Science, Innovation and the Economy: UK Challenges and Opportunities

Science, Innovation
and the Economy:
UK Opportunities and Challenges
Tera Allas
July 2014

2
Science, Innovation and the Economy –
• Background: BIS evidence exercise, HMT/GO-Science/BIS
instruments review, MOFI conference
• Context: science and innovation are at the heart of productivity,
competitiveness and growth
• Innovation systems: complementarities and complex
interactions can generate increasing returns
• UK’s strengths: world-class assets, highly productive
knowledge creation and conducive business environment
• UK’s weaknesses: poor absorptive capacity and lack of depth
and dynamism in both public and private sector
• Implications: need for a whole-system policy making
framework that recognises public sector role

3
BIS’s evidence exercise benchmarked UK’s
science and innovation leadership
Exam question for the project on international comparative evidence
on the performance of the UK’s science and innovation system
"What does international
comparative evidence tell us about
the key challenges we need to
address in order to maintain and
develop the UK's global leadership
position in science and innovation?"

4

5
Growth theory attributes increased
productivity to technological progress
Cobb-Douglas production function
Y = A * Ka * Lb
Total Output = Total Factor Productivity *
Capital Inputa * Labour Inputb
“A measure of the
economy’s technological
dynamism”

6
A large proportion of UK productivity growth
is associated with innovation activities
Sources of growth in UK labour productivity 2000-2008
Health warning: these figures are volatile from year to year
Captures the impacts
of the science and
innovation system
Key input into
innovation activities
Source:UKInnovationIndex:ProductivityandGrowthinUKIndustries,NESTAWorkingPaper12/09,(NESTA,2012)

7
There is a correlation between innovation and
labour productivity at the firm level
Correlation coefficient between (log) sales from innovative products
per employee and labour productivity
Source:Criscuolo,Chiara(2009)InnovationandProductivity:EstimatingtheCoreModel
across18Countries,inInnovationinFirms–aMicroeconomicPerspective,OECD
Allresultssignificantat1%levelexcept(1)significantonlyat10%leveland(2)significant
onlyatmorethan10%

8
More innovative companies achieve higher
sales growth than non-innovators
Sales growth of UK innovators and non-innovators 2006-2009
Annual growth, %
Source:(NESTA,2009)InnovationIndexsurvey,responsesweightedtogiverepresentativeresults
Innovators
Non-innovators

9
The UK’s comparative advantage derives
from knowledge and R&D intensive sectors
UK revealed comparative advantage* in selected sectors 2011
** = R&D intensive sector; *** Highly innovation active sector
Source:BIScalculationsbasedonUNCOMTRADEandIMFdata;BISEconomicsPaper15Figures34and35
*Apositiverelativecomparativeadvantage(RCA)valueindicatesthatcomparedtotherestoftheworld,
asectorrepresentsadisproportionatelylargeshareofacountry’soverallexports;1wouldimplyacountryis
completelyspecialisedinaspecificsector;-1thatthecountryhasnoexportsinthatsector;and0thatthe
shareofthesectorinthecountry’sexportsisexactlythesameastheworldshareofthatsector
**
**
**
**
**
**
*****
***
***
***

10

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Science and innovation systems are complex
and can contain virtuous or vicious circles
Bird’s eye illustration of the UK’s science and innovation system
Source:https://www.gov.uk/government/publications/science-and-innovation-system-international-benchmarking

12
For example, more public money for science
can “buy” more than just better research
Illustrative example of what public sector science funding can “buy”

13
Indeed, there is a strong correlation between
public and private sector R&D investment
*GovernmentfinancedGrossExpenditureonR&D;**TotalGrossExpenditureonR&D(GERD)minusGovernmentfinancedGERD
Source:OECD,BISanalysis
Government and business expenditure on R&D 2011
% of GDP

14
The public and private innovation expenditure
link also holds at the firm level
Correlation coefficient between receiving financial public support
and (log) innovation expenditure per employee
Source:Criscuolo,Chiara(2009)InnovationandProductivity:EstimatingtheCoreModel
across18Countries,inInnovationinFirms–aMicroeconomicPerspective,OECD
Allresultssignificantat1%levelexcept(1)significantonlyat10%leveland(2)significant
onlyatmorethan10%

