Written evidence

Written evidence from the Association of Innovation, Research and Technology Organisations (AIRTO) GPP 114

Introduction

This response is from AIRTO (The Association of Innovation, Research and Technology Organisations). AIRTO’s members comprise representatives from:

Public Sector Research Establishments (PSREs)
Non-profit distributing member and non-member based research and technology organisations (RTOs including Catapults)
Privately held research and technology companies (including Contract Research Organisations - CROs)
Universities (Enterprise/Technology Transfer Departments)
R&D departments of industrial companies
Business support (including Access to Finance) and early stage technology-based venture capital companies

AIRTO’s members generally operate in the private sector but with varying degrees of interaction and financial involvement from the public sector. All are to a significant extent involved in aspects of the translation of ideas, research and technological advances into the commercial arena, for clients in both the private and public sectors.

Overview

AIRTO welcomes the review of the Government’s Productivity Plan. Organisations in the innovation, research and technology sector play a pivotal role in driving economic growth and innovation, frequently acting as the aggregator of scientific and technological demand from businesses and markets. Such organisations typically work at the mid-level technology readiness levels (TRLs) and are well placed to understand company and sector based innovation strategies, where they are optimally positioned to facilitate interactions involving academic partners, SMEs and large organisations to approach challenge-led innovation projects.

Britain has a large and thriving Innovation, Research and Technology (IRT) Sector, which contributes significantly to our national capabilities1, with the economic impact for UK plc now estimated to stand at £32-36 Billion pa. The Research and Technology Organisations (RTOs) that AIRTO represents are a significant component of the UK’s innovation ecosystem, but differ from universities in their primary objectives, strengths and capabilities, which are centred on commercial translation of applied research. In its 2011 ‘Innovation and Research Strategy for Growth’, BIS recognised the sector as an ‘under-utilised asset’2. Both universities and RTOs have vital and complimentary roles to play in leveraging publically funded research to drive economic growth. The best outcomes for the UK will be achieved by supporting these two crucial sectors, working together, to operate at the TRL levels where they excel.

RTOs are well equipped to help companies seeking mid-TRL research capabilities, either on a self-sufficient basis or in conjunction with university partners. The recently launched Catapults (which are effectively new RTOs) are intended to provide a match to the research needs of business in specifically identified areas of technology and application. The intention is that these new organisations complement existing RTOs, and they are a welcome addition to the AIRTO Membership.

AIRTO’s response to the specific questions posed with particular reference to the science and innovation component of the Government Productivity Plan (Section 8), is as follows:

Executive summary of main points

This is a welcome plan and good in its ambition, but in our opinion there are nevertheless a few important omissions.

We should therefore like to see:

More prominence given to innovation, the processes for bringing it about and to embedding its results in the economy as a key driver of productivity improvement.

More prominence given to the UK’s infrastructure for supporting these processes. This infrastructure is a UK asset; it extends well beyond the Catapults but appears not to be well understood or very prominent in government thinking. The government stands to benefit from harnessing the expertise and thought leadership of the IRT sector to help shape national innovation policy.

Better means of capitalising non-profit research organisations and Public Sector Research Establishments (PSREs). These are key contributors to the UK technological infrastructure supporting innovation, sometimes referred to as the ‘innovation ecosystem’.

Recognition that many new ideas and innovations needing to be supported across the ‘valley of death’ originate outside the university research base. The impression too frequently promulgated is that academic research is the main source and focus for innovative activity (although clearly good scientific understanding and the production of appropriately skilled manpower are of course essential for creating and growing successful technology based businesses).

More emphasis on investment in human capital and enhancing skills, particularly the skills needed to manage the development and commercialisation of innovative products and processes.

More and better access to patient finance; patient finance reduces the need for refinancing rounds and lessens the likelihood of losing control at times of financial weakness, which almost all growing companies go through; such fears act to dampen and deter growth ambitions, entrepreneurialism and dynamism in the economy.
Acceptance that government has a role to play in direct support for innovation, which frequently opens up new opportunities for innovation, stimulates competition and initiates new supply chain relationships.

A more positive context for treatment of public services - less focussed on cuts as the driver and more on innovation and improved productivity (leading to lower costs), mirroring comparable efforts in the private sector.

Increased innovation in public services through procurement of innovative products and services, particularly from SME suppliers with export growth potential.

A presentation of this plan in the form of a roadmap, rather than as a collection of existing policy elements with a few new additions, which tends to be the impression given by the document as it stands.

Our more detailed discussion follows, but we would reiterate our welcome for the publication of the Government’s plans to address the critical challenge of enhancing the UK’s productivity.

