Memorandum submitted by the Confederation
of British Industry (CBI)
1. As the UK's leading business organisation,
the CBI speaks for some 240,000 businesses that together employ
around a third of the private sector workforce, covering the full
spectrum of business interests both by sector and by size.
EXECUTIVE SUMMARY
2. The global accessibility of inexpensive
labour means that UK-based businesses cannot compete in markets
for internationally traded goods and services on the basis of
low labour costs alone. Thus our economy naturally tends to focus
on higher value and higher value-added activity where investment
in skills, knowledge, technology and innovation more broadly are
important factors.
3. Government "innovation policy" per
se is only one of many policy measures which affect business
investment in innovation. To create a thriving ecosystem for innovation
in the UK, the government must also consider the impact of its
other "non-innovation" policies in areas such as planning,
transport, health, defence, energy, environment, tax, education
and skills. For example, the government can use public procurement,
regulation and other policy levers as demand-side drivers of innovation,
creating lead markets for new technologies and services which,
in turn, could provide a major incentive for further business
investment.
4. The establishment of the Technology Strategy
Board (TSB) as a Non-Departmental Public Body at arm's length
from government provides a new structure for helping to develop
this further. We have proposed that it should focus on the acceleration
of technology development to meet the needs of business and that
its work should be more "mission-oriented", linked to
solving major UK challenges that could lead to innovative solutions
feeding into public procurement.
5. Lord Sainsbury's review of science and
innovation made very welcome recommendations on the new co-ordination
and leadership role to be played by TSB, but we are still concerned
over the level of funding for the TSB, which is about half the
level we proposed to be really effective.
6. Research and Development (R&D) is
an important factor underpinning business innovation and R&D
tax credits have had a positive role in promoting business R&D
spending and in retaining R&D activity in the UK. The evidence
available so far suggests that this role is significant and, despite
the imperfections of the tax credit regime, likely to increase.
However, R&D is only one factor in innovation and, with our
service-dominated economy, not always the most important. Care
is thus needed in making international comparisons on the potential
for value-added activity in the economy on the basis of national
R&D performance alone.
7. Progress has been good on university-business
co-operation and knowledge transfer since the Lambert Review in
December 2003. To build on this positive trend, action is still
needed to encourage better and more extensive links with SMEs,
to ensure that the successor to the Research Assessment Exercise
gives appropriate recognition to excellence in user-focused research,
and in understanding the nature, extent and potential of university
links with service sector businesses.
8. For the Government's innovation support
products we believe it would be acceptable to "raise the
access bar" for firms, but with the compensation that the
support made available will be more substantial and focused on
business growth. The Manufacturing Advisory Service has already
made progress in disseminating best practice in the UK SME community
and we look forward to this being developed further.
9. The CBI welcomes the creation of a new
department (DIUS) which explicitly takes responsibility for innovation
as well as skills. However, the separation of innovation from
business, and schools from skills, needs to be handled with care:
the economic focus of DIUS, and the robustness of links between
DIUS and BERR, and between DIUS and DCSF, are of critical importance.
10. On the Regional Agenda, RDAs and Devolved
Administrations are naturally concerned with their territorial
focuses. But most successful businesses do not operate solely
within individual political boundaries so the conditions they
face and the support they can access should not vary arbitrarily
across these boundaries. There needs to be a consistency of approach
to support for business investment in innovation and growth across
the UK, but with regional "flavours".
11. Manufacturing plays a critical role
in a higher value added economy, not only as a high value sector
in itself, but also as a driver for the majority of business innovation
and R&D. Government policy needs to recognise that modern
manufacturing does not equate solely to the production process
but includes a far broader value chain from basic R&D to service
provision, and that each stage has the potential to be a "high
value" activity.
12. Whilst this submission primarily concerns
the role of innovation in creating a higher value added economy,
also critical is the importance of ensuring the UK has the high
level skills required to develop and exploit new technologies.
For example, the UK compares relatively well with our European
competitors in terms of the proportion of the workforce qualified
to graduate level (29%)—but poorly with the US (40%) and
Japan (45%). China and India are also moving up the value chain
and together annually produce four million graduates compared
to 250,000 in the UK. Lord Leitch recommended the UK move to at
least 40% of the workforce qualified to level 4 and above by 2020
to remain competitive—an ambition supported by the CBI.
13. But meeting the challenge of developing
a higher skilled workforce is not simply a matter of more young
people entering higher education—more than 70% of the 2020
workforce has already left formal education. Developing more business-university
partnerships on raising workforce skills and new flexible methods
of delivery, accreditation of bite-sized training and e-learning
could all be powerful tools in raising the skills of those already
in work.
14. There must also be a greater urgency in
ensuring significantly more individuals have science, technology,
engineering and maths (STEM) skills. Employers are increasingly
concerned by the falling numbers of young people graduating with
degrees in STEM—particularly as new STEM-related jobs will
grow by 2.4 million over the decade to 2014[11].
The CBI supported the Sainsbury Review's recommendations to encourage
more young people to study STEM—particularly its emphasis
on raising the number of specialist teachers and improving the
support available to them, better careers advice and the value
of more young people studying the three separate science GCSEs.
But the Government must go further:
— young people able to do so should
be automatically opted-in to GCSE triple science (they can opt-out),
not just given the option to do so;
— £120 millioninvestment in one-to-one
careers advice at ages 14, 16 and 18—and access to appropriate
guidance for even younger age groups too; and
— £1,000 annual bursaries for
STEM undergraduates to reflect their importance to the economy.
COMMENTARY ON
SPECIFIC QUESTIONS
IN THE
CALL FOR
EVIDENCE
Q1. What is meant by a high value-added economy?
Which business activities qualify as such?