15
Effective S&I systems rely on a large number
of elements that work well together
Money (investment, expenditure, financing)
• Sufficient public sector funded research
(often performed in HE institutions)
• Strong private sector funded and performed
research (relative to industrial structure)
• Funding from other sources (charity/third
sector and overseas)
Talent (human capital, absorptive capacity)
• Population instilled with intellectual curiosity
and inspired by science
• Ability to grow, attract and retain world-
class researchers
Knowledge assets (science base, IP)
• World-class, internationally collaborative,
highly cited published research
• High-quality research facilities
Structures and incentives
• Competitive excellence driven funding, with
sufficient stable investment in new areas
• Balance between curiosity-driven (“pure”)
and needs-driven (“applied”) research
• Balance between deep expertise and inter-
disciplinary research
• Meaningful (public/private) career paths for
world-class researchers
Broader environment
• Sufficient number of companies willing and
able to invest in knowledge creation
Money
• Effective funding for applied research and
innovation investment (public and private)
Talent
• Sufficient quantity of individuals in firms and
public sector with right absorptive capacity
‒ Specific science and technology
understanding
‒ More generic basic, STEM,
knowledge management and
business translation skills
Knowledge assets
• Strong business/academia co-authorship
• High-performing clusters with world-class
research institutions and and critical mass
Structures and incentives (institutions,
collaboration, co-ordination)
• Incentives for business/researcher
collaboration, co-creation and mobility
• Sufficient co-ordination and strategic
alignment among key actors
• Effective challenge-led programmes
Broader environment (structure of the
economy, tax and regulation)
• Open markets encouraging innovation as a
source of competitive advantage
• Mutually reinforcing activities within and
links between science base and firm base
Money
• Timely access to risk capital (alongside
advice, skills, networks, market disciplines)
• Exit routes that provide access to markets
and finance for growth companies
Talent
• Entrepreneurial aspirations and business
building skills
• General business skills (e.g., strategy,
management, marketing, production)
Knowledge assets
• Patents, trade-marks and other
commercialisable IP
Structures and incentives
• Sufficient intellectual property protection to
incentivise innovation and capture value
Broader environment
• Productive dynamic between large firms
and vibrant growth companies
• Sophisticated demand, including from public
sector (procurement)
• Generally positive business environment
(tax, regulation, planning, etc.)
Innovation outputs
• Revenues, exports, profits, productivity and
growth derived from science and innovation
• Improved societal outcomes due to better
level and application of knowledge
*Thisisnotacomprehensivelistbutonewhichaimstocapturethemostimportantfeatures;whilethekeycharacteristicsarecategorisedhere
inanecessariy2-dimensionalway,theactualsystemismulti-dimensionalandnon-linear,wheretheconnectionsbetweenelementsarecritical
Knowledge
creation
Knowledge
diffusion and translation
Knowledge
application and value capture
Key characteristics* of an effective science and innovation system

16
The BIS study used a 6-part framework to
benchmark science and innovation systems
Framework for assessing science and innovation systems
2.
Talent
1.
Money
5.
Broader
3.
Knowledge
Assets
6.
Innovation
Outputs
4.
Structures
and
Incentives
Environment
2.
Talent
1.
Money
5.
Broader
3.
Knowledge
Assets
6.
Innovation
Outputs
4.
Structures
and
Incentives
Environment

17

18
Selected countries' share of global expenditure on higher
education in 2010 and global top universities in 2013-14
Source:httpsTheTimesHigherEducationWorldUniversityRankings2013-2014;TAestimatesbased
onUNESCO,OECDandWorldBankdata
3. Knowledge assets
UK is home to a disproportionately large
number of world-class universities
(UK: 31) (UK: 10) (UK: 7) (UK: 3)

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Source:Elsevier(2013)InternationalComparativePerformanceoftheUKResearchBase–2013,
DepartmentforBusiness,InnovationandSkills
3. Knowledge assets
With only 3% of research expenditure, UK
generates 16% of most highly-cited articles
The UK accounts for:
• 0.9% of global population
• 3.2% of world R&D expenditure
• 4.1% of researchers
• 9.5% of academic article downloads
• 11.6% of citations
• 15.9% of most highly-cited articles

