Memorandum submitted by Intellect
BACKGROUND
Intellect is the UK trade association for the
IT, telecoms and electronics industries.
Its members account for over 80% of these markets
and include blue-chip multinationals as well as early stage technology
companies. These industries together generate around 10% of UK
GDP and 15% of UK trade. Intellect is a vital source of knowledge
and expertise on all aspects of the hi-tech industry.
Alongside the technology industry's considerable
footprint in the UK, it also enables many other industries in
today's economy:
— transport and logistics;
— defence and aerospace; and
The UK has had a good record in creating a business
environment that allows the technology industry to thrive and
drive the growth of other sectors. However, in an era of globalisation,
and new competitive threats, sustained economic growth cannot
be guaranteed. UK based businesses must work with policymakers
to ensure that the UK remains an attractive location for technology
companies.
Intellect welcomes this timely inquiry into
the creation of a higher-value added economy by the Business,
Enterprise and Regulatory Reform select committee. Intellect values
the opportunity to provide input to the committee and looks forward
to a programme of continual engagement with relevant government
departments, agencies and other stakeholders on this and related
issues.
SUMMARY
The UK Government has a role to play in creating
a business environment that attracts investment.
Intellect's members have been aware of the importance
of taking action to ensure that the UK remains a competitive location
for some time. Whilst we have seen strong growth across knowledge
based industries such as technology, financial services and creative
industries for a number of years, continued growth is not guaranteed
and there are a number of issues that require action to ensure
that the UK business environment remains an attractive investment
location. Whilst many of the priorities require action from business
itself, there are a couple of areas where we believe policymakers
can help:
— Driving up quality of research
There is a critical role for universities not
only to drive research but also to work with business to commercialise
research ideas as they are developed. The UK is falling behind
its competitors in this area; other countries have a stronger
culture of commercialising R&D. Whilst there is already work
underway to drive improvement in this area, through Knowledge
Transfer Networks and other initiatives, Government has a key
role to play as the financer of the university sector.
Government's ongoing efforts to tackle the skills
gap in the UK need to be refined to ensure a more holistic approach
to STEM subjects. We are concerned that technology skills are
being systematically overlooked in the wider debate on driving
up STEM skills, with worrying implications.
Recognising the size of the public sector in
the UK, government must seek to continue in its efforts to improve
efficiency in procurement and leverage the impact of the high
levels of investment in goods and services to best effect.
— Open business relationships
It is critical that there are open, wide-ranging
relationships between business and government. Over recent months
decisions have been taken without any consultation with business,
which have had considerable market effects. Open channels of communication
and consultation between Government and industry have to be an
established part of the UK business environment.
INQUIRY QUESTIONS
1. What is meant by a higher value added
economy? Which businesses qualify as such?
Intellect defines a "higher value-added
economy" as a knowledge economy:
Where the generation and use of knowledge
has come to play the predominant role in the creation of national
wealth, achieved by effective use and application of all types
of knowledge and technology, in all manner of economic activity.(Navigating
the New Economy, Intellect, 2006)
Knowledge has become the new factor of
production. The exploitation of technology, innovation, skills
and creativity are central to the development of new high value
goods and services across public and private sectors. The UK's
continued economic stability is reliant on successfully realigning
our economy to enable us to compete in this changing global market.
This will only be achieved by placing the successful orientation,
diffusion and exploitation of knowledge at the heart of our economic
vision.
Currently we believe the UK is developing
a knowledge base, but not a knowledge based economy. To have a
knowledge based economy highly innovative, and therefore high
risk, activities have to be invested in with the accompanying
risk of failure. That risk of failure handicaps companies within
the UK where efforts are lacking as there is no mechanism to encourage
such innovation by supporting the levels of risk associated with
a highly innovative industrial/commercial base. While tax incentives
support success, such incentives do nothing to support the risk
of failure. If failure is not allowed for, innovation levels reaching
the forefront of technologies and turning that knowledge into
usable product and services, will not happen.
2. How does UK business compare internationally
in areas such as research and development, creativity and design?
Statistically UK business does not compare
well with its international competitors. Private sector R&D
is currently 1.8% of UK GDP.[45]
This level of investment puts the UK significantly behind Germany,
Japan and the US. The UK currently lies 18th in the table of R&D
spend on services as a percentage of GDP.[46]
The economy wide statistics do mask some areas of
strength in R&D, such as aerospace, F1 and pharmaceuticals.
However we have concerns relating to two factors: firstly international
perceptions of the UK's R&D abilities and secondly a lack
of focus on the "D" of R&D.
