WEDNESDAY 16 DECEMBER 1998

MR ROBERT FOSTER, MR PETER BUNN and DR ALISTAIR KEDDIE

  840.  Does the White Paper actually promote or enhance any role for the clustering of high-tech companies? I did hear this morning the Secretary of State make some reference to planning regulation changes going to take place?
  (Mr Foster) The Secretary of State is very clear that the Department is going to do a lot more work on the whole concept of clustering. We have done a lot of studies already on what has been going on in the US around places like Pittsburg, Stanford, Boston, and there are already some very effective clusters in the UK. The Cambridge example is one, Surrey University another. But we are also very conscious that there are some massive problems, for example, in the case of Cambridge on planning permissions, and therefore one of the things the Secretary of State wants is some work done in the context of clustering on what are the barriers to encouraging effective clusters, including planning. One specific exercise which is already making progress is what can be done, for example, to encourage exploitation of all the money which is going into the life sciences, in particular the human genome, to see what sort of clusters might be encouraged for what could be a massive business in the UK in the medical sector.

  841.   I understand there are going to be ministers leading clusters, and that the first one is going to be Lord Sainsbury appointed for biotechnology. What will their job be, what will their role be in that? Will they be going out to Cambridge and saying: "You have got to sort out the local planning authority", or what?
  (Mr Foster) There are a number of things obviously where it is extremely valuable to have Ministers directly involved, not least in this concept of joined-up government. In order to encourage clustering to take place there are a number of different departments with a major interest like DETR, DfEE, and ministerial clout can be pretty helpful if one is really going to address seriously issues like planning permission.
  (Mr Bunn) Obviously clusters will be a very important point on the agenda of RDAs. The role of ministerial teams will be particularly where you have got clusters of national significance and bio-tech, as you observed, is the first of those teams. Ministerial involvement, as Mr Foster was saying, is specifically to promote co-ordination across government on taking action to promote clusters or to remove barriers to those clusters flourishing.

  842.  My questions are on research and development generally in British industry. One of your main initiatives in recent years has been the R&D scoreboard and publishing in a layman's kind of way the performance of British industry alongside international competitors. How successful do you think that initiative is?
  (Dr Keddie) I think in terms of raising the issue both amongst companies and investors and raising the quality of debate and discussion amongst companies and investors on the importance of R&D then I think it has been successful. Certainly that is the feedback we have had. There is a much greater prominence given now between companies and their investors to the extent to which, for certain companies anyhow, investment in R&D is likely to be adequate for future growth.

  843.  Has it helped to increase the percentage devoted to R&D generally in British industry?
  (Dr Keddie) I think to try and identify any increases there have been (and there have been increases) that are directly attributable to the scoreboard is difficult to do, quite honestly. I would like to think that is the case but it is difficult to do. The scoreboard does indicate, however, that there are certain sectors of the UK economy and there are individual companies within a variety of sectors who are investing and growing investment in R&D at rates comparable with leading edge competitors worldwide. The issue is whether there are enough of them.
  (Mr Foster) In terms of what are the benefits, I think it would be asking a lot to expect that to have really increased the level of investment in R&D. I think what it has done is raised awareness of the need to be asking questions as to are you as a company investing enough in R&D compared to your international competitors? There I think there has been quite a sea change in some sectors. In some areas people are acutely aware of what their international competitors are doing. In telecommunications if you ask Nokia they know perfectly well it is, say, 15 per cent R&D as a percentage of total turnover and all their competitors will know. In other sectors, perhaps parts of shipbuilding, that may not be the case. By having a scoreboard it has raised awareness that this is a very important thing to be benchmarking against.

  844.  Our inquiry is into innovation but particularly engineering and physical sciences. Are there particular barriers to investment in R&D in those sectors in Britain?
  (Mr Foster) I think if you talk to technical directors of companies they will often say that they wished their chief executive would allow them to invest more. If you talk to the chief executive as to why it is not making more available then you may get the reply it depends on the internal rate of return for that company. You then get into issues of the cost of capital for the firm which takes us back to the institutional investment point.