20
UK’s field-weighted citation impact across ten research
fields in 2002 and 2012
Source:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/263729/bis-13-1297-
international-comparative-performance-of-the-UK-research-base-2013.pdf
3. Knowledge assets
The UK’s science output is strong across a
broad range of research fields

21
Business enterprise R&D funded from abroad in 2011
% of business enterprise R&D
Source:OECDScience,TechnologyandIndustryScoreboard2013
1. Money
UK businesses attract a large share of the
funding for their R&D from abroad

UK relative score on a number of indicators relating to
structures and incentives operating in the system
1=worst comparator country; 10=best comparator country
Structures and incentives in our science and
innovation system are mostly fit-for-purpose
Source:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/277043/bis-14-
544an-insights-from-international-benchmarking-of-the-UK-science-and-innovation-system-annexes-bis-
analysis-paper-03.pdf;*Surveyquestion
4. Structures and incentives22

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The UK’s business environment is relatively
favourable to science and innovation
5. Broader environment
UK relative score on a number of broader environment indicators
10=highest ranking comparator country, 0=lowest ranking comparator country
Source:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/277043/bis-14-544an-insights-from-
international-benchmarking-of-the-UK-science-and-innovation-system-annexes-bis-analysis-paper-03.pdf

24

25
The UK appears to lag behind in adoption of
technological ideas from abroad
The fraction of potentially useful ideas originating from
the other 4 countries that were ever adopted in the country specified
6. Innovation outputs
Source:Eaton,Jonathan,Kortum,Samuel(1999)InternationalTechnologyDiffusion:
TheoryandMeasurement,InternationalEconomicReview
This is a major
disadvantage, given that
80-90% of productivity
growth is estimated to
be attributable to
technology transfer
derived from foreign
research

26
The UK’s performance in science and
innovation related human capital is mixed
UK relative score on a number of talent indicators
10=highest ranking comparator country, 0=lowest ranking comparator country
2. Talent
Source:,BISanalysisusingOECD,UNESCO,WEF,CEPandIMDdata

27
University qualifiers in
STEM subjects 2011-12
Source:https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/249720/bis-13-1241-
encouraging-a-british-invention-revolution-andrew-witty-review-R1.pdf
2. Talent
The UK’s STEM graduates tend to be
concentrated in life science fields

28
Gross Expenditure on Research and Development (GERD) 1991-2011
% of GDP
Source:OECD(2013)Science,TechnologyandIndustryScoreboard
1. Money
0
1
2
3
4
5
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Per cent
Canada Finland France Germany
Japan South Korea United Kingdom United States
The UK’s investment in R&D has been static
and below comparators since early 1990s

Public and private sector GERD as a % of GDP, 2011
1.0 0.9
0.6
0.8 0.9 0.8 0.8
0.6 0.7
3.0
2.8
2.8
2.0 1.8
1.4 1.4
1.2 1.1
0
1
2
3
4
5
South Korea Finland Japan Germany United States France Australia United
Kingdom
Canada
Per cent
Private and third sector GERD
Government financed GERD
29
The UK appears to significantly under-spend
on R&D relative to comparator countries
Public and private sector gross expenditure on R&D 2011
% of GDP
1. Money
*GovernmentfinancedGrossExpenditureonR&D;**TotalGrossExpenditureonR&D(GERD)minusGovernmentfinancedGERD
Source:OECD,BISanalysis
4.0
3.7
3.4
2.8 2.7
2.2 2.2
1.8 1.8

30
Resource funding allocations to Research Councils
% of total
Source:Innovationandthepublicsector:fromstaticandsub-scaletodynamicandbold
http://www.scribd.com/doc/233785756/Innovation-and-the-public-sector-from-static-and-sub-scale-to-
dynamic-and-bold
*Forcomparability,thefiguresincludetheSTFCallocationthatwasreallocatedtocapital(fromresource)
inthe2010SpendingReview
1. Money
Within this, the public sector’s funding
allocations have remained essentially static