Detailed answers

1. Do you agree with the Government's assessment of the reasons for the UK's productivity slowdown (as outlined in the Annex to the Plan)? Has the Government acknowledged all of the main causes of the UK's poor productivity growth?

1.1 The Government’s proposals give insufficient consideration to the challenges involved in prompting and encouraging innovation in products and services and their deployment in the wider economy. Innovation in products, processes, services and business models is the main driver of change and the means of lifting productivity in the economy. The measures outlined largely overlook the role that Government can and should play in stimulating innovation of all kinds and in deploying innovative developments, particularly by pulling them through to improve the quality and cost-effectiveness of public services. Innovation is not mentioned until page 11 of the Plan. InnovateUK is a key player in this arena and it is vital that support should continue and if at all possible be expanded, particularly given the excellent and widely reported return on the Government’s investment in its activities.

1.2 Innovating successfully in any context, pulling innovative developments through into everyday use and delivering the benefits for the economy, requires skills that are in very short supply. It requires a combination of multidisciplinary technical skills, soft interpersonal skills, good communication skills and business skills. Investment is badly needed in this aspect of the human capital. For business and industry to play its part there has to be a good flow of capable and well-motivated people from our educational system. If this is lacking the private sector has to recruit from overseas and/or subcontract work to overseas suppliers. This leaves a domestic workforce underemployed and ultimately dilutes UK productivity as a whole.

1.3 There has been insufficient focus on matching the education, training and experience provided all the way from primary through to tertiary education with the human capital required by high value, high productivity sectors of the business economy. There is a need for innovation in apprenticeships, targeted at filling skills gaps in value adding innovation teams, ideally undertaken ‘in company’. Apprenticeships should not just be about getting as many people as possible into some kind of employment as seems to have been the case in many instances in the last five years.

1.4 In this regard, many new and growing SMEs are poorly equipped to assess and handle the risks associated with making the changes that accompany innovative developments; hence there is a comparatively high mortality rate amongst SMEs and a stunting of ambition in many instances. Government and large companies both have a role to play in helping SMEs to upskill and develop their capabilities. The r&d tax credit system might be used to this end (see later).

2. One pillar of the Government's Plan is to increase "long-term investment". It outlines eight areas with specific measures to increase productivity.

a. Why has the UK's long-term investment been so low up to now?

2.1 Factors restraining long-term investment include:

Risk aversion and, particularly for SMEs, fear of having to repeatedly refinance long term developments, with the accompanying potential to lose control in the process at such times. High cost, long timescale, capital intensive developments are particularly difficult for SMEs to handle and have hampered innovative developments in areas such as biomedicine and offshore renewable energy.

A scarcity of long term finance as many investors try to focus on and specialise in specific stages of company development and to churn their funds, as they hand their holdings on to later stage specialists in order to extract fees and realise their capital gains.

Uncertainty over the prospect of repeated changes to government policies, incentives and regulations which affect the business environment for innovation.

b. How can we ensure that the measures relating to long-term investment in the new Plan will contribute to productivity growth?

2.2 Key to ensuring that investment contributes to productivity growth is in turn ensuring that the execution of initiatives and plans is well managed and carried out using experienced practitioners. The community of AIRTO’s members is a major source of such expertise and an asset that can be deployed to advantage in the planning and execution of developmental initiatives.

2.3 Another priority should be to make sure that the economy makes best and productive use of its indigenous workforce, rather than having to resort to importing skills and capabilities from overseas to compensate for weaknesses in the UK’s own skills base. This comes back to upskilling the workforce.

2.4 It means not just making the UK the best place in which to inwardly invest but also the best place in which to build supply chains.

2.5 It means that the UK has to be the best place to innovate. This cannot be achieved by relying solely on the academic research base and business. To compete globally the Government needs to be a partner in the UK enterprise, as is the case in other countries, and to set an ambition and targets jointly with business for lifting productivity in both the private and public sectors.

2.6 It will be essential to incentivise disruptive innovation and not just encourage ‘more of the same’ in terms of r&d, meaning direct intervention as well as indirect support; stimulating new areas of innovation and not simply subsidising r&d in general; supporting an expansion of the Catapult concept therefore where there is a “gap” in the UK’s innovation infrastructure (this should involve the development of existing organisations, as recommended in the first Hauser Review, as well as setting up new Centres).

2.7 The Catapults are an important and relatively new part of the innovation support community, a network that also includes PSREs, RTOs and a number of other specialist suppliers. This network and its constituent organisations are key assets that should all be connected to the productivity agenda to inject their expertise into the efforts to raise the UK’s game in this regard.