Research published in the FT in December
2007 showed that German high-technology companies are much more
likely to invest in China, India or eastern Europe than Britain.[47]
The findings make worrying reading for both UK businesses and
policymakers. According to the research, declining research standards
and skills levels combine to reduce the attractiveness of the
UK as a location for investment.
Government policy has focused on R&D
over recent times, reinforced by the R&D tax credit. However,
we are concerned that too much attention is put on research, and
little on development—the UK is bad at commercialising its
ideas. Our competitors are better at developing innovation into
commercial success.
3. What can be learnt from the experiences
of other countries in this area and how fast other countries are
moving up the value chain?
It is important to temper international
comparisons with recognition that each country is in a different
stage of development and has had a unique development. With this
in mind it would be valuable for Government to undertake deeper
analysis of competitor nations, and their effect on UK business.
For example, the profile of Indian technology companies
is evolving rapidly from the provision of back-office IT outsourcing
to business process outsourcing and knowledge process outsourcing.
It would therefore be valuable for companies in the UK technology
market to have access to data on the Indian market to establish
the exact nature of the opportunities for business collaboration.
It is important that the UK embraces
emerging markets and actively engages to ensure that UK business
is well positioned to take advantage of opportunities that may
arise.
4. The extent to which UK business
has absorbed new business practises such as lean manufacturing
Technology enables business change. The
adoption of technology has allowed UK business to reap the benefits
of higher productivity and allowed them the flexibility to enter
global markets.
The exploitation of broadband is an interesting example
of a driver of new business practise. Broadband is now available
to 99.6%[48]
of the UK, over the last five years broadband has started to have
a real impact on the way businesses interact and transact with
their customers—both consumers and B2B. For many companies,
particularly SMEs, broadband is changing the way they operate.
These are global trends and there is
every expectation that these trends will continue to develop.
Therefore the capability of the underlying comms infrastructure
available to small growing companies is a real competitive differentiator.
It is therefore essential that we look to the long term evolution
of these networks to make sure they can keep pace with the requirements
of a fast changing commercial world.
Intellect is a member of the Broadband
Stakeholder Group[49]
and strongly endorses its recent work[50]
to highlight the challenges of the rollout of next generation
broadband in the UK. This has stimulated a dialogue between industry,
government and regulators on the steps we need to take over the
coming two years to ensure our long term competitiveness.
5. Why some sectors of the UK economy
appear to be more effective at embracing value-added activities
than others
There are sections of the UK technology
industry that are particularly effective at creating higher value-add
from their activities, including for example, the space industry.
Recent research shows that the value added per head in the UK
space industry is around four times the UK average.[51]
Several key factors have been identified as drivers of this high
level of value added activity:
— The presence of an upstream
industry in the UK is likely to have brought benefit to the downstream/applications
sector that would not have happened if they had bought satellite
capacity from non UK suppliers.
— UK space industry is about
six times more R&D intensive than the UK economy as a whole.
We should seek, wherever possible, to
ensure that the UK business environment facilitates these factors,
capital investment, development of high skills levels, support
of UK businesses and R&D, as much as possible.
6. The impact on business of government
efforts to promote research and development, including the research
and development tax credit
The R&D tax credit is a key enabler
of the UK's knowledge economy. Intellect has long been involved
with helping technology companies to maximise the tax credit system
and believes the scheme is an important enabler of UK business
innovation. However, even with the increases announced in the
last Budget statement, Intellect believes the scheme for large
companies is insufficient to have a real impact and will not help
the UK catch up with competitor nations in terms of R&D spend.
Intellect has been arguing for several years that
the large company scheme needs a substantial rise. The current
rate for large companies is 130%, many costs involved in an R&D
project are not eligible for the credit and corporation tax is
still applicable, creating a real value of the tax credit of about
4%. This is an increase of just half a percentage point.
R&D is fundamental to the success
of UK's knowledge economy and the UK has lagged behind its international
competitors. Gordon Brown has reiterated his ambitious target
of 2.5% of UK GDP spent on R&D by 2014. This represents an
increase of one third in seven years. When we consider that R&D
spend has either fallen or been flat over the past few years,
this target becomes even more challenging.
Although the tax credit is just one factor
for companies deciding upon R&D projects, it can still act
as a real incentive. To attract multi nationals to undertake R&D
in the UK, the R&D tax credit needs to rise to at least 150%
for large companies, which equates to 6-8% in real terms.
