House of Commons - Business and Enterprise Committee

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

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

INTRODUCTION

1. NESTA's mission is to transform the UK's capacity for innovation. We invest in early stage companies, encourage a culture that helps innovation to flourish and use our research agenda to build a body of evidence about how best to support, measure and improve the UK's climate for innovation.

2. The Government has recognised that harnessing innovation in the UK is critical to improving the country's future wealth creation prospects[61] and developing and maintaining a high value-added economy. What we now need to do is to develop policies that support the innovation that matters to enterprises from across all sectors of the economy.

3. Over the past year NESTA has published "The Innovation Gap" and "Hidden Innovation". Both publications demonstrated a gap between how innovation happens, how it is measured and how policy supports it. This research has informed this submission. A third study in this series investigates how innovation really happens in "traditional" high-innovation sectors such as pharmaceuticals and aerospace. NESTA is also investigating innovation in services, how the UK can "make innovative places", how users contribute to innovation and the role that the creative industries play in stimulating innovation in other sectors of the economy.

4. Alongside its extensive research programme, NESTA also undertakes practical experiments to understand "what works" in supporting innovation. For example, NESTA Connect examines different models of collaboration, NESTA Investments is seeking to establish a model to encourage investments in early-stage businesses, and NESTA Challenge is focusing on creating opportunities for innovation in response to major social issues.

5. NESTA believes that the Government can help create and maintain a high-value added economy by identifying and supporting innovation across the different sectors of the economy. The creation of the Department of Innovation, Universities and Skills and the relaunch of the Technology Strategy Board provide an opportunity for this to be achieved—but only if they receive the support that they need from across the rest of Government.

Q1 What is meant by a high value-added economy? Which business activities qualify as such?

Defining a high value-added economy

1.1 A high value-added economy focuses on those activities that generate a large margin between the final price of a good or service and the cost of the inputs used to produce it, and thus create higher profits for businesses and higher wages for workers.

All business sectors have the potential to perform high value-added activities

1.2 The mass adoption of Information and Communications Technology (ICT) and the fall in communication costs have made it easier to break up the value-chain[62] into several tasks which can be re-located anywhere around the world. ICT allows for more distributed innovation processes, such as global collaborations in design and development. This means that firms can increasingly outsource high-value work (such as Research and Development (R&D) and other forms of innovation) that they might previously have done in-house.

Moving up the value-chain is crucial for the UK's economic performance in a world with growing international competition

1.3 As a result, it has become much easier to move activities abroad, including those previously performed by high-skilled workers. So, for the UK to remain competitive it will need to move up the value chain, rather than compete solely on cost. It will therefore have to both generate high value-added activities and create the conditions that sustain its advantage against increasingly rapid progress by international competitors.

Q2 How UK business compares internationally in areas such as research and development, creativity and design?

UK lags behind on R&D expenditure and patent activity

2.1 Despite increases in funding, public sector R&D expenditure still remains low compared to our major competitors. R&D performed by the Government and universities in 2004 was 0.6% of Gross Domestic Product (down from 0.68 in 1994) compared to 0.69% in the US, 0.75% in Germany and 0.78% in France.[63] However, the UK appears to be efficient at converting this relatively "low" spend into traditional measures of academic outputs. At 11.9%, the UK's share of world academic citations is second only to the US.[64]

2.2 Over the last five years, UK business R&D expenditure has increased by 2% to £13.4 billion, either through in-house operations or extramural activity.[65] Forty per cent of this spend takes place in the pharmaceuticals and aerospace sectors, and is dominated by six large companies.[66] However, UK businesses still spend less on R&D than many of their international competitors.[67] Given this, it is not surprising that the UK lags behind in patenting activity.[68]

Traditional indicators are incomplete

2.3 However, while the traditional innovation metrics suggest that the UK has a poor performance at innovation activities, these indicators are incomplete measures of the "innovation that matters" to the UK. They ignore innovation in sectors such as financial services. NESTA research into this "hidden innovation" has explored what this skewed measurement means for policy and the UK's economy. A more detailed breakdown of this argument is provided in response to Question 8.

The UK is a world leader in the creative industries and knowledge economy

2.4 Creativity and design are often as important to the development of high value-added products and services as science or technology. Such linkages may be better understood through broader concepts, such as the "knowledge economy".

