Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 160 - 179)

TUESDAY 17 OCTOBER 2006

SIR GEORGE COX AND MR STEPHEN RADLEY

  Q160  John Thurso: Another example of off-shoring, particularly if you look at the example of the call centre, is that those were jobs in the South East of England which then relocated to more distant parts of the United Kingdom, like Thurso, and then relocated to India or wherever it might be. There is an inevitability to a certain extent. It is not that which is my question, my question is: Does this mean that it is going to be the South East and London which benefit from off-shoring, whereas it is going to be the regions, the more further away areas of the United Kingdom, which are going to bear the brunt?

  Mr Radley: I think to some extent that has already happened. If you look at the developments that have taken place in the last 10 years and before that, we have seen significant increases in employment and also in the level of GDP within the southern regions in the country—I think, in many cases, benefiting from their proximity to London. We have started to see an improvement more recently in some of the northern regions of the economy but it is worrying that they have become extremely dependent on the public sector. If you look at some of the northern regions of the country, significantly more than half of their GDP is from the public sector. They have also struggled to create highly skilled jobs. In many cases, most of the skilled jobs are in the public sector and the private sector has really struggled. We need to put more effort into developing innovation, into creating highly skilled jobs—which are going to compete in world markets in the future—in all parts of the country, really raising the standards of performance of other regions in the country.

  Q161  John Thurso: You would see going to the root of innovation and high wealth jobs in the regions as being the answer to that.

  Mr Radley: Exactly. Certainly there is an encouraging story to tell. Our recent survey of members did find that around about three-quarters of them, all over the country, were putting more emphasis on innovation and had forward plans to do that. In many cases they found that assistance from government, in terms of developing links with universities and collaborating with other organisations, was very effective. Where we struggle sometimes is that the RDAs can be rather narrowly focused, and they are not as effective at brokering relationships outside their regions. Because of the targets they have to fulfil, they tend to be very inward focused. If we really want to drive up our performance and innovation, that is something we need to address.

  Q162  John Thurso: This is a subject that particularly concerns me, because the major employer in Caithness is Dounray, which is decommissioning, and in 2012 the number of jobs drops off the cliff. Our goal is to replace not simply the number of jobs but jobs of the same quality, so that we can retain the skilled workforce that we have. One of our problems is in getting the enterprise agencies to understand that a clear resource requires to be put to look outward and to bring people in from outwith. I am interested that your experience in England with the RDAs is a similar one, that they tend to be inward focused. Should we be doing more as a country to coordinate inward investment in specifically targeted ways, so that they are geared around innovations such as, for example, marine renewables?

  Mr Radley: I think it goes beyond just coordinating inward investment. I think that is an absolute must. The situation we have seen in recent years, with different inward investment agencies from different parts of the country competing with each other around the world to secure investment into the UK, has been a nonsense. We have set out a really muddled message to people who are considering investing here and we have a wasted a lot of resources. We need to see more coordination in the inward investment area, but it is not just there. In the organisations that have responsibility for revitalising the regions and driving up our capabilities—and I am thinking particularly in the skills area—there is a lot of fragmentation generally. We need more coordination and simplification to make sure that the bodies work together effectively.

  Q163  Mr Todd: There is a stereotype that Britain is good at innovating, in the sense of producing new ideas and developing research, but poor at implementing that in product for the market place. Is that a stereotype which has truth?

  Sir George Cox: Yes. Having started my life as an aerospace engineer, I spent most of my life in what became known as information technology—an industry which did not exist when I got my degree. We have had successes. I can point to some good companies in the area but where are our Googles? Where are our Microsofts? Where are our Dells? This evening I am going to the British Computer Society's 40th anniversary. A few years back I gave an inaugural speech at 50 years of commercial computing in this country. We were at the very forefront—the very forefront—but we have not exploited that to the extent that we should have done.

  Q164  Mr Todd: Of those three examples you have given, none of them one would quote as being at the cutting-edge of technology development.

  Sir George Cox: Exactly, but it is the people who exploit the cutting edge, not the people who produce it. I gave the example earlier of eBay. It is the people who see the opportunity that technology opens up for them, rather than the originator.

  Q165  Mr Todd: All of them started as SMEs essentially—very small—and in the case of Microsoft almost a garage business.

