Memorandum submitted by the Institute
of Physics
What is meant by a higher value added economy?
Which businesses qualify as such?
A high value-added economy is built on
sectors with a higher turnover and gross value added (GVA) per
employee. This definition is met by high-technology industries
ranging from oil extraction to telecommunications to aerospace
which are underpinned by physics expertise and knowledge. The
IOP's report, Physics and the UK economy[57],
states that these physics-based industries (where modern physics
and modern physics developments are integral to the continued
success and survival of the businesses) have worker productivity
more than twice the national average (£165 000, compared
with the UK average of £72,000) and the GVA per worker in
2005 was 70% higher than the UK average, at £69,000 per year.
Additionally, the physics-based sectors contribute more to the
UK's (GVA) than the construction sector and provide employment
to more than a million people in the UK. The total GVA of physics-based
sectors stood at £70 billion in 2005, accounting for 6.4%
of the output of UK plc, comparable with the GVA produced by the
finance, banking and insurance sector that accounted for 6.8%
of the UK total.
High value-added sectors such as these, in which
modern physics research and development is crucial to the survival
of businesses, contribute significantly to the strength and stability
of the national economy.
The impact on business of government efforts to
promote research and development, including the research and development
tax credit
The R&D tax credit programme has demonstrated
considerable successes over the past 10 years and the Institute
welcomes the recent budget increases. However, the Physics and
the UK economy report suggests a recent decline in R&D spending
in physics-based industries, which are integral in reaching the
2014 target R&D intensity of 2.5% of GDP—in 2004, 24%
of all business R&D spend in the UK was spent in physics-based
industry. The level of R&D spending in physics-based industries
has been in decline since 2001, falling from £3.8 billion
in 2001 to £3.3 billion in 2004, a drop of 14%. Over the
same period overall R&D spend in the UK increased by around
2%.
Ongoing industrial scientific R&D provides the
UK with an engine room of innovation, producing a stream of new
developments, proprietary knowledge and inventions, driving high-technology
industries. Physics-based industries are vital to unlocking the
potential of the UK's science base and R&D is integral to
the prosperity of these industries. If the downward trend in investment
in R&D continues it will have a deleterious effect on the
ability of the UK economy to exploit its science base successfully
and to compete internationally in the high-technology industries.
The reasons for this decline in R&D spend in physics-based
sectors need to be identified and addressed as a matter of urgency.
Whether business and government interpret innovation
too narrowly
The precise definition of innovation
within government is not the issue, innovation in the service
industries is often supported by scientific research and progress,
for example in RFID technology currently being introduced in supermarkets
or the advanced computers used in the banking industry. As such,
it is important that any redefining of the boundaries of R&D
for statistical measurement to include money spent in services
should not result in a reduction in the government funding of
industrial research in areas where the UK is traditionally strong,
such as physics. Physics R&D provides opportunities for the
exploitation of home-grown physics-based industrial R&D, guards
against the copying of innovative techniques and processes (as
can occur in sectors such as construction and finance) and retains
the value of inventions and the jobs they create in the UK.
What the government can do to further promote
higher value-added business activities and innovative thinking
among UK businesses
The government can and should make more of a difference
through its procurement process. Supporting innovative solutions
produced by high-technology high value-added industries can result
in more cost-effective and efficient solutions and promote industrial
R&D, providing both primary solutions to procurement problems
and also secondary benefits to the industries involved. Selecting
solutions to procurement requirements on the basis of short-term
costs can disadvantage novel and innovative solutions to problems,
and may not result in the most cost-effective long-term policy.
Pre-commercial procurement strategies, such as those employed
on the small business innovation research (SBIR) programme, give
companies the confidence to invest in R&D, sharing the financial
risks between the government and the supplier. This provides direct
funding and security that cannot be achieved through tax breaks,
removing some of the financial risks implicit in research and
development, and offers a primary market for the end products.
We welcome the proposals made in Lord Sainsbury's
Review, The race to the top[58],
to introduce an enhanced small business research initiative (SBRI)
programme to promote innovative solutions for public procurement.
The strengthening of this programme is essential to the success
of research and development in small businesses in the UK, and
the IOP supports a full implementation. However, we are concerned
that, as with the previous implementation, the culture within
government departments and other funding bodies will inhibit a
fully successful SBRI programme.
It should not be ignored that physics-based
sectors in the UK accounted for 29% and 30% of the total value
of domestic exports and imports respectively in 2005. Additionally,
they directly employ around 5.4% of the UK workforce and indirectly
support 1.2 million jobs in upstream industries, which add more
then £50 billion in gross value added—accounting for
a further 5% of the UK's economic output.
Integral to the success of physics-based
industries is a strong supply of science-educated workers; additionally,
high value-added service sector industries, such as the financial
services, employ large numbers of physics-qualified people, benefiting
from their unique skills set and expertise. The IOP is extremely
active in promoting the take up of physics in schools and universities,
operating the HEFCE-funded Stimulating Physics project[59].
Additionally the IOP operates networks to provide mentoring and
support to physics teachers throughout the UK.