2.5 The knowledge economy comprises knowledge services (creative and cultural services, financial services, business services, computer and information services, and trade in intellectual property rights including fees, royalties and R&D services) and knowledge industries (principally ICT, telecommunications, health and education). This is founded on the argument that economic success and competitive advantage are increasingly based on the effective utilisation of intangible assets such as knowledge, skills and innovative potential.[69]

2.6 The UK has the largest creative sector in the EU, and relative to GDP probably the largest in the world. As well as representing a national asset through wealth-creation,[70] the creation of ideas, images, symbols, design and cultural expression on this scale would alone be enough for the sector to warrant attention.[71]

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?

National policies are broadly similar

3.1 Across the world, national policy interventions for supporting a high value-added economy are very similar. These include investing in a strong knowledge base (R&D, skills, and universities), creating knowledge transfer networks, increasing the amount of venture capital and seed funds, and strengthening intellectual property regimes.

3.2 The ultimate goal is to increase innovation above and beyond the level that markets would provide, since without intervention market failures would result in less socially valuable innovation.

3.3 In particular, innovators find it difficult to appropriate the full benefit generated by their innovations, since spillovers[72] enable others to benefit without contributing to the cost. Similarly, market transactions become more difficult when participants have access to different information and there are no incentives to share it truthfully. Raising finance for innovation is particularly challenging as a result. Finally, lack of coordination among individuals, organisations or firms can reduce innovation, and governments may be able to play a role in helping them to work together.

The UK can learn from others' experiences

3.4 China and India are educating their people to a higher standard and expanding the knowledge-intensity of their economies, and hence the race is upward (on value) and not downward (on cost). How much the UK can learn from this is somewhat limited by the significantly different socio-economic and political conditions—China and India are massive yet poor industrialising economies, in comparison with more mature and high-wage Western European economies. It is the successful experience of other developed countries that are managing to weather the growing competition of China and India that are most interesting for the UK.

3.5 It is important, therefore, carefully to identify international experiences that may have strong relevance to the UK. Broadly speaking, we can break these into the following categories:

— Countries that have managed a successful transition from a natural-resource economy to a high value-added economy (eg Finland, Canada and to a lesser extent Norway).

— Countries that have managed the transition from a manufacturing-based economy to a competitive services-based economy (eg the Nordic countries).

— Countries that have managed to maintain their manufacturing base through industrial renewal (eg Germany, Netherlands, Sweden).

3.6 While the UK has been successful in making the transition from a manufacturing-based economy to a service economy, it has also become a more diversified economy with important portions of its economy driven by natural resources (oil and gas: 2.7% of GVA), food sector (7.7% of GVA), and manufacturing (14% of GVA) and services linked to these sectors. The service economy itself is very diversified ranging from business services to industrial and public services.[73]

Invest in the deepening and broadening of the knowledge base

3.7 The experiences of countries like Canada, Finland, and Norway in managing diversification and knowledge transfer from natural resources industries, is useful for the UK. All three countries have used significant parts of their income from natural resources to build and invest in a strong knowledge base.

3.8 Canada boosted its investment in public R&D infrastructure especially at universities[74] and built a strong network of national centres of excellence[75] to exploit the R&D created.

3.9 Norway developed policies to favour local small and medium-sized enterprises (SMEs) in subcontracting from large oil and gas companies (a majority of which were foreign). This policy also helped many of the old and decaying ship building companies to link with the oil and gas industry of the North Sea and experience an industrial renewal.[76]

3.10 In Finland, the transition from an economy fuelled by the abundance of cheap raw wood into one that is knowledge-based and ICT-driven was primarily facilitated by a series of economic liberalisation and deregulation measures. However, it also required massive investments in R&D and the knowledge base, initially by government, followed later by the private sector.[77]

Moving up the value chain

3.11 The UK also has much to learn from countries that have managed industrial renewal by upgrading their manufacturing base. For example, Germany and Sweden have weathered the rise of global competition in manufacturing from low cost countries by focusing on advanced knowledge-intensive activities that yield higher returns and face less competition on cost. However, as low cost countries start higher value activities, Germany and Sweden will face new challenges.