2.8 Key features of the Catapults are their independence, as non-profit organisations, and their core funding of human and physical capital, which enables them to stay at the leading edge of innovation and maximise their impact. PSREs and other non-profit RTOs should be enabled to access core capital funding in a similar manner for the same reasons. The important thing is that they should be able to plan for the development of both their human and physical capital in a coherent way. Their role is to create enduring but up-to-date capability and infrastructure and this needs coordinated and long-term investment in both knowledge/skills/experience and physical capital. For PSREs, annualised capital (or indeed programme) budgets as currently practised make this kind of activity very difficult and can easily end up wasting money, constraining innovation and limiting their ability to address new opportunities and to support government and industry in a timely manner. Capital funding lines therefore need to be available on a multi-annual basis.

3. The second pillar of the Government's Plan is to encourage a "dynamic economy". It outlines seven areas with specific measures to increase productivity.

a. What are the main weaknesses of our economy, in terms of dynamism, which are supressing our productivity?

3.1 Weaknesses in terms of dynamism could be said to be rooted in:

Skill shortages in key areas of innovation and its practice and relatively low levels of familiarity with managing risk.
Constrained mobility as a result of high living costs in the South and relative paucity of comparable infrastructure and critical mass of resources for business activity in the North.
Lower growth amongst SMEs than desirable. Stronger participation in supply chains would help them; and, for example, r&d tax credits to larger companies might to in some way be made conditional on proven involvement of supplier SMEs in development programmes.
Also, relatively high levels of risk aversion and limited ambition in some businesses, including reluctance to go beyond their ‘comfort zone’.
Considerable reluctance in many instances to introduce new finance when it requires release of equity or property to be offered as security.

b. Do the measures introduced under in the plan address those weaknesses and are they appropriate?

3.2 The measures in the Plan will in principle contribute in different ways to enabling business to increase productivity, relying on the premise that the incentives and operational flexibility introduced will result in the shift towards the greater innovation and risk taking required. This is not assured and will require the Government to keep track of indicators relating to levels of innovation and productivity in the economy and to make adjustments in the event that progress falls short of expectations and target.

3.3 In general the measures are appropriate but we would highlight a perception in Government that persists and which threatens to weaken moves to embed innovation across the economy. Paragraph 15.14 says “The Government will invite universities, LEPs, businesses and cities to work with the government to map research and innovation strengths and identify potential areas of strategic focus…”. This omits the main practitioners and experts in innovation and the infrastructure that supports innovation, namely the community of AIRTO’s members, including Catapults, PSREs and RTOs. The asset and expertise represented by these organisations should be included because, as paragraph A26 states, “The challenge is to make the most of ideas from wherever they come, and to help best practice to spread”.

4. Overall, does the Plan adequately address the main causes of low productivity in the UK (as discussed in question 1) and will it have the desired results?

4.1 In many respects the Plan does address most of the main causes of low productivity but there are some important areas, namely innovation and skills, which are not sufficiently emphasised.

4.2 The main challenge will be to ensure that the Plan does in practice lead to the desired results. Simply rolling out the listed measures as a collection of separate initiatives from the different departments of government is of itself unlikely to be sufficient to ensure the desired result. Each individual measure will have to be carefully and professionally implemented.

4.3 But just as importantly, the Plan needs to marshal these measures with some indication as to their interdependencies into a roadmap for improving the UK economy; the current presentation gives the impression of a basket of sometimes only weakly connected initiatives. Attempts to introduce too many of the intended measures at once, unless it is clear that they do not risk interacting confusingly or interfering with each other, could in the long run result in more problems than it solves; hence the advisability of producing a roadmap. A roadmap will also enable businesses and other stakeholders to see clearly the proposed timing, sequencing and interrelationships between the measures and hence the overall picture; and it will permit each stakeholder to plan and act accordingly.

4.4 For the public sector, an emphasis on the adoption of productivity enhancing technology, data usage and process models, rather than cost cutting as the headline, would be helpful.

4.5 Finally, the Government should accept that it will need to intervene, not to subsidise but to prompt more radical innovation and to lead innovation in public services to match productivity improvements as they are made in the private sector.

Declaration of interests

This submission is made by the Association of Innovation, Research and Technology Organisations (AIRTO). The organisation represents research and technology organisations operating in the space between the academic research of universities and the commercial needs of industry. AIRTO members undertake research and development, and knowledge and technology transfer. This submission does not necessarily represent the views of individual member organisations. AIRTO currently comprises organisations, employing more than 40,000 scientists and engineers1, with a combined annual turnover in excess of £5billion (AIRTO Ltd. is a company limited by guarantee registered in England No. 1217006 Register office address: National Physical Laboratory, Hampton Road, Teddington, Middlesex, TW11 0LW. AIRTO is a not-for profit organisation funded by membership subscriptions, and managed under contact by NPL Management Ltd). The members of AIRTO currently are: