The report says: "The potential of the residential sector to offer high quality, stable placements for a minority of young people is too often dismissed."
It adds that targets to improve training and skill levels in the residential sector are failing and are in need of "greater investment".
Among those to welcome the report is National Care Association children services development officer Janet Rich.
She said: "It is the strongest statement in favour of residential care that I've heard from Parliament, acknowledging that residential care is not a last resort and that it has a far greater role to play in the children's care sector."
She also welcomed the report's emphasis on the importance of improving training and calls for better support for young people leaving residential care.
The National Centre for Excellence in Residential Child Care (NCERCC) also welcomed the report, in particular its acknowledgement of residential care's focus on building relationships between children and staff.
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