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By Marco Pisano, Julian David, Woz Ahmed, Tony King-Smith
Workstream Sponsor : Sir Hossein Yassaie, Chief Executive, Imagination Technologies
CONTENTS
3 Section 1 Introduction
4 Section 2 Views from the cockpit – what our leaders said
There is success to build on in the UK
Export or Die - achieving scale through export-led growth
Public sector and regulated industries can become National Markets of Scale
Better alignment between government initiatives and ES industry reality
Cultural issues affecting innovation
People are still the UK’s best asset – but engineering needs to be made more attractive
The UK cannot survive only as a ‘consumer society’
Customers as innovation drivers
10 Section 3 Where does it work: international examples
USA
Japan
China and Hong Kong
Taiwan
South Korea
12 Section 4 Themes for action and recommendations
Supply-side factors
Capital
People
Demand-side factors
Public sector markets
Regulated markets
Detailed Recommendations
Appendices
Responses to one-to-one interviews
List of interviewees and breakfast meeting participants

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The document is part of the ESCO (Electronic Systems – Challenges and Opportunities) initiative which is a collaborative effort across
trade associations, government and other stakeholders with the objective to define and outline the state of the Electronic Systems (ES)
community in the UK. This document assesses the innovation climate in Electronic Systems as seen by UK industry leaders and
overseas experts and provides public policy-makers with their insights on the state of UK’s competitiveness in technology. The questions
of ‘what works well’ and ‘what needs to happen’ are considered with the intent to outline a set of recommendations for government and
industry in order to allow both parties to create an environment truly conducive to technology innovation and sustainable economic
growth. The purpose of this section of the ESCO report is to get answers from the industry leaders we have today to this question:
What do we need to do to ensure we have an economy and a society where innovation can succeed and where innovative companies can
grow to the scale needed to deliver the economic growth and high value jobs we need for the future?
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The focus of this section of the report is the innovation climate and it was written by a joint team from Intellect and Imagination
Technologies. It is based on responses gathered in a series of semi structured interviews carried out between May and August 2012 with
UK business leaders from key parts of the ES value-chain ranging from Semiconductor IP and Embedded Technology Suppliers to Original
Equipment Manufacturers (OEMs) in both niche and mass markets. In order to gather the input from Industry players we conducted a
series of guided one-to-one interviews and also held a CEO roundtable meeting hosted by Imagination Technologies and Intellect in May
2012 with the participation of Tim Luke, Senior Adviser on Business, Trade and Innovation at Number 10 Policy Unit and Mark Turner
from BIS. Companies involved included Imagination Technologies, ARM Holdings, McLaren Electronics, Amino Communications, Sharp
Electronics, Dialog Semiconductor, Stadium Electronics, Aptina Imaging, Apical, Plessey Semiconductors and Wolfson Microelectronics.
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The UK ES community directly employs around 856,000 in the UK and directly contributes around £78bn (5.4%) to UK GDP. However ES
industry products are also fundamental contributors to the progress and competitiveness of almost all other industry sectors from
Automotive to Healthcare and Consumer Products to Smart Energy, which gives the sector an added importance to UK PLC.
The technology landscape in the UK has developed somewhat differently from North America and Asia. Britain did not witness the
massive growth of consumer firms like Apple and the rise of global internet giants such as Google and Facebook nor the emergence of
state-backed OEMs like Samsung and Huawei. Early leading companies including GEC, Marconi, Ferranti and Racal have been unable to
sustain or generate adequate revenues over the years and have therefore fallen into breakup or acquisition. In both cases this has
usually meant shrinkage of UK jobs and investment as evidenced by the fact that few tech powerhouses are listed today in the FTSE 350.
The UK has a very good record of start-ups and spin-offs but although they are world-class creators of great product and technology
concepts, they often fail to turn their inventions into a product or solution that can be monetised.
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Megatrends such as climate change and ageing population are triggering the potential for new technologies and emerging markets. Low
power, for example, is a major technology driver in many vertical sectors, impacting everything from user mobility to national power
usage. The DECC/Ofgem Smart Grid Forum estimates that the cost of upgrading the distribution network in a smarter way will be £27
billion between 2012 and 2050 - while according to a recent Smart Grid GB report, 57% of the economic value is likely to be generated in
the manufacturing part of the supply-chain and 27% in the ICT sector.