  845.  And what is the answer to that? Is there a way of somehow changing that structure?
  (Mr Foster) If you talk to leading sectors, as I mentioned take telecommunications, there is a benchmark of the level of expenditure and their chief executives know perfectly well you may not get immediately a return on research but if you are in Glaxo and not investing at that level you are going to be dead in ten years.

  846.  If you took things like heavy engineering or machine tools or motor vehicles, then generally levels of investment are way behind our international competitors.
  (Mr Foster) Therefore, our prime role is to help such areas through the trade associations or directly to become aware of what competitors, particularly in the US and Germany, are doing and what they are spending. One of our jobs is to help them become aware of that.
  (Dr Keddie) Can I add to that because you asked, Dr Williams, about barriers. I think again if you look at what some individual companies are doing, whether it is Renishaw in instruments or whether it is Reuters on the media side, there is a culture within the company and in the boards and the volume of R&D is being pulled through by the need to grow the company. Perhaps we need more companies in the engineering sector in the United Kingdom who have a growth culture and the R&D problem would therefore solve itself. If you try and solve the R&D problem without looking at the business of the company then you will get it wrong.

  847.  Within the DTI's language and presentation today and in recent months and so on there is all this emphasis on high-tech modern companies and spin outs. Obviously we all agree enthusiastically with all of that but is there not a larger problem that the White Paper also addresses, that of large established companies that have got regular trade but which are not sufficiently investing in new products or in innovation? Is there anything in the White Paper today that addresses this problem of low R&D in well-established large companies?
  (Mr Foster) Very much so. As I said earlier, it looks at three levels of company, the world class company, with big research centres, small companies and the medium-sized company, which I think you are referring to where the need is to help effectively supply chains in the sector. One of the things that the White Paper today has said is there will be a very big expansion of the supply chain initiatives which have been used effectively in the automotive and aerospace sectors to other areas, the best practice work which Alistair Keddie's unit is involved in. There are also the Foresight initiatives which have been effective but have probably not involved a wide enough group of companies and people in the United Kingdom. It is hoped by the re-launch of Foresight there will be a wider range of people in contact networking with each other to find out what is happening in other parts of the world.
  (Dr Keddie) The White Paper also mentions very forcibly encouraging more of an enterprise culture in the UK. That is not just addressing small businesses, it is enterprise throughout the whole of British business, and that covers the large companies as well as the smaller ones.

  848.  I think you were quite right earlier in saying that access to the science base is going to be increasingly important and you have just been talking about the creation of networks and so on. Could you be a bit more specific about how you are going to promote this? How do these networks work? Obviously there are a lot of initiatives in relation to encouragement of collaboration between universities and industry but what has worked well? How have you been evaluating these and how are you disseminating that information? You mentioned the Foresight exercise. One of the concerns that I think this Committee has picked up previously is that the big companies are aware of Foresight but the smaller companies are not, but there do not appear to be any mechanisms for disseminating that information. Will tomorrow a small company browsing the Internet be able to get access to your site and find out what they should be doing in relation to all of this? Can you be specific about exactly what is going on on the ground because it seems a bit too nebulous at the moment.
  (Dr Keddie) If the small company interrogates our Web site tomorrow it is not going to get a detailed specific answer to its question in quite the way you posed it.

  849.  I had a look at your Web site and I looked under business support for engineering and the only thing I could find was something about achieving competitiveness through innovation and value engineering, an Active programme, and then it said the closing date and the initiative is expected to continue until December 1997. That is your Web site today.
  (Dr Keddie) Clearly we need to put that bit right. On the point of networks, networks are about people they are not really about mechanisms, they are not things you can describe in great detail, and what we have been doing more of, and being more successful on, is through interacting with the key decision-makers (whether small, medium or large businesses, universities) encouraging them to look at opportunities from a different angle from the way they have perhaps traditionally done. That includes companies looking not in their own sector for best practice but if a company has a problem with distribution, whether it is small, medium or large, and they are in the engineering sector, they may get the best lessons from the retail side or from DHL or TNT for example. The networking, or what we are helping to bring to it, is actually building these interpersonal contacts in a way that they have not had in the past. That sounds very soft, it is very difficult to explain.

