House of Commons - Risk and Reward: sustaining a higher value-added economy

Risk and Reward: sustaining a higher value-added economy - Business and Enterprise Committee Contents

4 An enterprise culture

58. The difficulty in measuring the real level of innovation in the economy is undesirable in itself, but it also contributes to the wider problem that there is little public understanding about the structure and the true state of the United Kingdom economy. This in turn contributes to a culture which does not appreciate the extent to which a higher value-added economy is already in existence, or the opportunities it offers. It also contributes to a mis-perception of risk. Taken together, these could have a serious impact on the future success of the economy.

Education and skills

59. Sir John Rose stressed the importance of the "visibility of rewarding careers".[55] The first problem with a misperception of the true state of the economy is that people may make choices about skills and careers which are not the best for themselves or indeed for the wider economy. Throughout the inquiry, witnesses raised the importance of skills to the HVA economy. NESTA put it succinctly: "Clearly skill levels are very important to innovation."[56] The globalised economy now means that companies can choose where to locate their facilities and the level of the skills in the workforce is one of the factors which influences their choice of location. Will Hutton told us that "When you talk to the high-tech companies in particular, one of the biggest considerations on their minds is whether they can get access to high quality human capital."[57]

60. We recognise the importance of skills to the higher value-added economy. However, there has been a great deal of work on skills by this Committee and others, including: the Leitch Review of Skills (2006);[58] The Lambert Review of Business-University Collaboration (2003);[59] Trade and Industry Committee Report, Better skills for manufacturing;[60] Innovation, Universities, Science and Skills Committee Report, Re-skilling for recovery: After Leitch, implementing skills and training policies.[61] Rather than replicate this work here, we limit ourselves to a few key points.

DEMAND-LED TRAINING

61. Evidence throughout the inquiry highlighted the importance of demand-led training. Sir John Rose explained to us that "If you are a young person, you are going to respond to the signals that you get from industry and from government about where the opportunities are likely to lie. This is not just a supply issue; this is a demand issue".[62] The CBI argued that training and education programmes should be designed to meet demand from both students (be they at school or in the workplace) and business. The Leitch Review recommended that the UK skills system be demand-led with qualifications that deliver the skills that employers and individuals need. Ford Motor Company told us it welcomed this but also recognised "that the implementation of this recommendation poses significant challenges but call upon all stakeholders to redouble their efforts in this area."[63]

62. Linked to this, there is a need to cultivate demand by promoting a range of skills leading to worthwhile careers.[64] Sir John Rose told us that apprenticeships were a good example of demand-led training but he highlighted the need for schemes to feed into growth industries.[65]

63. As in previous inquiries, manufacturers and the business community expressed concerns about the number of graduates in science, technology, engineering and mathematics (STEM) subjects.[66] The CBI told the Committee that "STEM subjects are absolutely vital to the high value-added economy. It has been going wrong for 20 years".[67] Professor Marshall of Coventry University, told us that the United Kingdom's situation with the number of STEM graduates was "really at a tipping point. Unless we can get the numbers up, the research base in this country will be staffed entirely by overseas researchers. In the short term there is only one thing you can do which is to pay them all a realistic bursary",[68] a suggestion that the CBI also made.[69] Dr James Wilkie of Birmingham University highlighted "the issue in terms of the perception and the communication of STEM subjects".[70] He noted the perception that STEM graduates do not get well paid "but in reality they get quite well paid in comparison with other graduates."[71] On the other hand, Will Hutton drew attention to the number of STEM graduates who moved into the city rather than into industry.[72]

64. It is vitally important that British education and training is as good as it can be, and we welcome the growing public debate about the necessary steps to improve it. We are particularly concerned about the continuing complexity of the skills system and the impact this has on the smaller companies who wish to engage with it. But ultimately, the skills available to the United Kingdom depend on the individual choices made by individual students and workers. They will create the demand for the training which will sustain the higher value-added economy. They will only do so if they have a realistic understanding of the opportunities available to those with particular skills. They will also need to know that employers reward the skills they say they need.

Risk taking and entrepreneurialism

65. The Enterprise White Paper states that enterprise "as one of the five drivers of productivity, has contributed to the United Kingdom's increased rate of productivity growth and a narrowing gap with comparator countries" and says that the Government wants to see more enterprise and "more people with the ambition to start, grow and innovate within business".[73] This will not happen if people do not take risks.

66. At the individual level, the United Kingdom's culture discourages risk-taking. Arguably, this is the cumulative effect of encouraging people into areas where the United Kingdom's economy is undoubtedly strong, such as services, and reducing entrepreneurs' appetite for innovative approaches. Unwillingness to accept risks can reduce long term effectiveness - as NESTA said, risk is not an inherently bad thing but is something that needs to be managed or properly balanced, even if it cannot be overcome.[74]

67. One thread from our evidence was the extent to which entrepreneurial skills could be taught. The Government has stated that it wishes to develop entrepreneurial education for children from primary through to higher and further education,[75] and our witnesses also highlighted the importance of educating young people and fostering business and entrepreneurial skills from an early age.[76]

68. Whether or not entrepreneurial skills can be actively taught to young people, schools should not discourage their pupils from considering a career in business. We were disappointed to hear from the CBI that "we have fundamental problems with careers advice and guidance" for careers relating to business and the higher value-added economy.[77] Similarly, we heard from the Dragon's Den panellists that that schools were not encouraging (or were even actively discouraging) young people to investigate careers in business and entrepreneurship.[78] The problem appears to be a desire to avoid risk as much as possible, rather than to balance risk and reward appropriately.