Another growing area is the medical sector, where innovation is triggering smart solutions to monitor patients and release drugs -
improving people’s lives and reducing load on an overstretched healthcare system. Many devices and services are thus emerging and
could represent an interesting market of scale for UK electronics companies. The UK has already the largest medical market in Europe
worth US$9.2 billion (which includes the UK electro-medical market estimated at US$606 million in 2012) according to Espicom.
Another major opportunity is represented by the growth predictions for the number of devices connected to a communications network
(the most widely quoted figure is from Ericsson, which predicts that there will be 50 billion connected devices globally by 2020) that
could bring direct global revenues estimated between $948 billion and $2.5 trillion by 2020 (source: GSMA). Hence UK companies may
have vast opportunities to capitalise on these markets – often referred to as the “Internet of Things” (a constellation of smart objects
each of which is networked, rather than isolated. In their domain of operation they will have unique identities, but most of the low-level
communication will not be over TCP/IP) - if the right conditions are in place.

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Before answering the question of how to support innovation in the UK, our panel of leaders considered the nature of innovation.
Many leaders interviewed highlighted that the key to innovation is to improve existing concepts by increasing the product scope and
adding services that are truly beneficial to customers. One of our technology leaders cited Apple’s success in digital and online music as
an exemplar of the approach of combining product innovation, service innovation and design innovation at its best: ‘...At the other end of
the spectrum there is Apple - which has famously chosen to join together technology and customer usability, winning the battle with
Japanese companies such as Sony who were innovating primarily through product novelty. By focusing on ergonomics and design Apple
won the ‘usability’ war in recordable music...Whereas companies like Sony were focussed on selling technology, Apple managed to focus
on the ‘ecosystem’ (i.e. content from music labels) and create the click wheel interface of the iPod together with iTunes, which kept
consumers ‘locked in’ [Paul Hide, Sharp].
Our technology leaders also pointed out that innovation does not always lead to success. Sometimes the most creative ideas are poorly
executed or arrive too late into the marketplace failing to meet customers’ deadlines and requirements. Sometimes external or other
factors can frustrate good innovation. It was felt that this is not something to fear but to learn from. It is generally accepted that Silicon
Valley in the USA is the most successful location for innovation globally and yet it is also seen as a place where failures can be accepted
as building blocks of that success both in terms of the reputation of innovators and their ability to get backing and support for new
ventures.
The rest of this section contains a summary of the areas that our CEOs believe are the keys to success in driving innovation and growth
in the Electronic Systems industry and also in other new sectors.
There is success to build on in the UK
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The UK has a unique DNA for technology innovation that is already proven globally. We shouldn’t feel the need to try and recreate Silicon
Valley, Israel or anywhere else –we already have many global leaders of innovation respected in the world for their creativity and
independent thinking. However, many more of these innovative companies tend to be acquired by companies outside the UK. Too many
companies must rely on success outside the UK to survive – that’s where we need to change the dynamics. We have an innovation
climate – however we need to work with government to stimulate and nurture much more within the UK, incubating UK-based companies
with early business success in the UK complementing export success. Lead customers are the lifeblood of young, innovative companies
– we need to ensure that many more lead customers are based here in the UK.
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UK innovations are already at the heart of many of the world’s most exciting and iconic products from the biggest brands. These UK
companies supply ES technologies in many forms (Imagination, ARM, McLaren, NDS/Cisco, Rolls Royce, and many more). This should
provide the springboard for growth of end product “brands” here in the UK – but it doesn’t. Instead, lead customers in the US and Asia
are the main drivers creating the demand for UK innovations. This is wasting the unique base of innovative technologies developed here
in Britain: these should be harnessed for UK end products and brands enabling them to be more competitive in global markets, and to
make bigger contributors to the UK economy.
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Brands capture by far the largest ROI of the value of innovation; it’s vital that we work together to create world-class global technology
brands based in the UK. Over the past 30 years, many household brand names in the UK have simply disappeared (GEC, Racal, Decca,
ICL, Marconi, etc), and haven’t been replaced. We need to work with government to make these companies happen, through focused
investment by government and industry.

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Creating companies and markets of scale is another key issue. The disappearance of Electronic Systems or Consumer Electronics home
grown giants such as Marconi and the present lack of companies or markets of scale has become an important strategic issue for the
UK. This means that for UK ES players the need to stimulate exports (especially outside of Europe) is fundamental to enable survival and
growth. As discussed above many ES companies have embraced this fact and have successfully established themselves as global
brands but more needs to be done both by industry and government.