  850.  How would I access that information? The other thing is, there is a tension, is there not, between the spur of competition to greater innovation and also the need for co-operation and this benchmarking and finding out who is doing it best?
  (Dr Keddie) Again, the most successful companies—and it does not matter what sector you are talking about, what size you are talking about—these days recognise they need to collaborate and share if they are going to compete. The best way of getting those who still do not believe that to understand that and see their own self-interest in it, is to put them in touch with people who are already doing it and doing it successfully. That is what a lot of networking is about and increasingly we are looking to Business Links, and we will be looking to the regional development agencies which Peter Bunn mentioned before, to help drive that forward. My own unit in any day is probably in touch with anything from 250, 300 organisations and several thousand individuals.

  851.  So you would put them in touch with somebody who could help?
  (Dr Keddie) Yes, and we have helped create networks where there is a self-interest in doing it in different parts of the country. Not only ourselves, but working with universities, working with large companies such as Glaxo Wellcome and others.

  852.  There is going to be an expansion of the Teaching Company Scheme and also the setting up of a national network of Faraday partnerships; could you tell us a bit more about those?
  (Mr Foster) In terms of specifics, as Dr Keddie has said, he has referred quite rightly to Business Links. In terms of practically what does your small firm do, they can talk to the Business Link, they can talk to the Innovation Unit. The White Paper also announces the concept of Faradays. The Engineering and Physical Sciences Research Council, for example, has been supporting some embryo Faradays which have been set up, there are four of them and they are working quite well, although they are still being evaluated. For example, the National Physical Laboratory and the Scientific Instrument Research Association. What the White Paper announces is that there will be another four which the DTI will be backing with the intention, hopefully, that if these are successful, which they have every sign of being, they will be a useful part of the new infrastructure particularly between universities and not just larger companies but through research and technology organisations, such as SIRA, with a broader range of small firms. So, for example, if you were running an instrumentation company you might be a member of the RTO but you would have access through this Faraday relationship which would cover, for example, a LINK scheme, a Teaching Company Scheme, and other specifics which will be on the back of the Faraday infrastructure. You then have access into the higher science and technology capability of somewhere like the National Physical Laboratory. There are four at the moment, they are off to a good start but, hopefully, in the longer-term we could have a network of a couple of dozen in the country. It depends very much on how they develop.

  853.  You mentioned that in the States there were more knowledgeable city analysts, is anything being done to improve that here? Can anything be done?
  (Dr Keddie) The work we are involved in is talking to the opinion leaders within the financial institutions and within companies who recognise there is a need to up-skill the knowledge of analysts and the industrial knowledge not only of analysts but also fund managers. Indeed that is part of the best practice recommendations we have published jointly with a group we sponsored, chaired by Paul Myners, the chairman of the Gartmore Pension Fund. So it is recognised within business there is a job there still to be done.

   Chairman: We must move on. Clearly the first step in solving any problem is recognising there is a problem, and I fear that until Dr Jones asked that question the city analysts might not have realised they were not up to world class standard. Do you feel they do know now from things you have said? If not, I hope they will do so from this Committee session this afternoon because, as I say, you cannot solve the problem until you recognise there is a problem.