3.12 In both countries, manufacturing businesses took advantage of falling trade barriers by moving some of their production lines to lower cost countries, while strengthening their R&D capacities at home.

3.13 Their experiences show that a transition into a services economy does not preclude developing higher value activities in other sectors. Both Germany and Sweden have a very high proportion of services in their GVA (70% and 70.6% respectively compared to a 74.1% in the UK).[78] The German and Swedish experience also shows that a country can maintain a sector by moving up the value chain and hence inducing a change of activities within a sector rather than by moving into new sectors (for example, engaging in industrial R&D and design rather than assembly).

Public Services have a role to play in creating value

3.14 In Denmark, Norway, Sweden, the Netherlands and France public services, such as elderly care, education, health, and welfare are important economic drivers of their high value-added economies. The demand posed by these sectors and their size in the economy make them both conduits for innovation and drivers of economic competitiveness.

Q4 The extent to which UK business has absorbed new business practices such as lean manufacturing?

Lean manufacturing is under-exploited by UK business

4.1 Lean manufacturing is now widely adopted as a strategy for focusing on activities that maximise benefits to customers through eliminating waste and continuous improvement in quality.

4.2 The manufacturers' association, EEF, has shown that many firms are improving performance by applying lean manufacturing across the whole of their business.[79] Yet many firms that have not undertaken this process miss out on the benefits. There are a number of reasons why some firms are not undertaking lean manufacturing, but these barriers can be removed if employers, government and trade unions work together in partnership.

Q5 Why some sectors of the UK economy appear to be more effective at embracing value-added activities than others?

Innovation that generates high value-added activities differs between sectors

5.1 The innovation that matters most differs between sectors. For example, it includes the development of new exploration techniques in oil production, modular (multi-purpose) accommodation systems in construction, or new, more successful programmes for the rehabilitation of offenders. This innovation frequently relies on collaborations between disciplines, across sectors and beyond regions—and it is often affected more by mainstream policies than by those aimed directly at innovation.[80]

5.2 From this approach, the UK appears to have struggled to retain previous indigenous strengths in areas such as mass market manufacturing, electronics and computing (IT hardware), telecommunications, chemicals, and some areas of engineering. This may reflect a long-term under-investment in higher value-added activities, as well as poor management, under-investment more generally (for example, in the latest technologies), and increasing international competition.[81]

5.3 The corollary of this may be that the areas in which the UK remains strong are those that have historically invested at competitive levels in higher value-added activities (whether or not these investments are captured in existing metrics of innovation).[82] Obvious examples include pharmaceuticals, oil and gas production, the financial services, aerospace and some areas of niche / advanced engineering such as motor sports.

The detailed operation of each sector's innovation system is considerably different

5.4 In banking, innovation often relies on investments in ICT supplied by service companies which are then integrated to provide new services to customers. By contrast, in education the bulk of new practice is developed by individual schools and teachers. In oil production and the rehabilitation of offenders, it is frequently groups from outside their sector that provide innovation (for oil, it is global service suppliers like Schlumberger; in rehabilitation of offenders, it is frequently voluntary groups). In construction, collaborative problem-solving with clients is a major source of innovation. This contrasts strongly with legal aid services, for instance, where there is currently limited innovation involving clients or the lawyers providing services to them.[83]

Q6 The impact on business of government efforts to promote research and development, including the research and development tax credit?

Evidence reveals a positive impact of tax credits on business R&D

6.1 The R&D tax credit is perhaps the foremost channel for Government to stimulate business expenditure on R&D. Studies have consistently shown that R&D tax credits are effective at raising investment in R&D. A 10% reduction in the cost of R&D is associated with a 1% increase in short term investment and 10% in the long term.[84] However, as yet, there has been no thorough evaluation of the effect of the R&D tax credit on the UK's innovation performance. As such, we do not know if R&D tax credits directly stimulate innovation, and consequently if they impact on overall levels of UK productivity.

The R&D tax credit remains poorly understood and overly-complex

6.2 R&D tax credits need to balance cost-effectiveness and simplicity. A clear and narrow definition of eligible expenditures reduces uncertainty and facilitates implementation. However, this simplicity excludes some research and development that should be eligible for support, particularly in the services sector where formal R&D is relatively less common.

