APPENDIX 18
Memorandum by QinetiQ Group plc
SUMMARY OF
THE MAIN
POINTS IN
THIS SUBMISSION
1. The UK faces a serious challenge, not
only because of rapid migration of high value jobs to the low-wage
economies, but also because the UK is failing to create large
fast-growing high-tech companies that can provide quality jobs
and sustain a world competitive commercial base in the knowledge-driven
economy. This contrasts starkly with the vigorous growth of such
companies in the United States.
2. Currently the vast majority of large
high-growth high-tech companies are in IT and electronics, and
the UK needs to address vigorously how it can develop new large
high-growth companies in this sector. It is not just e-commerce
that matters, but the harnessing of network-enabled capabilities
in all areas of commerce and industry.
3. The UK Government has many ways to influence
the knowledge-based economy indirectly, but fewer direct levers
by which it can make a real difference. The most important direct
lever that government can use is to create a market demand for
innovation through government agencies, particularly in knowledge-based
services in healthcare and transport. E-health is arguably the
most important opportunity to do this in the next five years.
Defence is an area where the UK has successfully used government
expenditure to create and maintain a world class industry, and
the US is even more successful in using defence expenditure to
develop its knowledge-based economy. The UK government needs to
apply the same approach in other areas of its major expenditure.
4. In the networked global economy, innovation
needs to be systemic and the old linear or closed innovation model
is largely ineffective. Innovation now requires complex interactions
between individuals, organisations and their operating environments,
drawing on technology from many sources. It often pays better
to innovate by being agile in exploiting the research discoveries
of others. The UK is still putting too much emphasis on just investing
in research, important though this is, rather than on the effective
exploitation of research to solve problems.
5. Culturally, open innovation fits more
easily into the US than into the more conservative and private
culture in the UK. The UK must improve the mechanisms that foster
the networking, knowledge sharing and clustering needed to make
open innovation work. For this, the UK needs to make better use
of knowledge intermediaries, and should give more attention to
the role of the Research and Technology Organisations (RTOs).
1. THE CHALLENGE
FOR THE
UK
1.1 In the knowledge-driven global economy,
the UK faces a serious challenge in creating new high value jobs
to replace the many skilled jobs in both the manufacturing and
service sectors that are migrating from the UK to China and other
low-wage economies. So far, the UK and most other EU nations have
made little or no progress towards meeting the Lisbon target agreed
by EU Heads of State in March 2000 to "make the EU the world's
most competitive and dynamic knowledge-based economy by 2010".
Apart from Finland, Sweden and Denmark, most EU countries, including
the UK, are falling further behind in competitiveness, as illustrated
by the most recent global competitiveness ratings from the World
Economic Forum, where the UK has dropped to 15th place from 11th
place in 2002.
1.2 Poor investment in R&D is acknowledged
to be one of the main factors in this decline. In March 2002,
the UK and other EU states endorsed the Barcelona target of increasing
overall R&D spending in the EU to 3% of GDP. The present European
average level is 1.9% of GDP (1.8% for the UK), compared to 2.7%
for the US and 3% for Japan. Europe invests
120 billion less in research than the US each year,
and the gap is growing. The gap in public research spending is
quite small; the grave problem lies in the weakness of industry
R&D spending. The UK must urgently transform its ability to
translate research and knowledge into innovative products and
services that can provide the profits to justify a larger R&D
investment by industry.
1.3 In March 2003, the European Commission
published a communication on innovation, which made a number of
important points. These included: the key role of competition
in motivating innovation in companies; the need for effective
exploitation and entrepreneurial action to turn research into
value; and the failure in Europe to create new companies that
grow large and provide many quality jobs. Two points are particularly
worth emphasising in the context of the knowledge driven economy:
— In the networked global knowledge
economy, innovation needs to be systemic and the old linear or
closed innovation model is largely ineffective. Innovation now
requires complex interactions between individuals, organisations
and their operating environment, drawing on technology and knowledge
from many sources. Public policy by the EC and in Member States
has not yet responded to the need for this systemic open innovation
and many measures put into practice are still driven by the old
closed innovation model.
— Improving innovation in Europe needs
to take account of the European context. A particularly important
factor is the large size of the public sector in EU economies,
which means that government agencies have a crucial role in creating
the market demand for innovation generally, and specifically in
knowledge-based services. However, they are often too conservative
and this prevents innovation.
1.4 In the UK, the Department of Trade and
Industry (DTI) is about to publish a new strategy for improving
UK innovation, and from what has already been made public, this
is likely to place a helpful emphasis on both of these two key
points.