31
Only part of the lower private sector R&D
spend is explained by industrial structure
1. Money
Business Enterprise R&D (BERD) adjusted for industrial structure 2011
% of GDP
Source:OECDScience,TechnologyandIndustryScoreboard2013

32
The UK’s public sector support for innovation
is fragmented across a number of bodies
List of UK government innovation support schemes July 2014
4. Structures and incentives
Source:gov.uk;Witty(2013);Heseltine(2012);departmentalwebsites
Department Innovation support schemes
HM Treasury Patent Box • R&D Tax Credits (Large and Small company schemes)
Department for
Business, Innovation
and Skills
Technology Strategy Board: Catalysts • Catapult centres • Collaborative R&D • Demonstrators •
Eurostars • Feasibility studies • IC Tomorrow • Innovate UK • Innovation and Knowledge
Centres • Innovation Platforms • Innovation Vouchers • Knolwedge Transfer Networks •
Knowledge Transfer Partnerships • Launchpad • Missions • Small Business Research Initiative •
Smart • National Physical Laboratory: Technology Innovation Fund
Department of Energy
and Climate Change
Low Carbon Innovation funding • Office for Low Emission Vehicles (OLEV) • Energy
Technologies Institute
Department of Health Health Innovation Challenge Fund • Innovation, Excellence and Strategic Development Fund •
National Institute for Health Research: Invention for Innovation (i4i) Programme
Ministry of Defence Centre for Defence Enterprise • Defence Science & Technology Laboratory
Research Councils Rainbow Seed Fund • Follow-On Fund • Funding for applied and collaborative research •
Collaborative training
Other related
initiatives
Devolved Administrations’ schemes • Local schemes • University Enterprise Zones • Higher
Education funding bodies’ support (incl. Higher Education Innovation Funding, UK Research
Partnership Investment Fund) • Government enterprise support schemes (e.g., Regional Growth
Fund, Growth Accelerator, Manufacturing Advice Service, Enterprise Investment Scheme,
Enterprise Finance Guarantee) • UK Trade & Investment services (e.g., Export Marketing
Research Scheme) • Various other departmental initiatives

33
Source:TSB,BISandFraunhoferInstitutewebsites
1. Money
The UK’s main network of collaborative R&D
centres is much smaller than in Germany
Germany UK
Name Fraunhofer Institutes Catapult centres
Budget in
2013
£1.7bn £330m
Number of
staff
23,000 n/a
Number of
units
67 7
Key statistics on UK and Germany collaborative R&D networks

34
Even with private sector innovation included,
UK’s total investment is only average
Estimated total R&D and innovation investment 2011
% of GDP
1. Money
*GovernmentfundedGrossExpenditureonResearchandDevelopment(GERD);**GERDminusGovernmentfunded
GERD(unadjustedforindustrialstructure);***Seeseparatemethodologicalnote(unadjustedforindustrialstructure)
Source:OECD,IMF,Corradoetal2010data,BISanalysis

35
Source:Source:Innovationandthepublicsector:fromstaticandsub-scaletodynamicandbold
http://www.scribd.com/doc/233785756/Innovation-and-the-public-sector-from-static-and-sub-scale-to-dynamic-and-bold
5. Broader environment
There is a lack of innovation depth and
dynamism in the UK’s business population
In the UK:
• Only 20% of SMEs have significant ambitions to grow
• Fewer than 20% of SMEs engage in exports
• Fewer than 20% entrepreneurs are internationally oriented
• Fewer than 15% of companies engage in innovation that isn’t
classified as “acquisition of computer software and hardware”
• Fewer than 15% of firms provide training for innovation
activities
• 0.001% of firms account for more than 50% of business R&D

Worryingly, only 7% of UK businesses’
turnover is accounted for by innovation
Turnover derived from new to market and new to firm innovations 2010
% of turnover
Source:EuropeanCommission(2014)InnovationUnionScoreboard
(http://ec.europa.eu/enterprise/policies/innovation/files/ius/ius-2014_en.pdf)

Overall performance on innovation outputs is
mixed*, with apparent weaknesses in SMEs
UK relative score on a number of innovation output indicators
10 = highest ranking comparator country; 0 = lowest ranking comparator country
Source:BISanalysisusingOECDandIUSdata
*Therearefewreliablemetricsofinnovationoutputacrosscomparatorcountries;forsome
oftheindicatorsbelow,areducedlistofcountries(Germany,France,Finland,UK)wasused