  Sir George Cox: They did indeed.

  Q166  Mr Todd: How do we move SMEs from being people with a great idea to being people who take global advantage of that idea?

  Sir George Cox: That is one of the things I tried to tackle in my report. You are absolutely right, too often we talk about innovation and getting the economy more vigorous and we concentrate on start-ups. Start-ups are just part of this. The window-cleaner who quits his company and buys his own van and ladder: jolly good luck to him, but he does not add anything to the economy. We need to start companies which form and then grow. For some reason many of the companies we start just do not grow. We run out of ambition. We sell out too early.

  Q167  Mr Todd: They are lifestyle businesses.

  Sir George Cox: They are lifestyle businesses. It is what I have heard referred to in the venture capital business as the "old rectory syndrome": as soon as the founders can afford the house they have always wanted, they run out of ambition. I have said that if Bill Gates had been born in this country, now he would be running the biggest software company in Guildford, and that is it. It is not just a stereotype, it really is true. We have to get our companies to be more ambitious and recognise the potential and get them carrying on. That is one of the things I tried to tackle in my report.

  Q168  Mr Todd: The examples you have given are all American. Is that not a cultural issue?

  Sir George Cox: Yes, it is a cultural issue.

  Q169  Mr Todd: I worked with American companies before I did this job and there is a different approach.

  Sir George Cox: There is. It can be broken. Let me give you an example of entrepreneurship which I admire enormously. If two or three lads out of university had come to me a few years back and said, "We want to start a fruit juice company" I would have said, "Forget it. Don't be daft. That is a crowded market dominated by big suppliers serving big customers. That is the dumbest idea." But these guys set up Innocent drinks, and they have broken through the market. The nice thing about them, if you talk to them, is that they are still full of ambition to grow the business. In almost any field, if you can be innovative enough, you can make it work. You are quite right, the number of big successes that come from start-ups... I know it is partly because the big companies cannot move swiftly enough and, again, reach a sort of plateau in terms of complacency—and I do think that is a pattern you see repeated—but it is getting people to recognise that potential and to have that ambition. If there is one thing I found in researching my report, it was that poverty of aspiration is at the heart of this—not naturally but at an individual company level. They are just not aspiring enough.

  Q170  Mr Todd: What do governments do about that?

  Sir George Cox: It is difficult for a government to change a cultural issue like that. If you think what a government can do, there are a number of things which are required: the regulatory environment, the economic stability, the highly skilled workforce. There are things like that. It is quite difficult to get beyond that and to do different things with companies. I hope that the kind of things I have put forward in my report will address that, though with many of the things in my report the recommendations are not in the hands of government to do. When you talk about the education system and you want universities to broaden what they teach and to get more cross-disciplinary courses, you cannot say, "Okay, let's get the government to do something about that." When you talk about getting companies exposed in programmes where they can sample design and they can use it to be encouraged, it is very difficult to do it centrally. When I was on the Board of the Institute of Directors I found that the amount of influence you can have with a megaphone from, say, Pall Mall or Centre Point is very limited. That is one reason why a lot of the initiatives have to be driven locally, out of self-interest. If you go and talk in the North East, you do not say, "This is part of a national programme." That kills it. You say, "Come on, this is the kind of thing that gets the North East on the map." That is the challenge in doing it. There are a limited number of things that government can do. In my report, the one thing that was in the hands of government was the R&D tax credit system, which, to the great credit of HMRC, they acted upon. But it is quite difficult.

  Q171  Mr Todd: Looking at intellectual property rights, which can be seen as a way of imposing monopoly power in a market place—the Gower Review is looking at this at the moment—how do we strike the right balance there between protecting the rights of the innovator and ensuring that the benefits of that innovation are then shared, very often by exactly the businesses you listed at the start, so that they can exploit them for growth?

  Sir George Cox: I did not go into that in my report, not because it was not important but partly because it was already being looked at and partly because we surveyed medium-sized and smaller companies as to what the innovations were. With selected exceptions, that was not the big issue. In some fields it is very important, in many others it is not. It really is not.

