‘Research and Innovation’ – Solving the Productivity Puzzle: Talk given on behalf of the UK Academies to a fringe meeting of the Labour Party Conference

I’m delighted to have the opportunity to talk about how innovation can boost UK productivity on behalf of the four UK National Academies – The Royal Academy of Engineering, of which I am a Fellow, The Royal Society, The Academy of Medical Science and the British Academy.

What are National Academies? The UK’s Academies operate with state approval and support – via ‘grants in aid’ – and co-ordinate scholarly research activities and standards for academic disciplines, in the sciences and in the humanities. The Academies also provide a hub for collaboration between professional institutions, and play a key role in international knowledge-sharing.

I’d like to make a few basic points about innovation and productivity:

Innovation is the process by which ideas are converted into value — in the form of new and improved products, services and approaches. Innovation often draws on R&D and may involve commercialisation, but it is not synonymous with either. While technology is a common source of innovation, innovation can also derive from developments in design, business models and mechanisms of service delivery.

  • The UK’s productivity lags behind many of the G7 countries – it has slowed since 2007. The UK has the lowest level of government-financed investment on R&D as a percentage of GDP
  • Research, with innovation, turns new knowledge into economic and productivity gains – between 2000 and 2008, innovation accounted for 51% of productivity growth. 32% is directly attributable to Technology arising from scientific research and innovation.
  • Research and Innovation offer substantial economic and social benefits – the Higher Education Sector generated £73bn of output in 2011-12 through direct and indirect effects, and Research, Technology and Innovation Organisations generated £7.6bn, taking account of indirect and induced impacts.
  • The UK is good at Research – We have only 0.9% of the global population and 3.2% of global R&D expenditure, yet we have 4.1% of global researchers and 15.9% of the world’s most highly cited research articles. This means that we have an on-tap opportunity, with appropriate innovation investment, to make a sea change in national productivity.

Despite these very encouraging messages, we have some serious blockers to unlocking and realising productivity.

  • We under-invest, and we do not respond ideally to global competition. The OECD average for R&D investment by governments is 0.67% of GDP, yet the UK invests only 0.49%. In Germany in 2013, government-funded R&D was 0.85%, and in the USA, 0.76%.
  • Evidence shows that public R&D investment attracts further funding – I would mention Alan Hughes’ report to Treasury. Every extra pound of public funding leverages £1.13 to £1.60 of private sector money.
  • The UK has a significant Skills Shortfall – particularly in Engineering. The report produced by Professor John Perkins, Chief Scientific Advisor to BIS, in 2014 shows that we are graduating only 50% of the engineers needed to sustain growth in the industrial sector. Of these, only 16% are women – there is plenty of room for improvement.
  • For small companies, having people able to take on board new technologies – absorptive capacity – is essential to realising the potential of our research excellence. The Dowling Review identifies the need to consolidate and strengthen local support for SMEs to enable them to better engage with the excellence in the UK’s research base.
  • According to surveys, data and numeracy skills are either essential or important to around 7 in 10 employees – at a basic arithmetic level for 3 in 10 – and at more advanced level for 4 in 10. The demand for more advanced skills is advancing. It is therefore essential that all training whether in schools, further education or higher education has an adequate quantitative skills component.

All these needs have to be viewed in the light of the Government’s productivity plan ‘Fixing the Foundations’: Creating a more Prosperous Nation.

A joint foreword by George Osborne and Sajid Javid recognises the role of science in boosting UK productivity.

‘The drivers of productivity are well understood: a dynamic, open enterprising economy supported by long-term public and private investment in infrastructure, skills and science’

And, in a Chapter entitled High Quality Science and Innovation, spreading fast:

‘There is clear and robust evidence of a link between R&D spending and national productivity’

Concerning Higher Education, Jo Johnson, Minister of State for Universities and Science spoke at the Universities UK Annual General Meeting on the 9th of September. He outlined plans for higher education, including:

  • Plans to implement the Teaching Excellence Framework, outlined in the Conservative manifesto. This includes a financial incentive so that universities offering high-quality teaching are able to increase fees with inflation.
  • A green paper is planned on higher education with proposals to improve teaching quality and empower students, opening up the higher education market and driving value for money.
  • The green paper will also set out plans to reform the higher education and research system architecture, following the Nurse Review of the Research Councils.
  • Key points include continuing with the dual support funding system, and respect for the so-called ‘Haldane Principle’. However, there is a growing indication that funding systems for research and innovation will be simplified, the latter being recommended in the Dowling Review.

Some final thoughts and conclusions:

A key driver of the requirement for public support is the fact that the original innovators often accrue a relatively modest proportion of the aggregate benefit associated with an innovation. For an individual company, funding innovation is inherently risky because the outcomes are uncertain and, even if an innovation proves successful, it is rarely clear at the outset who the main beneficiaries will be.

Furthermore, the benefits may be delivered over longer time horizons than those the company uses to guide its investment decisions and, crucially, there are significant ‘spill over’ effects which mean that innovations can create substantial value for other businesses that adopt or adapt the innovation, as well as for society at large.

Without public sector support, innovation in the private sector tends to be incremental rather than making step-changes. History shows us it is the step-changes that make real effects on the economy. Take fibre optic technology, which has brought super high-speed communications to almost all of us. Or the laser – invented in 1960, with no immediate application – yet now a central part of our lives, with perhaps five or more lasers in every household in computers, cars and sound systems.

The UK has a world-class science and engineering research base, and with smart policy and public sector investment, could be world-class at the full ‘concept to value’ chain.

There are a few areas of low-hanging fruit; one is strategic procurement by government. The SBRI scheme operated by Innovate UK could be very much more effective at growing SMEs if the winners were awarded at-scale supply contracts by the commissioning bodies.

We need to view innovation-led productivity through several lenses – product, service and process innovation. Service innovation can increase productivity and sustainability, for example in infrastructure and the built environment, where preventative can replace scheduled maintenance. Process innovation may be a Cinderella area, but one where digital technologies can make immense impact. This is already being seen in public services.

All of the above need significant public sector incentives to achieve the step changes our society and economy needs.

Government has a pivotal role to play in stimulating innovation. While innovation offers many potential benefits at the level of an individual firm, government support is often essential to encourage companies to engage in innovation. The work of Innovate UK (previously the Technology Strategy board) is to be strongly commended in providing a support framework to do this.

This is because innovation is an inherently risky process with an uncertain outcome, the benefits may only materialise over very long timescales and the innovator often accrues only a small proportion of the overall benefit generated.

By creating a conducive policy environment, using procurement intelligently and providing targeted direct support, the public sector can be highly effective at enticing the private sector to invest in innovation.

In the context of international competition, if the UK is perceived as offering a less attractive location for innovation activities, there is a high risk that companies will choose to make their knowledge-based investments elsewhere.

It is certain that innovation will happen irrespective of the UK’s policies — what is at risk is our ability to drive and benefit from it.

One of the essential ingredients for a successful innovation system is a clear strategy underpinned by a stable and coherent policy framework.

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