Science and TechnologyWritten evidence submitted by the Department for Business, Innovation and Skills

Introduction

1. The Government recognises that knowledge and innovation are the keys to growth in a developed economy. Government stressed the importance of the UK’s knowledge base, and the opportunities it provides for innovation, in the recently published Innovation and Research Strategy for Growth.1

2. The commercialisation of research is economically important, as it is one of the activities that drives innovation in the economy. Evidence shows that innovative companies, defined as those that have introduced a new product or process, grow nearly twice as quickly in terms of both employment and turnover as non-innovators.2

3. The Government recognises that to succeed in the global innovation economy we must maximise all of the benefits from research. Economic and social impact of publicly funded research is delivered through a range of mechanisms rather than a single channel. These mechanisms include:

delivering highly skilled people to the labour market;

developing new businesses;

improving the performance of existing businesses;

improving public policy and public services; and

attracting foreign direct investment in R&D from global businesses.

Examples of these mechanisms can be found at Appendix A.

4. The commercialisation of research is a complex area. Government plays an important role in investing in a range of mechanisms to stimulate both the supply and demand side—through incentivising both the research base and business to work together to drive innovation.

5. There has been much discussion about spin out companies and the intellectual property generated by the commercialisation of research, but these activities represent only a small part of university-business relations. The external income generated by Higher Education Institutions (HEIs) from engagement with business and community is at an unprecedented level, having more than doubled in real terms since 2001 to £3 billion. The majority of this income is generated by collaborative and contract research, consultancy, and the provision of professional training, which are the main routes by which knowledge generated by the research base is commercialised. Income from licensing and sales of shares in spin-outs accounts for only around 2–4% of total income per annum.3

6. The Government recognises that the provision of funding for research is UK-wide. We will work closely on these matters with the devolved administrations, who offer similar support for the commercialisation of research in other parts of the UK. The UK Government’s key partners in this area—Research Councils UK (RCUK) and the Technology Strategy Board (TSB)—will each be submitting a separate memorandum to the Committee, as will the Higher Education Funding Council for England (HEFCE).

7. Professor Sir Tim Wilson is undertaking a review for Government of university-business collaboration. The Committee may wish to consider his recommendations, which are expected to be published before Easter.

Question 1—What are the difficulties of funding the commercialisation of research, and how can they be overcome?

8. The ability to support the translation of scientific research into new products and services depends on the capability of the public and private sector research base and innovation system. This system needs to support a range of processes, that bring together specific knowledge, skills, technical resources and financial capital, to solve specific problems or exploit opportunities at different stages of the innovation cycle. There is a strong case for the public sector investing to incentivise and drive innovation. The evidence suggests that this delivers a significant return to the taxpayer (see response to Question 4) in terms of both supporting economic growth and employment creation, and through other benefits such as increasing demand for higher levels skills of the improved environmental efficiency of products and processes. However, there are a range of market failures in relation to innovation, and public sector investments play an important role in mitigating these.

9. Commercialising research requires investment in scientific research, proof of concept and proof of market activities, investment in R&D or in establishing spin-out companies, support for demonstration activities to prove technologies work, and investment in design and other areas that help develop and refine products and services for the market. Support for all of these activities is necessary for successful technology commercialisation; while necessary, research strength alone is insufficient. If an innovation system is unable to do this, and is not adequately integrated, then it poses a significant barrier to innovation.

10. There are a number of established market failures in relation to innovation, relating to the ability to access funding, identifying potential collaborators and in the provision of information. These have an impact on the level of investment companies are prepared to make in R&D, or other forms of funding such as venture capital, that supports technology commercialisation. The market failures arise from the inherent risks that technologies will not work, or work less well than anticipated, and the financial risks associated with long term and complicated technology development projects. This is a particular problem in the UK, where Business Expenditure on R&D (BERD) is 1.1% of GDP. This is well below the Organisation for Economic Co-operation and Development (OECD) average of 1.63%.4 Early stage technology enterprises are particularly seen as vulnerable to capital scarcity, and find it difficult to raise equity debt or other forms of finance.5

11. There is also the difficulty that innovators have in appropriating the economic return from their research and innovation, due to the spillover benefits that occur through, for example, the movement of workers or the use of technologies in new areas of application. Economic research into this area indicates that whilst the private return on investment in R&D is likely to be 20–30%, the social rate of return is likely to be 50–100%.6 Whilst this creates a strong incentive for public investment into science and R&D, it acts as a disincentive to private sector investment, particularly at the earlier stages of technology development, sometimes identified as Technology Readiness Levels 1–4.7

12. Other obstacles that have been identified in the area of innovation include difficulties in accessing specialist skills and knowledge required in connection with innovation, which individual companies do not possess internally, or access to specialist technical facilities or services, the costs of which are too high for most individual businesses to bear. There is also an established market failure in the area of information provision, and the ability of innovators to identify sources of knowledge across the public and private sectors that can support innovative projects.

13. Both the existence of these market failures, and the positive spillovers generated by innovation activities, provide a strong rationale for Government intervention. The Department of Business, Innovation and Skills (BIS) supports a range of programmes, both directly but also through organisations that it funds and sponsors, that seek to address such market failures. These include:

Support for R&D: Government provides support for companies investing in R&D through the R&D Tax Credit. In total, over £1 billion of support was provided through the Small and Large Companies schemes in 2009–10. In the 2011 Budget, the Chancellor of the Exchequer announced that the level of the Small Firms R&D Tax Credit would be increased to 200% in April 2011 and to 225% in April 2012. Direct grant funding for innovation projects, including collaborative projects undertaken between businesses and universities is provided through the TSB, which invests over £150 million per annum in a portfolio of Collaborative R&D projects, many of which involve universities, and SME-focused programmes such as the Knowledge Transfer Partnerships (KTPs), which place a graduate or postgraduate student in a business to undertake an innovation-related project.

