Memorandum submitted by the South East
England Development Agency (SEEDA)
What is meant by a high value-added economy? Which
business activities qualify as such?
High value added activities are any activities
that are knowledge-intensive, irrespective of whether they involve
products, processes or services. These activities create high-value
jobs that lead to increased productivity and drive innovation.
The RDAs, with UK Manufacturing Forum and BERR, have
recognised through recent policy research and debate that the
boundaries between manufacturing and services are increasingly
blurred, and that higher value activities typically involve a
whole-business process that involves sale of a hybrid of products
and services.
How UK business compares internationally in areas
such as research and development, creativity and design.
The challenge for the UK is to both reduce regional
disparities within the UK and to increase global competitiveness
of the UK. It is not sustainable for the UK to achieve only one
of these objectives.
The Sub-national Review emphasises the importance
of high value-added, knowledge intensive businesses. The review
goes on to highlight the encouraging progress being made in reducing
regional disparities through initiatives such as the Northern
Way and Science Cities, as well as other focused activity centred
around UK knowledge strengths.
We note that the Northern Way focuses
on reducing the disparity between the South East and the North,
and as such provides only a part of the solution. Even the best
performing UK regions (London, South East and East) are falling
in international competitiveness; and productivity in these regions
remains relatively low compared to the best performing world regions.
There is an opportunity with the formation
of the Technology Strategy Board (TSB) as an NDPB to develop a
strategic overview of UK strengths and understand where regional
disparities arise on the basis of sector or technology strengths.
This overview would be could be based on existing evidence initially
and identify gaps that should be addressed through further research.
(Following recommendation of the 3.7 Sainsbury Review).
What can be learnt from the experiences of other
countries in this area and how fast other countries are moving
up the value chain.
The UK has much to gain from collaboration
with other countries. As such the RDAs are looking to strengthen
links with the Foreign and Commonwealth Office Science and Technology
Network, and work with the regional Inward Investment teams and
UKTI to garner good practice from around the world. In addition
RDAs and DAs are well placed to share good practice within the
UK.
The regions are also looking to build strong relationships
with other regions across the world, through a variety of mechanisms
such as the Innovating Regions in Europe network, or working with
national government. These relationships provide an additional
opportunity for the UK to learn from other nations.
The Sainsbury Review particularly noted
the San Diego CONNECT scheme, which has UK partners in the from
of SETsquared, a partnership between the universities of Bath,
Bristol, Southampton and Surrey, which give a level of scale required
to develop meaningful relationships both nationally and internationally.
The extent to which UK business has absorbed new
business practices such as lean manufacturing.
There are many interpretations of lean
manufacturing, and it is important to recognise that the original
concept related to the whole business needs for reacting to and
shaping customer demand, not just addressing shop floor operational
competitiveness issues such as wasted time and materials. The
concept has been pioneered by the automotive industry, and by
2000 it had already been recognised that the agenda had changed
from one of efficiency to growth.
Over the past 5 years, the BERR Manufacturing Advisory
Service has helped businesses to embrace new business practices
to drive down costs and increase their agility in the global market
place. Research has shown the uptake to be at best sporadic across
the country. Specific research in the North east region has shown
that even though companies are aware of the available benefits
of lean manufacturing few are applying it. Those companies with
less than 250 staff have been slower in the uptake especially
on introducing business practices such as Lean Manufacturing due
to lack of resources and access to information.
However, the companies that have used
government business support programmes, such as the Manufacturing
Advisory Service, to kick-start improvement programmes have found
that they can gain a competitive advantage due to their resource
efficiencies and low-cost access to best business practices. In
some cases, businesses that believed it would be cheaper to offshore
their production have found that with some investment in business
improvements the opposite is true.
It must be recognised that the work needed
to change a WHOLE company to one which is a "lean" company
is a journey of some 3 to 5 years initially then a further 5 years
to embed and become innovative.
A trend has emerged that those companies wanting
to grow their operations to the next lifecycle stage ie moving
from small business of 20-30 staff to a medium sized business
of 50+ staff or from a medium to a large business are most receptive
to adopting best business practices such as lean manufacturing.
However companies of this size have difficulty coming to terms
with the full organisational impact of the change to lean manufacturing.
The Manufacturing Advisory Service has
kick-started manufacturing companies to adopt lean manufacturing,
which is an example of process innovation. There are many companies
who are outside of the target audience of MAS who desperately
need help in moving towards lean manufacturing but find help hard
to come by.
Designing Demand and Innovation Advice
Guidance (eg the Innovation Advisory Service in the South East)
have extended support to innovation in products and services.
Looking to the future, closer cooperation
between MAS and the National Skills Academies provides the opportunity
to not just initiate change processes, but to underpin them with
formal training that will ensure that a culture of continuous
improvement is embedded. There is a scope to make very large added
value changes to manufacturing companies if they are given access
to the correct skills. The refreshed MAS vision is to help companies
that might not normally be able to afford external advice to access
it and make the journey to world class.
