Another three bricks in the innovation wall

Gordon Brown: putting flesh on the new framework

India and China are no longer competing on the basis of low cost, but of high skills, leaving economies like the UK with no choice but to out-innovate and out-perform them by the excellence of their science and education, the quality of infrastructure and environment, and through high levels of creativity and entrepreneurship.

This was the message from the UK chancellor and likely next prime minister Gordon Brown today (6 December), as he began to put the flesh on a new framework for investment and innovation as part of the annual pre-budget speech.

Underpinning his statement were the findings of three independent reviews that he inspired, looking at how to improve the deployment of medical research funding, increase the investment community’s appetite for backing high tech companies, and more rigorously defend the currency of innovation – intellectual property.

The economic power of knowledge, ideas and innovation is now evident, Brown said. “Twenty-five years ago the market value of our top companies was no more than the value of just their physical assets. Today the market value of Britain's top companies is five times their physical assets.”

The next challenge is to match strength in basic research with success all round in transforming knowledge into successful products and new jobs.

Changes for medical research

As a first step Brown announced reforms in the funding and commercialisation of medical research, based on the findings of a report by David Cooksey entitled “A review of UK Health Research Funding”.

The report calls for a new central coordinating body to oversee all publicly funded health research, the Office for Strategic Coordination of Health Research (OSCHR). This body will sit above the National Health Service and the Medical Research Council, setting the health research strategy, and will be the sole body negotiating with the Treasury for funding.

It will also be responsible for getting the pharmaceutical and bioscience sectors to buy into the strategy, through designating public and private sector projects addressing unmet medical needs. The chancellor confirmed these “Priority Projects” will have a budget of £1 billion a year and be governed by a new fast-track procedure for priority research.

Sitting alongside the OSCHR, the report recommends the formation of a Translational Medicine Funding Board to translate medical research findings to the bedside and maximise the economic and health benefits of innovation.

Cooksey calls also for a new drug development pathway to speed products through clinical trials, and a more proactive approach to the uptake of new technologies in the National Health Service. The speeded up development pathway will be modelled on the US Food and Drug Administration’s Critical Path initiative, and will dovetail into its European counterpart, the Innovative Medicines Commission.

While current funding levels for basic research in medical science are to be sustained future increases will be weighted towards translational and applied research.

Further down the innovation food chain, Brown announced the formation of a new £60 million per year fund for universities to spend on applied research with commercial potential.

Targeted reform of IP

Brown then turned his attention to intellectual property, announcing the introduction of a new fast track system for small companies to safeguard trademarks, and higher penalties for copying and piracy. Online copyright infringements will now carry a maximum 10-year prison term.

While the review of the intellectual property, carried out by Andrew Gowers, former editor of the Financial Times newspaper, concludes that the UK has a fundamentally strong IP system, it did suggest other targeted reforms.

These include restructuring the Patent Office as the UK Intellectual Property Office, with a brief to provide greater support and advice for businesses using IP. A new independent Strategic Advisory Board on IP Policy should be set up with members from industry to advise the government, and there should be increased support and advice on international IP issues to enable businesses to protect their investments around the world.

The review also proposed lowering the costs of seeking redress by using mediation and fast-track litigation.

Gowers said the overall aim is to strike a balance to encourage firms and individuals to innovate and invest in new ideas while ensuring that markets remain competitive and that future innovation is not impeded. “The ideal IP system creates incentives for innovation, without unduly limiting access for consumers and follow-on innovators.”

'Losing the ability to create wealth'

But there is a sobering assessment of the UK’s chances of competing through innovation in the third report, which concludes that, apart from defence and pharmaceuticals, the UK has lost much of its ability to translate scientific leadership into wealth creation.

“SET and the City: Financing Wealth Creation from Science, Engineering and Technology” sets out to address a paradox that threatens the future of the UK economy: Why are there so few science, engineering and technology (SET) businesses generating wealth in the country when London is a powerful capital market, and the UK’s science base is among the best in the world?

At present, there are only 16 SET-related businesses in the FTSE 100 and only 45 in the FTSE 250. In contrast, the US Nasdaq index is dominated by technology-based companies, with almost a thousand listed.

Although they are few in number, the technology-based companies are an important wealth creating engine. SET intensive sectors produced 27.3 per cent (£252.3 billion) of the total UK value-added in 2002. But the level of wealth creation falls short of what would be expected if the UK was getting maximum leverage from its science base.

The report identifies three issues at the heart of the paradox:

1. For public investment in science and engineering to be economically worthwhile and sustainable, the private sector has to match the government’s financial commitment, but there is little sign that this message is accepted or understood;
   
   
2. Government procurement strategies are ineffective in promoting emerging technology based businesses, and may in fact discriminate against them;
   
   
3. Growing start-ups into world class enterprises requires the active support of the capital markets. But says the report, all the available evidence calls into question the commitment of the major financial institutions to technology stocks and suggests that nothing less than a fundamental change in investment attitudes will reverse these trends.

One of the key recommendations is a review of government procurement processes to give small businesses a chance of finding a niche in the supply chains for public sector contracts.

In 2006, the public services will purchase well over £150 billion worth of goods and services. “This potential pool of investment could improve the relationship between company and investor for whom secure order books offset the risks inherent in technology business,” says the report.

In 2004, US pension funds were a larger source for UK venture capital and private equity than their UK counterparts. The bulk of UK private equity and venture capital went into non-technology funds, with technology funds at only 3.3 per cent of funds raised. To redress this imbalance the report calls on the government to “supercharge” venture capital trusts and to consider giving tax incentives to institutions investing in venture capital.

“Our report aims to encourage financial institutions and SET-related businesses to work together,” said Williams. “We hope the government will continue to help by putting the right tax and regulatory policies into place.”