The decline of Britain’s manufacturing sector is not in dispute, though the causes of that decline have prompted much debate. The popular candidates are the general shift of manufacturing toward lower-cost developing countries and the recent high value of the pound sterling. But while such exogenous factors doubtless play a part, the troubles of the UK manufacturing sector result in large measure from a factor that, fortunately, lies squarely within its managers’ control: labor productivity. The proof lies in the productivity of foreign-owned plants in the United Kingdom. In US-owned plants there, for example, labor is about 80 percent more productive on average than it is in UK-owned plants—in every sector. As a result, overall productivity is suffering and so, consequently, are both UK manufacturing’s contribution to the country’s gross domestic product and the financial performance of individual manufacturers.

While it is true that—with the exception of the United States—developed nations generally have lost trade in manufactured goods to developing markets over the past ten years, manufacturing’s share of GDP fell faster in the United Kingdom than in any other Group of Seven (G-7) country, reaching just 17.7 percent at the end of 1999. This shrinkage isn’t explained by...