WEDNESDAY 16 DECEMBER 1998

MR ROBERT FOSTER, MR PETER BUNN and DR ALISTAIR KEDDIE

  809.  Mr Foster, Dr Keddie, Mr Bunn, may I thank you very much indeed for coming along this afternoon to the Science and Technology Select Committee. May I at the outset apologise for keeping you waiting outside for three minutes. We had a bit of private business that we did not quite finish in time. We like to think as a general rule, Mr Foster, that we have the upper hand over the witnesses, although we do not play that hand you understand, but today you have got the upper hand over us without any doubt whatsoever. We have got the White Paper but have not had the chance to read it; you have written it! So there is no doubt who is going to have the upper hand over the course of the next hour and a half. I hope that you will help us and understand because, although we have sent down to get it in the last twenty minutes, we have not been able to do other than have a very brief look at the conclusions and one of our Members did stay in the House to hear the Minister's statement. That is all we have got. May I start, Mr Foster, and perhaps before I ask you the first question, you might like to tell us a little bit about yourselves and the Innovation Unit that has been created, when it was created and what it is doing?
  (Mr Foster) Thank you very much. Good afternoon. I am Robert Foster and I am in charge of the Technology and Standards Directorate in the DTI. In fact, its responsibility is rather wider than suggested. It covers innovation policy, technology policy and the work we do on measurement standards and standards more broadly. Peter Bunn works with me.

  810.  Mr Bunn?
  (Mr Bunn) I am Peter Bunn, Director for Innovation Research and Technology Policy, one of Robert Foster's team, dealing particularly with innovation policy and the management and the policy on the innovation budget.
  (Dr Keddie) I am Alistair Keddie and I am Director of the Innovation Unit which spans right across the whole of the Department of Trade and Industry. It was established originally in 1991. You asked for the date, Chairman, for that. It is composed primarily of business people seconded into the Unit with some academics and some civil servants, so it is very much a mixed team of people. Our primary role is to promote and encourage a more innovative economy throughout the UK in the private and public sectors. By innovation we are talking about the whole process of taking ideas through to satisfied customers.

  811.  Thank you very much indeed. Mr Foster, we shall, as a general rule, direct our questions to you. If you think it is more appropriate that they should be fielded out we will leave it to you to decide. I wonder if I could start with the natural question, Mr Foster, and ask what are the key features of the White Paper that has come out today and what are the issues within the White Paper that will have the greatest impact on technology transfer over future years?
  (Mr Foster) One of the key messages of the new White Paper is the need for the United Kingdom to back high added value businesses of all types wherever they are, whether they are in the manufacturing or whether they are in the service sector. There are three levels of business that it backs. It includes small firms and exploitation of science from universities and so forth but it is not just about that. It is also about backing world-class companies whether through inward investment in the United Kingdom or growing indigenous large companies which are incredibly important because they are the top end of the supply chain on which medium and small firms are dependent. It is also about backing medium-sized companies many of which have slowed down in their growth and need to think more globally and adopt the best practices from the US and elsewhere. In a nutshell, the key theme is to exploit, as our Secretary of State has said, the knowledge based economy through encouraging high-value-added businesses and in particular one of the key aspects is the theme of innovation and entrepreneurialism. The Secretary of State is putting very high emphasis on all aspects of innovation but that includes exploitation of science, use of people who are highly knowledgeable who have moved from the science base into industry, encouragement of the skills base more broadly, encouragement of the supply chain and knowledge transfer through the supply chain.