UK Trade Investment (UKTI) should reach out to more companies and support their expansion overseas. The efforts that have been
applied in the GREAT campaign are welcomed, as is the successful focus on TechCity and the promotion of the UK’s Creative Industries.
What we need to see is a similar push to help Electronic Systems companies. For example a similar approach to boost exports by
promoting existing UK ES technology clusters (e.g. Silicon Fen, M4 corridor) which are well known internally but have a relatively low
profile globally would yield significant progress. As the government acknowledges ‘.... major international events and a media culture
that cherish innovation are great opportunities to promote UK technology and electronics abroad‘. The UK has managed to produce a few
visible brands such as Dyson and McLaren that could be used as international marketing stories to showcase British technology and the
panel of CEOs involved believe that UK Electronic Systems capability must be at the forefront of future UKTI initiatives. This will provide
the opportunity to expand Tech City to encompass Tech UK!

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UK based ES companies should also be able to organise themselves by creating successful clusters and ecosystems to ensure
permanent collaboration and mutual support in promoting own technology abroad.
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Public sector and regulated industries can become National Markets of Scale
As well as finding Markets of Scale through export there is a way nearer to home to allow UK ES companies to grow, which is to
encourage innovation in the publicly funded or regulated industries in the UK such as Energy, Healthcare, Defence and
Transport. So far this has not happened at a speed and in a strategic enough manner to allow UK ES companies to thrive.
‘Risk aversion among private investors is matched with a general reluctance to embrace new technologies by many tax payer funded
sectors including healthcare, transport and defence. This adverse attitude is in sharp contrast with what happens in other countries
where there is a better drive and confidence to embrace change’ [Warren East, ARM].
Technology companies could be developing world-class solutions for the public sector in the UK that would allow them to export globally
once their products have proven successful at home. A systematic approach involving co-creation of innovation between the NHS and
the private sector, for example, would allow patients to access cutting-edge technology and at the same time bring wider economic and
societal benefits by allowing UK SMEs to grow and create high level jobs as a result.

7. ¡ ¢ £ ¤ ¥ ¡ ¥ ¦ § ¡ ¨ © ‹
‘The NHS, in particular, with its scope and resources could represent a huge engine of UK innovation if it overcomes present cultural
barriers’ [Peter van Manen, McLaren Electronic Systems].
Similar approaches would work well in other areas driven by the government such as green-tech and transport infrastructures. The UK
should look at megatrends affecting the world today such as ageing population, energy and healthcare, and invest wisely by offering
business opportunities to companies with a real vision to transform society for the better and, at the same time, generate economic
growth for the country.
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Growing suppliers need lead customers – that’s what will drive their capabilities to become world-class product and service providers.
Coupling the ROI attractiveness of the ES sector with government procurement – design-led as well as manufacturing-led – could make
all the difference, without needing any additional investment from the government. It is effectively a huge investment fund, that wisely
allocated could not only ensure the UK’s major societal projects are the world’s best, but create thousands of jobs that persist long after
those contracts have been completed. That’s the difference between design-led and manufacturing-led procurement: by stimulating the
design of new products, those designs can then be exploited worldwide by the businesses creating them.
Given the tremendous technology capabilities, history and strength as a leading industrialised economy, it is disturbing to see that
according to the World Economic Forum the UK is ranked only 45 out of 144 ranked countries in government procurement of advanced
technology products. Improving this should hence be a key objective of any UK industrial policy.
Better alignment between government initiatives and ES industry reality
…
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The situation is rather different now as the UK failed to protect its competitiveness in manufacturing unlike Germany, where Mittelstand
companies excel in complex, high value niches, and their capabilities are not easily mimicked by foreign competitors. The government
needs to understand and embrace technology better by working more closely with industry as the fast-paced electronics sector is global
in nature and radical change may happen in few years.
