finance

Britain suffers from outdated thinking on innovation


The business secretary Kwasi Kwarteng is working on a new innovation strategy for the UK. We clearly need one. Covid-19 has hurt our economy, but we had longstanding issues before the pandemic such as low productivity growth and major regional disparities. The government’s shift to a greener agenda will also require us to innovate as a nation to hit net zero. 

For the strategy to be any good, it must confront the reality of the UK economy. We are not Germany, with its focus on manufacturing — 80 per cent of the UK economy is services. Many of our leading sectors such as finance, law, design and the creative economy are focused on more intangible products of knowhow and brand. Current ways of thinking about innovation can seem not to have moved on to reflect this.

The UK’s research and development tax credit specifically excludes research in the Shape (social science, humanities, arts for people and economy) disciplines. The OECD’s “Frascati Manual, used to standardise the collection of statistics on R&D, recognises that R&D might involve behavioural science, economics, history or design as much as engineering or clinical trials. Indeed research in companies around issues such as artificial intelligence, data science and behavioural science is increasingly interdisciplinary — it is time to reform the R&D tax credit so it is in line with modern business practice. Similarly, the intellectual property system needs reviewing so it is fit for a services economy. 

The UK’s success in vaccine development provides lessons. Innovation can occur at speed, but needs strong foundations in the research base and skills. The government has committed to increasing investment in R&D to the OECD average of 2.4 per cent of gross domestic product by 2027.

This is necessary but not sufficient: it is not a linear process from basic research to commercialisation. Not all universities are well set up to commercialise research effectively, and business can find it difficult to engage with them. We need better incentives to bring them together.

As well as thinking about the supply side of research, an innovation strategy must think about the demand side of who will pull the new product into market. Vaccine developers were guaranteed a market through the contracts that the UK arranged and support was provided, for example to Novovax, with manufacturing and clinical trials. Where else can public procurement be used to create early markets for new products and services to help speed up their development and uptake? 

It is important to remember that innovation is not just about waving our hands at high-tech sectors and using the phrase “machine learning” a lot. Where we really need some innovation is in what are too often dismissed as relatively unglamorous sectors that are stuck in a cycle of low-pay, low-skilled jobs such as retail, hospitality.

Innovation is also not confined to business alone. As a recent review by the British Academy shows, many of the issues we face as a nation post-pandemic are social as well as economic. The pandemic has exacerbated inequalities, left a legacy of mental health issues and raised a variety of policy questions around the way we organise our urban centres, work lives and transport systems. In the coming decade, we will need social innovation by civil society and policymakers alongside business innovation. The new strategy will miss a trick if it forgets this. 

The operating environment has been frenetic in recent years with Brexit, the pandemic, and changing policies. A senior government figure told me they wanted the innovation strategy to last a decade or more. I asked which of the coalition government’s policy frameworks from a decade ago were still in place? I was met with silence. Industrial strategy was in vogue for a while, but has now gone.

Business and the research community need stability to plan and invest, so the question is how to guarantee that the new innovation strategy will be around for longer than a few years. Ironically, innovation requires some certainty. 

The writer is chief executive of the British Academy, the UK’s national academy for the humanities and social sciences



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