Innovation Report From Dti Uk

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INNOVATION REPORT

INNOVATION REPORT

Competing in the global economy: the innovation challenge DECEMBER 2003

Competing in the global economy: the innovation challenge

Printed in the UK on recycled paper with a minimum HMSO score of 75. First published December 2003. Department of Trade and Industry. http://www.dti.gov.uk/ © Crown Copyright. DTI/Pub 7035/2k/12/03/NP. URN 03/1607

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The DTI drives our ambition of ‘prosperity for all’ by working to create the best environment for business success in the UK. We help people and companies become more productive by promoting enterprise, innovation and creativity. We champion UK business at home and abroad. We invest heavily in world-class science and technology. We protect the rights of working people and consumers. And we stand up for fair and open markets in the UK, Europe and the world.

Steering Committee Members Nick Baldwin Energy Advisory Group Board Robert Crawford Scottish Enterprise John Cridland Confederation of British Industry Anthony Dunnett South East of England Development Agency Mark Gibson Business Group, DTI Anne Glover Amadeus Capital Partners Ltd. David Hughes Innovation Group, DTI John Kingman HM Treasury Ron Loveland Welsh Assembly Roger Lyons AMICUS Geoffrey Norris No. 10 Policy Directorate Vicky Pryce Chief Economic Adviser, DTI Janice Shiner Department for Education and Skills John Taylor OST, DTI Joe Tidd Science and Technology Policy Research, University of Sussex Caroline Whitfield Innovation Group Advisory Board

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Contents Foreword ...................................................................................3 Introduction ............................................................................5 Overview ...................................................................................7 Chapter 1 The innovation challenge .....................................17 Chapter 2 High performance innovative companies...............................................31 Chapter 3 Technology innovation .............................................51 Chapter 4 National innovation assets..................................69 Chapter 5 Innovation policies across Government ....................................................79 Chapter 6 Regional innovation.....................................................97 Chapter 7 Global links .........................................................................113 Action plan ..........................................................................127 Annex ........................................................................................135 Glossary of terms .......................................................141 Steering Committee Members ..............................................................................145

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Foreword

The creativity and inventiveness of our people is our country’s greatest asset and has always underpinned the UK’s economic success. But in an increasingly global world, our ability to invent, design and manufacture the goods and services that people want is more vital to our future prosperity than ever. Innovation, the exploitation of new ideas, is absolutely essential to safeguard and deliver high-quality jobs, successful businesses, better products and services for our consumers, and new, more environmentally friendly processes. There are many British companies who have risen to this challenge and reaped the rewards for their vision. Those Britishbased manufacturing industries that have invested heavily in Research and Development (R&D) have, in recent years, competed successfully in the global economy and have grown faster than the economy as a whole. But this is, by no means, the whole picture. We do have world-beating companies but also have too few of them. Too many of our firms have failed to put enough emphasis on R&D and developing skills.

in place through a huge investment in our nation’s science base, the platform of macro-economic stability and support for enterprise, skills and knowledge at the centre of our policy making. We now need to go further. The challenge – set out in this important report – is to create the conditions where all our firms put innovation at the centre of their strategies for the future. Government can’t do this alone. We need to work with industry, trade unions, employees and consumers. But Government does have a key role. So I have asked the Secretary of State for Trade and Industry to chair a Ministerial team to lead the innovation agenda across the whole of Government and drive forward the implementation of this report. We want the UK to be a key knowledge hub in the global economy, with a reputation not only for world-class scientific and technological discovery but also for turning that knowledge into new and profitable products and services. This report sets out the next steps we are taking to turn that vision into a reality.

We have been working hard to put this right. Over the last six years, the Government has put the right foundations Rt. Hon. Tony Blair, Prime Minister

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Introduction

A year ago I was asked by the Secretary of State for Trade and Industry, Patricia Hewitt, to review the Government’s policies which impact on innovation. She saw the need to raise our level of productivity and position ourselves to compete effectively against the low-wage, newly-emerging economies and this means that a step change is required in our rate of innovation. This report of our work has been produced in close partnership with industry, the Trade Unions and our university and research institutes, who are in the best position to know how we can compete in global markets. If we are to be able to compete successfully against the most dynamic industrial economies in the world, it is not enough to open up our markets to competition, though this is an essential first step. It is also necessary for the Government to provide the significant range of public goods which are necessary for a knowledge-driven economy to create competitive advantage, such as a strong science and technology base, incentives for knowledge transfer and business Research and Development (R&D), and high standards of education at all levels. Only in this way can we provide opportunities for all those who want to innovate and create new businesses, whatever their jobs and in whatever region of the country they work.

We have already put in place many of the foundation stones of a successful knowledge economy, and the case studies in the report show what can be done by innovative and dynamic companies, large and small. But in the fast-moving world in which we live, we need to constantly benchmark ourselves against the best, learn from other countries, and increase the effectiveness of our policies. As Patricia Hewitt has made clear, our vision is that we should be a key hub in the global knowledge economy. This means that the UK should be a country famed not only for its outstanding record of discovery but also for innovation, a country that invests heavily in business R&D and education and skills, and exports high-tech goods and services to the world. We also want to be a country with strong science and technological links with the best research around the world, so that we can stay always at the leading edge. Finally, we should be a country to which talented entrepreneurs and world-class companies come from around the world to do research and set up high-tech companies, attracted by the quality of our research, by the strong links between universities, research institutes and industry, by geographic clusters of high-tech companies, by their ability to raise finance, particularly venture capital, and by our quality of life.

Lord Sainsbury, Minister for Science and Innovation

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Overview

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1. Competing in the Global Economy Dramatic moments in the history of industrial change have always been characterised by the successful exploitation of new ideas and the achievements of innovators. Innovation has driven economic progress, from the invention of the spinning jenny that transformed the textile industry during the 18th century, to the harnessing of electricity and the development of mass production. More recently, semi-conductors, the internet and mobile technology have revolutionised business performance and the economic potential of nations. Today, there are three reasons why innovation is even more urgent for companies and countries:  trade liberalisation and a rapid fall in communication and transport costs mean that the UK must increasingly compete against countries with much lower labour costs and well-educated labour forces. Wages in China are less than 5% of those in the UK. Labour costs in Korea are just over half UK levels, and the proportion of graduates in the working age population is almost identical;  technology and scientific understanding are changing our world faster than ever before. Developments in Information and Communications Technologies (ICT), new materials, biotechnology, new fuels and nanotechnology are unleashing new waves of innovation, and creating many opportunities for entrepreneurial businesses to gain competitive advantage; and  global communications, the 24 hours, 7 days of the week media phenomenon of the 21st century, mean that consumer tastes are also changing faster, as new fashions, ideas and products spread across the world almost instantaneously.

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These developments are occurring at a speed and on a scale never seen before. In the past, many UK-based businesses have prospered even when selling in low value markets, but today British industry faces a new challenge: how to raise its rate of innovation? Professors Michael Porter and Christian Ketels of Harvard University have recognised this challenge, describing how “the UK currently faces a transition to a new phase of economic development.” “We find that the competitiveness agenda facing UK leaders in Government and business reflects the challenges of moving from a location competing on relatively low costs of doing business to a location competing on unique value and innovation. This transition requires investments in different elements of the business environment, upgrading of company strategies, and the creation and strengthening of new types of institutions1.”

2. Why Innovation is Important We define innovation as “the successful exploitation of new ideas”. Often it involves new technologies or technological applications. Innovation matters because it can deliver better products and services, new, cleaner and more efficient production processes and improved business models. For consumers, innovation means higher quality and better value goods, more efficient services (both private and public) and higher standards of living. For businesses, innovation means sustained or improved growth. The innovative company or organisation delivers higher profits for its owners and investors. For employees, innovation means new and more interesting work,

1 DTI Economics Paper, “UK Competitiveness: Moving to the Next Stage”, (May 2003) http://www.dti.gov.uk/economics

Overview

better skills and higher wages. Equally, an absence of innovation can lead to business stagnation and a loss of jobs. For the economy as a whole innovation is the key to higher productivity and greater prosperity for all. Innovation will also be essential for meeting the environmental challenges of the future – including moving to a low carbon economy and reducing waste. We need to find new ways to break the link between economic growth and resource depletion and environmental degradation. It is important to every sector of our economy, in both manufacturing and services. To hold our own in modern manufacturing we will need to innovate strongly, creating new high-tech manufacturing industries such as biotechnology and upgrading traditional sectors such as steel and textiles.

While British-based manufacturing faces threats from developing economies, advances in science and technology also offer many opportunities. In the last ten years, the chemicals (including pharmaceuticals), computers and office equipment and communication sectors have all grown faster than the economy as a whole. And even within sectors that have suffered overall decline there are sub-sectors where companies have grown and prospered by focussing on unique value and innovation. What characterises these success stories is that they tend to have relatively high inputs of research and development (R&D) and skilled labour forces, as Table 1 shows. At the same time we need to raise the level of innovation in our service industries, if we are to meet the challenges posed by the outsourcing of low – value added administrative jobs to developing nations. Services accounted for 56% of GDP in 1981 and 72% in 20012. Our productivity in services is no better than in manufacturing

Table 1 Output growth, R&D and skills inputs by manufacturing sector Average annual percentage growth 1991-2001 Electrical and optical

R&D as percentage Percentage of of value added employees (average with degrees 1991-2000)

5.5

6.6

18.8

16.1

5.5

27.5

6.4

12.9

20.9

Chemicals & man made fibres - of which pharmaceuticals

3.1 6.6

18.5 44.2

26.4 n/a

Plastic and rubber products

1.4

0.8

7.5

Food, drink & tobacco

0.4

1.1

8.1

-4.0

0.4

<8.5

1.0

7.0

12.9

- of which computers & office equipment - communication equipment, TV, radio

Textiles Manufacturing total/average Source: DTI manuafcturinng Strategy (April 2002) – http://www.dti.gov.uk/maufacturing/strategy.pdf

2 Office for National Statistics: UK National Accounts – The Blue Book 2003 edition.

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when compared with our major competitors. Technology is being used increasingly in areas such as retail banking and computer games to improve business processes and customer service, while almost a fifth of business Research and Development (R&D) expenditure today takes place in services.

The latest international comparisons of data on business R&D (Table 2) show the UK well behind the US and roughly equal to the EU average. However, it is encouraging that after a steady period of decline from 1.5% of GDP in 1981 to 1.16% in 1997, we have seen a move in the right direction to 1.24% in 20023.

3. The UK’s Innovation Performance

Measures of patents filed in Europe, Japan and the US provide an indicator of those patents judged most valuable by their creators. On this indicator, adjusting for size of the economy, UK patenting lies well behind that of Japan and the US, and slightly behind the EU average. As the latest figures we have are for 1998, it is not possible to see what the trend has been since then.

The UK is one of the world’s most open trading nations and our consumers can enjoy the benefits of innovation wherever it occurs. But if UK-based companies fail to innovate, jobs and profits will suffer, and our standard of living will fall compared with other countries.

4. The Role of Government

We already have some sectors that lead the world in innovation: aerospace, pharmaceuticals, biotechnology, financial services and many of the creative industries; and there are some firms in almost all sectors that are global leaders. However, overall, our performance is not good enough. Although there is no single indicator of innovation, two measures of technological innovation – business R&D and patenting – show the UK’s performance is only average compared with our international competitors.

Innovation ultimately depends on the knowledge, skills and creativity of people at work, but Government has an important role to play in creating the best possible conditions for innovation, and developing the significant range of public goods that are essential for a dynamic and innovative knowledge economy, including a strong science, engineering and technology base, incentives for knowledge transfer, and high educational standards.

Table 2 Expenditure on business R&D as a percentage of GDP, 1992-2001 1992

1997

1998

1999

2000

2001

Finland*

1.21

1.79

1.94

2.20

2.41

2.42

Germany

1.66

1.54

1.57

1.70

1.75

1.76

France*

1.49

1.39

1.35

1.38

1.37

1.37

UK

1.39

1.16

1.17

1.23

1.19

1.23

EU average*

1.18

1.13

1.14

1.19

1.22

1.24

USA

1.90

1.91

1.94

1.98

2.04

2.10

OECD*

1.49

1.48

1.49

1.53

1.56

1.62

2002

1.75 1.24 2.06

*Most recently available figures are for 2002. Source: OECD/ONS 3 OECD, Main Science and Technology Indicators (May 2003).

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Overview

The innovation challenge has been a clear theme of policy-making since 1997. In that time we have published three White Papers: “Our Competitive Future – Building a Knowledge Drive Economy” (1998); “Excellence and Opportunity – A Science and Innovation Policy for the 21st Century” (2000); and “Opportunity for All in a World of Change – Enterprise, Skills and Innovation” (2001). These new policies are already beginning to produce results. For example, since 1997 we have seen a significant cultural change in the relationship between the university sector and industry. In 2000/2001 there were 248 spin-off companies from British Universities compared with 203 in the previous year and 70 a year, on average, in the 5 years before that4. The number of Intellectual Property (IP) licences granted to UK-based companies, based on Higher Education Institutes’ IP, increased by 38% from 382 in 1999/2000 to 527 in 2000/2001, while total new (initial) patents filed rose by 26% from 725 to 913 over the same period. UK companies will have to compete more in the future on unique, high value-added and innovative products and services. This will require inspirational leadership, stronger management and leadership skills, a highly skilled workforce, a flexible labour market that promotes diversity and fair treatment, and high performance workplaces. The Government’s Skills Strategy, “21st Century Skills: Realising Our Potential” (published in July 2003), makes clear that we have many strengths in the way in which we develop skills, learning and qualifications in this country. Thanks to our recent reforms, our young people compare well internationally in their literacy, numeracy and science skills. We are as good at developing highly skilled graduates as the best in the world. 4 Higher Education Business Interaction Survey; http://www.hefce.ac.uk/pubs/hefce/2003/03_11.htm

But it remains the case that French, German and US workers produce between a quarter and a third more in every hour they work than their British counterparts. A highly educated workforce with a culture of lifelong learning is more likely to adapt to economic change and, as our Skills Strategy makes clear, improving skills levels across the board, particularly among those with the lowest skills levels, is a focus for the Government’s agenda for enhancing flexibility across the UK. The Skills Strategy sets out the Government’s agenda for acting on both the demand for, and supply of, skills as a major contributor to improving levels of innovation and productivity. It commits the Government to creating a more demandled, responsive and flexible training system delivered through:  the Skills Alliance, jointly chaired by the Secretaries of State for Trade and Industry and Education and Skills;  the joint Department for Education and Skills (DfES) and DTI Leadership and Management Unit;  the joint DfES and DTI sponsored Skills for Business Network of Sector Skills Councils leading the development of Sector Skills Agreements; and  Regional Skills Partnerships – which will bring together activities on regional and sectoral skills priorities, training, business support and labour market activity in support of regional economic strategies. This report builds on the policy themes of the previous White Papers: the need for the improved funding of science, incentives for knowledge transfer, the development of innovation-driven regional strategies and clusters, improving knowledge and skills, and the international battle for talent. To improve our innovation performance, a major cross-government initiative is required. The DTI and the Office of Science

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and Technology (OST) have a key role to play but wider actions across a range of Government Departments are necessary if we are to achieve the best possible conditions for innovation. If real change is to be achieved then innovation must become embedded in the thinking of all departments and agencies, and there must be greater collaboration between them. In addition to the £2.3 billion of R&D funded by the OST, and the Higher Education Funding Councils, Government Departments including the NHS funded over £4.5 billion of R&D5. This means that there are substantial opportunities for collaboration across Government, particularly in knowledge transfer to business. The public sector, which purchased £109 billion of goods and services in 2001/026, also has huge potential to stimulate innovation by acting as an ‘intelligent customer’. As the European Commission Report ‘Raising EU R&D Intensity’7 said: “The boost to innovation derived from defence spending in the USA could be matched in Europe by innovation-orientated procurement in health and public security”. Furthermore, Government can help through its sponsorship of particular industries and by drafting outcome-based regulations that promote, rather than restrict, innovation. Recognising the innovation challenge facing the UK, the Prime Minister has asked the Secretary of State for Trade and Industry to chair a Ministerial team to lead the innovation agenda across Government and drive forward the implementation of this report.

5 ONS Government R&D survey (reproduced in The Forward Look, Table 4, pp 170-171). Figures cover 2003/04 – http://www.ost.gov.uk/research/forwardlook03 6 Public Expenditure Statistical Analyses, HM Treasury and ONS, (May 2003). 7 http://europa.eu.int/comm/research/era/3pct/pdf/reportmixpublicsupport.pdf

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5. What we will do We want the UK to be a key knowledge hub in the global economy, with a reputation not only for outstanding scientific and technological discovery, but also to be a world leader in turning that knowledge into new and exciting products and services. In terms of business R&D and patenting we will aim to be the leading major country in Europe within ten years. In developing our analysis and drawing up proposals, we have consulted widely with businesses, successful entrepreneurs and innovators, trade unions, academic and business experts, Devolved Administrations (DAs), and Regional Development Agencies (RDAs). We also looked closely at international experience and the lessons learned by other economies seeking to raise their rate of innovation. We have already laid the foundations of an innovation economy in areas such as macro-economic policy, fiscal policy, competition policy, trade policy and education and skills. But there are other measures that directly bear on innovation where Government needs to do more, taking forward our programme of microeconomic reform. This report sets out a strategy for innovation that will be backed by the resources of the DTI, the RDAs and other relevant parts of Government. Chapter 1 sets out in more detail the economic reasons why the innovation challenge is so important, and Chapters 2 to 7 set out our policies for achieving a step change in the UK’s innovation performance. In summary, we will take the following direct measures in the seven key areas where Government can most effectively act to raise the rate of innovation:

Overview

(i) Sources of new knowledge – ideas and inspiration come from a range of sources. The UK has a strong science, engineering and technology base. But our analysis shows that the UK record of knowledge transfer and exploitation by business has been generally weak.

In recent years the Research Councils have increased significantly the rate of knowledge transfer from their research activities. But we believe that there are more opportunities for much greater collaboration between the Research Councils and business in strategic areas of research.

Government action to encourage businesses to develop and implement new products and services has become a high priority. Given this, the UK Government needs to harness its resources more effectively in promoting technological innovation.

 The Director General of Research Councils will agree with each of the Research Councils, plans and goals for increasing the rate of knowledge transfer and the level of interaction with business through activities such as collaborative research, start-up companies and the Small Business Research Initiative (SBRI). Where these are not already in place, Research Councils will establish measures of collaboration, so that progress can be monitored. Furthermore, the level of interaction with business by each Research Council will be subject to peer review within Research Councils UK and to external challenge by a group including business representatives (Chapter 3).

We need to improve both the supply side and the demand side of our research performance. Fundamental to our approach will be setting priorities, taking account of the growing international mobility of business R&D.  In conjunction with business, the science, engineering and technology (SET) base, Government more widely (including the DAs and RDAs) and other stakeholders, we will develop a Technology Strategy, with a medium to long term perspective, which will provide a framework for setting policy priorities and improving the effectiveness of business support. The Strategy will also be available to help guide Government-wide R&D, European programmes and RDAs support for science and technology and to inform the future development of technical regulations, measurement and product standards, and identify opportunities for innovative public procurement (Chapter 3).  We will work closely with business to ‘pull through’ and exploit technologies from the UK and the international research base by providing some of the funding, and sharing some of the risk, in taking new technologies to the market (Chapter 3).

 We will ensure that the objectives of our National Measurement System (NMS) are developed to include a greater focus on innovation. The NMS will be tasked with increasingly focusing research programmes on emerging technology areas, working in line with the Technology Strategy, initiating 15-25 co-funded research projects each year in collaboration with industry and facilitating up to 250 product development projects per year. We will facilitate 20 exchange secondments between National Measurement Institutes and industry to promote additional knowledge transfer (Chapter 4).  We will set up a visionary, new programme of Measurement for Emerging Technologies. This will address work on nanotechnology and the biosciences and will be closely integrated into the Technology Strategy.

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Businesses need to be able to make wellinformed decisions on how to manage their IP.  The Patent Office will develop a major awareness-raising programme which will target SMEs to ensure they can use the IP system effectively. This will build on the success of current initiatives such as HM Customs and Excise-led “Business Advice Open Days”, and will involve the provision of training to business advisors in IP and launching a national project providing free IP advice in the second half of 2004. It will also target ‘innovators of the future’ such as business studies, design and technology students and entrepreneurs to raise awareness of IP (Chapter 4).  The Patent Office will, in conjunction with rights holders and enforcement bodies, develop a new national strategy for dealing with IP crime, to be launched by summer 2004. In particular, this will involve improving the evidence base, removing administrative overlap, and setting out agreed priorities (Chapter 4). The Lambert Review of UK UniversityBusiness Collaboration8 has also identified many specific barriers to collaboration, which still remain. Proposals in the Lambert Review for removing or reducing these are summarised in Chapter 3. The Government will be responding soon to these proposals. (ii) Capacity of companies to absorb new knowledge – the ability of firms to absorb new ideas and turn them into action is critical to a high innovation performance. We need to make certain that our managers have the technological and management skills to innovate, and that, as a country, we put more resources into technician and intermediate skills where international comparisons show our record is very poor. 8 http://www.hmtreasury.gov.uk/consultations_and_legislation/lambert/cons ult_lambert_index.cfm

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 The SBS will make promoting innovation and knowledge transfer one of the key delivery themes for Business Link. Business Link will tailor assistance to a company’s specific needs depending on its level of innovation capability and the stage it has reached in the product/ service life cycle. Advisory services will include: Intellectual Property Rights advice; assistance with R&D grants and Knowledge Transfer Partnerships; brokering collaboration between companies and Higher Education Institutions; and alerting SMEs to public procurement opportunities (Chapter 2).  The DTI and Design Council will deliver three campaigns to show how innovation can be enhanced through the improved use of design in manufacturing, emerging technology and services businesses. Initially this will involve up to 10 industry sectors over the next two years; the learning will be shared with up to 5000 companies (Chapter 2).  The DTI and Design Council will also work in partnership with UK universities to establish design learning for science, engineering and business management students and develop design demonstration activity within Technology Transfer Offices (TTOs) (Chapter 2). (iii) Access to finance – the UK has relatively sophisticated and large financial markets, and an excellent venture capital industry, but there are some gaps.  The new DTI product supporting investment in the Assisted Areas will have as its main objective the creation of sustainable, high-value investment and jobs rather than simply maximising the number of jobs (Chapter 6).  In order to improve access to finance for women entrepreneurs, the Government will ask the BBA (British Bankers’ Association), BVCA (British Venture Capital Association), and the NBAN (National Business Angel Network) to

Overview

work together to identify what measures should be taken to improve access to mainstream finance (Chapter 2). (iv) Competition and Entrepreneurship – provides a stimulus to innovation and helps determine the intensity of competition and the ability of firms to spot opportunities and manage risks.  To build on the success of the Science Enterprise Centres we will work with Business Schools and Management Institutes to develop curriculum material and case studies to aid the teaching of the skills underpinning the management of high tech, fast growth businesses, as well as new product development (Chapter 2). (v) Customers – demanding customers create the markets for new and innovative products and services. The public sector purchased £109 billion of goods and services in 2001/02 and can play a major part in creating a demand for Innovation.  In order to build on existing initiatives the Office of Government Commerce (OGC) will produce best practice guidance for policy, project and procurement staff on capturing creativity from suppliers by March 2004 (Chapter 5).  To support the Government’s efforts to improve its performance as an intelligent customer, the DTI will work across Government to look at the opportunities for, and barriers to, innovation in key public sector markets. We will pilot this approach by working with NHS Estates to look at how we can draw innovation through the supply chain and with the Department of Health (DoH) to address barriers to greater uptake of telecare and telemedicine technologies. DTI will also ask its industry-led Innovation and Growth Teams (IGT) to identify where public procurement could better facilitate innovation and how this could be achieved (Chapter 5).

(v) Regulatory environment – competition policy and regulatory policy, can affect the level of innovation. There is an important opportunity to increase innovation through more use of outcome-based regulations, which do not specify the technology to be used, and therefore incentivise companies to innovate. To encourage Government Departments we will focus on specific examples to test how this approach can be applied in practice.  A cross-Government project team led by DTI including Department for Environment, Food and Rural Affairs (Defra), Department for Transport (DfT), Cabinet Office and the Environment Agency (EA), will look at three areas of environmental policy and will focus on how the regulations are designed or whether there are alternatives to regulation. The project team will work in consultation with business and other stakeholders (Chapter 5). (vi) Networks and collaboration – firms need to collaborate with many different organisations and to draw ideas from many different places, and there is evidence to suggest that this is an area where we have an opportunity to improve.  The DTI, RDAs and DAs will work in closer partnership to ensure that national policy and priorities take full account of regional priorities, and that they also shape more effectively what is delivered by and through the RDAs at the regional level (Chapter 6).  We will agree with the RDAs a set of regional innovation indicators and assist them to set up Regional Science and Industry Councils or similar bodies (Chapter 6).  Clusters play a key role in driving economic growth and innovation in localities, cities and regions. To further assist the RDAs’ work with clusters, we are publishing alongside this report the conclusions of the work by Ecotec on success factors in cluster development

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and the Ecotec Practitioners Guide to Cluster Development (Chapter 6). We will –  work with the TUC to explore ways in which unions can respond to the challenge of helping companies to innovate;  building on the work already undertaken by the TUC and CBI on productivity, build on the work to establish an Innovation Taskforce, with joint unionbusiness leadership, to undertake additional work to identify how the innovation agenda can be spread through Britain’s workplaces (Chapter 2); and  improve international science and technological collaboration by increasing the number of International Technology Promoters by a third and doubling the number of outward industrial secondments. We will also seek to increase the participation of UK businesses in European programmes, such as Eureka, starting with a new service to help access to the EU’s sixth Framework programme (Chapter 7). We live in a fiercely competitive global economy. If we are to enhance our productivity and raise our standards of living we need to improve radically our innovation performance. And we will need to innovate continuously in the future so that we can hold our own against fastmoving new economies. Since coming to power, the Government has consistently sought to create the conditions necessary for the UK to become a high value-added, high-tech economy and we are beginning to see the first signs of success. This report sets out the further steps we are taking to create the best conditions for innovation in industry so that we can all move forward together to meet the innovation challenge.

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Chapter 1 The innovation challenge

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Summary Global competition is increasing as a result of trade liberalisation, technological change and reductions in transport and communication costs. UK based businesses will find it increasingly difficult to compete on low costs alone in labour intensive industries exposed to international competition. The challenge for businesses is to compete on the basis of unique value.

 sources of new technological knowledge;

We have defined innovation as the successful exploitation of new ideas and it is central to meeting this challenge. It involves investments in new products, processes or services and in new ways of doing business. Measures to develop the skills and creativity of the workforce are often an essential prerequisite. The speed of technological change and market responses make the challenge to innovate urgent and continuous.

They help us to identify current strengths and weaknesses of the UK innovation system. A highly abridged summary is provided in this chapter but the more detailed analysis is contained in an accompanying economic report1.

Overall UK innovation performance appears to be, at best, average compared to our major competitors. This is reflected in the large productivity gap which exists between the UK and its major competitors. Innovation performance accounts for a significant proportion of this gap. On the whole, UK firms face a challenge: how to raise their rate of innovation? Innovation is a complex process so understanding why the UK has a relatively modest innovation performance is not straightforward. We drew on an extensive review of the international innovation literature and consulted with a group of leading experts in the field. As a result we have identified seven critical success factors for innovation performance. They are:

 capacity to absorb and exploit new knowledge;  access to finance;  competition and entrepreneurship;  customers and suppliers;  the Regulatory environment; and  networks and collaboration.

Our vision is of the UK as a key knowledge hub in the global economy. A country that will have maintained its outstanding tradition in the advance of scientific and technological knowledge while developing a similar level of performance in turning knowledge into exciting and novel products and services. This Report is part of the broader set of changes that DTI is now putting in place. The new DTI strategy2 has identified priorities for action that will encourage more business innovation (including knowledge transfer and skills). We have re-engineered our business support products, reducing the myriad number of individual programmes. The resources freed up by rationalisation will be used to fund new, more strategic and better targeted DTI initiatives. The Report complements the Lambert Review of University-Business links as well as the cross-Government Skills Strategy. It makes proposals to strengthen UK performance against all the success factors building upon initiatives that have gone before.

1 DTI Economics paper no. 7 – http://www.dti.gov.uk/economics 2 Prosperity for all: The Strategy; DTI 2003 – http://www.dti.gov.uk/about/strategy2003.html

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Chapter 1 The innovation challenge

What is innovation? 1.1. Innovation in this Report is defined as the successful exploitation of new ideas. Ideas may be entirely new to the market or involve the application of existing ideas that are new to the innovating organisation or often a combination of both. Innovation involves the creation of new designs, concepts and ways of doing things, their commercial exploitation, and subsequent diffusion through the rest of the economy and society. It is this last – diffusion – phase from which the bulk of the economic benefits flow. Most innovations are incremental – a succession of individually modest improvements to products or services over their life cycle. But a few will be dramatic, creating entirely new industries or markets. 1.2. Innovation involves experimentation and risk taking. Some attempts to innovate will fail, but across the economy the successes outweigh the failures. And the failures themselves generate new knowledge, which if evaluated correctly, can improve the chances for future success. The risk of failure justifies the potentially high returns from successes, which provide the incentive to innovate in the first place. Successful innovation-led companies have a number of common characteristics (Box 1.1).

Why is it important now? 1.3. Innovation is vital to most businesses operating in the UK if they are to survive and grow in the long term. But there are five reasons why innovation matters more for businesses and the people who work in them today.

Box 1.1 Characteristics of innovation-led companies;  a world wide focus, often requiring early expansion overseas;  a balanced growth strategy, based on organic growth and targeted acquisitions to enter new markets or acquire critical expertise;  a balanced investment strategy;  above average investment in market led research and development (R&D);  a focus on what really matters to the customer; and  an innovation culture with corporate leadership that expects growth through development of new products and services. Source: R&D and Value Added Scoreboards.

 Markets around the world are being liberalised. This brings opportunities from expanding trade. And firms can locate all or part of the production process or service wherever the economic advantage is greatest. But UK-based firms also face competition from firms in countries with relatively low labour costs and where education and skills levels are high (Figure 1.1). For example, hourly labour costs in South Korea are just over half UK levels, but the proportion of graduates in the working age population is almost identical.  Long-term reductions in the costs of transportation and communication have also opened up new markets and faster global communications mean that consumers learn about new fashions, ideas and products faster than ever before. The cost of sea freight has fallen by two-thirds since 1920, air transport by five-sixths since 1930. Transatlantic telephone calls are now almost free on the internet3. 3 Legrain, Philippe: “Open World: the Truth about Globalisation”, pp108.

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Figure 1.1 Hourly labour costs of production workers in manufacturing, 2002 Sri Lanka (2001) Mexico Brazil Taiwan Hong Kong Singapore Korea Ireland Australia UK Japan US Switzerland Denmark Germany Norway 0

20

40 60 80 100 120 Labour compensation per hour (US=100)

140

Note: Comparisons are illustrative, as they are affected by exchange rate movements. Source: US Bureau of Labor Statistics

 Science and Technology are providing new opportunities for businesses to compete based on exploiting knowledge, skills and creativity to produce more valuable goods and services. Industries are being created, such as biotechnology, and traditional ones are being transformed (e.g. growth of technical textiles). Because they rely on knowledge and skills, they provide areas where high wage, developed economies can maintain a competitive advantage over low wage, unskilled ones.  Services, accounting for over 70% of the economy, are becoming more technology intensive. Technology is being used to improve business processes and customer service in sectors such as retail, hotels and banking (Box 1.2), and to develop new products combining creative strengths with the latest technology, such as computer games (Box 1.3). Many high technology manufacturers now make more money from services than they do from manufacturing4.

4 Wise, Richard and Baumgartner, Peter: “Go Stream: The New Profit Imperative in Manufacturing”, Harvard Business Review, Sept – Oct 1999.

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Box 1.2 The impact of the internet on banking Internet banking has come a long way. The UK has around 7.5m internet banking customers, attracted by a form of banking that is easily accessed anywhere and anytime and offers a wide range of services (e.g. carry out share transactions, check balances). The internet has allowed new entrants to enter the market, forcing established banks to provide similar services, reduce prices and provide more innovative products and greater choice. Peter Horrell (Director, Transactions, Trade and E-channels) of Barclays has suggested that, if current trends continued, by 2008 at least 40% of business transactions would be taking place online, and that further developments in technology, security and education will result in greater and more sophisticated use of the internet as the standard, rather than an additional, channel.