15. The term "value added" refers
to the differential that can be achieved between the cost of a
service/product/process etc. and the price that can be charged
for it. In turn, "higher value-added" concerns maximising
that differential, be it through reducing input costs (eg reducing
material, labour or process costs etc) or increasing the price
that can be realised (eg through brand association, improved quality,
innovative features, faster delivery, higher specification etc.),
or some combination of the two.
16. It follows then that there is a spectrum
of possibilities for achieving a higher value-added economy: at
the one end focusing on low cost production, for example; at the
other, building up high value qualities such as brand, design
and innovation. The increasing accessibility of cheaper sources
of labour implies that UK-based businesses cannot compete in markets
for internationally traded goods and services on the basis of
low labour costs and thus our economy should be, and is, increasingly
focused on higher value-added activity. However, a "high-value
economy" does not necessarily equate to a "high value-added
economy". Nor is it practical or possible for an economy
the size of ours to undertake only higher-value activities—there
will always be a need for low-value activity at some level if
only to support activities further up the value chain. Value added
can be increased by lowering costs as well as by raising the value
of the product: in an economy with comparatively high labour costs,
both are heavily dependent on investment in innovation.
17. Within manufacturing, high value-added activity
does not exclude all production activity. While commoditised,
labour-intensive production is essentially low value-added and
hence vulnerable to low cost competition, high value production,
relying on specialised scientific and engineering skills or the
utilisation of advanced technology, can form an integral part
of a manufacturer's sustainable competitive advantage and support
a climate for business innovation.
18. Each stage in the manufacturing value
stream, from basic R&D through to after sales service provision,
provides an opportunity for business to add value. We should resist
the false conclusion that a high value-added economy necessarily
equates to one with a smaller production capacity, especially
before the link between R&D activity and production is fully
understood.
19. What is important for the UK is that
we understand the balance and interaction between different parts
of the economy and that we nurture an economic ecosystem that
favours activities that are both higher-value and higher value-added.
Q2. How UK business compares internationally
in areas such as research and development, creativity and design
20. The European Innovation Scoreboard 2006
lists six countries as "innovation leaders"—Denmark,
Finland, Germany, Japan, Sweden and Switzerland. These countries
all have high "Summary Innovation Index" (SII) measures
compared with other OECD members (including the UK), and all have
higher rates of SII growth than the UK, although only one of them,
Denmark, has a rate of SII growth which exceeds the UK's by more
than 1%. (The ranking varies in different years, and Denmark's
position in 2005 was less advanced than in 2006; also in 2005
the USA was in the "innovation leaders" group.)
21. The Regional Innovation Scoreboard included
in the same publication lists the top-performing 10 European regions
as being in Sweden and Germany (four regions each), Finland and
France.
22. It may be true that the UK as a whole
is less innovative than the "innovation leaders"; however,
the definition of the SII should be noted: it is made up mostly
of inputs (including R&D) and therefore is not necessarily
a reliable measure of innovation. For example, it tells us little
about the effectiveness of combining different inputs to create
innovation output, nor about whether the focus is on incremental
or radical innovation, and, more importantly, the balance of measures
may not provide a good reflection of innovation in a service-dominated
economy such as the UK.
23. As far as we are aware, none of the
various UK, EU and international surveys and scoreboards that
attempt to measure innovation adequately capture the full innovation
dynamic across all sectors.
R&D
24. According to the OECD's Main Science
and Technology Indicators (Vol 2007/1), 1.78% of the UK's GDP
was spent on R&D in 2005 (a fraction below the average for
the previous four years, despite increases in both government
and business spending): 42% of this comes from industry and 33%
from government. For the 27 EU countries as whole the figures
are 1.74%, 62% and 30% and the UK is rated "about average"
in most analyses of our performance:
| | |
|
| R&D as %
of GDP
| % financed
by industry | % financed
by government
|
| | |
|
| EU-27 | 1.74 | 62
| 30 |
| UK | 1.78 | 42
| 33 |
| France | 2.13 | 53
| 38 |
| Germany | 2.46 | 67
| 26 |
| USA | 2.62 | 65
| 30 |
| Japan | 3.33 | 76
| 17 |
| Finland | 3.48 | 67
| 31 |
| | |
|
| |
| |
25. The OECD R&D data show that:
— spending on R&D as a proportion of GDP in
the UK is low by comparison with other developed countries,
— the proportion of R&D in the UK financed by
government is similar to that in most other developed countries,
and
— the proportion of R&D in the UK financed by
industry is low by comparison with other developed countries,
and as a proportion of GDP lower still.
26. The low total level of spending on R&D as a proportion
of GDP in the UK is at least partly caused by the size and success
of "high sales" industries (including oil and gas, banks/financial
services, telecoms, food producers & retailers) in this country.
While these sectors do invest in R&D they naturally have a
low level of R&D-intensiveness (R&D/sales) compared to
sectors which are R&D-led, such as the electronics and technology
hardware industry, which make up a much larger proportion of the
economy in countries such as Japan and the US than they do in
the UK. In other key sectors of the economy where high R&D
investment is critical (for example, aerospace, defence, pharmaceuticals
and healthcare) the UK does very well in terms of matching world-class
levels of R&D intensity.
27. The low proportion of private sector spending in
the UK is also partly balanced by a high proportion of third-sector
spending (eg by charities such as the Wellcome Trust) and by R&D
investment from abroad.
28. Where the UK does appear to have suffered is in some
of the price-regulated industries (water, gas and electricity)
where the need to meet price targets set by the regulators has
meant that firms have been unable to invest as much as they might
otherwise have wished in longer-term R&D and innovation. This
point was recently highlighted in Lord Sainsbury's report, "The
Race to the Top: a review of government's science and innovation
policies" (October 2007).