Why some sectors of the UK economy appear to be
more effective at embracing value-added activities than others
There are two factors that influence
the perception of the take-up of high value-assed activities.
— Firstly, there are some sectors,
such as oil and gas, that are highly capital intensive, so that
the significant value of R&D appears small compared to the
turnover that it influences.
— Secondly, there are sectors such
as financial services and retail with "hidden innovation"
that is not recognised by current approaches to innovation / research
and development. Innovation support tends to focus on new technology
concepts rather than a broader definition of innovation.
The impact on business of government efforts to
promote research and development, including the research and development
tax credit.
All the RDAs have been involved in a
rigorous assessment of public support for research and development
through their key role in the Business Support Simplification
Programme (BSSP). Direct public support (national, regional and
local) for research and development can be classified into four
broad areas, namely
1. Innovation Collaborations—Funding
to support collaborative research and development (consisting
of networking, secondments and joint projects)
2. Innovation Finance—Funding
for single company research and development
3. Business Expertise for
Growth—Subsidised access to expert knowledge and specialist
input.
4. Research and development
tax credit
Through the BSSP programme, it has been
demonstrated that all of these areas are effective in promoting
research and development and should be regarded as complementary
mechanisms.
Funding for collaborative R & D is
rightly one of the most widely available mechanisms as it offers
a scale of support from networking through secondments, such as
KTPs, to collaborative projects that can be £Ms in value.
This mechanism is the most effective in terms of economic spillovers,
addresses specific priorities and helps to create an open innovation
system for the UK.
Funding for single company research and
development addresses the significant market failure experienced
by SMEs in obtaining finance for research and development activity.
The subsidised provision of Business
Expertise to SMEs is justified in particular circumstances where
businesses are not aware of the opportunities and the potential
benefits.
The R & D tax credit is a positive
fiscal incentive for increasing the overall level of research
and development. While take-up has been stronger in large companies,
there is evidence that awareness is increasing and private sector
professionals are proficient in advising their use for their clients.
We are aware of efforts to further promote this scheme by HMRC
and this would be welcomed. In terms of broader taxation issues,
the recent proposal regarding the removal of taper relief and
its replacement with a standard Capital Gains Tax rate is retrograde.
The progress that has been made on university/business
co-operation and knowledge transfer since the publication of the
Lambert Review in December 2003.
One of the most effective ways in which
regional development agencies can promote innovation is by building
business-university collaborations. As publicly-funded organisations
which are business-led, they are well placed to act as a bridge
between business and universities. Increasingly, the RDAs are
focussing on increasing the speed of innovation through knowledge
transfer and promoting open innovation.
RDA activity to support knowledge transfer can be
considered to fall into four broad areas of activity
1. KT Partnerships offer knowledge
transfer through various depths of people exchange, ranging from
short-term interactions through vouchers to full Knowledge Transfer
Partnerships.
2. KT hubs are aimed at making
the knowledge base more accessible to business, and particularly
small businesses, through providing facilities that are focused
on business support.
3. Technology brokering is
bringing together technology developers and potential users who
might not otherwise find each other.
4. Partnership R & D is
collaborative research and development where much of the value
of the project is generated through the combination of partners,
as much as the technical content.
In response to the Lambert Report, the
RDAs introduced a new core mandatory output 4a: the number of
businesses within the region assisted to engage in new collaborations
with the knowledge base. The RDAs assisted 7,572 businesses in
2006/07 through a range of knowledge transfer initiatives.
Whether business and government interpret innovation
too narrowly.
The two most commonly used measures of
innovation performance are business R&D spend and the volume
of patenting, which are inputs rather than outcomes. The UK performs
unimpressively on both counts and so it has been widely concluded
that the UK lags its international competitors on innovation.
However, the Sainsbury Review says that these measures are inadequate
because they are only relevant to a small number of R&D intensive
sectors such as pharmaceuticals and aerospace.
Innovation in other sectors where the UK is internationally
very competitive, particularly financial services and the creative
industries, takes place in very different ways and is not captured
by these measures. As a result our innovation policy has been
too narrowly focused on R&D intensive sectors and we've paid
insufficient attention to the innovation potential of other sectors
which are extremely important to our economy. Sainsbury argues
that UK innovation policy should no longer be driven by these
narrow indicators. Instead it suggests that we should be guided
by the four major goals of the Technology Strategy Board.
The ambition must be to adopt a broader
approach to innovation that recognises innovation in products,
processes and services. Particularly as services are a UK strength
and the second largest foreign direct investment in the UK.
However, we recognise that the current
metrics and support mechanisms may not be easily extendable to
a more inclusive definition of innovation and welcome the work
in this area by range of organisations, including central government,
Royal Society and CBI. We would be happy to work with these organisations
to develop this definition more widely. In addition we would expect
to see compelling evidence and recommendation from NESTA, who
are well placed to provide this.