Intellect believes that the R&D tax
credits for small and medium sized companies is working well and
welcomes the increase from 150 to 175% announced in the 2007 Budget.
7. The progress that has been made
on university/business co-operation and knowledge transfer since
the publication of the Lambert Review in December 2003
Intellect is involved in a number of
Knowledge Transfer Networks (KTNs) and believes they are a useful
mechanism for ensuring that innovation flows across the value
chain more effectively. However, KTNs are just one part of the
solution and it is important to ensure that more work is done
to develop the links between universities and business.
8. Whether business and government
can interpret innovation too narrowly
The creation of a department for Universities, Innovation
and Skills in the recent Government restructure has raised concerns
within industry that the government equates innovation solely
with higher education. Whilst innovation undoubtedly does take
place in the academic sphere, business innovation has to be recognised
as a central tenet of the UK's progress towards a knowledge economy.
The Sainsbury Review of Science and Innovation is
a welcome contribution to the debate on how Government can play
its role in driving the UK's development as a knowledge economy.
Such an approach has been adopted by many of our international
competitors such as India, South Korea, US, Brazil and Japan,
and has demonstrated impressive returns.
Lord Sainsbury's recommendations provide
a framework for Government action. The challenge Government faces
now is ensuring that departmental silos do not inhibit this important
agenda and that there is an aggressive programme to implement
the recommendations laid out in the review. The recommendations
should be implemented right across Whitehall; the agenda should
not be constrained to the DIUS work programme alone.
9. What the government can do to further
promote higher value-added business activities and innovative
thinking among UK businesses
Intellect believes there are a number
of priorities for Government:
— Creating an attractive business
environment
The UK Government has a role to play in creating
a business environment that attracts investment. There are some
concerns that we are losing some competitive advantage in this
regard. Research published in the FT in December 2007 showed that
German high-technology companies are much more likely to invest
in China, India or eastern Europe than Britain.[52]
The findings make worrying reading for both UK businesses
and policymakers. According to the research, declining research
standards and skills levels combine to reduce the attractiveness
of the UK as a location for investment.
As we adapt our businesses to the globalised
economy we must also update our definitions of innovation. Thinking
on innovation tends to be linear: focused on how to drive innovation
that takes place in universities into business. Whilst this is
an important area of focus, it is also important to recognise
that new types of innovation are taking place.
There has to be a greater recognition of the
variety of places innovation can take place—not only in
academia, but also in business. For technology companies, definitions
of innovation are shifting as consumers and users are increasingly
taking control. Innovation is no longer a linear process that
takes place in universities and is then pushed into the commercial
sphere—it is everywhere and technology is allowing the individuals
to push their ideas back to their suppliers. Recognising this
the public and private sectors need to move from the mindset that
innovation is a move from A to B. In reality competitive environments
drive innovation to a much greater extent than collaborative environments.
In terms of Government approaches to innovation
and R&D, there is a need for a holistic approach. There is
a concern amongst industry that policymakers consider innovation
as something that takes place in the academic sphere, a perception
reinforced by the creation of the Department for Innovation, Universities
and Skills.
The Government has opportunities to drive innovation
through the procurement of products and services. There have been
a number of commendable initiatives undertaken by the Office of
Government Commerce to ensure that the procurement is better able
to take account of the most innovative products and services available
at any given time. There have also been important developments
at a local level: local authorities setting standards for services
rather than procuring large projects to allow different suppliers
services to interoperate across areas. These moves, which place
an emphasis on the desired outcome rather than prescribing a projects
scope, give the most space for the application of innovative solutions.
A key aspect to this work is improving SME access
to Government contracts. This is a challenging agenda as SMEs,
whilst often producing the most innovative products and services,
do not have the resource or capacity to compete in long term bidding
processes. As such the imperative has to be on Government to provide
better information on procurement opportunities to SMEs, they
need to be given channels to market.
There has been widespread recognition of the
importance of improving STEM skills in the UK education system
and workforce. However, an unhelpful by-product of this has been
the proliferation of initiatives that have sprung up to tackle
the skills gap. Many of the schemes are overlapping creating a
disjointed picture and a bureaucratic burden for companies trying
to respond.
— Don't forget the T in STEM
Over the last two years there has been a concerted
effort to tackle the falling levels of skills in Science, Technology,
Engineering and Maths, the so-called STEM subjects. The technology
industry draws on skills from across the STEM disciplines. However,
there is concern that within the programmes to drive STEM, there
is less of an emphasis on technology skills than the other three
disciplines and this has worrying consequences.