6.3 R&D is increasingly funded across national boundaries, while the knowledge learned from such investment is increasingly globalised. This internationalisation of R&D and knowledge transfer raises several issues about what expenditures should qualify for a credit. R&D performed by foreign multinationals in the UK generates benefits for the UK economy, while R&D expenditures by UK firms abroad improve the UK's ability to apply new knowledge. Finally, the mobility of R&D raises the question of whether R&D tax credits are driven by tax competition or whether they have a net positive effect on overall R&D.

R&D tax credit or innovation credit?

6.4 Policy should concentrate on building capacity for innovation rather than the creation of specific innovations. Ultimately, there are two possible objectives for innovation policy. The first is directly to stimulate innovation in a sector. The second is to improve a sector's capacity for innovation not only by generating more innovation, but also by improving its internal incentives and processes for developing and diffusing innovations, and its ability to identify and draw them in from elsewhere. These policy objectives may best be served through an innovation tax credit that funds these activities, rather than an 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?

Knowledge transfer from universities has improved, but performance is mixed

7.1 Knowledge transfer and commercialisation activities have steadily increased in UK universities since the early 1980s, with a large exploitation of such activities since 1997.[85] University spin-out companies attract a significant proportion of the UK's venture capital, almost 12% of all venture capital investment in the UK in 2006.[86]

7.2 Evidence indicates that collaboration between business and universities is generally on an upward trend.[87] Contract research income increased by 13% in 2005-06 from the 2003-04 survey. There was also a consistent increase in the number of disclosures and licences granted by universities and colleges between 2001 and 2006. However, despite this, only 10% of the UK's innovative businesses currently interact with universities.[88]

Different models of university knowledge transfer

7.3 Whilst it is important that universities, and industry, recruit and retain individuals focused on and skilled in commercialisation and knowledge transfer activities, this alone will not improve performance. It is increasingly important to seek out and exploit new models of university-business collaboration. For example, the IP Group provides an upfront payment to a number of UK universities in return for exclusive rights to the commercialisation of intellectual property, although the university retains some of the profit.[89]

7.4 NESTA has committed to investing in the UMIP/MTI fund,[90] which has been established to invest in Intellectual Property (IP) coming out of the University of Manchester. This is the first time that an established venture capital house has partnered with a specific university to resolve IP problems at the early stage of partnership.[91]

Universities should reach out to a wider range of businesses

7.5 As the UK economy is increasingly dominated by the service sector, universities must identify how their academic research and knowledge could benefit these businesses.[92] Reaching out to a wider range of businesses will mean introducing more flexible schemes, with limited bureaucracy and greater incentives for both sides to collaborate. In time, this should lead to more extensive collaborative activity. NESTA therefore welcomes Recommendation 4.6 of the Sainsbury Review, to introduce mini Knowledge Transfer Partnerships (KTPs), intended to help spread the benefits of KTPs to smaller businesses through shorter-term (3-12 months) and less expensive projects.[93]

Q8 Whether business and government interpret innovation too narrowly?

Linear interpretation of innovation is misleading

8.1 Innovation is vital to the future economic prosperity and quality of life of the UK. It rarely happens based on traditional understandings of linear, "pipeline" R&D that lead only to new products, drugs or technology. If that were the case, where, for example, would there be room for the retail innovation of IKEA, Zara and eBay, or the role of the City of London as a centre for financial services? What would we make of the UK's advertising and music industries, or of social innovations such as NHS Direct, the BBC and the Open University?

Traditional indicators ignore major sectors of the UK economy

8.2 Traditional indicators of innovation performance are heavily biased toward investments in scientific and technological invention and so do not capture innovation in those sectors that represent the vast majority of the UK economy. Moreover, even within those sectors that they do represent, traditional indicators poorly reflect the true level of innovative activity.[94]

8.3 While the traditional innovation metrics suggest that the UK has a poor performance at innovation activities, these indicators are incomplete measures of the UK's most important innovation. The results do little more than describe the sectoral make-up of the UK economy rather than measuring the innovation performance of those sectors. As a result, these metrics ignore important sections of the UK economy.