  812.  And I am sure when we have read the White Paper we will find that there are many words in there and words of wisdom, we have no doubt, but to transfer words into action does need mechanisms of some sort. That is really the acid test, is it not? Can you inform us of anything that is produced in advisory form or by way of a critique if there are recommendations on how you turn those recommendations into action? Have you given any clues as to the mechanisms that would be used?
  (Mr Foster) If I could just talk initially on innovation and the encouragement of knowledge transfer, there are a number of important priorities in the White Paper particularly on encouraging closer collaboration between the higher education base and industry. For example, the movement of people is obviously absolutely crucial. We have had a very successful scheme called the Teaching Company Scheme whereby post-graduates who move from universities and actually work in projects in industry continue to be supervised by the university. That scheme will be doubled in size. Another important area is to encourage universities themselves as well as through research and training. The proposal is that there would be a third stream of funding which is specifically to encourage interaction between universities and industry. It is called the Reach Out Fund. That will be jointly organised between the DfEE and the DTI. There is also, as you will be aware, the announcement on the new Institutes for Enterprise to which the Chancellor of the Exchequer has referred. The role model is primarily the Massachusetts Institute of Technology, Centre for Enterprise, with the intention of encouraging people studying engineering and studying science to have an injection of business studies, in particular entrepreneurialism, on how to set up companies and financing that as part of their studies as well as encouraging exploitation of technology in the universities. So in terms of specific things there is a whole nexus of issues which are about the university/industry exploitation area. That is one area. A second area is, which I referred to, the importance of supply chains. The DTI has been very actively working with industry in the past—and there are a number of areas, for example the automotive sector and the aerospace sector—to encourage more effective supply chains and best practice in the supply chain. For example, in the aerospace sector we are working with companies like British Aerospace and Rolls Royce to encourage suppliers down the supply chain to use the best practice from some of the larger companies. The intention is that that type of process will be spread to a much wider range of sectors; we do not know which they will be yet, but a wider range of sectors to adopt that sort of practice. Another major emphasis, which I will ask Alistair Keddie to talk about, is the emphasis more broadly on innovation and encouraging best practice.
  (Dr Keddie) I think, Chairman, essentially there it is building on things that we are already doing and extending them, particularly in trying to identify leading edge practices and leading edge United Kingdom and international companies and then working with a whole host of organisations ranging from Training and Enterprise Councils, Business Links, professional institutions, other government departments and, as Mr Foster said, supply chains, to disseminate these findings to a much wider business community. They are really all part of encouraging more businesses to raise their game to be more comparable with the leading companies we clearly have in this country already.

  813.  Thank you very much. There are many things government can do, we know, to encourage innovation, including funding research and encouraging technology transfer and making sure scientists have got business skills, but how important do you think those three factors are, for example, compared with the other things that the Government can do, which are to provide an appropriate fiscal regime or a stable and sound economic climate? I know they all interact but is there any priority or is it really a circular argument and you cannot have one without the other; to be successful you have got to have both?
  (Mr Foster) I think, obviously, unless you have a stable macro-economic environment you have a problem because industry, companies, nobody is going to invest long-term unless they are fairly sure what levels of inflation there are going to be. So a stable macro-economic environment is obviously number one key. Other factors have obviously been shown by other countries to be massively important—the quality of the skills base is vital. We have made massive strides in the UK on this, shown by the number of people now going through higher education, a third, 40 per cent or so, but where we have problems is perhaps more at the technician level where we do not have the wide range of training which happens in countries like Germany, and it is absolutely vital we increase that. When you get below this sort of level, there are a number of specific schemes which the Department has been running and indeed are in the new Competitiveness White Paper. These are specifics. I mentioned, for example, the Teaching Company Scheme. They tackle particular problems, they are very focused; evaluation shows they are very effective but if one is going to have a very wide effect on the economy overall at the micro-level then fiscal policies, issues like research and development tax breaks, are ones which can apply to everybody. One is comparing apples and pears. Once you have got below this top level of macro-economic, then you get into these micro-economic policies and there are some which are highly focused which evaluation shows are extremely effective, but there are others which are more generic, across the board, and would apply to anyone, and it may be the value for money return in a sense is not quite as good, but anyone can take them up.

  814.  Maybe I will ask a supplementary which Dr Keddie can answer, or you, Mr Foster. I have mentioned five criteria and you could say: "We have always done all five of those to a greater or lesser extent but we have been weak on one them, perhaps weak on having the right fiscal regime while we have been doing the business skills and research funding and technology transfer, I hope this White Paper will lift that particular weakness." Particularly, Dr Keddie, would you like to say which is the weak link in the chain of those five which we ought to try and strengthen from now on? Is it technology transfer?
  (Dr Keddie) I think you have put your finger on it, you actually need all of them. If we learn the lessons from the most successful parts of the UK or other parts of the global economy, if you learn lessons from the most successful business or private sector organisations, you will find they get most of the things which are important to them right and get them right at the same time. So I am not quite sure it is a circular model, but you do have to have all these things in place and they need to be in place at the right sort of level of activity and effectiveness.