2. OPEN INNOVATION
2.1 The thrust of thinking on open systemic
innovation is that the old closed paradigm that relied on internal
industrial R&D, and a linear funnelling of research into development
and thence into products and services, is too narrow. Because
of globalisation and the great mobility of knowledge and products,
this paradigm no longer provides a barrier to competitive entry
in most sectors. Successful innovating companies now seek out
and exploit external knowledge and ideas richly. Rather than investing
in research, it can often pay better to innovate by being agile
in exploiting the research discoveries of others. Often this is
by partnering with them or by investing in and/or acquiring start-up
companies. However, often it is just by exploiting the high mobility
of knowledge, people and enabling technology.
2.2 What makes open networked innovation
so important today is that technologies are more complex, and
this places a premium on recombining existing technologies in
new ways. Success comes from being linked by a very extensive
network to multiple diverse domains that otherwise share few connections
between them. Linear innovation and traditional project-driven
partnering tend, in contrast, to link people and organisations
in the same or similar domains. Perversely, creating denser networks
of interactions within an existing domain can make it more difficult
to think outside the confines of this domain and to recognise
new possibilities. In contrast, moving among different domains
creates the ability to see how knowledge learned in one domain
might work somewhere else. Gifted innovators tend to know a little
about a lot, and a lot about just the little that they recognise
as important. By their breadth of knowledge and experiences in
many domains, they can approach each new problem with a more open
mind and a wider suite of possibilities.
2.3 It is easy to talk about the importance
of networks and of exploiting the ever-richer flows of knowledge
and information that are being created by the Internet. However,
in practice open innovation is difficult. Culturally, it fits
more easily into the US than into the more conservative and private
culture in the UK. The UK must therefore improve the mechanisms
that foster the networking, knowledge sharing and clustering needed
to make open innovation work. This requires technology brokers—people
and organisations that can see how the resources of one domain
might benefit another, and can act speedily to capitalise on this
and help other to do so.
2.4 For successful technology brokering
it is necessary not only to know of a technology, but also to
know how to apply it, what else it can do, and how to adapt it
to new circumstances. These skills tend to come through use, and
this means having a degree of practitioner expertise and a real
understanding of how to integrate and apply technology through
prototypes into new compelling products and services. Therefore,
the Research and Technology Organisations (RTOs) have a particularly
important role to play, but one that tends to be neglected in
current UK Government thinking and policy.
3. THE NEED
FOR FAST
GROWING HIGH-TECH
BUSINESSES
3.1 The UK prides itself on being good at
creating high-tech small businesses. UK universities, according
to the DTI, create an order of magnitude more small businesses
per £billion of research than do US universities. The problem,
however, comes in growing these businesses into larger enterprises.
Of the world's 100 fastest-growing large high-tech companies in
2003, as identified in Business 2.0's annual survey, not one is
in the UK, and only three are located in Europe. Twenty-seven
are located in California, and these generated a combined turnover
of $38 billion in 2002, out of a total turnover of $126 billion
for all 100 companies. This demonstrates that, even though the
Silicon Valley miracle has seemed a little tarnished since the
bursting of the high-tech bubble, the California model of innovation,
which emphasises open innovation exploiting wide networks and
knowledge mobility, is still very strong. Significantly, most
of the fastest growing companies are in electronics and IT: roughly
29 are in IT services, a further 22 are in software, and almost
all of the rest are in electronic components and subsystems. Biotechnology
and pharmaceuticals are also increasingly based on informatics
and the management of complex knowledge rather than on conventional
biology.
3.2 This demonstrates that it is not just
e-commerce that is important to the UK, but the application of
informatics and network-enabled capabilities (e-capabilities)
into all sectors. A good example is e-Health, not only for improving
efficiency and coping with the ageing UK population through tele-healthcare,
but also because the combination of genomics and information systems
will generate truly disruptive innovation in the next decade.
This is an area where the UK still has an opportunity through
the potential coherence of its healthcare and the strength of
its pharmaceutical industry to create a globally leading industry
and national healthcare delivery. Network-enabled capabilities
are also particularly important for defence and security, and
there is scope for the UK to benefit by translating knowledge
from defence research into sectors such as healthcare.
3.3 Small businesses can be more innovative
and gain some benefits of scale if they are part of a cluster.