Chapter 1 The innovation challenge

Box 1.3 Computer games development  Electronic games have started to emerge as mainstream entertainment to the point where the global industry is worth some $17 billion per year. In 2002, the UK leisure software market was worth £1.1 billion5 and the computer games sector employed approximately 20,000 people, with 6,000 in development alone. Playable through a growing number of platforms – PC, dedicated games consoles, mobile devices, online and interactive TV – games offer an increasingly sophisticated experience for the player in terms of game play, nearcinematic visual impact, sound effects and music.  Within this rapidly growing industry, the UK’s games developers have a global reputation for their combination of creativity, innovation and originality, having produced some startlingly imaginative and highly successful titles. The small, but fast-growing, cluster of Scottish games developers has made a particular impact in the global market place. For example, Rockstar North, an Edinburgh-based development studio, produced the best selling game of 2002 with Grand Theft Auto III. The specialised digital entertainment research centre established by the University of Abertay International Centre of Computer Games and Virtual Entertainment (IC-CAVE), provides valuable technology and knowhow support to the games community. The Proof of Concept Fund has given a particularly powerful boost to the commercialisation of research in this area and, after four years of participation, the Digital Media and Creative Industries

cluster is beginning to emerge as one of the most successful participating industry groups in terms of commercial outcomes.  Lionhead Studios achieved critical and commercial acclaim with their PC title, Black and White, which sold over 2m copies. John Riccitiello, President and Chief Operating Officer of Electronic Arts, the world’s largest games publisher and a significant inward investor, recently said in an interview in trade magazine Develop, “Many of the greatest games in the history of our industry have originated in the UK and I expect that trend to continue.”  The UK also excels in the technologies that drive the game playing experience. Guildford-based Criterion, for example, is the leading developer and supplier of middleware, software tools that provide basic functionality and game programme code. These tools enable developers to concentrate on the more creative elements of games development. Criterion’s Renderware software is used by developers worldwide, and has been used in games such as Burnout 2 and Pro-Evolution Soccer 2.  Hollywood has for some time seen a “games spin-off” as a valuable merchandising revenue stream. However, the creative flow can go the other way and Lara Croft, developed and owned by the UK’s Eidos Plc, is arguably the most widely recognised cyber character globally and has inspired two blockbuster films.

5 ELSPA, White Paper: Computer and Video Games: A British Phenomena around the World (2003).

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 Increasing environmental concerns are acting as a stimulus to innovation. Demand for environmental improvements – for example, reducing CO2 emissions and volumes of waste – may require changes in the economy and to the way we live. To deliver these changes the market has to generate innovative uses of technology, new ways of doing business and new consumer attitudes (Box 1.4). There is a particularly strong case for Government to join up its innovation and environmental policies to reduce the costs of environmental damage.

Box 1.4 Environmental benefits from innovation Kronospan have demonstrated economic and environmental benefits from using new technology to recover re-usable water and fibres from effluent generated during wood fibreboard manufacture. The manufacture of medium density fibreboard (MDF) at Kronospan Ltd’s site in North Wales generates large amounts of effluent, which was previously taken off site for treatment and disposal at huge cost and environmental impact. The company installed a membrane system that allows virtually 100% material recovery and re-use of treated water. Costs of handling effluent were cut by half. The benefits of using a membranebased system at Kronospan Ltd include:  net annual cost savings of over £250,000;  disposal of nearly 48,000 m3/year of effluent avoided;  mains water consumption reduced by 44,000 m3/year; and  replacing about 480 tonnes/year of materials with recovered solids.

1.4 The speed of changing technology and the extent to which new products and services can change market conditions mean that the challenge to innovate is urgent and continuous. UK-based businesses will find it increasingly difficult to compete on low costs alone in labour intensive industries exposed to international competition. The challenge for businesses is to compete on the basis of unique value. 1.5. The UK is not alone in facing this challenge. European leaders agreed at Lisbon in spring 2000 to make the EU “the most dynamic, knowledge-driven economy in the world by 2010”. Innovation is integral to achieving this vision. The issues covered in this Report match closely the agenda set out by the European Commission in its recent Communication on Innovation6, and Governments around the world are engaging in policies to promote innovation (see Box 7.1 in chapter 7).

How is the UK doing? 1.6. We have consulted a distinguished panel of leading academic experts in drawing up the analysis underpinning this Report. This analysis has been published separately7. The main points concerning the UK’s innovation performance are set out below.  The latest international comparisons of data on business R&D (Table 1.1) show the UK well behind the US and roughly equal to the EU average. However, it is encouraging that after a steady period of decline from 1.5% of GDP in 1981 to 1.16% in 1997, we have seen a move in the right direction, to 1.24% in 2002.  Adjusting for size of economy, UK firms’ patenting activity at patent offices in Europe, Japan and the US8 lies well behind firms in Japan, Germany and the US and is just below the European average (Figure 1.2).

6 http://www.cordis.lu/innovation-policy/communications 7 DTI Economics paper no. 7 – http://www.dti.gov.uk/economics 8 These are described as triadic patents.

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Chapter 1 The innovation challenge

Table 1.1 Expenditure on business R&D as a percentage of GDP, 1992-2002 1992

1997

1998

1999

2000

2001

Finland*

1.21

1.79

1.94

2.20

2.41

2.42

Germany

1.66

1.54

1.57

1.70

1.75

1.76

France*

1.49

1.39

1.35

1.38

1.37

1.37

UK

1.39

1.16

1.17

1.23

1.19

1.23

EU average*

1.18

1.13

1.14

1.19

1.22

1.24

US

1.90

1.91

1.94

1.98

2.04

2.10

OECD*

1.49

1.48

1.49

1.53

1.56

1.62

2002

1.75

1.24

2.06

*Most recently available figures are for 2001. Source: OECD/ONS

 Although systematic data is lacking, it appears that the UK lags behind the US and major Organisation for Economic Cooperation and Development (OECD) economies in the take- up of best practice improvements such as lean manufacturing.

 However there are significant differences between sectors reflecting important differences in opportunities for innovation as well as performance. The UK has some strong sectors – such as pharmaceuticals, aerospace, biotechnology, financial services, telecommunications and creative industries (Box 1.3) – and strong individual companies in other sectors.

 Data from surveys, which rely on broader measures of innovation, paint a similar picture with UK performance weaker than its international peers.

Figure 1.2 Number of patents per million population, 1998 90 80

80.9

70

69.9

60

52.2

50 40

34.0

30

31.7

20

16.9

12.4

10 0 Japan

Germany

United States

France

United Canada Kingdom

Italy

Note: These are triadic patents registered in the EU, US and Japan. Source: OECD

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1.7. Overall UK innovation performance appears to be, at best, average compared to our major competitors. This is reflected in wider measures of economic performance:  UK productivity lags behind many leading economies. The gap between the US and the UK is substantial whatever measure is adopted;

 In contrast, all the productivity gap with Germany is due to lower levels of investment in capital and skills. The rate of return on investment in R&D is lower in Germany than in the UK. Innovationrelated factors such as organisational culture and business methods also contribute to the unexplained “other” productivity differential.

 UK productivity is relatively low in most sectors. Much of the overall productivity gap arises in service industries such as retail and distribution, rather than manufacturing; and

1.8. The analysis suggests that UK business faces a challenge: how to raise its rate of innovation? In a recent DTI Economics Paper10, Professors Michael Porter and Christian Ketels made this point very clearly:

 innovation is one of the key sources of productivity growth alongside competition, enterprise, skills and investment 9. A lack of investment in capital, skills and R&D all contribute to explaining the productivity gap (Figure 1.3). The chart shows that, compared with the US and France, a significant proportion of the labour productivity gap is due to lower volumes of R&D.

“However, the UK currently faces a transition to a new phase of economic development… We find that the competitiveness agenda facing UK leaders in Government and business reflects the challenges of moving from a location competing on relatively low costs of doing business to a location competing on unique value and innovation. This transition requires investments in different elements of the business environment, upgrading of company strategies, and the creation and strengthening of new types of institutions.”

Figure 1.3 Contributions to the UK productivity gap with the US, France and Germany, 1999

% difference with UK

30 25

1.9. A similar analysis underpins the Scottish Executive document “Framework for Economic Development in Scotland” and the “Smart, Successful Scotland” strategy.

20

How did we try to explain the causes of UK performance?

15 10 5 0 -5 US Other R&D

France

Germany

Skills Physical capital

1.10. Innovation is a complex process so understanding why the UK has a relatively modest innovation performance is not straightforward. To help us do this we drew on an extensive review of the international innovation literature, aided by a panel of experts11. We also drew heavily on analysis by the AIM Management Research Forum and the OECD.

Source: Crafts and O’Mahoney (2001).

9 HM Treasury, Productivity in the UK: The Evidence and the Government’s Approach (2000).

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10 M Porter and C Ketels, UK Competitiveness: moving to the next stage, DTI Economics Paper No. 3, 2003; pp5. http://www.dti.gov.uk/economics 11 DTI Economics paper no 7. – http://www.dti.gov.uk/economics

Chapter 1 The innovation challenge

As a result we have identified seven critical success factors for innovation performance. They help us to identify current strengths and weaknesses of the UK innovation system and to develop proposals to improve its performance.

Success factors for UK innovation performance 1.11. What follows is a highly abridged version of the supporting analysis, summarising the UK’s performance against the seven factors:  sources of new technological knowledge play an important role in shaping innovation systems. Science-based technologies are increasing in importance. New products and services tend to embody a wider range of technologies, increasing the complexity faced by individual firms. UK-based firms make extensive use of customers and suppliers as knowledge sources. The UK Science, Engineering and Technology (SET) base is highly productive and the UK has world class design expertise. Relatively low levels of innovation spend mean that UK-based firms are less well placed to benefit from these or from comparable sources internationally;  the capacity to absorb and exploit knowledge defines a firm’s ability to turn knowledge into new products, processes or services. Fundamentally it is people who create knowledge, manage businesses and innovate. Poor skills amongst managers and the workforce more generally have hindered performance. The culture within UKowned firms appears to place less emphasis on creativity. Few firms show evidence of systematic adoption of the human resource management practices typically associated with effective employee relations and a workplace culture supportive of innovation;

 all investments in innovation need access to finance. Relatively lower levels of innovation spend are probably more due to a lack of incentives and capacity than a shortage of funds, although some financing gaps exist. A past history of macro-economic instability, weaknesses in skills and corporate strategies have all contributed to lower levels of spend;  competition provides a stimulus to innovation and helps determine the intensity of competition and the ability of firms to spot opportunities and manage risks. Weak competition policies in the past have reduced incentives to innovate; and entrepreneurship rates are, at best, moderate;  customers and suppliers put pressure on firms to deliver better quality goods and services and provide opportunities for innovation. Many UK-based firms compete in global markets and the UK is an attractive market for innovative firms from abroad. The public sector purchased £109 billion of goods and services in 2001-0212. There are major opportunities to make public sector procurement more effective in stimulating innovation while achieving spending objectives and value for money;  the regulatory environment affects the possibilities and incentive structures for innovation. OECD comparisons show the UK to be relatively lightly regulated, although there are continuing business concerns about the impact of new regulations. Some firms appear to lack awareness of Intellectual Property Rights (IPR); and  networks and collaboration are important means of accessing knowledge. Businesses are increasingly looking outside their sectors for opportunities to collaborate. UK-based firms appear to have many, varied network relationships, but the infrastructure is patchy and relationships appear to be largely driven by short-term decisions.

12 HMT/Office for National Statistics, Public Expenditure Statistical Analysis, May 2003.

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Figure 1.4 How Government policies influence innovation Opportunities

Enablers

 Public procurement  Regulations

 Intellectual property framework

 Measurement system  Standards

Business Innovation

Advice and support for business

 Best practice programmes  Support for developing new technology

 Help accessing finance  R&D tax credits  Support for inward investment

 Access to global knowledge base

Building blocks of innovation: a supportive climate

 Macroeconomic stability  Competition policy

 Education and training policy  Physical and IT infrastructure

Areas of Government influence 1.12. Ultimately innovation depends on the knowledge, skills and creativity of those working in businesses. But Government has an important role in creating the right environment for innovation. Figure 1.4 sets out the main mechanisms and channels through which Government – at various levels – influences business innovation. 1.13. The Government has already laid the foundations of an innovation-driven economy in areas such as macro-economic policy, fiscal policy, competition policy, trade policy and education and skills (Box 1.5). 1.14. Since 1997 we have produced three White Papers, “Our competitive future – Building a knowledge driven economy” (1998), “Excellence and Opportunity – a Science and Innovation Policy for the 21st Century” (2000) and “Opportunity for All in a World of Change – Enterprise, Skills and Innovation” (2001). In these we set in motion a series of micro-economic measures to stimulate innovation, such as increased investment in the science base, incentives to encourage research institutions and

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 Trade policy  Science policy

universities to commercialise their research, and measures to encourage more small businesses to start up and innovate. This Report builds on the progress made in those White Papers. 1.15. Policies and programmes affecting innovation are determined at a variety of levels. In some cases, the role of the UK Government is to influence developments on a European or global scale. Many policies in this Report cover the UK as a whole. But significant aspects of the innovation policy agenda in Northern Ireland, Wales and Scotland are the responsibility of the Devolved Administrations (DAs). Where matters are devolved, we will work with the DAs to address the innovation challenge that we all face. In England, the Regional Development Agencies (RDAs) are significant players in innovation policy. Chapter 6 sets out how DTI and RDAs will work in closer partnership to ensure that national policy and priorities take into account regional priorities.

Chapter 1 The innovation challenge

Box 1.5 Putting in place the building blocks for successful innovation  Support for investment – Reforms to monetary and fiscal policy – independence for the Bank of England and the code of conduct on fiscal stability – can have a significant positive impact on investment in innovation. The new tax incentives for R&D are comparable with, or more generous than, those in other OECD countries. The small firms rate of corporation tax has been reduced to 19%, alongside the creation of a new zero starting rate. The Government has also introduced financial incentives for venture capital.  Better education and training – Between 2000/01 and 2005/06, education spending will increase by 36% in real terms (forecast to rise to 5.5% of GDP in England by 2005/06). This will be supported by demand and supply side reforms to improve effectiveness. These include changes to improve standards and skills delivery. And through the new Skills Strategy work will be done to boost demand for learning and make skills development more responsive to the needs of employers.  Competition Policy – Recent measures include introducing the Competition Act 1998, with two major provisions to guard against anti-competitive agreements and abuse of dominance, and the Enterprise Act 2002. The Office of Fair Trading (OFT) now has powers to refer markets to the Competition Commission where they may not be working well. Other changes include improvements to the mergers and monopolies investigation regimes, and criminal penalties for those engaging in hard-core cartels.

 Better infrastructure for business  Planning – The planning system is being reformed so that it will deliver a higher quality service for the business community, helping competitiveness and productivity. The Scottish Executive has taken forward a number of initiatives to modernise the Scottish planning system including a review of Strategic Planning Conclusions and Next Steps (June 2002) and the updating of National Planning Policy on Economic Development (November 2002) and Planning for Housing (February 2003).  Transport – The Department for Transport’s (DfT) latest progress report, published in December 2002, shows that a good start has been made in delivering the improvements envisaged in the 10 Year Plan. Increased funding is in place; new projects are being planned and delivery is being improved.  Broadband – The Government is working hard to deliver its target for the UK to have the most extensive and competitive broadband market in the G7 by 2005. Broadband networks now cover some 80% of the UK population (although the coverage challenge is much greater in more remote parts of the UK) and the market is more competitive than our EU G7 neighbours and the USA. The Government hopes to see broadband available to every community in the UK by 2005. Departments across Government will spend £1 billion on broadband connections, bringing broadband to every school in England by 2006 and wiring up every GP’s surgery and every hospital.

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Next steps 1.16. Our vision is of the UK as a key knowledge hub in the global economy. A country that will have maintained its outstanding tradition in the advance of scientific and technological knowledge while developing a similar level of performance in turning knowledge into exciting and novel products and services. In terms of business R&D and patenting we will aim to be the leading major country in Europe within ten years. 1.17. This Report is part of a broader set of changes that the DTI is putting in place. The DTI strategy13 has identified five priority areas for the next five years. We want to:  strengthen knowledge transfer from business to business and between businesses, academic communities and other knowledge creators and providers;  maximise people’s potential in the workplace;  ensure competitive markets;  strengthen regional economies; and  forge closer partnerships with key economic players nationally and overseas. 1.18. Furthermore, the DTI is continuing to refine its portfolio of business support products. We have rationalised the number of products that are available to business to release resources. This will make it easier for business to access Government support when needed and provide greater focus and clarity on where the DTI is adding value. Furthermore the work of the Innovation and Growth Teams (IGTs) has played an important role in identifying priorities in sectors such as aerospace (Box 1.6).

13 Prosperity for All: The Strategy, DTI 2003; http://www.dti.gov.uk/about/strategy2003.html

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Box 1.6 DTI Sector Innovation and Growth Teams In the last couple of years the DTI has set up a series of IGTs. These are teams of business people, trade union officials, industry experts and officials from various Government Departments who have come together to develop a longterm vision for the industry sector and to advise the Government on policies that need to be adopted by the sector to innovate and grow. They are developing close ties with the Sector Skills Councils to identify skill needs. Seven IGTs have been established and five have produced reports (automotive14, environmental goods and services15, aerospace16, software and digital content, chemicals17, bioscience18 and electronics). The construction sector has also produced a similar report19. There are common themes arising from IGT recommendations that are consistent with the conclusions emerging from this Report:  the need to raise productivity through business improvement;  the need for businesses to encourage the demand for skills and help identify significant gaps;  the need for central Government and regions to work closely together;  the need for regulations to be innovation-friendly; and  the important role of Government as a customer in some industries (bioscience, aerospace).

14 Automotive IGT report (May 2002); http://www.autoindustry.co.uk/companies/aigt 15 Environmental Goods and Services IGT report (November 2002); www.jemu.org.uk/igt/ 16 Aerospace IGT report (June 2003); http://www.dti.gov.uk/aerospace/aigt.htm 17 Chemicals IGT report (December 2002); http://www.dti/cigt 18 Bioscience IGT report (November 2003); http://www.dti.gov.uk/bio-igt/bigt-report.html 19 The Report of the Construction Task Force to the Deputy Prime Minister (July 1998); http://www.dti.gov.uk/construction/rethink/report/

Chapter 1 The innovation challenge

1.19. This Report proposes modifications and changes in the direction of Government policy that will unfold over a number of years. These are balanced with specific proposals that will deliver change within a short period of time. 1.20. We have prepared an action plan summarising the main recommendations together with milestones for their implementation and a statement of responsibilities. This can be found at the end of this Report.

1.22. Recognising the innovation challenge facing the UK, the Prime Minister has asked the Secretary of State for Trade and Industry to chair a Ministerial team to lead the innovation agenda across Government and drive forward the implementation of this Report. We discuss cross-Government innovation policies in more detail in Chapter 5.

1.21. However, achievement for a significant and sustained impact on UK innovation performance requires a strategy for the medium to long term. Long-term success requires action across the whole range of Government policies18. It requires partnerships within Government and with other players in the innovation system, such as universities and research organisations. Meeting the innovation challenge is a matter of urgency but historic weaknesses in innovation performance are not resolved overnight. Nevertheless, we want to see more:  Innovation in business – that is, more new products and services and more use of new business processes, all driven by customers and markets. An increased rate of innovation will be necessary to reduce the productivity gap with our major competitors and continue seeing improvements in living standards and quality of life.  Businesses engaging in innovation. While we will never have 100% of businesses engaged in innovation we would like to see an increase in the proportion of businesses engaged in innovation.

18 The European Commission also make this point in Investing in Research: an Action Plan for Europe [COM (2003) 225 final], (adopted 30 April 2003).

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Chapter 2 High performance innovative companies

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Summary In the future, UK companies will have to compete more and more on the basis of unique and innovative products and services. This will require inspirational leadership, stronger management skills, a highly-trained and motivated workforce, a flexible labour market that promotes diversity and fair treatment, and workplaces that recognise environmental issues and the need for greater resource productivity. The Skills Strategy (July 2003) sets out the Government’s agenda for acting on both the demand for, and supply of, skills as a major contributor to raising productivity. It commits the Government to creating a more demand-led training system and, through the DTI, Department for Education and Skills (DfES) and other relevant Departments will implement the Strategy in England, focusing particularly on co-sponsorship of Sector Skills Councils. Similar initiatives are underway in Scotland and Wales. The DfES and DTI are already jointly pursuing a major programme of work to follow up the recommendations of the Council of Excellence in Management and Leadership. But more needs to be done:  co-sponsorship of the Skills for Business network1 to enhance the capacity and capability of Sector Skills Councils to increase employer leadership on skills. Using our sponsorship of RDAs to ensure the effective development of Regional Skills Partnerships; and  working with DfES and the Department for Work and Pensions (DWP) to align our targets and objectives towards the same goal of raising employment, productivity and competitiveness.

1 The Skills for Business network comprises employer-led Sector Skills Councils and the Sector Skills Development Agency

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The ability of companies to innovate and deliver high value products and services critically depends on a high level of management and technological skills:  to build on the success of the Science Enterprise Centres (SEC) we will work with Business Schools and Management Institutes to develop curriculum material and case studies to aid the teaching of the skills underpinning the management of high tech, fast growth businesses, as well as new product development. We see the Small Business Service (SBS) as having a major role to play in raising the innovation performance of Small Mediumsized Enterprise’s (SMEs) in England. Promoting innovation, skills and knowledge transfer will be made one of the key delivery themes for Business Link. To improve the rate of innovation of small companies, the SBS will ensure Business Link proactively targets companies with high innovation potential. Business Link will tailor assistance to a company’s specific needs depending on its level of innovation capability and the stage it has reached in the product/service life cycle. Advisory services will include:  intellectual Property Rights advice;  assistance with R&D grants;  assistance with Knowledge Transfer Partnerships;  brokering collaboration between companies and Higher Education Institutes; and  alerting SMEs to public procurement opportunities.

Chapter 2 High performance innovative companies

Design skills are vital to business innovation, but not enough companies use design to connect new ideas with market opportunities. The DTI and Design Council will:  deliver three campaigns to show how innovation can be enhanced through the improved use of design in manufacturing, emerging technology and services businesses. Initially this will involve up to 10 industry sectors over the next two years, The learning will be shared with up to 5000 companies; and  work in partnership with UK universities to establish design learning for science, engineering and business management students and develop design demonstration activity within Technology Transfer Offices (TTOs).

There is also an increasing need to recognise our diverse workforce. In particular, women in the UK are less likely to start-up a business than their counterparts in other countries. To address these factors we will:  ensure that business support is better targeted to help women who want to start, or grow, a business; and  work together with private sector organisations to identify what measures should be taken to improve access to mainstream finance.

Innovation ultimately depends on the knowledge, skills and creativity of people at work. The Government is committed to working with industry, trade unions and employees to supply the skills on which the development of high value-added strategies will depend. we will  work with the TUC to explore ways in which unions can respond to the challenge of helping companies to innovate; and  build on the work already undertaken by the TUC and CBI on productivity by establishing an Innovation Taskforce, with joint union-business leadership to undertake additional work to identify how the innovation agenda can be spread through the UKs workplaces.

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2.1. The challenge for UK companies in today’s global knowledge economy is to make innovation a key part of their strategies, embed innovation into the workplace and to move from competing on the basis of low costs to competing on unique value and innovation. 2.2. Competitive strategies require a new perspective on management leadership and employee skills. The DTI’s value added scoreboard2 shows that the more competitive firms have, higher-level skills. Mark Hepworth’s report3 “A regional perspective on the knowledge economy” demonstrates that knowledge intensive, high performing innovative companies drive demand for skills and reward workers with higher wages. The Government’s strategy for raising skills across the workforce, in order to meet the needs of employers and learners and contribute to higher productivity, was set out in the Skills Strategy published in July 20034. Similar initiatives are underway in Scotland and Wales. 2.3. The extent to which organisations innovate depends on their capacity to absorb new knowledge and implement change. Innovative companies have an entrepreneurial culture driven by inspirational leaders, skilled management, and informed and engaged employees. In such a culture both businesses and individuals are able to reach their full potential. 2.4. Businesses can also improve their capacity for innovation by fostering organisational flexibility, raising skills and employee engagement. Better ways of working such as flatter structures, family friendly work practices, teleworking, information sharing and the involvement of employees in problem solving help create a more agile organisation with greater innovative capacity. The most definitive US study to date, Manufacturing Advantage5, 2 http://www.innovation.gov.uk/finance 3 A Regional Perspective on the Knowledge Economy in Great Britain, Feb 2003. 4 “21st Century Skills: Realising our Potential” was published as a White Paper on 9 July 2003, Cm 5810 http://www.dfes.gov.uk/skillsstrategy/ 5 Manufacturing Advantage: Why High performance work systems pay off, Eileen Appelbaum, et al, Cornell University Press, Ithaca, 2000.

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found that high performing work systems may enable firms to shorten the time re quired to develop new products, introduce new models or styles, produce a greater variety of products, increase the extent of customisation or ease the adoption of new production technologies. UK and European research has had similar findings6. 2.5. In the Skills Strategy there is a strong emphasis on the relationship between skills and innovation in raising productivity. The Government is committed to ensuring that the supply of publicly-funded skills and training is responsive to employers’ and learners’ needs, while also acting to raise demand for skills as an essential element in securing a flexible labour market and a competitive economy. The Government is committed to raise standards in order to produce tomorrow’s entrepreneurs and managers. Workforce skills will be essential for delivery of new goods and services with lower environmental impacts.

Management skills 2.6 The ability of companies to innovate and deliver high value products and services critically depends on a high level of management and technological skills and the ability of people to solve problems faster and better than their competitors. The difficulty of putting together the right blend of skills in management teams is one of the major barriers to growing successful high value-added businesses. 2.7. We also need draw upon a much wider and more diverse pool of talent if we are to unlock the potential of managers in the future. At present, women comprise 30% of managers in England, 29% in Scotland and 33% in Wales, and managerial occupations remain strongly gender-segregated. 6.2% of all managers in Great Britain are from ethnic minority backgrounds compared to 8.7% of the overall working age population7. 6 UK:Jonathan Michie and Michael Sheehan, “HRM practices, R&D expenditure and innovation investment”, Industrial and Corporate Change, 8(2), 1999. Germany: Reinhard Hujer and Dubravko Radic, “Holistic Innovation Success? Complementarities between Flexible Workplace and Human Resource Management Practices in the Innovation Process”, paper to the European Association of Labour Economists conference, Seville, September 2003.

Chapter 2 High performance innovative companies

Box 2.1 High performing start-ups (Global Entrepreneurship Monitor) The Global Entrepreneurship Monitor8 (GEM) was initiated by London Business School and Babson College in 1999 to better understand the characteristics of a group of entrepreneurial companies that accounted for significant levels of job creation. In addition, in a landmark study in 1979, David Birch estimated that 66% of new jobs created in the US between 1969 and 1976 originated from small firms with less than 20 employees. Subsequent empirical studies have shown that a small high-potential group (3-4% of companies founded in a period) account for between 50-75% of all jobs created 10 years later. 37 countries participate in GEM, which surveys over 100,000 adults, performs indepth interviews of over 1000 national experts, and collects standardised national data from sources such as the World Bank, International Monetary Fund, and United Nations. GEM data suggests that high-potential entrepreneurs thrive in economies with effective Science, Engineering and Technology Bases (SET bases). Three findings particularly show this link:  high-potential entrepreneurship is consistently linked to national competitiveness measures (competitiveness, government efficiency, technology index, ICT);  high-potential entrepreneurship is also strongly linked with a strong SET Base (participation in secondary and tertiary education, scientific publications per capita); and  high-potential entrepreneurship is only weakly linked to “raw” measures of national science, engineering and technology (R&D expenditure per GDP and per capita) suggesting that it is not just how much is put in but also how it is exploited that matters.

7 Summer 2003. Labour Force Survey. 8 http://www.gemconsortium.org/default.asp

2.8. The Skills Strategy in England, and equivalent programmes in Scotland and Wales, aim to provide high opportunities for training and skills development to meet the needs of both employers and employees. The Government is encouraging businessto-business learning by working with Business Schools and other management bodies such as the Chartered Management Institute (CMI) to improve the access of managers and students to high quality and relevant management education. In recent years there has been a huge increase in student enrolment in business courses: DfES figures show that there are 160,000 people studying Business Administration at undergraduate level and a further 80,000 at postgraduate level in 2001/02. The latest available information shows that 13,318 people enrolled for MBA courses in 2000 with 10,800 people graduating with MBAs in 2002/03. 2.9. Regional Development Agency (RDAs) led regional partnerships have done much to highlight the skill needs of managers and have championed innovative approaches to management development and training. In the South East, for example, the RDAs has committed £2m to activities that will develop and enhance management and leadership across the region. These activities include: increased number of business mentors, and employer learning networks and diagnostic packages that are available to businesses across the region. 2.10. The joint DfES and DTI Leadership and Management Unit is pursuing a programme of work to follow up the recommendations of the Council for Excellence in Management and Leadership9. Within the context set by the Skills Strategy the main elements are: a) Introducing a programme to support leadership and management development of the Chief Executives and senior managers of medium-sized firms (see paragraph 2.19).

9 http://www.managementandleadershipcouncil.org/

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Box 2.2 Developing entrepreneurship among science students The Centre for Scientific Enterprise Limited (CSEL) is one of 13 SECs at leading UK universities funded by the Office of Science and Technology (OST). CSEL places 40 University College London (UCL) professors, lecturers and postgraduates per year in 100-hour long business courses at London Business School, alongside MBA students. The scheme has delivered some concrete results:  35% of Research Scientists identified commercial opportunities from their research;  a number of departments in UCL, including Computer Science and Medicine have adopted a more proactive approach to commercial exploitation of research; and  UCL Research Scientists and London Business School graduates have become involved in a number of successful spin-outs. In 2002 CSEL created the E-Challenge. 140 UCL academics formed teams that included 30 London Business School MBAs: together they explored 40 live technology proposals and generated 12 start-up proposals, a number of which have already attracted funding. Discussions are currently underway to fund Technology Enterprise chairs at both London Business School and UCL.

b) Supporting the work of the new forum created by the Council for Industry and Higher Education and the Association of Business Schools. This brings together employers and the Deans of major Business Schools, so that they can understand better what employers want in business and management education.

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The Chevening Technology Enterprise Scholarship (funded separately by Trade Partners UK and operated by CSEL nationwide) brought 57 technology postdoctoral students to 11 UK universities, including several SEC universities for the purpose of working with academic supervisors on the commercialisation of technology research. London Business School, Imperial College London and Cambridge University’s Institute of Manufacturing are collaborating on business training designed to enable students to assess the commercial value of technology research, develop business plans and potentially launch start-up companies. Cambridge has benefited from a SEC, as well as from substantial funding for the Cambridge/ MIT Institute. They have established four Masters degrees based on successful MIT multi-disciplinary programmes:  Chemical Engineering Practice;  BioScience Enterprise;  Engineering for Sustainable Development; and  Technology Policy In Scotland, the Scottish Institute for Enterprise (SIE), funded by Science Enterprise Challenge now brings together all of Scotland’s universities. The SIE is now delivering enterprise education to over 8000 students and has supported 55 sustainable businesses.

c) Using the new Investors in People model for Management and Leadership to help firms assess their own performance and benchmark themselves against others. The launch of the Chartered Manager programme by the CMI, combined with the forthcoming new occupational standards for effective management and leadership programmes, helps companies develop the skills of their managers.

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Box 2.3 South Derbyshire College - Employer Direct South East Derbyshire College offers 500 different study programmes, serving more than 8,000 people each year at its main sites and learning centres throughout the local area. A key part of the College Mission is to respond to the needs of individuals and employers through the provision of high quality, cost-effective training and related services. The college has created a branded service called ‘Employer Direct’ which works as a dedicated business support unit by helping businesses to find practical solutions, not just flexible training packages. The service is delivered through a range of providers, including the college, which means that they can refer businesses to the most appropriate source of help and advice. In 9 months they have worked with 200 new businesses and are now working with the local Business Link to better target employers.

d) Identifying and implementing specific sector-related leadership and management priorities through a dedicated Skills for Business network10 action group. 2.11. In 1999 we launched Science Enterprise Centres (SEC) to provide access to entrepreneurial skills for undergraduates and graduates in science and engineering. The uptake has been enthusiastic, there are now thirteen centres funded by the Office of Science and Technology (OST) at a cost of approximately £40m.

A full range of services is offered including flexible and bespoke training packages, advice and guidance on human resources, distance learning, Modern Apprenticeships and signposting to the range of business support opportunities available within the College and more widely. South East Derbyshire College Principal Mick Brown explained: “The College takes its role of developing a strong vibrant community in Erewash and Amber Valley very seriously. We remain committed to supporting the learning and skills training needs of the local community whether that be school leavers, adults and community groups or employers. Our Employer Direct business unit has been extremely successful in working in partnership with local businesses of all sizes to address their training requirements and tackle skills shortages which have a direct benefit to the bottom line.”

2.12. To build on the success of the SEC we will work with Business Schools and Management Institutes to develop curriculum material and case studies that aid the teaching of the skills underpinning the management of high tech fast growth businesses, as well as new product development. We will appoint a lead institution to identify needs, commission high quality material, and aggregate and distribute it to educators across the UK SET base. We also will explore ways to make available to UK students innovative programmes such as the Chevening Technology Enterprise Scholarship mentioned above.

10 The Skills for Business network comprises employer-led Sector Skills Councils and the Sector Skills Development Agency.

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2.13. We also believe that an opportunity exists to increase the knowledge transfer activities of Further Education Colleges (FE Colleges). The DfES are proposing to develop the capacity in Centres of Vocational Excellence’s (CoVEs)/FE colleges and where appropriate DTI will support that under its Business Support programme11.

customers are encouraged to access support through the Business Link brand. Business Link will build on the success of their current role for the Employer Training Pilots, where it signposts companies interested in raising the basic skills of their workforce to the most appropriate training providers. 300 Business Learning Accounts (BLAs) will be piloted over the next two years in Scotland.

