Plan I Fostering innovation for long-term growth 5 February 2013 Stian Westlake, Exec Dir of Policy & Research @stianwestlake 1
Two plans dominate the debate “Plan A”: Austerity “Plan B”: Stimulus OR � Cut government � Maintain spending - if spending necessary borrowing � Reduce government more deficit � Preserve employment � Maintain low interest and demand rates � Reduce deficit as � Deregulate to economy recovers encourage growth 2
Where will economic growth come from? Productivity growth after major UK recessions Year 1 Year 2 Year 3 Year 4 Quarters since start of recession 3 Source: ONS
But Plan A or Plan B alone won’t solve our problems Productivity Slowing before 2007; sharp fall since 2008 Changing economic Will what worked in the past work now? realities “The Great Stagnation”, “Race Against the Machine” Major societal Green technology and healthcare present challenges unique economic issues The long-term Stimulus and investment spending work affects the short- better if the underlying economy works term better 4
Innovation is the main driver of growth Both for the economy as a whole… …and for individual businesses Make-up of UK economic growth UK Business growth, 2004-08 Innovators %/yr, 1990-2007 Revenue growth, %/yr Non-innovators Innovation: 67% of growth 5 Source: Nesta, The Innovation Index (2009-12) Source: Nesta, The Vital Six Per Cent (2009)
Innovation investment has fallen sharply since 2008 Since the recession began there has been UK Business investment in a 14% drop in real terms in innovation investment innovation (constant prices) Between 2008 and 2009 investment in innovation fell by £24 bn 7% in real terms drop Source: Nesta, The Innovation Index (2012)
Innovation investment started slowing before 2008 UK business investment in innovation (%age of GDP) Intangible (“innovation”) investment Source: Nesta, The Innovation Index (2009-12) 7
Tangible investment fell, and its composition changed Composition of UK businesses’ UK business investment in tangible investment (£bn, nominal) tangible assets (%age of GDP) Tangible investment Buildings (buildings, computers, vehicles, machinery) Plant ICT Vehicles Source: ONS; Nesta, The Innovation Index (2012) 8
All the while, the business sector’s surpluses increased UK Business sector currency and deposits (% of GDP) Net lending to UK businesses (% of GDP) Financial crisis Source: ONS; Bank of England
So: an innovation collapse has followed an age of cash and concrete 2000-2008 2008-2012 £ billion, real terms Innovation investment Investment in innovation Between 2008 and 2009 Since the recession began there investment in innovation has been a 14% drop in real fell by 7% in real terms terms in innovation investment levels off and begins to falls sharply decline No evidence of recovery yet Tangible investment Survey data 2008 2009 2011 falls Buildings dominate, ICT investment falls Businesses accumulate cash 10
Other countries have made innovation a top priority since the crisis Government Outlays on R&D, 2007=100 Korea Germany France Japan USA UK 11
“My children are eight and ten years old. I don't want them to read about how China has just built the world's most advanced aircraft; how India is leading the globe in computer design; and have to say to my children: that used to be Britain. I want Britain to be the home of the greatest scientists, the greatest engineers, the greatest businesses - a land of innovators.” George Osborne, 3 October 2011 12
But in the UK other commitments have won out Discretionary government spending on science, technology and innovation, 2012/13 to 2014/15, £million Science budget “ring fence”* Science, Technology and Innovation R&D tax credit changes EIS, SEIS, VCT reform Spending to scale Science capital fund, aerodynamics centre, graphene centre £ billion Video games and VFX credit Total ~£2.6 billion Entrepreneurs relief and EMI Science 1.0 ring fence Catapult Centres SMART awards and SME innovation Other 1.6 innovation Smaller cities broadband Aid Business angel co-investment 8.5 Ring fence 46.0 Health Other examples Corporation tax cuts Ring fence Weekly collection support scheme (“bins fund”) Ring fenced aid budget 8,469 Ring fenced health budget 46,045 * Difference between planned expenditure and average spending consolidation of other departments Source: Budgets 2009, 2010 (x2), 2011,2012, BIS Research and Innovation Strategy, TSB
So what can the Government do about it? “Just get out of “Picking winners” the way” 14
Lesson 1: Don’t get stuck in a PICL P lanning I mmigration C ompetition L abour market reform Important, but not enough 15
There is another way 1990 1991-3 1995-2011 Recovery and growth Austerity + Innovation Banking crisis and recession 16
Three main areas of recommendations 1. Investing more resources into innovation 3. Creating a 2. Making the lasting culture of innovation innovation system work better 17
Area 1: UK capital markets have little bearing on innovation investment The UK’s capital markets and business investment in innovation, £ billion, nominal 1999 to 2007 Total capital raised 3000 £6.6 tr above 1998 levels Additional innovation 2500 £0.2 tr investment above 1998 levels 2000 Net profits re-invested by UK businesses (£bn) 1500 Net inflow of capital from flotations (£bn) Net equity investment in UK 1000 businesses (£bn) Net financial acquisitions (debt, MMIs, securities) UK businesses (£bn) 500 Investment in innovative activities / NESTA innovation index (£bn) 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Nesta and the Big Innovation Centre
Area 1: The right financial architecture � A £200m venture co- investment fund � A business bank with the freedom and expertise to bank innovation � New sources of finance: peer-to- peer lenders, long- term investors 19
Area 1: Harnessing procurement � Put 1% of procurement towards innovative solution � Follow US SBIR model � Create a £2.3 billion “Innovation Engine”, providing demand for growth businesses 20
Area 1: Twenty-first century infrastructure � Invest in the infrastructure of the twenty-first century, not just the nineteenth � Use low interest rates to build super-fast broadband, smart grids � Remove planning barriers in innovative clusters 21
Area 2: invest in demonstrators � Fund demonstrators connecting research, business, infrastructure and government � Beyond manufacturing: services, retail, adoption of technologies 22
Area 2: better incentives for innovators � Modernise IP law – fewer junk patents � Use Challenge Prizes to mobilise innovators to tackle tough problems 23
Area 2: Harness public and social innovation � Public services 24% of GVA � Harnessing evidence- based solutions, new technologies and social innovators � Early investment and decommissioning � Information-sharing 24
Area 3: culture of innovation � Educate both the “brain” and the “hand” Education for � A C21st BBC Computer Literacy project digital makers � A commitment to innovation in education � Break down Allow businesses to attract the best global the barriers to talent � innovation Regulate with competition in mind 25
Where’s the money? 4G auction £4+ billion to be raised in 2013 Prizes? Investment? ERDF £1+ billion for innovation 2014-2020 Procurement £2+ billion per year if 1% of procurement went through SBRI Business £1 billion of capital for growing bank businesses 26
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