  815.  Even if it is not circular and it is linear, it will still only be the strength of the weakest link, will it not?
  (Dr Keddie) Yes, but I think it depends which sector of the economy you look at, which businesses you are looking at, where the weaknesses are. It is rather dangerous to generalise on one weakness across the board. I think it is important to get all of it right and also to bear in mind that the benchmarks internationally keep rising all the time, so while something is right now, it may not be right tomorrow, and I think that is very important.

  816.  I am not sure if you are saying that there has been a sea change suddenly or that you have been doing this all the time and it has just come right. Is that what you are saying, that there is a sea change? If there is, why now? Why do you think suddenly something has happened now? Because the language is absolutely new, the way you are talking here; it is like California re-visited really. Where has that come from? Why has it been picked up? When did it start? Who did it?
  (Dr Keddie) They come from lots of directions. I think it also is that we are all learning, that we need to continuously improve and find better ways of doing things. I guess a lot of that has come together at the same time. That is not quite answering your question—I can tell from your smile!

  817.  Is it spontaneous?
  (Mr Foster) Can I comment on timing? As my colleague, Alistair Keddie was saying, obviously priorities change over time. 1998 is different from five, ten years ago. We have been working quite closely with the European Commission on a Community survey and that shows the very increasing emphasis that companies are putting on accessing information, for example, from the science base. If you look at the priorities of where companies obtain external knowledge, it is primarily through their customers and through their supply chain, but the interesting thing is that areas like standards directives and all that is very important too, but we have this small area which is access to the science base. Ten years ago that would have been very small, now it is 10 per cent, and most people who are knowledgeable looking at that say that is probably a massive under-statement. It is the fact people are saying it at all which shows there has been a huge change, because people have always accessed the science base, they have done it by employing graduates. What they are showing is the changing perception of the value of the science base which has happened massively in the United States including the need to have far more networking and interaction with intelligent people in universities as much as with technology and science in the science base.

  818.  Sir David Cooksey has told the Committee that in the US between 1980 and 1995 67 million new jobs were created, and virtually all those came from the small, start-up company sector. I was interested, Mr Foster, when you were describing what your Unit does, that you referred to large and medium-sized companies but not small and start-up companies. I would be most interested if you could give us some idea of what you think is the relative importance of these different size of companies?
  (Mr Foster) In fact I did refer to all three levels. I referred initially to small companies and then the medium and the top sizes. In many ways in terms of economic growth, our economists say that one of the crucial things to do is to make sure that the medium sized companies continue to grow and do not become static. That is absolutely vital, hence some of the best practice activities which Dr Keddie referred to are extremely important. But small firms, as you say, are important. There is a very high proportion of the UK employed in small firms and that will increase pretty dramatically in the next 20, 30 years. But if you look at how small firms start, particularly in the high tech area, a pretty small number come directly from the science base. A much more typical pattern is that world class international companies or very large UK indigenous companies which have been networking with the science base have such levels of expertise that people spin out from those companies, and that is where they come from. It is only partly a spin off directly from start-ups in universities, much more common is that from leading companies—IBM or whoever in the UK—groups of people, highly knowledgeable, spin off. Hence my point about the need to be encouraging all three levels, the major companies, at the top end of the supply chain, the medium sized companies as well as the small companies.

  819.  Could you give me some idea how much effort you put into working with small and start-up companies compared to the other two? Is it a third, a half, given the number of new jobs that the States have produced from small companies?
  (Dr Keddie) I cannot give you a number on that this afternoon, I am afraid, but in fact certainly a very considerable resource either from the Department directly or indirectly through Training and Enterprise Councils, Business Links and other channels which will go into the small business community. I probably will get it wrong if I try and give you a number here and now. It is important to keep all these things in balance as Mr Foster said. All types of companies and all sectors and all sizes are fundamental to the economy and in fact you cannot sensibly talk about small businesses unless you are talking about them in terms of the overall economy, because that is where a lot of your customer base is. Yes, a lot of the dynamic in the economy is there, a lot of the change comes from smaller companies, but a lot of the volume of economic activity still comes from other companies, and we need to have policies and delivery mechanisms which can actually address different parts of the economy in a way which recognises they are all part of the overall economy, if that makes sense.