Proof of concept/market funding: The TSB provides support for proof of concept and proof of market activities within businesses and universities through the Smart Awards (previously Grant for R&D). Companies can also seek support for the development of prototypes through this programme. The TSB manages the Small Business Research Initiative (SBRI), which enables technology-based SMEs to compete for contracts to develop innovative solutions to public sector challenges, which has helped to support the commercialisation of new technologies in sectors such as healthcare, defence and electronics.

Support for business investment: Government invests in a number of programmes that support venture capital investment, notably the Enterprise Capital Funds programme, which seeks to support early stage investments. The Government provides funding through the UK Innovation Investment Fund which invests in a range of venture capital funds providing investment to businesses in all sectors and from early stage to later stage investments. Tax incentives such as the Enterprise Investment Scheme and Venture Capital Trusts provide incentives for investors to provide equity finance for individual companies or to invest in venture capital funds.

Demonstration support: Support for the demonstration of new technologies at scale, to prove these work in operating environments is a key stage in the innovation process, helping to create a market for new technologies. The TSB has supported a number of demonstrators, often linked to its Innovation Platforms—programmes of activity which seek to bring together all those with an interest in the development of technologies in a particular area, including academia, companies, customers and regulators. To date, demonstrators have been supported in the areas of low carbon vehicles, digital technologies and sustainable construction technologies. £25 million was also allocated in the Autumn Statement to support large scale demonstrators in technologies.

Information provision: Support for the Knowledge Transfer Networks (KTNs), which link those interested in a particular technology area or sector across business and academia, enabling the exchange of information and the development of new contacts. The TSB also manages the _connect platform, which hosts the KTNs, and provides an online networking resource for business (http://connect.innovateuk.org).

14. Another key challenge is demonstrating the market opportunity for new technology, and the potential customer base both in the UK and internationally. A number of Government interventions are designed to address this gap and help universities and businesses to prove the technology concept and prove market applications. These measures include HEFCE’s Higher Education Innovation Funding (HEIF) for universities and support from Smart Awards, which help businesses to bridge the funding gap and provide customers and investors with reassurance of the commercial application of the technology. The SBRI also has an important role in pulling new technology through into the market place and demonstrating to other potential customers the commercial viability of the technology.

15. Encouraging the application and commercialisation of research and knowledge generated in the UK research base is one of a number of key strategic priorities for Science and Research funding and policy. These strategic objectives also include incentivising economic impact from research and supporting the leveraging of research funding from business and charities. HEFCE and the Research Councils have developed a broad range of mechanisms, programmes and incentives to deliver these objectives, some of which are set out in the remainder of this memorandum. Further details of these measures and examples will be provided in separate memoranda from HEFCE and RCUK.

16. Research and Innovation Campuses such as those at Daresbury, Harwell, Norwich and Babraham, provide thriving environments for businesses, industry, universities and researchers. They enable innovation, deliver impact from Science and Research investment, and act as magnets for investment. For example, 71% (or 41 companies in total) of the companies in the Innovation Centre at Daresbury experienced a growth in sales over the previous financial year, compared to only 30% of the small business population as a whole.8

17. Campuses support the creation and growth of businesses in life sciences and biomedical research, energy, security, climate and the environment. In recognition of this, the Prime Minister announced in August 2011 that the campuses at Harwell and Daresbury would be within new Enterprise Zones. The Zones benefit from over £150 million in tax breaks over four years, new superfast broadband, lower levels of planning control and the potential to use enhanced capital allowances.

18. Public Sector Research Establishments (PSREs) are a diverse collection of public bodies carrying out research. This research supports a wide range of Government objectives, including informing Government policy making, statutory and regulatory functions and providing a national strategic resource in key areas of scientific research. Many of these bodies are involved in commercialising research.

The European Union (EU) State Aids Framework

19. In delivering support for innovation and technology development in business, the UK Government is required to work within the European Union (EU) State Aids Framework, which aims to limit market-distorting subsidies given to companies. The State Aids framework also enables the EU to meet its international commitments on subsidies in the World Trade Organisation (WTO). Funding for business R&D projects is considered an allowable State Aid, and support can be provided subject to certain levels (calculated as a % of total project costs). Support is allowed for four categories of innovation activity: fundamental research; industrial research; experimental development; and technical feasibility studies. The definitions of these activities used by the European Commission are those developed by the OECD, and are contained in the Frascati Manual.9

20. The State Aids Framework aims to ensure that public funds are targeted on identified market failures in the area of innovation. Therefore, higher levels of support are allowed for fundamental research (100% funding) than R&D in businesses (50% for large companies, up to 70% for SMEs), and lower levels of funding for experimental development (25% in large companies, up to 45% in SMEs), which includes later stage innovation activities such as demonstration. The UK Government recognises the importance of the State Aids Framework in ensuring fair European and international markets for products and services, and is committing to providing support for innovation in business within this framework of rules. However, the Government believes that in some areas improvements are needed to ensure that these enable effective support to be delivered to business, particularly in the area of support for demonstration activities. The Government will be making proposals for change as part of the ongoing consultation on the State Aids Framework for R&D and Innovation being run by the European Commission.

Question 2—Are there specific science and engineering sectors where it is particularly difficult to commercialise research? Are there common difficulties and common solutions across sectors?

21. Most of the market failures that exist in research and innovation are generic, and these affect companies in all technology-based sectors. The difficulties in accessing finance and other resources, and market failures relating to the provision of information, tend to be related to company size rather than sector. Most of the available economic research has identified that SMEs face particular problems.10 However a report produced by Oxera identified that the sector in which a company is active is a crucial variable in innovation market failures.11 The report found that companies in technology-based sectors that depended on innovation needed to invest a higher proportion of their resources in innovation. Because of this, any market failure in the area of innovation would be magnified in these sectors.