38

39
In sum, the UK’s main weaknesses are overall
under-investment and human capital issues
Summary of the relative performance of the UK’s S&I system
Element
Relative
performance Comments
Money Medium / Low • Public sector support for both R&D and innovation low (but data imperfect)
• Private sector R&D investment low even after adjusting for industrial structure
• Relatively high private investment in innovation does not outweigh low R&D
Talent Medium / Low • Long-standing issues in basic numeracy and literacy, STEM and especially
engineering disciplines, and management skills
Knowledge
assets
Medium / High • Extraordinary productivity of science system as measured by highly quoted
articles and field-weighted impact
• Relatively poor performance on patents not a good indicator of value added
Structures and
incentives
Medium / High
(*)
• Excellence driven competitive system praised by other nations
• Questions about whether portfolio coherent and complementary enough
Broader
environment
Medium / High
(*)
• Overall business environment positive in comparison to non-US comparators
• Issues around dynamism and ability of business population to fully exploit
science and innovation
Innovation
outputs
Medium
(mixed)
(*)
• Export performance and general competitiveness relatively high
• Low levels of innovation active SMEs and questions about innovativeness (and
productivity) of sectors less exposed to global competition
(*) The table shows assessments as in the original BIS study; on basis of further evidence since then, “Structures and incentives”, “Broader
environment” and “Innovation outputs” would likely be assessed as worse than shown here

The government
1. Sets the tax and corporate governance framework, planning regime and
other regulations – including antitrust and intellectual property
2. Is a major economic actor in its own right (govt expenditure accounted for
43% of GDP in 2012-13) – so major demand-side innovation driver
3. Funds critical inputs into the innovation system: education and skills,
scientific research and infrastructure
4. Targets growth and innovation through an array of policies – standards,
regional / local, export promotion, enterprise schemes, innovation support
40
The public sector has an important role in
enabling and stimulating innovation
Public sector role in enabling and stimulating innovation

41
Maximising value of science and innovation
requires co-ordinated whole-system policies
Element Potential priority issues to address
Money • Addressing under-investment in non-incremental way
• Recognising potential increasing returns in instrument design and funding
Talent • Addressing basic numeracy and literacy, STEM, management skills
• Considering government levers to raise aspiration and entrepreneurship
Knowledge
assets
• N/A
Structures and
incentives
• Linking innovation support more seamlessly into other business support
• Managing science and innovation investment as an active portfolio
• Further aligning Industrial Strategy with science and innovation strengths
Broader
environment
• Attracting R&D intensive corporations to locate and stay in the UK
• Ensuring access to finance interventions are of sufficient scale and co-
ordinated with industrial strategy and science and innovation policy
Innovation
outputs
• Understanding drivers of innovation in service sectors
• Understanding further causes of poor innovation performance of SMEs

42
It may be best to focus on fewer, bigger
policy instruments to maximise outcomes
Source:Allas(2014)Innovationandthepublicsector:fromstaticandsub-scaletodynamicandbold
http://www.scribd.com/doc/233785756/Innovation-and-the-public-sector-from-static-and-sub-scale-to-dynamic-and-bold
Illustrative costs, benefits and net benefits of a
government intervention as a function of scale

43
A number of questions remain to be
discussed and debated
Questions for discussion
• What might be the cause of, or any solutions to, UK firm
population’s poor innovation performance?
• How could supply of STEM graduates to non-finance
sectors be increased affordably and sustainably?
• Do you agree that public sector has a major role in
driving innovation in the economy?
• Do you agree that fewer, bigger innovation policies
might make a bigger difference to outcomes?

Tera Allas
tera@allas.net
@TeraPauliina
July 2014
BIS report and annexes available at:
https://www.gov.uk/government/publications/science-and-innovation-system-
international-benchmarking
Paper for Mission Oriented Finance for Innovation available at:
http://www.scribd.com/doc/233785756/Innovation-and-the-public-sector-from-
static-and-sub-scale-to-dynamic-and-bold
Science, Innovation
and the Economy:

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