Upgrading SME management skills

2.17 We will use the brokerage and signposting capacity of Business Link to strengthen the links between business support programmes and skills. For example, where the managers of medium sized companies have benefited from the new DfES management and leadership initiatives (see paragraph 2.10), we want Business Link to signpost them on to the most appropriate and relevant Business Support programmes. Business Link will also broker links between the companies involved in knowledge and technology transfer programmes and local education colleges when these are best able to provide the necessary skills and business development support. To complement this DfES intends to support the capacity of further education colleges to offer a wider range of business support services.

2.14. In small business the vision, leadership and management skills of the owner/manager and the small top team are the keys to success. SME managers, however, face obstacles to improving their leadership and management skills. They are usually so central to running the company on a day-to-day basis that they cannot be away from it for more than short periods of time, and they need to have courses tailored very closely to their specific needs rather than covering the whole range of management and leadership skills. 2.15. We see the Small Business Service (SBS) as having a major role in raising the innovation performance of SMEs in England, working with a range of partners including RDA’s, and public, private and voluntary sector service providers with access through Business Link. Last year Business Link provided support services or products to over 300,000 SMEs, an increase of 40% over the previous year. 2.16. Working with Business Link and its wider network of business intermediaries we will strengthen the links between skills and business support programmes. At a regional level RDAs and the SBS will need to ensure that the offerings of regional providers are branded consistently and in a clear and simple way, and that Delivery Partners work together to ensure that 11 Knowledge transfer partnerships product will now bring in FE colleges

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2.18. The activities of SBS, RDAs and Business Link need to be better coordinated to maximise SMEs’ access to technology support. Through close engagement with the RDAs, in particular on regional priorities, the SBS will ensure that services brokered by Business Link are properly integrated into Regional Skills Partnerships to create a better fit between Business Link services and RDA sector and cluster development plans, skills and labour market support. 2.19. Following the publication of the Skills Strategy, the SBS is supporting DfES and its agencies in developing a flexible Leadership and Management Programme for leaders in small businesses of over 20

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employees. Business Link will broker delivery of the programme which will be delivered through a partnership involving Investors in People UK, the Sector Skills Development Agency (SSDA), the SBS, the Learning and Skills Council (LSC), the Chartered Management Institute (CMI), University for Industry (UfI) learndirect and others. Pathfinder projects will be completed across England by April 2004. 2.20. In 2002/03, the SBS made “promoting innovation and knowledge transfer” one of the key delivery themes for Business Link. Some £23m will be spent on this delivery theme in the current year. 2.21. To improve the rate of innovation of small companies, the SBS will ensure Business Link proactively targets companies with high innovation potential, including those identified as priority through the Technology Strategy and RDA cluster policies. 2.22. In order to implement strategic, innovative approaches, SMEs require assistance to understand complex issues such as Intellectual Property Rights (IPR) and ICT (this is covered in more detail in Chapter 4). They need to know what help is available from Government and others nationally, regionally and locally, and have it provided in an easily accessible format. Business Link provides access to this type of advice from experts in the public, private, social enterprise, and voluntary sector. It helps business learn from business by providing access to local clubs and networks, some of which specialise in innovation and technology topics. In Scotland advice relating to intellectual assets and property will be channelled primarily through the National Intellectual Asset Centre (NIAC).

Box 2.4 Business Link case study: water for barren lands Business Link Wessex (BLW) has been leading the way in providing innovation services to small companies. Inventor Sam Barzanji has invented a new gravity pump. Powered solely by the weight of water inside it, it can raise 5,000 litres of water a day, day in, year out, to a height of 25 metres, even out of sludgy rivers. Sam, a Kurd, was a top irrigation engineer in Iraq until his house was destroyed by Saddam Hussein’s forces in l997. Fleeing to this country as a refugee, but unable to bring his family with him, he initially lived on benefits. “Faced with an empty life,” he said, “I had to try to do something useful, and I cannot thank Business Link Wessex enough for helping me.” First, BLW surrounded Sam with a Virtual Company, a team of experts including a one-time director of Vosper Thorneycroft and an ex-IBM marketing specialist. Pioneered by BLW to give lone inventors credibility with investors, The Virtual Company consists of experts who work for no money but for virtual shares, which become real shares when the company takes off. (Forty-such companies have been started in Wessex in the past three years.) Next, BLW helped Sam to secure a £45,000 DTI SMART grant, guided him to an incubator workspace, and put him in touch with UK Trade and Investment and people who could smooth his way to market. Trials of Sam’s pump were recently completed at the Southampton Institute. At around £150, it would be significantly cheaper than the standard aid-agency hand-pump. And if current discussions go well, Sam’s pump looks to have a lifesaving future in the world’s irrigationbarren regions.

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2.23. Business Link will tailor assistance to a company’s specific needs depending on its level of innovation capability and the stage it has reached in the product/service life cycle. Advisory services will include:  Intellectual Property Rights advice;  assistance with R&D grants;  assistance with Knowledge Transfer Partnerships;  brokering collaboration between companies and Higher Education Institutes; and  alerting SMEs to public procurement opportunities; 2.24 In Scotland, general assistance is provided through the Business Gateway with advice on specific schemes is given by the scheme administrators, e.g. the Scottish Executive, Scottish Enterprise, Highlands and Islands Enterprise and the Local Enterprise Companies (LECs). Diagnostic advice and help to prepare for innovative projects is provided free by the Innovators Counselling and Advisory Service Scotland (ICASS). Advice relating to intellectual assets and property will be channeled primarily through NIAC. 2.25 To help those who prefer to access information electronically, the SBS will be launching the new http://www.business link.gov.uk/service by April 2004.

In short, the most successful, growing and imaginative companies use design to enable innovation. Better designs will be crucial in developing goods and services which use less energy or materials, or are more easily reused and recycled. 2.27. Unfortunately not enough businesses use design to connect new ideas with market opportunities and a lack of design ingenuity usually indicates static or poor overall business performance. Design contributed to the competitiveness of 64% of rapidly growing businesses, but only 9% of static ones. Design is considered integral or significant to 90% of rapidly growing companies, compared to just 26% of static businesses14. Similarly, 79% of those that had grown rapidly in the previous year saw a great or fair contribution to productivity through design, innovation and creativity. This falls to 4% for those that have stayed the same size. 2.28. The UK has a world leading design industry. The design consultancy sector alone had a turnover in 2001/2002 of £5.9 billion15 and employed 67,000 people – and overseas fee income increased by 40% in 2002. In some niche activities, such as product design, up to 80% of turnover comes from overseas earnings16. Britain also has a world-class design education system.

Design and innovation 2.26. Research shows that design skills are vital to business innovation and can significantly enhance a company’s financial performance. A recent study revealed that the share price of companies that used design well outperformed the FTSE 100 by 65% over the last seven years to 200212. Research shows that 42% of UK businesses engage in design activity of some sort. But, significantly, this rises to 74% for rapidly growing companies13. 12 Design Index research, Design Council/BVA, 2003. 13 National Survey of Firms, Public and Corporate Economic Consultants, 2003.

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14 ibid. 15 Design Industry Valuation Survey, British Design Initiative and Design Council, 2002. 16 ibid

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Box 2.5 Denby Pottery Company Ltd Denby Pottery combined effective use of design with significant investment in plant and equipment to improve its performance at home and abroad. Commercial success in the mid-90s with two classic ranges – Imperial Blue and Regency Green – enabled the company to float on the Stock Exchange, raising capital for investment. The business invested over £5m in a materials preparation plant and a kiln, which increased production capacity. At the same time, it also invested strongly in Design, taking a ‘lifestyle’ approach to its markets, broadening the ceramic product range and including glassware and tabletop accessories. In this way they stand out from their competition and attract their customers. A business driver now! Turnover, fuelled largely by the success of the new products, grew from £21.9m in 1993/4 to £38.7m in 2002. From its manufacturing base in Derbyshire, Denby now exports to 30 countries. Significantly, a large proportion of this increased turnover is from these new products.

2.30. The challenge is to exploit fully the design excellence that exists on our doorstep, through policies, which bring about changes in the behaviours of UK management in both the private and public sectors. At the national level, the Design Council19 is the catalyst for the delivery of those policy mechanisms. It provides examples and tools, which enable companies and organisations to embed design in business activities, and to stimulate changes in behaviour so that a higher value is placed upon design and creativity in the workplace. 2.31. The Design Council has evolved a new type of practical activity with small groups of manufacturing and early stage emerging technology companies. Even in this early pilot stage, the scheme has influenced management decisions. The participating companies have increased projected turnover, significantly raised design spend and recruited designers/creative directors, and they have moved from being product or technology driven to being customer centric.

2.29. Design can facilitate technology transfer, yet is rarely – and never systematically – used as a transfer tool by universities17. In addition, there is a poor understanding of the business relevance of design by engineering, science and MBA graduates – tomorrow’s managers18.

17 Research for the Design Council by Scientific Generics Ltd on University Technology Transfer and Enterprise Teaching, 2003. 18 Research on design activity in higher education by Nuventis and the Design Council, 2002-2003.

19 http://www.design-council.org.uk/

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Box 2.6 Aqualisa To differentiate products from increasingly strong European competition, Kent shower manufacturer Aqualisa involved designers Seymour Powell from an early stage in developing a product that balanced user needs, commercial pressures and technology. The resulting Quartz range exceeded sales targets by 160% after launch in 2001 and the project achieved payback within a year. The company grew by 15% in 2002. Quartz showers contain electronics to control temperature and power, making it possible to locate controls anywhere – including on the wall outside the shower – and to programme the shower before getting in. And because water is mixed in a unit outside rather than inside the bathroom wall, installation time is reduced from two days for a conventional shower to just a few hours. This responded directly to user research showing that customers disliked the experience of having a shower installed and were unsure whether they were being charged correctly for plumbing. Investigating customer needs with the designers also led Aqualisa to include other features including a light showing when optimum temperature is reached and push-button controls which don’t require strength and dexterity to use. ‘If you think design’s expensive, look how much bad design costs.’ Martyn Denny, Aqualisa.

2.32. After consultation with the DTI and industry, the Design Council will work with a range of partners to deliver three campaigns to enhance innovation through the improved use of design in manufacturing, emerging technology and services businesses, involving up to 10 industry sectors over the next two years. Sector Skills Councils will also be invited to provide guidance on how investment in skills can increase the returns from applying a higher value approach to design. 2.33. Phase 1 of each campaign will be Design Demonstration activities. These bring design professionals into companies identified with help from the relevant industry organisation. The professionals provide a high quality design diagnosis, working with senior management and designers to look strategically across the companies’ to identify opportunities where design can add value and connect innovation to market opportunities. The Demonstration will be chosen to develop and highlight the potential for “cutting edge” best practice. Continued support is to be provided through a mentoring activity. 2.34. Phase 2 will take the outcomes of the demonstration phase and transfer the understanding to a further 500 companies and communicate the key learning to up to 5000 companies. By mounting these campaigns with other intermediaries such as the Engineering Employers Federation (EEF), RDAs, DAs, Sector Skills Councils, Business Link, Manufacturing Advisory Service (MAS) and others will ensure the best possible business outreach. 2.35 The goal for each campaign will be to deliver self-sustaining change towards the more effective and strategic use of design by companies over the next three years. 2.36. A further pilot Design Council demonstration project with University College London Ventures demonstrated the added benefits that design can bring to enabling technology transfer from

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Universities into industry, whether through licensing or spin-outs. This initiative will now be further developed in other TTOs. 2.37. The Design Council, in consultation with Sector Skills Councils, will work in partnership with UK universities and FE colleges to establish design learning for science, engineering and business management students. This will enable a better understanding of the role of design in translating science and technology into products and services. Design learning activities will be specific to each course and could include: enterprise teaching inputs, entrepreneurship challenge support, collaborative projects with design

departments, multidisciplinary projects, design mentors, placements and PhD training. This will start with a pilot demonstration project with two universities, growing to involve ten within three years. (see box 2.7). 2.38. The Design Council also will work with the DTI and others to further develop design demonstration activity within TTOs in other leading academic research centres. Initially this will be through a pilot with four TTOs undertaking 5 projects in each and subsequently rolled out to other research based universities when proven effective.

Box 2.7 Industrial design and engineering The MA in Industrial Design and Engineering (IDE) run jointly by the Royal College of Art (RCA) and Imperial College provides engineering graduates with training in industrial design professional practice. The course highlights the links between industrial design and engineering in creating effectively designed products. It focuses on radical approaches to user centred briefs, state of the art materials and production processes within responsible environmental parameters, and produces many patentable products ready for production. Industrial placements with design and manufacturing organisations all over the world are a key part of the course (which leads to a diploma from Imperial College as well as an MA from the RCA). More than 85% of graduates have gone on to work as industrial designers with companies including Dyson, Phillips, Audi and Glaxosmithkline. Glasgow School of Art and University of Glasgow’s jointly run Product Design Engineering course combines

engineering theory with laboratory and design studio practice. The course aims to helps students apply academic skills in an innovative ways to design manufacturable products. The course pioneered this form of undergraduate education in 1987, and is accredited by the Institution of Mechanical Engineers to offer BEng and MEng degrees. It gives undergraduate students an appreciation of the technical, creative, management and human centred issues at the heart of designing for production. The course has successfully produced design engineers with strong creative and integrated skills and its well established links with industry provide another highly practical dimension. Uniquely in mechanical engineering education, the courses attract a substantial proportion of women. Graduates have gone on to set up their own businesses or to employment with companies including Apple computer, BAE SYSTEMS, Dyson, JCB, Marconi, Nokia, and Psion.

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Upgrading skills across the work force 2.39. At first degree level the UK provides a high level of scientists and engineers. In fact, the UK has in recent years produced more new science and engineering graduates as a percentage of 25-35 year olds than any other G7 country apart from France. But in the UK, as in other countries, the pattern of subject study has shifted; significantly fewer students are taking physics and chemistry courses, while more are taking biology and IT. The Government is working with the Engineering and Technology Board and the Science Council to redress this imbalance. 2.40. As set out in the Skills Strategy20, the UK has a significant skills gap at the intermediate skills level. At the technician, associate professional and skilled crafts levels we have a serious shortage of such skills compared to our main European competitors. In the UK 27.7% of the workforce have intermediate level skills compared with 51.2% in France and 65% in Germany. This skills shortage clearly has a serious impact on our productivity and innovation performance (see Chapter 1).

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2.42. The Hepworth report21 also revealed striking regional disparities: for instance, in Greater London, 30% of the workforce has a degree or higher qualification compared with less than 18 per cent in the North East. Furthermore in Greater London, 43% of those in work are employed in knowledge intensive private sectors compared with only 6% in the North East. 2.43. The Skills Strategy22 in England marked a significant shift to a demand-led approach that put business needs at the centre of our skills policy. Throughout the Skills Strategy there is a strong emphasis on the relationship between skills, innovation and enterprise. Innovation drives demand for higher-level skills and skills are essential for businesses to move up the value chain and develop products and services that make effective use of new and emerging technologies. 2.44. The Secretaries of State for DTI and DfES, are jointly leading the Skills Alliance which brings together key Government Departments, social and economic partners, and delivery agencies, to implement the Skills Strategy.

2.41. Compared with our international competitors, the UK also has specific weaknesses in: management and leadership skills; professional Information, Communication and Technology (ICT) skills; mathematics, engineering and physical sciences (STEM skills as identified by Gareth Roberts); generic skills (such as communication, team working and problem solving); and basic literacy, numeracy and ICT skills.

This will involve:

20 21st Century Skills: Realising our Potential. National Skills Strategy, published July 2003. http://www.dfes.gov.uk/skillsstrategy/

21 Mark Hepworth, A Regional Perspective on the Knowledge Economy in Great Britain, February 2003 22 ibid

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 Co-sponsoring the Sector Skills Development Agency and the Skills for Business network to ensure that employers are able to influence public sector funding of training programmes, increase their own investment in skills, and get the skilled people they need. We are on course to meet the target of a fully operational network of 23 Sector Skill Councils by Summer 2004. Four are already in place, and 19 in various stages of development. The network will cover approximately 90% of the workforce.

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 Once in place, the Skills for Business network will make a major contribution to increasing innovation and providing employer leadership on skills issues by promoting:  a clear evidence-based business case, on how skills contribute to improved innovation and sector productivity;  improvements in key areas such as leadership and management;  action by employers, through Sector Skills Agreements, to address these skills issues;  world-class occupational standards that promote innovation.  Using the business contacts and sector understanding of the DTI’s sector-based teams, and specifically the DTI Innovation and Growth Teams, to work in a close partnership with the Sector Skill Councils, sharing information and analysis, drawing on their respective networks, and developing shared agendas. This will involve close collaboration on the development of Sector Skills Agreements. The skills needs and priorities identified through this work will then be reflected in LSC’s planning and funding of the supply of training, working through the Regional Skills Partnerships.  Making sure companies who are receiving business support also have access to support to develop the skills required to implement their strategies successfully. Evaluation of past DTI programmes shows that innovative projects have a significant impact on the demand for skills: 97% of participants mentioned that they had increased their skills levels as a result of undertaking the project. All future DTI Business Support programmes and our regional investment support programmes will therefore go further to address the skills needs associated with those programmes. In each case we will consider, in designing and implementing the programme, the skills that will be

needed to ensure the investment brings the maximum benefits for the company. Where relevant, we will help the company identify and secure the new and enhanced skills it will need as a result of the investment. In monitoring the impact of relevant programmes, we will assess the skills impact as one of the key elements of progress.  Using our sponsorship of RDAs to ensure effective implementation of the new Regional Skills Partnerships. These will provide a strong alignment between regional strategy, business need and service provision. Business Link and the new business support programmes will be fully integrated into the work of these partnerships. Working with DTI and DfES, the RDAs will need to assess their capacity to fulfil the expanded role identified for them in the Skills Strategy and take the necessary action to improve their capabilities.  Working with DfES to reform and expand education and training for 14-19 year olds and Modern Apprenticeships, and introduce Foundation Degrees, so that they develop young people able to do work to the high standards that employers require. As a result, they will be in a position to command a premium in the labour market. This will involve increasing employer involvement in the design and delivery of Modern Apprenticeship and Foundation Degree programmes.  Using the Technology Strategy to identify new demands for skills in high technology areas such as nanotechnology, life sciences, aerospace, and ICT.  Working with DfES and DWP, we are producing shared priority targets towards the common goal of raising employment, productivity and competitiveness.

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High performance workplaces 2.45. Evidence shows there is a clear link between innovation and high performing workplaces, where good managers inspire their employees and create a workplace culture in which new ideas are encouraged and rewarded. In turn, employees who are motivated and valued can play a vital role in contributing to the success of the business. The 1998 Workplace Employee Relations Survey identified fifteen key workplace practices. Those businesses that displayed four or more of these practices were more productive than those that did not. These included fully or semiautonomous team working, single status for managers and other employees, team briefings with feedback, non-managerial approach to problem solving, and family friendly policies. The results show, however, that only 14% of workplaces had a majority (eight or more) of these practices in place, and 29% had adopted three or less. This is not sufficient if we are going to achieve a competitive advantage through workplace innovation. 2.46 Research23 has also illustrated the relationship between skills deficiencies and organisational weaknesses and concluded that strategies to tackle the former cannot be undertaken in isolation from the latter. The TUC-CBI productivity report24 presented research that found that UK companies were more likely to implement technology and technique related practices than people related practices. 2.47 Team working, involvement in decision-making and extensive communications are all particularly important characteristics of high performance workplaces. Organisations can get a bigger performance boost from

23 What can the UK Learn from the Norweigan and Finnish experience off attempts at Work Reorganisation, Warwick Keep & Payne (2002). 24 Productivity Report, CBI & TUC (2002)

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working with their employees than from a ‘command and control’ approach to management. A 1990s study carried out by the Employee Participation and Organisational Change programme (EPOC)25 into the impact of employee participation reforms in eight countries found that 94% of workplaces that had delegated tasks to groups of workers saw an improvement in quality and 58% saw an improvement in output. These research findings illustrate the impact of work organisation and workplace culture on innovation. Furthermore, high-trust relationships that allow workers to have a say in the way work is organised are vital to the successful implementation of new technologies and processes. For innovation to flourish, work must be organised in a way that enables new skills and employees’ knowledge to be fully utilised and to create a culture of continuous innovation. 2.48. We will continue to encourage the growth of high performing organisations by educating business, both employers and employees, about the role of innovation. We also have to ensure that policies are in place to support such development through the business support network and our work on inspirational leadership. We will publish a range of league tables and best practice which help business to business learning for example; The Times’s “100 Best Companies to Work For”, the DTI/interforum e-commerce awards, and the DTI’s Value Added Scoreboard both enable companies to benchmark themselves against others and identify possible areas for improvement. 2.49. We will continue to promote good employment practices by supporting partnership at work and championing flexible working practices. We will offer an initial diagnostic to highlight areas where improvements might be most effective, and signpost companies to appropriate 25 Sisson (K) et al (1997) New Forms of Work Organisation: Can Europe realise its potential? European Foundation for the Improvement of Living and Working Conditions.

Chapter 2 High performance innovative companies

support. In some cases the most appropriate support will be advice from a business adviser. In other cases, a short project to implement a best practice process will be appropriate, and we will provide support to help companies access accredited experts to implement change within the organisation. We will also assist companies to measure the benefits of implementing best practice, and demonstrate long-term improvements in performance.

2.50. We will;  work with the TUC to explore ways in which trade unions can respond to the challenge of helping companies to innovate; and  build on the work already undertaken by the TUC and CBI on productivity to establish an Innovation Taskforce, with joint union-business leadership to undertake additional work to identify how the innovation agenda can be spread through Britain’s workplaces.

Box 2.8 Pork Farms Ltd Pork Farms recognised the need to improve productivity, improve its culture and skills base by upskilling the employees, jointly working together towards world class manufacturing standards. Although Pork Farms is the major brand, and a major supplier to the big four supermarkets of both brand and own label product, the market is very difficult with limited opportunities for growth, and with the commercial environment becoming evermore competitive, the continued survival of the factory was of concern. After a one-day event for all employees the business had a much clearer idea of the issues from an employee perspective: communication, dignity and respect, consultation and general training all highly amongst the items on the employees’ agenda. Half day Dignity and Respect workshops were held jointly for managers, supervisors, Transport and General Workers Union (TGWU) Union Learning Representatives, and Employee Support Workers and smaller workshops were held for the whole workforce to endorse company policy and offer support for anyone with issues of this nature.

Funding to support a large NVQ programme was sought and the LSC is currently supporting a Technical Services NVQ level II. This has attracted 150 candidates of whom 30% have completed their courses within 3 months of starting, showing both the employees’ desire for training and qualifications, as well as the ability to deliver results, given support and opportunity. Throughout the process a weekly partnership meeting has been held, made up of a management group and the 4 senior TU representatives. A working relationship has been forged, and a much more open and straightforward dialogue has emerged. Benefits so far include:  an increased level of training throughout the factory;  an open and straightforward dialogue between employees, the Trade Union (TU) and the business;  increased levels of productivity in the factory through joint problem solving;  decreased absentee levels; and  increased employee involvement in decision-making.

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2.51. We will proactively push the benefits of the new framework agreement on the Information and Consultation Directive to maximise the roll-out of improved workplace consultation ahead of the required implementation date of March 2005. The Directive includes the right for employees to be informed and consulted about decisions likely to lead to substantial changes in work organisation. This might involve discussions around training and development, investment in skills, cultural changes, or human capital management – all beneficial to the development of high performance workplaces and a higher skilled, more participative workforce. 2.52. We will continue to promote ACAS as an agent of positive change in the workplace and a centre of excellence on workplace practice. We will also continue to support the increase in Union Learning Representatives, given statutory backing by this Government, as part of the process of ensuring lifelong learning is recognised throughout the economy.

Figure 2.1 The Global Entrepreneurship Monitors (2002) prevalence rate of entrepreneurial activity

Innovation in a diverse and inclusive work force 2.53. An increasingly diverse population is driving demand for an equally diverse range of products and services, for example specific products to help people with impairment as a result of old age or disability. A diverse work force is better able to anticipate the demands of a diverse market place and therefore create the innovative product to meet these needs. For example, increasing the numbers of disabled people in design and engineering occupations would encourage the design and manufacture of product that really work for this sector of the population. Over half the growth in the working age population in the next decade is expected to come from ethnic minorities; we need to ensure that we harness the innovative potential of this pool of talent. 2.54. It is clear that if we are to raise both productivity levels and rates of entrepreneurial activity within our economy then additional steps to promote female entrepreneurship need to be taken. As the Global Entrepreneurship Monitor 2001, UK Executive Report states “one of the clearest ways for the UK to increase its levels of entrepreneurship would be by encouraging and supporting more women into business”.

25 20 15 10

0

New Zealand Mexico Korea United States Iceland Canada Australia Ireland Switzerland Norway Hungary Denmark Italy Netherlands Finland Germany United Kingdom Poland Spain Sweden France Belgium Japan India Argentina Brazil China Chile South Africa Israel Slovenia Russia Thailand Chinese Taipei Singapore Hong Kong Croatia ALL Countries

5

Women

Men

Note: Countries with an asterisk are OECD member countries. Source: OECD – Women Entrepreneurship, Issues & Policies 2003.

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Chapter 2 High performance innovative companies

Box 2.9 Women starting high-potential businesses around the world There are difficulties in obtaining consistent data across different countries on the actual economic impact of women entrepreneurship in most OECD countries – there is sufficient research to illustrate the challenge the UK faces.  in the UK women comprise 26% of selfemployed and own account workers compared to 34% in Austria, 28.7% in Belgium, 33.4% in Canada, 32.3% in Finland, and 39.8% in Portugal26;  in the United States, just over 40% of business start-ups are women-owned; in the UK this figure is much lower at 28%27;  men are at least twice as likely to be an entrepreneur in the UK than women28; and  the peak age group at which people start businesses is 35-44 for both men and women – however the difference between male and female entrepreneurial activity is also at its highest in this age category.

26 OECD- Women Entrepeneurship, Issues & Policies 2003. 27 National Association of the Self-Employed Survey, 2003; Barclays “Women in Business”. 28 Global Entrepreneurship Monitor 2002, UK Executive Report.

2.55. We will ensure that business support is better targeted to help women who want to start, or grow, a business. To achieve this we will seek to increase the number of women using governmentsponsored business support to 40% of all customers by 2006. In addition, we have required each RDA to develop an action plan for women’s entrepreneurship in partnership with Business Link, existing women’s enterprise initiatives and other key groups. The action plans will deliver a range of services including improved business advice and mentoring, networking opportunities, and access to finance for the full range of women-owned businesses, including social enterprises and community interest companies. 2.56. We will also work with the existing network of women’s enterprise agencies, such as Women Into the Network (WIN) in the North-East, Train2000 in Merseyside and the Women’s Business Development Agency (WBDA) in the West Midlands, to ensure that every region has a network of targeted women’s initiatives as part of the regional plan. These provide specific advice, training, networking, mentoring and, in some cases, incubation facilities for women entrepreneurs. To achieve this, we will target the new round of the European EQUAL programme funding, starting in 2004, to develop this network. 2.57. In order to improve access to finance for women entrepreneurs, the Government will ask the BBA (British Bankers’ Association), BVCA (British Venture Capital Association), NBAN (National Business Angel Network) to work together to identify what measures should be taken to improve access to mainstream finance. This should build on the experience of current loans programmes targeted at women, such as the Bolton Business Ventures fund, the Full Circle Fund, and international initiatives such as Women’s World Banking and the Finnish Women Entrepreneurs Loan.

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2.58. Current evidence suggests that women may be particularly interested in working through co-operative models. Consequently, the Government has asked the Co-operative Movement to undertake a piece of work to determine what additional measures might be developed to facilitate the establishment of womens’ cooperatives within the UK. 2.59. As part of a capacity-building programme, we will work in partnership with Prowess to develop a comprehensive Toolkit – ‘Effective Business Support for Women’ – to complement current adviser training and ensure that the business support community is able to support the needs of women entrepreneurs more effectively. 2.60. We will improve the quality, quantity and availability of data relating to womens’ enterprise across Government to establish solid baselines for monitoring progress towards the targets contained in the Strategic Framework for Womens’ Enterprise29. The Devolved Administrations are also developing a range of new Initiatives in this area. For Example, in Scotland, support for women in business remains a priority and a new support strategy will be introduced in 2004, building on the range of programmes currently in place within the ambit of the National Womens’ Unit.

29 http://www.sbs.gov.uk/content/consultations/ womensframework.pdf.

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Chapter 3 Technology innovation

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Summary Developed countries around the world have recognised that success in the future will come from businesses increasing the added-value from their products, processes and services. Government action to encourage businesses to develop and implement new products and services has become a high priority. Given this, the UK Government needs to harness its resources more effectively in promoting technological innovation. This chapter explains what action has already been taken and how we will build on that towards realising our vision of the UK being a key knowledge hub in the global economy. The UK has a strong Science, Engineering and Technology (SET) base. But analysis shows that the UK record of knowledge transfer and exploitation by business (measured, for example, by Business Enterprise Research and Development (BERD)) has generally been weak, though with some notable exceptions such as pharmaceuticals, telecommunications and aerospace. In recent years the Research Councils have increased significantly the rate of knowledge transfer from their research activities. For example, the Medical Research Council (MRC) has a successful venture capital fund and the Engineering and Physical Sciences Research Council (EPSRC) undertakes 40% of its projects in collaboration with business. This represents about 25-30% (£140m) of its budget. But we believe that there are more opportunities for much greater collaboration between the Research Councils and business in strategic areas of research.  The Director General of Research Councils will agree with each of the Research Councils plans and goals for increasing the rate of knowledge transfer and the level of interaction with business through activities such as collaborative research, start-up companies and the Small Business Research Initiative (SBRI). Where these are not already in place, Research

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Councils will establish measures of collaboration, so that progress can be monitored. Furthermore, the level of interaction with business by each Research Council will be subject to peer review within Research Councils UK and to external challenge by a group including business representatives. Initiatives in recent years, to increase the diffusion of research findings from universities into the economy, have been very successful, and are being extended in England as part of the second round of the Higher Education Innovation Fund into many more of the less research intensive universities. We believe that an important alternative mission in applied research, training and knowledge transfer exists in such universities. The Lambert Review of UK businessuniversity collaboration has also identified continuing barriers to business-university collaboration, and has made recommendations directed towards removing these barriers which complement the actions identified in the Innovation Report. However, we need to improve both the supply side and the demand side of our research performance. We need to put in place a more strategic approach, embracing businesses; the research and knowledge transfer communities and government more widely. As a first step, we have re-engineered the DTI technology support products, and drastically reduced their number.  In conjunction with business, the SET base, Government more widely including Regional Development Agencies (RDAs), the Devolved Administrations (DAs) and other stakeholders, we will now develop a Technology Strategy, with a medium to long term perspective, which will provide a framework for setting policy priorities and increasing the effectiveness of business support.

Chapter 3 Technology innovation

The Strategy will also be available to help guide Government-wide R&D, European programmes and RDA support for science and technology, and to inform the future development of technical regulations, measurement and product standards, and identify opportunities for innovative public procurement. The Strategy will also help inform the development of technology support mechanisms in Scotland.  We will work closely with business to ‘pull through’ and exploit technologies from the UK and the international research base by providing some of the funding, and sharing some of the risk, in taking new technologies to the market. We will do this through funding an industry led-technology programme. We will measure our performance by the wealth creation and broader public benefits generated; we will consider not only the quality of research, but also the extent to which a greater number and variety of companies are involved. We will also support knowledge transfer networks, building on established, successful networks including sectorbased ones.

technology programme will depend on close alignment with priority market applications such as transport (including aerospace and automotive), health care, construction (including sustainable buildings), digital content, retail/logistics and financial services. DTI sector units will play a key role in this, working with business to maximise the benefit of the technology strategy to individual sectors, as an integral part of their broader business relations role.  In the near term, funding for the technology priorities will be drawn from the rationalisation of the mass of current DTI schemes that are gradually being closed down and from major programmes already announced but where the funds have yet to be specifically allocated (e.g. nanotechnology and energy renewables). We will start this new approach by launching between now and Spring 2005, application programmes, totalling £150m over their lifetime.

 A Technology Strategy Board will be set up to ensure the technology priorities are market-focussed and to advise on the broad allocation of resources to them. The Board will act as a high level forum for interaction between business, Government and other stakeholders.  The Technology Strategy will be based firmly on market pull, and will therefore reflect the requirements of current and potentially key UK world-class innovative sectors, including those that already invest heavily in industry R&D or demonstrate the capacity to exploit leading edge technology. As technology – particularly Information and Communications Technology – is increasingly being used in service applications, the Technology Strategy will also cover the needs of service industries. The success of the

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The need to improve the take-up of new technologies 3.1. The end of the 20th century witnessed a wave of scientific discovery and technology innovation in a range of areas that have only just begun to change the way we work and interact with our physical, natural and social environments. For example, the development of the internet and mobile communications have transformed people’s access to information. Mapping the genome of humans and disease-causing agents, such as the malaria parasites, using massive computing power, has opened the way to wider, rapid screening and targeted, more cost effective treatment. Miniaturisation and our growing ability to operate at the nano scale has opened up the prospect of even greater performance and functionality across a wide range of products and services, including electronics and healthcare. 3.2. The pace of change is often quicker than anticipated and the impacts are fundamental. The growth of completely new industries such as biotechnology, software and the digital content industry in the UK, as well as the decline of more traditional sectors, bear very real testimony to this. For example during the 10 year period 1992-2002 the number of biotechnology businessess in the UK has increased from some 165 to 425, and turnover has increased by over six fold (from £0.5 billion to £3.2 billion). 3.3. The UK has a strong indigenous knowledge source available to business through the Science, Engineering and Technology (SET) base and we do have a strong presence in some science-based technologies such as pharmaceuticals, telecommunications and aerospace. However, our strength in science is not matched by our overall technology innovation performance as seen in measures such as Business Enterprise Research and Development (BERD) or patenting (see Chapter 1).