In the UK, most companies tend to stay for the quality and skills of local engineers, which are often unique in a particular domain (e.g.
embedded software, audio and broadcast electronics). Government incentives have proven inadequate and universities risk widening the
divide with the private sector. ‘In Israel, for example - a small country with few natural resources - universities are much more dynamic
in marketing their skills to industry’ [Nick Thexton, NDS/Cisco]. Mechanisms should therefore be in place to ensure public purchasers
and research communities are in line with the private sector, which needs to co-invest with government in order to establish a significant
presence in the country. In the medium-term, some CEOs at the breakfast meeting proposed that government match industry on a 1:1
basis in university sponsorship and RD funding in agreed priority areas. Government’s assistance would also be required to help
unlock domestic markets of scale like healthcare, energy and education.
t f d u q e v i t h t q d € x d i r s t h r t i d i € t i p h r € i u q r p v y x u i œ j f € h r i € € i € e f € t t x v i q r t ™ i h q d y p x r p d i y i r t y i € € y w v y x w t q h h r
Technology markets and applications often exhibit winner-take-all (WTA) dynamic(1) where success depends on scaling up faster than
rivals. Only one player can survive, with the losing platforms facing extinction or meagre niche returns, giving rise to various decisions,
e.g. opening a previously closed platform to help proliferate it; suing another platform vendor (or proxy) for infringement or monopolistic
practices. If a market or application segment exhibits WTA dynamics, the platform vendor must invest aggressively to attain scale before
a rival, i.e. first-mover advantage. Notable WTAs include video (VHS vs. Betamax), online auction (eBay), DVD formats (Blu-ray), online
payment (PayPal).
As a result, any UK-based initiatives must be used as world class “showcases” to build global presence, influence and reach. By working
closely with government and other key organisations such as the Technology Strategy Board (TSB), we should be creating showcase
programmes that demonstrate true leadership in UK society, highlighting the power of ES innovation as a key factor in how they achieve
success. These leadership projects in key strategic vertical sectors such as Assisted Living, Intelligent Transport and Smart Homes will
enable the UK to showcase how ecosystems can be created in the UK to solve big and complex challenges better than anywhere else in
the world. This “end solution” leadership then acts as a springboard for all the companies in that ecosystem – not only ES – to sell those
capabilities throughout the world. If the strategic goals of industry and government are truly focused on “winner-takes-all”, then all the
companies associated with that will assume the same attitude, driving business success.

8. ¡ ¢ £ ¤ ¥ ¡ ¥ ¦ § ¡ ¨ © —
Cultural issues affecting Innovation
Many of our most successful company leaders believe that the tradition of innovation in our past has been progressively diminished by a
trend to regard engineering as secondary and less attractive compared to other service based or artistic activities. These are important
industries and contribute much to UK social and economic life but without a major capability in technology and innovation, British society
risks becoming unbalanced and uncompetitive. The extreme shortage of engineers is perhaps the most obvious consequence of the
present overreliance on retail, professional and financial services according to the business leaders interviewed. But in addition there is
a general mindset (fuelled by the media) that jobs in engineering and manufacturing are ‘old fashioned’ and ‘uncool’. Again the
government is now making some good progress to establish a different view of new ICT activities around the internet and this needs to be
matched by progress in making engineering and technology equally attractive.
The right messages should be directed at children at schools, in the various media and at parents. The US does not have a ‘tech crisis’
and yet they keep on investing in advocacy and education with Intel and Google at the forefront. China and India are also climbing the
OECD’s Programme for International Student Assessment (PISA) education rankings and are producing engineers of high calibre. To
encourage students taking up careers in engineering and making electronics more financially attractive, the ES community and
government could form a 1:1 matching fund to pay the entire course fees for the ablest home students wishing to pursue electronics at
university.
In addition to reversing the present aversion to careers in technology and engineering, the UK should shift the focus away from ‘celebrity
culture’ when it comes to business and entrepreneurialism. Getting meaningful financial backing was mentioned as a major barrier by
the vast majority of leaders interviewed since it has become extremely difficult in the UK partly due to an ‘anti-tech’ culture reigning
among investors where potentially disruptive technologies, especially in hardware, are seen as too risky. There is generally a lack of
appetite for risk indeed. Investors are still happy to invest in software, as the investment levels are lower than for hardware and
electronics. This culture might have even affected management styles and aspirations among entrepreneurs prompting early exit
strategies and lack of global vision. Many individuals start a business in the UK with clear plans to get acquired thus ending up making
short-term tactical decisions rather than decisions aimed to build the company up.
People are still the UK’s best asset – but engineering needs to be made more attractive
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Recruitment is a barrier to growth, limiting the ability of high growth companies to maximize their base in the UK, and consuming too
much of senior management’s time. It is constricted by a small supply of graduates and adverse immigration policies, leading, in many
cases, to off-shoring where talent is more readily available. The present contradiction between immigration restrictions and the
government promoting UK universities to students from overseas - is clearly hurting industry as it becomes difficult to capitalise on
bright foreign graduates.
