Lord Sainsbury of Turville

ESW ANNUAL DINNER

At a time when innovation is becoming a common feature of everyday life – the iPOD has revolutionised personal audio entertainment in 2004 – DTI is now making innovation a top priority. Indeed, as the Prime Minister recently said, in the next five years the DTI will become as much the Department for Technology and Innovation as for Trade and Industry. I would like to say this evening a few words about why the Government regards innovation as such a priority and what we are doing to create the best possible conditions for industry to innovate.

I think there are two fundamental reasons why innovation is today so vital to our future.

The first is simply globalisation. Trade liberalisation and a rapid fall in communication and transport costs mean that the UK has increasingly to compete against countries with significantly lower labour costs and reasonably well-educated labour forces. Wages today in China are less than 5% of those in the UK. Hourly labour costs in South Korea are just over half UK levels, but the proportion of graduates in the working age population is almost identical.

The second reason for innovation being so important to economic success is that today, technology and scientific understanding are changing our world faster than ever before. This is creating many opportunities for innovative and entrepreneurial businesses to gain competitive advantage.

The only way for countries in the developed world to compete and increase their standards of living has been to move into new high-tech, high value-added industries, and fortunately major advances in science and technology have enabled whole new industries such as ICT, aerospace, pharmaceuticals and telecommunications to be developed, and many new, high-tech, high-wage jobs to be created.

If one looks specifically at manufacturing industry over the years 1991-2001, the picture is very clear. Almost without exception the industries which have grown are those where R&D is a significant percentage of value-added and which have a high percentage of employees with degrees. For example, over that period the computer and office equipment industry grew at an average rate of 16.1%, spent 5.5% of its value added on R&D, while 27.5% of its total workforce had degrees. Compare this with the food, drink and tobacco industry which grew at 0.4% per annum on average, spent 1.1% of its value-added on R&D, and where the percentage of its workforce with degrees was 8.1%.

So, if the UK is to remain competitive, we must compete in the high added-value areas, which will create economic growth and prosperity for all. This is why the Government has put so much emphasis on knowledge and entrepreneurship, and why we want to see the start-up and fast growth of many more high-tech businesses. We’re particularly focussing on driving up the rate of business R&D whilst also improving the level of Government support for scientific and engineering research.

Whilst we have some very innovative industries: at the national level our innovation performance is no better than average. Although there is no single indicator of innovation, two measures of technological innovation – business R & D and patenting – show that the UK’s performance is not good enough compared with our international competitors. Despite the fact that the latest data from 2002 for business R&D show the UK well behind the US and roughly equal to the EU average, it is encouraging that after a steady period of decline from 1.5% of GDP in 1981 to 1.16% in 1997, there has been a move in the right direction, to 1.23% in 2003.

If the UK is to increase the rate of business R & D significantly corporate managers will have to put innovation at the centre of their corporate strategies, treating it not as a cost but an investment. They will only do this if they believe that innovation is essential to their business success.

The Government is also playing its part. In 1997/98, the Government’s science budget was £1.3 billion and by 2007/8 this will rise to £3.3 billion. This has enabled Research Councils to raise substantially the amount of research they support and to start in repairing our scientific infrastructure.

As well as substantially increasing the Science Budget, the Government has also made other major policy changes in order to improve our rate of knowledge transfer. We have had three major schemes to increase our rate of knowledge transfer, University Challenge, Science Enterprise Centres, and the Higher Education Innovation Fund. In the last 6 years we have spent £169.5m on these activities, which have now been merged into one third-leg funding stream, and over the next 3 years, we will be spending £187m on them. These schemes have been extremely successful and we have seen a major cultural changes in our universities.

We have also introduced R&D tax credits for small and large companies, which have so far been worth £600m.

The Government has also pulled together all the funding in the DTI which supports pre-competitive applied R&D into the new Technology Strategy. This will provide a business-driven framework for identifying emerging technologies where the UK has the research capacity to maintain a leading position and the potential to exploit such technology. By focussing on user needs in selected technologies, the strategy is most likely to be able to address the market failures in the UK innovation system.

