House of Commons - Science and Technology

Select Committee on Science and Technology Second Report

SUCCESSFUL INNOVATION

16. Using the definition of innovation that we have already established (see paras 5-7), there is a number of factors that must come together if technological developments are to be turned into successful innovation — research, design and development, market investigation, tooling up and manufacturing process development, and commercial launch. The major part of university and public sector activity is research, directed at acquiring knowledge. The major part of industrial activity is development, directed at achieving what the market wants.

Research

GROSS DOMESTIC EXPENDITURE ON R&D

17. The UK's total spend on R&D has declined in recent years in comparison to other developed nations (see figure 1). Since 1993 the UK has seen a greater drop in expenditure on R&D as a percentage of gross domestic product (GDP) than any other G7 nation as growth in GDP has outpaced R&D investment.[43]

QUALITY IN THE SCIENCE BASE

18. Industry is not confined to using its own internal R&D as a basis for innovation. It may also draw upon scientific and technological advances and expertise in the publicly-funded science base. The extent and effectiveness of the science base's contribution to the innovation process is, however, dependent on its quality. Measuring the quality of the science base, and the contribution it makes to competitiveness can be as complicated as measurements of innovation. The science base may have many outputs which are used in various, and often unpredictable, ways and often over such long time scales that direct attribution to the science base may be very difficult or impossible. And, as the Royal Society told us, there are "valuable outcomes... such as better-informed decisions regarding product development and commercial strategy, including the identification of ways not to proceed. These outcomes may be particularly valuable ... yet not publicly reported".[44]

19. A DTI report in 1997, using an internationally accepted method of analysis, showed that, with only about 1% of the global population, the UK conducts 5.5% of the world's research, produces 8% of the world's scientific publications and receives 9.1% of all citations.[45] The measure of citations is of particular interest as it gives some indication of the visibility of UK scientific publications although it remains a relatively crude indication of quality. The same study also showed that the UK's science, engineering and technology (SET) base is the most cost effective among G7 countries, as measured by citations per unit of expenditure.[46] The majority of our witnesses agreed that the knowledge output of the science base was of a high quality although many noted that there was room for improvement in dissemination.

20. It is, of course, also important that the UK should be in a position to benefit from the vast amount of scientific research which is performed overseas. One way to ensure that the remaining 94.5% of scientific advances is accessible is through a healthy and diverse SET base, which produces researchers who are welcomed as part of the international research community. These are the people who can understand and bring the fruits of external research to bear on UK activities. Therefore, a strong domestic SET base is the foundation of a virtuous circle which enables the UK to benefit from the totality of the international research effort.

21. Many witnesses stressed the importance of a world class SET base in creating the right infrastructure for successful innovation. The Generics Group, for instance, told us that "without an excellent scientific base, effective technology innovation (and hence product, service and business innovation) is impossible".[47] Nevertheless, it was widely agreed that a good SET base was only one, and not necessarily the most important, among numerous required factors. Dr Alan Rudge, the Chairman of the Engineering Council, told us that "It is development in industry primarily and the quality of management of the company and also the fiscal environment ... plus the regulatory environment, which are important. You have to look at the complete framework rather than at research or research and development".[48] Moreover, it was widely argued that failures to innovate could not be attributed to a lack of scientific and technological developments ripe for exploitation. For instance, British Aerospace[49] stated that "we are not short in the country of people with bright and innovative ideas. The real challenge is creating an environment in which those can come through".[50] Similarly, BT argued that the UK's weaknesses were not the result of a lack of domestic inventiveness, but rather the result of a failure to exploit it.[51] Such comments are supported by hard evidence; there are numerous examples of technologies which have been invented or developed in the UK but which have been successfully exploited overseas. The amorphous silicon technology developed at the University of Dundee, for instance, was commercialised mainly by non-UK companies and is now estimated to underpin 40,000 jobs around the world and the industries which exploit the technology continue to grow.[52]

