Nesta claims the Index is the most ambitious attempt yet to measure the contribution of innovation to economic growth in the UK. It uncovers a direct link between the amount of investment in innovation by companies and productivity.
UK businesses invested £133 billion in innovation in 2007 (the most recent year covered by the Index), representing 14 per cent of private sector output.
Two-thirds of UK private sector productivity, equivalent to 1.8 percentage points of productivity growth per year between 2000 and 2007, was a result of innovation. Nesta says this compares favourably with countries like France and Germany, and is similar to US levels.
The Innovation Index measures arguably the most important driver of growth, says Jonathan Kestenbaum, Chief Executive of Nesta, ”For people who care about the prospects for our economy, this Index will be as important as the Consumer Price Index.”
Working with innovation experts, practitioners, policymakers and economists, the Innovation Index has taken two years to design. It measures innovation ‘in the round’, making it broader than the current measure of R&D, which represents only 11 per cent of the UK’s investment in innovation in 2007. It is a bigger number because it includes factors such as product design, training in new skills, organisational innovation, developing new products and brands, and copyright.
Nesta has previously referred to these activities as ‘hidden innovation’, which are as important to overall productivity as R&D.
David Currie, who chaired the group that drew up the Index. said, “We know that innovation is a powerful driver of economic growth but we can now show the direct link between the two. This is critical to guiding innovation policy.”
The Index also reveals that innovation is linked to business growth across a range of sectors. Innovative software firms enjoyed a much faster growth rate than non-innovative ones, of 13 per cent average revenue growth per year compared to just over zero per cent.
Curiously, this relationship holds true even in sectors not traditionally associated with innovation, such as legal services, where innovative firms enjoyed average revenue growth of over 10 per cent, while non-innovative firms revenues shrank on average.
While the UK is a relatively good place to innovate, it has some shortcomings and is mid-table when it comes to the wider conditions for innovation compared the US, France, Germany, Japan, South Korea, and Finland.
It also performs poorly on three important indicators: access to finance, demand for innovation, and in particular the use of government procurement to encourage innovation, and skills for innovation.
The Innovation Index is available to download from http://www.nesta.org.uk
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