Innovation policy 'needs to reflect reality'

The traditional model takes no account of innovation in areas such as retailing, financial services, advertising or other aspects of media and creative industries, says Jonathan Kestenbaum, CEO of Nesta.

Nesta’s report, The Innovation Gap: Why policy needs to reflect the reality of Innovation in the UK, has been published in a bid to drive forward the discussion and practice of innovation policy

“We need a deeper understanding of innovation, based on where it actually happens, and we need to develop our approach to innovation policy based on this understanding,” says Kestenbaum.

While the current emphasis on traditional R&D is necessary, it is not sufficient. It has grown from a concern over the UK’s unimpressive performance on traditional innovation metrics. But these metrics measure inputs more than outcomes, and are inherently biased against the make-up of the UK economy.

“The result has been an over-emphasis on a very small sector of our economy and the exclusion of the vast majority,” says Kestenbaum.

It's the same the whole world over

The UK is not alone in having this problem: government innovation strategies world wide have a remarkably similar ring to them. This arises because most innovation policy is bolted onto science and technology policies.

To fashion more appropriate innovation policies there first needs to be an understanding of what a country wants from innovation and an appraisal of the capacity for innovation in sectors that are not usually considered when innovation policies are being formulated.

The real innovation gap

Traditionally, any reference to an ‘innovation gap’ is assumed to mean the UK’s deficit in innovation performance compared to other leading nations.

However, traditional indicators of innovation performance are heavily biased toward investments in scientific and technological invention. As a result, says the report, they do not capture innovation in those sectors that represent the vast majority of the UK economy.

Moreover, even within those sectors that they do represent, traditional indicators poorly reflect the true level of innovative activity.

The gulf between practice and measurement is the real innovation gap, argues the report. “Understandably, policy built to remedy historical poor performance on these indicators has focused on scientific and technological invention.”

The emphasis now needs to be balanced against a wider agenda around the skills and attributes required to create, absorb and exploit innovation in the rest of the economy.

Underperforming

The UK underperforms on traditional innovation indicators and has built policy and structures to remedy this. The traditional headline data that informs the innovation debate shows that the UK performs poorly on business expenditures on research and development (R&D) and on the production of patents.

For example, overall per capita expenditure on R&D in Britain is just half that in some other countries: the UK spends $566, the US $1,005, Sweden $1,154 and Finland $999.

Similarly, the UK has a triadic patenting rate – patents assigned in the US, EU and Japan –  of 36.7 patents per million population, while Germany achieves a rate of 90.7 and Japan reaches 92.3.

As a result, policymakers have sought to drive improvements in these areas, and have focused on incentives for scientific and technological R&D, support for high-tech manufacturing firms, increasing public investment in the science base and improving links between universities and industry.

The innovation/growth paradox

If innovation is fundamental to economic development, a paradox is apparent in the continued economic expansion of the UK despite its supposed underperformance. The resolution of this paradox lies in the way in which innovation has typically been measured, says the report.

Traditional indicators have captured only a limited amount of the innovation and innovative potential that exists in the UK. First, they are more relevant to some sectors than to others. For example, formal R&D is much less important in many service sectors than in high-tech manufacturing.

The decline in some manufacturing sub-sectors therefore helps to explain much of the UK’s relative under-investment in business R&D.

Similarly, although universities have been a focus of much innovation policy based on the traditional ‘pipeline’ view of innovation (where pure knowledge is created and then commercialised in industry), they actually produce only a small amount of the innovation relevant to the modern UK economy.

Second, the Organisation for Economic Co-operation and Development (OECD) definition of some indicators neglects some of the UK’s strengths, for example exploration activities in petroleum, one of the UK’s most valuable sectors.

Third, traditional measures unhelpfully aggregate data from many sectors into single indicators. For example, the UK pharmaceutical sector, where the development of new drugs in traditional laboratory settings is crucial, outperforms its competitors in investment in R&D but this performance is obscured when crude economy-wide indicators are compiled.

 If these factors are taken into account in the traditional metrics, the UK’s performance significantly improves against its international competitors. The gap in business R&D intensity between the UK and France closes by 80 per cent, and between the UK and Germany by 73 per cent.

Where is innovation hiding?

Uncovering the innovation that is hidden by traditional indicators will be a defining issue in the development of successful innovation policy. Nesta has begun this process by using five in-depth case studies to examine how innovation actually occurs.

For example, the development of new genetic tests in the NHS suggests that informal and iterative development and research is often more significant than formal R&D, even in scientifically advanced sectors.

The case studies emphasise how innovation relies on interactions between a wide diversity of people. They indicate how innovation reaches far beyond the production of products and into the development of new services and organisational models to meet social as well as economic challenges.

“The extension of our understanding of hidden innovation, and the development of new metrics that more accurately represent sectors such as these, might allow us to be more confident about the UK’s ability to generate and exploit innovation,” says the report

The wide distribution of high quality skills is crucial to the development of hidden innovation and the absorption of innovations developed outside of the UK. This means that the traditional focus on the supply of people with advanced science, engineering and technology (SET) skills into jobs in formal R&D, needs to be balanced by a recognition that SET graduates working in other sectors also make an important contribution to innovation.

Reforming the innovation policy agenda

Nesta’s research has implications for policy formulation, which needs to be based a broader view of where innovation comes from and where it applies. “In other words, we need to look beyond science and technological invention and the obvious forms of innovation that result in new materials or products.”

Innovation policy needs to focus on building an education system that is able to foster analytical and problem-solving skills, creativity, imagination, resourcefulness and flexibility.

While current policy may over-estimate the importance of academic research as a source of innovation, it may under-estimate the damage that low per capita investments in public research have had on the production of skilled scientists and engineers who can apply their skills in the wider economy.

Innovation policy needs to recognize that one size does not fit all sectors. The recipe in the pharmaceuticals sector will not work for financial services or for public services.

Finland’s innovation policy role model

The striking feature of most innovation policies around the world is their similarity, but some countries, for example Finland, have attempted to tailor innovation policies to suit their particular needs and realities.

The Finns recognised the need to move beyond the science and technology focus, especially with regards to the country’s SMEs, and in overall levels of entrepreneurship.

A major objective of Finnish science and technology policy has been to ensure a more balanced development of the innovation system and to promote co-operation within it. Over time, the goal is to develop more horizontal and collaborative relationships between more sectors, and between policymaking in areas such as the economy, industry, the labour market, the environment, regional policy, and the social and healthcare sectors.

This represents an explicit recognition that the conditions for knowledge-based development are created in society at large, and within different policy sectors, not just within the science and technology sphere.

Sitra, the Finnish National Fund for Research and Development, published a report in April 2005, "Making Finland a Leading Country in Innovation".The report presented the results of Sitra’s Competitive Innovation Environment development programme launched in late 2004. During the programme, 24 leading decision makers representing government ministries, companies, universities and research institutes and other well-versed in innovation policy issues prepared specific proposals on how Finland can secure its future success via innovation.

The resulting 27 proposals cover a wide range of areas such as innovation policy, the taxation system, the education system, immigration policy, company networking, and a system of regional centres.