The tech sector offers the greatest economies of scale, scope and high payoffs to global champions; the UK has a burgeoning and promising tech sector. In league tables on venture capital spending in fintech, virtual reality, autonomous driving, wearables, education technology, big data, and AI and machine learning, the UK is ranked among the top five in the world. In fact, besides the US and China, the UK is the only other country that managed to come in the top five of these league tables, outperforming even Japan, despite the fact that the UK’s economy is by far the smallest.
- The UK has the human capital and the institutions that will continue to nurture a significant stock of such capital. Its universities and research labs rank among the highest in the world, and it has the highest research productivity in the world (the ratio between R&D spending and output resulting from R&D). Brexit won’t change this.
- The UK is the third largest recipient of venture capital investment in the tech sector, behind only the US and China. In AI and machine learning, the UK even has larger nominal venture capital commitments than China. Brexit most probably won’t change this.
- The UK commands tremendous and difficult-to-emulate soft power – a strength that will prove to be invaluable after Brexit and in a changing world, in our view. Brexit won’t change this.
- After Brexit, the UK government will likely deploy significantly more financial and political resources to the development of the tech sector, to build on an already impressive achievement that is perhaps not too widely recognised. While it has been difficult for investors and UK politicians to think about the long-term development strategies of the UK, it is important for them to keep in mind the immense potential of the UK to thrive either inside or outside the EU. The UK’s strength in the tech sector is just one of several reminders of the UK’s potential.
The bottom line
We think the fixation on the next crack in the pavement for Brexit is so intense that we collectively may have missed the ultimate destination of the UK economy in the long run. Assessing the UK and the GBP properly requires, in our view, flipping between using ‘low beam’ and ‘high beam’, i.e., being aware of the short-term risks but also cognizant of the long-term potential of the UK economy. In our note, we focussed on one particular sector that has the highest economies of scale and scope and the highest payoff to becoming a global champion. The UK, by most measures, already ranks among the top five in the world in the tech sector. Brexit will likely not change the UK’s path in tech much. If anything, we believe it might better focus the UK’s industrial policy in the sectors they are already good at, following the strategy they employed in achieving the stunning results at the 2012 and 2016 Summer Olympics. Sterling assets, including the currency itself, are grossly under-valued, in our view. They will likely not stay undervalued forever.
The above article is an extract from our research paper “A Burgeoning UK Tech Sector” published on August 21, 2019.
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