There are problems in the teaching of
physics in higher education (HE). The government initiative to
increase the cohort of 18-30 year olds at university by 2010 to
50%, has led to an influx of students onto softer courses such
as drama studies, while at the same time, the cohort for physics
has remained stable. An increased number of overall students has
led to additional strains placed upon HEFCE's block grant within
HE institutions, which has resulted in teaching resources for
physics, and other STEM subjects, being squeezed, as the overall
pot size has not been increased sufficiently. A major problem
in the HE sector is that university finances are being driven
by student choice, which would be fine if such choice was wholly
informed. The recent expansion in participation has had an emphasis,
correctly, on the traditionally under-represented groups. However,
a side-effect of this emphasis has been that subjects requiring
specific skills and knowledge on entry, such as STEM and the modern
languages, have not benefited from the increased number of students
and their relative (in many cases absolute) market share has decreased
sharply. This is illustrated by the fact that in 1996, physics
undergraduate entrants made up 1.1% of the total cohort; in 2006
that percentage fell to 0.81%.
The progress that has been made on university/business
co-operation and knowledge transfer since the publication of the
Lambert Review in December 2003
Knowledge transfer (KT) is integral in
creating successful businesses, high-skilled jobs and more advanced
and user-friendly products. Through collaboration and spin-out
activity, the strength of the science base can be exploited to
the advantage of high value-added business and the level of academic
research in academic departments enhanced. To this end, collaborative
research between university departments and industry should be
made economically profitable for both parties, both through subsidy
and through research council funding mechanisms and metrics. However,
support for applied research and KT activity must not be at the
expense of funding for blue-skies research which may or may not
demonstrate short-term economic benefit at the proposal stage
for funding—this research is the foundation for any advances
in applied research that may occur decades after the original
discoveries.
One of the major obstacles in building and maintaining
successful business-university partnerships highlighted by the
Lambert Review is the difference in culture and experience between
the two groups. A recommendation of the Lambert Review was to
encourage greater interaction between personnel in the academic
and industrial sectors and this remains a key goal. University
physics departments are starting to become more active in transferring
technology to industry and their attitudes to entrepreneurship
are changing, but an acceleration of effort has to be encouraged.
A further, often neglected, aspect of
promoting knowledge transfer is the level of business support
given to high-technology companies that have their roots in academic
departments. These spin-out companies are affected by a number
of barriers to success. The IOP's submission to the BERR Simplifying
Business Support consultation[60]
stated that high technology start-ups and spin-out companies require
greater support and guidance on obtaining funding than more established
companies. Academic spin-out companies are often managed by people
with limited business experience who require a different kind
of support than that offered to established businesses and we
support Lord Sainsbury's recommendation of a mentoring scheme
for small businesses. We welcome the BERR proposals to simplify
the business support offered by government, but are concerned
that the prescriptive structure it proposes will not fully support
academic spin-out companies or early stage innovative work resulting
from interdisciplinary research. Targeted support must be implemented
to ensure the continued success of high-technology start-ups and
spin-outs which are one of the drivers for high value-added industry.
An additional concern in this field is the vulnerability and complexity
of intellectual property (IP) rights. The length of time needed
to gain IP protection for novel research through patents, and
the perceived vulnerability of patents and intellectual property
rights, remain a concern to small businesses, especially academic
spin-out companies. A strengthening of the enforcement of IP rights
would greatly benefit those working to fully exploit the strength
of the UK science base.
The effectiveness of machinery of government arrangements
in encouraging innovation and creativity
We are concerned that Regional Development
Agencies (RDAs) are not providing the ideal structures to promote
both industry-academic partnerships and also business R&D
and we look to the new cross-cutting role of the Technology Strategy
Board (TSB) to alleviate some of these problems. Physics expertise
and research capability is not uniformly spread across the UK,
and for high-technology industries to benefit fully from collaboration
with academic departments it is crucial that they are made aware
of the strength of the research base nationwide. The RDAs are
currently exercising strategies for encouraging university-business
collaboration centred on connecting local businesses with local
universities. To complement these and to fully serve the businesses
in their region, RDAs should recognise the importance of cooperating
with both other regional and national bodies in connecting industry
with academia. Restricting collaborative support and funding to
local companies and local universities does not reflect the national
diversity and heterogeneity of physics knowledge and expertise,
both in industry and academia, nor the fact that major research
universities do not operate at a local level, and more funding
should be available for long-distance collaborations. We look
to the TSB and its new role to alleviate some of these problems.
Lord Sainsbury's Review proposes a new landscape
for technology strategy in the UK but a change in culture is needed
within government departments for many of the proposals, particularly
the enhanced SBRI programme, to be successful in their aims of
promoting innovation solutions of procurement problems, and to
support R&D and small physics-based companies.
9 November 2007
57 www.iop.org/activity/business/Publications/Physics<_>and<_>the<_>Economy/page<_>4388.html Back
58
Sainsbury Review of Science and Innovation:the race to the
top, 2007 Back
59
www.stimulatingphysics.org Back
60
www.iop.org/activity/policy/Consultations/Industry<_>and<_>Innovation/file<_>25963.doc Back
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