22. Whilst these market failures affect all technology-based sectors, there is some evidence to suggest that sectors are affected to a different extent. Sectors which are capital intensive and have long horizons for product development, such as the life sciences (particularly those SMEs developing new medicines) and low carbon energy where many R&D activities are further from market, are particularly affected by market failures. These relate to access to finance, particularly early stage finance, and difficulties in appropriating the value of their investments. This reduces their attractiveness to potential investors. A report by HM Treasury, Bridging the Finance Gap, suggested that the difficulty in raising equity finance varied by region, sector, round of funding and stage of development.12 Other evidence suggests that for technically complex investments, such as clean energy or life sciences, the equity gap identified by Bridging the Finance Gap of £250,000–£2 million could be higher, at £10–£15 million.

23. It is also possible that other factors play a part in reducing the level of innovation and the commercialisation of research that takes place in particular sectors. In some sectors, the existence of long supply chains, comprising companies of varying innovation capability can have an impact. Sectors characterised by large numbers of SMEs (particularly micro-businesses) such as construction, also struggle to adopt new innovations on a large scale. Skill levels in sectors, and the range of disciplines from which staff are recruited may also play a role. The regulatory framework in sectors such as the utilities may also play a part. Companies in the price-regulated parts of these sectors, including the main water supply and electricity transportation companies, are required to have their pricing policies and levels of investment in different activities for pricing periods approved by the relevant regulator. This can limit the resources available for investment in innovation, and create uncertainty about longer term investment frameworks, although this is frequently balanced by other regulatory incentives for companies to innovate.

Question 3—What, if any, examples are there of UK-based research having to be transferred outside the UK for commercialisation? Why did this occur?

24. This question rests on a model of innovation that is only partially relevant. The assumption here is that innovation consists of an act of research-based discovery, followed by a separate process of commercialisation which is separately financed. Commercialisation of this type is only one of the multiple forms of innovation, and this type of finance is therefore part of a much wider financial picture. Most innovation takes place in established firms, and is financed via retained earnings. Relatively little innovation follows a linear pathway from research and R&D to commercialisation. BIS would be keen to study well-documented cases of a clearly British discovery that then became the basis of commercial activity elsewhere because of financing difficulties, but at present has no evidence that this has happened on a significant scale.

25. Even where we have clear innovation-relevant research results, the economic benefits do not necessarily have to accrue from commercialisation of a new product. On the one hand, there can be patenting strategies that seek licence income. On the other hand, researchers can make knowledge freely available to companies and then derive income from consultancy, advice, and contract research (this is currently the strategy of at least one major UK university).

26. The main analytical problem around the commercialisation of research is that innovation frequently involves collaboration, often across borders. Innovation usually consists of the creation of new product concepts that are then developed via design, engineering and testing processes. These often run into problems that require further research in order to be resolved. Often such R&D is done outside the innovating firm—whether in, for example, universities, consulting firms or Public Research Organisations (PROs). These can be located outside the borders of the UK. By the same token, UK universities can do research for foreign firms. UK universities, for example, have undertaken significant work for the German car industry.

The UK imports technology as well as exporting it

27. Both science and innovation involve cross-border collaboration. In 2011, 46% of all scientific papers with a UK author were produced with at least one foreign author involved.13 Among innovating firms, 27% have formal collaboration agreements with foreign partners.14 Although the UK performs well in both scientific research and high tech R&D, it is important to remember that our efforts are only a small component of a global effort, and that most technologies in use in the UK are imported to some extent. The boundaries between UK and foreign research and innovation are therefore blurred. BIS is aware of evidence that firms have moved from the UK to the Boston area in search of funding, and would be keen to examine further case studies. However, at present BIS has seen no systematic evidence that might suggest whether this is more of a problem for the UK than other countries. In addition, there is increasing international competition for innovation-related resources, driven by the increasing globalisation of business. Investment capital and skilled workers are increasingly internationally mobile, and there are global markets for technology-based products and services. The exchange of people and ideas between countries (often within companies), and the movement of people between different companies in different locations, means that knowledge, skills and technologies are being transferred more quickly than before. These are examples of the positive spillover benefits from innovation.

Question 4—What evidence is there that Government and Technology Strategy Board initiatives to date have improved the commercialisation of research?

28. At the macroeconomic level, there is significant evidence that public sector investment in science, R&D and other innovation activities has a positive economic impact. Research suggests that an increase of 1% in public sector R&D achieves a multi-factor productivity increase of 0.17%, which is greater than the equivalent increase of 0.13% achieved by a 1% increase in business investment in R&D.15

29. There is also strong evidence that demonstrates the innovation support programmes run by the TSB, and other innovation supporting bodies such as the Design Council, have had a significant impact in driving innovation, and in providing a significant return on public investment. A summary of the results of recent evaluations of these programmes is set out below.

30. A joint evaluation of the R&D Tax Credit by BIS and HM Revenue and Customs found that the Credit was important at different stages of a business’s life cycle. The repayable tax credit for SMEs was found to be particularly important for new innovative companies, helping them with cash flow and securing external investment. The evaluation also found that the Tax Credit enabled R&D projects to happen sooner and that more risky research and development projects were able to take place.

31. The Collaborative R&D (CR&D) programme provides funding to enable business and research communities to work together on R&D projects from which successful new products, processes and services can emerge. It funds activities in both large and small companies, and is used to support the largest scale R&D projects, such as those in the aerospace sector. It is a particularly effective mechanism for supporting innovation projects in existing of new supply chains, strengthening links between large companies and SMEs. Since it was established in 2007 the TSB has funded over 1,300 projects through this process, amounting to around £550 million of grant funding to date which is matched by business. Over £150 million will be invested in 2011–12. Evaluation of this programme showed that for each £1 of CR&D grant, there will be an increase in gross value added (GVA) of £6.71.16

32. Smart (previously Grant for R&D), is a long running programme to help correct the recognised market failures around private finance for high-risk and potentially high-reward technologically innovative projects carried out by SMEs. An independent evaluation of the programme in 2001 found that 94% of these companies could not have pursued their objectives without Smart.17 The evaluation also showed that, in spite of the risky nature of some of these ventures, some 70% of the projects supported resulted in new or improved products and processes reaching the market place. A further impact evaluation of the programme in 2009 highlighted that 70% of businesses supported had since increased their R&D expenditure or activity, and that 78% had used their participation in the programme to help open up new markets.18 The average net additional increase in GVA was £95,000 per recipient firm, and the average net increase in employment was 2.1 FTE per firm. Overall, the evaluation indicated that the programme generated a return of £9 for every £1 of public money invested.

