Select Committee on Treasury Written Evidence

Memorandum submitted by the National Endowment for Science, Technology and the Arts (NESTA)


Why is NESTA responding and who does it represent?

  1.  NESTA, the National Endowment for Science, Technology and the Arts, is working to transform the UK's capacity for innovation. We invest in all stages of the innovation process, backing new ideas and funding new ventures that stimulate entrepreneurship.

  2.  We act as a catalyst for UK innovation. Our partnerships and networks broker ideas across sectors, accelerating the process of innovation. Our pioneering models of investment are being adopted by organisations throughout the UK. Our strong evidence base helps to influence policy.

  3.  Underpinning our work is the fundamental view that successful innovation fuels long-term economic and social progress in the UK. It's an essential ingredient of our competitive edge in the global marketplace.

  4.  We have recently published a report, Creating Growth—How the UK can develop world class creative businesses, which highlights the massive opportunities that exist for our creative industries in a global market, but also notes the vulnerability of the sector in the face of international competition.

  5.  In response to the Committee's inquiry, we would like to highlight the relevant key findings from this research, focusing on our recommendations to support the growth and global competitiveness of UK's creative businesses.

The UK's creative industries in a global economy

  The UK has a wealth of creative talent and the creative industries represent a significant part of our economy. In the past 10 years, UK policymakers have led the world in recognising and supporting the creative industries, and these sectors have been seen as some of the success stories of the economy. A growing international market is there to be won by creative businesses that are willing able to innovate. Some UK businesses are already exploiting these opportunities, but others need more help to do so. The UK's creative businesses have the potential for outstanding success, but a renewed approach to policy, one which focuses on business growth, is needed in order to ensure the future success of these sectors in an increasingly competitive international environment. We need to grow more world class creative businesses, resolve issues relating to distribution and access to markets, and encourage more creative businesses to innovate.

Our Key Recommendation

  6.  Creativity is key to the knowledge economy and to ensuring that the UK is more globally competitive. UK policymakers, trade associations and other relevant parties need to identify key commercial objectives for each sector of the creative industries for the next 10 years, and consider what these objectives will require from related policy areas, such as education and skills, and science and technology research and development.

Response outline

  7.  This response highlights some of the key findings made in our report, Creating Growth—how the UK can develop world class creative businesses, published in April 2006:

    —  The UK's creative industries are facing increasing international competition.

    —  These challenges are balanced with significant opportunities.

    —  More creative businesses need to prioritise commercial growth.

    —  The UK needs a more coordinated agenda for the creative industries.

  8.  For each of the above, this response discusses the issue, its relevance and provides specific recommendations.


The UK's creative industries are facing increasing international competition

  9.  Creative businesses and policymakers need to appreciate the scale of the competitive challenges now facing the sectors in the UK. From film production to design, new international centres for creative business are developing rapidly and underpinning the importance of globalisation to UK creative industries. These are challenging established businesses, including those based in the UK. UK television exports have fallen for the second year running (despite an overall increase since 1998). In design, overseas earnings have halved since 2001, while the value of exports in music, the visual and performing arts in 2003 was down 20% from 2000.

  10.  International competition and approaches to globalisation are being supported and driven by policies that are often more ambitious and more focused than those in the UK. These policies have a greater focus on commercial value (especially from content industries), an emphasis on cross-sectoral working (within and beyond the creative industries), and a desire to identify and exploit emerging opportunities (including export markets). For example, in Singapore the Creative Industries Development Strategy in 2002 identified the creative industries as one of three priority areas of the "service economy" for the development of a more entrepreneurial and globalised economy. This includes an explicit objective to double the contribution of the creative industries to GDP, to a level comparable to the US and the UK. Industry-specific blueprints have been formulated within this overall strategy, including for design and media. Similarly aggressive strategies are apparent in France (for the games sector), in South Korea (for digital cultural content and media). The political context may be very different in these countries, but approaches such as these will increasingly inform the competition faced by UK creative businesses in the international market. There should be no room for complacency among policymakers or in the creative industries themselves.

