Lord Sainsbury of Turville

Working Together to Stimulate Innovation

I want to address two questions this evening: 'Why is innovation so important today for companies and Governments?' And 'What can Governments do to improve their rate of innovation?'

In October the US Competitiveness Council announced a new initiative on national innovation. In announcing it, the Chairman of IBM said he expected 13 million jobs to be created in the next two years around the world, including in rapidly developing countries such as China, India and South Korea. Other countries, he said, are becoming more competitive not only in wages but in education, job skills and network infrastructure. "We believe", he added, "the United States must again raise the bar - to take the steps necessary to keep the nation at the forefront, to continue to offer the most fertile and attractive environment for innovation in the world." In the UK we believe that what applies to the USA applies also to our own country and Europe.

There are two reasons why innovation is vital. The first is globalisation. Trade liberalisation and a rapid drop in communication and transport costs mean that the UK and Switzerland have increasingly to compete against those with significantly lower labour costs and reasonably well-educated labour forces. At the same time wages in China are less than 5% of those in the UK. Hourly labour costs in Korea are just over half UK levels, but the proportion of graduates in the working age population is almost identical.

The second reason why innovation is so important for companies and governments is the major advance taking place in science and technology. Developments in information and communications technology, new materials, biotech, new fuels and nanotechnology, are unleashing new waves of innovation and creating many opportunities for entrepreneurial businesses to gain competitive advantage.
Innovation is a complex process, so understanding any country's innovation performance is not straightforward. In Britain we have recently conducted an extensive Innovation Report, consulting a wide group of experts. The Report will be issued shortly, but I thought this would be a good occasion to share with you a few of its highlights.

The Innovation Report has identified a number of critical success factors where we need to improve if we are to increase our rate of innovation:

• First of all Customers - create the demand for new and innovative products and services. Intelligent and demanding customers put pressure on businesses and public sector providers to deliver high quality and value for money goods and services.
  
• Secondly the regulatory environment. Product and labour market regulation, environmental, health and safety regulation, intellectual property rights, and standards and measurement frameworks can all impact on the ability, and willingness, of firms to innovate. There is plenty of room to make sure that regulations are drafted in a way to encourage innovation rather than inhibit it.
  
• The third area is Competition and entrepreneurship - competitive pressures spur firms to innovate, while entrepreneurial behaviour is needed to spot opportunities and turn them into profit.
  
• The fourth area is Access to finance - Investments in new products, services or processes require financing what ever the size of the innovating firm.
  
• Sources of new knowledge are clearly important- companies draw on scientific and business knowledge from a range of sources, including universities and research institutions, competitors, suppliers and employees.
  
• The way they do this is through Networks and collaboration - firms rely on a variety of types of collaboration and relationships with many partners.
  
• Finally, there is the Capacity to absorb new knowledge - firms have to build the capability to make the most of external sources of knowledge.

Across these factors there are areas of great strength for the UK, the continuing excellence of the science and engineering base and the size and sophistication of our financial markets. However, there is also room for improvement in a number of areas, which the forthcoming review will seek to address.

So what can Government do to improve the rate of innovation? Innovation ultimately depends on the knowledge, skills and creativity of people at work, but in the UK we believe that Government has an important role to play in creating the best possible conditions for innovation, and in creating the significant range of public goods which are essential for a dynamic and innovative knowledge economy, such as a strong science, engineering and technology base, incentives for knowledge transfer and high educational standards.

In recent years Government has taken many steps to make the UK an attractive place for high-tech businesses and innovation. When this Government came into power, the science budget stood at £1.3 billion. In 2002/3 the science budget stood at £2 billion and this figure will increase by 10% a year in real terms until 2005, when the science budget will be nearly £3bn. This will mean that in the eight years since 1997 the science budget will have more than doubled.

As a result of our excellent record of scientific discovery, Britain is home to strong science-based industries such as aerospace and pharmaceuticals, as well as being a leading centre for opto-electronics, computer games and mobile telephone software and services. It is a remarkable tribute to the creativity of British science that fifteen out of the world's top 75 medicines were discovered and developed in Britain.

We have introduced R&D tax credits, which are worth £600 million per year to businesses. As part of moving the research base onto a sustainable long-term footing, the Government is building on the success of the Science Research Investment Fund (SRIF) and the Joint Infrastructure Fund (JIF) with "SRIF 2". This will increase to £500 million a year by 2005-06 for universities' science research infrastructure.

We have also put significant extra resources into knowledge transfer, using such schemes as University Challenge which puts seed-corn funding into universities, Science Enterprise Centres, which are giving access to entrepreneurial skills to science and technology graduates and undergraduates, and the Higher Education Innovation Fund which provides incentives for universities to transfer knowledge into the economy.

These are producing exciting results. We had 248 spinout companies in 2001-2 from universities, representing an increase of from 203 the previous year and compares with an average of 70 a year in the previous five years. I am not saying spinouts are the only thing that is important, it is just that the figures here are really dramatic. We have equally seen major increases in numbers of licenses and patents.

We have already laid the foundations of an innovation economy in areas such as macro-economic policy, fiscal policy, competition policy, trade policy and education and skills. But there are other measures that directly bear on innovation where government needs to do more, taking forward our programme of micro-economic reform. These will be set out in the Innovation Report that we will be issuing shortly.

This Report will suggest initiatives in several areas. It will set out proposals to help managers acquire the skills to manage high-tech, fast-growth businesses. In my ministry, the Department of Trade and Industry, we have drastically reduced the number of schemes we have to support business innovation so that we can focus our resources on the most successful ones. The Review will look at how we can prioritise the areas we support. It will look at how we can stimulate regional innovation. It will look at the role of all Government Departments and how they can support innovation by being 'intelligent customers', by developing output-based regulations and by incentivising knowledge transfer from the £4billion of R & D they do. The report will also propose a range of measures to enable more small businesses to realise their innovative potential.

We live in a fiercely competitive, global economy. If we are to enhance our productivity and raise our standards of living we need step change in our innovation performance and continuously to innovate so that we are a moving target for competition from the newly emerging economies.

Since taking office the present British Government has consistently sought to create the conditions necessary for the UK to become a high value-added, high-tech economy. We want the UK to be a key knowledge hub in the global economy, which has a reputation not only for outstanding scientific and technological discovery, but is also a world leader in turning that knowledge into new and exciting products and services. To achieve this goal will require a major cross Government initiative. At the same time companies will need to put innovation at the heart of their corporate strategies.

We also believe that there is an important international dimension to our innovation policies. Research shows that businesses that internationalise are more competitive, and that innovation benefits from international collaboration, and we would like to have Switzerland as one of our key international partners. This is an area to which we attach a great deal of importance.

There are 5 International Technology Promoters (ITPs) covering Europe. During the past 12 months 3 of the 5 ITPs have led Global Watch Missions to Germany, France and Switzerland covering MEMs, Composite Hybrid Materials and High Throughput Technology.

The UK Department of Trade and industry and I, drawing on the local resources of the British Embassy, are actively engaged in promoting closer collaboration with Switzerland on science and technology matters. And I know that our Swiss opposite numbers, including the Swiss Embassy in London, are equally committed. Increasingly, innovation is the key to economic success, and in meeting the innovation challenge Britain and Switzerland are increasingly moving forward together. I am confident that the example of business collaboration that your chambers represent will also underpin this historic endeavour.