Innovation’s steady course… downward

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6 september 2012 | The first decade of the century was a ‘lost decade for innovation’, UK’s NESTA-chief Geoff Mulgan concludes. He has the statistics to prove it: innovation expenses in the UK declined with £24 billion last year.

At a Policy Network-conference tackling ‘thequest for growth’, Geoff Mulgan (Chief Executive of NESTA, theNational Endowment for Science Technology and the Arts) was one ofthe rare speakers pointing out the importance of innovation.

He urged decision makers to get out of their trenches of either’austerity’ or ‘stimulus’, and turn their eyes towards that strangeand apparently contradictory policy mix that fosters innovativegrowth. NESTA will shortly publish this recipe in a ‘Plan I’. Youcan read the speech of Mulgan here:

“Commentators and policymakers have struggled to understand theworld of innovation. We need not just a change of economic policybut a change of political culture as well.”

Beyong the binary worldview

“Much of the Western world the policy debate has polarised into achoice between just two options:  Plan A or Plan B, austerityor stimulus. These macroeconomic choices matter greatly. Butneither addresses the UK’s longer-term growth prospects. They arefamiliar territory, but they miss much about the moderneconomy.”

“Macroeconomic strategy needs to be matched by a strategy forinnovation. Economic theory has struggled to understand the worldof software and new materials, computing and design. But there isnow a pretty broad consensus that innovation is the most importantdriver of long-term productivity and prosperity (including at leasttwo thirds of UK productivity gains in recent years), and thatinnovative businesses create more jobs and grow faster. Yet all toooften economic commentators, who can be precise about exports orquantitative easing, resort to vague platitudes when it comes toinnovation.”

“The UK has many significant strengths in innovation, from worldclass firms like ARM and Rolls Royce to dynamic creativeindustries. But our research shows that we face major problems offinance, structures and culture. Nesta’s Innovation Index (which is acknowledged as the mostauthoritative measure available) shows that investment ininnovation by UK businesses has fallen sharply since the financialcrisis of 2008: the most recent data suggests it declined by asmuch £24 billion last year. This issue predates the credit crunch:in the period from 2000 to 2007, businesses’ investment ininnovation levelled off, investment in fixed assets fell and becameincreasingly dominated by bricks and mortar at the expense oftechnology, and companies accumulated cash. For many businesses,the 2000s were less an age of innovation than an age of cash andconcrete.”

A heterodox policy mix

“Commentators and policymakers are slowly waking up tothese facts, though most are more at home with the more familiardiscussions about stimulus packages, investment in infrastructureand credit easing for small business.  Fortunately there is alot we can learn from other countries, even if specific policiesare hard to transplant. Evidence from around the world shows thatthe most successful innovation strategies combine many, oftenapparently contradictory elements: generous public funding forbasic science and lively universities, but also entrepreneurialcultures; strong industries based around complex technologies likelife sciences, as well as others like fashion and design with veryfast turnarounds; high risk investment in start-ups combined withpatient capital to help firms grow.”

“Our strategies need to be equally heterodox. The steps neededto boost innovation, and thus boost both productivity and economicgrowth include a significant reshaping of financial flows – withnew funds, tax treatment, and both bank and non-bank lending whichwe will set out in detail in Plan I. It will require new roles forgovernment procurement; a reorientation of infrastructure spendingaway from rail and road and towards high speed broadband and smartenergy grids; and it will require a host of small changes toeverything from HE and schools to planning rules and publicservices.”

“In the short run we argue for directing forthcoming windfallsfrom technology back into the innovation system; in the longer runwe argue for a shift in the balance of government spending awayfrom consumption and towards investment, reversing movements thathave gone in the wrong direction over the last few years.”

‘Scientific constituency’ needed

“That will require a change of political culture as wellas economic policy. The UK has a highly influential sciencelobby. But that lobby has relied too often on the insidetrack, and on enlightened science ministers, rather than making itscase to the wider public. It has also tended to privilege upstreamresearch over downstream application. Other countries have abroader constituency supporting innovation, and arguing for itsshare of resources – and in some cases, such as Finland, Israel orTaiwan, it is seen as vital for national survival, as well as smarteconomics.”

“In the UK, by contrast, these choices have been largely invisiblesince the financial crisis. If they are mentioned at all, they arepresented as choices to turn to once the economy has turned around.But this misreads both the economics and the politics: around theworld that the most successful stimulus packages have prioritisedgrowth sectors and technology areas rather than being whollyneutral.  And there are good reasons for thinking that it willin fact be easier to make microeconomic changes alongside the majordislocations and sacrifices of macroeconomic reform, rather thanapart from them. So let’s get beyond Plan A and Plan B – andturn our attention as well to what actions now will deliver thegreatest rewards in ten or twenty years’ time.”