House of Commons - Science and Technology

Select Committee on Science and Technology Second Report

SECOND REPORT

The Science and Technology Committee has agreed to the following Report:—

ENGINEERING AND PHYSICAL SCIENCES BASED INNOVATION

INTRODUCTION

1. Our first inquiry after our appointment in 1997 looked at the report of the National Committee of Inquiry into Higher Education (NCIHE) and the impact that the measures it proposed would have on the research base in higher education institutions. While the scope of that inquiry was deliberately narrow, many witnesses pointed to the crucial rôle that research plays in sustaining the UK's international competitiveness.[5] In the 1993 White Paper, Realising Our Potential, the then Government explicitly acknowledged the contribution that the science base could make to wealth creation and industrial competitiveness.[6] Indeed, a 1996 study by the Science Policy Research Unit (SPRU) at Sussex University found that "most of the productivity increases this century have come from our mastery over technology".[7] That study, amongst others, also identified a new understanding "in which there are more specific expectations that basic research should generate economic and social benefits in return for the substantial public funds that it receives."[8] These considerations led us to undertake an inquiry into the ways in which the output of the wider science base, not just that part of it which is represented by higher education, is utilised by industry. Our decision to place special emphasis on engineering and the physical sciences was taken in response to a general perception that these industrial sectors are less successful than, say, the biological sciences, in converting the results of research into innovation.

Conduct of the Inquiry

2. We have sought to build on the work of other select committees which have examined the relationship between the science base and industrial competitiveness in the past. Our own predecessor Committee in the last Parliament considered The Routes through which the Science Base is Translated into Innovative and Competitive Technology by focussing on specific sectors.[9] The Science and Technology Committee in the House of Lords reported on Innovation in the Manufacturing Industry in 1991 and 1992;[10] and on The Innovation-Exploitation Barrier in 1997.[11] We have also benefited from a number of academic and other studies, some of which have become available during our inquiry. The Government White Paper, Our Competitive Future: Building the Knowledge Driven Economy,[12] was published as we were in the process of gathering evidence, as was HM Treasury's working group report on the Financing of High Technology Businesses,[13] Lord Sainsbury's Report on Biotechnology Clusters,[14] and the Baker Report on Creating Knowledge Creating Wealth: Realising the Economic Potential of Public Sector Research Establishments.[15]

3. Our terms of reference were: "to inquire into the manner in which companies in the fields of engineering and physical sciences decide on developing new products and processes and the factors influencing their decisions."

4. We have benefited from the evidence submitted by a wide range of organisations and individuals. In 16 oral evidence sessions we have heard from 20 sets of witnesses whose expertise and insights have been supplemented by 110 written submissions from other sources. We have visited companies, business support organisations and research institutions in the UK, in the USA and Germany and met many individuals who have given invaluable guidance. (Brief synopses of each of those visits appear in annexes to this Report, see pp.xli-xlvii.) We are grateful to all who have assisted us either through oral or written evidence or by less formal means. We would also like to thank our specialist advisers for this inquiry: Professor Derek Burke, former Vice-Chancellor of the University of East Anglia; Professor Michael Elves, former Director of the Office of Scientific and Educational Affairs, Glaxo Wellcome plc; and Professor Michael Brady of the Department of Engineering Science, University of Oxford. We have drawn extensively on these sources of advice and been guided by them in our deliberations. Our conclusions are, however, our own.

Definitions

5. There are many different definitions of 'innovation' in common use. Indeed, it seems that the term is frequently used without any clear understanding of what it actually entails. 'Innovation' is not synonymous with either 'invention' or 'research and development' (R&D), although both can be an integral part of the process. 'Invention' has no implication of application or potential exploitation. 'R&D' can be defined as "Creative work undertaken on a systematic basis in order to increase the stock of knowledge ... and the use of this stock of knowledge to devise new applications" and can be measured against internationally-agreed criteria such as those defined by the Organisation for Economic Cooperation and Development (OECD).[16] Essentially, however, R&D activity is an input whilst innovation is one of the outputs which may result from such activity.