22. Professor Brook, the chief executive of the EPSRC, and others, also made the point that a failure to exploit commercially the fruits of scientific and technological research was not necessarily just a British problem and that similar sentiments were expressed in almost every other developed nation in the world.[53] Dr Rudge agreed but pointed out that in engineering and the physical sciences in particular, other countries, notably Japan and some of the southern Asian economies, had a better record than the UK. The reason for that was however "not necessarily a science reason, it has more to do with the whole environment within which industry operates. It is more to do with the industrial end.".[54] The health of the UK's research base is an important factor in enabling innovation to take place in industries operating in the fields of engineering and physical sciences. Nevertheless we, in common with the majority of our witnesses, conclude that the UK's relatively poor record in innovation in engineering and the physical sciences is not the result of a weakness in the science base. There is plenty of good research being produced in the UK and there are more innovative ideas than are taken up and commercialised by industry. The UK is strong in terms of scientific production but weaker in terms of its application and exploitation.[55] We must therefore look to other parts of the innovation process.

BUSINESS ENTERPRISE RESEARCH AND DEVELOPMENT

23. Business Enterprise Research and Development (BERD) reflects that expenditure incurred by industry and Government in carrying out research and development activities within industrial facilities. In 1970 the UK had a stock of domestic business R&D substantially higher than any other nation except the United States.[56] This has since declined in comparison to major competitor nations and the UK now ranks fifth among the G7 nations in terms of BERD as a percentage of GDP (see figure 2).[57] The fact that BERD financed by firms in the UK has grown more slowly than in other developed nations is only part of the reason for this; there have also been recent declines in R&D performed by industry but financed by Government.

24. Nor has the decline in industry-financed BERD been offset by any increase in expenditure by industry on the research it sponsors in higher education institutions and public sector research institutes. UK industry now funds a smaller proportion of gross domestic expenditure on R&D than any other G5 country (see figure 3).[58] The proportion of gross domestic expenditure on R&D (GERD) funded by UK industry was lower in 1996 than any year since 1986, and remains significantly lower than that in the US, Germany or Japan.

25. The picture is not, however, uniform across all sectors of the economy. The UK pharmaceuticals sector, led by major companies such as Glaxo Wellcome, SmithKline Beecham and Astra Zeneca, has consistently invested a higher proportion of turnover in R&D than many of its international competitors.[59] The 1999 R&D Scoreboard shows, however, that many other sectors are still significantly below the international average for R&D intensity. (R&D Intensity is a measure of the extent to which sales revenues are re-invested in R&D. For companies it is calculated by dividing R&D investment by sales income.) In 1999, the average R&D intensity of the UK's largest chemical companies (in terms of R&D intensity) was less than a third of that of their competitors overseas. In the engineering and machinery, electronic and electrical and software and IT services sectors, the picture is mixed, with some UK companies investing in R&D on a par with their international competitors. However, the aggregate R&D intensity in these sectors is lower than that for international competitors (see figure 4).

26. Recent figures also provide a mixed picture on current trends in UK R&D expenditure. The CBI's 1998 Innovation Trends survey showed that expenditure on innovation reported by manufacturers fell to 4.9% of turnover in 1997 from 5.9% in 1996, continuing a trend of steady decline from a peak of 6.7% of turnover in 1994. The levels of expenditure reported by non-manufacturers fell more dramatically from 11.8% of turnover in 1996 to 5.4% in 1997 (although this may be explained in part by alterations in the profile of companies responding to the survey). More detailed analysis of the figures from the 1998 Innovation Trends survey suggests that overall reported investment in R&D by UK companies is significantly inflated by the activities of a minority of firms which invest heavily in R&D and that the majority of firms actually invest less than the average.[60] Similarly the 1998 R&D Scoreboard indicates that the overall increases in R&D investment which occurred in 1997 in some sectors (such as engineering and telecommunications) can be accounted for by sizeable increases on the part of a few individual companies.[61] For the 561 UK companies that are listed in the 1999 R&D Scoreboard, their R&D spend increased by 6% over the previous year. This compares unfavourably with the 12% increase reported by the international companies in the list, which already have a higher baseline investment in R&D. Only 4 UK industry sectors invest 4% or more of their sales income in R&D and only the pharmaceuticals sector invests more than 10%.

