What is Britain good at?
It's a similar question when it comes to paying our way in the world. As the centre of gravity of the world's wealth shifts eastwards and southwards, western nations will need to become more and more specialised in their economies. A recent report on globalisation by the Institute for Public Policy Research described "a journey of perpetual movement up the value chain" for developed countries.
That report sought to cross-reference those sectors where the UK has a global competitive advantage, and where demand will be driven by the burgeoning wealth of the BRICs and their satellites.
It's an important question that should guide where the country invests financial, political and human capital. But it could also be a pointer to future investment success. Companies in sectors where the country has a competitive advantage should benefit from a network effect. And better to invest in a company riding the up escalator than one swimming against the tide, to mix a couple of metaphors.
Predictably, financial services is in pole position as the sector we're best at and is most in demand, with legal and business services hanging on its coattails.
Unfortunately, we're still paying the price of the country's over-dependence on financial services. But there's no denying the sector's importance, and so it's no surprise the City has reacted against the latest political craze of banker bashing, however satisfying and justified it might be.
Ironically, the two flagships of British banking that are thriving on emerging market demand, HSBC and Standard Chartered, are products of the Empire, which the Institute for Public Policy Research (IPPR) described as the first wave of globalisation. They are testimony to how enduring competitive advantage can be.
In manufacturing, aerospace and pharmaceuticals are in the top spot, with high tech and electronics a creditable third.
Rolls-Royce leads the aerospace pack with world-beating products, followed closely by BAE, which is hampered only by the cutbacks in defence spending in its traditional markets. If BAE can yet reverse India's decision to buy fighter jets from France, it would be a paradigm for UK high-tech sales to emerging markets, but it may be that the very politically influenced defence sector is a harder nut to crack than commercial aerospace.
Apart from the big beasts, a handful of smaller companies such as Meggit, Cobham and Senior have globally competitive products.
Recent job cuts from AstraZeneca and the closure of Pfizer's UK research centre show just how tough it can be to move perpetually up the value chain. The pharmaceutical and biotechnology sector is well populated on the LSE -- there are 60 constituents -- and there are no doubt some potential multi-baggers lurking there.
But it's a difficult sector to understand, so I hold my exposure through the Biotech Growth Trust , which has outperformed the sector fairly consistently. Unfortunately for UK PLC, 90% of its investments are in North America.
Other high-tech sectors include electronics and the engineers. King of the chip makers is ARM Holdings, but I prefer the much smaller (and much cheaper) IQE. Characteristic of this sector is the emphasis on design and intellectual property, and the outsourcing of manufacturing. But I wonder if a company is purely engaged in design, such as ARM, how can it go further up the value chain? In a future world, will the more basic elements of design be outsourced to India, for example?
Britain's engineers have moved up the value chain by specialising on narrow global niches, investing heavily in product development and proprietary technology while outsourcing basic manufacturing to foreign factories. It's a strategy successfully deployed by Spectris and Spirax-Sarco , but could equally apply to a range of mid-cap engineers.
There are a couple of sectors where I'd take issue with IPPR's analysis. It rates fashion as a sector that the UK is good at but with relatively low demand for its products in the BRICs. That may be so, but Supergroup's international sales, which include India and the Middle East, and French Connection 's Chinese stores are indicators of the potential demand for UK design.
That's undoubtedly the case when you add a couple of zeros to the price to sell Mulberry handbags or Burberry coats to eager Chinese consumers. Those pictures of the Christmas sales speak volumes. So it's surprising that IPPR rated the UK as below average in luxury goods.
There is plenty of room for argument about what the country is good at, of course. But there is no doubt the world is changing, Britain needs to adapt to prosper, and investors have to be wise as to where value is created.