UK Innovation Policy The expert's perspective

Participants were asked for their views on how the two main political parties – Conservative and Labour – had presented their policies on innovation over the course of the general election campaign. They also gave their views on the issues they want an incoming government to fix.

The ensuing 90-minute discussion covered a broad range of subjects, including access to finance and adopting a longer term view to funding start-ups and scale up businesses, research and development (R&D) tax credits, Brexit, Britain’s appetite for risk compared with other countries, the role of our universities in commercialising new ideas and how innovation is not just about new technology and can play a part in reforming and modernising ‘old’ industries, like rail.

Each of the participants brought their own unique take on some of the issues facing the next government, which could help unlock the promised economic growth that lies at the heart of policymakers’ plans for the next five years.

Patient Capital

Perhaps the main theme of the discussion was around that of investment, or lack of, in innovative startups and scale up businesses.

One of the academics on the panel said: “We see quite a lot of innovative ideas get stuck at the licensing stage, uncommercialised, and I think there’s a huge opportunity for government to support the commercialisation of ideas that already exist but haven’t made it out to the market.

“What we see is startups struggle to get access to finance … particularly critical scale up capital. There’s a perception it’s easier to find in the US.”

Another noted that Britain is very good at developing ideas and taking them through the initial phases, but agreed that we don’t have the deep pools of capital, like in the US, to take companies through the scale up phase.

He said: “Angel investors, like those clustered around Cambridge or London, the amounts there for science and technology development that people want to do just doesn’t cut it. You’re only getting £150-£200k.”

It was a view shared by an entrepreneur, who also noted that as well as the disparity in funding amounts, the UK investment market is significantly more risk averse than the US.

He added: “Relative to the US we have a very risk averse funding environment. Of the three startups I’ve taken to trade sale, the funding came from the VC (venture capital) and PE (private equity) community in the US. It’s very hard to raise money in the UK. We have to accept that risk is part and parcel of the process.”

The funding issue was brought into sharp focus by one panellist who noted the vast chasm that has already opened up in funding for new AI startups.

She said: “If we just look at AI. I think the French have committed $8bn, we’ve committed $4bn and Meta [owner of Facebook] has spent $40bn to date. So, all that’s going to happen is that we will have our brilliant innovators and they will perhaps scale a little bit in the UK before they take money from the US and become a Delaware corporation, or sell to a US company and I think that is the key issue that somebody should tackle.”

This element of the discussion fed into the view that the UK government, and UK investors, don’t currently adopt a sufficiently long-term view when seeking to support innovation.

A participant on the panel said: “British investors have quite an issue with patient capital and that tolerance for failure. Nothing ever succeeds without many failures along the way. We need fundamental changes with how small businesses are supported. [We should] look at some of the more successful nations like the US and how they go about that.”

It was thought a longer-term approach would be far more beneficial to the health of the British economy because it would ensure more of our innovative companies would stay in Britain and grow the business, instead of being tempted to sell up to the first Silicon Valley ‘white sneakers boy’ to wave their cheque book.

One academic said: “It’s a way of [large international corporates] shortcutting the R&D process. So we need to think about that.”

Another panellist concluded: “We just don’t know how to hold IP (intellectual property). We give it away too quickly, we are looking for the quick win … Government could take a longer view.”

Process Goals

An alternative view to the funding narrative was offered by one of our panellists, who runs a business consultancy.

He said: “I think there’s a misunderstanding about what innovation is and how it comes about. We talk to our clients about turning inspiration and ideas into sustainable value – that could be growth, value to shareholders etc. – and that often comes through process change.”

The panellist believes there is too much focus on R&D in the debate about innovation instead of broadening it to include the many tens of thousands of existing businesses and organisations that require a different kind of approach – this could include anything from how they organise their business systems to improving the culture.

He cited some recent work he had done with Innovate UK, the national innovation agency, which looked at the return on investment (ROI) of 45 startup companies. Of those 45, just two companies grew and 43 ‘stumbled along’. The collective ROI of the cohort was just 0.25% to 0.3% – meaning that for every £1 of taxpayers’ money invested in the startups, the government got just 30p back.

“There’s too much focus on inputs, usually funding,” he said.

The participant works as a consultant with the UK rail industry, which has just created a Rail Innovation Charter. This has nothing to do with new technology and is mostly about how to optimise behaviours and process change.

