95. The premise of our inquiry that bioscience based companies have been far more successful at innovation than those companies based on the physical sciences and engineering was widely supported by witnesses. Likewise, the definition of innovation adopted, which goes beyond R&D and invention to involve the successful presentation and introduction of a new product to a market or a new process to commercial production, is generally accepted. Science based innovation is, therefore, a process combining research, design, development, market investigation, manufacturing process development and commercially launching the product.

96. The difficulty of innovation in the engineering and physical sciences based industries lies in arriving at a clear presentation of what is wanted by the market and the need to combine various technologies to achieve that. By contrast, the pharmaceutical industry depends heavily on research which, when successful, is readily marketable. In other words, engineering and physical sciences based innovation depends on the pull of the market and so upon market understanding, development, manufacturing processes and market launch much more than it does in the pharmaceutical industry.

97. There is no evidence of any shortage of ideas and knowledge emerging from engineering and physical science research in universities or in industry. Indeed, the Government's efforts to encourage innovation have been directed almost exclusively at creating that fertile soil for innovation growth. The quality of the British science base is good. However, there is a need for funds to demonstrate the usefulness of research as a basis for deciding whether development is likely to be worthwhile.

98. The development of that knowledge to a well-designed product, meeting a market need is where the problems arise. This conjunction of technology with market assessment is almost exclusively and essentially the job of industry. It is far more expensive and risky than research. All indications are that it is this part of the process of innovation which is skimped, under-funded and inadequate in engineering and physical science based companies.

99. That position is worsening. Business funded research and development, of which the major part is development, has been growing more slowly than that of other developed nations so that Britain is fifth among the G7 nations in the proportion of GDP business devotes to R&D. Taken as a proportion of company turnover, UK pharmaceutical companies' R&D is slightly higher than the international average at approximately 13% but for engineering and machinery, electronic and electrical, software and IT sectors of industry, the proportion of turnover spent on R&D is between a quarter and a half of spending by international competitors.

100. Government policy in this field has been directed at securing a healthy science, engineering and technology base upon which industrial development can feed and which provides trained and experienced scientists and technologists who can carry their skills into industry. That is, indeed, the proper priority for Government.

101. Other aspects of Government policy have been to secure the transfer of science and technology from academic research to industry, particularly for small and medium-sized companies. That, too, is important. Neither of these aspects of policy will notably improve innovation however if industrial development is not there to pick up the ideas. The inevitable result is an increasing queue of ideas originating in Britain but waiting to be commercialised elsewhere.

102. The Government's tax credit for R&D spending by small and medium-sized companies is directed to encourage more spending on development among those companies. However, if Britain is to remedy its declining capacity for science-based innovation, large companies will play the major part. There is, therefore, a strong case for extending tax credits to them too. Market research and the provision of demonstrators of the final product are recognised as critical to innovative success. It would substantially reduce industry's risks and encourage innovation if the costs of market research, demonstrators and product launch were included in such an R&D tax credit.

103. In engineering and physical science based industries, the failure to innovate sufficiently has resulted from a lack of investment in demonstration, development and marketing — key parts of the innovation process, but parts which are ultimately the responsibility of industry to address. Government support for the innovation process must recognise this rather than concentrate too heavily on the research phase or technology transfer. A fundamental shift in Government policy is required based on the recognition that, first, ultimately only industry can deliver an innovative economy and, secondly, that the science base, although critical to successful innovation, can provide only the first step in what can be a long, complicated, expensive, and risky path between invention and commercial exploitation.