Time for hidden innovation to grab the limelight

Innovation policy focuses on technology-driven industries such as electronics and pharmaceuticals. But it’s happening elsewhere too, in sectors ranging from banking to construction – and needs to be recognised and encouraged.

Innovation is hiding in Industrial Age sectors that are not traditionally perceived as innovative and as a result fall outside the scope of innovation policy. In consequence, the potential contribution of innovation in these areas is overlooked and the opportunity to boost competitiveness is wasted.

This hidden innovation has little to do with the obsessions of current policy, such as what percentage of gross domestic product is spent on R&D, or the number of patents granted. An appraisal is needed to track how and when innovation occurs in sectors ranging from banking and law, to education and construction, which fall outside the remit of current innovation policy.

The appraisal would form the basis of a comprehensive strategy for measuring and encourage innovation – wherever it occurs – based on an understanding of the needs and capabilities of each sector, says the UK’s National Endowment for Science, Technology and the Arts (Nesta) in its latest report, “Hidden Innovation”.

Nesta is now exploring ways in which it can work with individual sectors to maximise their potential for innovation.

The new reality of innovation

Nesta’s CEO Jonathan Kestenbaum says it is time to catch up with the realities of innovation in all areas of today’s society. “It’s clear we need to develop policy that supports innovation above and beyond its traditional home in science and technology.”

He suggests a blueprint for government to facilitate this broader innovation agenda, in which innovation policy is explicitly extended beyond the historic bounds of science and technology policy. All government departments should given a brief to be innovative and to act to stimulate, or be hospitable to innovation elsewhere. The UK government should create a Department for Innovation.

“Too many people still see innovation as the reserve of scientists, and in doing this they overlook our broader capacity for innovation in the UK,” says Kestenbaum. “Without the right kind of support hidden innovation will remain just that: one teacher in one classroom pioneering a new approach, a bank making incremental improvements that might ultimately lead to a new service.”

Retail therapy for innovation

Coinciding with the publication of Nesta’s report Alistair Darling, Minister for Trade and Industry announced the setting up of the first of five industry groups to search out hidden innovation. This first group will examine the retail sector. Others areas being considered for study include transport logistics, business services, environmental services and the construction industry.

Echoing Nesta’s report, Darling said, “Science and research can be measured in research studies or number of patents [but] it isn't so easy to measure the innovation that is going on in our high-street shops, building companies or banking services. We have a chance to change that. It is a vital driver……”

Kestenbaum agrees, saying, “These action groups represent an important step in understanding how innovation actually happens in critical areas of the economy. We will investigate the individual triggers and barriers to innovation in each sector and the way in which best practice can be shared within and beyond across industry boundaries.”

Innovation is in the eye of the beholder

Innovation differs between sectors. It includes the development of new exploration techniques in oil production, modular building systems in construction, or new programmes for the rehabilitation of offenders. It often relies on collaborations between disciplines, across sectors and regions, and it is affected more by mainstream policies than by those aimed directly at innovation.

In some cases, getting hidden innovation to flower will involve the extension of existing policies, beyond their historic focus on science and technology. Most often, it will mean involve regulation, taxation, procurement and education policy.

In common with its peers in the European Union, the UK has a low standing against its major competitors on traditional measures of innovation. Adjusted for the size of the economy, the UK’s investment in formal R&D is barely half that of Japan and only two-thirds that of the US.

Governments around Europe have responded by incentivising R&D, encouraging businesses to collaborate with universities and substantially increasing public investment in scientific research, working both at a national level and through the EU’s Lisbon Agenda.

While Nesta agrees these measures are timely and necessary, it points out that in the case of the UK, science-based innovation in the form of new-to-the-world products and technological processes, takes place in only six per cent of the UK’s economy.

Mind the innovation gap

In short, a gap has opened up between the types of innovation that impact most directly on the vast majority of the UK economy, and the established policy interventions that are intended to promote innovation. This gap is particularly significant in the context of the UK economy with its dominant services sectors and large public sector.

To understand the dynamics of hidden innovation, Nesta conducted a detailed analysis of six sectors that perform poorly on traditional metrics: oil production, retail banking, construction, legal aid services, education and the rehabilitation of offenders.

None of these invests heavily in formal R&D; nor do they produce many patents. Three are publicly funded services that are typically not included in studies of innovation at all.

The innovation in the six sectors Nesta studied rarely happens at one time in one place. It depends on a sector’s ability to draw on ideas from related sectors and is frequently a global process.

Innovation often involves melding existing technologies and matching those with organisational change to deliver innovative services. And it can be stimulated or blocked by taxation, skills, regulation, and wider political conditions.

Developing metrics for hidden innovation

The shortage of suitable metrics is a substantial barrier to the extension of innovation policy beyond science and technology. However, some metrics that more accurately capture hidden innovation are available.

In oil production investment in technologies for exploration is a better proxy for innovation than traditional R&D. Instead of characterising the oil sector as being 70 times less innovative than pharmaceuticals because it spends far less on R&D, this recognises the £600 million spent on exploration in the UK alone as a more accurate measure of innovation in the sector.

In construction, metrics like the use of modern methods of construction would produce a better measure of innovative activity than patents. While only 1 per cent of construction firms apply for patents, new construction methods are saving substantial amounts of money and have cut more than £800 million off central government procurement alone.