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Oxford Capital Partners' Investors Forum

Lord Sainsbury of Turville,  Former Parliamentary Under Secretary of State for Science and Innovation
SAID Business School, Oxford,  20 September 2006

The starting point of what I want to say today has to be the challenge that Europe faces from globalisation. At no time since the industrial revolution has the restructuring of global economic activity been so great: Asia is moving from the fringes of the new world economic order to the centre. Barriers to world trade are coming down. The world's division of labour is being redrawn. In 1980 less than a tenth of manufacturing exports came from the developing world. Today it is almost 30%. In 20 years time it will probably be 50%. Today China alone is producing 70% of the world's photocopiers, 50% of cameras, 40% of microwaves and 25% of textiles – and at wages that are 5% of the UK’s.

Technology and scientific understanding are changing our world faster than ever before and creating new opportunities. Developments in ICT, new materials, biotechnology, and nanotechnology are creating a new wave of innovation and new opportunities for entrepreneurial businesses, large and small, to create competitive advantage.

So on the one hand we have the challenge that has come from the emerging economies - and on the other, the opportunities created by new developments in science and technology.

I want in the rest of my speech to concentrate on what we in the UK are doing to meet the challenge of globalisation.

The good news is that the UK is restructuring its economy rapidly and effectively. We lead Europe in a number of knowledge-based industries such as aerospace and pharmaceuticals. Knowledge-based business services have accounted for over half of our job growth in the past two decades. Britain has five of the World's top ten legal firms, helping to account for a £17 billion trade surplus in business services.

Our world-class financial services industry accounted for 5.3% of the UK GDP in 2003, employed over 1 million people and generated a trade surplus of £17.8 billion. Britain's creative industries produced 8% of our GDP, a higher proportion of our total wealth than anywhere else in the world. But it is only in the last few years that we have seen, as a result of our policies, an upsurge in fast-growth, high-tech businesses and we need to work hard to build on our success in this area.

Competitive advantage for countries, as for companies, is achieved not by doing what others already do well, but by doing what others cannot do as well. Our record of scientific discovery and the quality of our universities should, therefore, be seen as national assets which we should take advantage of to strengthen our competitive position in the global economy.

Our record of scientific discovery is one of the best in the world. With 1% of the world’s population we undertake 5% of the world’s science, produce 9% of all scientific papers and receive 12% of all citations, including 13% of the most highly cited ones. We are also ranked first in terms of papers and citations per head in the G7.

Therefore, when the present Government came into power in 1997 its first priority was to ensure that the science and technology base was properly funded.

When the Government came to power, the science budget was £1.3 billion. As a result of substantial increases in a number of spending reviews, the science budget will have more than doubled in real terms to £3.4 billion by 2007/8. This currently includes £500 million a year for the renewal of scientific facilities in universities, and we now produce a 15-year roadmap for large facilities so we can provide our world-class scientists with a world-class scientific infrastructure.

The Government has also set itself ambitious goals for the future in a 10 year Science and Innovation framework. The Government’s long-term objective for the UK economy is to increase the level of knowledge intensity in the UK as measured by the ratio of R&D across the economy to national gross domestic product, from its current level of around 1.9 per cent to 2.5 per cent by around 2014. If achieved, this would put the UK in a position to secure a leading place among the major European countries and substantially close the gap between the UK and the USA, the USA being the best performing, innovation-driven major economy.

This scenario represents a considerable challenge, both for the Government and for U.K. business. If overall levels of R&D are to reach 2.5% by 2014, then both private research and public sector research will need to grow at an average real annual rate of around 5.75% over the next eight years.

A second major objective of the Government has been to increase the amount of knowledge transfer from our science and engineering base. This has been a great weakness of the UK’s innovation system in the past, and the Government has introduced a number of schemes to improve our performance. These have included: University Challenge, which provided universities with seed corn funds; Science Enterprise Centres which have provided access to entrepreneurial skills to science and engineering undergraduates and graduates, and the Higher Education Innovation Fund which provides incentives for universities to transfer knowledge to the economy.

Our universities have responded swiftly and enthusiastically to the incentives provided by these schemes, and we have seen a significant rise in all the measures of knowledge transfer, licensing, patents, spin-off companies and contract work for industry. A couple of figures can be used to illustrate simply this point. In the past two years alone, 20 spin outs from UK universities have floated on the stock market with a combined value of £1.3bn. These 20 companies cover a wide range of sectors, and their products can be found from inside the I-pod to on the ocean floor.

There is an interesting story here which has I think important lessons for Government policy. As a result partly of attractive tax changes introduced by the Government, the AIM market has been a great success. This in turn has encouraged a number of companies such as IP (formerly IP2IPO) and Angle to make deals with universities to bring their spin-off companies to the market. This they are doing very profitably. The IP Group has agreements with seven different universities including King’s College London and the Universities of Leeds and Southampton which last for around 25 years. It also has 44 companies on its books, 8 of which have floated.