33. KTPs stimulate innovation by facilitating the transfer of knowledge and the spread of technical and business skills. Around 1000 live projects per annum are undertaken by high calibre, recently qualified people under the joint supervision of personnel from business and the research base. For every £1 million of Government spend in 2009–10 the average benefits to the company amounted to a £3.53 million annual increase in profit before tax, £1.42 million investment in plant and machinery, with 34 new jobs created and 374 company staff trained as a direct result of the KTP.19

34. Encouraging the application and commercialisation of research and knowledge generated in the UK research base is one of a number of key strategic priorities for Science and Research funding and policy. In January 2012 a series of reports were published on the impact of Research Council funding. They included a report from RCUK and individual reports from the seven Research Councils. Each report details how research has created wealth, improved society, provided skilled individuals and promoted health and well being.20

35. The impact of Research Council funding is recognised in industry. In 2005 the Medical Research Council (MRC) received over US$200 million, from US pharmaceutical company Abbott in recognition of the techniques invented in the MRC Laboratory of Molecular Biology in Cambridge and the Scripps Research Institute in California, and used to develop the first blockbuster therapeutic monoclonal antibody, HUMIRA®. The MRC has a strong track record in commercialising the outputs from its research; licensing income to the MRC reached £61.69 million in 2010–11. This brings the total cash generated from MRC intellectual property generated since 1998 to more than £550 million. A significant source of this income has been MRC patents on key technologies used to produce therapeutic monoclonal antibodies. In October 2011, the Engineering and Physical Sciences Research Council (EPSRC) received a Partner of Choice award from the world’s largest consumer products company, Procter and Gamble.21

36. Working with the TSB, RCUK leverages wider research funding. RCUK spent £165 million between April 2008 and March 2011 on complementary and collaborative activities with the TSB. These included:

the Low Carbon Vehicle programme that has supported 440 company and academia partnerships; and

a project based on nano-scale technologies to develop the next generation of solar energy panels.22

37. The Innovate for Universities programme delivered by the Design Council is helping improve the commercialisation of research. An independent evaluation by Ekosgen of the 2009–10 programme, found that the design mentoring received by the participating university technology transfer offices had helped improve commercialisation by: reducing the risks associated with a technology; making new concepts viable and appealing and hence more marketable and attractive to potential investors through visualisation and prototypes; and identifying new markets or products for a technology. For example, Nottingham University subsequently secured funding of £250,000 to conduct more proof of concept work for one of its projects.

Question 5—What impact will the Government’s innovation, research and growth strategies have on bridging the valley of death?

38. The Government has demonstrated its strong commitment to the UK knowledge base by protecting Science and Research programme funding with a flat-cash, ring-fenced settlement of £4.6 billion per annum over the Spending Review period for 2011–15. Since the £1.9 billion the Government allocated for capital in the 2010 Spending Review, the Government has announced a further £495 million of capital investment in Science and Research.

39. The Autumn Statement and the subsequent publication of the Innovation and Research Strategy for Growth and the Strategy for UK Life Sciences23 confirm the Government’s commitment to accelerate the commercialisation of emerging technologies.

40. The Strategy for UK Life Sciences announced a £310 million investment to support the discovery, development and commercialisation of research. Of this, £180 million will be used to fund an initiative that will target the “valley of death” where investment is currently seen as too risky for many private investors, who, due to the high early attrition rate of programmes and the long lead times to commercial returns, want proof of efficacy in high cost clinical studies before making substantial investment decisions. Over the next three years this joint MRC/TSB Biomedical Catalyst Fund will nurture innovative technologies from the academic or commercial sector through to commercialisation of products or technology platforms in order to attract private equity The fund will build on existing MRC programmes for academia and provide new funding of £90 million through the TSB for support for SMEs, delivering growth to the Life Sciences sector and providing support to both academically- and commercially-led R&D and development to speed up the delivery of the benefits of science to patients.

Supporting business

41. The TSB is the Government’s prime channel of support for business-led technology innovation. The TSB provides a range of products aimed at improving the commercialisation of R&D, with proven impacts. These support a range of activities in the innovation cycle and include the Smart Awards, SBRI, CR&D, KTNs, KTPs and the Catapult centres. The Innovation and Research Strategy for Growth commits to continue these programmes and provided additional funding to support small business innovation.

42. Government has committed to extend the TSB’s Launchpad programme which aims to help strengthen existing clusters of companies. This programme provides funding to small business to develop new products and services and, at the same time, help these companies leverage in private sector finance. The initial competition focussed on Tech City was successful in attracting over 200 high quality proposals, with over 80% coming from new, small or early stage companies. The TSB supported 18 projects with funding of just over £1.75 million.

43. The TSB is also in the process of establishing an elite network of Catapult centres. The first centres have been announced in the areas of high value manufacturing, cell therapy, offshore renewable energy, satellite applications and the connected digital economy. These centres will play an important role in helping the translation and commercialisation of research for the benefit of business.

44. Clusters—geographic concentrations of interconnected businesses, knowledge base organisations and suppliers—can play an important role in reducing risks associated with developing and commercialising new and emerging technologies, and supporting higher adoption and diffusion. Government has committed to remove barriers to the emergence of new clusters and the growth of existing clusters. RCUK, working with others, will establish a principles-based framework for treatment and submission of multi-institutional funding bids to allow consortia to tackle large-scale and ground-breaking new research beyond the capabilities of single institutions.