29. In our lower R&D spending service sectors other
forms of investment in innovation (eg investment in software and
ICT, design, marketing, and innovation-related training) are likely
to be much more important than pure R&D figures. However,
recent changes in international accounting practice saw HSBC,
Tesco, Royal and Sun Alliance, and RBS all jump from "nowhere"
on DTI listings into the top 25 R&D spenders in the UK in
2006. R&D in the service sectors which are so important to
our overall economy, may thus have been significantly under-reported
in the past.
30. As we have proposed to government, the UK should
not be judged solely against targets to reach "x% of GDP
invested in R&D by y date" (the current target being
2.5% GDP by 2014), but should be more pragmatic and consider a
wider benchmark for overall levels of investment in innovation.
Design and creativity
31. International data on design and creativity are less
easy to access, but NESTA provides a good overview of the UK creativity
sector in its 2006 Creative Industries report. NESTA notes
that:
32. "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 eight per cent of the UK economy| 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."
33. However, the report goes on to paint a less promising
picture of the future for the UK creative industries:
34. "Evidence suggests that there are reasons to
be concerned about the current performance of these sectors, beyond
the variations that result from the normal economic cycle. Over
the past few years, employment has fallen in advertising, design,
film production, games development, music and the visual and performing
arts. For example, employment in advertising has fallen by more
than 20,000 in just three years, from a high in 2001. This is
a reflection of lower revenues and consolidation in these industries.
In design, there has been a 31% fall in turnover since 2000. Film
production spending was nearly a third lower in 2005 than in the
previous year (including international productions filming in
the UK). The number of people working in games development has
fallen by 6% since 2000, despite the continued growth in the market."
35. The lack of scale of most businesses across the UK
creative industries (eg 55% of design agencies employ five people
or less) as well as access to global markets and structural issues
in areas such as the UK music and film industries were cited as
particular issues to address in the NESTA report.
Q3. What can be learnt from the experiences of other countries
in this area and how fast other countries are moving up the value
chain
36. The UK is a mature economy, already comparatively
high-value and high value-added, and economic growth is bound
to be comparatively slow in consequence, whereas many developing
countries with a much lower starting point have begun to enjoy
higher rates of self-sustaining growth. Often this is sustained
by investment in existing technology rather than in innovation.
Rapid growth from a low starting point is much easier than rapid
growth from a high starting point and it is inevitable that many
countries will be moving up the economic value chain faster than
the UK. A similar process took place in Japan for several decades
after the Second World War, but Japan is now itself a mature economy
and is no longer experiencing such rapid growth.
37. Nevertheless there are useful lessons to be learned from
other developed countries, such as Finland, which has a Science
and Technology Policy Council chaired by the Prime Minister, and
the US, where DARPA provides, in the specific field of defence,
a model we refer to in answer to Q9.
38. There are also grounds for concern in the fact that,
as happened with Japan, some countries, such as China, India and
Brazil, are not only developing basic industries such as large-scale
manufacturing, but also rapidly acquiring skills and technology
in specific high value-added sectors, which will make these industries
increasingly competitive against their UK counterparts. For example:
in software, pharmaceuticals, high-tech engineering, aerospace
and space technologies.
39. Other countries such as Singapore, Malaysia and the
Czech Republic are even further advanced along the value chain
and are effectively competing for some of the highest value activities
in the global economy including R&D.
Q4. The extent to which UK business has absorbed new business
practices such as lean manufacturing
40. Lean manufacturing is a broad term referring to a
range of practices in manufacturing originating mainly from Japanese
automotive industry in the 1980s, including those to reduce waste
(eg Toyota Production System, Just-in-Time production) and those
to improve quality (eg Six Sigma, Total Quality Management). Successful
implementation of lean manufacturing can deliver efficiency gains
and improve business performance.
41. Virtually all global businesses have by now undertaken
a programme of process improvement along the lines of lean manufacturing.
For such businesses, high levels of efficiency and quality management
are competitive necessities, not advantages. However, it is not
clear to what extent this best practice has been embedded within
smaller manufacturers, although anecdotal evidence suggests that
there remain many businesses that have yet to fully embrace lean
manufacturing.
42. Businesses at the head of complex supply chains are
taking proactive steps to ensure best practice filters down to
the SMEs that comprise subsidiary tiers of their supply chain.
In vertically disintegrated industries such as automotive and
aerospace (whose production processes are diffused across several
businesses) suppliers have responsibility for increasingly complex
tasks and hence have a significant impact on the overall performance
of the final assembler.
43. Therefore, developing the capability of SME manufacturers
is not only of direct economic benefit to the UK, but also acts
as a tool to attract and retain investment from global manufacturers.
44. Government action to spread best practice within
manufacturing has successfully addressed a market failure in that
private consultancies offering affordable and appropriate manufacturing
advice to SMEs are not widely available. The Manufacturing Advisory
Service (MAS) was established in 2002 by the then Department for
Trade and Industry, to offer free or subsidised best practice
advice and support for SMEs.
45. Figures published by the DTI in June 2006 claim that
in the first four years of operation (2002-06), the MAS responded
to 86,414 enquiries, completed 14,982 diagnostic reviews and carried
out in-depth consultancy with 4,700 businesses (note that the
UK manufacturing SME community comprised 121,000 firms in 2002
and 109,000 in 2005). The MAS will be further improved from 2008
with the ability to offer longer periods of in-depth support to
manufacturers and offer support on a wide range of subjects, including
strategic planning and skills development.
Q6. The impact on business of government efforts to promote
research and development, including the research and development
tax credit
46. A report by HMRC published in December 2005 supports
the view that tax credits are having some impact in achieving
their objectives, particularly in the case of SMEs, but that they
are, on average, less effective than one might wish:
— About 57% of firms surveyed (including both those
that had claimed and those that had not claimed the credits) felt
that R&D tax credits were an incentive to undertake further
R&D.