Currently clusters tend to be geographically based, but in the
future they may be more virtual, particularly exploiting the Internet
as this becomes capable of providing more realistic human-human
communication. The application of network-enabled capabilities
to support clustering and new organisational models for business
deserves greater attention.
4. KNOWLEDGE
INTERMEDIARIES
4.1 Fundamental to open innovation is the
need to create networking and communication across many domains.
Knowledge intermediaries provide the means to achieve this. In
the UK, some large universities have set up internal technology
brokerages with business and market skills to help provide the
complex channels to industry customers and their needs. Regional
Development Agencies, and similar bodies, also fill a knowledge
intermediary role, mapping company needs to available technology
and vica versa. Venture capital companies are important in creating
good opportunities as well as providing funding for exploiting
them.
4.2 The organisations that in many ways
have the strongest capabilities as knowledge intermediaries, and
particularly as technology brokers, are the Research and Technology
Organisations (RTOs), and in particular the largest RTOs, because
these already span many domains. The largest RTOs in Europe are
Fraunhofer Gesellschaft in Germany, QinetiQ in the UK, TNO in
the Netherlands, and VTT in Finland. These have around 13,000,
9,500, 5,400 and 3,000 staff respectively, making a combined resource
of over 30,000 staff linked to all technology areas and markets,
and partnering with a huge number of companies.
4.3 These four RTOs plus the other larger
European RTOs form the Eurotech group within the European Association
of RTOs (EARTO). In the UK, we have placed little emphasis on
the role of the RTOs in growing the knowledge economy and there
has been little mention of the RTOs in recent UK Government reports.
In contrast, VTT has played an important part in giving Finland
the top position, ahead of the US, as the most competitive economy
in the world, according to the World Economic Forum. The ability
within Finland to network and exploit open innovation is arguably
the most important factor in its current success. Fraunhofer and
TNO are also seen in Germany and Netherlands, respectively, as
playing a key intermediary role in the competitiveness of industry,
and the successful coupling of university research into exploitation.
Sweden, though currently in third place after Finland and the
US in the global competitiveness score, is also seeking to exploit
FOI (the Swedish organisation within the Eurotech group) more
strongly to strengthen knowledge networks and open innovation.
5. SUMMARY OF
THE MAIN
POINTS IN
THIS SUBMISSION
5.1 The UK faces a serious challenge, not
only because of rapid migration of high value jobs to the low-wage
economies, but also because the UK is failing to create large
fast-growing high-tech companies that can provide quality jobs
and sustain a world competitive commercial base in the knowledge-driven
economy. This contrasts starkly with the vigorous growth of such
companies in the United States.
5.2 Currently the vast majority of large
high-growth high-tech companies are in IT and electronics, and
the UK needs to address vigorously how it can develop new large
high-growth companies in this sector. It is not just e-commerce
that matters, but the harnessing of network-enabled capabilities
in all areas of commerce and industry.
5.3 The UK Government has many ways to influence
the knowledge-based economy indirectly, but fewer direct levers
by which it can make a real difference. The most important direct
lever that government can use is to create a market demand for
innovation through government agencies, particularly in knowledge-based
services in healthcare and transport. E-health is arguably the
most important opportunity to do this in the next five years.
Defence is an area where the UK has successfully used government
expenditure to create and maintain a world class industry, and
the US is even more successful in using defence expenditure to
develop its knowledge-based economy. The UK Government needs to
apply the same approach in other areas of its major expenditure.
5.4 In the networked global economy, innovation
needs to be systemic and the old linear or closed innovation model
is largely ineffective. Innovation now requires complex interactions
between individuals, organisations and their operating environments,
drawing on technology from many sources. It often pays better
to innovate by being agile in exploiting the research discoveries
of others. The UK is still putting too much emphasis on just investing
in research, important though this is, rather than on the effective
exploitation of research to solve problems.
5.5 Culturally, open innovation fits more
easily into the US than into the more conservative and private
culture in the UK. The UK must improve the mechanisms that foster
the networking, knowledge sharing and clustering needed to make
open innovation work. For this, the UK needs to make better use
of knowledge intermediaries, and should give more attention to
the role of the Research and Technology Organisations (RTOs).
QinetiQ is Europe's second largest R&D organisation,
with 9,500 employees, over 7,000 of them scientists, at locations
throughout the UK. QinetiQ's stake in the knowledge-driven economy
derives from technologies it has developed over 50 years of pioneering
military science, many of which it has successfully adapted for
civilian use, initially as an agency of the Ministry of Defence
and, since February 2003, as a commercial entity.
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