45. Local Enterprise Partnerships (LEPs) have the potential to influence partnership working between all players in a local economy, and many already have HEI representation on their boards. As LEPs develop their strategies at the heart of local democracies, it is expected that they will play a more robust role in promoting economic growth including bringing together business and universities to commercialise R&D.

46. To further support collaboration between SMEs and external knowledge providers across the public and private sectors, Government will introduce a new Innovation Voucher programme in 2012–13. The Voucher programme will initially focus on geographical areas and sectors of low economic growth, and will look to support small businesses who have not previously engaged with the UK’s knowledge base or lack the in-house expertise or research facilities to develop ideas into new products and services.

47. R&D tax credits support business expenditure on research and development activities. Government has recently announced a number of reforms to the scheme, including:

increasing the rate of relief available for SMEs to 200% from April 2011, and to 225% from April 2012; and

the introduction in April 2013 of an “above the line” R&D tax credit which will provide greater visibility and greater certainty for large company investors.

48. Turning an initial patent or concept into a marketable product requires a range of complementary activities, including further R&D activity either on the intellectual property itself or the processes required to manufacture or deliver the product or service. The R&D tax credits scheme provides further support during this phase, where the work is seeking to resolve scientific or technological uncertainty.

Importance of the knowledge base

49. Strong universities and the wider knowledge base drive UK competitiveness in the global economy, through underpinning technology-based sectors and enhancing our health, quality of life and creative output. They train the skilled researchers and technologists who work in knowledge-driven sectors.

50. Government recognises the importance of the research base, which includes HEIs, Research Council Institutes, PSREs, and Research and Innovation Campuses, in assisting companies to commercialise ideas.

51. Research Councils support activities which encourage researchers to work with business. These include support for collaborative research, collaborative training, the exchange of researchers between academia and business, and in some cases proof of concept funding. Research Councils are working with nearly 3000 businesses in sectors ranging from broadcasting to biotechnology and engineering to insurance. Research Councils also work closely with a number of strategic partners to deliver impacts from research.

52. RCUK is committed to developing strategic partnerships to ensure that the potential impact which exists in the research base through previous investments is tailored appropriately to meet user needs, and future evidence can be generated collaboratively. A number of sectors have been selected as the focus for current strategic engagement through a coordinated cross-council approach. These include pharmaceuticals, the creative economy, water and energy.

53. Of vital importance is the support that the UK provides for fundamental, or “blue skies” curiosity-driven research, which attracts leading researchers to work here, and allows the combination of ideas from different research fields. Research Councils will continue to fund both responsive, curiosity-driven research proposals, and research initiatives into specific areas. This funding will continue to be complemented through the UK Higher Education funding bodies, which will provide universities with flexible, quality related research funding.

54. HEFCE research funding also includes an element to support research with business (amounting to £64 million per annum) allocated by reference to the collaborative research income generated from business.

55. HEIF, provided by HEFCE, enables HEIs in England to maintain and develop capacity to work with business and other users, including:

strengthening technology transfer offices and providing proof of concept funding to help with commercialisation of intellectual property outputs (including through spin-outs, licensing);

support for business development function to help increase interactions with business (such as collaborative research, consultancy, continuing professional development training); and

enterprise education for students and support for starting a business.

HEIF is being maintained at £150 million per annum for 2011–15, and is being reformed to increase the rewards for universities that are most effective in business engagement.

56. Similar support is offered by Higher Education Funding Bodies in other parts of the UK.

57. Through the Higher Education Funding Councils and Research Councils, Government has developed further incentives to recognise and reward HEIs and researchers for the broad range of economic, social and cultural impact derived from their research. A major exercise is undertaken every few years to assess the research performance of all UK HEIs. The Research Excellence Framework (REF), which replaces the earlier Research Assessment Exercise (RAE), will complete and report at the end of 2014. REF 2014 will not only assess research excellence but will also include, for the first time, an assessment of the impact that excellent research has made on the economy and society. “Impact” will account for 20% of REF 2014.

58. Research Councils now require researchers submitting grant applications to include a proposed “Pathway to Impact”.24 This encourages researchers to consider from the very beginning the potential “pathways to impact” and those who may be interested in the outcome of their research. It will help speed up these impacts and ensure researchers think about the value of their research to the economy and society.

The international dimension

59. Innovation and research are now increasingly international endeavours as most innovations originate from multiple countries. Businesses looking to commercialise new ideas or technologies can also benefit from international partners’ ability to provide access to wider markets. High growth economies’ strong, long-term growth makes them of increasing importance to UK businesses looking for new markets.

60. The Innovation and Research Strategy for Growth announced a range of measures to support international collaboration for UK businesses including:

UK Trade & Investment (UKTI), the Science and Innovation Network (SIN) and the network of IP attachés will focus particular support on helping innovative UK businesses take advantage of commercial opportunities and build successful international collaborations in innovation hotspots.

The Catapult centres will all have a focus on international engagement, varying according to where the best opportunities exist.

UKTI will create a collaborative online platform, enabling innovative companies and service providers to support one another.

61. BIS will review the system of support available to UK participants in Horizon 2020 proposals. Under the “Leadership in Enabling Industrial Technologies” pillar of the Commission’s proposed Horizon 2020 programme, support will be available for the deployment of the outputs of research projects by European industry. Such support will play a key role in aiding the commercialisation of research, thereby strengthening Europe’s productivity and innovation capacity and ensuring Europe has an advanced, sustainable and competitive economy, global leadership in hi-tech application sectors and the ability to develop effective solutions for societal challenges. The Government recognises its role in ensuring that UK companies are well-placed to benefit from these opportunities by putting in place a support-system that is fit for purpose.

62. International collaboration is also important to the UK’s research base. The quality of the UK research base attracts companies from around the world. Companies such as Ford, Pfizer, Airbus, Nokia and Syngenta have all chosen the UK for large scale R&D investment. The RCUK International Strategy outlines how the Research Councils can grasp new opportunities and build on the UK’s already impressive international reach.25 Building strategic links with the institutions and companies in the emerging economies such as the BRIIC countries will be vital if the UK is to succeed in the global economy, and international collaboration in Science and Research has a key role to play in this.