  854.  One of the problems we have identified during our research into this subject is that many of the Government schemes for technology, R&D and technology transfer have been criticised for being long-winded, bureaucratic, difficult to understand, sometimes too difficult for small companies to participate in. You mentioned Boston as one of the places you looked at. We went to Boston and were very impressed by what they are doing there in taking ideas forward. A company arrives to push an idea forward to the market place and a technical person concentrates on the technical aspect of the idea, whereas all the other bits and bobs just arrive and happen, including venture capital. Can you tell us what is in the White Paper to streamline what is going on at the moment in this country and what new ideas are going to be there for you to help the smaller end?
  (Mr Foster) There are a number of levels on this. The first one—and you mentioned Boston and I have mentioned that in the context of the new institutes of entrepreneurialism—is the idea that there will be six to eight centres, world class centres, in the UK hopefully at the Boston, Stanford level. By having extra funding going to those centres they should be places where leading companies who are in those areas, or are working in sectors where there are real skills in those particular universities, should be able to go and talk to individuals in order to get, hopefully, the sort of advice you were picking up on when you talked to the key people in Boston. That is at one level. The second one I did mention too, the concept of the Reach Out Fund, whereby the DTI and the DfEE will be working together more broadly in the non-research, non-training area work of universities, and that is right round the country. The hope there is that this will be a new impetus to recognise the work that higher education institutes are already doing and can be encouraged to do in working with industry, for example problems being brought in by companies for people to actually work on, on the spot. By encouraging that sort of third leg of activity, there will be people then sitting all round the country in those centres which will become the centres of those sort of networks. That is helping networking as is the Faraday activity. Obviously we will have to see how the regional development agencies develop to see what they can do in their areas.

  855.  In the statement there was a section on the Internet, an incredibly powerful tool for helping enterprise. The Government is going to invest 20 million in new comprehensive advisory services and have a target of one million small businesses exploiting the Internet to the full by 2002, and the Secretary of State is going to appoint an E-envoy. Could you talk us through that and how you are going to do that?
  (Mr Foster) Yes, just in the broad. The problem, as we all know from buying home computers, is that there are so many adverts we do not know who to go to, and independent advice is very difficult to get. So, conceptually, the idea is that there will be local support centres around the country which companies will be able to go to in order to get informal advice with the right sort of system for networking. That is at one level. The second activity is the need to actually improve the skills of business advisers who are operating in this area. So they are the two prongs of improving skills here.

  856.  Will small businesses have to pay for that service?
  (Mr Foster) We may have to write to you about that.

  857.  Is that because it has not been decided rather than that you cannot remember?
  (Mr Foster) I personally do not have the details of the scheme.
  (Mr Bunn) No, Mr Chairman, it is not an area which is directly my responsibility, so we would need to check with colleagues.

  858.  It is that you do not know rather than that it is not known?
  (Mr Foster) It probably is known and we will write to you as soon as we can.

   Mrs Lait: In that letter I wonder if you could clarify who would be responsible when the advice is taken if the advice is bad. Is it caveat emptor or is it the adviser? If you could put that in the letter.

   Dr Jones: Could I suggest you have got an awful lot of small businesses around in this building which you could use as guinea pigs in relation to use of technology.

  859.  One other issue we picked up in Boston particularly was this business about the fear of failure. I think there was one person who told us that actually failing with a couple of businesses is the best training ground for the success of the third one. There is a section in the White Paper, paragraph 2.12, which talks about tackling the fear of failure. Can you tell us your plans on that.
  (Mr Foster) It is a very complex one. In the United Kingdom the problem is if you move from a large company and you set up a small business and it fails it is very hard culturally to get back into a large company. What happens in the States if you leave Xerox and start a company and it goes wrong is that you are quite likely to be networked through the venture capital firm you were working with to help you get into some other job and then you might start up again. So I think part of the answer to that is trying to get the whole of this venture capital activity working in the way I was describing beyond just getting finances but also networking and encouraging management because otherwise people feel they have got no safety net if they start up a company.
  (Dr Keddie) The only other point I can add is to refer you also to paragraph 2.13 which refers to the further work that we intend to do in looking at the extent to which bankruptcy laws and the insolvency approach may be reinforcing this failure culture in the United Kingdom rather than helping to address it. There is still a lot of work to do. It is a very complex area.

  Dr Jones: Who is doing that?