A nation's or region's standard of living is determined by the productivity of its economy. Productivity, in this sense, is more than just efficiency. It also depends on the value of the product or services that a region's firms can produce as measured by the prices they can command. The central challenge in enhancing the prosperity of a region or a city is to create the conditions for sustained productivity growth, and in advanced regions today productivity and prosperity increasingly rest on the capacity for continuous innovation.
As a Government we believe that achievement by all parts of the country and all people of their full potential is an economic and social imperative. A national economy cannot function to its full capacity and individuals cannot realise their full potential if regions and localities are under-performing.
That is why we have adopted a new approach to regional policy designed to build the capability of regions and communities. Instead of largely being concerned with providing financial incentives to attract jobs to particular areas, this new approach puts greater emphasis on growth within all regions and boosting the capacity of regions for innovation, enterprise and skills development.
Today there are huge variations in the extent to which regions and communities possess the key building blocks for innovation and productivity growth. A key ingredient for success in a local economy is the rate of business formation, but while in 1999 there were 66 new business registrations for every 10,000 adults in London, and 45 in the South East, there were only 29 in Yorkshire and the Humber, and just 21 in the North East. The level of skills in a region is also extremely important, and yet in the North East and the West Midlands almost 20% of the working age population had no qualifications compared to 11% in the South East. Finally, the South East with 32% of the population of VAT registered businesses has 46% of England's venture capital backed companies; the South West with 11% of the population has 6%.
The Government has taken many steps at a national level to speed up the rate of innovation. We have put substantial extra funds into the science and engineering base so that over the next three-year planning period it will rise at 10% per annum in real terms. We have increased the incentives and mechanisms for knowledge transfer from our universities into industry, and this has already begun to produce results. In 1999-2000 there were 199 spin-off companies from our universities, compared to an average of 70 a year in the previous five years. And, to encourage firms to raise their level of R and D we have introduced R and D tax credits for large and small firms.
But these national policies need to be matched by policies and actions at a regional and sub-regional level to drive up the rate of innovation. We need to encourage inward investment of high value added jobs but put greater emphasis on growth within regions. This means having policies to increase the rate of new firm formation, to raise the education and skills level of people in the regions, to encourage clusters of businesses, to increase the supply of venture capital and to form better links between universities and local businesses. Networks between the regional and local actors are particularly important. For examples, links need to be formed between local clusters and Learning and Skills Councils.
This is why one of our first initiatives on coming to power in 1997 was to establish the Regional Development Agencies in England. Their main priority is to provide strategic leadership to promote economic development, enterprise and regeneration in the regions, tackling economic differences as well as driving up the performance of the regions as a whole.
Government funding for the RDA's has risen from £1.2 billion in 2000-01 to £1.7 billion in 2003-04 and to £2 billion by 2005-06. They have also been given substantial funding flexibility to allow them to respond to regional priorities. Encouraging innovation forms a key part of their activities.
Already a great deal has been achieved. We are seeing better coordination between local businesses and universities. New incubator space has been developed, networks have been facilitated, clusters have been encouraged, and research has been undertaken on regional and sub-regional strengths and weaknesses.
The Government has also made £30 million available to establish five university innovation centres which will aim to develop top class, long term, research partnerships between major business interests and the university sector. The centres will stimulate private sector research and development, harness the potential of universities to act as hubs of growth and provide support for new start-ups. The Warwick Manufacturing Group, for example, is establishing a regional Business to Business E-Commerce centre, with BT, Sun Microsystems and Parametric Technology Corporation, which will be of major benefit to businesses in the West Midlands.
Another initiative which I think is immensely important is the establishment of the North West Science Council and the North East Science and Industry Council. These councils are developing a science strategy for their regions, based on their known strengths and advising their RDAs on how they can raise their level of innovation.
At the level of cities and towns, policies also need to be adopted which provide the best possible environment for innovation and growth. In particular it is vital that planning policies are adopted which enable new and growing businesses to have the modern premises they require. Incubators and science parks are extremely important in providing the right environment for innovation, and it should never be forgotten that the high-tech, fast-growth businesses which are most valuable to a local economy are very mobile. If they can't get the right premises in one part of the country, they are quite likely to go to another part of the country, or to Boston or Munich.
Each region and sub-region is different, which is why it is so important that each RDA develops the right strategy for its region. Some are faced with modernising their traditional industries. There are tremendous opportunities, for example, for the chemical clusters in the North West and North East to develop the opportunities which currently are opening up for speciality chemicals. Others need to provide support for new high-technology industries. Others have to face the problems of success, where transport, planning and housing become key factors in sustaining prosperity. Geography and history impact on each region differently, and the relationship between each city and its region differs too – Birmingham's relationship with the rest of the West Midlands, for example, is vastly different from that of Bristol to the South West. Each region and locality has different strengths and weaknesses, and it is always a good principle to build on current strengths.
Finally, it is essential always to keep a clear focus on innovation, to invest in new technologies, skills and communities rather than simply spending money, and to take a long-term view. Only in this way will we be able to ensure that all parts of the country and all members of our society have the opportunity to fulfil their potential.
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