  Mr Radley: I would very much agree with that answer and I would like to draw attention to some other areas where government can play an important role. One of those is public procurement. Ultimately, it is up to companies to spot the opportunities and to do what they need to do to grow their companies, to become more innovative, to add more value. If you look at some of the examples around the world, particularly the United States, the government can be a very important player in this, in terms of providing the first major order for the company that really gets them to enter the growth phase and move from being a small company to being a major player. We have picked up from companies that there is a lot of good stated intentions. We have had the innovation review, the Kelly review, various action plans from the Office of Government Commerce. Public procurement is still very bureaucratic, risk averse and slow. Many companies are able to offer products that are well ahead of what the government/the customer is seeking for them. I think there is a lot more we could do going down that road.

  Sir George Cox: May I come back on that point. Public sector procurement generally could be a big force for innovation. At present it is just the opposite, with a few honourable exceptions. I have found from my own experience of running a big technology company when providing a submission to a big public sector procurement requirement, that you put in a response to an over-specified, wrong question, for which you have to come up with the cheapest solution. Enormously frustrating. It really is. I can remember one bid we worked on—and I will not go into the specifics—which took ages. It was a terrific bid. We spent £4.5 million on the bid and we had a partner in who spent about the same. I have no doubt, looking back, that it was the right solution. The night before you submit it, you come to the key issue. You sit down there with your partner and you come up with the eventual pricing—this was a PFI bid, so it was on a transaction basis—and it is not: What is this worth? It is: What is our competition going to come in at? It is like a game of poker. With that particular bid, we came in at the same level as the main competition. It went to a third supplier who did not understand the problem: they came in at about two-thirds of the price, they got the job, and it collapsed a couple of years later with great loss to them and the public sector. It was outrageous. It was absolutely outrageous. What a way to buy. I can give you example after example of this. You speak to companies about innovation and a number of design companies say, "We've got this great design here, where do we put it?" One company said, "We've designed a new area for the patient area in hospitals." It was tremendous. It was more than just a bed: it enabled the patient to sit themselves up, get themselves out of bed, lower the bed, get a drink of water, turn the television on—all the things for which you would press the button for the nurse. They abandoned it. I said, "Why?" and they said, "Where do you go with it? If you go to a health authority, they put you on to the man who buys beds. You go to him with the idea, he says, `Tremendous! How much is that?" and you say, "£3,000" and he says, "No, no, I buy beds for £800. If yours was £850, I could stretch the point." So you say, "Look at the quality of the patient state" and he says, "Forget it." "Look at the saving in nursing time" and he says, "I'm not there to save nursing time; I am there to buy beds." You hit this. You are quite right about America. You can see it in so many fields. You are not about featherbedding your own industry—you just cannot do that—but if the public sector were a demanding buyer you would generate innovative companies which would supply markets overseas.

  Q172  Mr Todd: In your report you commended the Design for Business Programme.

  Sir George Cox: Yes.

  Q173  Mr Todd: What else can be done to boost R&D and improve innovation and design? That seemed to be successful on a small scale.

  Sir George Cox: Yes. When we looked at the programme, there were two things. One was the field where there is a financial incentive, which was R&D tax credits—on which I made specific recommendations, two of which have been taken up. The biggest one was to change the regime which was applied and get the Revenue to understand that this was an incentive scheme to be promoted, not an avoidance scheme to be policed (as I put it). Commendably, they have done that, and we can give examples. As I say, this is an example where you are seeing a different attitude to promotion, so I think that is a good one, and that is for the part of innovation which is dependent on R&D. The other one was to look at the Design for Business Programme, which had been originated long before I went to the Design Council and had been pioneered with RDAs to very good effect. I looked at how you could roll that out: How could you change that from a couple of hundred case studies to several thousand? We put forward a programme which is now rolling forward. I think eight of the nine RDAs are sold into it. I have had a word with the Deputy First Minister in Scotland and they want to roll it out there. The reason I went for that figure was that we thought it would be about the biggest the design industry could support. I have found that the thing which tends to alter the attitude and understanding of small companies is the behaviour of other companies in the area. My view is that if you get 6,000 case studies out there, right around the country, of companies who have not just used design to change their business but have changed their thinking, so that they are not just a "one-off innovation" but are going to keep innovating, I think that will have an effect. I think on the scale we have planned here—and it is being rolled out—it will have an effect.