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3.4. Technology provides a means of developing new products, processes and services, or new ways of doing things. We need to address weaknesses in the innovation system that hold back the development and exploitation of new technologies. This applies to both manufacturing and service sectors. In this chapter, we discuss how Government can work with businesses, the SET base, intermediaries, Regional Development Agencies (RDAs) and other stakeholders to drive technology innovation forwards. The aim is to increase business engagement in the development of value adding new products and services by facilitating more collaboration.

Investment in the Science, Engineering and Technology (SET) base 3.5. Today the UK SET base is doing more research more productively than ever. The market for science and research has become increasingly global in recent years and UK universities have to compete internationally for talent and research contracts if their departments are to maintain or improve their world ranking. The Government has a responsibility to ensure that the SET base (universities together with Research Council Institutes) is maintained and developed so that it continues to deliver new basic research and skills to underpin the rest of the innovation system. 3.6. In the last two Spending Reviews the Government has recognised this problem and has provided for significant increases in the overall resources for the SET base. Action has been taken to strengthen the research infrastructure. As a first step, the Government, in partnership with the Wellcome Trust, launched the Joint Infrastructure Fund (JIF) which injected £750m into universities for capital projects. To put infrastructure renewal and development on a sustainable footing, the

Chapter 3 Technology innovation

Government created a dedicated capital funding stream for science research infrastructure – the Science Research Investment Fund (SRIF) – to provide £675m over 2002-04 and £1 billion for 2004-06. The Government has also increased the funding for the Research Councils. In real terms, total funding for the SET base is expected to increase by over 50% between 1997/98 and 2004/05. We recognise the need to maintain the balance between this SET base funding and that for exploitation and applied research.

Promoting knowledge transfer 3.7. The SET base makes a major contribution to knowledge transfer through the publication of research results and the supply of highly skilled people capable of transferring and adapting codified and tacit knowledge. However, there is an additional role that Government can play in providing the opportunities and incentives for translating quality UK science into commercially successful applications. 3.8. Transfer of knowledge and know-how from Higher Education Institutions (HEIs) has been promoted through a number of programmes in recent years. Over the period 2001 to 2004 £110m of public funding (see Box 3.1) is being invested in knowledge transfer under three main programmes:  Higher Education Innovation Fund (HEIF) and equivalents in Scotland and Wales;  University Challenge; and  Science Enterprise Challenge. 3.9 In Scotland, The Proof of Concept Fund is investing £33m over six years to fund the pre-seed development gap between the scientific discovery stage and the prototype or proof of concept stage. Over the last four years, the fund has committed £19m to 83 projects.

Box 3.1 Example of collaboration supported through HEI-industry knowledge transfer programmes Bodymetrics is a London-based company that is focussed on providing Body-Sizing and Visualisation solutions to clothing retailers. The company attracted its first large scale customer, Selfridges in Oxford Street, in May 2003. The company’s products help to reduce ‘returns’ for retailers, and enable novel direct marketing services. The company is a spin-off from the Department of Computer Science, University College London (UCL), and the seed round financing was from the University Challenge Fund

3.10 The SET base is responding well to the demands for greater engagement with business. The latest data, taken from the Higher Education Business Interaction survey (HEBI) for the academic year 2000/011 shows that:  the number of Intellectual Property (IP) licences granted to UK-based companies, on the basis of HEI-owned IP, increased by 38% from 382 in 1999/2000 to 527 in 2000/2001. Income from IP licenses more than doubled between 1994/95 and 2000/012;  the number of spin-off firms established with some HEI ownership increased by 22% from 203 in 1999/2000 to 248 in 2000/2001; and  total new (initial) patents filed rose by 26% from 725 in 1999/2000 to 913 in 2000/2001.

1 Higher Education Business Interaction Survey for the academic year 2000/01, (http://www.hefce.ac.uk/pubs/hefce/2003/03_11.htm). 2 The source for this statistic is the Higher Education Statistical Analysis (HESA).

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3.11. To simplify arrangements for universities, HEIF is to be consolidated into a permanent third stream of knowledge transfer funding to universities, alongside that for teaching and research. More money will be put into the second round of HEIF (HEIF 2), which will be worth £81m in 2004/5 and £90m in 2005/6. The aim is to simplify the funding landscape and ensure that HEIs in England have greater discretion and the flexibility to develop their capacity in a way that best suits their needs and the needs of business. 3.12. The new expanded HEIF will have two separate allocations:  to build on the successes in knowledge transfer already being achieved by some HEIs; and  a separate allocation to further broaden the reach of knowledge transfer activity through support for less research intensive university departments. 3.13. RDAs will play a particularly important role in helping to direct resources from HEIF2 so that they contribute most effectively to regional economic strategies: especially the funds going to less research-intensive universities. There are equivalent arrangements in Scotland and Wales. 3.14. Similarly, the Research Councils have focussed considerable extra energy and resources on working with industry over the past 4-5 years. Research Councils UK has this year also set up a Research Council-wide knowledge transfer group to coordinate and streamline many of their individual activities. Activities can be classified under the following headings:  Knowledge Generation in Collaboration with Industry, for example, university participation in past LINK programmes. The Engineering and Physical Sciences Research Council (EPSRC) funds 40% of its research projects in collaboration with industry, amounting to 25-30% of its research spend;

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 Continuous Professional Development (CPD);  Knowledge Transfer through networking, for example, participation in Faraday Partnerships;  Development of Entrepreneurial Skills, for example, the Biotechnology and Biological Sciences Research Council (BBSRC) has developed the Biotechnology Young Entrepreneur’s Scheme, which it has been running for over six years; and  Promotion of Start-up Companies, for example by the Medical Research Council (MRC) (see Box 3.2).

Box 3.2 Technology Transfer and the Medical Research Council (MRC) MRC Technology transfer has been boosted in recent years. Through its technology transfer arm, MRC Technology, MRC has seen royalty income rise from £1.4m in 1997/9 to £15.1m this year. In 2002/03, 41 new patent applications were filed, 32 new licensing agreements completed and 2 new spin-out companies, Iclectus Ltd and Etiologics Ltd, were established. MRC’s venture capital subsidiary, MVM has raised over £150m, attracted investment from multi-national concerns and set up 14 companies.

3.15. We have already seen that Government has done much to encourage knowledge transfer from the SET base – with measurable evidence of progress. We want to see industry pull through more from the science base and we, therefore, want to encourage the science base to work more closely with industry. We will ask the Research Councils to explore ways of increasing industry collaboration further.

Chapter 3 Technology innovation

3.16. The Director General of the Research Councils (DGRC) will agree with each of the Research Councils plans and goals for increasing the rate of knowledge transfer and increasing the level of interaction with business through activities such as collaborative research, start-up companies and Small Business Research Initiative (SBRI) (see chapter 5). Where these are not already in place, Research Councils will establish measures of collaboration, so that progress can be monitored. Furthermore, the level of interaction with business for each Research Council will be subject to peer review within Research Councils UK and to external challenge by a group which includes business representatives.

3.17. There are some good examples of where industry has taken the lead in making University Technology Centres (UTCs) work (see Box 3.3). Proven benefits from demand-pull collaboration will be a factor in deciding application programme priorities. 3.18. The complementary Lambert Review of Business-University Collaboration has identified many specific barriers to collaboration which still remain. Proposals in the Review for removing or reducing these are summarised in Box 3.4. The Government will respond to these proposals by summer 2004.

Box 3.3 Imperial College University Technology Centre (UTC) in Vibration Rolls-Royce established one of its first UTCs at Imperial College. The UTC was created to address a critical need for enhanced capability in analysis and prediction of vibration in gas turbine components and structures such as fan blading. From its inception the UTC had a dedicated director at a senior level within the College (Professor David Ewins) as well as a full-time team of post-doctoral research fellows and research students. The group faced considerable problems in successfully addressing the UTCs technology field. In their initial work with Rolls-Royce, aimed at establishing a core knowledge base on vibration understanding, it became clear that there was a major technological advantage to be gained by developing a new suite of computer codes for aero-elastic analysis and vibration prediction (now recognised as the bench-mark analysis tool in its class.) As the research team developed

new and improved engineering knowledge, they were able to incorporate their models into the latest releases of the software code following full validation through Rolls-Royce rig and engine testing. This model validation through ‘hardware tests’ and ensuring the UTC staff have visibility of, and involvement in these tests, continues to be critical in maintaining both an underpinning focus for the UTC team and in transferring their results and methods into the company design teams and systems. In this way the UTC outputs have been used to address significant design challenges in the Trent civil aero-engines, in ground based combustion systems and in the uniquely demanding design of the vertical lift system for the Joint Strike Fighter. Through projects such as these the technology developed by the UTC is tangibly converted into a commercial benefit to Rolls-Royce.

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Box 3.4 Key proposals of the Lambert Review of Business-University Collaboration  A greater role for the Regional Development Agencies (RDAs) in facilitating knowledge transfer in their regions;  A new funding stream for businessrelevant research, along with increased and improved “third stream” funding for knowledge transfer;  Universities to develop a code of governance and to demonstrate good management and strong performance in return for a lighter regulatory touch from Government and the Funding Councils;  Development of model contracts and a protocol for IP to speed-up negotiations;  Encouraging new forms of formal and informal networks between business people and academics, including the establishment of a business-led R&D employers’ forum; and  Universities to provide more information on student employability, and businesses to take a greater role in influencing university courses and curricular.

A Technology Strategy to increase innovation

3.20. However, on their own, these policies are unlikely to achieve the breadth and depth of business engagement needed to realise significant improvements in innovation performance. We have increased the incentives for knowledge creators in the SET base to “push” technological knowledge towards commercial exploitation. To be effective, these must be balanced by complementary policies to ensure that technologies with the potential for strong economic, social and environmental benefits are “pulled” through by business from the SET base. 3.21. There are some demand-side measures in place (e.g. R&D Tax Credits). But these policies are not designed specifically to focus efforts on those emerging and potentially disruptive technologies that have the greatest potential to change market conditions or improve the quality of life and the environment. Through the IGTs, industry is identifying significant demand-side application needs (eg clinical trials proposals from the bioscience IGT3 and new systems demonstrators for the aerospace IGT4). In considering these business priorities, we need also to explore the opportunities for collaborating across Government in areas where there are common underlying activities, such as the £4 billion spent outside the science budget on R&D, the £100 billion plus that the public sector spends on procurement, or innovative solutions to climate change, waste minimisation and other environmental challenges.

3.19. We have strengthened the performance of the UK SET base. Policies are in place to encourage knowledge transfer and exploitation. Those directed towards the UK SET base are discussed above. Measures to help business exploit the global knowledge base are discussed in Chapter 7.

3 4

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“Bioscience 2015: Improving National Health, Increasing National Wealth” DTI, 2003. An independent report on the future on the UK: Aerospace Industry, Aerospace Innovation and Growth Team, DTI, 2003.

Chapter 3 Technology innovation

3.22. We can achieve this by bringing business, Government, and the research and knowledge transfer communities together to identify the most important emerging, potentially disruptive technologies on the basis of their potential economic, social and environmental benefits for the UK. We then need to develop collaborative, application-based solutions to technology development, drawing on the resources and instruments available to all parties. Business has told us that a strategic approach in this area is of high importance (Box 3.5).

Box 3.5 Comment from CBI on importance of a Technology Strategy “The development of a Technology Strategy for the UK is very welcome. This should be a Government strategy that is clearly led by business and focuses on business priorities. The starting point for identifying these priorities should be our markets and customers and the products and services UK companies wish to develop for them. We also look forward to the proposed development of an innovation policy framework that can guide regional economic strategies and national policy making. This will be critical for achieving coherence and scale while also allowing for regional disparities to be addressed.”

3.23. We propose to implement this through developing a Technology Strategy that will identify technology priorities. The Strategy will be used to stimulate an industry based technology programme. It will have the potential to influence a much wider set of Government policies as well as the behaviour of business and other participants in the innovation system (e.g. RDAs and DAs). 3.24. The Technology Strategy will be business-led, market focussed and need a high level of stakeholder input. The process will be based on the development of stakeholder networks and advisory groups, which DTI will support and facilitate. There will be close collaboration with important established business networks, such as the Information Age Partnership, IGTs, technology intermediaries and Public Sector Research Establishments (PSREs). The DTI will also be pro-active in brokering collaboration and the development of networks in sectors where these would be beneficial but are not well established, such as high tech services, photonics and fuel cells. Stakeholders that we expect both to contribute and benefit from the strategy process would include:  individual businesses;  business organisations (CBI, Chambers of Commerce, trade associations);  Research and Technology Organisations (RTOs);  Public Sector Research Establishments;  professional institutes;  Devolved Administrations (DAs);  RDAs and the proposed regional Science and Industry Councils (see Chapter 6);  Other Government Departments (OGDs);  research Councils and universities; and  Non Governmental Organisations (NGOs).

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3.25. A high level Technology Strategy Board will ensure the technology priorities are market focussed and will advise on the broad allocation of resources to them. The Board will also act as a high level forum for interaction between business, Government and other stakeholders. Innovation works best when there is a clear market and business pull and we will focus the Technology Strategy on this basis. The main criteria for prioritising the Technology Strategy themes will be:  the degree to which technologies will have an impact on sectors that are a major UK strength (eg pharmaceuticals and aerospace) or have high growth potential;  the degree to which a particular technology will have an impact on a number of sectors;  strength of the UK SET base relative to other countries;  potential economic, social, quality of life and environmental benefits and scope for cross-government collaboration (e.g. healthcare, energy);  potential for spill-over benefits and whether there is an underpinning market failure; and  the degree to which there is scope for effective action by Government or others. We have identified a number of ways in which the Technology Strategy can influence government policy in addition to setting priorities for DTI’s business support programmes:  providing an information source that other Government Departments can use to inform their own R&D and procurement priorities;  providing a resource for technology support funded by RDAs and the DAs (which may involve collaboration between regions and/or with central government);

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 signalling technologies where action might be needed to strengthen the supply of technical skills;  signalling technologies where particular attention to regulatory issues may be justified (Chapter 5);  generating a higher level of awareness of IP issues (complementing the actions in chapter 4);  informing negotiation of EU Framework programmes; and  informing the development of standards and measurement (Chapter 4). 3.26. The benefits of the Technology Strategy will build over time. It has the potential to become a key information source, including technology road maps, for all participants in the innovation system, strengthening co-ordination and improving effectiveness at all levels. 3.27. Scottish Enterprise has also been allocated funding by the Scottish Executive for 3 Intermediary Technology Institutes (ITIs). A total of £450m over 10 years will be spent on them. The 3 ITIs are based on the sectoral areas of communication technology and digital media “Techmedia”, energy, and life sciences. The activities within the Institutes will reflect a strong partnership between key global market drivers, local companies and researchers. The Institute will commission, from leading researchers, locally and worldwide, precompetitive market focused research in these key technologies. The resulting intellectual capital assets will be assessed and bundled within the Institutes with the primary objective of building new high growth, market-focused, sustainable technology companies. Other channels for commercial exploitation of IP may include licensing to existing companies, whether Scottish, UK based or international, or selling IP to others willing to take ideas to the market. A key aim is to increase substantially the level of exchange between academia and the corporate sector in

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Scotland, helping develop not just a transfer of skills but also a more commercial and entrepreneurial culture and ethos in the Scottish academic science base. 3.28. Of the countries we have reviewed, several operate some form of strategic selection of technologies and research themes. The models used by the Finnish technology agency (TEKES) and by Japan appear closest to our proposal.

More effective DTI support for technology innovation in businesses 3.29. Like other Governments around the world, the UK Government provides support for technology innovation where private firms may under-invest in knowledge acquisition and development through R&D because of market or system failures. Such investment can be justified on the basis of:  Spillover benefits – technology development in one firm may produce benefits elsewhere in the economy that are not captured by the firm making the investment. Even collaborations with other firms may not be sufficient to capture all the benefits because some will arise in unanticipated areas (e.g. different sectors). These benefits can also be social or environmental.  High degrees of risk – the development of the technology may be uncertain, as may be the commercial potential. These uncertainties are likely to be greatest at the early stages in taking an idea from basic research through to a commercial application, while the size of investment can be significantly greater through the subsequent development and prototyping phases. There may be information asymmetries between the firm wishing to innovate and potential backers. Access to finance may be particularly difficult for Small and Medium-sized Enterprises (SMEs) who are less likely to have access to internal finance or equity funding (discussed later in this Chapter).

 Barriers to effective co-ordination between the SET base and business, and between different businesses. Technology applications are also increasingly likely to cross sectors and these linkages – especially between manufacturing and service industries – may not be well appreciated or developed. Government can facilitate knowledge transfer between businesses by enabling or creating networking opportunities. Direct and indirect Government involvement can build trust between participants, e.g. by allaying concerns about protection of IP. Government can also facilitate business collaboration for major technology validation programmes cutting across a range of companies and potentially sectors. The complementary Lambert Review has made proposals to remove or reduce remaining barriers to business/ university collaboration (see Box 3.4). 3.30. DTI currently provides about £200m of support each year through a range of public-private partnerships and interventions to help the technological innovation activities of individual firms. Over the years, the number of schemes has grown and many of them have been on such a small scale that they have had very little impact. While some individual programmes have been successful in meeting their objectives, the lack of focus means that important areas have not been covered and that some less important ones have received support. DTI’s support for innovation and other activities has been expensive to administer and difficult and confusing for companies trying to use it.

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3.31. DTI has, therefore, changed its approach to business support, drawing on the available evidence to build on what works best3. As a result, the number of schemes will be reduced from over a hundred to around ten. 3.32. In future, support for technological innovation will be available through five products, which build on the most successful elements of previous schemes. The five products are:  Collaborative R&D support is available to meet some of the costs and risks associated with research and technology development, by facilitating collaboration between different businesses and between business and the SET base across the UK. Evaluations of previous DTI programmes in this area point to significant benefits from these investments. The focus of future programmes, however, will be on broader strategic areas of technology likely to impact across sectors and key market priorities and thereby engage with a broader range of industrial participants. The Collaborative R&D product builds on the LINK scheme. Details of LINK programmes can be found in the Annex.  Knowledge Transfer Networks will encourage the diffusion of new and existing technology. The product builds upon the existing Faraday Partnerships, which connect universities and independent research organisations with business and finance in key areas of technology. In the last 5 years we have increased the number of Faraday partnership from 4 to 25. Today Faraday Partnerships bring together about 51 university departments, 27 independent research organisations, 25 intermediary organisations and more than 2,000 firms, large and small, covering a wide range of 3 A review of the evaluation evidence for DTI innovation programmes is presented in the Annex of the analytical report.

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areas from advanced materials to farm animal genetics. While this type of networking will continue, the new arrangements provide for a wider, more flexible range, of networking activities to deepen and broaden knowledge transfer into UK businesses and will focus on areas that have the potential to maximise UK productivity. Details of Faraday Partnerships can be found in the Annex.  Grant for R&D from June 2003 this has been available for individuals and SMEs, and it enables them to meet some of the costs of investing in technology innovation. The Grant for R&D is based on, and enhances, the successful Smart Awards. In the last year in England, the Grant for R&D/Smart scheme has supported 974 small businesses, offering a total of £52.4m of grant funding. The levels of support allowed have been increased within European Community state aid rules. Access to the grant is also being improved. This grant is for supporting specific projects and therefore complements the R&D tax credit, which is only available after expenditure is incurred. Comparable support is provided in Scotland through the SMART, SPUR and SPUR PLUS .  Grant for Investigating an Innovative Idea – this is a pilot, offering help to SMEs in England to look objectively at their ideas for innovative products, services or processes and to draw up an action plan to take the idea forward. The Grant provides 75% of the costs of outside experts.  Knowledge Transfer Partnerships provide direct support for knowledge transfer by enabling universities and others in the SET base across the UK to work with businesses using recently qualified people, like graduates, to undertake specific knowledge transfer projects in firms of all sizes. This builds on the former Teaching Company Scheme (TCS). The 900 TCS programmes in operation at March 2003 representing over 1000 graduate projects. Total Government

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Box 3.6 How Government is supporting the development of nanotechnology  Nanotechnology, the importance of which was highlighted in paragraph 3.1, simply groups under one heading a range of technologies that deal with the engineering and applications of very small particles approaching the sizes of small molecules and atoms. There will be exciting opportunities for micro- and nano-technological applications in most industries. The technology is already being applied in products as diverse as sun creams and self cleaning glass. Advanced pharmaceutical applications may include the monitoring of patient condition by inserting nano-components into the blood stream. The global market for nanotechnology is forecast to exceed US$1000 billion within the next decade. Worldwide government funding for nanotechnology R&D last year alone exceeded US$2 billion.  In July 2003, Lord Sainsbury announced the latest DTI support for nanotechnology, a cash injection of £90m

expenditure in 2002/03 was over £24m. Successive reviews of TCS confirmed the value to business of the technology transferred. 80% of companies involved believe that knowledge transferred during the placement was either new to the firm or represented a considerable advance of their knowledge base. Whereas TCS was largely restricted to two-year projects, the new form of support is more flexible, allowing projects from between 1 and 3 years and encouraging a wider engagement of knowledge based partners (such as FE colleges).  For Scotland: The Scottish Executive have established a National Intellectual Assets Centre (NIAC) to help business by raising the profile of intellectual asset management and providing expert advice. There are also two new grant

over the next six years to help industry harness the commercial opportunities offered by nanotechnology. £50m will be spent on collaborative R&D and £40m on a new network of micro and nanotechnology facilities. This will help business build on the UK’s excellent track record in small-scale science and win a share of this developing market.  The DTI, RDAs and DAs have worked with industry, universities and Research Councils to provide businesses with access to a network of facilities for research, fabrication and prototyping, including those engaged in MicroNano Technologies in the UK, the UK Microsystems and Nanotechnology Network (MNT). The DTI investment is expected to secure additional industry and regional spending exceeding £200m and will provide a boost to future advanced manufacturing in the UK.

schemes. The SME Collaborative Research (ScoRe) programme is designed to support R&D projects jointly undertaken between public sector research bodies (such as universities, Research Institutes, NHS Trusts) and Scottish SMEs. The complementary Scottish Expertise Knowledge and Innovation Transfer (SEEKIT) programme will provide support for research baseindustry interface and outreach activities that are not currently funded by existing mechanisms. This will lead to projects which encourage productive knowledge transfer activities between SMEs, Research Institutes, Technology Transfer Offices (TTO) and higher and further Education Institutes.

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 SCORE is aimed at encouraging businesses to undertake collaborative research projects with the science base.  SEEKIT provides support research base- industry interface and outreach activities. 3.33. The Technology Strategy will increase the coherence and effectiveness of DTI support for the exploitation of basic technologies and applied research in emerging or ‘breakthrough’ technologies where the science is largely known but the potential for exploitation and development is strong (Box 3.6). Specific themes will be identified to which DTI will give priority in allocating resources for technology development, taking account of the EU Framework Programme (see Chapter 7, paragraphs 19 to 23 for details). Assistance will largely be delivered through the business support products for Collaborative R&D and Knowledge Transfer Networks. 3.34. There are already precedents of how this top-down approach is encouraging greater business R&D activity. For example,

Ministry of Defence (MoD) has developed its technology strategy around technology themes, which it calls “Towers of Excellence”. As a result, it has launched a series of collaborative technology programmes with industry called Defence Technology Centres (DTCs). Encouragingly, these now involve a number of nondefence companies. 3.35. There are also strong examples of how an underlying technology can have applications in several different sectors. For example, the e-science (grid computing) programme was developed to help scientific researchers by linking up large computers and databases. The infrastructure created has already been used by several sectors (medical, aerospace) to accelerate new developments (Box 3.7). As grid computing technologies develop they will permit maximum use of the internet by enabling businesses of all sizes to share resources such as processing power and database access in secure, seamless, transparent and flexible ways. They will give businesses on-demand access to massive

Box 3.7 Application of Grid Computing Mammography Case Study: e-diamond The e-diamond (Digital Mammography National Database) project was established to deliver a prototype database of standardised mammograms for improved diagnosis, training and epidemiology implemented using grid technology. It will be used to aid the work of clinical and support staff involved in the NHS Breast Screening Programme. The project has been carried out by an industry-academic collaborative ICT R&D team working closely with a range of clinical partners, from Guy’s and St Thomas’s NHS Trust to the South East Scotland Breast Screening Centre. The project uses the Standard Mammogram Form (SMF) for image comparison.

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A photographic-film mammogram’s appearance can vary with image capture settings, making diagnosis based on film density difficult and potentially misleading. However the SMF representation gives reliable information about the amount of glandular tissue in the breast. Grid technologies will provide high-speed access to image data from a cohort of patients across the UK and advanced analytical and data-mining tools to aid diagnosis of the SMF under examination. Moreover such a database will allow in-depth studies to determine the impact of the environment and lifestyle on the development of breast cancer and aid clinicians in the development of better treatment options.

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computing power and to functions such as collaborative design, simulation, modelling and information services. 3.36. We will make a start by funding applications of technology priorities from the rationalisation of current DTI schemes that are gradually being closed down and from major technology programmes already announced but where funding has yet to be allocated to specific projects (eg nanotechnology, renewable energy). We will start this new approach by launching, between now and spring 2005, application programmes totalling some £150m over their lifetimes. The themes to be supported in the very first programmes will be those already identified by IGTs and related industry expert groups as important: nanotechnology, renewable energy, sustainable technologies, life sciences and systems/ICT. As emphasised earlier, essential to the success of these and future programmes will be close alignment with priority market applications such as transport (including aerospace and automotive), health care, construction (including sustainable buildings), digital content, retail/logistics, and financial services. 3.37. In allocating money to these programmes we will be looking particularly for collaboration between business (including business to business and businesses which traditionally have not participated in such programmes, the latter point is also one of the recommendations in the Lambert Review), the Research Councils, other Government Departments and technology intermediaries. Defence and Aerospace Research Partnerships (DARPs) are one example of how such collaboration can leverage funding. In one programme, DTI funding was tripled by additional support from EPSRC, the MoD and industry. Some of these potential sources of collaboration are discussed below.

3.38. The Technology Strategy Board will help in the identification of priority areas for collaboration between DTI and the Research Councils, and DTI will increase co-funding of projects with the Research Councils in order to facilitate the participation of a wider range of companies in strategic technology investments.

Technology Intermediaries 3.39. To complement the above actions, we will work more closely with technology intermediaries, whose role in technology development and transfer has been undervalued in recent years in both policy development and implementation. Technology intermediaries also have an important role to play at regional level, working in partnership with RDAs and DAs. 3.40. The principal members of the technology intermediaries community are the Research and Technology Organisations (RTOs). They are a private sector community of effective knowledgetransfer companies. Their objective is knowledge transfer to industry to fill knowledge gaps and to stimulate innovation leading to higher value added products and services. 3.41 Collectively the RTOs employ over 20,000 scientists and engineers and have annual turnover in excess of £2 billion. It is one of the largest communities of its kind in Europe and has over 30,000 clients globally. Their main activities include:  support for in-company innovation champions by in-sourcing expertise and the required business model plus underpinning technology to increase productivity;  translating ‘raw’ knowledge into applied opportunity, understood by company management, and management of the integration process;

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 working with universities to develop an idea or competence into a business proposition which will attract ‘second’ stage funding and subsequent investment;  working with universities to optimise spin-out or licensing and manage the contracting process;  auditing organisations for underexploited innovative assets and bringing them to market; and  help for companies with low R&D capability. The RTOs have also played a central role in establishing and managing Faraday Partnerships as part of the increasing emphasis on technology transfer and adaptation (see Knowledge Transfer Networks in paragraph 3.32, and Annex A to the Report for further details). 3.42. This combination of roles and capabilities makes intermediary bodies vital in sharing knowledge – not just from the SET base to business, but also in helping businesses develop the technology to fruition. We will ensure that they are closely involved in policy formation and delivery, both as participants in the development and implementation of the Technology Strategy and by encouraging their involvement in the application programmes.

Finance for technology innovation 3.43. If UK companies are to reach their full potential it is essential that they have access to the finance they need to make the investment necessary for future success and growth. This is an area of strength for the UK which has welldeveloped capital markets compared to other European countries, and is second only to the US in world terms. Overall the majority of UK businesses can access the finance they need to operate their business.

3.44. However, this generally positive overall picture does mask some underlying problems for certain businesses. For example, start-up businesses and those lacking a track record sometimes face difficulties in accessing debt finance, and SMEs with high growth potential are often unable to raise the relatively modest amounts of equity finance required to meet their growth ambitions. The problems maybe more acute in particular areas where the risks are especially high (e.g. bioscience)4. 3.45. To help address these “finance gaps” the Government has implemented a range of targeted measures. For example, the Small Firms Loan Guarantee Scheme provides support for debt finance where businesses lack the necessary collateral to obtain a loan. The Enterprise Investment Scheme and Venture Capital Trusts offer tax incentives to support investment in early-stage businesses affected by the finance gap. 3.46. Regional Venture Capital Funds have also been set up across England. These are investing a total of up to £270m in SMEs with growth potential, backed by up to £80m of Government funding. Initial investments are restricted to amounts of up to £250,000, with an opportunity for a follow-on investment of up to £250,000 after six months. The Early-Growth Funding Programme complements the regional funds by providing smaller amounts of risk capital, averaging around £50,000, for start-up and early-stage businesses. Similar arrangements are in place in Scotland and Wales. For example, the new Scottish Co-investment Fund, with £20m from the Scottish Executive and £25m from European Regional Development Fund (ERDF) funding, matched by the private sector, will help address the early stage equity gap in Scotland.

4 Reference: innovation review Bioscience 2015 report.

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3.47. Recognising that the long lead times and uncertainties associated with investment in technology-based firms may lead to particular problems in accessing funding, the Government also supports the UK High-Technology Fund – a ‘fund of funds’ supporting early-stage hightechnology businesses across the UK. The Government acts as ‘cornerstone’ investor, leveraging over £100m of additional private sector investment. Complementing this fund, the University Challenge Fund provides capital for early-stage financing to enable universities to develop business proposals and spin-off companies. It aims to strengthen public-private partnerships by supporting the transfer of science, engineering and technology research to commercial application.

3.50. To encourage greater levels of investment in R&D, which is a crucial component of innovation, the Government has also introduced R&D Tax Credits for SMEs and large companies and is currently consulting on possible ways to improve and clarify the definition of R&D for Tax purposes. 3.51. The Grant for R&D in England, building on the successful SMART Awards, can play a significant role in helping to finance small, fast growth, high tech businesses. Increased funding for this scheme will be one of our priorities for the future.

3.48. While these targeted interventions each make an important contribution in stimulating an increased supply of risk capital to smaller businesses, the Government recognises that some innovative firms seeking modest sums of capital are still affected by the equity gap. The Government has recently published the findings of its Bridging the Finance Gap consultation, which take into account the views expressed by a wide range of interested parties from the business and finance communities. 3.49. In the light of these findings, the Government has announced a series of proposals to build on the success of its existing interventions. It has also announced its intention to establish a ‘pathfinder’ round of Enterprise Capital Funds (ECFs), based on the Small Business Investment Company model that has played an important role in channeling risk capital to smaller companies in the US over the past 45 years. ECFs will be commercial venture funds, investing a combination of private and public capital in UK-based companies that are affected by the equity gap.

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Summary In addition to a strong science, engineering and technology (SET) base, the UK has a number of well established institutions that have performed essential and highly specialised functions for government, business and researchers. These institutions are a potential knowledge bank for business enabling them to develop new products and services. They constitute our national innovation assets. They can help businesses and we need to increase the impact they have. Every product and service we use depends on accurate, often leading-edge measurement and instrumentation. Without accurate and consistent measurement, these goods and services could not be reproduced or commercially exploited and scientific research would be severely constrained. The National Measurement System is the infrastructure which underpins the standards of measurement and develops the measurement technology that is a key driver of innovation in our economy. The NPL (National Physical Laboratory), LGC (the former Laboratory of the Government Chemist), NEL (the former National Engineering Laboratory) and the NWML (National Weights & Measures Laboratory) are our National Measurement Institutes (NMIs) and the principal suppliers of these standards and technical services. These institutions are acknowledged as being amongst the best in the world.  We will ensure that the objectives of our National Measurement System are developed to include a greater focus on innovation. The NMS will be tasked with increasingly focusing research programmes on emerging technology areas, working in line with the Technology Strategy, initiating 15-25 co-funded research projects each year in collaboration with industry and facilitating up to 250 product development projects per year.