Recruitment takes time – usually of the more experienced staff and management. The more that can be done to help ensure UK-based
staff stay in the UK, the more time management can be spent focusing on driving business forward. The reality is that for ES, there are
not enough UK or even EU nationals coming out of UK or EU universities to satisfy demand. Of those graduates, a significant number are
from outside the EU – as many as 60% of some leading universities’ students are fee-paying, mainly from China, India and elsewhere in
Asia. We are wasting valuable UK-based resources by preventing their long-term employment by UK companies because of visa or work
permit restrictions – these must be changed while we work to drive more children into science, technology, engineering and mathematics
(STEM) subjects, which will take at least 10-20 years to address.
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The ES community is acutely aware of the need to promote STEM subjects to children and their parents. We need to drastically improve
the status and respect for engineering both in the community and in schools, especially when children are starting to think about their
future in the 11-14 age range. Industry and government can make a real difference here.
One way to do this is to work together to convince the many media channels such as the BBC, other TV channels and content producers,
radio and social media platforms to develop prime time content to help make this happen. Given the BBC’s social responsibilities in their
Charter for example, we should be able to work together to make this happen(2) The great news is that products created by the ES
community are really cool! From smartphones and tablets to intelligent cars and robots, these products can capture kids’ imaginations.
But it requires focus and promotion – for example an “Electronics is GREAT” campaign based around the imagery of these products – to
make something meaningful happen. A co-ordinated grassroots outreach programme to schools will be key to successfully fostering
tomorrow’s innovators in the UK, both in ES and across all technology sectors.

9. ¡ ¢ £ ¤ ¥ ¡ ¥ ¦ § ¡ ¨ © –
The UK cannot survive only as a ‘consumer society’
The UK is usually among the first embracers of new technologies often leading the world in adopting new devices such as smartphones,
consoles, new entertainment devices and using them to access the internet and to improve their homes and lifestyles. However this
enthusiasm to use new technologies is not accompanied by an equal enthusiasm among UK people, industries and investors to
champion UK producers of the latest technologies.
‘Global brands based in the UK risks turning the UK into a ‘consumer-only’ technology-rich society. If we are not careful, the UK
becomes a place where cutting edge technology is widely used and valued, but almost none of it is actually produced here, nor are UK
brands visible even on successful products relying on UK-created technologies. We must not allow this to happen” [Hossein Yassaie,
Imagination Technologies].
This means a society with the majority of jobs in services such as law, banking or retailing to the detriment of engineering, hardware
design and apprenticeships. In addition, the perceptions and image of manufacturing created by the British media tend to reinforce the
idea that engineering is a fading subject for a few ‘geeks’ whereas wealth and forward-looking jobs are to be found in the service
industry.
The present economic crisis has triggered debates about rebalancing the economy towards advanced manufacturing and engineering
that could bring more stability in the long run.
‘ A ‘pro-tech’ culture where lay members of the public, especially children, are systematically exposed to innovations in science
technology via TV programmes and media stories about successful businesses overcoming failure, will probably take a decade or so to
happen. Nevertheless, both businesses and the government ought to implement measures now to achieve change in the near future’
[Warren East, ARM].
Customers as innovation drivers
Proximity with the customer base is a crucial factor for a business willing to grow and continue to be profitable. It is known how many
developers and entrepreneurs have managed to create successful businesses in places like Silicon Valley thanks to constantly
networking and co-innovating with their customers. Technology is a sector that evolves through convergence and interoperability allowing
for system integration and innovation that improve people’s lives. Large companies often come about from synergies with pioneering
suppliers that co-innovate with them and thus form an ecosystem where all players benefit.
Scaling a business from a start-up to a national, then global success story has traditionally proven difficult in the UK for a variety of
reasons. Almost every business leader interviewed mentioned poor access to capital and the right skills (directly or through the supply-
chain) as the main causes for the lack of scale but one CEO noted that many SMEs fail to scale also because global outreach is not in
the business plan from the beginning and/or customers’ engagement is left for too late.
‘Large OEM customers do often act as ‘innovation catalysts’ as they encourage a plethora of SMEs to develop solutions which allow the
latter to export and grow as a result. Giants such as IBM, Microsoft and Apple in the US are all surrounded by highly responsive SME
suppliers that help them innovate and grow’ [Donald McGarva, Amino Communications].