— However, 41% of large firms which had claimed tax
credits thought that the credits were not an incentive to conduct
further R&D.
47. When the CBI lobbied for the R&D tax credit to
be made available to all firms we noted that it would take time
to influence long-term trends in business R&D investment.
Experience from Canada had suggested that benefits would only
become clear after around 10 years of operation. Given that larger
firms in the UK have only been able to benefit from the tax credit
since 2002, it is still too early to make a definitive judgement.
The government itself has suggested that 2014 should be the point
at which their impact is properly assessed.
48. We also noted that, to be effective, the tax credit
would have to make a difference to R&D decision-makers (not
necessarily those in charge of conducting R&D, but the Finance
Directors and other Board members responsible for strategy and
investment) and that to do this the tax credit would need to have
a value clearly visible above the "background noise".
We suggested this noise level to be around 5-6% of costs and that
the tax credit would need to reduce overall R&D costs by 10%
or more to be widely recognised and valued.
49. When set up, the tax credits instead reduced R&D
costs on qualifying R&D by 7.5% for large firms and 9.5% for
SMEs. Critically, not all R&D as defined by business, nor
as defined by the DTI, was included in the Government's definition
of "qualifying R&D". The overall value of the tax
credit was thus reduced as a consequence. Our research with the
Engineering Employers Federation in 2005 suggested that the actual
value of the tax credit was, on average, a 4% reduction in total
R&D costs—SMEs benefitting most with a reduction in
costs of around 5%, while costs for the largest firms were reduced
by less than 3%. Clearly, these figures are well within the noise
level for decision-makers and so it is perhaps not surprising
that the impact of the tax credit has not been universally high.
50. Tax credit rates were increased in Budget 2007 to
reduce the costs of qualifying R&D by up to 8.4% for large
firms and 16.5% for SMEs. As a move on its own, this appears to
be positive, but the overall value needs to be considered in relation
to changes in corporation tax rates that were announced at the
same time:
— Large firms are more likely to benefit from the
reduction in corporation tax rates to 28% and this may be a greater
spur for further investment than the increase in tax credit rate.
— Small firms were hit by an increase in corporation
tax rates to 22% by 2009-10. This has the effect of increasing
the overall value of the tax credit, so those investing most in
R&D should now be at a much greater advantage. However, those
making higher profits and many at the low-R&D investment end
of the spectrum and/or without the need or capacity to increase
R&D investments, will be worse off.
51. Modelling shows that SMEs making average rates of
profit and investing above 1.5% of turnover in R&D should
be better off in tax terms as a result of the Budget 2007 changes.
This level of R&D investment may not sound very high, but
it could equate to over 20% of pre-tax profit for a firm operating
on an average 7% profit model. For firms investing in non-R&D
based innovation, the increase in corporation tax rates, followed
by decisions in the 2007 Pre-Budget Report to abolish Capital
Gains Tax taper relief, are effectively "anti-innovation"
measures that will discourage longer-term investment and risk
taking by small firms.
52. Despite all of this, the real impact of the R&D
tax credit is already starting to be seen in individual firms,
but the nature of this impact varies considerably. Those whose
business is centred around high R&D intensity activities have
benefited extensively. Some have focused on using the credit to
off-set their tax liabilities while also investing in growth—thus
making the UK an attractive place to invest. For many, the tax
credit has helped to stimulate investment in technologies through
internal development, spin-outs, acquisitions and collaborations.
For others it has been a significant factor in influencing where
to do R&D in the face of other global opportunities—helping
to maintain R&D in the UK, a factor that we suggested would
be critical when the tax credit was being developed. Some firms
have said that receiving an R&D tax credit can even help demonstrate
that they are meeting some of their corporate social responsibility
aims: the tax credits acting as an external validation that they
do invest in R&D, and that they are a responsible firm developing
for the future and can thus provide better career prospects.
53. The Treasury document of July 2005, "Supporting
Growth in Innovation: enhancing the R&D tax credit"
recognised three principles in the introduction of the credit
system: simplicity, consistency and certainty. HMRC have taken
time to deliver on these principles, which has contributed to
the delayed impact of R&D relief on UK businesses:
Simplicity: A significant process change was required
within large organisations to capture appropriate data for a valid
claim. The process change has taken time to put in place and agree
with HMRC. Better help and guidance for firms has also taken too
long to materialise and we have yet to see its impact on take-up
rates.
Consistency: It has been clear from the outset of the
regime that there have been differing approaches to claims by
local inspectors. The changes within HMRC, with the introduction
of client relationship managers (CRMs) for large companies, have
begun to improve the consistency of the approach.
Certainty: The certainty will come with experience and
confidence of both HMRC and the Taxpayer in applying the regulations.
The relief is still relatively new in comparison with other regimes,
like Canada. It will take time to provide the certainty. Currently,
some firms report that they purposely exclude more applied development
work from their claims -even though such work is likely to be
valid- simply to make it more certain that their claim will be
accepted.
54. Overall, the R&D tax credit may not be an incentive
for the short term, but with more certainty and continuity of
the legislation, business will be able to work the relief into
its long term strategy and it will increasingly stimulate innovation
in parts of the UK economy where R&D is an important factor.
We welcome the fact that both Ian Taylor's STEM Taskforce report
for the Conservative Party and Lord Sainsbury's review of science
and innovation for the Prime Minister both gave their support
for continuing with the R&D tax credit.