Question 6—Should the UK seek to encourage more private equity investment (including venture capital and angel investment) into science and engineering sectors and if so, how can this be achieved?

63. Government is committed to making the UK the best place in Europe to finance and grow a business. Despite the turbulence in global financial markets the Government believes that unlocking private sector investment remains the key to enabling private sector led growth. Evidence from NESTA shows that about 6% of innovative, high growth companies created 50% of new jobs.26 Government is committed to enabling innovative, high growth businesses, including the science and engineering sectors to access more diverse sources of finance.

64. Business Angels have an important role in supporting early stage innovative companies, not only with small amounts of equity investment, but also in providing mentoring support and networking opportunities. In recognition of the importance of Business Angels the Government has reformed the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) tax reliefs. These changes include increasing the rate of income tax relief for the EIS to 30% from April 2011 and doubling the investor limits to £1 million per annum from April 2012. The EIS, which is not sector specific, supported £611 million of investment in 2009–10 including £125 million in high tech companies (which include instrument engineering, some chemicals, R&D, and computer consultancy among others).

65. The risks involved in investing in the newest, early stage companies are recognised by Government, which has introduced the Seed Enterprise Investment Scheme (SEIS) providing a 50% rate of income tax relief for individuals who invest in qualifying seed companies. To kick start the scheme the Government is providing a Capital Gains Tax Exemption on any gains realised in 2012–13 that are invested through SEIS in the same year.

66. Government also recognises the importance of improved access to equity investment across the English regions. Working with Capital for Enterprise Limited and Business Angels networks the Government has committed £50 million through the Regional Growth Fund to a Business Angel Co-Investment Fund which will support Business Angel investment across England.

67. We know from the USA that governments can play an important role in unlocking private sector investment for early stage, innovative companies. Apple, AOL, Hewlett Packard and Intel all received early stage equity investment from Federal Government backed venture capital programmes. Our own Government backed venture capital scheme is the Enterprise Capital Fund (ECF) programme which invests up to £2 million in a range of early stage, high growth businesses including a number in science and engineering sectors. The ECF programme specifically encourages the creation of venture funds through providing a mechanism whereby private investors can benefit from a greater share in the profits of those funds. This helps to level the playing field between equity gap investment and the returns that might be had from alternative asset classes.

68. The ECF programme has to date supported 10 professionally managed funds, which together have invested £124.6 million in 114 companies. The funds have a commercial focus, but a clear target to invest within the equity gap. Funds often collaborate with Business Angels and other early stage investors, and around 60% of investments to date are in firms at seed or early stage.

69. In the last spending review, the Government committed a further £200 million to creating new ECFs, which will extend their reach. Proposals for ECFs can come from teams focusing on any industry sector, including from teams working with universities and other research and technology institutions to commercialise and invest in early stage and technology-based ventures.

70. Government is also continuing to support the UK Innovation Investment Fund (UKIIF), one of Europe’s largest technology Fund of Funds. Working with Hermes GPE and the EIF, the UKIIF targets investment in advanced manufacturing, clean technology, digital, and the life sciences sectors by investing up to £330 million in a range of specialist technology funds.

71. Venture capital markets are increasingly global with a third of investment into UK venture capital coming from overseas including the USA and Asia. Europe continues to under perform compared to US markets, investing four times less in venture capital. The UK Government has led European proposals to create a Pan EU Fund of Funds of the size and scale of successful US Technology Funds. We welcome proposals in the forthcoming Horizon 2020 Framework Programme to place greater emphasis on the financing of innovative, high growth companies across Europe including the creation of Pan EU Innovation Fund of Funds funded through a reprioritisation of existing EU budgets through the EIF and national operators.

72. Government will also strengthen links between the UK and US venture capital sectors. Following President Obama’s State Visit to the UK in May 2011 the UK and US Governments have announced that they will bring together UK and US fund managers to enable strategic partnerships to be developed, and to showcase and secure investment for some of the UK’s leading innovative companies.

73. The TSB is looking at how it can create greater links between the support it provides and the private equity community. Companies supported through the SBRI programme for instance tend to attract private equity interest as government funding helps to de-risk the technology and there is also the prospect of a government contract. The Launchpad programme provides 50% of the funding to the company. The TSB then creates the opportunity for these companies to meet the private equity community to gain the other 50% of the funding.

74. UKTI’s strategy, Britain Open for Business, states that it will work to attract venture capital investment from overseas through developing strategic relationships with key venture capital decision makers across the world, making intensive use of their networks to stimulate interest.27 This new package will aim to attract significant new investment for high growth and innovative SMEs, and bring new venture capital operations to the UK.

75. Not all technology businesses require large amounts of capital and it is relatively common for start ups in the creative and digital sector to use their own finance or that of friends and family to fund their enterprise. This helps to gauge the business potential and avoids diluting the ownership of the business too early. Through the Business Link website (www.businesslink.gov.uk) and the “No Nonsense Guide to Finance for Innovative and High Growth Companies”, the Government wants to ensure that innovative businesses have access to the information they need to make appropriate funding decisions.

76. As well as proving the viability of technology, investors will want to ensure that the potential market opportunities and the customer base, both domestically and internationally, are fully understood. A number of Government programmes help to address “investment readiness” and ensure that business owners fully understand what investors are seeking including the potential rates of return on investment.

Question 7—What other types of investment or support should the Government develop?

77. As well as addressing supply side measures to support the commercialisation of technologies, Government believes that there are other measures that can support innovative, high growth companies. These include public procurement, prizes and business programmes.

Procurement

78. The scale of Government’s purchasing power means that the public sector can be a lead customer for innovative products and services. Through engaging with the supply chain, the public sector can identify opportunities to incentivise the development of new products and services, and use the scale of the public sector market to accelerate the commercialisation of innovation where this represents value for money, benefitting the wider economy.