  Q174  Mr Newmark: If Bill Gates had been born in Guildford, I think he would be a lab technician. I think it is a cultural issue. The UK plans to reach 2.5% investment in R&D to GPD ratio by 2010. Given that the US and Germany are already above this threshold and that the Lisbon Strategy has set a target of 3%, is our target ambitious enough?

  Mr Radley: If you look at the Lisbon Agenda you have to say that there are some very big aspirations there, but very limited delivery across Europe. It is absolutely vital that we do look to drive up levels of expenditure on R&D. That can both be in the public sector but also in the private sector as well. I think we need to look at whether the money is being spent effectively. For example, if you look at public spending on R&D, it tends to be extremely fragmented. We have high hopes of the proposals to make the Technology Strategy Board an arms length body that we are going to see a lot more coordination here, in terms of the technology strategy brought, bringing together all the different pockets of money that the Government spends, bringing it into one large pot that business can access and leverage their own money to go in with it, and really start to make a difference. In the private sector, obviously driving up levels of R&D is important, but in many cases that is not the whole story about delivering innovation. In many cases, innovation is developing new services. Even in the manufacturing sector it can be about developing new and improved services. That does not have to be necessarily highly R&D intensive. We have already talked a lot about design. We have found a lot of manufacturers are putting more emphasis on that. Again, it does not need to be that R&D intensive. In many cases we are also looking at the fact that we need to improve substantially our links with universities. We have found a lot of companies are doing that, but we can do that far more effectively. Yes, we do need more R&D, but there are a lot of other things we need to do too.

  Q175  Mr Newmark: Do you think it should be across the board? Twenty-five years ago, I did a study with Michael Porter, when I was at business school, and we came to the conclusion that there were some areas, like advertising, where we had a great expertise and so therefore we developed a cluster of advertising. You can go to Finland, where they developed expertise in mobile phones. Rather than spreading R&D flatly across the board, why not let it be driven into much more narrow silos? Is that a better way of going about it? Is that a more effective way of doing R&D in terms of where money should be going to?

  Sir George Cox: I think the real issue with R&D is not trying to give more push to it and to drive it, but it is getting the pull. R&D should be driven out of self-interest. Companies should invest in R&D not because they are part of a national programme, but because: "If I invest in this, I am going to have a winner." That is what we are trying to get across. It is the same with education: if companies were demanding these skills as well as supplying them, then we would change them. It is the demand side.

  Q176  Mr Newmark: Is government a facilitator?

  Sir George Cox: Government is a facilitator. Things like the financial incentive count towards it, and a different attitude towards public sector procurement. In relation to public sector procurement, I would like to see the National Audit Office and the PAC, when they get something in, asking, "What more innovative ways did you look at doing this?" but also accepting, when you innovate, that there is an element of risk. One of the problems we have in the public sector—and I have great sympathy for it—is that when it goes wrong, as innovation does at time, heads must roll. It is outrageous. The penalty for failure is far too strict.

  Q177  Mr Newmark: That is a cultural thing.

  Sir George Cox: It is a cultural thing. But I do think we could alter this. I have spoken to people at the NAO—I have not spoken to the PAC—and the question should be asked, when you come up with something, "Did you look at the problem more widely? What other solutions did you look at?" When you get a submission which has come from a company which is too small to provide it, why do you not put them in touch with another company and say, "We love this. We love your idea of a bed but we are not going to order it from a company your size. However, if you were to get into bed with a bigger company, like So-and-So, and come back to us, we could do it." If we had that part of it then you would get more innovation.

  Q178  Mr Newmark: Do you think the EU has any role in stimulating innovation and R&D? What role do you see the EU has versus the UK Government, especially in those areas which are perceived as slightly weaker, like IT hardware/software or electronics?

  Mr Radley: I think the EU can have a role. Particularly where we are looking at emerging industries, for example some of the energy efficient industries, some of the low carbon technologies, low carbon industry sources. I think it is a good idea to have a common strategy there to move forward and, rather than have lots of small markets, have one major market which is really going to push innovation.

  Q179  Mr Newmark: Give me an example of what you mean by that.

  Mr Radley: Wind, I think, is no longer an emerging area, but there are lots of other examples of micro-generation where we could see opportunities to develop new industries. Making carbon capture and sequestration commercially viable is a priority.


 
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