Q7. The progress that has been made on university/business
co-operation and knowledge transfer since the publication of the
Lambert Review in December 2003
55. Progress has been good and the positive trend is
continuing. Collaborative research between business and public
funders is now valued at just under £600 million, a 12% increase
from 2004-05. Overall, UK higher education institutions (HEIs)
received £2.25 billion in 2005-06 from business and community
interaction, a 7% rise from 2004-05. The number of full-time equivalent
staff dedicated to engaging with commercial partners also rose
by almost 28%. Some of the other key figures for 2005-06 from
the Higher Education Business and the Community Interaction survey
run by HEFCE are:
|
| Engagement with business | 2005-06 income
|
|
| Consulting income from business | £115m
|
| Collaborative research income | £595m
|
| Equipment and facilities services | £89m
|
| Contract research income | £651m
|
| Short bespoke course on companies' premises
| £80m |
|
| |
56. CBI Innovation surveys have also shown rising levels
of business-university engagement over time, with around three-quarters
of the most innovative firms reporting innovation-related links
with universities in the UK.
57. In our input to the Sainsbury Review, we made the
following broad observations on progress since the Lambert Review:
— A code of governance has been developed and adopted
by all UK universities.
— The "third stream" of funding has been
made permanent.
— Guidance material and model contracts have been
developed to cover intellectual property issues in five different
collaborative and contract research scenarios, and these are now
being used by a wide range of firms and universities. A further
set of model agreements covering consortia arrangements are under
development. The initial set of model agreements are now even
being used by at least one firm in making academic links in China
and the UK Intellectual property Office is working on taking the
ethos of the Lambert Agreements and translating them into model
agreements for business-business collaboration.
— HEFCE has announced a £60m/yr fund for user-focused
research within the QR stream. This is a good start along the
way to the £100-200 million business-relevant research fund
proposed by CBI at the time and recommended in the Review.
— Developments with the RAE post 2008 now look set
to enable user-relevant research to be valued appropriately.
— RDAs and the Devolved Administrations are taking
an increased role in facilitating business-university links. In
particular, steps are being taken to engage businesses that had
not previously made connections with universities—for example
with the INDEX innovation voucher scheme for SMEs coordinated
by Aston University and funded by Advantage West Midlands, ESRC
and EPSRC. We would argue that this scheme should be rolled-out
nationally as part of the general package of business support
delivered by the RDAs.
58. It is also worth highlighting that the UK now has
an Institute for Knowledge Transfer (IKT), launched in May 2007.
This provides a focus for the ongoing training and development
of knowledge transfer professionals from business, universities,
government agencies and elsewhere. Shared experience and training
on all sides should help to create a shared understanding, create
networks, help break down perceived or real barriers to knowledge
exchange and bring partners closer together. While not a direct
recommendation in the Lambert Review, establishment of the IKT
followed discussions and links made by partners in responding
to the Review.
59. There was a welcome announcement in the 2007 Pre-Budget
Report that the Higher Education Innovation Fund (HEIF) will be
increased to £150 million over the next three years, in line
with a Lambert Review recommendation.
60. The advent of HEIF has certainly helped to accelerate
the rate of exploitation of some university IP. It is clear however
that it is predominantly the "early adopter" universities
that have made the most significant use of the available funding.
More needs to be done to affect cultural change within some of
the others. This will only be achieved by having a greater proportion
of funding linked to exploitation of research in future years
and we have suggested that HEIF metrics should better reflect
actual levels of activity. For example: active knowledge transfer
engagement with SMEs; R&D income from business, and repeat
income; and that HEIF should also reward "in-kind" engagement
not usually captured by bald income figures, but which can have
a significant impact on business innovation.
61. Similarly the issue of business working with universities
on R&D is another requiring a degree of cultural change. The
present systems for government funding of collaborative R&D
appear to work well in fostering co-operation, principally because
of the longer (2-3 yr or longer) time frames for the projects.
This fits well with university timescales for recruitment of students
and publication of papers. What seems to work less well is the
requirement for a faster turn around and perhaps more focused
piece of work which many firms, in particular SMEs, frequently
need. Universities are less well geared up to support short-term
activity as this most often has to be conducted by more senior
staff. For example, in the North-West, the "Knowledge NW"
programme, which aimed to provide short-term consulting activity
from universities to SME's, encountered difficulties due to a
general lack of interest from academics in short-term interactions
with business.
62. The North-West is not alone, it appears to be a general
problem that, with high teaching and admin loads and the need
to conduct academic research that will score well in the Research
Assessment Exercise, senior academics have less and less flexibility
to engage in other knowledge transfer activities.
63. Given the nature of the UK economy, more effort also
needs to be put into examining the extent and nature of engagement
between service sector businesses and universities, whether this
would benefit from further support, if there are specific barriers
that need to be removed and whether different metrics and mechanisms
for knowledge transfer are required.
64. Often the initial problem for firms facing innovation
challenges is knowing where to turn for help and whether they
need to make connections with other firms or if there might be
a solution they could use in a university. And the challenges
only get worse if the solution lies in a different discipline
to the ones with which the firm is familiar and, in particular,
if they need to be assured of strict confidentiality to protect
ideas. In these circumstances, knowledge transfer could be greatly
improved with commercially focused intermediaries acting as an
intelligent and independent link between universities and firms.
Examples of this already exist with the Innovation Advisory Service
pilot funded by SEEDA and with the Birmingham University-based
Innovation Exchange. The success of these ventures should be monitored
to establish if they could be replicated elsewhere, either through
support from HEIF or as part of the business support package provided
by the RDAs.
Q8. Whether business and government interpret innovation
too narrowly
65. The important issue is not so much interpretation
as the consequences of disregarding examples of innovation which
should be recognised; focusing primarily on R&D as the main
indicator of innovation misses other valid inputs such as design,
ergonomics, marketing-related innovation, investment in ICT, and
training. These are often of particular importance in the "servicisation"
of technology: transforming technology into a workable service
offering.
66. Many of these aspects involve just as much investment
and just as much risk as investment in R&D and, as with R&D,
there are often tangible spill-over benefits to competitors and
other parts of the economy that the firm making the initial investment
is not able to fully capture (in other words, market failure where
there is a good case for appropriate government intervention).