Specifically we are concerned that the Higher
Education Funding Council for England has excluded computer science
from the Strategically Important Vulnerable Subjects classification,
on the basis that there are higher numbers of students studying
computer science. This overlooks the fact that demand for computer
science skills still substantially outstrips supply.
This is exacerbated by a further anomaly in the
education system that means funding per student is lower for computer
science than other STEM subjects. For individuals who wish to
retrain by taking a second degree, funding is available for students
taking all STEM subjects except computer science.
The Sainsbury Review reflects on the teaching
of STEM subjects, concluding that Science and Maths are subjects
that should be taught from secondary level onwards whereas Engineering
and Technology are suited for higher education only. We are concerned
about the ramifications of this distinction and its impact in
practise. We recommend the following measures be examined in order
to introduce a more holistic approach to STEM teaching:
— Greater focus on the problem solving
aspects of STEM subjects to bring the subjects to life and link
them to vocational applications.
— Examination of key Stage 2 and
3 curricula for computer science to capitalise young people's
natural technological abilities: a refreshed approach to computer
science teaching that focuses on skills rather than applications.
— Build on the good progress made
in recruiting STEM teachers with more aggressive targets to increase
numbers going forward.
— Build more links between STEM
related employers and educational sector to allow young people
to better understand the path to take to get jobs in our sector.
Engagement would also help break down stereotypes of STEM jobs
such as IT geeks or scientists.
— Exploit technology solutions to
allow careers advisors to keep abreast of the skills demands from
employers. Make it easier for people to understand the latest
careers opportunities and how to get there by using ICT to link
skills with careers.
Much of the debate on skills naturally focuses
on the education of young people and their progression into the
workforce. However it is very important to also consider the existing
workforce and the needs for retraining and up-skilling that exist
amongst the people already working today.
70% of the 2020 workforce is already in work
today.[53]
This fact reflects the importance in removing barriers to people
retraining in STEM subjects. There should be incentives in place
to encourage workers to retrain as the demand for skills evolves.
There are frequently debates about the
role of offshoring in the UK business community and its impact
on the UK workforce. We believe this debate should be considered
within the wider focus of the global marketplace with global sourcing.
Rather than focusing on how offshoring may deplete the UK jobs
market, we should instead consider how UK workers are upskilled,
retrained so that the workforce remains relevant.
Within debates about retraining it is
also valuable to look to mechanisms that can introduce flexibility.
A good example of such a scheme is the IET classifications which
classify particular skills rather than focusing on whole degrees.
This allows a more nimble reaction to skills shortages as they
develop. In these terms, offshoring is simply an aspect of a wider
process of reclassifying the jobs we need in the UK.
10. The impact of nationality of ownership
on the location of research and development work
The nationality of ownership of R&D
should not be the focus of the debate. We should focus on taking
steps to ensure that the UK is an attractive location for R&D
and that companies operating here have access to the skills base
they need.
Some UK companies undertake R&D offshore, but
the benefits of this innovation filter back to the UK. Conversely
foreign owned companies undertake R&D within the UK that also
delivers benefits for the wider UK economy.
A number of global companies within Intellect's
membership choose to have one of their research bases in the UK.
11. The effectiveness of machinery
of government arrangements in encouraging innovation and creativity
The Sainsbury Review says that "the
best way for the UK to make the most of globalisation is to support
the restructuring of British companies into high-value goods,
services and industries". We endorse this view and suggest
that the Government also needs to be structured around this objective.
The review gives a framework for action
but we are concerned that it lacks a vision for a global knowledge
economy, it gives insufficient weight given to services as opposed
to manufacturing and does not take account of technology as a
sector which will drive the UK's growth. These points are outlined
below:
— Lack of a vision for a global
knowledge economy
The Sainsbury Review says that, "The UK
needs a vision of our role in the global knowledge economy",
but no vision is provided nor a recommendation as to how this
vision might be produced and used as a basis for action.
As in any business strategy, we would expect
to see market segmentation as a starting point. Targeting the
global knowledge economy in general is not sufficiently specific,
not least because most developed economies have the same target.
The UK Government should identify the clusters, or market segments
within the global knowledge economy in which it—and industry—believes
that the UK can succeed. Examples of such clusters or market segments
are oil, investment banking or IT services. The next step would
be to develop strategies in support of each of those clusters.
Some elements of those strategies would relate to science and
innovation; others would relate to tax policy, infrastructure,
training and skills, geography, etc. In attempting to review science
and innovation policies without that context the cart is being
put before the horse.
