & Business Intelligence Service (EBIS), July 2014, Hampshire County Council 6 EBIS estimate based on the latest productivity and workforce jobs data from ONS. 7 Huggins, R. and Thompson, P. (2016) UK Competitiveness Index 2016, Cardiff University and Nottingham Business School, available at: https://orca.cf.ac.uk/104593/1/R%20Huggins%202018%20UK%20Competitiveness%20Index%20rep ort.pdf 8 Ibid 9 Ibid 10 Perkovic, I. (2010) Economic growth and technological innovation, in The Future of the South East Debate (2010) South East England Partnership Board Think Piece, March 2010. 11 Micro-businesses have 0-9 employees, SME businesses have between 10 and 249 employees and large businesses have more than 249 employees. 12 The narrowly defined financial & business sector is based on a number of higher-value added activities from the broad professional & business services and finance & insurance activities. GVA contribution is a proxy estimate based on national estimates from ABS. 13 EBIS (2018), The Farnborough & the Southern Aerospace & Defence Cluster Study: Stage II – Firm-Level (Micro) Report, Economic & Business Intelligence Service, Hampshire County Council. 14 https://www.hants.gov.uk/business/tourism 15 Swinney, P. and Breach, A. (2017) The role of place in the UK’s productivity problem, Centre for Cities, November 2017. Available at: http://www.centreforcities.org/publication/role-place-uks- productivity-puzzle/ 16 OECD, 2010, High-Growth Enterprises: What Governments Can Do to Make a Difference, Paris: OECD 17 Nesta (2009) The vital 6 per cent: How high-growth innovative businesses generate prosperity and jobs, October 2009, available at: https://media.nesta.org.uk/documents/vital-six-per-cent.pdf 18 BIS, (2010), Economic Growth, BIS Economics Paper No. 9, Department for Business, Innovation and Skills, London 19 High-growth definition is based on the OECD definition of high growth businesses, see OECD, 2007, Eurostat-OECD Manual on Business Demography Statistics, Paris: OECD 20 EBIS (2018) Economic growth in Enterprise m3 - the main factors behind the decline in nominal growth in North Hampshire in 2016, EBIS Policy & Research Note 24 , Economic & Business Intelligence Service (EBIS), Hampshire County Council 21 BIS, (2010), Economic Growth, BIS Economics Paper No. 9, Department for Business, Innovation and Skills, London 22 ONS (2018) International comparisons of UK productivity (ICP), final estimates: 2016, UK Office for National Statistics (ONS) Statistical Bulletin, available at https://www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures/bulletins/inter nationalcomparisonsofproductivityfinalestimates/2016 23 Bell, A. and van der Scheer, B. (2013) Firm Internalisation, Ministry of Business, Innovation and Employment Occasional Paper 13/03, November 2013

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24 The Rotterdam effect (sometimes Rotterdam-Antwerp) is the theory that trade in goods with the Netherlands is artificially inflated by those goods dispatched from or arriving in Rotterdam despite the ultimate destination or country of origin being located elsewhere. Some commentators feel that the Rotterdam effect distorts the UK’s trade relationship with EU and non-EU countries. For example, oil exported from Saudi Arabia to Rotterdam and re-exported to the UK (possibly without processing) may be counted as an EU import rather than a non-EU import. Conversely, a product exported by the UK to Rotterdam and subsequently transited to a non-EU country may be counted as an export to the EU rather than the rest of the world. 25 Regional exports data from HMRC and ONS was apportioned to its sub-regions using sub-regional employee jobs as weights. Sub-regional export estimates were constrained to the South East total for both goods and services. 26 This is a proxy estimate and it needs to be treated with a degree of caution. These estimates assume that export propensity per jobs is the same between areas which may not be the case. 27 Oxford Economics (2017) Understanding County Economies: Analysis to Inform the Industrial Strategy and the Devolution Debate, Oxford Economics, July 2017 28 BIS (2012) Industrial Strategy: UK Sector Analysis, BIS Economics Paper 18, September 2012. 29 Revealed comparative advantage indicates the relative specialisation of countries in particular sectors in global markets (see BIS (2012)). 30 Export intensive sectors can be loosely categorised into three broad sub-groups: manufacturing, production and services. Detailed Standard Industrial Classification (SIC) codes for each sub-group and sector is availably on request. 31 HM Treasury (2016) The long-term economic impact of EU membership and the alternatives, London, HMSO. 32 Economists for Brexit (2016) The economy after Brexit, available at: https://www.economistsforfreetrade.com/wp- content/uploads/2017/08/Economists_for_Brexit_The_Economy_after_Brexit.pdf 33 Sampson, T. Dhingra, S. Ottaviano, G. and Van Reenen, J. (2016) Economists for Brexit: A Critique, Centre for Economic Performance (CEP), LSE. 34 European foundation for the improvement of living and working conditions (2006) Restructuring and employment in the EU: Concepts, measurements and evidence. 35 Frey, C. and Osborne, M. (2013) The Future of Employment: How Susceptible are Jobs to Computerisation, University of Oxford. Available at https://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf 36 OECD (2006) Productivity Impacts of Offshoring and Outsourcing: A Review, STI Working Paper 2006/1, Organisation for Economic Cooperation and Development (OECD), Paris. 37 Chakravorti, B. Bhalla, A. Shanka Chaturvedi, R. (2017) 60 Countries’ Digital Competitiveness, Indexed, Harvard Business Review, July 2017. 38 https://5g.co.uk/news/5g-is-18-months-away/4288/ 39 Ordnance Survey 5G projects https://www.ordnancesurvey.co.uk/business-and- government/smart/5g-connected-autonomous-vehicles.html 40 Breach, A. McDonald, R. (2018) The role of commercial space in Local Industrial Strategies, Centre for Cities, June 2018. 41 B1(a) offices; B1(b) research & development of product and processes. Please note: some office type developments may fall under mix use B1-8 use class. 42 54,000 sqm of B1a excludes some potential B1a developments that fall under mixed use (B1-8 use class). 43 MHCLG (2018), National Planning Policy Framework Draft text for consultation, Ministry of Housing, Communities and Local Government, London, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/68 5289/Draft_revised_National_Planning_Policy_Framework.pdf 44 The lower quartile earnings relate to full-time employees, derived from Annual Survey of Hours and Earnings (ASHE). House price data are taken from ONS House Price Statistics for Small Areas for the year ending September. 45 DCLG (2017), Housing supply; net additional dwellings, England: 2016-17, page 2. 46 UK Trade & Investment (2011) International Trade and Investment - the Economic Rationale for Government Support. London, BIS Economics Paper No. 13, May 2011. 47 Blomström, M (2006), Study on FDI and regional development final report, Copenhagen Economics, Copenhagen, available at http://ec.europa.eu/regional_policy/sources/docgener/studies/pdf/fdi2006.pdf