6. Innovation is a process which may span numerous activities. It need not be complicated and can be about incremental changes to products, processes, or management. It can also involve administrative efficiency as much as major scientific developments. In today's global economy, however, with its increasing emphasis on competitive advantage, a greater premium must be placed on the exploitation of scientific and technological advances. One witness told us that "Innovation is taking the bench discovery, matching it either with the market's current needs or potential needs and bringing a successful product to market",[17] implying that new developments had to be commercially successful before they could be classed as innovative. Other witnesses used similar definitions.[18] These definitions have the attraction of simplicity; if a new product is brought to market, its success can be tested. They do however have the disadvantage that innovation cannot be recognised until the process is complete. The Confederation of British Industry (CBI) uses a subtly different definition: "innovation occurs when a new or changed product is introduced to the market, or when a new or changed process is used in commercial production. The innovation process is the combination of activities — such as design, research, market investigations, tooling up, and so on — which are necessary to develop and support an innovative product or production process".[19] Similarly, the OECD state that innovation "consists of all those scientific, technological, commercial and financial steps necessary for the successful development and marketing of new or improved manufactured products, the commercial use of new or improved processes and equipment or the introduction of a new approach to a social service".[20] Our use of the term innovation includes both proven and potential successes.

7. Innovation is a complex process dependent, among other things, on the science base, industry and appropriate funding. The Office of Science and Technology (OST) is only one of a number of Government departments which influence industry's capacity to innovate. New technologies and scientific advances are largely developed and exploited by industry. Thus we have to look well beyond the OST and the science base to determine the most effective ways to encourage innovation and identify barriers.

The Innovation Process

8. There is a broad consensus that the traditional models of innovation, which place academics pursuing research at one end of the process and companies earning profits at the other, are outdated. Research into innovation and its processes has been conducted for around 40 years, with a rapid growth in activity in the 1960s which coincided with a growth in business-funded R&D. The proportion of innovation which follows the old, "technology push" model is small, although there are specific circumstances where it can happen — particularly where the saleable product is close to the underpinning science, such as can happen in the software and communications industries. These instances are important, as some of the most dynamic and fastest-growing firms in the economy are based directly on emerging technologies. Most researchers and practitioners agree, however, that they do not provide an adequate model for the bulk of innovation in most established companies and particularly not for companies operating in the fields with which we are primarily concerned. Yet, as the Centre for Exploitation of Science and Technology (CEST) argued, there is still "always a danger that debate about physics and engineering innovation in the UK is frustrated by outmoded views on its provenance and how best it is commercialised.".[21]

9. Rather than viewing the innovation process as a progress along a pre-determined, linear path, many of our witnesses saw it as the result of interaction between players — "for example, between industry sectors, between different parts of a supply chain, between academics and scientists, and so on".[22] Recent trends over the last ten years or so show an increasing tendency on the part of companies to engage in alliances with other companies through joint ventures, to sub-contract or out-source business activity, and to increase participation in networks. Much of this activity is directly related to sharing R&D expertise or to the acquisition and development of new technologies; or to acquiring understanding of and access to specialist markets.[23]

10. The Science and Technology Committee in the last Parliament were right to assert that, if Government is to encourage the processes by which innovation takes place, those processes must be fully understood: "policies introduced without understanding will at best be inefficient and at worst counter-productive".[24] Government, industry and the science base must continue to co-operate to broaden understanding of these issues. To give but a single example from many, one of the Economic and Social Research Council's (ESRC) current major research themes is 'Innovation' through which it supports research "to determine the factors that lead to successful innovation and its implementation in public and commercial sectors".[25] It also funds some research units in universities which study innovation in companies. The Department of Trade and Industry (DTI) and OST co-operate with other organisations, notably the CBI, to identify and disseminate best practice, through research and publication on innovation-related topics.[26] Individual researchers are also devoting attention to the study of innovation.[27] Successful innovation does not depend on a uniform process or a set approach; it is inherently dynamic and evolutionary. The success of Government policies designed to foster innovation in industry is dependent on a clear understanding of these issues. We commend efforts to further the understanding of innovation and recommend that they continue to attract Government support.