8.4 The metrics ignore innovation in sectors such as financial services, retail, consultancy and the public sector, that together account for 94% of the UK economy. The accepted definition of R&D even ignores expenditure on oil exploration activities (that industry's version of R&D), another vital sector to the UK. Finally, although the UK performs exceptionally well on pharmaceutical R&D (a sector where R&D expenditure is directly relevant to innovation), this performance is lost when aggregate indicators are compiled and other sectors where R&D is less relevant are mixed in.

8.5 By using OECD analysis to reinterpret the raw data provided by traditional innovation metrics, the gap between the UK and Finland on Business Expenditure on Research and Development halves from 1.9% to 0.8%.[95] The gap with Germany on triadic patents produced per million of population reduces from 38 to 10.[96] On business R&D intensity, the gap between the UK and France closes by 80%.[97]

Understanding "hidden innovation" is vital to the UK's future prosperity

8.6 To understand the dynamics of hidden innovation, NESTA conducted a detailed analysis of six sectors that perform poorly on traditional metrics of innovation: oil production, retail banking, construction, legal aid services, education and the rehabilitation of offenders.[98] None of these six sectors invests heavily in formal R&D; nor do they produce many patents. Three represent publicly-funded services that are typically not included in studies of innovation at all. It examined whether these sectors are truly lacking in innovation, or whether traditional measures of innovation are failing to capture all of the innovation that takes place.

8.7 This research has revealed at least four types of hidden innovation:

— Type I: Innovation that is identical or similar to activities that are measured by traditional indicators, but which is excluded from measurement. For example, the development of new technologies in oil exploration.

— Type II: Innovation without a major scientific and technological basis, such as innovation in organisational forms or business models. For example, the development of new contractual relationships between suppliers and clients on major construction projects.

— Type III: Innovation created from the novel combination of existing technologies and processes. For example, how banks have integrated their various back office IT systems to deliver internet banking.

— Type IV: Locally-developed, small-scale innovations that take place "under the radar", not only of traditional indicators but often also of many of the organisations and individuals working in a sector. For example, the everyday innovation that occurs in classrooms and multidisciplinary construction teams.

8.8 In oil production, for example, the development of new technologies in oil exploration is a better measure of innovation than spending on R&D. This is because much of the development of technology takes place in close collaborations between production companies and suppliers, often on-site rather than in research labs. This type of technology development, testing and refinement is explicitly excluded from some international surveys of R&D spending. The construction industry patents few new inventions, but drives innovation elsewhere in the economy; moreover, innovation in construction methods that go uncounted by traditional indicators have already saved more than £800 million in central government procurement alone.

Innovation policy needs to be sensitive to sectoral differences

8.9 The Department for Business, Enterprise and Regulatory Reform (BERR) has commissioned research on broader categories of innovation, including innovation in services. The BERR-NESTA Sector Innovation Groups (SIGs) will be completed in early 2008 and deliver recommendations for future Government action geared towards supporting innovation in six service sectors under-served by traditional innovation policy.

Developing new metrics for innovation is possible and valuable

8.10 Measurement of innovation is not simply a matter of academic interest: it is fundamental to the development of evidence-based policy and monitoring the impact of those policies. Though traditional metrics are flawed, they are at least consistent, and relate to economic measures such as productivity in particular sectors. They are, however, usually only proxy indicators for innovation.

8.11 To date, innovation policy has valued longevity and comparability over accuracy, and placed insufficient weight on "health check" indicators compared to inputs and outputs. The result has been a small set of indicators relevant to only a small part of the UK economy. Most obviously, there is an inherent tension in seeking to establish metrics for innovation that never develop—as if the innovation that matters in a particular sector will not change over time. In this respect, the desire for longevity needs to be balanced against a stronger regard for accuracy.

8.12 While it would be inefficient to collect data for a vast set of highly accurate indicators that were valid only for one sector or for a very short period of time, NESTA's research demonstrates that it is possible to develop a small but accurate set of indicators that would effectively track the innovation performance of particular sectors. The resulting set of indicators may give a clearer impression of the innovation performance of the UK as a whole.[99]

Q9 What the government can do to further promote higher value-added business activities and innovative thinking among UK businesses?