69. The Committee recognises that a successful higher value-added economy is influenced by factors stretching across many government departments. The role of education in giving young people the confidence, ambition and skills to be creative and entrepreneurial is vital. The Committee welcomes the Government's proposals to extend and develop entrepreneurial training. The Committee also believes that it is important to teach children from a young age to take appropriate risks and not to fear failure. We recommend that the Government incorporates this into education on entrepreneurship.

70. We also stress the importance of well-informed, up-to-date careers advice in schools to encourage children to consider careers in business—especially in engineering—and in entrepreneurship, alongside balanced advice about other careers. Careers advice in most schools appears not to be of the standard required to enable young people to make properly informed choices and we urge the Government to consider how this serious shortcoming can be addressed. If our economy is to continue adding value and competing successfully internationally, it is essential that young people understand the true range of opportunities open to them.

Risk aversion

71. While some of the reluctance to promote industry and entrepreneurship as possible careers rests on misperception, Mr Doug Richard told us that many of those who feared risk were justified:

The fact of the matter is fear of failure in the UK is not some abstract culture, as Roger said, some woolly thing. I believe it is grounded in very specific conditions where the risk of failure is greater. It is as simple as that. Part of it is a cultural condition. It is quite shocking, when you move from the US to the UK, to see exactly what happens when you reach public status in this country. You get skinned alive. It is a harsher public environment, and there is nothing you can do about it, it is what it is, but the fact of the matter is you stick your head above the parapet and all of a sudden everybody takes a shot at you.[79]

He suggested to the Committee that the scale of risk associated with failure in the United Kingdom should be changed to motivate more people to take the step into entrepreneurialism or to innovate.[80]

72. Doug Richard and Rachel Elnaugh set out a range of difficulties facing business angels[81], ranging from flaws in the Enterprise Investment Scheme to the eagerness of the Government to conduct investigations when a company closes down.[82] There is clearly a difficult balance to be struck between promoting a culture in which investors are encouraged to back new businesses, and know they can close businesses that fail, and protecting the legitimate interests of taxpayers, creditors and employees. In our work on the Insolvency Service[83], we drew attention to the fact that the targets for enforcement had not been raised, even though the recession meant that there were likely to be more cases of wrong-doing. In its response, the Government explained it considered that a simple numerical target would give the Service a perverse incentive to look at simple cases, and neglect more serious and complex ones. We were told that "the Insolvency Service and the department are working to move towards a profiling and reporting system based on outcomes alongside outputs for enforcement which more closely relate inputs to the desired policy objectives."[84] One of those policy objectives should be to detect and deter wrong-doing; another should be to ensure the regime does not inadvertently deter honest entrepreneurs.

73. Two other key risks identified by Mr Richards were the way in which the insolvency regime in the United Kingdom provided insufficient breathing space for entrepreneurs, and the frequent requirement for entrepreneurs to provide their homes as security for start-up capital. There are gradual moves to reduce these risks, which we welcome. We note that the Insolvency Service is currently consulting on a new regime for company voluntary arrangements. Similarly, the Government has said that the family home cannot be used as security for loans backed by the Enterprise Finance Guarantee Scheme. Shifting the United Kingdom's culture to one which accepts that making progress may require taking risks, and that success is not always guaranteed, will take time, but will be vital to the future success of our economy. It will depend in large part on a more balanced approach from politicians and the media—two groups that too often seem to celebrate failure with more enthusiasm than success.

THE PUBLIC SECTOR

74. The public sector is, if anything, subject to more pressure to avoid risk than the private. As Will Hutton told us:

Where the public sector is weak is in coming up with the new thing. It does that because of … profound risk aversion and very heavy costs for getting something wrong with the new thing, where you get kicked and the present accountability in the way that the media operates.[85]

There has to be a balance here: no one wants tax payers' money to be wasted. However, there would be clear economic benefits if the Government could use its purchasing power not just to buy goods or services but also to promote innovation and higher added value. Learning from the example of such organisations as DARPA in the USA, we examine ways in which this could be done in more detail later in this Report. In Innovation Nation, the Government announced that the National Audit Office will be conducting a study into the role of risk in public sector innovation.[86] We welcome this development. We have no desire to waste money, but progress requires risk-taking. Some of those risks will lead to a project's failure, in whole or in part. We believe that the United Kingdom's culture is too risk averse. This needs to change in the public as well as the private sector.

55 Why Manufacturing Matters Back

56 Ev 222 [NESTA] Back

57 Q 202 Back

58 Leitch Review of Skills, Prosperity for all in the Global Economy- World Class Skills Back

59 HM Treasury (2003), Lambert Review of Business-University Collaboration: final report Back

60 Fifth Report of Session 2006-07, HC 493. Back

61 First Report of Session 2008-09, HC 48 Back

62 Q 109 Back

63 Ev 191 [Ford Motor Company] Back

64 Qq 255, 256 Back

65 Q 110 Back

66 HC 493 (2006-07), paragraph 83. Back