I am not saying these deals are good or bad for universities. The point I want to make is that there may now be very profitable opportunities for venture capitalists in early stage spin-offs from universities. In the past we have seen little venture capital go into early stage investments because the return on them has been poor. But as a result of the entrepreneurial approach taken by the universities in the last few years we may be at a turning point. The moral is that the best way to achieve a goal of Government policy is to use the market to deliver it.

Three other figures can also be used to illustrate the cultural transformation which has occurred in our universities in recent years. Firstly, there is the buoyancy of the Cambridge cluster, arguably the most exciting high-tech cluster in Europe. Today, Cambridge is home to more than 895 innovation-based companies, 200 of which are biotechnology companies, 17 of the UK’s quoted biotechnology companies, and a quarter of the top 50 publicly quoted biotech companies in Europe. Biotechnology companies in the region have over 70 products in clinical development, which is more than any other individual country in Europe. And Cambridge is not the only high-tech cluster in the UK. In Oxford, Manchester, York, Nottingham, and Dundee, for example, we are seeing the development of exciting high-tech clusters based around universities.

Secondly, there is the performance of MRC’s Technology ARM which is responsible for exploiting the intellectual property rights from research in MRC establishments. MRC’s commercial income was £28.5m in 2004/05. Expenditure on commercialisation was £9.3m. This level of license income is equivalent to 9.17% of research expenditure on MRC institutes and units which, on the basis of the most recent comparative figures available, is more than three times the proportion achieved overall by U.S. universities.

Finally, as a result of the enterprise schemes we have introduced, today 24,000 science and engineering students are receiving enterprise training, whereas the figure in 1998/99 was 3,000.

Another objective of the Government has been to encourage more applied or user-driven research, as an increase in it is essential if we are to reach our goal of total public and private research reaching 2.5 per cent of GDP by 2014. To help us achieve this objective we have developed a Technology Strategy Programme to provide a business-driven framework for identifying emerging technologies where the UK has the research capacity to create a competitive advantage. This is the funding we have used to support the rapid developments taking place today in areas such as ICT, biotechnology, stem cells, nanotechnology and aerospace. We have allocated £320m over three years to this Technology Strategy, and have set up an industry-led Technology Strategy Board to manage it.

Nineteen Knowledge Transfer Networks have also been set up under the auspices of the Technology Strategy Board and act as a link between universities and industry in key areas of technology, such as bio processing, grid computing, healthcare, Cyber-security, the Modern Built Environment and Electronics.

We have introduced R&D tax credits for small and large companies to incentivise them to do more research and these are now worth £600m per year.

In the case of regional policy we have encouraged the RDA’s to put a greater emphasis on science and innovation, and they have responded by strengthening research activities essential to regional growth, supporting knowledge transfer form universities, encouraging high-tech clusters, and providing financial support for new high-tech firms. All RDA’s now have a Science and Industry Council, and it is encouraging that the RDA’s are planning to spend £360m on supporting science and innovation this year.

I think it is also worth mentioning in this context the £50m we gave to RDA’s early on in the life of the Government to encourage the setting up of high-tech incubators. This had a surprisingly powerful effect. In 1996 we estimated that there were about 25 incubators for high tech firms in the country. By 2000 this had risen to a 100 and today we reckon that there are over 270. Over the same period there has also been a significant increase in science parks. In 1998 there were 39. Today there are nearly 100 with almost 1,700 tenant businesses. These figures are exciting because they show that if Government creates the right conditions for innovation and growth, then across the country companies, universities and cities will respond to the challenge of creating new industries and new jobs.
Finally, as we are in Oxford, I would like to mention a Government initiative which I think opens up a lot of opportunities, and that is our decision to turn CCLRC’s sites at Harwell outside Oxford and Daresbury in Cheshire into Science and Innovation Campuses.

By bringing together on a single site large science facilities such as the Diamond Synchrotron together with industry and university research, and in the case of Daresbury venture capital, we are planning to create high-tech clusters which can drive innovation and growth in their areas. I was up at Daresbury yesterday, and there we are already achieving a highly successful outcome.

The Government's vision for the UK is that we should be a key hub in the global knowledge economy - famed not only for its outstanding record of discovery but also for innovation; a country that invests heavily in business R&D and education and skills, and exports high-tech goods and services to the world. We should be a country to which talented entrepreneurs and world-class companies come from around the world to do business, attracted by the quality of our research, by strong links between universities, research institutes and industry, by their ability to raise finance particularly venture capital, and by our quality of life. Ten years ago this would not have been a realistic goal. But today it is, though we still have much to do to make it a reality.