79. The House of Lords Science and Technology Select Committee report on “Public procurement as a tool to stimulate innovation”28 recognised innovation procurement as a vehicle to help “…stimulate British industry to generate new products and ideas that will, in turn, lead to economic growth, often based on the translation of scientific research into commercial products and services”. Innovation procurement initiatives reduce risk, guarantee sales, encourage market entry, provide early testing ground and manufacturing experience, create demand and make latent demand manifest, and diffuse technology.

80. In its response, Government set out how its ambitious and radical programme of procurement reform will help foster innovative solutions, through reducing bureaucracy in the procurement process making public procurement more attractive to smaller and more innovative suppliers, and greater use of outcome-based specifications allowing the market to come forward with solutions. The commitments made by Francis Maude on 21 November 2011 around procurement and growth will require Government to undertake greater pre-market engagement before starting the formal procurement process.29 This will encourage more innovative ideas from the market which will shape future specifications.

81. The SBRI programme operated by the TSB encourages, and provides a mechanism for, the development of innovative solutions to public service needs. The SBRI provides innovative solutions to public sector challenges, new business opportunities for innovative companies and a route to market for new ideas, thereby accelerating technology commercialisation.

82. The recently published NHS strategy, Innovation, Health and Wealth, announced that the Department of Health would double its investment in the SBRI programme to develop innovative solutions to healthcare challenges, encourage greater competition in procurement of services, and drive growth in the UK SME sector.30

Innovation inducement prizes

83. Governments and businesses are increasingly recognising the potential of innovation inducement prizes as being complementary to other ways of supporting innovation. Prizes can encourage wider collaboration across public and private sector organisations, communities and consumers in response to a clearly identified challenge or opportunity. A well designed prize will aim to solve a multi-disciplinary problem that is not the subject of existing research grant programmes or challenges, and can bring together different types of knowledge and other resources to solve problems. Prizes can be particularly effective in targeting “neglected” areas where innovation is needed, but might not otherwise take place.

84. The Innovation and Research Strategy for Growth announced that Government would work with NESTA to establish a Centre of Expertise to run, design and facilitate inducement prizes. Government and NESTA will co-finance a new fund to run future inducement prizes. Government will also contribute £250,000 per annum towards the fund and will seek to leverage interest and investment from the public and private sectors and philanthropic organisations.

Supporting business

85. In addition to the direct innovation support to business provided by the TSB, the Government enables innovative businesses to access external finance through a basket of other measures. These include access to finance information on the Business Link website and the production of a “No Nonsense Guide to Finance for Innovative and High Growth Companies” and the “Fit for Finance Programme”.

86. Government has also launched “Business Coaching for Growth” to help 10,000 SMEs a year overcome the barriers they face in achieving high growth potential. The programme will include help to commercially exploit innovation, build a culture of innovation within the businesses and identify and protect intellectual property. There will be strong links between the Intellectual Property Office, the TSB and the Design Council.

Appendix A

ECONOMIC AND SOCIAL IMPACT OF RESEARCH

The following examples demonstrate how economic and social impact of research is delivered through a range of mechanisms.

Delivering highly skilled people to the labour market

There were 20,080 new PhDs and 162,365 Masters graduates from UK HEIs in 2010–11.31

A recent survey of doctoral graduates showed that over 90% felt that their PhD enabled them to be innovative in the workplace.32

David Lathbury, former Head of Process Chemistry at AstraZeneca’s Charnwood site, has looked at the value the pharmaceutical industry gains from PhD training: “PhD students produced by our higher education sector create far more monetary wealth than that associated with a particular project funded in their university department”.33

Developing new businesses

Between 2003 and 2011, 40 university spin outs were floated on the stock exchange with an IPO value of £1.79 billion; and 25 university spin out companies were acquired by other business for a total value in excess of £3 billion.34

The software company Autonomy, based on research from Cambridge University, was a FTSE100 company before being acquired in 2011 by US firm Hewlett Packard for £7 billion.

Improving the performance of existing business

Rolls Royce has a long-established network of Technology Centres in universities in the UK and elsewhere.

Lloyd’s Register is developing a £100 million Maritime Centre of Excellence on the campus of Southampton University.

Improving public policy and public services

The Natural Environment Research Council (NERC) gathered vital data from the Icelandic volcano which grounded flights across Northern Europe in 2010, enabling flight restrictions to be lifted in airports across Britain, saving money and bringing thousands of stranded tourists home.

Researchers at the MRC Lifecourse Epidemiology Unit in Southampton developed a computer-based algorithm, FRAX, to assess the fracture risk of patients, giving a 10-year probability of fracture. FRAX is in use worldwide. The economic implications are significant—musculoskeletal disorders cause discomfort for approximately 10 million people in the UK. This public health issue has associated costs estimated to be in the region of £40 billion.

Professor Theo Farrell, an Economic and Social Research Council (ESRC)/Arts and Humanities Research Council (AHRC) Fellow, undertook an assessment of the British Army’s performance in Operation Moshtarak, a 2010 offensive to clear the Taliban from central Helmand Province in southern Afghanistan. The resulting classified report was briefed to Army chiefs, and has informed doctrine development and pre-deployment training for troops going to Afghanistan.35

Attracting Foreign Direct Investment in R&D from global businesses

450 R&D projects were attracted to the UK in 2006–7 and 2007–08.36

Tata Motors, which owns Jaguar Land Rover, has invested over £85 million in collaborative research with the Warwick Manufacturing Group.

Eisai is one of the world’s top 20 pharmaceutical companies and defines its corporate mission as enhancing patient value by meeting unmet medical needs. As part of its global development strategy, the Japanese company is to develop a £75 million facility on the Hatfield Business Park. The investment will ultimately employ more than 500 people—including some 300 new roles in R&D and manufacturing.

