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Spread the innovation around

The UK economy needs greater diffusion of innovation, not just new inventions.

By Michael Kitson, University Senior Lecturer in International Macroeconomics at Cambridge Judge Business School

Hand reaching up and touching the network.
Michael Kitson.
Michael Kitson

A consortium of prestigious science, business and research organisations is calling on the next Prime Minister to ensure that the UK remains a leader in research, development and innovation. And who can argue with that?

Yet the problem with much highly touted “innovation policy”, including in the UK, is that attention is focused on the generation of innovations rather than their diffusion throughout the economy – into regions and sectors that most need the added productivity that innovation can deliver.

Such a focus on creation rather than breadth of application will do little to address the regional and sectoral disparity in economic performance that plagues the UK, as I have outlined in a paper just published (“Innovation policy and place: a critical assessment”) in the Cambridge Journal of Regions, Economy and Society.

Instead, policymakers need new approaches – and metrics – to spread innovation to all regions and economic sectors (not just “high tech” firms), to build networks appropriate to local economies, and to adopt long-term plans that aren’t shattered by short-term changes or temporary shocks.

This will be difficult – but this does not negate its necessity. Such diffusion should penetrate all parts of the economy, including “traditional” sectors such as retail and manufacturing. It can also be strengthened through ties with local “anchors” such as hospitals and universities: often seen as innovation generators, such institutions act as key sources of local resilience and expertise that enhance the local adoption of innovations created elsewhere.

The consortium urging renewed commitment to R&D spending in the UK want the next Prime Minister who emerges from the Conservative Party leadership contest to build on the government’s current target to boost R&D spending to 2.4 per cent of GDP by 2027, with a longer-term aim of three per cent of GDP – as already exceeded in such countries as Germany, Israel, South Korea and Japan.

“If we lose the momentum behind the commitment to investing 2.4 per cent of GDP, we will be left behind by our competitors,” the president of the Royal Society, Professor Sir Venki Ramakrishnan, told the BBC, following the joint statement from a coalition that includes the Royal Society, the British Academy, the Confederation of British Industry (CBI), the Royal Academy of Engineering, and Universities UK.

Yet the UK is already being left behind by other countries, according to many economic measures. The slowdown in UK productivity since the financial crisis of the last decade has been particularly stark, exceeding the slowdown in other G7 countries. A more granular look, highlighted in Bank of England research, shows that the productivity gap between the top and bottom-performing companies is far larger in the UK than it is in Germany, France and the UK – including in the services sector, supposedly Britain’s crown jewel.

So why is innovation diffusion a key to reversing this? Since the Industrial Revolution two centuries ago, the dispersion of innovation has had a far greater economic impact than the initial generation of such innovation. This is not really surprising, as the “innovation-using” sectors are far larger than the “innovation-generating” sectors: take the use of the steam engine in factories in the 19th century, and the use of mobile devices today. The huge economic benefits come not through invention but by use throughout the economy.

The focus of government attention when it comes to R&D has centred mostly on the need for more STEM (science, technology, engineering and mathematics) education, and the need to commercialise science through patents, spin-outs and other tech transfer mechanisms.

Again, it’s difficult to argue against this – and that makes such a focus politically convenient: it is simple to understand, with clear links and processes, and is relatively uncontroversial as few politicians publicly oppose scientific progress.

But this approach often conflates technology (the technological aspect of products and services) with innovation, which the then-titled Department for Innovation, Universities & Skills described in 2008 as “the successful exploitation of new ideas”.

The policies usually promoted by the UK government (among other countries) often neglects the “exploitation” aspect of that very apt definition. The focus on innovation creation is narrowly focused on a small range of sectors and a small number of firms – and even some of the most innovative and successful tech firms employ a relatively small number of people when looked at through a historical prism. Apple, Facebook and Google parent Alphabet top the current league tables for revenue per employee.

So how can better diffusion of innovation be measured? The key focus should be on long-term impact: not a narrow focus on hard economic indicators, but on behavioural change and innovation trajectories that provide better evidence of long-term development and transformation.

Such a focus may provide little short-term boost to ambitious politicians, but will in the long-term provide a greater boost to UK economic success – across the whole country – than a quick fix of R&D cash.