For example: modelling of aircraft movements may increase effectiveness
at one airport, but can easily be copied by others; internet banking
was a major risk for the early players, but now virtually all
banks have followed suit.
67. The question that should be asked is whether the
government does enough to support business innovation as a broad
theme, rather than just business investment in R&D. We would
argue that the government should be much more focused on innovation,
understanding the real innovation needs of business, and barriers
to innovation, in different sectors and helping them invest in
growth appropriately. The Sainsbury Review, with its recognition
of an innovation ecosystem in the UK, at least now demonstrates
a real willingness to consider innovation more broadly.
Q9. What the government can do to further promote higher
value-added business activities and innovative thinking among
UK businesses
68. As mentioned previously, the UK's future is unlikely
to lie in the low cost commoditisation phase of technology take-up,
but, with the right support, it could make a real impact in the
global market for high-value early stage development and adoption.
Addressing the demand-side for innovation is now critical for
this to be achieved.
Public procurement
69. In 2005, manufacturing (as traditionally described
-see HoC T&I Committee recent 5th report on manufacturing
skills) accounted for 13.6% of national GDP. This is about the
same as the share of GDP accounted for by public procurement in
the UK. In total, public procurement in the UK was worth around
£150 billion in 2003-04 and, if a portion of this could be
used to purchase innovative solutions, it could provide a major
incentive for further business investment.
70. In Finland, the report of the Competitive Innovation Environment
Development Programme of the Finnish National Fund for R&D
(SITRA) in 2005 on "Making Finland a leading country in
innovation" recommended that a proportion of the appropriations
granted to different branches of government be allocated to innovation
and development activities; and that innovativeness be included
among the criteria for public procurement decisions and competitive
bidding by central and local government.
71. We would welcome a similar degree of commitment in
the UK.
72. In our 2006 CBI/QinetiQ report on innovation and
public procurement, we recommended that public procurement should
be transformed to embrace, and act as a driver for, innovation.
The UK should help to create lead markets, actively support technology
demonstration and, in general, become a more intelligent customer
for innovation.
73. A key development in this would be for the Technology
Strategy Board (TSB) to be transformed into an ARPA-like body
(similar to the Defence Advanced Research Projects Agency in the
US) at arm's length from government and tasked with investing
in the acceleration of technology development -in particular linked
to solving major UK challenges that could lead to innovative solutions
feeding into public procurement.
74. The process of creating a mission-oriented TSB as
we proposed is now underway. Lord Sainsbury's review made very
welcome recommendations on the new co-ordination and leadership
role to be played by TSB and we are now looking for it to make
a real impact on technology development and demonstration in the
UK. However, we are still concerned over the level of funding
available to the TSB, which (at £1 billion for three years-
about 1/3 of which is money recycled from RDA and Research Council
projects) is about half the level we proposed. To maximise its
impact, it will now be critical for the TSB to match these funds
with investment from other government departments, agencies and
the wider public sector in the pre-commercial procurement of innovation.
Further comments on the TSB are made in answer to Q11.
75. Other recommendations in the CBI/QinetiQ report on
innovation and public procurement are also still valid:
— Innovation incentives (for staff, to encourage
and reward long-term performance) and stretch targets should be
introduced in public procurement.
— Outcome-based procurement should be made a reality,
with better signalling of the real procurement needs (and broader
government intentions over the long-term) so that potential suppliers
can be involved at an early stage in developing solutions.
— Procurement on the basis of whole life value should
become the norm.
— A rational approach should be taken to sharing
IP rights between those funding and those developing innovative
solutions for public bodies.
— All those involved in public procurement should
take the opportunity to share and learn from best practice.
76. The Cox Review of Creativity in Business 2005 -to
which the CBI made a major input- also made key recommendations
on innovation and procurement:
"The approach to public procurement, both for central
government and local bodies, should be adapted (in the ways listed
below) to encourage more innovative solutions from suppliers:
— Allow and require more discussion pre-specification.
— Identify project needs more holistically.
— Improve purchaser capability through better training.
— Take into account the impact on future supplier
capability.
— Help smaller innovative companies to bid.
— Require the NAO and the Audit Commission to monitor
innovation.
— Define accountability for central government implementation."
77. Since those two reports, the government has committed
to addressing public procurement as a priority, accepting points
made by the CBI and others in the HM Treasury report "Transforming
Public Procurement" (January 2007). We welcome this and
look forward to significant progress being made, but do not underestimate
the scale of change required. The government now needs to demonstrate
real vision and ambition in using procurement, regulation and
other demand-side drivers to boost the UK's innovation performance.
Business support products
78. The CBI has contributed to the on-going BERR review
of business support products—the Business Support Simplification
Programme (BSSP).
79. Overall, we have advocated a more holistic approach to
innovation support that focuses on all aspects of business growth
and development through innovation. Firms should be able to make
a single application for support that is actually aimed at addressing
their business needs—for example: support that covers training,
collaborative work, R&D finance and general or specific development
advice in one flexible package, rather than having to make separate
applications for each aspect.
80. For the innovation products under consideration we
have suggested that it would be acceptable to "raise the
bar" slightly higher for firms wishing to access this sort
of coherent and holistic innovation support if it meant that more
substantial support could be provided to those that do gain access.
Research by the Centre for Business Research at the Cambridge-MIT
Institute indicated that very small high-tech firms in the UK
are twice as likely to receive government support as similar firms
in the US; but US firms that do receive support get nearly five
times as much as their UK counterparts. The UK system can be characterised
as "spread it thin", but with little impact. The US
approach is much "lumpier": some firms do not get support,
but where funding and support is made available it can really
make a difference, helping firms to grow and underpinning further
investment in innovation. The CBI/QinetiQ innovation survey in
2005 showed that although 25% of respondents used government initiatives
and grants as a source of finance for innovation, only 3% rated
it as the most important source—again, suggesting that the
BSSP exercise must look at the likely impact of government measures,
not just their coverage.