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 We will facilitate 20 exchange secondments between National Measurement Institutes and industry to promote additional knowledge transfer. The management of Intellectual Property (IP) (patents, trademarks, copyright and designs) is also crucial for innovating firms. Our IP framework is managed by the Patent Office, though much policy development takes place at European and global levels. The Patent Office has also developed strong links with the National Intellectual Assets Centre (NIAC) in Scotland. Businesses need to make well-informed decisions on how to manage their IP and guard against infringements of their intellectual property.  The Patent Office will develop a major awareness-raising programme building on its involvement in Business Advice Open Days and a new national strategy for dealing with IP crime. The Community Innovation Survey for 1998-2000 found that 60% of UK businesses that are engaged in the development of new products, services or processes gain useful information from standards and regulations. Standards also help innovation by diffusing technical knowledge. A National Standardisation Strategic Framework (NSSF) has been developed and will be implemented with the Confederation of British Industry (CBI), British Standards Institution (BSI) and other partners to provide industry with an improved service.

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National Measurement System (NMS) 4.1. The National Measurement System (NMS) is the infrastructure that underpins the measurement standards and develops the measurement technology essential to our modern economy. The NMS includes the National Physical Laboratory (NPL), LGC (the former Laboratory of the Government Chemist), NEL (the former National Engineering Laboratory) and the NWML (National Weights & Measures Laboratory), all of which supply DTI funded standards and technical services. 4.2. Measurement standards are public goods. Firms have little incentive to develop these since they cannot exclude other firms from the benefits. Furthermore, there are efficiency gains to be made from the use of standard measurements. Although productivity benefits of the NMS are largely taken for granted, they are substantial and widespread1. One indicative estimate suggests that metrology underpins around £5 billion of Gross Domestic Product (GDP2). The NMS is particularly important to the UK’s instrumentation sector, itself worth £8.1 billion. NMS ensures that its technical research can give UK manufacturers a technical edge and also secures quality of life benefits – such as better control of therapeutic radiation dosages for cancer patients.

1 Swann GMP (2003) Case studies, mechanisms and a micro model of measurement impact, report to the DTI, 27 August. 2 PA Consulting (1999) Review of the rationale for and economic benefit of the UK National Measurement System, report for DTI, 8 November.

Box 4.1 Standards project removes barriers to innovation An NMS project has been instrumental in revising Standard ISO 51673, thereby reducing some of the technical barriers in North Sea oil and gas installations. NEL analysed the results of US research to prove that gas installations could be radically redesigned, but still remain within the accuracy (and safety) requirements, and then ensured that the redesign was incorporated into a revision of the Standard. The advantages arising from the revised Standard’s specification are many: reduced material costs, manufacturing savings, platform space and weight reductions, all of which contribute to significant overall financial benefits. It has been estimated, for instance, that in one typical installation (named Rhum), AMEC stand to achieve a saving of approximately £1m. These savings were made on just one tieback to one platform and there are several hundred such installations in the North Sea alone. The UK oil and gas industry is now set to exploit the advantages of the revised Standard and benefit from its consequential huge cost savings.

4.3. The NMS impacts on innovation performance by helping develop new technological knowledge and improving the capacity of firms to absorb and exploit it. The laboratories and other organisations that make up the NMS also provide partners for networking and collaboration. NPL has, for example, always been at the forefront of groundbreaking collaborative research, which in turn is applied by business.

3 Measurement of fluid flow by means of pressure differential devices.

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Box 4.2 High fliers

Box 4.3 Helping small manufacturers to innovate

The National Physical Laboratory (NPL) has teamed up with Virgin Atlantic Airways, the Mullard Space Science Laboratory (MSSL) and the Civil Aviation Authority (CAA) to measure and interpret the effect, if any, of cosmic ray doses on aircrew. Measurement of these doses has now been made on over seventy flights all over the world. This team brings together expertise in airline management (Virgin), expertise in solar and cosmic ray physics (MSSL), legislative and medical knowledge (CAA) and skills in instrument calibration and interpretation (NPL).

Millbrook Instruments, a Lancashire based instrumentation company employing 6 people, has recently launched the MiniSIMS, a popular new desktop instrument for secondary ion mass spectroscopy (a technique used for the surface analysis of materials and a vital tool in the development of new materials). The charge neutralisation system used by this chemical microscope (used by analytical laboratories) is based on developments in measurements by NPL scientists as a result of DTI funded NMS research. These product improvements would not have been possible without NPL’s work, which enabled Millbrook staff to develop inhouse expertise very quickly. Since Millbrook started offering the charge neutralisation system as an accessory to the MiniSIMS, they have had 100% take up from customers. Already 15 instruments have been sold – worth around £1m of sales.

4.4. The NMS also has a strong track record of addressing more immediate industrial problems and supporting our quality of life. It also works in partnership with smaller UK manufacturers to help develop innovative products.

4.5. The challenge now is to ensure that NMS programmes address the needs of emerging technologies and that UK-based companies take up its services. We have to raise awareness, and bring its expertise to the attention of a much wider audience, encouraging the kind of exchange with the NMS that has characterised the transfer of knowledge between business and other centres of expertise.

Facilitating knowledge transfer 4.6. We will run a campaign to publicise the expertise of our National Measurement Institutes (NPL, NWML, NEL & LGC) and services to businesses. We will provide regional focus by using local and sectoral intermediaries.

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4.7. We will introduce 15-25 measurement research projects co-funded with industry, which can be executed on a much-reduced timescale. This will allow greater scope for shorter-term research projects, more flexible arrangements on ownership of IP and co-funding ‘in kind’ rather than cash. 4.8. In collaboration with industry, we will take part in up to 250 product development projects per year across the UK. This will involve SMEs receiving free measurement consultancy from the most relevant National Measurement Institute, in order to help them refine near-market prototype products. 4.9. We will set in train 20 exchange secondments between our NMIs, industry and other bodies to assist the development of new products and techniques. This will introduce business people to the facilities and expertise available inside the NMIs and allow NMI staff to gain a better understanding of UK business priorities.

Technology Strategy. The aim will be to provide UK industry with world-leading measurement tools to drive forward innovation and gain competitive edge. 4.12. We will ensure that the objectives of our National Measurement System are developed to include a greater focus on innovation.

Intellectual Property Rights (IPR) 4.13. Intellectual Property Rights (IPR) underpin innovation by providing a tool for businesse to make a return on its investment. For many innovators, access to finance is impossible without IP protection. Furthermore, the patent regime helps to spread technological knowledge because applicants have to disclose information about their invention. IP laws aim to strike the right balance between protecting new developments and stimulating competition. The UK, through the Patent Office, works to ensure that its own IP regime and the international framework balance these two objectives.

Addressing new technologies 4.10. Leading-edge industrial innovation depends on exploiting new scientific developments, but unless it can be measured, a process or product cannot be reproduced or commercially exploited. That is why other world leading NMIs (such as the PTB in Germany and the NIST in the US) are developing advanced measurement capabilities to enable their industries to compete at the leading edge. We need to take advantage of our strong science base and of our world-class NMS to exploit the emerging and disruptive technologies, which hold such promise for the future.

4.14. New developments can be protected through formal IPR, such as copyright, trademarks, designs and patents, for which the Patent Office has responsibility. Informal methods, such as know-how, speed to market, confidentiality agreements, and secrecy, also play a role. Which options, or combinations, are chosen will depend on a number of factors, not least the level of awareness of those options. 4.15. The following schematic illustrates how IPRs can interact with the generation, development and protection of ideas, including using information available through IPR.

4.11. We will set up a visionary new programme on Measurement for Emerging Technologies. This will address work on nanotechnology and the biosciences and will be closely integrated into the

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Figure 4.1 IPR in Innovation searching IPR to find potential business or research partners raising cash for or employees development using IPR as security avoiding or licensing other peoples' IPR

recognising and protecting IPR

enforcing IPR maintaining checking IPR competitor activity adding IPR as (including product/service their IPR) is developed

information from existing IPR

£D$ idea

something to sell (product or service) £

£

£

profits £

Innovation – the exploitation of new ideas

The IP framework 4.16. The Patent Office will continue to work to improve the cost-effectiveness of the IPR system internationally and nationally, by building on successes such as the agreement to streamline and update the European Patent Convention; the implementation of EU-wide design rights; and the recently announced agreements improving the Madrid protocol system for international trademark registration.

Use of the IP system by UK business 4.17. The UK has a strong system of rights4, and strong institutions5, but most UK businesses, including large firms, do not place a great deal of emphasis on formal methods of IP protection (see figure 4.2). It may be that informal methods are preferable in some circumstances. 4 Global Competitiveness Report data cited in Porter M (2003) ‘UK Competitiveness: moving on to the next stage’ DTI Economics paper number 3. 5 Quinquennial Review of the Patent Office (2001); Evaluation of OHIM by Deloitte Touche (2003).

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4.18. However UK businesses, especially SMEs, may not have a grasp of the fundamentals in order to make informed decisions about which options to choose relative to their competitors. For example, patent-based indicators show that the UK patenting activity lags a long way behind the larger economies, such as Japan and the US [see chapter 1]. In the manufacturing sector, the UK average for the proportion of innovators that had applied for at least one patent in a three year reference period 1994-96 was 18%, compared to an EU average of 25%6. A similar picture emerges from trademark data7. 4.19. Large firms are more likely to take out a patent than SMEs8 and more enterprises in manufacturing take out patents than those in services. Those manufacturing industries where firms take out most patents are also those that have the highest R&D intensity.

6 Community Innovation Survey (1994-96). 7 OHIM benchmarking report comparing the performance of 10 offices worldwide, including the USPTO (June 2003). 8 According to the UK Community Innovation Survey 2000.

Chapter 4 National innovation assets

Figure 4.2 Enterprises who attach importance to IP protection Percentage of enterprises who attach some importance to IP protection - large firms (500+ employees) (CIS 1998 - 2000) 70 60 50 40 30 20 10

Box 4.4 New antennas for mobiles Wireless innovator Sarantel Limited has patented a new antenna, PowerHelix®, that provides a consistently low level of electromagnetic energy absorption for mobile phone users. Other benefits include: extended battery life; improved signal reception and improved sound quality.

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4.20. While this highlights the importance of patents to many manufacturers, other types of IPR are more relevant to other sectors. Service-related businesses rely less on patentable technology and more on brand protection and copyright. The creative industries are heavily dependent on copyright.

IP awareness Before going too far into product development, Sarantel first carried out patent searches to ensure that the idea they were seeking to exploit was not already covered by others’ products, and once they had a prototype, made sure they further protected it by registering its name as a trademark. They are now exploiting its extensively patented technology through licensing both patents and trademarks.

4.21. While such evidence requires careful interpretation, a consistent picture is emerging: UK companies allocate a lower level of resources to innovation activities (such as investment in R&D) and this is reflected in lower rates of patent and trademark activity. It seems likely that some firms, particularly SMEs, lack knowledge of IPR and consequently do not make informed decisions.

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4.22. To improve IPR awareness we will:  target SMEs to ensure they can use the IP system effectively. This will build on the success of current initiatives such as HM Customs and Excise-led Business Advice Open Days, and will involve the provision of training in IP to business advisors and launching a project providing free national IP advice in the second half of 2004. In Scotland the coordination of awareness raising in the areas of formal and informal IPR will be undertaken by the Patent Office and the NIAC respectively;  improve the available evidence base on IP use and awareness as well as develop appropriate metrics to monitor and assess progress; and  target ‘innovators of the future’ such as business studies, design and technology students and entrepreneurs to raise awareness of IP. The first element is a revised version of the successful ‘THINK kit’, due to be launched by Spring 2004. Further specific proposals will be tabled in the Patent Office Corporate Plan by April 2004.

Box 4.5 Building on success The Patent Office’s new educational resource, ‘THINK kit’, has been an unprecedented success in putting intellectual property at the top of the learning agenda. Within a month of its launch at the Education Show in March 2003 over 51% of UK secondary schools had requested a copy. THINK kit is a comprehensive resource, which covers all forms of IP and has been developed for 14 – 16 year old design and technology and business studies students. It comprises five case studies relating to Audi®, Virgin®, Pop Idol®, Adidas® and I C Can and these are supported by a full set of teachers’ notes. The Patent Office will be building on this success and developing the product to use in business schools.

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Enforcement 4.23. Formal IPR can be rendered ineffective unless owners take strong enforcement action. It is often regarded as expensive and time consuming, especially for SMEs who often lack the means to both police and enforce IPR. Resorting to litigation is expensive and risky: all too often larger companies make use of this fact to prevent smaller innovators from succeeding, or to avoid paying their dues. Such difficulties can have an influence on decisions to adopt formal IPR. 4.24. Some of the difficulties of enforcement have been underlined by the work of the Government’s high-level independent advisory body, the Intellectual Property Advisory Committee (IPAC)9. The committee has recommended several concrete measures (some listed below) but has not advocated sweeping changes to the IP system. 4.25. To improve confidence in protection we will:  improve the speed and costs of resolving IP disputes, by improving litigation procedures (e.g. extending the jurisdiction of the Patents County Court as a lower cost alternative to the High Court by November 2004); and  conduct a feasibility study of a new institutional arrangements to help SMEs protect their IPR, which will report on its conclusions in summer 2004. 4.26. The creative industries are one of the UK’s success stories, accounting for 8.2% of Gross Value Added in 2001 and 1.9m jobs in 200210. The UK is a world leader in many fields, such as music, in which it is estimated that it has 10-15% of the world market, second only to the US. Creative industries depend on IPR and recognise that the protection and enforcement of IPR assets are a key to their competitiveness. 9 IPAC is an advisory body formed in 2001 to give independent advice to the Government on intellectual property issues (http://www.intellectualproperty.gov.uk/ipac) 10 According to http://www.culture.gov.uk/creative_ industries/default.htm

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4.27. The music and content sectors in particular face a specific and potentially life-threatening commercial and technical challenge from new digital distribution methods. IPR, especially copyright, can be more difficult to protect in digital than printed media, and the prevalence of illegal file sharing means these sectors have to overcome huge hurdles in educating consumers and developing innovation business models, for example, strong alternatives to free down-loads. The Broadband Stakeholder Group (BSG), the Government’s key advisory body on promoting broadband services, is working with the Digital Content Forum and others to build consensus between stakeholders on how to proceed. The Government has also taken steps to implement the EU Directive, “ Copyright and related rights in the Information Society”, (2001/29/EEC). It came into force on 31 October 2003, and updates and harmonises legal protection for digital rights management systems.

IP crime 4.28. Criminal proceedings can arise where infringement of IPR raises public interest issues, such as consumer deception or safety concerns, or where there is commercial piracy. The Patent Office has been working closely with others to improve actions taken against IP crime, for example, training on IP for Trading Standards Officers, and working with the National Criminal Intelligence Service to improve the data on levels of crime. 4.29. To step up efforts in this area, we will, in conjunction with rights holders and enforcement bodies, develop a new national strategy for dealing with IP crime, to be launched by Summer 2004. In particular this will involve improving the evidence base, removing administrative overlap, and setting out agreed priorities.

Standards 4.30. Standards have underpinned commercial activity and trade for centuries but they have never been as important as they are today. Standards range from full formal standards such as for CD-ROMs11 or safety of machinery in the workplace12 to informal ones e.g. on knowledge management13 to de facto industry ones e.g. MS Windows™.

Box 4.6 Mobile gas cylinder standards Transporting gases safely has long been an issue with different countries setting their own requirements on gas pressures and thicknesses of the container walls. Working closely with UK industry, a British Standard was developed using a design formula that results in thinner walls, and so lighter weight gas cylinders. After much research taking account of advanced manufacturing processes and new materials, and communication of the findings outside the UK, a family of international standards drawing on the British one was agreed which opens up global markets for safer and more efficient cylinders.

4.31. A recent study by DIN14, the German Institute for Standardisation, estimated that standards made a very significant contribution to growth in Germany, accounting for up to around 1⁄3 – 1 percentage point of the average annual economic growth rate. 11 BS 4783-7:1993: Storage, transportation and maintenance of media for use in data processing and information storage. Recommendations for optical data disks. 12 BS EN 50144-2-5 Safety of hand-held electric motor operated tools – circular saws and circular knives. This is one of over 400 such standards that enable manufacturers meet the requirements of the Supply of Machinery (Safety) Regulations (SI 1992/3073) as amended (SI 1994/2063). 13 (BSI) PAS 2001:2001 Knowledge management. 14 Economic benefits of standardization, published by DIN (German Institute for Standardization) 2000 ISBN 3-410-14860-4.

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4.32. The Community Innovation Survey for 1998-2000 found that 60% of UK businesses engaged in the development of new products, services or processes, gained useful information from standards and regulations, and 12% found those to be of significant importance. Enterprises using any form of standard or regulation as knowledge inputs were more likely to introduce new products (including services) or processes than businesses that did not draw on standards. 4.33. Standards also help innovation by diffusing technical knowledge. New information thus reaches a much wider range of companies, enabling them to innovate. The standard then becomes a benchmark in the market on the basis of which leading companies can launch the next developments. 4.34. However, the standardisation infrastructure needs to remain relevant to business and other stakeholders (including Government itself as a major purchaser as well as a regulator) both in terms of the range of businesses catered for and the standardisation services offered. This is particularly true for new or rapidly developing technologies and, increasingly, for the service industries15. Value-added products and services based upon standards (such as guidance on using standards) can enable business achieve greater competitiveness. 4.35. The challenge now is to raise the performance of the standardisation system and to adapt it fully to the modern needs of business, Government and consumers. This will involve raising understanding and awareness within the UK of the commercial and strategic importance of standards, and increasing the number of businesses with standards on their strategic agenda. The recently launched National 15 Other examples are BS 7960: 1999 – Code of practice for door stewards/supervisors [otherwise known as bouncers]; and BS 7911: 2003 – Specification for organisations conducting market research; PD 5000:1999 – code of practice for electronic documents as legally admissible evidence; BS EN 13816: 2000 – guidelines for the definition, targeting and measurement of service quality in public passenger transport.

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Standardisation Strategic Framework (NSSF)16 has been developed to meet these challenges. 4.36. We will implement the NSSF, in conjunction with CBI, BSI and other partners where appropriate. Key actions will include:  establishing a Business Forum to develop and maintain business engagement with the strategic development of UK standardisation priorities, by working with the CBI’s Sectoral Affairs and Enterprise groups and the UK Trade Associations;  improving the efficiency of the processes for developing formal standards;  developing value-added products (e.g. guides) and services, based on standards, that can help UK business be more competitive;  developing an action plan to ensure that standards create a competitive advantage for small business, working with BSI’s Small Business Policy Committee, including accessing standards and understanding how they can be applied to SMEs;  establishing an international network of contacts – equipping commercial staff in targeted UK embassies and consulates with the knowledge to identify threats and opportunities presented by standards in the markets into which UK businesses wish to export (please refer to chapter 7). The output will inform the national, European and international standards development strategies, focusing on reducing technical barriers to trade in priority markets and countries for UK business;  developing with BSI an internet based standards alert service for exporters, alerting them to potential new markets that have adopted common standards; and  demonstrating the benefits of standards to businesses both in terms of product or service developments and of business processes. 16 www.nssf.info

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Summary More innovative approaches can lead to more effective solutions for Government as well as business. So Government needs to “Think Innovation” as it develops and implements policies and uses its huge power as a purchaser and provider of services to improve people’s well being through better public services. Recognising the innovation challenge facing the UK, the Prime Minister has asked the Secretary of State for Trade and Industry to chair a Ministerial team to lead the innovation agenda across Government and drive forward the implementation of this report. The economic analysis accompanying this report has identified the role played by demanding customers as one of the seven critical success factors that contribute to the UK’s innovation performance. The public sector, central and local government combined, purchased £109 billion worth of goods and services in 2001-02. The public sector accounts for an estimated 55% of all spend in the UK on IT services and systems, and more than 30% of all construction spend. By acting as an intelligent customer and one open to new approaches, Government purchasing can provide an incentive for companies to develop new products, processes and services. In turn, innovative products and services can help Government achieve better value for money by improving the quality of public services and reducing whole-life costs.  In order to build on existing initiatives the Office of Government Commerce (OGC) will produce best practice guidance for policy, project and procurement staff on capturing creativity from suppliers by March 2004. Barriers to, and opportunities for, innovation will differ from one market to another, and so need to be addressed at market level.

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 The DTI, supported by OGC, will be organising future procurement events to bring together suppliers and public sector purchasers in specific markets to agree some practical measures that can support innovation through procurement. All the Innovation and Growth Teams (IGTs) set up by the DTI will be asked to identify whether public procurement could better facilitate innovation and how this could be achieved.  To support the Government’s efforts to improve its performance as an intelligent customer, the DTI will work across Government to look at the opportunities for, and barriers to, innovation in key public sector markets. We will pilot this approach by working with NHS Estates to look at how we can draw innovation through the supply chain. NHS Estates, through the ProCure21 initiative, has created the procurement environment in which the supply side should be able to deliver better solutions to its client, but both suppliers and clients need to develop a better understanding of the real potential for innovation to meet current and future healthcare needs. The proposed joint DTI and NHS Estates project will seek to identify this potential and enable its take-up through ProCure21.  The DTI, Department of Health (DoH) and the IGT will work together to address barriers to greater uptake of telecare and telemedicine technologies to help meet the NHS and social services target of a 50% increase in the number of people benefiting from community equipment services by 2004. While the public sector purchases significant amounts of research and development (R&D), it has proved difficult for small and medium sized enterprises (SMEs) to get access to research funding. The Government established the Small Business Research Initiative (SBRI) in 2001 to tackle this, and set Government

Chapter 5 Innovation policies across Government

Departments the target of purchasing at least 2.5% of their R&D from SMEs by 2004/05. This was inspired by the equivalent scheme in the USA, which has played an important part in encouraging the growth of small high tech businesses.  To improve the effectiveness of the SBRI we will strengthen the DTI’s role in coordinating and monitoring the programme, extend the collection of SBRI data across departments, publish the results on an annual basis, and investigate how the wider range of R&D opportunities, arising from, for example, Regional Development Agencies (RDAs) and local authorities, could be included in the scope of SBRI. The way that the Government designs and implements regulations can also have an impact on the ability of businesses to innovate. In recent years the Government has established a number of new central arrangements to ensure that better regulation principles are applied rigorously. But the effects of regulation are usually long term and dynamic. As a result, some policy makers are ill-equipped to assess the impact of any particular policy or regulation on business innovation.  To improve regulatory decision-making DTI will develop a ‘Think Innovation’ guide for policy-makers, in consultation with business and other stakeholders, to provide sound economic and practical guidance on what to look for when assessing the unintended consequences as part of the Regulatory Impact Assessment process. There is an important opportunity to increase innovation through more use of outcome-based regulation, that is regulation which defines the policy objectives, not how they should be achieved. This gives companies greater scope to innovate to comply with the regulations using the most effective technological solutions or business practices.

 To encourage Government Departments to adopt more outcome-based regulations we will focus on specific examples to test how this approach can be applied in practice. We will start by examining how environmental regulation can better promote innovation. A crossGovernment project team led by DTI including the Environment Agency (EA), the Department for Environment, Food and Rural Affairs (Defra), the Department for Transport (DfT) and the Cabinet Office will look at three areas of environmental policy and will focus on how the regulations are designed or whether there are alternatives to regulation. The project team will work in consultation with business and other stakeholders.  We will increase DTI resources dedicated to expanding our knowledge of the emerging European regulatory agenda and our influence upon it.  DTI will also work more closely with the Health and Safety Executive (HSE) in promoting health and safety requirements as an enabler of innovation. Government spent some £4 billion on R&D in 2001/02 to meet its own Science, Engineering and Technology needs, especially in health and defence. We want to see more of the research results flow into the exchange of knowledge between business and research organisations and end up in the pool of ideas and inventions available for commercial exploitation.  The work of the Ministerial innovation team will include a review of the extent to which knowledge transfer objectives are embedded in Departmental Science and Innovation Strategies.

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Promoting innovation across Government 5.1. The Government needs to “Think Innovation” because what is true for business is true for Government: more innovative approaches can lead to more effective solutions. Government has an impact on society, not only through its policies, but also through its direct activities. 5.2. This chapter focuses particularly on the potential impact that Government can have on innovation through three key activities:  Government’s role as a customer – the public sector purchased £109 billion worth of goods and services in 2001-02;  Government’s role as a regulator – the way it designs and implements health, safety, product and environmental regulations; and  Government’s role as a source of new knowledge – in the research and development that it carries out, and its exploitation for wealth creation. 5.3. However there are other areas in which Government needs to take action in order for the UK to make the increase in its innovation performance necessary to achieve productivity levels as high as those of our competitors. 5.4. For example we outlined in Chapter 3 our plans for a Technology Strategy in order to identify the most important emerging and potentially disruptive technologies on the basis of their potential economic, social and environmental benefits for the UK. Government has a role to play in adopting and promoting the use of new technologies in order to deliver its own policy objectives, for example, putting in place an appropriate infrastructure, the delivery of healthcare and learning, and in defence.

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Box 5.1 Innovative delivery of Government services: the internet The Office of the e-Envoy is part of the Prime Minister’s Delivery and Reform team based in the Cabinet Office. It was set up in September 1999 in response to the Performance and Innovation Unit’s report, “[email protected]” and is headed by the e-Envoy, Andrew Pinder, who was appointed in January 2001. The primary focus of the Office of the e-Envoy is to improve the delivery of public services and achieve long term cost savings by joining-up online Government services around the needs of customers. The e-Envoy is responsible for ensuring that all Government services are available electronically by 2005 with key services achieving high levels of use. The Government has also set a deadline of 2005 for local government to become completely capable of providing electronic services. As a result there is a strong incentive for the businesses that supply them – many of which are SMEs – to adopt e-procurement systems. Business investment in integrated Information and Communication Technologies (ICT) reduces costs, increases productivity and stimulates new product development, whilst local authorities will benefit from innovative, tailored solutions at lower cost. The e-Envoy also works to meet the Prime Minister’s target for internet access for all who want it by 2005 and supports work across Government to develop the UK as a world leader for electronic business. Latest figures published by the Office of National Statistics show that internet access in the UK continues to grow. 56% of the population are now regular users of the internet and 48% of all households have internet access – five times the number of homes connected in 1998.

Chapter 5 Innovation policies across Government

5.5. We also need to ensure that Government strives to achieve the managerial culture recommended in Chapter 2, so that our senior managers are adept at managing knowledge, have a good understanding of entrepreneurial activity, and work in a framework in which they can take managed risks. We must lead by example in developing the skills of the public sector workforce to be able to innovate and increase productivity – a significant aim of the cross-Government Skills Strategy. 5.6. In addition, because Government’s partnerships with industry are vested in a wide range of departments, many Government Departments have a role to play in driving up the level of innovation in the sectors which they partner (Table 5.1). Through sector sponsorship, a Government Department acts as a bridge between the industry and Government as a whole. Such sponsorship alerts Government to industry concerns and opportunities, and also explains the Government agenda to business. 5.7. Recognising the innovation challenge facing the UK, the Prime Minister has asked the Secretary of State for Trade and Industry to chair a Ministerial team to lead the innovation agenda across Government and drive forward the implementation of this report.

Government’s role as a customer 5.8. The economic analysis accompanying this report1 has identified the role played by demanding customers as one of the seven critical success factors that contribute to the UK’s innovation performance. The public sector (central and local Government combined) purchased £109 billion worth of goods and services in 2001-022. For some sectors of UK industry, the Government is the single most significant customer in the country. For example, the public sector accounts for an estimated 55% of all spend in the UK on IT services and systems, and more than 30% of all construction spend (excluding Private Finance Initiatives)3. Other sectors for which the Government is a major customer include defence equipment, educational supplies, healthcare supplies and services, as well as custodial and associated services. 5.9. By acting as an intelligent customer and one open to new approaches, Government can require suppliers to compete on the basis of criteria that emphasise the innovative features of goods or services. If Government acts as an ‘early adopter’ by contracting for products and services in sufficient volume, it can give industry enough of a market to justify investment in new skills, equipment or R&D. Hence a Government contract could strengthen a company’s long-term innovative capability and competitiveness in other markets. In turn, innovative products and services help Government achieve better value for money, i.e. the best balance of product or service performance, quality and whole life cost to meet the user requirement.

1 DTI Economics Paper No. 7, publication 17 November 2003. 2 Public Expenditure Statistical Analyses, HM Treasury and Office of National Statistics, May 2003. http://www.hmtreasury.gov.uk/documents/public_spending_and_services/ public_spending_data/pss_pss_pesaindex.cfm 3 The Construction Statistics Annual 2003. http://www.dti.gov.uk/construction/stats/constat2003.pdf

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Table 5.1 Government Department responsibilities for promoting the competitiveness of different sectors of the economy include: Government Department4

Sponsored industries

Department of Culture, Media and Sport

Alcohol and entertainment Architecture and design Arts Broadcasting industries, including film and music Cultural property Gambling and racing Historic environment Libraries and Communities Museums and Galleries National Lottery Sport Tourism

Department for the Environment, Food and Rural Affairs (Defra)

Agriculture Food & Drink Water industry Fisheries Horticulture Horse industry

Defra/DTI (jointly)

Environmental Goods & Services

Department of Health

Pharmaceuticals, Medical devices & systems

Department for Transport

Bus & coach industry, light rail, trams, guided bus, taxis and private hire vehicles (services) Transport for London (services) Air services Airports Shipping Ports Railways Freight and logistics

Department of Trade and Industry

Aerospace & Defence Automotive Bioscience Chemicals Communications Networks Construction Consumer Goods & Services E-business Electronics Energy Marine Materials & Engineering Publishing & digital content (including computer games and graphic design) Security & Fire protection equipment Software & Computer services

Department for Education and Skills

Education and Skills services, (including Schools, Youth and Lifelong Learning)

4 Devolved Administrations also have sponsorship responsibilities.

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Box 5.2 Defence Industrial Policy The Government launched its Defence Industrial Policy in October 2002. This policy is aimed at enhancing the competitiveness and sustainability of the UK defence industry, while continuing to provide high quality equipment to the UK Armed Forces at best long-term value for money. In seeking to maximise the UK economic benefits of our spend on defence equipment it requires that wider factors, including industrial benefits, are fully considered in the UK’s defence capability procurement. The policy also helps underline DTI’s commitment to a UK-based manufacturing industry able to design and build the latest generation of advanced defence equipment. In the light of this new policy, DTI engaged fully in the Government’s decision to purchase BAE SYSTEMS next-generation Hawk 128 advanced jet trainer. An analysis of wider factors in this procurement, notably an export market worth potentially more than £2 billion, its importance to the

regional economy in East Yorkshire, and the contribution of UK sub-system suppliers, notably on engines, systems and high-value manufactured components, contributed to this decision. BAE SYSTEMS were able to convince the Government that the latest generation of Hawk, which will be fitted with an open system architecture and state-of-the-art avionics, would satisfy MoDs demanding requirement to train pilots for emerging front line fast jet aircraft such as the Eurofighter Typhoon and the US/UK Joint Strike Fighter. The Defence Industrial Policy commits the Government to become more innovative in its major defence equipment procurements. By fully considering wider factors at the outset of the procurement strategy before companies have committed millions to bids, and being more transparent with bidders on how we analyse wider factors, the procurement strategies derived should establish outcomes that are broadly acceptable to all stakeholders.

Box 5.3 Innovative traffic management systems Delivering clearer and faster information to drivers is vital to increasing safety as well as reducing congestion on our road and rail transport networks. Variable colours, graphics and enhanced lighting are being built into the design of more intelligent traffic management systems. Hence additional and more effective Light Emitting Diode (LED) light sources will be needed in any given area. VMS Ltd of Gateshead, winners of the Queen’s Award for Enterprise in 2002 developed a new reflector design that captures 90% of the light emitted from LEDs – a fourfold increase in efficiency. The new design reduces the number of LEDs

needed, allowing more information to be displayed and refreshed 70 times faster. To gain board approval for such a major R&D investment in new product development, the company had to demonstrate its market potential. The company’s largest customer is the Highways Agency, which imposes criteria based on value for money in awarding long-term framework contracts. Meeting the criteria set by such a large customer persuaded the board that the investment was justified and led to contracts with the Highways Agency worth £25m and exports in the order of £6m.

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CURRENT POSITION 5.10. In researching the difficulties of capturing creativity from suppliers, the Office of Government Commerce (OGC) identified a number of barriers to securing the most innovative solutions to Government contracts:  some businesses feel that the Government is not good at communicating its longer-term plans to the market. As a result, some of the more creative firms are unwilling to orient their long-term investment strategy to the objective of securing Government contracts;  companies are concerned that insufficient notice of demand and inadequate attention to their lead times make it hard to develop and deliver innovative products or services;  the perception that public sector buyers are risk averse may deter potential suppliers from bringing forward innovative proposals if they anticipate rejection in favour of lower cost solutions. There are also concerns about possible loss of Intellectual Property; and  potential suppliers can also be discouraged by the time it takes to bid for major Government contracts, not to mention the cost and bureaucracy associated with the process. These conditions have a disproportionate impact on Small and Medium-sized Enterprises (SMEs).

A STRATEGIC APPROACH TO PUBLIC PROCUREMENT 5.11. The Government is taking steps to improve access and reduce costs and bureaucracy for suppliers5. But there is more we can do to create a better understanding between the public and private sector about the Government’s longer-term, 5 http://www.brtf.gov.uk/taskforce/reports/entrypages/ smeprocurement.html and http://www.cabinetoffice.gov.uk/ regulation

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strategic needs and the demands they place on the market, and to develop a procurement culture that recognises the potential for innovative solutions to deliver value for money. Better planning of Government procurement would help to address some of the issues highlighted above by giving potential suppliers greater scope for capacity planning.