Supporting formal R&D and absorptive capacity are important

9.1 Government has incentivised R&D, encouraged businesses to collaborate with universities and substantially increased public investment in scientific research. Although R&D spend does not reflect true levels of UK innovation, it remains important that the UK invests at a competitive level in formal R&D. For example, even in a period of increasingly open innovation—where more firms are seeking to exploit the value from ideas and technologies developed outside the firm—internal R&D remains crucial for a business's ability to identify, assimilate, and exploit knowledge from its wider environment, including other research centres, businesses, or customers.

Ensuring the growth of the creative industries

9.2 The creative industries provide a major source for economic growth in the UK, but such growth is dependent on the commercialisation of creative content, services and experience. As part of an overall focus on intellectual property for small businesses, NESTA has suggested that the Government should launch a campaign around the creation and exploitation of IP within the creative industries, linking outreach and education efforts across the Department for Culture, Media and Sport, the Patent Office, BERR and related entities, and fronted by new role models within the creative sectors.

Innovation Vouchers

9.3 Stronger links between industry and academia could also further promote higher value-added business activities and innovative thinking among UK businesses. Efforts to boost business demand for university R&D should be stepped up. One exemplary approach is the Innovation Voucher scheme currently being piloted by Aston University. Based on a Dutch model, this has provided 80 high-growth SMEs with £3,000 vouchers which they can use to purchase academic support to improve their innovation capability.[100]

Supporting domestic collaboration—a National Innovation Advisory Service

9.4 With "open innovation" systems[101] becoming increasingly important, UK businesses need actively to engage with other domestic businesses and universities. However, since small businesses often lack the knowledge to engage in such processes, a nationally branded, regionally delivered Innovation Advisory Service should be developed to actively facilitate open innovation. This should build on the existing regional innovation advisory services, and would ensure that all regions have a core offering to businesses to support open innovation. Crucially, it must be led by highly skilled and credible advisors and work with businesses from all sectors.[102]

Q10 The impact of nationality of ownership on the location of research and development work?

The decision where to locate R&D is based more on home country than nationality

10.1 A home country is defined as where a firm was first started, whereas its nationality is where its corporate headquarters are located. Nationality has less impact in an increasingly global and multinational corporate environment than a company's home country on where it decides to locate R&D activities. This role becomes clear when we outline the factors that often shape the location decisions of R&D of companies.

10.2 Generally speaking firms base their decision to locate their R&D activities abroad on the basis of the following:[103]

— Quality of the local R&D personnel.

— Collaborations with local universities.

— Cost.

Availability of scientific and technological excellence

10.3 The decision to keep certain R&D activities at home and move other activities abroad is largely decided by the factors listed above. However, a strong scientific and technological base is an important magnet for R&D investment, which can outweigh these factors.[104] Some research has shown that the decision is often driven by the strength of the home country in certain science and technology fields.[105] If the home country is superior in science, for example, then a firm relying on scientific research is less likely to move its R&D operations in that field abroad. If the home country is less specialised or lags behind in science then that firm is very likely to move part or all of its R&D activities to better performing countries.

Tax Incentives, Regulations & Government Assistance

10.4 Some firms are influenced in their decision on R&D location by government incentives, such as tax breaks and/or direct government assistance. Where they help keep the costs of R&D low, such incentives help mitigate the high risks associated with R&D spending.[106] Furthermore, visa and work permit regulations can be important drivers or deterrents, since R&D personnel usually include many nationalities. Also important is the ease of negotiating ownership of intellectual property from research relationships, especially with universities, and this also reflects the extent to which a country's cultural and regulatory environment is conducive to new businesses. In general, a country also has to have the reputation for a strong collaborative business culture, as no firm wants to locate somewhere where it is isolated.

Q11 The effectiveness of machinery of government arrangements in encouraging innovation and creativity?

The link between universities and innovation is now reflected in government structures

11.1 As we have noted, the creation of the Department for Innovation, Universities and Skills (DIUS) means that for the first time, innovation policy has a seat at the Cabinet table. These changes have also emphasised the link between innovation policy and universities, and brought both strands of the dual support system for higher education funding into one department. It has also linked innovation policy to skills—perhaps the single most important driver of the UK's future capacity for innovation.

11.2 To take full advantage of the opportunities that these changes provide, the newly formed DIUS should build on the innovation agenda laid out by the Department of Trade and Industry, and work closely with other Government departments (particularly the new Department for Business, Enterprise and Regulatory Reform) to develop world-leading innovation policy.