81. For additional comments on the Manufacturing Advisory
Service, see the response to question 4.
Q10. The impact of nationality of ownership on the location
of research and development work
82. This issue has attracted a considerable amount of
interest, but it is difficult to draw firm conclusions.
83. The OECD Science Technology and Industry Scoreboard 2005
collected figures on the internationalisation of R&D, and
found that, "R&D performed abroad and by foreign affiliates
represents on average well over 16% of total expenditure on industrial
R&D in the OECD area. In most OECD countries, the share of
foreign affiliates in industrial R&D is increasing. In the
United Kingdom, Canada and Ireland, it currently exceeds 35%."
84. R&D intensity (defined as R&D expenditure
as a share of value added in industry) of affiliates under foreign
control and R&D intensity of domestic firms in various countries
was also compared (see table below). For the UK, the foreign:domestic
R&D intensity ratio is approx 0.6 (firms in foreign ownership
have an average R&D intensity of 0.7%, compared to 1.2% for
UK-owned firms). This ratio is fairly similar to that of Sweden,
the Czech Republic, Canada and Australia, but the ratio is much
higher than for Japan, France, Germany, Netherlands, US or Finland,
all of which have higher levels of R&D intensity in their
own firms and lower intensity for foreign affiliates. In only
a very few countries (eg Ireland and Hungary) is R&D intensity
higher in firms under foreign ownership. In other words, by comparison
with the situation in most large developed countries:
— the propensity of foreign affiliates in the UK
to conduct R&D in the UK is quite high, and
— the propensity of UK-controlled firms to conduct
R&D is only average—although even in the UK, domestic
firms tend to do more R&D than foreign affiliates.
| | |
|
| Average R&D intensity: | Firms controlled by the
compiling countries (%)
| Affiliates under
foreign control (%)
| Intensity ratio:
foreign/domestic
|
| | |
|
| Canada | 0.93 | 0.47
| 0.51 |
| United States | 2.21 | 0.36
| 0.16 |
| Japan | 2.91 | 0.10
| 0.04 |
| Australia | 0.51 | 0.36
| 0.72 |
| Finland | 2.90 | 0.48
| 0.17 |
| France | 1.71 | 0.41
| 0.24 |
| Germany | 1.67 | 0.55
| 0.33 |
| Greece | 0.27 | 0.01
| 0.05 |
| Ireland | 0.37 | 0.69
| 1.87 |
| Italy | 0.51 | 0.25
| 0.49 |
| Netherlands | 1.65 | 0.40
| 0.24 |
| Portugal | 0.29 | 0.13
| 0.45 |
| Poland | 0.16 | 0.02
| 0.11 |
| Spain | 0.48 | 0.22
| 0.45 |
| Sweden | 4.43 | 2.74
| 0.62 |
| Turkey | 0.23 | 0.03
| 0.12 |
| United Kingdom | 1.15 | 0.70
| 0.61 |
| Hungary | 0.08 | 0.30
| 3.64 |
| Czech Republic | 0.59 | 0.45
| 0.77 |
| Slovak Republic | 0.39 |
0.11 | 0.29 |
| | |
|
| OECD Science Technology and Industry Scoreboard 2005 (based on data for 2002 or nearest available year)
| | | |
| |
| |
85. It seems then that the UK does at least a reasonable
job of attracting foreign-owned firms that then invest in R&D
in the UK. There is no one single reason for this (compared to
the very low rates of corporation tax often cited as the key reason
underpinning investment in Ireland), but rather this is likely
to be due to the combined effect of a range of factors including:
access to skills, access to markets, location adjacent to Europe,
the R&D tax credit etc.
86. The DTI R&D Scoreboard 2006 notes that "The
top ten foreign-owned UK companies account for just over half
of the £4.4 billion of R&D performed by foreign-owned
UK companies. Eight of these 10 have higher R&D intensities
than their overseas parents and this emphasises the attractions
of the UK as a location for R&D."
87. A recent (2005) survey by Arthur D Little, commissioned
by the DTI's Office of Science and Technology, found that: "As
in other well-developed countries, firms under foreign control
are generally less R&D intensive than UK based firms. However,
foreign firms in the UK appear to be relatively more R&D intensive
than foreign firms based in other G7 countries."
88. It also found that "In terms of the international
exploitation of technology, the UK has a positive Technology Balance
of Payment and its surplus expressed as a percentage of its GDP
is the largest of all the OECD countries". This is illustrated
in the table below:
|
| High level of technology trade as % GDP (both receipts & payments)
| Low technology trade as % GDP |
|
| Positive Technology Balance of Payment |
UK | US, Canada, France, Japan |
| Technology Balance of Payment Deficit | Germany
| |
|
| |
|
89. Among the report's conclusions was the claim that:
"Overall, the literature suggests that countries with strong
national technological capability are likely to benefit from the
trend toward technology sourcing motives for [multi-national enterprises]
internationalising their R&D resources. There is some evidence
that R&D investment by foreign multinationals have [sic] made
a strong contribution to UK productivity growth through technology
transfer."
90. On the broader subject of innovation, rather than
R&D, the CBI Innovation Trends Survey in 1998 concluded: "Foreign
Firms in the UK were more likely to take a positive approach towards
the exploitation of novel technology and process innovation than
UK `internationalised' firms (ie UK businesses with business units
or subsidiaries overseas). UK `internationalised' firms were more
likely to take a positive approach to supply chain driven innovation
than either foreign firms in the UK or UK domestic firms. UK domestic
firms were the least likely to exhibit any of the four categories
of innovative behaviour identified."