These challenges are balanced with significant opportunities

  11.  On one measure the creative industries constitute a larger part of the economy and employ more people than the financial services sector. The most recent estimates suggest that the creative industries account for 8% of the UK economy—a total of £56.5 billion. Exports by the creative industries contributed £11.6 billion to the UK's balance of trade in 2003. The UK has led the world in terms of developing the creative industries as a focus for policy, and there has been a rapid growth in initiatives across the UK to support the development of creative businesses.

  12.  The global market value of the creative industries increased from $831 billion in 2000 to $1.3 trillion in 2005. For example, global revenues from cinema admissions amount to $25 billion, the same size as the market for computer and video games. Similarly, the world market for mobile music is expected to reach $6.4 billion by 2009.

  13.  Globalisation raises a number of challenges for policymakers to ensure that the UK continues to develop world class businesses in the creative industries. It is vital that these businesses have international reach and the ability to operate strategically within international markets. Globalisation by definition also ensures that there will be increased competition in our home markets. This competition is being driven by ambitious and commercially focussed policies and strategies that have been developed in other countries. We recommend that UK policymakers, be they Whitehall based or in the creative sectors themselves, should likewise review their policy strategies. We also recommend that business support and other support organisations such as the British Chambers of Commerce must build on strengthening the ability of UK businesses to reach external markets and consolidate their position within them. Specific suggestions regarding these are provided in the following sections.

More creative businesses need to prioritise commercial growth

  14.  Three key issues need to be addressed across the UK's creative industries:

    —  the lack of scale of most businesses;

    —  difficulties in accessing markets; and

    —  a lack of innovation to cope with and exploit structural changes in these industries.

  15.  (i)  Many creative owner-managers take an "organic" approach to the growth of their businesses, by adding slowly to their customers and clients through the distinctiveness of their creative work. However, the purpose of creative business is to harness and exploit creativity in a commercial context and for commercial ends. Creative businesses in the UK need a greater awareness of business strategy skills and related core skills such as financial planning.

  16.  More of these businesses need to grow into world class businesses that achieve significant international success and reach. Too many UK creative businesses have been unable to respond effectively and on a scale that ensures their survival and continued growth in the face of international competition. Policy and support initiatives across the UK need to include a stronger focus on how these types of businesses might be developed. This is not about picking winners. Rather, it is about being more responsive to the actual needs and ambitions of individual creative businesses, some of which do have a strong focus on achieving high growth and international reach.

  17.  To face the challenges that globalisation brings to the creative industries business support services need to focus more on core skills, such as business strategy, financial planning and marketing. Such services will need to understand the motivations of creative entrepreneurs and present business skills in a language and in a form that they will respond to. Equally, the creative industries need to understand the importance of having these skills particularly in the context of the opportunities that globalisation brings. Furthermore, given the range of the support that is available, organisations such as NESTA should act as accessible gateways for creative businesses that are looking for public investment, support and development, and opportunities for networking.

  18.  We would also recommend that a distinct system of targeted support for businesses with high growth potential should be developed. This could include the development of Creative Accelerator Funds across the UK to invest in and support these creative businesses. Organisations such as NESTA could help to develop, pilot and evaluate new approaches to investment, support and business development in the creative industries, especially for those businesses with high growth potential.

  19.  (ii)  In one survey commissioned by NESTA, the most commonly identified barrier to growth for creative businesses was difficulty in accessing customers. Throughout the creative industries, the primary routes to domestic and foreign markets can be dominated by a few large "gatekeepers", including retailers, publishers, and distributors. In several cases these gatekeepers operate across sectors, and many are foreign-owned. Success frequently depends on securing an agreement with a gatekeeper, who can hold much of the leverage in a deal, resulting in many transactions which may disproportionately favour the gatekeeper over the creator. This structure can impose severe challenges on creative businesses, particularly start-ups and SMES, in terms of accessing and developing their routes to customers and global markets. In addition to stifling growth, the unfavourable terms imposed upon creators also reduces their incentive to explore new markets or develop innovative products.