27. The overall lower R&D intensity of the top UK companies is in part due to the country's industrial profile: a significant proportion of the UK's overall R&D investment takes place in sectors which typically have low R&D intensities. The UK's overall position has, nevertheless, deteriorated over the last decade. This can be attributed to large increases in competitor countries' R&D intensity, coupled with falls in the intensity of some sectors of UK industry, such as metals products, machinery and electrical equipment. These have not been offset by increases in other areas such as healthcare and pharmaceuticals.

28. Despite the mixed picture shown by these statistics there is no doubt that the UK's overall expenditure on business enterprise R&D as a percentage of GDP has declined both absolutely and in comparison with major competitors. Only Germany, which has been adversely affected by unification, has performed worse; yet it still devotes a higher proportion of GDP to business enterprise R&D than the UK.

29. A joint study between the DTI and CBI in 1992 found that only one in ten UK companies could be considered to be truly innovative.[62] Despite significant efforts on the part of Government and industry groups since then to promote and encourage innovation, the available data suggest that many UK companies still have a long way to go before they too can be considered truly innovative. One particularly disappointing feature revealed by the R&D Scoreboard is the relatively low R&D intensity across the engineering sector compared with certain other UK industrial sectors and, more importantly, with the world average figure for engineering, albeit that world class UK companies in the sector are comparable to the global average. The significance of this is that engineering R&D is largely development.

Demonstration and Development

30. The vast majority of our witnesses agreed that it was in the design and development phase, which is largely undertaken by industry rather than in the public sector, that innovation based on physical sciences and on engineering in particular was at its most different to the equivalent process in the biosciences. Research (R) in the pharmaceutical industry typically accounts for around 30% of a company's total spend on R&D whereas, even in a leading investor in R&D in the engineering sector such as Rolls-Royce, the figure is between 10 and 15%.[63] It is nevertheless a critical part of the process. The Engineering Council, for instance, told us that "there is no doubt that in engineering you do not have a product until you are well into the development phase".[64] In contrast in the pharmaceutical industry, for instance, research can result in the discovery of a molecule that is closer to a marketable product.[65] As Sir Ralph Robbins told us, there is typically a greater emphasis on the development phase in the engineering and physical sciences sectors than in many others.[66]

31. Witnesses drew attention to a number of difficulties associated with development. Dr Rudge, among others, argued that development in most industries was a far more expensive process than research — in many sectors as much as 80-90% of total R&D expenditure were associated with development.[67] In engineering and the physical sciences, as in some others, it can be complex, lengthy, expensive and risky. Other witnesses also made the point that the risks associated with development were higher than those associated with research, not only because of the greater expenditure involved but also because development represented a commitment to a particular product or process.[68] This higher level of risk is often compounded in engineering and the physical sciences by the extended time periods involved between the inception of the project and eventual product delivery. For example over a five year period, Verity plc sunk more than the net worth of the company into a project to develop a new material for loud speakers and into establishing their rights to it around the world.[69] Indeed the risks in the development phase are so high that, as the Engineering Council told us, some companies, and small and medium-sized enterprises (SMEs) in particular, may be unable to undertake development alone and seek assistance or collaboration.[70]

32. One particular aspect of the development phase that witnesses thought particularly problematic was that of the demonstration of applicability of research. Access to incubator facilities can reduce the risk of translation from research to development by allowing proof of concept work to be carried out at an early stage and avoid development which does not result in a marketable product. At the other end of the development process, Rolls-Royce told us that innovation in engineering and physical sciences was "complex in terms of being a system .. We have to take a whole bunch of different technologies, integrate them into a product and the big risk is actually the integration. This is where the technology demonstrator becomes important ... it is the only way that we can decide if research is useful to us". Dr Gordon Edge of Generics plc agreed: "The demonstrations of proof of principle at various stages of development are absolutely essential and it is always worth spending more money on producing multiple examples of a product and it is very dangerous indeed to go straight through" to market.[71] That said, however, the Engineering Council pointed out that it was not always appropriate for those classes of engineering, such as information technology, where speed to market may be more critical.[72]

