1.  N M Rothschild & Sons Limited is a merchant bank operating in many countries and offering a wide variety of financial services including the management of venture and development capital investment funds, resource banking, asset management and corporate financial advisory services. We have wide experience of investment in innovative companies in many countries. We offer the following perspective to help the Committee focus their deliberations and provide a summary of the issues we believe should be addressed.

  2.  The scope of the Committee's enquiry is very ambitious. It represents a review of the nation's ability to design, manufacture and distribute innovative new products and processes and an examination of the role of government in enabling this to the best extent possible. We suggest the Committee consider sub-dividing the work into manageable pieces. Alternatively, the issues might be dealt with in stages beginning with the economic and policy factors that influence product and process innovation leading to a review of the policies and programmes of government funded research and its relationship with industry.

  3.  A global market perspective is essential. The key question is how do we create a national culture that promotes our natural innovative skills and applies them effectively to the introduction of high value, leadership products and processes in global markets. By contrast, there is limited and declining opportunity for cheap "me too" products as this role is rapidly becoming dominated by the new industrial economies. A strong "customer" or "user" emphasis is required. In summary, we must become a knowledge-based economy where knowledge and expertise enables us to be best in some important and valuable global markets.

  4.  Many factors will determine our success. We highlight those we consider deserve the Committee's attention.

  4.1  The nation's competitiveness will be determined mainly by the quality of our work force and the leadership they are given. A well-educated and trained workforce is of paramount importance. Government policy is clear for initial education but, in addition, we must have a culture of life long learning to develop our cutting edge. Although the government is taking the first steps to tackle this important requirement, we need a significant culture change within employer organisations and in the workforce. This will require a kick-start and substantial support. Financing should be provided by a combination of the individual, the employer and government.

  4.2  We must modify the incentive system between our universities and industry so that they are motivated to share strategic goals for both research and teaching. We need to create a strong climate of interdependency for mutual benefit, built on an intellectual partnership and less on altruistic donations. Changes in attitudes in both industry and academia are required: in industry to influence and support long term strategic research and in academia to give greater weight and reward for successful collaboration with industry. For example, the periodic research assessment exercise takes too little account of the university research conducted in collaboration with industry.

  4.3  We need to strengthen our "industrial courage" to better assess, take appropriate and well judged risks, and provide leadership to succeed with global opportunities. This will require the development of more senior business managers in the industrial and financial services sectors able to directly assess and balance business and technical risks, and make investment decisions.

  4.4  We must encourage and reward the individual innovators and the investors in them. Particularly, we must provide greater support for small innovative research based companies. History shows that much novel innovation comes from small committed and dedicated groups and there is no reason to believe that this will change. The availability of venture and development capital for such companies must be improved. At present, the provision of capital and loan finance for "start ups" and "research based" companies is very limited and difficult to raise in the UK. There are two principal reasons: a lack of technological knowledge in the financial services sector to properly assess the risks and inadequate incentives for private individuals to provide backing. The "tax shelter" mechanism to encourage high-risk investment by rich individuals should be extended to enable an individual to invest up to £0.5 million per year in approved schemes. Another important issue for these companies is that the cost of realising wide geographic patent coverage is prohibitively expensive and we recommend this problem be examined. Legal aid to help small companies protect their intellectual property from infringement might also be considered.

  4.5  The concept of a university based "ideas incubator" has considerable merit and a number are being planned. This involves the financial services sector and others creating a fund to provide loan finance for a collection of new and innovative ideas. A support organisation provides guidance and advice to the nominated projects. Contributors to the fund would be entitled to make equity investments in these projects at the appropriate time when a business plan has been fleshed out, a clear market identified and a management team selected. Government support through a tax shelter scheme could be very helpful.

  4.6  We believe that the Foresight Programme has made a positive contribution to academic research priorities but the industrial commitment to engage in appropriate strategic research appears to be weak. The Programme seems to have lost inertia and needs to be revitalised. If properly focused, it could play a valuable role to strengthen industry/university bonding as discussed in 4.2.

  4.7  The recognition that many technologies have dual purpose for both defence and civil applications needs further examination and development. We should improve the flow and interchange between the defence and civil sectors for the benefit of both. The Defence Establishment Research Agency (DERA) could have an important role here but needs to have the freedom to operate, in part unfettered from the Ministry of Defence.