91. On a different aspect of this subject, the recent
OECD China report argues that "there is no evidence so far
that R&D investments in China substitute for investments in
home countries. They are merely additional and would not take
place where expected private returns would be lower. They help
to increase the global stock of knowledge by engaging more brains
in more efficient cross-borders innovation processes."
92. The CBI believes that it is the UK's interest for
this country to continue to be an attractive place to do R&D
and innovation more broadly, with network benefits to all concerned.
Currently the UK competes well for foreign R&D investment—better
than almost all other OECD countries—and this is something
that we should seek to maintain. As discussed earlier, the low
to average overall R&D intensity performance of the UK is
significantly influenced by the make-up of our economy, but we
recognise that at least in some sectors, UK-owned firms could
invest in R&D at higher rates.
Q11. The effectiveness of machinery of government arrangements
in encouraging innovation and creativity
DIUS
93. The CBI has welcomed the creation of a new department
(DIUS) which explicitly takes responsibility for innovation, and
has also welcomed the explicit inclusion of universities and skills
in the same department. However, the separation of innovation
from business (which is the responsibility of BERR) gives grounds
for caution and we note with concern that only £0.3 billion
of the DIUS budget is currently allocated to innovation (primarily
support for the TSB) out of a total budget of £18.3 billion.
94. Demonstrating the economic focus of DIUS is of critical
importance, as is ensuring the robustness of links between DIUS
and BERR.
95. It should be borne in mind, however, that government "innovation
policy" per se is certainly not the only, and not
usually even the most important, driver of business investment
in innovation. To create a thriving "ecosystem" for
innovation in the UK, the government must also consider the impact
of its other "non-innovation", policies such as planning,
transport, procurement, health, defence, energy, tax, and for
the longer-term in particular- education policy. Across the policy
spectrum the government must ensure that it creates the right
culture and market for investment in innovation.
96. People will be critical to this. We need engaged
people with the right skills and experience in maths, science,
technology and engineering, but also in design, marketing, knowledge
transfer, social sciences, entrepreneurship and the management
of innovation. An effective ecosystem is one that encourages the
public sector, private sector organisations and individuals to
invest in innovation.
97. Other CBI priorities for DIUS are:
— Making innovation a core part of public procurement
culture (which will entail DIUS working much more closely across
government to help realise change).
— Improving the supply of individuals with STEM-skills.
— Securing a critical mass of funding for the Technology
Strategy Board (TSB), which we estimate needs to be at c. £625m/year,
rather than the c. £300m/year recently announced (see below).
— Giving adequate recognition to the fact that higher
education institutions contribute to the economy not only through
their educational role, but also through research, consultancy,
providing opportunities to use facilities or equipment, technology
transfer, spin-outs, and in other such ways.
The Technology Strategy Board
98. The establishment of the TSB as a Non-Departmental
Public Body at "arm's length" from government is welcome,
as are the recommendations on TSB development made in Lord Sainsbury's
review. The TSB should be able to create close links between the
science base and industry and to assume a new leadership and co-ordination
role, promoting new innovation platforms and more collaborative
research. Our key priorities for the TSB are:
— Funding: annual funding in the order of £625m/yr
is appropriate, allowing the TSB to fund a substantially increased
amount of collaborative R&D in priority areas and to establish
(and fully fund) a range of new innovation platform initiatives
(major technology demonstration and proof of concept activities
that seek to bring a wide range of public and private stakeholders
together to address key challenges for the UK). We have suggested
£625 million to place TSB funding on a par with funding for
the EPSRC. This would provide £300 million per year for collaborative
research programmes (which are already two to three times oversubscribed),
£300 million for innovation platforms, with the remainder
for Knowledge Transfer Networks, strategy activities, pilot projects
and staffing etc.
— Ambition: the TSB must be ambitious, supporting radical
as well as incremental innovation, taking the lead to build a
critical mass of internationally competitive technology-based
activity in the UK.
— Coordination: the TSB should provide the focus
for technology development and demonstration funding and activity,
linking in to the RDAs, Devolved Administrations, Research Councils,
Government Departments and Agencies.
— Business focus: it is paramount that the TSB should
continue to be business-led and should focus on addressing real
user needs, bringing businesses, universities and other partners
together to help develop solutions.
— Procurement: the TSB should play a central role
in the pre-commercial procurement of innovation for public customers,
helping them to become early adopters of new ideas and providing
lead markets that will, in turn, drive further investment by business.
Regional aspects
99. A different issue is raised by the engagement of
the RDAs and Devolved Administrations in innovation: although
diversity is a consequence of these bodies' existence, and they
are naturally concerned with their territorial focuses, problems
can arise as a result.
100. Our key concerns are that:
— Most successful businesses do not operate solely
within individual political boundaries so the conditions they
face and the support they can access should not vary arbitrarily
across these somewhat arbitrary regional or political boundaries.
Business should be able to access the support it needs no matter
where it is based in the UK.
— There needs to be a consistency of approach to
support for business investment in innovation and growth across
the UK, but with regional "flavours". This does not
mean reinventing the wheel in each region, but the regions taking
a view on how to balance support across a portfolio of nationally
agreed schemes according to their regional needs.
— There should be coherency between national and
regional approaches.
— RDAs, while often having market awareness, often
lack full appreciation of the needs of business. One common problem
is investing in technology parks where business might not want
to invest—the danger is that these then become real estate-led
activities rather than knowledge based economy-led initiatives.
A greater awareness of logistics and other operational factors
affecting business would go some way to addressing this issue.
— The UK should strive to create activity of a critical
mass that will make us competitive on the world stage. This may
mean different regions taking the national lead on a specific
aspect of innovation or technology focus, with other regions as
active partners rather than competitors for investment and development.
October 2007
11
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