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48 UK Trade & Investment (2011) 49 UNCTAD, (2018), Investment Trends Monitor, United Nations, New York 50 Hamroush, S (2017), A review of UK foreign direct investment statistics: winter 2017, Office for National Statistics, London, available at: https://www.ons.gov.uk/releases/areviewofukforeigndirectinvestmentstatisticswinter2017 51 Dhingra, S et al (2018), UK trade and FDI: A post‐Brexit perspective, Papers in Regional Science (Pap Reg Sci. 2018;97:9–24), John Wiley & Sons, New Jersey, https://onlinelibrary.wiley.com/doi/abs/10.1111/pirs.12345 52 UK Trade & Investment (2011) 53 Hamroush (2017) 54 An SPE is a legal entity created to meet defined, specific or temporary objectives and typically used by companies to isolate the firm from financial risk. Commonly created and registered in tax havens 55 BIS and DFID (2011) Sources of Economic Growth, Trade and Investment Analytical papers, Topic 16 of 18, Department for Business, Innovation and Skills (BIS) and Department for International Development (DFID), available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/32 468/11-723-sources-of-economic-growth.pdf 56 OECD (2007) Innovation and Growth: Rationale for an Innovation Strategy, Organisation for Economic Cooperation and Development (OECD), Paris. 57 HMT (2003) Productivity in the UK: 4 – The Local Dimension, UK Treasury, London. 58 Ulku, H. (2004) Innovation and Economic Growth: An Empirical Analysis, IMF Working Paper WP/04/185, International Monetary Fund (IMF), Washington DC. 59 Shambaugh, J. Nunn, R. Portman, B. (2017) Eleven Facts about Innovation and Patents, The Hamilton Project, The Brookings Institution, Washington DC. Available at: https://www.brookings.edu/wp- content/uploads/2017/12/thp_20171213_eleven_facts_innovation_patents.pdf 60 The Work Foundation (2010) The 21st Century and the Knowledge Economy – the Age of Regions. 61 A list of SIC codes used to define the knowledge intensive sectors is available on request 62 Swinney, P & Thomas, E (2015), A century of cities Urban economic change since 1911, Centre for Cities, London, available at http://www.centreforcities.org/wp-content/uploads/2015/03/15-03-04-A- Century-of-Cities.pdf 63 Harris, J. P. (2015) Identifying Science & Technology Businesses in Official Statistics and Douglass, G. and Hoffman, J. (2015) The science and technology category in London, GLA Economics Working Paper 64. 64 Shambaugh, J. Nunn, R. Portman, B. (2017) Eleven Facts about Innovation and Patents, The Hamilton Project, The Brookings Institution, Washington DC. Available at: https://www.brookings.edu/wp- content/uploads/2017/12/thp_20171213_eleven_facts_innovation_patents.pdf 65 BIS (2012) Industrial Strategy: UK Sector Analysis, BIS Economics Paper 18, September 2012 66 Hanushek, E. A. (2017) For long-term economic development, only skills matter, IZA World of Labour, March 2017 67 Abramovsky, L. Bond, S. Harrison, R. and Simpson, H. (2005) Productivity Policy, Institute for Fiscal Studies (IFS).

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BLANK (NOTES) PAGE

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