On the other hand, large British companies such as BT, the BBC and Vodafone were seen as not so successful at engaging meaningfully
with local SMEs, and leading companies such as Rolls-Royce and BAE systems are too small in number to act as a sizeable innovation
pool for the next decade. As indicated earlier there is an opportunity that the larger players servicing vertical markets such as energy,
health and transport can become the catalysts of innovation for the ES industry.

10. ¡ ¢ £ ¤ ¥ ¡ ¥ ¦ § ¡ ¨ © … †
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This section has some comments about countries in the world that are seen to be successful at fostering innovation. Various overseas
experts involved with the electronics industry in their own countries through research institutes or universities and independent
commentators were interviewed by Intellect to discuss the innovation climate in their countries.
H G ‚
Many tech entrepreneurs in the States, especially coming from Silicon Valley, have managed to innovate and grow their businesses like
no other in the world. Many of them were talented immigrants such as Andy Grove of Intel and Sergey Brin of Google. A ‘fail fast’ culture
based on early customer engagement combined with a strong cluster of developers has allowed many start-ups to emerge globally. It is
the combination of education, open access culture and a clever procurement policy that has allowed the US to build a global tech empire.
The state has been proactive in promoting innovation. Every public sector organisation in the States has an outreach programme and
many government departments (especially the DoD) have driven innovation by matching industry’s funds through ‘intelligent
procurement’ policies. The Small Business Investment Companies (SBICs), for example, helped Intel and Apple in their early days by
supplying equity capital, long-term loans and management assistance. Another example of government support is the National Science
Foundation that has helped develop Google’s technology.
In addition to the public sector, however, industry has proven capable of helping itself. In fact, many US tech companies have created
venture divisions to search and provide seed capital to innovating start-ups. Hotmail, for example, was a successful local start-up
acquired by Microsoft.
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Perhaps the most successful Asian country in electronics to date, Japan has managed to dominate the consumer electronics and
semiconductor market in the 1970s-1980s by developing global brands still operating today. Recent developments in the global market
though, especially the decline of consumer electronics goods, have affected many Japanese companies. Whereas American, South
Korean and Taiwanese brands were able to capitalise on new trends, Japanese electronics firms had to rely heavily on their domestic
market to compensate weak exports. The recent government-backed consolidation of Sony’s, Toshiba’s and Hitachi’s display
technologies is the latest strategic move to attempt to fend off international rivalries in LCD innovation. This is a far cry from the 1960s
when Japan demanded technology in exchange for market access by American firms – and the 1970s, when the Japanese government
subsidised research through MITI (former Ministry of International Trade Industry) and forced domestic companies to collaborate with
each other(3)
Japanese companies hence benefitted from import protection and access to lower cost capital than their US rivals, allowing them to take
longer-term risks. However, Japanese technology companies have been increasingly unable to engage outside Japan, as products got
more complex, beyond just catalogue items that can be sold through distribution (e.g. system level chips). Also many Japanese
companies focused on their flat lining domestic market and ignored export markets for far too long.
One particular area though where Japanese companies were still able to maintain best-in-class capability and high margins is electronic
components. Successful players such as TDK and Murata successfully supply highly reliable non-commoditised components into the
global market, which often require customised solutions allowing for constant innovation.
’
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China is the country where major technology innovation is expected to boom according to some analysts. Around 2% of the Chinese GDP
is spent on RD and the government has adopted over the years an approach similar to Russia based on developing infrastructures for
local companies. Thousands of technology centres, science parks and incubators were created to provide companies with free land,
machinery and equipment in exchange for inward investment. This approach is not paying-off as hoped though, with many buildings left
empty, corruption still widespread and inefficiencies in public spending. However, one area China is proving successful is incremental
innovation arising from small improvements of existing concepts (often invented in America or Europe).
Just as Taiwan used the ‘low-cost, fast-follower’ approach to chase the American and Japanese innovators, the Chinese are doing the
same against the Taiwanese. However that means many RD dollars are spent on ‘me-too’ products rather than sustainable competitive

11. ¡ ¢ £ ¤ ¥ ¡ ¥ ¦ § ¡ ¨ © … …
advantage, i.e. just price competition, which hurts everyone. China still imports most of its semiconductors though, despite being the
world’s largest consumer of them!
