Focus on high tech clusters can overlook innovation

An analysis of the industrial and geographic distribution of innovative companies in the UK has uncovered innovation in unexpected places and unexpected sectors, calling into question the widespread tendency to target government support and policy towards high tech clusters.

The report, “The distribution of innovation activity across UK industry,” by Richard Adams of Exeter University, shows there is a wide distribution of innovation, in which no particular industrial sector, or geographical area, absolutely dominates.

For policy makers in pursuit of growth, clusters and hotspots are seductive phenomena, since there is seen to be great potential for firms locating close by to benefit from positive feedback, or externalities. Clusters matter because they have the potential to increase innovation in and between firms, raise productivity and competitiveness and hence contribute to regional and national economic growth.

However, the report raises questions about whether or not the promise of clusters is as alluring as might first be thought.

As Adams notes, cluster-based policies are predicated on the observed successes from the late 20th century of a few significant high-technology clusters. But policies that seeks only to replicate clusters may overlook measures that are needed to promote innovation in different kinds of businesses.

“The implication is clear. It means that we do not necessarily have to look to established clusters to find innovation (though they are one important source), nor establish clusters to promote innovation: innovation may be found in locales not characterised by clusters of homogeneous economic activity,” Adams says.

Adams’ research is based on UK Innovation Surveys carried out in 2005, 2007 and 2009 and was commissioned by the UK government.

At the spatial level innovation is widely distributed across the UK. No single industry or area has a monopoly on innovation, though a small number of areas could be thought of as hotspots. Hotspots are seen as differing from clusters, in that the companies in a cluster are linked, whereas hotspots are geographical areas characterised by relatively high concentrations of innovative firms regardless of sector. (Hotspots are also defined as concentrations of companies in the same sector, but not located in the same place).

R&D is not necessary for innovation

Interestingly, up to one quarter of companies that are classified as innovative do not engage in internal R&D.  But they still manage to generate an important range of innovative outcomes. “Whilst the absence of internal R&D may suggest a non-product or non-technical orientation to innovation, these innovators that do not engage in internal R&D generate a variety of outputs and up to 64 per cent of them appear to be product innovators,” Adams notes.

In another challenge to the preconceptions of policy makers, up to 10 per cent of firms in sectors traditionally not thought to be particularly innovative were found in the upper deciles of several of the innovation measures looked at in the analysis.

Adams says such companies are an important component of the UK innovation system. They include the organisational, service, business model and practice innovations that have delivered budget airlines and internet banking, and brought about supply chain improvements and process efficiencies across every business sector.

“These, as well as product and process innovations, are found in all sectors. However, they have been neglected in academic study and retain a low profile in policy debates,” Adams believes. Further research is required in order that the nature and contribution of innovation in these ‘non-R&D’ and ‘low-performing’ contexts can be better understood.

In particular, it is important that the contribution to growth is better understood. These findings raise some interesting questions for policy. An economic recovery strategy predicated on the idea that innovation leads to growth, and that innovative businesses are growing businesses, requires policy makers fully understand which are the  innovative firms and where they are located.

Adams adds that just because innovation happens in the areas identified in the study it does not necessarily mean this is where growth in jobs and tax revenues will come from. Further research is needed to understand which of these innovative industries and geographical areas offer the best prospects.

“The distribution of innovation activity across UK industry,” Richard Adams of Exeter University Business School, available at UK Department of Business Innovation and Skills http://www.bis.gov.uk/publications/whats-new