  20.  For example, in a recent NESTA report on commercial challenges within the Creative Industries, it was noted that more than 80% of music sales in Europe are controlled by the four major music labels. The eight largest book retailers have just under two thirds of the UK's overall book market. Within the film industry, six distributors account for 87% of the UK's box office share.

  21.  If UK creative firms are to take advantage of the opportunities provided by globalisation, they must have access to the established and emerging global markets. They must also be armed with the skills, knowledge, and contacts necessary to successfully incorporate foreign targets into their business strategy and product or service development. UK firms need to be "born global", with foreign markets and sources of capital integrated into their strategy from the outset. Global success will require a more thorough understanding of the customers, needs, and culture of target markets.

  22.  The government should conduct a competitive review of the distribution and retail elements of the creative industries, particularly with regards to the ability for UK creative SMEs to gain access to foreign markets on favourable terms.

  23.  The government should explore public support for the development of stronger, potentially state-supported, international distribution entities and networks in those sectors where a lack of scale has seriously disadvantaged UK creative businesses in accessing international markets.

  24.  The government should enhance its efforts regarding advice and business support to SMEs which can benefit from engagement with foreign markets and sources of labour or intellectual capital. The UKTI, RDAs, Business Link and other support entities should extend their efforts to identify and target high-potential SMEs with products or services which are particularly applicable to other markets. Furthermore, commercially-oriented curricula and other qualifications should include elements relating to accessing foreign markets and leveraging foreign resources or investment.

  25.  (iii)  Creative businesses need to focus on commercial innovation if they are to respond to the challenge of increased global competition. This includes moving into new markets and reaching new customers by exploiting skills and resources developed in existing and emerging markets, using digital technologies for distribution in order to bypass traditional distribution channels or extend into new markets, and moving from producing to owning intellectual property.

  26.  There are many examples of UK creative businesses innovating in their strategies, processes and business models, developing and diversifying their markets and achieving greater growth and profitability. Although these examples are encouraging, the opportunities that exist for commercial innovation need to be better promoted and supported, and must be oriented towards both domestic and foreign activity. In particular, there needs to be a much greater focus on the opportunities—and challenges—presented by digital technologies and the internet.

  27.  Trade associations and other organisations such as NESTA need to do more to identify and promote these forms of innovation amongst creative businesses. As an example of finding new markets and customers, such organisations could fund and support innovative projects to integrate outputs from the creative industries into products and services from other sectors. Furthermore, a foresight review should be conducted on the innovative exploitation of new technologies by the creative industries, in order to anticipate future trends and extend into foreign markets.

  28.  The DTI and UKTI could do more to encourage cross-firm and cross-sector collaboration to create or enter new markets, and to leverage foreign resources and intellectual and financial capital.

  29.  HM Treasury should explore expansion of tax mechanisms which could stimulate UK firms to more actively pursue foreign business where appropriate.


  30.  The UK needs to nurture and support a new generation of creative entrepreneurs who place strong and sustained commercial growth alongside creative expression at the top of their ambitions. Potential world class businesses will benefit from clearly differentiated systems of investment and support. This support needs to be intensive and highly ambitious, to grow the UK's creative economy within the context of international markets and supply chains. The aim must be to develop the kinds of media-entertainment conglomerates and brands that can challenge existing players in the global market and generate significant jobs and wealth for the UK economy.

  31.  A growing international market is there to be won by UK creative businesses that are able to innovate and do not see any inherent conflict between creative excellence and commercial success. The ambition to win a greater share of this market will help to ensure that the UK becomes a creative hub for the world.

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Prepared 16 October 2007