And we are giving the Technology Strategy strong financial support. The Government’s 10 year Science & Innovation Investment Framework published in July announced an increase in funding for the Technology Strategy and Programme – £320m between 2005-2008 – more than doubling the previous budget. This will help to exploit our strong UK science base and ease the transition of ideas from the laboratory to the marketplace.

To ensure that our Technology Strategy is user-driven, in April the DTI appointed a Technology Strategy Board to identify and back key technologies where UK industry can commercially take advantage. So for the first time, business has a strong voice at the heart of UK technology policy.

At a regional level, we also need to support high-tech clusters and encourage inward investment which will not simply bring in transient, labour intensive jobs but high value-added skill intensive ones which will make use of the research capabilities of the region and make a real contribution to its restructuring and growth. In this respect it is encouraging that the Bristol city-region is one of Europe’s largest concentrations of knowledge-based high-technology industry clusters including computing, tele-communications, digital media and e-commerce.

To hold its own in modern manufacturing, the South West will need to continue to innovate, not just creating new high-tech manufacturing industries such as biotechnology but also, and very importantly, continually upgrading traditionally strong areas in manufacturing such as Aerospace and Marine.

I know that SWRDA and GOSW are now very focussed on creating the best possible conditions for innovation at a regional level and vigorously tackling these issues.

To address the barriers of accessing appropriate sources of finance to support companies grow, a £25 million regional venture capital fund, known as the South West Ventures Fund has been created. This offers small and medium sized enterprises equity finance at a level that was previously difficult to access.

In the South West, the role played by Universities is, I think, very important. Recently, we saw the Universities of the West of England, Bath and Bristol run ‘Winner of Winners’ Business Plan competitions to raise the profile of enterprise amongst staff and students. The overall winner was a project, with worldwide potential, that enables the manufacture of new and complex structures from metal alloys.

In the recent Government Spending Review we announced additional responsibilities for RDAs in supporting knowledge transfer from Universities, the management of Research and Development Grants, and the operation of Business Links, which provide much practical support for innovation in business. We have also welcomed the greater role of regions in supporting design and early stage technology venture development in conjunction with national bodies such as the Design Council and NESTA, and their increased role in Knowledge Transfer Partnerships, Foresight and the Higher Education Innovation Fund.

The South West Regional Science and Industry Council will play a key role in these initiatives and should be in place by next April.

Developing innovation takes time, and this new policy approach, based around partnership and foresight, is still in its early stages. However, it is very encouraging to be able to see how regional activity here in the South West, working in conjunction with national policy and programmes, is leading to improved innovation which benefits both the South West and the UK as a whole.

The Bristol University-led 3C Research Limited project is one of five University Innovation Centres established by DTI nationally, to strengthen regional capabilities in innovation, skills and enterprise, and to facilitate knowledge transfer between Higher Education Institutions (HEIs) and industry. The project, which will receive £7.7m of DTI funding towards an £11m programme, between Bristol University and key industry private sector players, including Qinetiq Ltd, Toshiba Research Europe Ltd and Granada.

Knowledge Exploitation South West (KESW) is a three-year, £3.7 million RDA-funded programme designed to increase productivity, profits and jobs in the region and is a partnership between the South West RDA and the Higher Education Regional Development Association South West. It draws on the vast knowledge resources of the region’s universities and colleges and sees higher education and southwest businesses working together to help businesses gain access to specialist expertise and new technologies developed in the universities and colleges.

It is clear there are a number of ways of promoting innovation such as learning from others, sharing knowledge and networking. I am particularly encouraged to see that ESW are keen on developing these ideals and have organised for 2005, a series of eight seminars based on the “concepts of excellence” including People Development, Continuous Improvement and Leadership, giving attendees the opportunity to share best practice ideas and enhance not only business methods but bottom line profit.

I think these examples, of which there are many more, show that the South West is actively taking up the challenge of innovation. Importantly, the examples all involve businesses that see the commercial value of these activities. They illustrate how we can jointly develop innovation in the South West, to the benefit of both the Regions and the country as a whole, through a partnership of business, central government, RDAs, universities and other regional organisations.

I believe that in the UK we have a major opportunity today to use our scientific and technological skills to create wealth and improve the quality of our lives. It is an opportunity we have begun to exploit. But in the future we must innovate, invest and drive this agenda forward hard and fast if we are to create the prosperity for all that we all want to see.