INNOVATION IN ENGINEERING AND THE PHYSICAL SCIENCES BASED INDUSTRIES

11. The distinction we drew at the outset of our inquiry between the UK's performance in innovation in the biosciences and that in engineering and the physical sciences was widely supported by our witnesses. Numerous reasons were put forward to explain the disparity. Professor Richard Brook, the chief executive of the Engineering and Physical Sciences Research Council (EPSRC), told us that in some areas, such as drug discovery, "research yields something which is then readily marketable ... whereas in the engineering and physical sciences ... the distance between the research which has been completed and its eventual place within innovation can be a long, tortuous and difficult one."[28] A similar point was made by Rolls-Royce who told us that innovation in engineering in particular was "much more complex" than in the pharmaceutical sector because its eventual product was the result of integrating and developing numerous different technologies rather than developing a single discovery or advance.[29] Dr David Potter CBE, the chairman and chief executive of Psion plc, told us that in respect of engineering and physical sciences "there is a greater barrier between the application of the science and its implementation in the market".[30] The last DART engine was produced in 1986, but Rolls-Royce will still be making spare parts in 2026. The pharmaceutical industry would not accept this over-simplification however: their development times are invariably long and expensive. The real difference was perhaps best illustrated by Sir Ralph Robbins, the Chairman of Rolls Royce, who, talking of his own company, said "We are different from pharmaceuticals. In many respects they have to do more R than we do and we have to do more D than they do. There is more of a market pull in our business than there is drive from research. That is not to say there is no drive from research but ... pharmaceuticals have to do more blue-sky research. They do not know quite what the market is going to be. The market is generated to a degree by the discoveries.".[31]

12. Others have drawn attention to a reticence on the part of companies to explore the possibilities of exploitation of research that has been conducted in the public sector. This may be due to the lack of market relevance of the research. Some witnesses also made the point that there was a tendency in the UK to value pure science to a greater degree than applied science and therefore that the UK's relative lack of innovation excellence in the engineering and physical sciences fields had cultural causes as well, driven to some degree by funding mechanisms such as the Research Assessment Exercise (RAE).[32] There is a failure in the UK to appreciate what at Massachusetts Institute of Technology (MIT) is termed the "dignity of applied knowledge".

13. There are, of course, wide variations in the nature of business within those industries based on engineering and physical sciences. Major process industries, such as aerospace or defence procurement, may recognise long lead times between project specification and delivery. In contrast, as the Engineering Council told us, such product life cycles would be "unbelievable ... in telecommunications".[33] IT-based industries may have as little as six months between project specification and delivery. Not a single witness disputed the maxim that for engineering and physical sciences based industries innovation required a greater focus on the application and development of scientific advances than in the biosciences and that this was the root of the differences between the two in terms of innovatory performance and approach.

5 First Report from the Science and Technology Committee, Session 1997-98, on The Implications of the Dearing Report for the Structure and Funding of University Research, HC 303-I, March 1998. Back

6 Realising Our Potential, 1993, Cm. 2250. Back

7 SPRU, The Relationship Between Publicly Funded Basic Research and Economic Performance, July 1996, p. 54. Back

8 Ibid., p. 55. See also HC 303-II, Q. 533. Back

9 First Report from the Science and Technology Committee, Session 1993-94, on The Routes through which the Science Base is Translated into Innovative and Competitive Technology, (hereafter "Routes") HC 74-1, April 1994. Back

10 First Report from the House of Lords Science and Technology Committee, Session 1990-91, on Innovation in the Manufacturing Industry, HL Paper 18-1, January 1991; Fourth Report from the House of Lords Science and Technology Committee, Session 1991-92, on Innovation in the Manufacturing Industry, HL Paper 54, March 1992. Back

11 Third Report from the House of Lords Science and Technology Committee, Session 1996-97, on The Innovation-Exploitation Barrier, HL Paper 62, March 1997. Back

12 Our Competitive Future: Building the Knowledge Driven Economy, (hereafter "Our Competitive Future") The Government's Competitiveness White Paper, December 1998, Cm 4176, p. 5. Back

13 HM Treasury, Financing of Technology Businesses: A Report to the Paymaster General, November 1998. Back

14 Biotechnology Clusters: Report of the Team led by Lord Sainsbury, Minister for Science, August 1999. Back

15 John Baker, Creating Knowledge Creating Wealth: Realising the Economic Potential of Public Sector Research Establishments: A Report to the Minister of Science and the Financial Secretary to the Treasury, August 1999. Back

16 Office for National Statistics, Business Monitor MA14, Research and Development in UK Businesses: Data for 1996, 1998, p. 5. The "stock" of domestic R&D is calculated as the accumulated sum of past business expenditure on R&D discounted by 5% per annum. Back