Box 5.4 Public sector broadband requirements DTI, in partnership with the RDAs, is setting up bodies in each of the English regions to take charge of buying broadband services for regional public sector customers. The new Regional Aggregation Bodies will be fully operational from January 2004. The Department for Education and Skills (DfES) and the NHS are their first customers, wiring up schools, hospitals and GP’s surgeries. See box 5.6 for more details of how broadband will contribute to better delivery of care and services in the NHS. Joining up broadband requirements at a regional level prevents duplication of effort and presents a clear business case for service providers to consider. This is bound to raise investment in broadband infrastructure and extend availability into new areas. Broadband represents a fundamental infrastructure for private and public sectors alike. It will allow them to develop innovative ways of transforming business processes and delivering services.

5.12. In the Autumn 2002 Pre-Budget Report the Chancellor asked OGC to examine what further steps could be taken to increase competition and long term capacity planning in markets where Government has significant purchasing power. Ministers have now accepted the OGC report and an

Chapter 5 Innovation policies across Government

action plan has been published as part of this year’s Pre-Budget Report. This action plan will deliver real progress on the issues identified by business, in particular the challenges of increasing transparency of public sector demand to enable long term planning and increasing the professionalism of public sector purchasing staff. 5.13. DTI has organised future procurement events for specific public sector markets. OGC will support these events where appropriate. These will enable discussion of the practical measures being taken to support innovation in procurement. DTI will also ask its industry-led IGTs to identify whether public procurement could better facilitate innovation and how this could be achieved. For example, as part of following up the work of the Environmental IGT, we have set up a group to identify opportunities for using public sector procurement to stimulate innovation in the environmental industries.

EMBEDDING BEST PRACTICE IN PROCUREMENT 5.14. Many best-practice procurement techniques can actively stimulate suppliers and promote innovation:  early supplier involvement allows designers and suppliers to apply their creativity from the outset rather than being faced with a rigid pre-conceived approach;  partnering stimulates trust and shared objectives which can lead to innovative solutions;  the use of output or outcome based specifications for example, when they can make intelligent use of standard rather than bespoke specifications, suppliers are able to innovate in developing alternative solutions; and

Box 5.5 Attitudes to innovative ideas In conjunction with defence-related trade associations, the Ministry of Defence (MoD) has drawn up a Code of Practice to encourage unsolicited innovative proposals. The Code:  provides a clear point of contact within MoD to whom the proposal should be addressed;  sets out MoD’s internal handling procedure, including the timescales for providing a response;  explains the key components an innovative proposal should contain; and  is published on the MoD website. The Code is backed up by an internal policy, mandating staff compliance with the Code. An up-to-date database of innovative proposals contains details of each proposal’s status and the technical expert to whom it had been assigned.

5.15. The public sector is already working hard to bring best practice in procurement across the public sector up to the highest standard. For example, central Government Departments are now required to introduce Centres of Excellence for project management, and procurement and project practitioners are using the OGC’s Successful Delivery Toolkit. The Office of the Deputy Prime Minister (ODPM) launched the National Strategy for Local Government Procurement in October 2003.

 good management of the tendering process can ensure contractors have sufficient time and opportunity to develop innovative proposals.

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Box 5.6 NHS Information Authority Innovation Centre – an emerging opportunity The National Programme for Information Technology (IT) in the NHS focuses on the key developments that will make a significant difference to improving the patient experience and the delivery of care and services. There are four key deliverables: electronic appointment booking, an electronic care records service, electronic transmission of prescriptions and an underpinning IT infrastructure. Broadband services will be brought via the Regional Aggregation Bodies (see Box 5.4). The Government investment in the NHS National Programme for IT and the establishment of the Regional Aggregation Bodies will act as a catalyst for innovation, which will contribute to ongoing modernisation of the NHS. In many ways the local context – in local hospitals, GP surgeries and communities – is where much of the untapped potential for innovation exists in the NHS.

Recognising this potential, and the need to develop national enduring information services that support innovative ways of delivering healthcare, the NHS Information Authority has been working closely with a wide range of key stakeholders – including the DTI, the NHS Modernisation Agency, industry, the Broadband Stakeholder Group, universities, NHS staff and patients – to develop an operational plan for a new Innovation Centre. If agreed, the Innovation Centre would support and work with current and future local NHS ‘Innovation Hubs’ to create a Healthcare Innovation Network that will identify local innovations and develop them into a national platform quickly and efficiently for the benefit of the whole of the NHS. The focus would be on new ways of delivering healthcare and the associated information requirements to support decision-making by clinicians and patients.

5.16. There are many examples of good practice from which we should draw out lessons learnt and adopt them across the public sector. For example, the ‘Achieving Excellence in Construction’ initiative, launched in 1999 and managed by OGC, set challenging targets for Government Departments to become best practice clients through the use of integrated procurement routes and performancebased, incentivised contracts.

completion time; higher building design quality; and value for money over the whole life of a facility.

5.17. NHS Estates has embraced these principles fully and has developed them further with the introduction of the ProCure 21 partnering framework. NHS ProCure 21 uses a standardised approach to the procurement of healthcare facilities which is based upon long-term relationships with supply chains to deliver tangible benefits to both sides: certainty of building cost and

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5.18. Increasing environmental concerns also act as a stimulus for innovation. The scope for using Government purchasing to help deliver sustainable development objectives is greatly under-utilised at present and a much more ambitious approach is needed. There is now a greater cross-Government focus on procuring innovative solutions to, for example, reducing waste and improving energy efficiency. New action in this area was announced in October 2003 in response to the report of the cross-Government Sustainable Procurement Group6. We will continue to build on these foundations. 6 http://www.sustainable-development.gov.uk/sdig// improving/partf/report03/index.html

Chapter 5 Innovation policies across Government

Box 5.7 Kit for Purpose project Focusing on education, and the £1 billion annual spending on learning resources, furniture and equipment, the Design Council initiative Kit for Purpose, backed by the DfES, is working with selected schools in England to create new procurement models allowing them to buy what they need to fulfil their learning goals, not just make stop-gap purchases to replace broken and damaged equipment. The learning from this threeyear project will be made available to other schools, allowing them to secure better value for money. Based on in-depth work with teachers, pupils and administrators to examine attitudes to learning environments and issues related to equipping them, Kit for Purpose has already led to the creation, through the project’s Furniture for the Future competition, of new school furniture designed to have a positive impact on learning and attainment. Designers and manufacturers were challenged to join forces and produce innovative, yet affordable concepts – and two of the winning designs (unveiled in February 2003) have been ordered by schools. The Orbital Workstation, a radical reworking of the traditional classroom chair and table, featuring a swivel seat that orbits round an adjustable table, has been so well received in school trials that the manufacturer Keen Group Ltd, is intending to export it to the US, Japan, Scandinavia and Europe.

5.19. In order to build on existing initiatives OGC will produce best practice guidance for policy, project and procurement staff on capturing creativity from suppliers by March 2004. An ongoing review of existing guidance will be taken forward in tandem. The new and amended guidance will be fed into relevant training and development programmes. 5.20. Cross-cutting activity of this sort needs to be complemented by targeted action in key public sector markets. Barriers to, and opportunities for, innovation will differ from one market to another, and so need to be addressed at market level. We will start by looking in two sectors: construction; and telecare and telemedicine technologies. 5.21. DTI will work with NHS Estates to see how, taking advantage of the improvements in construction procurement and delivery process that ProCure21 will deliver (for example the use of integrated construction teams), we can achieve a step change in the delivery of healthcare facilities that meet the needs of staff, patients and visitors and enable flexibility in decisions on capacity and use of these facilities in the future. This project will draw from expert knowledge in the supply side to identify how best to release the innovation in the supply chain. We will be looking to identify the scope for innovations such as standardisation of products and design which can drive out waste in the development and delivery of solutions for the NHS and development of products and materials that better meet NHS business needs in ensuring patient and staff well-being. 5.22. Telecare and telemedicine products – such as movement sensors, fall alarms and implants, and the systems that enable remote monitoring of symptoms – will play a vital role in helping people maintain their health and independence whilst relieving pressure on hospital and residential care. The NHS and social services have a target

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to increase by 50% the number of people benefiting from community equipment services (which include these technologies) by 2004. To help meet this target DTI, the Department of Health (DoH) and the Electronics IGT will work together to address barriers to greater uptake of telecare and telemedicine technologies.

Public sector contracts for R&D: the Small Business Research Initiative (SBRI) 5.23. While the public sector purchases significant amounts of R&D, it has proved difficult for SMEs to get access to research funding. 5.24. There may be a number of reasons for this, including:  the cost and bureaucracy of the tendering process (as for other Government contracts);  some SMEs are start-ups and as such often fail to meet financial tests for potential contractors;  the number of contracts is low relative to the number of potential bidders;  some Government R&D requirements (principally those of the Research Councils) have previously been let primarily to universities; and  there may be resistance to dealing with unknown companies. 5.25. The Government established the Small Business Research Initiative (SBRI) in 2001 in order to increase the success of smaller businesses in obtaining contracts from government bodies to conduct research and development. The Government Departments involved have a target of purchasing at least 2.5% of their R&D from SMEs by 2004/5.

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5.26. The SBRI aims to increase the size of the market available to small firms whose businesses are based upon providing R&D, as well as to encourage other SMEs to increase their R&D capabilities, and to create opportunities for new knowledgebased start-up companies. The SBRI is complemented by other forms of support, for developing the research capability of SMEs, such as the DTI’s R&D Grant. 5.27. Some progress has been made, with DEFRA, the DoH, and the Engineering and Physical Sciences Research Council (EPSRC) already meeting or exceeding the 2.5% target. Over 230 companies have registered with the SBRI web site (www.sbri.org.uk) and received information about contracts suited to their capabilities. 5.28. But it is clear that we need to do more. The Government is determined to fulfil its objective and we will improve the effectiveness of the SBRI by:  strengthening the co-ordination and monitoring of the programme;  providing an on-line tender alert service possibly via the Business Link website (www.businesslink.gov.uk), and providing data on levels of interest and conversion rate;  re-engaging with all the participating departments and other public sector organisations to ensure full support for SBRI’s aims; the SBS will actively promote the scheme with other Government Departments;  extending the collection of SBRI data across departments and publishing the results on an annual basis;  working with departments to identify packages of work for which SMEs could bid; and  investigating how the wider range of R&D opportunities – e.g. those arising from RDAs and local authorities – could be included within the scope of SBRI.

Chapter 5 Innovation policies across Government

Government’s role as a regulator WHY REGULATION MATTERS FOR INNOVATION 5.29. Regulation has a marked impact on ways and costs of doing business. The timing for implementing regulations, the specific nature of the rules as well as the type of industry involved all affect incentives to introduce new products or services. In this section of the report we focus on areas of regulation where there is a clear dynamic between a firm’s processes, products and services and the regulatory environment. This is particularly the case in environmental, health and safety and product regulations.

Box 5.8 Regulation of embryo research An example of regulations that enhance the opportunities for innovation is the legislation on embryo research, which has evolved over 20 years of public and Parliamentary debate. Following extensive consultation with the public, business, the research base and many other stakeholders, the UK has reached a national consensus on this issue and has devised a framework which sets out a rigorous and effective licensing system in which this research can take place. This is regulated by the Human Fertilisation and Embryology Authority. This clear regulatory framework gives the UK an advantage over many other countries in which the debate is still underway, and has enabled the UK research base to carry out world-class research at the frontiers of scientific discovery.

5.30. By focusing on the desired outcome of regulations rather than prescribing in detail how things should be done, we can do more to reduce any constraints on innovation that regulation can introduce. Businesses themselves should have a say in how best to comply with regulations. An outcome-based approach to regulation offers businesses the opportunity to work with Government in designing regulations and their means of implementation that could provide more cost effective solutions for both the private and public sectors.

BETTER REGULATION PROCESSES – THINK INNOVATION 5.31. In recent years the Government has established several new central arrangements to apply rigorously better regulation principles. For instance, the Better Regulation Task Force (BRTF), established in 1997, serves as an independent advisory group to Government; the Panel for Regulatory Accountability (1999) takes an overall view of regulatory implications of the Government’s regulatory plans; the Regulatory Reform Ministers have been appointed in each Government Department; and the Regulatory Reform Act of April 2001 is a new tool to make it easier for Government to amend burdensome primary legislation. 5.32. It is hard to quantify the effects of regulation on innovation because they are usually long-term and dynamic. We would like to encourage policy makers to take account of the possible effects of their proposals on businesses, so that options that provide businesses with greater flexibility are developed and considered as alternatives to more prescriptive regulatory frameworks. Greater awareness, better guidance and higher quality interaction with business could reduce negative regulatory impacts on innovation.

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5.33. To improve regulatory decisionmaking the DTI will develop a ‘Think Innovation’ guide for policy-makers to provide sound economic and practical guidance on what to look for when assessing the unintended consequences as part of the Regulatory Impact Assessment process.

OUTCOME-BASED REGULATION 5.34. Outcome-based regulation defines the policy objectives, not how they should be achieved. Business faces the responsibility – and has the choice – about how to comply; it also has the freedom to explore new ways of meeting regulatory demands. 5.35. There are good examples of outcomebased regulation to build on both at the European and national levels. However, the approach still tends to be the exception rather than the norm. In the are a of product safety regulation, the EU’s New Approach has created an outcomebased framework. The fundamental principle of the New Approach is to confine legislative intervention to a set of “Essential Requirements” that are of public interest. The technical detailed specifications are delegated to standard setting organisations. Maximum flexibility is given to manufacturers over the choice of technical solutions they use to meet the requirements.

Box 5.9 Outcome-based regulation A good example of outcome-based regulation is the Contaminated Land Regime, introduced in England in April 2000. The regime does not necessarily involve formal enforcement or specify remediation actions. The regulator can secure remediation of a contaminated site through mutual agreement with those responsible on what actions are required to meet the remediation standard. These actions are identified within a framework of guidance and take account of a range of considerations including site-specific circumstances. In practice this means it is open to the “problem holder” or contractor to propose how to deal with the site, and have the proposals recognised by the regulator and carried out in the agreed manner. This allows any number of different approaches to be used including some innovative remediation techniques such as:  landfarming, windrows and biopiling – controlled processes that use aerobic microbial action to degrade organic contaminants from soil;  phyto-remediation – using plants to take metals out of the soil;  reactive barriers – such as filtering through clay particles;  addition of oxygen or hydrogen generating compounds;  solidification stabilisation – the use of compounds to encapsulate and immobilise contaminants; and  air sparging – technology that reduces concentrations of volatile constituents in petroleum products that are absorbed to soils and dissolved in groundwater. As a result the UK is one of the world leaders in this area of research and development.

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Chapter 5 Innovation policies across Government

5.36. Applied initially to product safety regulation, the New Approach now extends to other areas of product regulation, such as electromagnetic compatibility and certain noise and engine emission limits. We can learn from and adapt the principles of the New Approach and explore how the outcome-based approach could be applied to more areas of environmental regulation and in other sectors such as services. 5.37. We will start by examining how environmental regulations can be designed and implemented to secure the desired environmental outcomes in a way that does more to promote innovation and business opportunities. A project team, led by DTI in partnership with the Department of the Environment, Food and Rural Affairs (Defra), the Cabinet Office, Department for Transport (DfT) and the Environment Agency (EA), working in consultation with business and other stakeholders, including Non-Governmental Organisations (NGOs), will start by looking at three areas: implementation of the Integrated Pollution Prevention and Control (IPPC) Directive; eco-design of products; and vehicle emission regulations.  the IPPC Directive regulates the emissions from a wide range of industrial installations in the EU through integrated prevention or minimisation of air, water and soil pollution, with a view to achieving a high level of protection for the environment as a whole. A key feature of the Directive is its requirement that permit conditions for each installation must be based upon the application of best available techniques (BAT) – a concept that by definition encourages innovative approaches to cost-effective pollution control. IPPC is being implemented sector by sector, and will eventually apply to some 7000 installations in the UK. The project team will identify best practice from work with those sectors for which the Directive has already been implemented and apply this to the way in which the Directive is implemented in further sectors;

 the eco-design of products so as to minimise their impact on the environment over the whole life-cycle of production, use and disposal is vital to delivering savings in energy use and carbon dioxide (CO2) emissions and promote better resource use and higher levels of recycling. This presents both challenges and opportunities for manufacturers. Here we will examine how different policy instruments, including alternatives to regulation such as voluntary codes, can deliver outcomes in a way which maximises the scope for innovation;  vehicle emissions are dealt with by both regulatory and non-regulatory regimes with required EU emissions standards for air quality, and voluntary agreements on new car CO2 emissions. The impacts of these different approaches on innovation will be assessed, looking forward to new, more stringent standards likely in future and technological developments already in the pipeline; and  the project team will complete its work by summer 2004. 5.38. We will also increase DTI resources dedicated to expanding our knowledge of the emerging European regulatory agenda and our influence upon it. Engagement on policy ideas in the EU at the earliest stages is critical. We shall step up our work across Government and with business stakeholders to track EU policy development and to engage strategically with the European Commission and Parliament. These institutions are now committed to the application of Better Regulation disciplines, with impact assessments for all proposals and the Competitiveness Council of Ministers has a new and clear remit to ensure EU regulation takes proper account of competitiveness impacts. In addition, we will review the New Approach to see where improvements could be made and will use the changes taking place in Europe to push for the wider application of outcome-based principles.

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5.39. Health and safety is another area where, in some circumstances, regulation can have a positive impact on innovation and business performance and where the need to control risks in a cost effective manner has led to major innovations in the form of new systems and technologies. Enterprising approaches to controlling risk, including safety risks, are net drivers of innovation. The advice and help of the Health and Safety Executive (HSE), within

a structure of minimum legal requirements, can assist firms to both improve health and safety and secure bottom line benefits (see box 5.10). 5.40. An effective regulatory regime also helps provide public reassurance and acceptability of new technologies and processes. DTI and HSE have a mutual interest in emerging technologies and new types of business or market opportunities.

Box 5.10 Examples of innovation in health and safety The safety of vehicle airbags The main safety concerns related to the introduction of explosive devices into work environments unfamiliar with such articles, e.g. car plants, garages and scrap yards. Their supply, conveyance and storage raised issues of compliance with explosives legislation. HSE worked with Honda and Vauxhall to identify the safest way to handle and store airbags on the assembly lines, and how best to package them so that they could be classified as non-hazardous for transport. The work resulted in innovative methods of packing and storage, which limited the restrictions on normal manufacturing practices and imposed no undue burdens on industry in terms of new plant and equipment. They were shared with the rest of the industry through the Society for Motor Vehicle Manufacturers and Traders and the Motor Industry Research Association. HSE also worked with the Vehicle Builders and Repairers Association in identifying safe procedures for the disposal of these devices. HSE has published guidance based on the work. The Hydrogen Economy HSE is playing a key role in researching new technologies, promoting innovation and providing expert guidance on best

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practice. Many of the organisations developing “hydrogen economy” technologies are SMEs, frequently without access to specialist advice on the special hazards of hydrogen. HSE has been actively involved in many of the groundbreaking demonstration projects that are in progress across the UK. Official guidance has been aimed specifically at helping industry to understand the hazards of hydrogen and how the risks can be minimised. This document received widespread acclaim during the consultation phase and will be published. HSE is also involved in leading edge research into aspects of “hydrogen economy” technologies fundamental to health and safety. NaturalHy, a major EU funded pan-European project with over 50 participating organisations, is looking at the possible use of existing natural gas pipes to transport safely mixtures of hydrogen and natural gas. Several large energy companies, the US Department of Energy and HSE are researching how the risks from retail of hydrogen dispensing can be minimised. The results of this work will be fundamental to the design of the first generation of roadside hydrogen filling stations.

Chapter 5 Innovation policies across Government

5.41. DTI will therefore work more closely with HSE to identify developing areas of technology and new business activities, and in promoting health and safety as an enabler of innovation.

Government’s role as a source of new knowledge 5.42. Government invests an immense amount in R&D both in the Science, Engineering and Technology base (SET base) and for its own needs, especially in health and defence. We want to see more of the research results flow into the exchange of knowledge between business and research and technology organizations and into the pool of ideas and inventions available for commercial exploitation. 5.43. Government spent some £7 billion on R&D in 2001/02 and this is expected to increase to nearly £9 billion by 2004/057. Less than half of this expenditure funds the SET base through OST and the Higher and Further Education Funding Councils (HEFC). Most of the remainder is research and development designed to meet the specific needs of Government Departments in areas such as defence and health8. 5.44. As demonstrated in Chapter 3, Research Councils, HEFC and universities have been increasing their efforts to improve the exchange of knowledge between universities and businesses, whilst maintaining the primary purpose of funding university research. However, much less attention has been given to making fuller use of Government R&D in terms of the wider economic goals of knowledge transfer and commercial exploitation, again without diluting the R&D missions of individual Government Departments. 7 The Forward Look 2003 – Government funded Science, Engineering & Technology. http://www.ost.gov.uk/research/forwardlook03/ 8 Estimates also include an amount to cover the notional UK contribution to EU R&D budgets (estimated to be some £400m in 2001/02).

5.45. In recent years two initiatives have gone some way towards strengthening knowledge transfer and exploitation: the “wider markets” policy (introduced in 1998 and revised in 2002)9 and recommendations arising out of the Baker Report (1999)10. Both initiatives aim to bring research in the Public Sector Research Establishment sector (PSRE, eg. Research Councils, Government Laboratories, and the NHS Trusts) into the commercial arena.11 5.46. The Public Sector Research Exploitation Fund was established in response to the Baker Report to help realise the economic potential of PSREs. Awards worth £10m were made in October 2001 (involving some 15 institutions and 10 lead NHS Trusts). £15m for a second round of the Public Sector Research Exploitation Fund was provided in the Spending Review 2002.

9 ‘Selling Government services into wider markets’, policy guidance note, HM Treasury, July 1998 http://www.hm-treasury.gov.uk/mediastore/otherfiles /sgswm.pdf; ‘Selling into wider markets: a policy note for public bodies’, HM Treasury, December 2002, http://www.partnershipsuk.org.uk/widermarkets/Guidance/ 2003_1.pdf 10 ‘Creating knowledge creating wealth – realising the economic potential of public sector research establishments’, a report by John Baker to the Minister for Science and the Financial Secretary to the Treasury, August 1999. http://archives.treasury.gov.uk/docs/1999/baker.html 11 ‘Delivering the Commercialisation of Public Sector Science’, report by National Audit Office, www.nao.gov.uk/pn/01-02/0102580.html

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Box 5.11 How the Defence Diversification Agency helps business access defence technology

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The Defence Diversification Agency (DDA), part of the MoD, was set up in 1999 to promote cross-fertilisation of technology between defence and industry. The DDA provides companies with access to the UK’s world-leading defence science and technology (S&T) base, a major repository of technical knowledge and expertise that can help them innovate and grow. Additionally, the DDA brings innovative technology developed within civil industry to the attention of the MoD. Four years on, this Government initiative can point to an impressive track record.

This unique demand-led approach – first find the business problem then match the, largely off-the-shelf, solution to it – has already proved highly successful and benefited some 2,300 companies.

The DDA has established a highly effective network of experienced technology transfer professionals throughout the UK, operating at regional level. They stimulate the demand for technology by helping businesses identify growth opportunities that can be fulfilled through access to knowledge, resource and facilities from within the defence S&T base.

 development and testing of novel polymers for use in building products.

5.47. The 2002 Cross-Cutting Review of Science and Research set out practical recommendations to ensure that the research which Government Departments commission in support of policy making and delivery is on a sound footing – and in line with the Guidelines on Scientific Advice and Policy Making. The report also recommended that departments ensure that knowledge transfer objectives are included in their Science and Innovation strategies, that the action points arising from the Baker agenda are addressed, and that the PSREs, which departments are responsible, have frameworks in place for the commercial exploitation of their work. These plans need to be completed as part of the 2004 Government Spending Review (SR2004). This is something that the new Ministerial Committee will be monitoring

closely. Departments will work to remove those barriers to exploitation that lie within their own control, within the bounds of commercial and other factors which can restrict demand for the results of Government research in the private sector.

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Examples of technology transfer carried out by the DDA include:  application of advanced optics from within the stealth domain to improve paint curing on pencils;  joint defence/industry development of a non-contact sensor for remote analysis of contaminants; and

The DDA network operation and its proven technology transfer methodology are applicable to other research institutes. Pilot projects have been agreed with Partnerships UK and with PA Technology to explore these wider opportunities.

Chapter 6 Regional innovation

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Summary The Government is committed to increasing the prosperity of all regions while narrowing inter- and intra-regional disparities. The Devolved Administrations (DAs) have all published innovation strategies or economic strategies which include innovation. The Regional Development Agencies (RDAs) in England have also put an increasing focus on innovation. They have used the Regional Innovation Fund set up in 2001 to initiate a total of 91 incubator and science/business park development projects, and in 2002/03 have committed more than £250m of their funds over a number of years to science and innovation projects. It is essential that there is a clear understanding on the respective responsibilities of Central Government and the RDAs. It is also necessary that the RDAs have the expertise and sources of advice to develop and implement the innovation elements of their regional economic strategies.  implementing this Report, the Department for Trade and Industry (DTI), the RDAs and DAs will work in closer partnership to ensure that national policy and priorities take full account of devolved and regional priorities, and that they also shape more effectively what is delivered by and through the RDAs at the regional level;  in consultation with the RDAs, the DTI will develop new Public Service Agreement Targets reflecting the contribution which innovation can make to achieving the overall economic goals of the RDAs; and  agree with the RDAs and DAs a set of regional innovation indicators and assist the RDAs to set up Science and Industry Councils or similar arrangements as regional bodies that bring together science, technology and business representatives from the private sector and universities. This is in line with the House of Lords Science and Technology Committee’s findings in its recent report – Science and the RDAs.1

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Clusters play a key role in driving economic growth and innovation in localities, cities and regions. They create an environment which encourages companies to adopt innovation-based corporate strategies and which facilitates knowledge sharing. The evidence suggests that Governments cannot create clusters, but Government and RDAs can help remove the barriers to their success.  to further assist the RDAs work with clusters we are publishing alongside this report the conclusions of the work by Ecotec on success factors in cluster development and the Ecotec Practitioners Guide to Cluster Development.2 In order to raise the rate of innovation in the regions, encourage inward investment and provide high value-added, long-term jobs, we need to support the development of knowledge intensive businesses.  to enable the RDAs to attract high valueadded, fast growth businesses the criteria for the new Investment Grant for the Regions in England will be redefined so that the main objective is the creation of sustainable, high-value investment and jobs rather than simply maximising the number of jobs. In Scotland, the Regional Selective Assistance (RSA) scheme has been re-focused, including more emphasis on quality projects and high growth firms.

1 House of Lords Select Committee on Science and Technology - Science and the RDAs: Setting the Regional Agenda, 3 July 2003, HL Paper 140-I http://www.publications.parliament.uk/pa/ld200203/ldselect /ldsctech/140/140.pdf 2 Ecotec Research and Consulting Limited were appointed by the DTI, HMT and the RDAs in 2002 to produce a report to identify the criteria for the successful development of successful clusters.

Chapter 6 Regional innovation

The Manufacturing Advisory Service (MAS) is a good example of an expert advisory programme delivered at a regional level. MAS is also available, to varying degrees, within the DAs. In its first nine months it has been extremely successful. It has had 8600 enquiries, carried out 1000 diagnostic and advisory visits, and was involved in 200 ongoing in-depth consultancy projects. 5500 manufacturers also attended regional training and other events.  we will therefore ensure that innovation is integrated into England’s regional business support delivery mechanisms, building upon the MAS model and including access to innovation and design advice where this is not explicitly already provided.

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Problems posed by regional differences 6.1. The economic gaps between different parts of the UK create imbalances in our standard of living, distortions in the national labour market – especially in the availability of skilled workers – and weaknesses in our business performance. The result is wide disparities in output per head between regions (Figure 6.1) reflecting significant differences both in employment rates and in productivity. While the focus here is on regional differences, it is important to note that, within the same region, there are often substantial differences in living standards and economic structures.

6.2. This disparity is also apparent by looking at regional performance against some of the critical innovation success factors. In terms of capacity to absorb and exploit knowledge, there is wide variation in the distribution of highly qualified labour across the UK, with the highest concentrations in London, Scotland, the South East and South West (Figure 6.2). 6.3. The picture is little different for the employment of qualified scientists and engineers, with businesses in London employing the highest proportion (Figure 6.3). 6.4. In terms of developing new sources of technological knowledge, there is a very pronounced concentration of Research and

Figure 6.1 Output per head by region, 2001 UK Northern Ireland Scotland Wales East East Midlands London North East North West South East South West West Midlands Yorkshire and Humberside 0

3,000

6,000

9,000 12,000 15,000 18,000 21,000 24,000

Gross Value Added (workplace basis) £s per head Source: DTI Regional Competitiveness Indicators

Figure 6.2 Proportion of working age population with higher education qualification by region, spring 2001 Degree or equivalent

UK Northern Ireland Scotland Wales East East Midlands London North East North West South East South West West Midlands Yorkshire and Humberside

Post-GCE A-level qualification (excluding degrees and equivalent)

0

5

Source: Labour Force Survey, Spring 2001

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10 15 20 25 30 % of working age population

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Development (R&D) activity in the Southern and Eastern areas of England, even when adjustments are made for the populations of different regions. This largely reflects the decisions of a few large companies in R&D intensive industries to locate their activities there. 6.5. There also appear to be significant regional variations in levels of entrepreneurship. VAT registrations are the best available measure of business startups by region. Looking at VAT registrations per head of adult population in 2001, London and the South East saw the highest level of entrepreneurship, with levels 61% and 19% (respectively) above the UK average. The North East and Wales were

lowest with VAT registrations per head 47% and 31% respectively below the UK average. 6.6. Access to finance in terms of private equity investment per head of population shows a slightly different picture (Figure 6.4). London and the South East show by far the highest investment per head, with the West Midlands relatively close behind. The South West and Wales show the least investment per head – less than a tenth that of the South East in 2002. Of the other regions, East Midlands and North West show a significant reduction in investment in the past three years, although figures may be unduly influenced by one or two large transactions in certain years, in particular management buy-outs.

Figure 6.3 Scientific skills by region, 1998 - 2000 UK Northern Ireland Scotland Wales East East Midlands London North East North West South East South West West Midlands Yorkshire and the Humber 0

2 4 6 8 10 12 14 Qualified scientists and engineers as % of employment

Source: Community Innovation survey, 1998-2000

Figure 6.4 Private equity investment per head of population by region, 2000-2002 250

2000 2001 2002

200 150 100 50

UK

M

Ea

st id Ea lan s d t Lo s nd on No rth Ea st No rth W es So t ut h Ea So st ut h W es t M W id e l Yo and st s rk s Hu hir m e& No ber r Ire the lan rn Sc d ot lan d W ale s

0

Source: British Venture Capital Association (2003)

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6.7. While the Government is committed to improving the economic performance of all regions, it orients its policies towards economic convergence, maximising growth in all regions in pursuit of a clear target: the growth rates of the regions with the lowest output per head should get closer to those with the highest3. The Government has pursued an active regional policy since 1997, believing strongly that regional needs are best targeted by regional solutions. It has set up the RDAs, facilitated the establishment of voluntary regional chambers, and developed the role of the Government Offices. The White Paper “Your Region, Your Choice” set out proposals for directly elected regional assemblies in those regions that wish to have them. One of the key roles of these assemblies will be to improve regional economic performance. This regionalism, however, needs to be outward looking; we need to maintain and enhance our international competitiveness against the strongest regions and subregions of the world. 6.8. If the less wealthy regions are to improve their performance compared to those with a high output per head, they will need to focus the additional resources they receive on improving the drivers of innovation such as business R&D, the rate of start-ups, the level of skills and the support for high-tech businesses and equity finance, where they lag behind. 6.9. Since the establishment of the RDAs we have introduced several policy instruments to raise innovation performance throughout the English regions. We have introduced Regional Venture Capital Funds and given the RDAs greater flexibilities in how they spend their own resources by creating a single funding mechanism. In addition, we have taken

3 The joint Treasury/DTI/Office of the Deputy Prime Minister Public Service Agreement target is for all regions to grow but with a reduction in regional disparities (http://www.hm-treasury.gov.uk/documents/public_ spending_and_services/public_service_agreements_2001_2 004/pss_psa_index.cfm)

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steps to increase the levels of collaboration between business and universities by providing a second round of Higher Education Fund (HEIF) funding and are in the process of establishing New Technology Institutes in every region. 6.10. Our approach has also been underpinned by the devolution of economic policy-making in Wales, Scotland and Northern Ireland. The DAs have already produced their own innovation and knowledge transfer strategies, either as separate statements or as an integral part of their overall economic strategies4. 6.11. The wide regional variations in productivity, drivers of productivity and critical success factors for innovation make it impossible to apply a “one size fits all” policy. Action to improve performance and innovation has to be tailored to the specific challenges and opportunities in each region. RDAs have made a start in directing their efforts towards raising the innovation performance of their regions, but more needs to be done by optimising national and regional efforts.