33. Despite the importance of demonstration and development, some of our witnesses argued that this was often part of the process that was rushed or left out.[73] It is therefore surprising that the vast majority of Government schemes to promote innovation concentrate on stimulating research and technology transfer and conversely that comparatively little is done to support technology demonstration and to encourage greater recognition of the importance of development. The Society of British Aerospace Companies told us that "demonstrators are inadequately funded despite their proven efficacy in reducing project risk and cost".[74] Several witnesses suggested that this was an area where greater Government assistance could make a significant difference to companies, especially those operating in the heavy engineering and chemical sectors or areas where product life cycles are typically long.[75] Other evidence supports their case. British Aerospace pointed to the Government's CARAD programme, which supports technology demonstration in the aerospace industry, as an important risk reduction tool.[76] Nor would such Government support necessarily be a drain on Treasury resources in the long term. In the early 1980s the Government supported the development of Rolls-Royce's Trent engine. Under that deal, because of the project's success, Rolls-Royce now repays £30 million per annum to the Government and will continue to do so for another 50, 60, perhaps a hundred years.[77] Policy in the US is distinctly different in this area, with the Federal Government prepared to put large sums of money behind demonstrator projects — such as the Department of Energy's tens of millions of dollars investment in a consortium of industry and universities which is developing gasoline conversion technology.[78] We recommend that the Government assumes a greater rôle in supporting development and technology demonstration where the risks are high but the rewards good if the project is successful. We recommend that the Government supports the development of large scale demonstration facilities to allow UK companies better means of carrying out proof of concept research.

Understanding the Marketplace

34. Sir Ralph Robbins partly attributed Rolls-Royce's success to its ability to recognise where the potential market for its products was, and to access that market: he told us that "The early recognition that we had to export and the early exposure to very demanding markets meant that we realised the product had to move very rapidly ... In my own view that is the reason that we succeeded and people like machine tools and motorcycles did not.".[79] He was among several leading industrialists who argued that "there is more market pull in our business than there is drive from research".[80] This puts a clear emphasis on the need to undertake thorough market investigation: Dr Rudge, for instance, pointed out that the key to innovatory success was matching the market's requirements to the right technology.[81] Many of our witnesses argued, however, that the real challenge in industries with long product life cycles was to identify market requirements "in a five, ten or 15 year time frame".[82] 3i Group plc told us "One of the key features here is how unpredictable investing in any of these companies is ... Although the time to market might be quite short, it is quite hard to know when it will appear.".[83] Further, they and others argued, that the unpredictability of rapidly changing markets and the high risks and investment required for development meant that it was essential to have a high level of managerial and marketing expertise and market knowledge which could inform the development process.[84] Several witnesses drew our attention to the increasing requirement by investors in companies to strengthen management and marketing in a like manner. As the Engineering Council put it "The fact is whether you develop the right products very much depends on your marketing expertise.".[85] We recommend that the Government scrutinises closely management and marketing strengths in companies seeking investment grants (such as SMART) and, where necessary, consider providing additional support.

35. The advantages of having a clearly identified market and continual customer involvement in the development process are demonstrated in the defence industry. The Defence Evaluation and Research Agency pointed out " the advantage that the defence community has is continuity of a customer base through the development process.".[86] The customer, the Ministry of Defence, sponsors "development from its earlier stages to actual purchase of equipment at the end of the day ... there is a continuity of customer interest [therefore] a fair proportion of what is originally researched does eventually yield a product at the end of the day."[87] The importance of tailoring development work to the needs of the market was further underlined by the Engineering Council which argued that the resources needed to develop a market from scratch to match a new technology were huge.[88]

Process Innovation

36. Several witnesses emphasised the need to be innovative in terms of production and manufacturing processes as well as in the introduction of new products. The Royal Society of Chemistry told us that operational advances were "central to day-to-day business competitiveness".[89] Similarly, British Aerospace stated that in some of its business divisions "as much as half of our research and technology goes into processes, processes for better means of manufacture, better processes for system integration, the development of new tools, new computer tools for example that give us greater efficiency and utilisation".[90] The DTI, too, accept the importance of process innovation in fostering a dynamic, technology-based economy.[91]

Market Launch

37. Placing an innovative product on the market does not alone ensure commercial success. There are many instances where companies which have been first to market a particular product have found others reaping the benefits.[92] Nor can technological superiority guarantee commercial success unless a series of other factors, including effective marketing, are in place. The familiar example of Betamax video recorders is relevant here. By offering a timely and advantageous deal to TV rental companies, VHS video suppliers prevented a technologically superior product, with similar production costs, from achieving any significant, long-term, market share.