What the government can do to further promote
higher value-added business activities and innovative thinking
among UK businesses.
Throughout this response it has been
emphasised that high-value added, innovative and knowledge-intensives
activities should be recognised whether they create new products,
processes or services. In this context, three recommendations
are made that are relevant to all high-value activity.
1. Increase the supply of people with
skills for innovation. These are higher level skills in both STEM
subjects (including technical skills) and in leadership and entrepreneurship.
These high-level skills are required to turn good ideas into commercial
successes.
2. Reinforce the importance
of networking businesses with each other and the knowledge base
within the UK. Successful innovators are well connected and open
to collaboration. They are continuously seeking out new suppliers,
partners, customers, investors, or just people they can learn
from.
A specific opportunity to encourage business engagement
with the knowledge base is through the use of voucher schemes.
Vouchers are used to subsidise a first-time collaboration between
a business and an institution of their choosing. Voucher schemes
have been used successfully in London and the West Midlands, and
there is also evidence from schemes in the Netherlands and Ireland.
3. Increasingly, competition
is global, but so is collaboration. Companies exposed to international
competition are more innovative. High-value business activities
may need support to find and address opportunities for global
competition and collaboration.
In addition, inward investment plays a critical role
in high value added activity. The prime objective of RDA activity
in this area is to attract investment into the region based on
the research strengths and the existence of high value manufacturing
businesses and service providers. There should be increasing support
for this nurturing of global innovation connections and relationships,
based on high value added activities.
The impact of nationality of ownership on the
location of research and development work.
One of the UK assets has been a lack
of restriction on the ownership of research and development work
carried out in the UK, which has made the UK a "global-friendly"
place and enabled international exchange.
The effectiveness of machinery of government arrangements
in encouraging innovation and creativity.
The creation of DIUS and the Technology Strategy
Board (as a NDPB) offers opportunities to align the innovation
and skills agendas, with a stronger focus on higher-level skills.
In particular, the leadership role of the TSB, in partnership
with the RDAs, is strongly welcomed as the TSB is able to take
an overview of the innovation landscape and collaborate with partners
to maximise impact.
Alongside this it is important that
— DIUS maintain the necessary
business focus for innovation, including cross-departmental working
with BERR where appropriate,
— DIUS has a broader view of
innovation than research led activity,
— DEFRA schemes which provide
parallel process innovation support work in close partnership
with the BERR and DIUS schemes.
Alongside government departments, the
nine English Regional Development Agencies (RDAs) have a critical
role to play through:
— understanding the strengths
of regional businesses and the knowledge base,
— providing the focus for SME
involvement and investment, and
— catalysing and coordinating
partnership-working with diverse stakeholders.
This enables the RDAs to implement aspects
of national policy that benefit from tailoring to regional needs.
However, there are still challenges for
the RDAs from the capital and revenue split in the Single Pot.
The emphasis on capital spend restricts the projects that can
be used to support innovation, as innovation support tend to involve
revenue spend.
Annex
MANUFACTURING LEAD ROLE POSITION
1. Manufacturing is strategically
important to the UK, eg by driving and investing in new knowledge-creation,
as well as in straightforward employment and export/balance of
payments terms.
2. Manufacturing is transforming rather
than declining, as services add to the product mix of their value-adding,
eg RR engine servicing, new health-care products linked to monitoring
services, eg via telephony.
3. But its productivity growth
lags behind competitors.
4. Manufacturing support needs
to be more clearly demonstrated—both by improving our communication
of the relevance of the whole portfolio of business support measures
and by demonstrating in new policy measures a commitment to retaining
manufacturing in the UK (eg to help redress problems of recruitment
of qualified people to the sector).
5. The lean manufacturing
agenda is in fact a whole-business agenda (not a shop-floor one)
that includes a range of issues including marketing, design, sales,
as well as shop-floor improvements. This requires business support
schemes to work more closely and effectively together, eg MAS/IMRC/NSAM
interfaces, Nevertheless, the big agendas for manufacturing are
technology and globalisation, and a failure to engage a wider
range of manufacturers on these agendas will result in large scale
disinvestment in the UK economy, eg shift of supply bases or whole
business operations overseas.
6. Efforts therefore still
need to be made to increase the flexibility with which RDAs can
provide tailored packages of business support, and recognise that
our remit extends beyond SMEs to include similar companies with
similar problems.
7. More company-specific and
technically-capable interfaces to this generic support need to
be provided, along the lines of the successful MAS model.
8. But overall, government
must make sure that the UK environment is generally attractive
for UK manufacturing, and that it is pulling the big levers to
ensure the competitiveness of the manufacturing sector, eg managing
school curricula; ensuring that the costs of establishing and
running a business are competitive vis-a-vis other European
locations.
November 2007
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