Illiteracy and a lack of skilled workers were the biggest threats to Britain's economic success, Sir Digby Jones told an investment conference in Birmingham.
The CBI directorgeneral said that 30 per cent of the organisation's member companies were forced to give young recruits remedial training in reading, writing and maths.
"There are three and a half million adults going to work and drawing down a salary who are functionally illiterate," Sir Digby told the audience at Brewin Dolphin's ninth annual Investment Conference at Millennium Point yesterday .
"What is that doing to productivity? In future there will be no room for people with no skills.
"The challenge for our country is how we can skill our people to meet the new industrial and economic situation," Sir Digby said.
Britain is leading the world in adapting and restrucuting its economy to meet the challenges of globalisation, he said Unlike the US, which has growing budgetary and trade deficits and a sinking dollar, France and Germany, the UK had been able to absorb a doubling of oil prices and a trebling of steel prices.
"We have a fabulous set of economic data and we are the only country in the developed world where that is happening all at once.
"But it presents an enormous challenge of how we use it wisely and how we can leave something better for the next generation."
Sir Digby told the conference that last year the West Midlands benefited from 57 new foreign direct investment projects that generated 2,300 new jobs.
But he warned that manufacturers now had to concentrate on innovation and on created value added, quality products.
"If you think you can get by making something that sells only on price, India will have your lunch and China will have your dinner."
Defending offshoring of jobs, Sir Digby said that the UK economy had benefited by £16 billion from companies that "exported" jobs that could be done cheaper overseas.