The report appears to recognise this point, suggesting
that (because the UK is strong in sectors where little if any
R&D is reported), "Rather than seeking to raise the amount
of research performed by all industries we should focus our efforts
on the four major goals developed by the Technology Strategy Board",
ie help our leading sectors and businesses to maintain their position,
stimulate those sectors with the capacity to be the best, combine
all these elements so that the UK becomes a centre of investment,
but then reverts to a far more traditional view of science and
research-based innovation as a driver of growth. The review was
commissioned by the Chancellor of the Exchequer but the scope
of review is closely aligned to the remit of the Department for
Innovation, Universities and Skills.
— Insufficient weight given
to services as opposed to manufacturing
Overall, the Sainsbury report gives much more
weight to manufacturing than to services, reflecting a historic
bias. The ITEM Club's recent report, "Financial and business
services—the driving force behind the UK's economic success",
demonstrates effectively that, "The Financial and Business
Services (FBS) market is the key to the UK's future prosperity".
Chapter 1 of the Sainsbury report does examine the importance
of the services sector, but what the review does not do, however,
is to reflect the centrality of the FBS sector in the weighting
of its recommendations and focus. Though there are frequent acknowledgements
of the service sector, for the most part it follows a traditional
line relating science to innovation to economic success (in manufacturing—albeit
now high-value manufacturing).
For example, the review describes the fragmentation
of the manufacturing chain—which occurred decades ago—but
fails to describe the fragmentation of services that is occurring
now. Off-shoring of services, whether call handling, claims processing,
or IT development, is now common-place. Exports of information-intensive
services have been growing by 20% a year in OECD companies[54].
This is a fundamental issue—and an opportunity—in
an economy based around high-value services. Reverting to the
previous point, this is the very sort of question that one would
expect to feature in a vision of the UK's role in the global knowledge
economy.
A related point is the under-valuing of Framework
Conditions. The review notes that Framework Conditions, such as
tax and infrastructure are critical to the success of services
industries, and are far more important to services than to manufacturing.
Indeed, it is notable that the growth of the UK economy, which
has been driven by FBS, has not depended on government policies
regarding science and innovation. Again the train of thought is
not followed through and the answer is still a hammer.
— Relative absence of technology
as a sector
Technology is largely absent as an industry in
its own right and as an enabler of other industries. This absence
is all the more striking when one considers that the overall thrust
of the report is towards building a knowledge-based economy. So
why is the basis for capturing, applying, and exporting knowledge
not central to the report? The sectors where the UK is strong,
such as business services, media and creative services and financial
services are all intensive users of technology.
The question of the role of Information Technology
in the national economy—a knowledge-based economy—
was equally missing in the Government's strategy for applying
technology to its own business, "Transformational Government,
Enabled by Technology" (Cabinet Office 2005). This ought
to be a central question, and the government's own technology
strategy and procurement policies should be considered in this
light. Innovation Platforms, such as for Network Security, are
a good start in this direction but we believe that government
has a major role to play in shaping this industry as a customer
and as a setter of Framework Conditions, such as standards and
infrastructure.
January 2008
http://www.ft.com/cms/s/0/e212ad24-a2bd-11dc-81c4-0000779fd2ac.html
http://www.ft.com/cms/s/0/e212ad24-a2bd-11dc-81c4-0000779fd2ac.html
file:///C:/Documents%20and%20Settings/amyw/Local%20Settings/Temporary%20Internet%20Files/Content.IE5/09QFWT67/Skills%2520in%2520a%2520Global%2520Economy%2520-%2520Eurhodip%5B1%5D.ppt#344,21,UK
workforce of 2020
45 OECD 2004 confirm. Back
46
OECD 2006. Back
47
Germans shun investing in UK, Financial Times, 5 December
2007 Back
48
Pipe Dreams? The prospects for next generation broadband deployment
in the UK, Broadband Stakeholder Group report, April 2007. Back
49
www.broadbanduk.org Back
50
Pipe Dreams? The prospects for next generation broadband deployment
in the UK, Broadband Stakeholder Group report, April 2007. Back
51
OEF research conducted within the Case for Space. Back
52
Germans shun investing in UK, Financial Times, 5 December
2007. Back
53
Skills for a Global Economy-Chris Humphries, City and Guilds Back
54
Organisation for Economic Co-operation and Development (OECD),
"Structure and Trends in International Trade in Services"
quoted in, "What a Flat World means for Government",
EDS Government Journal, Volume One Issue One. Back
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