Hong Kong’s innovation policy of the late 1990s produced the Applied Science and Technology Research Institute (ASTRI) following the
successful model of ITRI in Taiwan despite having only 0.2% of GDP spending in RD. Thanks to a high concentration of universities, the
presence of many OEMs and government sponsored activities such as the Innovation and Technology Fund - companies have been able
to innovate by accessing local manufacturing know-how and public funds. By systematically matching industry’s investments (up to
90% for high risk projects) the Hong Kong government has been able to attract innovative businesses and generate local growth in the
technology sector.
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Taiwan has grown thanks to a combination of inward investment and government-led innovation that prompted the emergence of
successful businesses. The Taiwanese government, in particular, proactively stimulated innovation through the Industrial Technology
Research Institute (ITRI) since the 1970s, which grabbed the majority of the national RD budget. A mix of state-funded research and tax
incentives (e.g. investment tax credits) resulted in an ecosystem conducive to SME innovation and growth.
Taiwan can now boast the largest semiconductor foundry (TSMC) and contract electronics manufacturer (Foxconn) in the world but also
fast-growing semiconductor device companies (Mediatek, Mstar and Realtek) together with a variety of SME leaders in electronic
components and process technology. Taiwanese companies also tend to help each other without solely relying on government support,
e.g. MediaTek continuously invests in smaller companies, sometimes acquiring them, sometimes not (ecosystem venturing).
Taiwan’s tech ecosystem proved to have all the ingredients necessary to create companies of scale. A proactive manufacturing policy
(especially in electronics and nanoelectronics) was matched by a vibrant private sector led by visionaries such as Morris Chang of TSMC
and Terry Gou of Foxconn. Having a portfolio of patents (e.g. tooling for plastic injection, how to make specific connectors) for example
has certainly helped Foxconn reach the present scale. It was creativity in managing down the costs of production, supply-chains and
customer relations that made Taiwanese electronics manufacturing so successful.
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Two perspectives can be taken to innovation in South Korea. One from the government’s point of view and the other from the chaebol
(conglomerates), such as Samsung and LG.
The government view: the Electronics and Telecommunications Research Institute (ETRI) is Korea’s response to Taiwan’s ITRI. ETRI
develops and transfers IP to domestic firms. Government funding is thus available to help SMEs survive through the provision of tools,
equipment and training. This has allowed domestic companies to benefit from government backing for high-risk RD activities. Korean
innovation in ES has been driven mainly by memory technology, specifically dynamic random-access memory (DRAM), following a
similar path to the Japanese semiconductor industry. As a result, Korea currently commands 50-60% share of the global DRAM market.
The chaebol view: Samsung took advantage of government support for DRAM development in a way that allowed it reach greater scale
than other companies. Samsung has become dominant across the entire spectrum of ES in South Korea – OEM products,
semiconductors, displays, etc - which is a double-edged sword, especially as Samsung accounts for 20% of South Korea’s GDP. While
the company partners with local SMEs, the relationship can be characterised as a standard supplier-customer relationship (enacting
‘partner substitution’ by asking a Samsung division to develop the same product) as opposed to one involving ecosystem venturing and
strategic co-creation. LG had the same opportunities as Samsung, but its path diverted more towards TVs and home appliances.
DRAM is a good example of South Korea’s aggressive use of scale to dominate a capital-intensive market. However, the country has
proven successful in other technology areas such as mobile phones, where Samsung managed to reach a dominant global market
position quite rapidly. The country has also managed to over take Japan in the TV market, thanks to two great vertical integrators in
Samsung and LG.
Now China can present a vast export opportunity for South Korea, with the capitals of both countries only 600 miles apart. But there are
cultural differences, so while the possibilities for trade are significant, there is unlikely to be co-development and co-innovation between
the two nations.

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Complete reliance on market forces has proven insufficient in the UK due to lack of innovation centres fuelled by tech enthusiasts and
venture capitalists. Improving ‘access to finance’ policies should be introduced, ranging from tax breaks for angels and seed capital to
more proactive state interventions in the credit market. Companies tend to partner with each other when they see a new market but are
often incapable of sustaining the huge RD costs involved on their own. Capital should be made available to encourage risk-taking
activities and when banks are reluctant to lend, a state-backed centralised funding route in competition with them could be introduced to
counterbalance cash scarcity and match industry’s efforts.
The government should therefore build on the UK’s strong heritage in specific technology domains and stimulate a culture where
entrepreneurialism is rewarded and technology is seen as a safe investment. If the right policy framework providing stability and
certainty is in place, businesses would have the confidence to co-invest and co-create innovation. At present there are very few regions
in the UK that champion innovation in electronics and can build a critical mass. Making available process technology and manufacturing
capabilities through state-backed research centres to grant SMEs access to expensive equipment locally and minimise risks could solve
this situation. The Catapult centre model inspired by the German Fraunhofer, for example, needs to be made more flexible, responsive
and affordable to serve SMEs and start-ups needs.