Action to promote innovation at the regional level 6.12. When RDAs were set up, the Government made separate funding streams available to them to support innovation:  in 2001, the Regional Innovation Fund (RIF) provided the RDAs with their first opportunity to use the £50m per year fund in a flexible way to match their regional priorities5. RIF was first used to fund new incubator space, facilitate networks and encourage clusters, as well as to deepen knowledge of the region’s strengths and weaknesses. With RIF 4 Ref: Wales for innovation, – Smarter Successful Scotland, and for Northern Ireland, Think, Create, Innovate. 5 This initiative built on the Innovative Clusters Fund, launched in March 2000 to promote the development of clusters and business incubation projects.

Chapter 6 Regional innovation

funding, RDAs initiated a total of 91 incubator and science/business park development projects; and  the Government made £30m available in 2001 to establish five University Innovation Centres across the UK. These endeavour to develop top class, long-term research partnerships between major business interests and the universities in industry sectors which are of strategic importance to the regions. The RDAs have now adopted this partnership model using their own resources (Box 6.1).

Box 6.1 Systems Engineering Innovation Centre Underpinned by £4.5m funding from the East Midlands Development Agency BAE SYSTEMS and Loughborough University are collaborating in this exciting venture to create what is planned to become a unique resource for Systems Engineering in the UK with global implications for most sectors of industry and universities. The Systems Engineering Innovation Centre (SEIC) at Loughborough will focus on systems engineering aspects that provide a framework for the integration of people, processes, tools and technology in order to improve the management of risk, product configuration and technology insertion for the development of innovative products. The Centre will attract top research scientists and engineers from universities and industry keen to work together on the latest innovations in products, processes and services. It will offer access to purpose built research and technology buildings in excess of 25,000 m2; research laboratories; synthetic environment laboratories; virtual engineering facilities; office accommodation; on-site conference and restaurant facilities and a lecture theatre and exhibition area.

6.13. The RDAs devote increasing resources to creating their own initiatives to support innovation in their regions. They have continued to invest in services tailored to the business profile of their region, creating facilities that provide the right environment to attract high potential entrepreneurs and encourage greater collaboration between businesses and universities. A key role for the RDAs is to ensure that national and regional resources are effectively integrated. Examples of a range of these activities are given in Box 6.2. 6.14. The introduction of the “single pot” of finance in 2002 gave the RDAs substantial funding flexibility to respond to regional priorities. The last Spending Review saw resources for the RDAs rise from £1.7 billion in 2003/04 to £2 billion in 2005/06. Increasingly, the RDAs are now putting large sums of money into innovation and Science, Engineering and Technology related projects – over £250m in 2002/03 – to complement funds available at national level. 6.15. RDAs also now operationally manage a high proportion of European Structural Funds. The UK’s allocation from the Funds for 2000-2006 is over £10 billion. The European Regional Development Fund (ERDF) is the fund that is most widely used by the regions to support innovation projects. ERDF has either launched or underpinned many major interventions within regions, providing invaluable additional funds to complement RDA single pots. For example, during its first two years in existence East Midlands Development Agency spent £9m on activities relating to innovation, but levered in an additional £30m in ERDF funding in its Objective 2 areas. A total of £23m of ERDF funding in the North East will contribute towards the cost of developing Centres of Excellence and supporting individual projects that demonstrably ensure that SMEs are equipped with the knowledge to exploit the economic benefits of innovation and technology transfer. In the North West,

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Box 6.2 Examples of activity in the regions to support innovation  London - London Development Agency is developing a range of services to help Small and Medium-sized Enterprises (SMEs) identify innovation needs and opportunities and facilitate links to sources of innovation and knowledge. Organisations such as the London Technology Network support the transfer and exploitation of knowledge and encourage collaborative innovation and technology transfer between academic/research institutions and business. These efforts will be supported through further development of the London Innovation website (www.london-innovation.org.uk/).  South East - South East of England Development Agency has established 17 Enterprise Hubs, each supported by at least one university/research centre, which are together now incubating over 520 companies. Incubation space in the region has doubled and survival rates improved. Each hub supports businesses in specific high tech clusters and ensures that the entrepreneurs are integrated into business services, venture capital and technological support.  North West - The Textile Incubator at Bolton Institute is establishing a core and virtual science base of excellence

£31m of ERDF will fund a variety of projects and schemes including the Cluster Development Through Business Support scheme.

Closer integration of national and regional innovation strategies 6.16. Innovation is a key feature of both the national and the regional agenda for raising productivity.

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for the development of smart fibres and intelligent textiles anticipating the developments required by the North West technical and performance textile cluster, associated sectors and customers during the next 20 years.  East Midlands - Collaboration between Nottingham Trent University and the University of Nottingham has resulted in the creation of Bio City - 12,000m2 of world-class laboratories, state-of-the-art equipment and extensive office space in one building, providing facilities for scientists and entrepreneurs working at the forefront of the commercialising research and development within the healthcare and biosciences sectors.  Yorkshire & Humber - Yorkshire Forward, Sheffield University and UK Coal are cooperating, with help from Boeing, to develop and market a 100-acre brownfield site in South Yorkshire for a new Advanced Manufacturing Park (AMP) located in Rotherham. This will be a high quality science park providing the focus of innovation in metals and materials technology in the UK. The AMP has already attracted world-class technology based organisations to colocate on the Park.

6.17. If the RDAs are to draw up successful economic strategies incorporating improvements in their innovation performance, it is essential that there is a clear understanding on specific roles and responsibilities of Central Government and the RDAs. It is also necessary that the RDAs have the expertise and sources of advice to develop and implement the innovation elements of their regional economic strategies.

Chapter 6 Regional innovation

 East of England has launched its first two Enterprise Hubs in 2003 attracting funds of over £1m with a view to rolling out a programme of a further eight hubs by 2005. These will act as a co-ordinated support structure for entrepreneurs and new businesses, exploiting particular local strengths in R&D. This will encourage new generations of entrepreneurs and facilitate the development of clusters of businesses. The first two hubs are in Stevenage based on pharmaceuticals and aerospace companies, and at the Babraham Institute to support early stage biotechnology start-ups.  North East - In essence, a two-pronged approach has been developed in which support for new and indigenous businesses is provided through the Regional Cluster Development Programme and the identification, exploitation and commercialisation of R&D (be it public or private) is advanced through the Strategy for Success (see Box 6.3). Five Centres of Excellence have been set up to ‘condition’ technologies arising from the regional research base to a point where these technologies can be commercially exploited.

6.18. In deciding action to be taken at a national level, versus a regional level, two principal criteria should be applied:  whether the action varies between regions and depends on the particular regional circumstances; and  whether the necessary action is best delivered at a national or a regional level, i.e. where there is greatest impact and/or critical mass.

 South West - The “Inspire South West” (ISW) programme will use European Regional Development Fund Innovation Action’s funding to create greater demand for innovation among regional enterprises. £4m has been set aside to fund four regional technology panels. These will focus on key sectors to encourage: (i) greater take up of ‘foresight’ information; (ii) support for and interest in science and technological innovation among communities and young people and; (iii) companies to be more innovative and participate in business networks to promote company-to-company learning. ISW aims to create sustained changes in business behaviour so that companies become more future-orientated and more responsive to change.  West Midlands - Advantage West Midlands is providing £33m over 4 years to a £60m collaborative programme between Warwick Manufacturing Group and the automotive sector, involving the Premium Automotive Group and potentially over 450 supplier companies in the region. This major programme involves the take-up of new technologies, improved manufacturing processes and increased craftsmanship.

6.19. In implementing this Report, the DTI, RDAs and DAs will work in closer partnership to ensure that national policy and priorities take full account of regional priorities, and that they also shape more effectively what is delivered. 6.20. In consultation with RDAs, the DTI will develop new Public Service Agreement Targets reflecting the contribution which innovation can make to achieving the overall economic goals of the RDAs.

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This process will take account of the conclusions of the Innovation Report and other relevant policy developments, and would be part of the settlement of the next Spending Round. Once the Targets have been agreed, each RDA will develop their Corporate Plan in consultation with DTI, setting out the outcomes they will achieve in support of the delivery of the Targets and addressing the innovation priorities identified in their Regional Economic Strategies. 6.21. Effective cooperation amongst the UK Government, DAs and the RDAs requires a consensus on defining success and assessing progress. DTI will lead, as part of defining the innovation Public Service Agreement target for the next spending round, a project involving the RDAs, DAs and the Office for National Statistics (ONS) to agree a limited set of innovation indicators, based on a common methodology. We will draw on the current ONS Quinquennial Review of the Business Enterprise Research and Development (BERD) survey. We will complete this work by the end of March 2004 so that it will contribute to development of the next Community Innovation Survey (CIS). The CIS re-surveys in 2005 and will incorporate recent developments in the business support infrastructure at both national and regional levels. This action responds to the findings of the House of Lords Science and Technology Committee’s Inquiry into Science and the RDAs which recommended that the Government should work with the RDAs to develop simplified performance measures that take better account of the importance of science and technology to economic development. 6.22. All regions recognise the importance of exploiting science and technology, but there has been limited capacity at the regional level in England to develop and implement appropriate policies or to establish a consensus on regional needs.

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6.23. Steps are already being taken to help science and business connect more effectively at the regional level. The North West, North East and more recently the South East have already established Science and Industry Councils. London and East of England have equivalent bodies in place. The West Midlands, East Midlands, Yorkshire and Humberside and South West are in the final stages of considering what form of body they wish to establish. 6.24. We will build on these developments by encouraging all RDAs to establish regional bodies that bring together science, technology and business representatives – “Science and Industry Councils” (Box 6.3). This endorses the findings of the House of Lords “Science and the RDAs” inquiry which recommended the establishment of a regional Science Council in every region.

Chapter 6 Regional innovation

Box 6.3 Regional Science and Industry Councils – the concept The regional Science and Industry Council (SIC) concept was initially developed for the North West in 2000 to establish strategic leadership for science in the region and ensure its coherent, active promotion. It was subsequently adopted by the North East in 2002. Based on the experiences of the North West and the North East, the following key success factors for effective SICs have been identified6.  they must fully align with the RDA and the Regional Economic Strategy;  be business-led (large and small), focusing on those industry sectors or clusters important to the region’s economy;  be founded on a clear and realistic understanding of regional strengths and weaknesses;  be based on a coherent regional strategy for the development and use of the science base, linked to national priorities;  be chaired by a suitably knowledgeable and committed individual who has the stature to command the attention and respect of all regional stakeholders, public and private;  be operated in a way that all the key stakeholders share a commitment to the regional economic agenda and to work together in partnership to further that agenda;  be able to exert genuine influence, both regionally and nationally; and  be provided with appropriate implementation resource and support, ensuring that policy decisions are implemented effectively.

6.25. The experiences and achievements of the North West and North East now provide useful guidance to other regions on how to develop their own plans to exploit SET strengths (Box 6.4). Regional organisations also recognise the importance of working across regional boundaries and with Central Government to strengthen the capabilities of those providing SET expertise and to ensure that any company seeking specific expertise will be able to find the best provider irrespective of its location. The MicroNanoTechnology Network described in Chapter 3 (Box 3.6) is an example of how the process of developing both national and regional resources can be optimised.

Support for innovative businesses in the regions 6.26 We are strengthening the mechanisms at the regional level in England for bringing together innovation, business support and skills development. Regional Skills Partnerships are providing the forum in which the work of all the agencies involved, including the RDAs, the Learning and Skills Council, the Small Business Service and others, can be more effectively linked to regional economic strategies. These new partnerships will also enable partners to collaborate more fully at regional and local level to meet the needs of the individual business customer.

CLUSTERS AND BUSINESS NETWORKS 6.27. Clusters play a key role in driving economic growth and innovation in localities, cities and regions. They create an environment where companies can share best practice and save costs through joint sourcing. They also create an environment where knowledge transfer is encouraged, and organisations can make best use of each other’s skills.

6 Ref. Arthur D. Little Ltd

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Box 6.4 Examples of activities bringing together business and the science, engineering and technology base at a regional level.  The North West produced the first regional science strategy - ‘Northwest Science’ - in October 2002. The strategy seeks to ensure that science and technology in the region’s companies and universities is of the highest calibre. The North West has committed over £120m over the next three years to science projects. The North West Science Council (NWSC) has played a key role in determining the future of NWDA Science Policy, in particular by giving direction to, among others, major cluster strengthening projects such as the National Biopharmaceutical Manufacturing facility, Genetics Knowledge Park, Infolab 21 and the Organic Materials Innovation Centre. It has also developed a set of measures based on scientific excellence, people/skills, finance/investment and technology exploitation against which progress in the region can be assessed and actions have been agreed to address shortfalls. It is heavily involved in developing the region’s major science projects (e.g. 4GLS, Microsystems Packaging, Daresbury Science Park) and will be the responsible body for the proposed NWDA Science Fund which will support major new science infrastructure projects.  One NorthEast, has established its “Strategy for Success”. This strategy is based upon the development of

6.28. The DTI’s Cluster Mapping Report7, published in February 2001 was the first attempt to map the UK’s clusters and the RDAs have since built upon it by carrying out their own mapping work. This work highlighted the fact that in many areas important clusters already exist, such as Chemicals in the North West or Aerospace 7 http://www.dti.gov.uk/clusters/map/

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Centres of Excellence in five areas of potential world-class excellence, from the perspective of both research and the capacity to exploit this research. Building on the region’s existing strengths, Centres of Excellence in Life Sciences, Nanotechnology, Process Industries, New and Renewable Energy, Digital Technology and Digital Media have been established. The principal function of these centres of excellence is to ‘condition’ technologies arising from the research base to a form whereby they can be utilised for commercial purposes. The centres will also undertake technology transfer and business development. The North East Science and Industry Council has led on the design and implementation of the Strategy for Success Programme, including the five Centres of Excellence. It has created a stepchange in university-industry linkages, leading to the development of new, shared facilities, e.g. large scale testing facilities for new and renewable energy technology, and new collaborative projects between industry and academia e.g. the Newcastle University Grid Computing project. The Council is also leading on the development of a new support infrastructure, for example by the establishment of two funds totalling £50m for Proof of Concept and Early Stage technology venture funding.

in the Midlands. Helping existing clusters to grow where this makes good business sense is as important as nurturing clusters in new high-tech fields such as Biosciences or Nanotechnology. In Scotland, Scottish Enterprise has pursued an approach of supporting key clusters for some years and current details are given in their Operating Plan.

Chapter 6 Regional innovation

6.29. Government intervention cannot force clusters to grow. Nevertheless, Government and RDAs can remove the obstacles to their development and success. These barriers vary in their significance from place to place. For example, some locations may need to provide the housing, transport and other infrastructure required to allow the business base to grow. In others the issues include the supply of incubators and Science Parks; shortage of skills; the difficulty for firms to access help in rural areas or the need to link up with a research-intensive university. 6.30. One of the most important lessons we have learnt from all the work that we have done both nationally and regionally on clusters is the importance of networks. Networking activities in the regions are vital for firms to learn about the benefits of innovation, identify opportunities for collaboration and stimulate them to take action. In many cases, specific fora nurture priority sectors and clusters at the regional level, providing the channel for communicating critical information on how support can be obtained. RDAs have already planned significant future investment to promote business networking and are striving to integrate the resources available to them into these activities (Box 6.5). 6.31. The recent report by Professor Michael Porter8 for the DTI stressed the need to continue to develop both the analytical and facilitation work on clusters. To further assist the RDAs work with clusters, we are therefore publishing alongside this report the conclusions of work by Ecotec on success factors in cluster development and the Ecotec practitioners guide to cluster development: A Practical Guide to Cluster Development – Evidence Paper, and a Practical Guide to Cluster Development.

INVESTMENT GRANT FOR REGIONS 6.32. The Government provides support for investing in disadvantaged localities through its Regional Selective Assistance (RSA) scheme. Historically its goal was to expand or sustain existing employment opportunities, but since 2000 we have placed greater focus on higher quality projects that have a wider economic benefit – determined by wage levels, the amount of R&D, and training indicators. For example, we have supported the Pfizer major facilities in Sandwich in Kent, the Filtronic plant in Newton Aycliffe in County Durham and Tripos Receptor Research at Bude in Cornwall. 6.33. To enable the RDAs to attract high value-added, fast growth businesses the criteria for the new Investment Grant for the Regions in England will be re-defined so that the main objective is the creation of sustainable, high-value investment and jobs rather than simply maximising the number of jobs. Following a review of RSA in Scotland, the scheme has been refocused for today’s economy, and this includes more emphasis on quality projects and high-growth firms. BUILDING INNOVATION AND DESIGN INTO LOCALLY DELIVERED BUSINESS ADVICE 6.34. We have stressed a number of times in this report the advantages that can be gained by “thinking innovation” in public policy and encouraging business to think so as well. In Chapter 2, we also identified the benefits to be obtained from building design principles into product and service development. 6.35. To exploit the full benefits of our approach, we must ensure that businesses receive imaginative and practical guidance on incorporating innovation and design into their business planning and operations.

8 http://www.dti.gov.uk/economics/paper3-porter-ketels.pdf

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Box 6.5 Examples of fostering clusters and collaboration  Yorkshire & Humberside - the region’s Digital Cluster is a highly diverse industry comprising the electronic and electrical component sectors, computer software and hardware producers, creative design and media sectors. The cluster employs 80,000 people with an annual turnover of £7.7 billion. Yorkshire Forward’s support for the cluster is aimed at improving its competitiveness through greater innovation and technology transfer and the development of networks.  East of England - Cambridge has a world-class cluster of inkjet printing companies, which are specialised in providing industrial inkjet printing solutions. Cambridge Display Technology and Plastic Logic are two companies based in Cambridge that use inkjet printing to deposit polymerbased electronics. Biodot and Biorobotics are using inkjet printing for precision dispensing of biological materials in microarrays. An inkjet consortium has been set up by Cambridge University Institute for Manufacturing to enhance the competitiveness of the existing inkjet cluster. There is also a large pool of relevant knowledge in the local area, including specialist consultancies.  South East - The Isle of Wight Marine Cluster was one of the first clusters to be established and it now has upwards of 30 members. Most of them are small boatyards involved in the production of components and equipment for larger manufacturers. Their prime concerns were shortages of skilled staff and the

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seasonal nature of their work, which meant long periods when they were not actively operating. They are now actively involved in developing their capabilities in Lean Manufacturing, selling their services to large manufacturers and setting up a scheme to create a skilled labour pool around the Solent. Most encouraging of all they are now working together as a virtual shipyard to compete for, and produce, complete boats.  West Midlands - The building industry is currently facing significant challenges with ever changing and more stringent environmental regulation requirements and skills shortages. The centre will develop and launch a Construction Information Services Package; provide a searchable database; provide a technical alert service and provide a helpline service providing access to technical experts at the Centre; help companies to improve their competitiveness by increasing their awareness of innovative developments around the world and provide specialist support for their efforts to innovate in the design and manufacture of products and systems.  The Creative Entrepreneurs Club developed through the Lighthouse Centre for Architecture and Design in Glasgow provides a network hub with international links for creative industry businesses across Scotland. Activities include expert presentations, business to business dialogue and a filtering service for potential investors.

Chapter 6 Regional innovation

6.36. The UK’s Manufacturing Advisory Service (MAS) is a good example of an expert advisory programme delivered at a regional level. MAS operate to varying degrees within Scotland, Wales and Northern Ireland. It is designed to address the practical operational needs of manufacturers, particularly SMEs. By providing advice and assistance from leaders in their field – on hand and easily available – MAS enables manufacturers to succeed and improve their productivity. RDAs and the Welsh Assembly Government fund the Regional Centres for Manufacturing Excellence (RCME) but their expenditure will be supplemented by a £14m contribution from DTI over three years. This budget also provides for DTI’s direct funding of the National Network of Centres of Expertise. In Scotland, similar advice is provided through the Enterprise Networks. The Scottish Executive is however currently reviewing its technical and specialist support to manufacturers in light of the success of the MAS programme. Progress of the MAS to date is summarised in Box 6.6.

Box 6.6 Progress of the Manufacturing Advisory Service (MAS) MAS impact to December 2002 (the first 9 months) Throughout the regions:  around 8600 enquiries and 1000+ diagnostic and advisory visits;  5500 manufacturers attending regional training and other events; and  200+ ongoing in-depth consultancy projects; The National Network:  490 applications and pre-registrations; 200 organisations approved The national website:  350,000 hits since April 2002; and  600 pages of content and links On average, impact of the service witnessed to date:  improvements in people productivity of about 30%;  reduction in wastage of 37%;  improvement in space utilisation of 45%;  improvement in on-time delivery of 42%;  increased stock turns of 86%;  improved equipment productivity of about 30%; and  benefit to each firm in value added of about £85,000 per year. The DTI Manufacturing Advisory Service website is specifically designed to help UK manufacturers, large and small, to identify sources of manufacturing related support and expertise. There are many excellent case studies presented which demonstrate the very real improvements gained by customers of the service.

9 http://www.dti.gov.uk/ manufacturing/mas/index.htm

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6.37. We will therefore ensure that innovation is integrated into England’s regional business support delivery mechanisms, building upon the MAS model and including access to innovation and design advice where this is not explicitly provided already. 6.38. Utilising the best practice products within the DTI’s new Business Support portfolio, the Design Council will take the lead in enhancing the design awareness of MAS, Business Link and similar intermediaries in their dealings with individual companies. The Design Council will help improve the design awareness skills and proactivity of such advisers by leading on the development for intermediaries of:  the design elements of a Business Diagnostic Toolkit for use by advisors, including those in Business Links responsible for providing business support assistance to individual companies;  the training of MAS, Business Link and similar advisors to significantly enhance their awareness of the role of product development and design in business success; and  a continuing information resource for advisers which will include the provision and updating of regional registers of design providers to whom companies can be referred by intermediaries with confidence. 6.39. Virtually all elements of the innovation agenda set out in this report to develop high performance, innovative companies have a regional dimension. These are not repeated here, but are acknowledged in other chapters such as the skills and knowledge transfer requirements (Chapter 2), the role of universities, the Small Business Service (SBS) and Business Link (Chapter 2), technology transfer and commercial exploitation (Chapter 3), access to national innovation assets (Chapter 4) and

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exploitation of global links (Chapter 7). All of these elements add up to a powerful overall system for improving innovation performance at local, regional and national levels, emphasising the need for close working relationships between national and regional stakeholders.

Chapter 7 Global links

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Summary Globalisation is changing and widening the basis of competition. UK companies are having to adapt to this by producing goods and services that are superior to those provided by their competitors, who are not standing still. Successful companies have a global perspective and are prepared to use it not just for international export purposes, but for understanding and accessing technologies from other countries that can add to their competitiveness. 95% of the world’s science and technology is based outside the UK. Successful firms will tap into the global knowledge base, often networks with foreign businesses and research organisations, to gain competitive advantage. The GlobalWatch service communicates technological advances to thousands of businesses/ researchers across the country, runs technology missions and international secondments. This action is complemented by a network of specialist science and technology staff in British embassies across the world. To increase international Science and Technological collaboration we will:  increase the number of International Technology Promoters by a third and double the number of outward secondments;  realign the delivery of our services to meet customer needs; and  increase participation of UK businesses in EU and pan-European programmes such as EU Framework and Eureka, starting with a new service to help access to the EU’s sixth Framework Programme. The UK is the second most popular destination in the world for inward investors and number one in Europe. In addition to bringing revenue and prosperity to the country, inward investment is also an important means of improving knowledge transfer and increasing value-added operations into the UK. UK Trade &

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Investment enable potential inward investors to identify technologically advanced UK firms with which they may wish to build strategic collaboration.  Our international innovation agenda should be driven by the contribution it can make to wealth creation in the UK. International trade and investment, which are UK Trade & Investment’s prime responsibility, are major drivers for stimulating innovation. UK Trade & Investment will take responsibility for the international innovation agenda by ensuring Government coordinates its actions in this area. Companies that engage in international business tend also to be more innovative and competitive or engaged in high levels of Research and Development (R&D). Exporters have a better chance of survival than non-exporters, and they tend to preserve jobs during economic downturns. For UK firms who want to expand into overseas markets, UK Trade & Investment provides support for companies across the range of international business activities including overseas market contacts for exporters, overseas investment, standards, joint venture partnerships, international sourcing of science and technology, participation in international collaborative programmes. UK Trade & Investment is currently evaluating all its products and services to re-deploy resources where it adds the most value.  To strengthen our effectiveness, UK Trade & Investment will produce a more customer focussed and coherent group of products and services as a result of this process.

Chapter 7 Global links

Global Links 7.1. The global economy is changing. Trade barriers are eroding, new markets are opening up, bringing opportunities to UK firms as well as threats from potential competitors. Competitive pressures are increasing. Reductions in transport and communication costs mean that customers face a wider range of potential suppliers. Firms also have a greater choice in where to invest. Many multi-national companies now conduct research in several bases located across the globe. UK firms are having to adapt to this environment by producing products that are superior to those provided by their international

competitors – who are not standing still. Successful companies are formulating their strategies in the context of the world market, world science and technology and world competition. The Government can help by:  promoting international collaboration in science and technology;  encouraging inward investment of high value added activities; and  assisting internationally competitive companies. 7.2. Governments around the world are engaging in policies to promote innovation. (see examples in Box 7.1)

Box 7.1 Recent initiatives overseas to move innovation up the policy agenda Canada: The Canadian Federal Government published an innovation and skills agenda and strategy in 2002. This sets out initiatives designed to achieve targets to improve Canada’s economic growth and social development by 2010. Targets include raising Canada’s rate of R&D and developing ten internationally recognised technology and community-based clusters. Actions include more support for university research and its commercial exploitation at national and local levels, the development of specific technologies using publicprivate partnerships, and a regulatory environment more conducive for business innovation. Netherlands: The Dutch Prime Minister recently launched an “Innovation Platform”, a debate about how to strengthen innovation as the future driver of economic growth. The Platform aims to produce its first concrete action programme within six months. In addition, the Dutch Cabinet has submitted a paper to Parliament and the platform, “In Action for Innovation”. Specific policy suggestions include greater

tax incentives for private sector R&D in Small and Medium-sized Enterprises (SMEs), increasing the flow of foreign knowledge workers and entrepreneurs, and stimulation of more collaborative research and development. Germany: The Action Plan on innovation in SMEs has been developed to combat the decline – from a high base – of the SMEs share of business R&D. It combines current and new initiatives; an example is the refocusing of R&D grants available in the eastern Länder towards growing firms. South Korea: In 2001 the Science and Technology Framework Law was enacted and brought about several important changes in science, technology and innovation policy in Korea. The law places emphasis on the co-ordination of national science and technology and R&D policies and investments, regardless of sponsoring ministry. The Government has also initiated new programmes to promote technology transfer, diffusion and commercialisation of new technologies.

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7.3. World trade has grown enormously in recent decades. The value (current prices) of world exports of merchandise goods & services rose from $2.4 trillion in 1980 to $8 trillion in 2002. Investment flows and economic activity increasingly crosses borders. The UN World Investment Report (2003) estimated that the world stock of (inward) Foreign Direct Investment (FDI) was equivalent to 22% of Gross Domestic product (GDP) in 2002, compared to under 7% in 1980. Over that period, the UK stock of (inward) FDI increased from $63 billion to $639 billion. 7.4. A global outlook is a characteristic of successful firms. All can benefit from small businesses producing specialised equipment and services to large bulk suppliers. For innovative companies, trading internationally can be very important. Markets and leading edge customers for a particular product or service may be overseas. Commercial dealings with them provide invaluable market intelligence and sources of technical knowledge. Those high technology SMEs producing novel products that take a risk and internationalise early may reap the rewards later of becoming a global market leader. Establishing an international presence, however, poses difficult commercial challenges for SMEs, and assistance for smaller businesses can help bring them to this global marketplace. 7.5. The UK does 5% of the world’s science, which means that 95% of the world’s science and technology is based outside the UK. Successful firms will seize opportunities to build international networks to exploit knowledge, involving both foreign businesses and research organisations. Overseas firms see the UK as an attractive location for investment. Inward investors can bring new technologies or practices to the UK which have knock-on benefits to the local, and ultimately regional economy.

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7.6. The reduction of trade barriers within the EU Single Market has also acted as a stimulus to growth, allowing innovative UK firms to sell their goods or services into a larger market. Membership of the European Monetary Union could also bring the UK significant economic benefits. The HM Treasury assessment of the five economic tests concluded that, were sustainable and durable convergence to be achieved between the UK and euro area, UK national income could rise between 5 and 9% over a 30-year period1. Sustainable and durable convergence between the UK and EU economies is essential to realise the benefits from increased trade, investment, competition and productivity. 7.7. The UKs role as a leading member of European Union brings opportunities to participate in, and benefit from, the wide range of business and research support available. As well as the Framework R&D programme, which is worth some £350m per year to the UK, the Structural Funds, which are offered at regional level, bring some £100m to the task of stimulating innovation on a substantially larger scale than domestic schemes. Firms and other organisations need to be alert to the potential of these EU offerings. In Scotland, the Scottish Proposal Assistance Fund (SPAF) helps SMEs to access the expertise needed to write high-quality proposals for FP6 funding, whilst the recently announced Proposal Assistance for Co-ordination of European Research fund (PACER) will help universities with the up-front costs of bidding to become a coordinator of Framework integrated projects. 7.8. Government helps UK-based businesses to access the global knowledge base by reducing the costs and risks of access and exploiting economies of scope and scale.

1 HM Treasury “UK Membership of the Single Currency, an Assessment of the Five Economic Tests (2003)”, http://assessment.treasury.gov.uk/

Chapter 7 Global links

International Collaboration in Science and Technology 7.9. For UK-based firms which wish to acquire knowledge of technological developments, advanced skills and scientific advances in other countries, develop their businesses by acquiring the GlobalWatch service (formerly known as the International Technology Service (ITS)) offers a range of practical help. This includes a website2 which carries out over 80,000 technology related searches each month and the GlobalWatch magazine with a circulation of 23,000. 7.10. The GlobalWatch service also runs about 30 technology focussed missions and 50 international secondments each year (see boxes 7.2 and 7.3 for examples of secondments and missions we have supported), as well as facilitated technology-partnering with several thousand firms through the International Technology Promoters (ITPs). The ITPs are business people with experience of developing technology partnerships between UK business and overseas organisations. They support technology partnering of various styles, often acting as the precursors to more formal licensing or other commercial deal making. The GlobalWatch service also supports bilateral science and technology activities with Russia, Japan, South Korea, and China through high technology industry forums and manages the BRITECH bilateral support programme for R&D with Israel. 7.11. The Foreign and Commonwealth Office (FCO) has established a new network of science and technology attachés in key countries around the world. Working closely with the DTI, UK Trade & Investment, British Council and others, the network helps inform policy making on science and innovation, helps companies access overseas innovation and technology, facilitates high-tech trade and investment and uses science and technology as a vehicle to maximise the UK’s impact abroad.

Box 7.2 Secondments offer new skills on joining TME (Total Maintenance Engineering) – an SME based in Gateshead – sent Martin Goodfellow on a three month secondment to France with financial support from the GlobalWatch service. This came about when TME realised that French apprentice-trained engineers had a greater breadth of knowledge and were the preferred option in their sector for work in the UK. After his secondment to Les Compagnons du Devoir, Martin Goodfellow had gained specific knowledge and best practice of the training regimes that could be applied in the UK. This resulted in an increase in staffing and in apprenticeship staff and profits by a factor of five. Since the secondment, TME has worked with the Prince’s Trust to secure 20 places every year for firms in the UK to send apprentices to France for two years of their apprenticeship training, acquiring advanced skills and techniques appropriate to precision welding and gaining knowledge about management techniques for developing an international business. Later, Emmanuel Constans from Les Compagnons du Devoir spent 6 months at TME’s premises. The inward secondment brought French skills and expertise in welding fine steel, aluminium and titanium to the UK. The direct result of this secondment was the recruitment of 12 apprentices in this work. This encouraged a multi-national food manufacturer to stay in Gosforth, Newcastle. Previously the company had been considering shedding jobs and moving from its base due to the lack of locally available welding skills.

2 www.globalwatchonline.com

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7.12. There are also a number of bilateral links which enable researchers and business people to share knowledge between the UK and overseas. One such is the UK-Texas Bioscience Initiative, which aims to promote collaborative R&D in biosciences and related topics between researchers in the UK and the region around Houston, Texas. In Scotland, the Edinburgh-Stanford Link was established as a programme of research and training linking the Human Communication Research Centre (HCRC) at the University of Edinburgh with the Centre for the Study of Language and Information (CSL) at Stanford. The focus is on speech and language technology, an area in which the participating centres both have internationally recognised reputations for excellence. The Link is fully funded by Scottish Enterprise (SE), with £5.3m for commercially focussed, early stage research over five years and a further £700,000 for commercialisation activities relating to the research. 7.13. These services have undergone considerable change and expansion over the past few years. For example, we have already taken some steps towards integrating international knowledge transfer with the UK domestic programme. We now use a common team of external consultants, to arrange the domestic Knowledge Transfer Partnership (formerly Teaching Company scheme (TCS)) projects and the outward secondments that are offered through the GlobalWatch service. 7.14. In terms of our future offering of individual elements of support for international collaboration science and technology we will:  expand the ITP network by a further six people to cover the Nordic countries, southern Europe, the Eastern European countries, India, Australia and South America; and  seek to double the number of outward secondments to at least 120 by 2005/06.

