Thursday, 27 September 2012

A brief thought about innovation strategies and growth...


The innovation strategy - or innovation-led growth -  isn't usually about "innovation" but is about government investment in science and in manufacturing industry. Stuff like:

A £200m fund for early-stage ventures; freedom to raise money for the Green Investment Bank, and a new business bank to lend to growth sectors including advanced manufacture and life sciences.


Invest the proceeds of the forthcoming 4G spectrum auction - estimated at £4bn - in science, technology and innovation.


Higher education funds for radical inventions around knowledge creation - putting design thinking at the heart of the new Catapult centres.

All good stuff and "targeted" at the things that made regions "competitive" - at innovation. Or so we're told. The truth is that innovation - or a great deal of it - isn't about science but about boring things like systems and distribution. Amazon's success is as much built on getting super swift logistics as it is about whizzo techie wonderments. But it's the latter that suck up the innovation funding from governments.

The problem is that, while innovation is awfully important at the firm level, at the macro level there's not much evidence that R&D spending impacts on growth:

And here lies our problem. We know that innovation generates growth (by reducing costs, by creating new products and so forth) but we can't capture that growth by looking at the sort of investments that typify government innovation strategies. Indeed, if a firm only innovates because of grant-funding (or 'soft loans' which amount to the same hill of beans) then we have to question whether the innovation is real or merely staged to secure the funding.

It seems to me - and there is some evidence to support this - that the real benefits lie in:

  • Concentrations of private sector knowledge workers (think Thames Valley)
  • Low (or no) taxes on capital gains
  • A focus on service/process innovation (services are 80% of our economy after all)
  • Active incentives (such as reduced taxes) for business innovation
  • Similar incentives for individual investors in innovation (tax reliefs or lower personal taxes)

What is clear however is that schemes predicated on the activities of universities - clutching another batch of government funding to their chests - do not deliver innovation and do not benefit growth.


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