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As we have seen, the UK has a track record of producing highly qualified engineers with good general problem-solving skills but still
lacks tech start-ups capable of reaching scale. Education and training systems should thus provide engineers with business skills
(entrepreneurial, managerial and commercial) to allow them understand markets and turn innovating corporate ventures into global
success stories. Industry has a role to play here, as tech companies should be supporting grassroots organisations like STEMnet and
Young Enterprise.
Immigration policy ought to encourage and not hamper the recruitment of competitive talent that would allow companies to grow and, in
turn, create more jobs. The current immigration regime makes it difficult to hire non-European engineers whereas the UK should use its
traditional multicultural approach to its own advantage.
Universities also need to be more ambitious in blue-sky thinking and more proactive in collaborating with the private sector, as basic
research relevant to industry would enable them to attract best-in-class international talent.
© ª ¦ « ¥ ¦ § ¨
By demand-side factors, we are not talking about an old-fashioned industrial policy, or indeed, embracing the current model of state
capitalism seen in many parts of Asia. We are talking about giving UK tech businesses access to the scale of demand needed to grow.
That’s at the heart of the innovation climate in the UK.
We have seen that there are many different ways of gaining a thriving technology sector, as in the US, Taiwan, China, Israel. They are all
very different models. However, there is a single truth: no country acquired a thriving domestic technology sector purely by accident. In
each case factors for growth can be traced to specific circumstance.
We therefore recommend looking at the following two key aspects:
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By aligning public sector procurement with a strong UK industrial strategy that leverages UK ES strengths, the government has a unique
opportunity to create both a strong local market and create the innovation-led business environment advocated in this report – all
without additional investment, just smarter processes.

13. ¡ ¢ £ ¤ ¥ ¡ ¥ ¦ § ¡ ¨ © … #
As we have seen with aerospace and defence - public sector markets have the scale to develop products that can be a global export. The
NHS, for example, while not a single buyer, is a market of scale. The demographic challenges the UK is facing are obvious - but have they
been shared as problems with the UK technology community?
The NHS is one example. Others include major UK infrastructure projects such as nuclear power, where the huge lead-time allows
sharing of roadmaps. Also, sharing plans for smart grid/smart meters would help industry. Another great opportunity area is transport,
which includes rail and automotive sectors. The latter in particular (with vehicle to infrastructure and vehicle to vehicle communications
for intelligent transportation systems - ITS) could create the right opportunities as there is a compelling need to reduce miles travelled
and minimise congestion.
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Where government is involved at pan-European and/or global level in setting technical standards or regulatory frameworks, it has the
potential to make sure that UK markets can lead on innovation. Both factors are crucial and following just one will not help UK
companies to thrive.
For example:
x While Digital Switchover was a huge technological success and gave the UK a very capable system, it was relatively closed in
its innovation. Europe is now going a different route in its hybrid broadband, broadcasting system. That fissures the UK from
the nearest thing it has for a domestic market of scale sufficient to allow tech companies a real shot at growth.
x Other examples include smart meters and TVs, which will increasingly become intelligent and networked domestic appliances
and assisted living equipment that will require ‘regulation’ for private care homes, health insurers, etc. Also smart vehicles
(both electric and internal combustion engine vehicles, which are connected to the internet and autonomous or semi-
autonomous) as they will be able to communicate with each other (collision avoidance), communicate with road infrastructure
(routing) or the internet (entertainment).
x Security is another example (whether tracking humans, animals or assets) once privacy concerns are properly addressed.
x In the longer-term smart buildings, manufacturing and energy harvesting will also represent great opportunities.
It can also be argued that for the last 30-odd years, every government has pledged to reduce red tape. If the ultimate test is UK plc’s
ability to access our large regulated markets (e.g. NHS), then we can see we have consistently failed. The companies that can tap into
such markets seem to be only the consulting/professional services firms. Why is that?
In sum, if the UK manages to implement the right demand-side and supply-side reforms, which are much needed to unleash economic
and business growth, local ES companies will be able to capitalise on emerging markets and generate the scale necessary to turn them
into global champions of innovation and the large employers of the future. Detailed recommendations to start this process are highlighted
below.

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