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Box 7.3 Technology mission: Getting to grips with Alzheimer’s Over 600,000 people in the UK suffer from Alzheimer’s or Parkinson’s disease, and a further 100,000 a year suffer a stroke. Some of the latest therapeutic approaches are being developed in the US, so the GlobalWatch service, working with the British Embassy science team in Washington and Boston, arranged for representatives of 7 UK bioscience firms and a senior academic from King’s College London to visit leading research institutions and businesses in Maryland and Massachusetts. Whilst respecting the Intellectual Property of both parties, the visit enabled UK researchers to gain an insight and transfer back to the UK knowledge of the latest thinking of how UK teams are focusing on the development of therapies and treatments. Also there were opportunities to learn about how the drugs companies are working in collaboration with the universities and national institutes in the field.

7.15. Our recent review of the organisation of cross-Government support in this area recommended that service provision should be aligned to meet customer needs rather than reflect organisational convenience. More specifically, UK and international knowledge transfer programmes should feed off each other and be promoted and delivered through the same channels and international activities should be targeted and delivered against a clear strategy and business plan. We will work to realign the delivery of our services to implement these recommendations.

Chapter 7 Global links

7.16. The Technology Strategy3 will also be used to realign our overseas activities with the overall direction of strategic innovation and at the same time offer new perspectives in other fields. We will align our overseas technical missions programme to the priorities of the Technology Strategy as well as to any opportunities emerging from the activities of the various networks or projects contributing to the strategy. We expect to achieve these objectives within the present envelope of running 30-40 high quality technical missions per year. 7.17. Maximising European opportunities: Nowadays, UK-based businesses routinely enter into a wide range of joint ventures and collaborative R&D programmes with firms in many other countries to develop and exploit new products and services. With our partner nations in Europe there is an opportunity to create a research trading bloc on a par with that in the US.

operating in a highly fragmented marketplace. The current programme, Framework 6, allocates some D17.5 billion (£12 billion) to research over the period 2002-2006. Framework gives priority to the following fields: life sciences, genomics and biotechnology for health; information society technologies; nanotechnologies and nanosciences; knowledge-based multifunctional materials and new production processes and devices; aeronautics and space; food quality and safety; sustainable development, global change and ecosystems; and citizens and governance in a knowledge-based society. (see example in Box 7.4).

Box 7.4 Retail is data-mining through Framework

7.18. The European Union is now encouraging the nations of Europe to coordinate their research efforts through the concept of the European Research Area (ERA). The UK welcomes the ERA concept. We believe that it can help to relieve some of the rigidities that have slowed down European industrial performance, by encouraging greater mobility for researchers, integrated and efficient use of resources as well as a more coherent approach to research planning and policy making.

A team led by Maurice Mulvenna, from the University of Ulster, participated in an EU-supported collaborative research project which helped prove the viability of data mining in on-line retail applications. The success of their involvement led to the establishment of a spin-off company – MINEit Software – which was selected as the Software Industry Federation’s New Company of the Year in 2001. One of MINEit’s products won the European IST Grand Prize in the same year. The research was used to enhance commercial software, which is now used by more than 500 organisations worldwide.

7.19. Since 1984, the EU has sought to promote industrial innovation through the Framework series of collaborative R&D programmes. Framework enables UK businesses and research organisations to enter project-based partnerships with organisations throughout the EU and beyond. Through Framework, European researchers can collaborate on precompetitive as well as basic R&D to attain a degree of critical mass that can offset some of the natural disadvantages of

7.20. The UK has always been an active participant in European research and contributes considerably to its development. UK participants receive about D510m (£350m) per year according to official data, a proportion that compares well with the UK’s share of European GDP. In 2001, participation from universities was the highest in Europe; participation by businesses was second only to Germany.

3 Please refer to chapter 3

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7.21. Framework represents a major opportunity for UK business to benefit from the available support and create international alliances. It is therefore a cause for concern that UK business investment in Framework seems to be declining. The reasons for this are:  the complexity of the application process incurs significant costs;  delays inherent to bidding with Framework inhibit success in some leading edge technologies;  Framework tends to support research suitable to large public research centres and larger firms; and  the lack of a clear and distinctive national research structure works against UK industrial involvement. 7.22. Recognising the vital importance of the Framework Programmes to the UK economy the Government has long provided a wide range of expert help and support to UK organisations seeking funding from this programme through its network of National Contact Points. We continue to develop stronger networks for promoting Framework to the organisations that are most suited to this type of engagement (e.g. those involved in UK technology programmes, regional clusters and networks created through the Technology Strategy).

We have:  made it easier for UK organisations to become aware of the opportunities offered by the current (sixth) EU Framework Programme by enabling them to access the wide range of National Contact Point experts by setting up a single, centralised information and promotion service4; and  rationalised the system of National Contact Points for specific Framework thematic fields, to reduce the number of separate contacts and provide a more holistic service to users. We will:  press the European Commission to simplify the application process for Framework Projects to reduce the cost and time needed by business to prepare early stage bids; and  seek to integrate more closely the EU’s Innovation Relay Centres in the UK with other national efforts that inform and involve business in opportunities to work with European partners and to benefit from research results. 7.23. We wilI aim to ensure that future Framework programmes and the processes involved complement UK priorities, as developed through the Technology Strategy) and focus on those areas where European collaboration delivers greatest added value to the UK. As the EU grows, it will become more difficult to predict the outcome of Framework bid calls but we will aim to ensure that UK-led bids involve high quality work and partners. We believe this to be the surest way of maintaining the success in Framework that we have enjoyed up to now.

4 www.fp6uk.ost.gov.uk

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7.24 In addition, the EU will publish an Environmental Technology Action Plan. This is intended to stimulate innovation in environmental technologies by identifying barriers. We keenly support this process and are encouraging the European Commission to carry out a number of measures including:  ensuring that the Framework Programmes are designed and administered in a way that stimulates innovation in environmental technologies; and  exploring ways of establishing a fast track route for environmental technology outputs from the Framework Programmes to be taken through to the LIFE Environment Demonstration Programme, to encourage market penetration for innovative technologies. 7.24. The UK is also a leading member of the Eureka initiative. Eureka is a panEuropean network to stimulate civil collaborative R&D with clear market relevance. Eureka projects have generated prototypes of advanced products, processes and services. Well known examples include digital radio, the “Galileo” airline booking system, the animation software for “Walking with Dinosaurs” and beer can “widgets”. Eureka complements Framework but covers a wider geographical area with 34 members, including the European Commission. Any public support for projects comes from individual governments. 7.25. The UK budget for Eureka has fallen compared to that of other leading countries. Since 1994 we have channelled funds to helping SMEs. Other Eureka partners contribute significantly more. Firms that obtain DTI domestic R&D support have been encouraged to consider forming or joining collaborative Eureka projects, but inevitably such firms will be a very small proportion of the population. The new Technology Strategy should offer opportunities for bids into Eureka to be considered on their merits.

7.26. We will work with business to increase participation in Eureka in line with the priorities identified by the Technology Strategy and operating within our new business support products for collaborative R&D and knowledge transfer networks.

Inward Investment 7.27. Currently we are doing well. The UK is the second most popular place in the world to do business and number one in Europe5. We are focussing on sustaining this position, which is underpinned by a stable economy, flexible labour markets and relatively low tax rates. 7.28. For overseas firms, UK Trade & Investment, the Regional Development Agencies (RDAs) and the DAs provide tailored help for inward investment into the UK. Foreign-owned companies undertake one-third of UK business enterprise R&D and some long-standing UK subsidiaries of foreign multinationals have worldwide leadership in particular product lines. Foreign-owned companies thus make a substantial contribution to the UK’s overall innovation effort and facilitate the spread of technological and business best practice. They also provide UK-based businesses with access to leading-edge materials, components and services as well as sophisticated customers on their own doorstep.

5 UNCTAD (United Nations Conference on Trade and Development) World Investment report 2003.

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Box 7.5 Knowledge transfer through cross-border clusters A number of countries have developed cross-border clusters for mutual benefit, the rationale being to stimulate greater cross-fertilisation of innovation and thereby contribute to enhanced Foreign Direct Investment. Examples are; Denmark/Sweden (resund); the Switzerland-France (near Basel) cluster stimulating innovation in biotechnology; and the Sweden/Finland/Baltic’s cluster.

7.29. UK Trade & Investment’s Global Partnerships Service strengthens businessto-business partnerships. This service enables potential inward investors to identify technologically advanced UK firms with which they may wish to build strategic collaboration. The AGES (Attracting Global Entrepreneurs Scheme) initiative targets expatriates and foreign nationals who have innovative business proposals or have management experience as entrepreneurs to relocate to establish start-ups or join emerging start-ups. 7.30. Like every other developed country we understand that we cannot compete on the same terms as the low wage, newly emerging economies such as India or China, and we have to look at increasing the value added to promote the UK as a great place to do business. Our strengths include being the world’s fourth largest economy, with a world-class Science, Engineering and Technology (SET) base and an international language. 7.31. Over the last five years, UK Trade & Investment has successfully refocused its resources on encouraging high-tech companies into the UK and, more recently, since 2002, has taken responsibility for the development of the White Paper6 commitment to attract global entrepreneurs. In today’s climate the key

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is the quality of the companies we want to encourage into the UK. Science and technology, creativity and innovation and adding value represent the future new investment in this country. 7.32. We recognise that this is an ongoing process. Supported by Government policies that have invested more in R&D, science and technology and education, UK Trade & Investment will spend £6.3m on lead generation and £4.5m on promoting the UK to potential inward investors in 2003. 7.33. Our international innovation agenda should be driven by the contribution it can make to wealth creation in the UK. International trade and investment, which are UK Trade and Investment’s prime responsibility, are major drivers for stimulating innovation. UK Trade and Investment will take responsibility for the international innovation agenda by ensuring that government coordinates its action in this area. Areas of activity likely to be included:  The Global Partnerships Service After 15 months of operation, the Global Partnerships Service has had a number of successes leading to the transfer of novel technologies to UK partners. Subject to a review in September 2004 we plan to roll out the service to the entire UK Trade & Investment network;  The AGES (Attracting Global Entrepreneurs) Since its launch in January 2003 the initiative has scored a number of wins. We will evaluate the success of this pilot initiative when it comes to an end in March 2004; and

6 DTI White Paper “Opportunity for all in a World of Change: Enterprise, Skills and Innovation, Feb 2001.” http://www.dti.gov.uk/opportunityforall/

Chapter 7 Global links

 UK Trade & Investment research and technology website and signposting We will develop UK Trade & Investment’s research and technology website so that it effectively signposts investors to relevant science and technology development in the UK; and establish a network of experts who can similarly signpost investors. 7.34. The recent House of Lords Select Committee on Science and Technology Report on Science and the RDAs7 highlighted the importance of exploiting science, technology and engineering for economic gain, and in particular the need for the true integration of national and regional perspectives. 7.35. In terms of regional action on international innovation, we will:  ensure that as regional Science and Industry Councils are established, they incorporate an international element to their activities in order that all regions are able to collaborate on equal terms with the best in the UK and internationally. This will build on the work already being undertaken with the RDAs and DA to provide up to date information about regional science and technology strengths to potential inward investors as well as indigenous businesses; and

Developing internationally competitive companies 7.36. Companies that engage in international business tend also to be more innovative and competitive or engaged in high levels of R&D8. Research also indicates that for the service sector outward investment is key to establishing a presence in foreign markets. Exporters have a better chance of survival than non-exporters, and they tend to preserve jobs during economic downturns. UK Trade & Investment is dedicated to helping companies become internationally competitive and preparing them for a global market place. 7.37. For UK firms who want to expand into overseas markets, UK Trade & Investment provides support for companies across the range of international business activities including overseas market contacts for exporters, overseas investment, standards, joint venture partnerships, international sourcing of science and technology and participation in international collaborative programmes. Other countries provide such services in different ways (see example in box 7.6).

 redefine the criteria for financial assistance, with greater emphasis on creating sustainable, high value added projects and jobs in the new Investment Grant for the Regions (See chapter 6).

7 House of Lords Select Committee on Science & Technology 5th Report, Session 2002-03: Science & the RDAs: SETting the regional Agenda http://www.publications.parliament.uk/pa/ld200203/ldselect /ldsctech/140/14003.htm

8 University of Nottingham – Exporting and Business Performance 2001.

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Box 7.6 Finpro (www.finpro.fi) Finpro is an association owned by Finnish companies which aim to guarantee that Finnish companies, especially SMEs, have access to high quality, comprehensive internationalisation services in different parts of the world. It operates in Finland and in 51 Finland Trade Centres around the world. Finpro supports Finnish companies by helping them find effective operational models and solutions for internationalisation. Services range from target market analyses and creation of market entry strategies for companies to full-scale planning and execution of an internationalisation project for a company. 2002 saw a number of changes and developments for Finpro. In response to the ever-changing situation in global markets, three new Trade Centres were opened in countries with growing business potential for Finnish companies; Chile (Santiago), Russia (St Petersburg) and Norway (Hammerfest). To strengthen the local service supply in Finland and, in co-operation with other operators in the Finnish innovation environment, a new e-service portal, Business Finland, www.yritys-suomi.fi was founded. The first concrete actions were taken towards the creation of a “One Stop Internationalisation Service”, a database, pulling together information from a number of service providers.

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7.38. UK Trade & Investment commissioned a comprehensive review of the needs of their existing and potential customers. From over 6,000 observations, the Review concluded that their customers primarily wanted sector-specific information relating to target markets and contacts there and in the UK. The report also showed that UK Trade & investment needed to strengthen its support for high-growth priority sectors, particularly those in technology-driven industries. 7.39. UK Trade & Investment is currently evaluating all its products and services to redeploy resources where it adds the most value. To strengthen our effectiveness, UK Trade & Investment will produce a more customer-focussed and coherent group of products and services as a result of this process. 7.40. A recent evaluation of the UK Trade & Investment Passport Scheme, which provides potential new exporters with a comprehensive range of help and advice to make them internationally competitive, shows that user businesses have improved their innovative capability. Some 47% of customers had improved their use of international networks, with 35% having boosted their capability for technological innovation and 28% investing in improving their software capability. 7.41. While exporting is important, a company may consider entering an overseas market simply to have greater contact with new ideas and technology. Also many entrepreneurs set up high technology companies with global markets in mind because they sell to highly specialised customers, few of which exist in any one country. Such start-ups have highly specific developmental needs as a result.

Chapter 7 Global links

7.42. To support this trend UK Trade & Investment has refocused its organisation to create new teams to provide support to companies in 10 high value sectors. These include: biotechnology and pharmaceuticals; chemicals; communications; creative and media; education and training; electronics and IT hardware; healthcare and medical; and software and computer services. We also encourage innovation in other sectors where a value-added product can transform an industry, such as smart textiles. The sector teams are designed to focus our support on high value added areas and to help innovative companies to grow their business. 7.43. UK Trade & Investment has employed sector specialists in the US, for example with specialist ICT and biotech expertise, (see Box 7.7) to provide additional support for UK companies in these highly innovative sectors to win business overseas. We are investigating extending this to other key markets.

Box 7.7 Working in a Global Marketplace UK Trade & Investment have developed a successful initiative to link US venture capital with the dynamic UK biotechnology sector. It was recognised that UK firms faced difficulties finding capital investment at the post start-up stage. UK Trade and Investment’s biotechnology specialist in San Francisco put together two visits by US venture capitalists interested in funding high quality research and innovation in UK biotechnology. We have just completed the second Bio TransAtlantic event, and have put 25 US venture capitalists and major bio/pharma companies directly in touch with over 40 selected UK biotech firms. We have involved british venture Capitalists to act as intermediaries for their US counterparts and large US Pharmaceutical companies. UK Trade & Investment also organised training workshops to help the small UK biotech companies make effective presentations to demanding US venture capitalists.

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Action Areas

Innovation Report Proposals

Ensuring we have the skills to support innovation.

DTI and DfES are jointly leading the Skills Alliance to implement the Skills Strategy. RDAs will develop Regional Skills Partnerships with their key partners. DTI will co-sponsor the Skills for Business network. DTI will also develop curriculum material with Business Schools to aid the teaching of skills for the management of high tech, fast growth businesses, and will support DfES work to develop capacity in Centres of Vocational Excellence (CoVEs).

Maximising potential in the workplace.

DTI will promote the benefits of information and consultation (I&C), taking forward the framework agreement so as to encourage increased and improved workplace I&C ahead of the required implementation date of March 2005. To spread the innovation agenda through Britain's workplaces, DTI will establish a joint CBI/TUC Innovation Taskforce.

Supporting innovation in SMEs.

The SBS will ensure that Business Link supports innovation in SMEs through the provision of relevant advisory services, development of a flexible Leadership & Management Programme (with DfES) for small business leaders, strengthened links between skills and business support programmes, and working with other partners to ensure technological and design brokerage is available locally, regionally and nationally.

Supporting women entrepreneurs.

The SBS will work with RDAs, Business Link and others to improve business advice, mentoring and networking opportunities for women who want to start or grow a business. We will develop a comprehensive Toolkit –‘Effective Business Support for Women’ to complement current adviser training and we will also strengthen the existing network of women’s enterprise agencies.

Incorporating design to add value.

The Design Council and DTI will work with companies in up to 10 industry sectors to demonstrate how innovation can be enhanced through the improved use of design. The Design Council and DTI will also work in partnership with UK universities to establish design learning for science, engineering and business management students, and develop design demonstration activity within Technology Transfer Offices.

Increasing the pull-through of new ideas from the SET base.

The Research Councils will make plans for increasing the rate of knowledge transfer and interaction with business.

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Action plan

Paragraph

Lead and participating organisations

Timescale

2.10, 2.12, 2.13, 2.45

DTI, DfES, DWP, RDAs, business schools

Skills Strategy ongoing to March 2006; Regional Skills Partnerships from April 2004; Skills for Business Network by Summer 2004; curriculum material by March 2005; CoVEs from April 2004.

2.47, 2.48

DTI, CBI, TUC

Increase/improve I&C ahead of March 2005 deadline; establish Taskforce in Spring 2004.

2.2, 2.19, 2.22, 2.23, 2.24, 2.25

SBS, DTI, DfES, RDAs, Design Council

Advisory services from April 2004; Management & Leadership Programme Pathfinders in England from January 2004.

2.52, 2.53, 2.54

SBS, DTI, RDAs

Draw up Action Plans with RDAs and Business Link by summer 2004; develop toolkit by Spring 2004.

2.33, 2.34, 2.35, 2.36, 2.38, 2.39

Design Council, DTI, HEIs, SBS, RDAs

April 2004 - March 2006.

3.16

OST, Research Councils, RCUK, DTI

From Spring 2004.

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Action Areas

Innovation Report Proposals

Increasing the pull-through of new ideas from the SET base.

DTI will develop a Technology Strategy with business, the SET base, other Government Departments, RDAs, and other stakeholders to identify key technologies with future growth potential. DTI will provide some of the funding and share some of the risks of pulling through technologies in these key areas into the market. The Technology Strategy will also provide a framework for Government policy decisions, European programmes and RDA support for science and innovation.

Capitalising on our measurement expertise.

Objectives for our National Measurement System will be developed to include a greater focus on innovation. The NMS will increasingly focus research programmes on measurements for emerging technologies, working in line with the Technology Strategy, and will work with industry to promote knowledge transfer through (per annum) 15-25 co-funded research projects, up to 250 product development projects, and 20 exchange secondments between National Measurement Institutes and industry.

Encouraging informed management and protection of intellectual property.

The Patent Office will develop a major awareness-raising programme building on its Business Advice Open Days and a new national strategy for dealing with IP crime.

Driving the innovation agenda across Government.

Recognising the innovation challenge facing the UK, the Prime Minister has asked the Secretary of State for Trade and Industry to chair a Ministerial team to drive forward the innovation agenda across Government.

Using Government’s purchasing power to support innovation.

We will identify how Government can procure innovative solutions to both improve the quality of public services and support innovation in businesses. The Office of Government Commerce will produce best practice guidance on capturing creativity from government suppliers, and DTI will work with DoH to trial innovative procurement in two areas of the NHS: in the construction of new hospitals; and in the adoption of telemedicine technologies. DTI will reinvigorate the SBRI programme to encourage the procurement of R&D from SMEs by Government Departments and Research Councils.

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Action plan

Paragraph

Lead and participating organisations

Timescale

3.23, 3.36

DTI, Research Councils, RDAs, other Government Departments, business

From Spring 2004.

4.6, 4.7, 4.8, 4.9, 4.11, 4.12

DTI, NPL, NEL, LGC, business, RDAs, DAs

From April 2004.

4.20, 4.23, 4.27

Patent Office, Customs & Excise, SBS, DAs, RDAs, and others

April 2004 - March 2005.

5.7

DTI, Cabinet Office, HM Treasury, Other Government Departments

November 2003 - November 2004.

5.13, 5.19, 5.21, 5.22, 5.28

DTI, OGC, DoH, NHS Estates, SBS, business

Guidance by March 2004; projects with DoH from January 2004; SBRI from April 2004.

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Action Areas

Innovation Report Proposals

Stimulating innovation through the regulatory framework.

DTI will produce a guide for policy-makers to help identify the impact of proposed regulations on innovation. DTI will lead a project team to identify how environmental regulatory frameworks (including voluntary measures) can be designed to encourage, rather than stifle, innovation in three areas of regulation and several industrial sectors. We will also continue to push for delivery of the better regulation agenda in Europe.

Aligning national and regional innovation strategies.

DTI will work in closer partnership with the RDAs to integrate national and regional policy development and implementation planning processes. This will include setting up Science and Industry Councils or equivalent regional bodies. In the context of developing new Public Service Agreement targets, we will agree a set of national and regional innovation indicators.

Encouraging regional growth through investment.

DTI will define the criteria for the new DTI product supporting investment in the assisted areas so that the main objective is the creation of sustainable, high-value investment and jobs rather than simply maxmising the number of jobs.

Supporting innovation in the regions.

We will integrate innovation into regional business support delivery mechanisms, building upon the Manufacturing Advisory Service model to include access to innovation and design advice where this is not explicitly provided already.

Encouraging innovation through international collaboration.

We will take a number of measures to strengthen collaboration between the scientific and technological expertise in UK-based companies and expertise overseas. This will include increasing the number of International Technology Promoters by a third and doubling the number of outward industrial secondments, realigning the delivery of UK Trade Investment trade services to better meet customer needs, and increasing participation of UK businesses in European and pan-European programmes such as EU Framework and Eureka. UK Trade and Investment will take responsibility for the international innovation agenda by ensuring that Government coordinates its action in this area.

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Paragraph

Lead and participating organisations

Timescale

5.33, 5.37, 5.38, 5.41

DTI, DEFRA, DfT, Cabinet Office, EA, HSE

Best practice guide by Autumn 2004; environmental regulatory framework project by Summer 2004.

6.20, 6.19, 6.21, 6.24,

DTI, RDAs, HMT, DAs, ONS

New PSA by February 2005; outline set of innovation indicators by March 2004.

6.33

DTI, RDAs

By April 2004.

6.36

DTI, RDAs, SBS, DAs

From April 2004.

7.33, 7.39, 7.14, 7.26

DTI and UKTI, with OST, RDAs, DAs

From April 2004.

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LINK Programme

136

List of LINK programmes

LINK programmes open to new project proposals

Biosciences/Medical

     

Electronics/ Communications/IT

   

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Applied Genomics Bioremediation Genetic and Environmental Interactions in Health Health Technology Devices Programme Integrated Approaches to Healthy Ageing Sustainable Technologies Initiative

E-Science GRID Technologies Information Storage and Displays Mobile Phones and Health People at the Centre of Communications & Information Technology  Basic Technologies for industrial applications  Sustainable Technologies Initiative

Annex

List of LINK programmes

LINK programmes open to new project proposals

Energy/Engineering

    

Basic Technologies for Industrial Applications Foresight Vehicle Ocean Margins Sustainable Technologies Initiative The Innovative Manufacturing Programme

The Innovative Manufacturing Programme, of EPSRC, funds a number of Innovative Manufacturing Research Centres, each funded over five years. Eleven have been established to date, and four more are planned. Within each centre a number of projects will be carried out, and some of these will operate under LINK rules. The Centres will cover the following sectors:  Integrated Healthcare Technologies  Aerospace  Construction  Road Transport  Process Industries  Electronics.

Food/Agriculture

      

Materials/Chemicals

 Manufacturing Molecules  Basic Technologies for Industrial Applications  Sustainable Technologies Initiative

Advanced Food Manufacturing Earth Observation Food Quality and Safety Horticulture Sustainable Arable Programme Sustainable Livestock Production Sustainable Technologies Initiative

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Faraday Partnerships Today Faraday Partnerships bring together about 51 university departments, 27 independent research organisations, 25 intermediary organisations and more than 2,000 firms large and small.

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Faraday Partnership

Description

Direct web link to the home page of the Faraday Partnership

ADVANCE

Automotive and aerospace materials.

www.faraday-advance.net

COMIT

Communications and mobile information technology.

www.comit.uk.com

CRYSTAL

Green technology for the chemical and allied industries.

www.crystalfaraday.org

EPPIC

Electronics and photonics packaging and interconnection.

www.eppic-faraday.com

FIRST

Innovative remediation science and technology.

www.firstfaraday.com

Food Processing

Developing the underpinning materials, equipment and process knowledge applicable to food processing.

www.pera.com/foodfaraday/index.asp

Genesis

Farm animal genetics and genomics.

www.genesis-faraday.org

High Power RF

Industrial applications of high power radio frequency engineering.

www.powerfaraday.org.uk

Imaging

Digital imaging.

www.imagingfp.org.uk

IMPACT

Innovative materials development and product formulation by the application of colloid technology.

www.impactfp.org

Industrial Mathematics and System Engineering

Industrial mathematics and system engineering.

www.smithinst.ac.uk

INREB

Integration of new and renewable energy in buildings.

www.inreb.org

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Annex

Faraday Partnership

Description

Direct web link to the home page of the Faraday Partnership

Insight

High throughput technologies for new product and process development.

www.insightfaraday.org

Intersect

Intelligent sensors for control technologies.

www.intersect.org.uk

Medical Devices

Providing a UK focus to the area of medical devices.

www.medical-devices-faraday.com

Mini-waste

Novel technologies and processes for the minimisation of industrial waste.

www.mini-waste.com

Packaging

Practical innovation for fastmoving consumer goods packaging, its manufacture and supply.

www.faradaypackaging.com

Pinpoint

Global navigation satellite systems (GNSS) applications.

www.pinpoint-faraday.org.uk

Plastics

Enabling research to meet the critical technological challenges of the plastics sector.

www.faraday-plastics.com

PRIME

Smart products (products with inter-dependent mechanical and electronic parts).

www.primefaraday.org.uk

Pro-Bio

Bio-catalytic processes for manufacturing.

www.pro-bio-faraday.com

PowdermatriX

Rapid manufacturing through powder processes.

www.powdermatrix.org

Smart Optics

Access to new optics technologies.

www.smartoptics.org

Technitex

A focus for academic excellence, industrial innovation and best practice in technical textiles.

www.technitex.hw.ac.uk

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Glossary of terms

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ACAS Advisory, Conciliation and Arbitration Service AGES Attracting Global Entrepreneurs AMP Advanced Manufacturing Park BAT Best Available Techniques BBA British Bankers’ Association BBSRC Biotechnology and Biological Sciences Research Council BERD Business Enterprise Research and Development

DA Devolved Administrations DARP Defence and Aerospace Research Partnership DCMS Department of Culture Media and Sports DDA Defence Diversification Agency DEFRA Department For Environment, Food and Rural Affairs DfES Department for Education and Skills

BL Business Link

DfT Department for Transport

BLW Business Link Wessex

DGRC The Director General of the Research Councils

BRTF Better Regulation Task Force

DoH Department of Health

BSG Broadband Stakeholder Group

DTC Defence Technology Centre

BSI British Standards Institution BVCA British Venture Capital Association CAA Civil Aviation Authority Capex Capital Expenditure CBI Confederation of British Industry CF Constant Frequency

142

CSL Centre for the study of Language and Information

DTI Department of Trade and Industry DWP Department for Works and Pension EA Environment Agency ECF Enterprise Capital Funds EEF Engineering Employers Federation EMDA East Midlands Development Agency

CIS Community Innovation Survey

EPSRC Engineering and Physical Sciences Research Council

CMI Cambridge/MIT Institute

ERA European Research Area

CO2 Carbon Dioxide

ERDF European Regional Development Fund

COD Chemical Oxygen demand

EU European Union

CoVEs Centres of Vocational Excellence

FCO Foreign and Commonwealth Office

CPD Continuous Professional Development

FDA Factors’ and Discounters’ Association

CSEL Centre for Scientific Enterprise Limited

FDI Foreign Direct Investment

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Glossary of terms

FE Further Education

LSC Learning and Skills Council

GDP Gross Domestic Product

MAS Manufacturing Advisory Service

GEM Global Entrepreneurship Monitor

MBA Masters of Business Administration

HCRC Human Communication Research Centre

MDF Medium Density Fibreboard

HEBI Higher Education Business Interaction

MNT Microsystems and Nanotechnology Network

HEIF Higher Education Innovation Fund

MoD Ministry of Defence

HEIs Higher Education Institutions

MPC Monetary Policy Committee

HMT Her Majesty’s Treasury

MRC Medical Research Council

HSE Health and Safety Executive

MS™ Microsoft

IC CAVE International Centre of Computer Games and Virtual Entertainment

MSSL Mullard Space Science Laboratory

I&C Information and communication ICASS Innovators and Counselling and Advisory Service Scotland ICT Information and Communications Technologies IDE Industrial Design and Engineering IGT Innovation and Growth Team IP Intellectual Property IPAC Intellectual Property Advisory Committee IPPC Integrated Pollution Prevention and Control IPR Intellectual Property Rights ISW Inspire South West JIF Joint Infrastructure Fund

LEC Local Enterprise Companies LED Light Emitting Diode LGC The former Laboratory of the Government Chemist

NBAN National Business Angel Network NEL National Engineering Laboratory NGOs Non-governmental organisations NHS National Health Service NIAC National Intellectual Asset Centre NIST National Institute of Standards and Technology NMIs National Measurements Institutes NMS National Measurement System NPL National Physical Laboratory NSSF National Standardisation Strategic Framework NVQ National Vocational Qualification NWDA North West Development Agency NWML National Weights & Measures Laboratory NWSC North West Science Council ODPM Office of the Deputy Prime Minister

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OECD Organisation for Economic Co-operation and Development OFT Office of Fair Trading OGC Office of Government Commerce ONS Office for National Statistics OST Office of Science and Technology PACER Proposal Assistance for Coordination of European Research PhD Doctor of Philosophy PSA Public Service Agreement PSRE Public Sector Research Establishment R&D Research and Development RCA Royal College of Art RCME Regional Centres for Manufacturing Excellence RCUK Research Council UK RDAs Regional Development Agencies RIF Regional Innovation Fund RSA Regional Selective Assistance RTOs Research and Technology Organisations S&T Science and Technology SBIC Small Business Investment Company SBRI Small Business Research Initiative SBS Small Business Service SE Scottish Enterprise SEIC Systems Engineering Innovation Centre SET Science, Engineering and Technology SET Base Science Engineering and Technology Base

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SIC Science and Industry SIE Scottish Institute for Enterprise SME Small and Medium Enterprise SMF Standard Mammogram Form SPAF Scottish Proposals Assistance Fund SRIF Science Research Investment Fund SSDA Sector Skills Development Agency STEM Science, Technology, Engineering and Mathematics TCS Teaching Company Scheme TGWU Transport & General Workers Union TME Total Maintenance Engineering TTOs Technology Transfer Offices TUC Trades Union Congress UCL University College London UfI University for Industry UKTI UK Trade and Investment UN United Nations US United States UK United Kingdom USA United States of America UTC University Technology Centre VAT Value Added Tax VF Variable Frequency VMS Variable Message Signs

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The DTI drives our ambition of ‘prosperity for all’ by working to create the best environment for business success in the UK. We help people and companies become more productive by promoting enterprise, innovation and creativity. We champion UK business at home and abroad. We invest heavily in world-class science and technology. We protect the rights of working people and consumers. And we stand up for fair and open markets in the UK, Europe and the world.

Steering Committee Members Nick Baldwin Energy Advisory Group Board Robert Crawford Scottish Enterprise John Cridland Confederation of British Industry Anthony Dunnett South East of England Development Agency Mark Gibson Business Group, DTI Anne Glover Amadeus Capital Partners Ltd. David Hughes Innovation Group, DTI John Kingman HM Treasury Ron Loveland Welsh Assembly Roger Lyons AMICUS Geoffrey Norris No. 10 Policy Directorate Vicky Pryce Chief Economic Adviser, DTI Janice Shiner Department for Education and Skills John Taylor OST, DTI Joe Tidd Science and Technology Policy Research, University of Sussex Caroline Whitfield Innovation Group Advisory Board

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Competing in the global economy: the innovation challenge DECEMBER 2003

Competing in the global economy: the innovation challenge

Printed in the UK on recycled paper with a minimum HMSO score of 75. First published December 2003. Department of Trade and Industry. http://www.dti.gov.uk/ © Crown Copyright. DTI/Pub 7035/2k/12/03/NP. URN 03/1607