38. If a product launch is unsuccessful, then all the effort and resources that have been devoted to its development are potentially wasted. Shell UK pointed out that commercial launch could be a particularly high hurdle for SMEs to overcome as they may not have the right range of expertise in-house to ensure success: "it is much harder to get over that bridge and very often an SME has plenty of clever minds, but not enough effort to be able to put into the marketing and obtaining those critical first few contacts and commercialising the ideas".[93] Nevertheless, the majority of Government initiatives, unlike schemes in some other countries, which are designed to stimulate innovation do not extend close enough to market as to offer support for commercialisation.[94]

Large Corporations and Small and Medium-Sized Enterprises

39. Just as the nature of innovation varies across different industrial sectors, so too can the size of a company influence its approach to innovation. As several of our witnesses stressed, it is crucial to distinguish between capabilities of large firms and those of SMEs in the context of innovation strategies.[95] Few SMEs will have the capacity to maintain a central distinct R&D function whereas larger corporations are more likely to have a significant in-house R&D capability.[96] Typically, therefore, SMEs will have to place a greater reliance on access to external information and, "while major multinational enterprises may have access to the necessary skills and specialist facilities worldwide, ... SMEs will be mainly dependent on their availability in the UK".[97]

40. The particular difficulties that SMEs may have in accessing external sources of technological development may be alleviated by Government assistance, delivered through schemes such as the Teaching Company Scheme (TCS) (see para 78), SMART[98] and Faraday Partnerships (see para 82), to focus on encouraging technology transfer between academia and SMEs. The creation and development of SMEs based on high technology must be encouraged. They are important routes for the translation of research into new products and services and can be among the most innovative businesses in the economy. Shell UK told us "SMEs are extremely important ... as a source of creativity and innovation".[99] The contribution that they can make towards creating a buoyant economy which successfully exploits the science base and has innovation at its core is significant, but it should not be over-stated. There is no inherent reason why small firms should be more innovative than larger ones. While their organisational flexibility may be advantageous in that it can make it easier to embrace an innovation culture, this is balanced by disadvantages, notably the unavailability of finance and an inability to devote resources to projects which may only bear fruit in the long term. While growth in small, high technology firms can appear radical and may have a significant impact on employment, it is important to recognise that a 1% increase in the workforce in a company employing 1,000 is the same as a 100% increase in a firm with 10 employees. As Rolls-Royce told us "it is a fact that in many ... areas it is only big companies who can exploit some technology and take it to market".[100]

41. The Secretary of State accepted that Government stimulation of innovation had tended to focus on the rôle of SMEs — "almost assuming... that some of the large companies will look after themselves. I am afraid that is not the case".[101] We welcome the Secretary of State's recognition both of the importance of larger corporations in creating an economy characterised by innovation and of the rôle of Government in stimulating them to innovate.[102]

42. For scientific and technological advances to be successfully exploited, each one of the components of innovation — research, development, market investigation, manufacturing and commercial launch and the entrepreneurial spirit to bring them together — must be present. The UK's comparatively poor record in innovation in engineering and physical sciences based industries is not the result of weakness in the research base. The failure results from poor translation of research ideas into viable products — weaknesses closer to the market where industry has primary responsibility such as in development, demonstration of a product integrating various technologies, marketing and launch.

43 The G7 nations are the USA, the UK, France, Germany, Japan, Italy and Canada. Back

44 Ev. p. 388. Back

45 DTI, Quality of the UK Science Base, 1997, p. 1. Back

46 DTI, Quality of the UK Science Base, 1997, p. 1. Back

47 Ev. p. 76. Back

48 Q. 373. Back

49 Now BA Systems. Back

50 Q. 615. Back

51 Q. 910. Back

52 Scottish Enterprise and The Royal Society of Edinburgh, Technology Ventures: Commercialising Scotland's Science and Technology, 1996, p. 29. Back

53 Q. 8. Back

54 Q. 12. Back