Developing a broad national innovation agenda

11.3 DIUS, as a Cabinet-level voice for innovation policy, now has the opportunity to build on these initiatives to develop a fuller innovation agenda that includes, but reaches beyond science and technology, to ensure that innovation is maximised across the UK's economy and society. This means acting as a champion of innovation across Government, particularly in procurement.

Cross-departmental and sector-sensitive policy-making

11.4 More generally, innovation policy needs to be sensitive to these dynamics already at work—but Government cannot be expected to do this alone. In ensuring optimal conditions for innovation in the UK, the relationships between DIUS, the Department for Business, Enterprise and Regulatory Reform (BERR) and the Technology Strategy Board need to be close and co-operative, particularly when considering important drivers of innovation like enterprise support, early-stage investment and framework conditions like taxation, competition policy and regulation. DIUS should work closely with the Department for Children, Schools and Families to build a coherent approach to developing the skills necessary for innovation in schools, colleges and informal learning settings.[107]

Working to co-ordinate the innovation responsibilities of RDAs

11.5 Many regional and city innovation strategies are similar. Of England's nine RDA strategies, eight include biotechnology or health sciences as a priority area, and five mention the creative industries. Nearly all include traditional science-based policy interventions such as technology parks, and university-industry collaboration.

11.6 This similarity inevitably leads to competition. But it is not clear exactly how many biotechnology hubs the UK really needs or can sustain, and this duplicative approach may waste resources. So many competing efforts may also be counterproductive—preventing the formation of critical mass at any one location.

11.7 What the UK requires is sufficient competition between local areas to allow for local relevance, policy experimentation and the emergence of good ideas, but not so much competition as to be destructive to the nation's ambitions or its use of public resources.

11.8 Local ambitions should be placed in a regional and national context. In developing their innovation strategies, cities and regions should conduct the policy equivalent of an environmental assessment to establish their own strengths and understand what others are doing. The resultant strategy should overtly complement those efforts rather than compete against them.

11.9 In developing its innovation strategy, a city / region should build on its history and focus on identifying its unique capabilities and challenges. Policies and programmes should then be based clearly on those strengths and the outcomes the city desires from innovation activity, rather than simply attempting to support innovation for its own sake.[108]

October 2007

[accessed 15 August 2007].

61 HM Treasury, DTI & DfES (2004), Science & Innovation Investment Framework 2004-14, (HM Treasury, London). Back

62 A chain of activities through which products pass, adding value at each stage. Back

63 DTI SET Statistics: Science, engineering and technology indicators (February 2007), Figure 7.1 Trends in gross domestic expenditure on R&D (GERD) in G7 countries as a percentage of GDP. Back

64 Universities UK (Summer 2007), Higher Education in Facts and Figures-Research and Innovation, available at: http://bookshop.universitiesuk.ac.uk/downloads/facts_research07.pdf Back

65 Office for National Statistics (January 2007), Research and Development in UK Businesses, 2005, Business Monitor, MA14, (HMSO, Norwich). http://www.statistics.gov.uk/downloads/theme_commerce/MA14_2005.pdf Back

66 In ranking order, with the largest first: Pharmaceuticals-GlaxoSmithKline, AstraZeneca, Pfizer; Aerospace-BAE Systems, Rolls-Royce, Airbus. Back

67 OECD (2006), Main Science and Technology Indicators (MSTI): 2006/2 Edition, (OECD, Paris). This shows that expenditure by UK businesses is $538 per capita, compared to $1,063 in the US, $924 in Japan, and $1,045 in Finland. Back

68 OECD (2005), Main Science and Technology Indicators (MSTI): 2005/2 Edition, (OECD, Paris). Back

69 ESRC UK Fact Sheet, Knowledge Economy in the UK, available at http://www.esrcsocietytoday.ac.uk/ESRCInfoCentre/facts/index4.aspx [accessed 15 October 2007]. Back

70 The Work Foundation (June 2007), Staying ahead: the economic performance of the UK's creative industries (Work Foundation, London). The UK's creative industries account for 7.3% of the economy, and employ one million people directly, while another 800,000 work in creative occupations. Back