January 2012

1 Innovation and Research Strategy for Growth, Department for Business, Innovation and Skills, 2011.
www.bis.gov.uk/policies/innovation/innovating-for-growth

2 Innovation Index data, the National Endowment for Science, Technology and the Arts (NESTA).

3 Higher Education Business & Community Interaction Survey www.hefce.ac.uk/econsoc/buscom/hebci/

4 OECD comparative data on levels of R&D investment, 2008. It is important to note that international comparisons are complicated by different historical, structural and industrial factors across countries. When accounting for the UK’s sectoral mix, BERD as a proportion of GDP is more in line with countries such as France and Germany.

5 “The Financing of Technology-Based Small Firms”, Bank of England, 1996; D J and B Tether, “New technology-based firms in the European Union: an Introduction”, Research Policy 26, 1998; “Risk Capital: A Key to Job Creation in the European Union”, European Commission, 1998; “Innovation market failures and state aid: developing criteria”, Oxera report for the European Commission, 2005.

6 Z Griliches, “The Search for R&D Spillovers”, Scandinavian Journal of Economics 94, 1992; M Nadiri, “Innovations and Technological Spillovers”, NBER Working Paper, 1993.

7 Technology Readiness Levels were developed by US Government agencies for use in defence and aerospace programmes but have subsequently been more widely applied. They are used to determine the distance of a particular technology from the market. They operate across a scale of 1–9, with 1 being technologies which are still the subject of fundamental scientific research, and 9 representing technologies which are capable of being manufactured and then used in functioning products. Technology Readiness Levels 1–4 primarily involve research in laboratories; levels 5–9 involve testing the underpinning technologies in a relevant environment, prototyping and the development of associated manufacturing technologies.

8 “STFC Research Performance and Economic Impact Report”, 2011.
www.stfc.ac.uk/resources/pdf/stfcimpactreport2011.pdf

9 An agreed taxonomy for classifying public investment in research and innovation, to enable effective international data gathering and comparison. These definitions form the basis of WTO and EU rules on subsidies.

10 “The Financing of Technology-Based Small Firms”, Bank of England, 1996; D J and B Tether, “New technology-based firms in the European Union: an Introduction”, 1998; “Risk Capital: A Key to Job Creation in the European Union”, European Commission, 1998.

11 “Innovation market failures and state aid: developing criteria”, Oxera report for the European Commission, 2005.

12 Bridging the Finance Gap: next steps in improving access to growth capital for small businesses, HM Treasury, 2003.
www.hm-treasury.gov.uk/d/small_business_452.pdf

13 International Comparative Performance of the UK Research Base, Elsevier for BIS, 2011.
www.bis.gov.uk/assets/biscore/science/docs/i/11-p123-international-comparative-performance-uk-research-base-2011.pdf

14 UK Innovation Survey, BIS, 2011.

15 OECD data.

16 “Evaluation of the Collaborative Research and Development Programmes”, PACEC for the TSB, 2011.
www.innovateuk.org/_assets/pdf/publications/pacec_evaluation_of_crandd_report.pdf

17 “Evaluation of Smart”, PACEC, 2001.

18 “Grant for Research & Development and Smart Final Report”, DIUS/LDA, 2009.
http://webarchive.nationalarchives.gov.uk/+/http://www.bis.gov.uk/files/file52026.pdf

19 “Knowledge Transfer Partnerships Annual Report 2009/10”, TSB, 2010.
www.ktponline.org.uk/assets/Resources-page/KTPAnnualReport09-10.pdf

20 “Research Councils UK, Impact Report 2011”, 2012.
www.rcuk.ac.uk/Publications/reports/Pages/RCUKImpactReport2011.aspx

21 “Research Performance and Economic Impact Report 2010/2011”, EPSRC, 2012.
www.epsrc.ac.uk/newsevents/news/2012/Pages/economicimpactreport.aspx

22 “Research Councils UK, Impact Report 2011”.

23 Strategy for UK Life Sciences, BIS, 2011.
www.bis.gov.uk/assets/biscore/innovation/docs/s/11-1429-strategy-for-uk-life-sciences

24 www.rcuk.ac.uk/kei/impacts/Pages/home.aspx

25 “Our Vision for International Collaboration”, RCUK.
www.rcuk.ac.uk/documents/publications/international.pdf

26 “The Vital 6%”, NESTA, 2009. www.nesta.org.uk/events/assets/features/the_vital_6_per_cent

27 Britain Open for Business: Growth through International Trade and Investment, UKTI, 2011.
www.ukti.gov.uk/uktihome/aboutukti/aimsobjectives/corporatestrategy.html

28 “Public procurement as a tool to stimulate innovation”, 2011.
www.publications.parliament.uk/pa/ld201012/ldselect/ldsctech/148/14802.htm

29 www.cabinetoffice.gov.uk/news/radical-package-unveiled-support-business-and-promote-growth

30 Innovation, Health and Wealth: Accelerating Adoption and Diffusion in the NHS, Department of Health, 2011.

31 Higher Education Statistics Agency (HESA) Student Record. These figures cover graduates of all domiciles from full-time and part-time courses. PhD graduates from UK HEIs increased by 13.8% between 2008–09 and 2010–11. Masters qualifiers increased by 31.7% over the same period.

32 “What Do Researchers Do? Doctoral graduate destinations and impact three years on”, Vitae, 2010.
www.vitae.ac.uk/researchers/1272-290131/What-do-researchers-do-Doctoral-graduate-destinations-and-impact-three-years-on.html

33 “Pioneering Skills to Build Britain’s Future”, EPSRC
www.epsrc.ac.uk/SiteCollectionDocuments/Publications/corporate/SkillsHLP.pdf

34 Data from PraxisUnico.

35 “ESRC Research Performance and Economic Impact Report 2010–11”, ESRC, 2012.
www.esrc.ac.uk/_images/Research-performace-impact-10-11_tcm8-19067.pdf

36 Data from UKTI.

Prepared 12th March 2013