He added: “Many innovations come through creating the right environment … The analysis we have undertaken shows that when it comes to business growth/scale-up, assuming the end product/service works, the biggest challenges are associated with the development of business models and marketing strategies.

“Not all great ideas lead to great innovations. And serendipity plays a role – many innovations come about from random encounters. Hence the importance of environment to make innovation happen.”

Another participant agreed, noting that there was no innovation policy for the services sector, which accounts for some 80% of the UK economy.

“Nobody talks about it. It is just assumed our generic innovation policy works for services,” he said.

University Challenge

Another hotly debated topic was the role played by our universities in nurturing innovative ideas and helping to commercialise them.

Several participants said there remained a cultural aversion within the university sector about the commercialisation of ideas, saying academics who stray into the world of commerce risked becoming pariahs and were often accused by colleagues of ‘selling their soul’.

One said: “What we should be saying is ‘isn’t it good that this technology is getting out’. So, the culture needs to change here.”

Yet again, funding was an issue that cropped up during the discussion about the role of universities as innovation hubs.

One academic said: “There is not enough [funding] to get academics thinking about commercialisation.”

Another panellist said: “I think funding for innovation hubs/partnership building and interlocutors between academia, industry and finance is critical, with the right kind of funding that allows for longer term programmes and experimentation.”

He said having large scale partnerships between academia and industry was also important, citing the Aviation Impact Accelerator (AIA). The AIA project is hosted by Cambridge University and comprises industry partners such as the Emirates, the Dubai-based airline, and IATA, the aviation industry body.

The Cambridge-based research project is building an interactive simulator to allow exploration of scenarios for achieving net zero flight.

Emirates recently joined as an industrial partner, pledging the first investment from its $200m Sustainability Fund, an R&D fund that focuses on projects that reduce the impact of fossil fuels in commercial aviation.

The panellist added: “The AIA shapes the context – policy, investment and alignment on pathways, but leaves space for companies and start-ups to innovate solutions behind it.”

Others on the panel praised the university sector for work with larger corporates, but said it might be a good time for policymakers to consider how to use the sector to help build relationships with smaller companies. As SMEs are the lifeblood of the UK economy, this could help to spread economic benefits throughout the country, instead of clustering around a few geographic locations.

One said: “We have amazing universities and some large, successful companies. But the majority of businesses [in the UK] are SMEs, so if there’s something we can do to connect universities and SMEs, because these institutions tend to work with the same [industry] partners.”

Taxing Issue

Another area that a large number on the panel want an incoming government to resolve is the situation surrounding R&D tax credits.

The government claims to have made it easier for SMEs to claim tax credits. However, thousands of small businesses have been asked to pay back the R&D tax relief they received in recent years as part of an HMRC crackdown on error and fraud.

R&D tax credits were introduced in 2000 to incentivise companies to innovate by giving them tax relief on investment in new technologies. HMRC estimates that more than £1bn was lost to error and fraud in tax relief to smaller businesses in 2020/21 alone.

Last year, Jeremy Hunt, the chancellor, announced reforms to the R&D tax relief scheme as part of a crackdown on fraudulent claims. Research suggests that 59% of R&D claims were either challenged or declined by HMRC in 2023.

One participant, close to the manufacturing sector, said: “The manufacturing sector doesn’t believe it’s working, and they rely heavily on [R&D tax credits] especially for training staff for new product development.”

Another said: “I would echo what has been said on R&D tax relief, which has become more restricted and is a growing area of difficulty [for SMEs]. Companies need to know where their money is coming from in order to plan investment in innovation.”

Another panel member said it was a shame that much of the debate about R&D tax relief had been focused on the SME scheme and urged policymakers to ensure that larger companies invest in innovation in the UK.

He said: “The large company tax credit scheme is basically just an instrument of international tax competition; it has nothing to do with innovation at all.

“We’d argue that the most impactful innovation that gets delivered happens within larger companies, but agree we need to ensure we’re competitive internationally, so that the R&D happens in the UK rather than other countries.”

International Duty

Britain’s place in the world post-Brexit and the government’s view that we are a science and technology ‘superpower’ were other themes that cropped up during the debate.

Many pointed out that capital is fluid and doesn’t recognise national boundaries. In turn, the brightest and the best entrepreneurs tend to follow the money … something the next government would have to consider in any innovation plan.

One participant said: “The UK is not the biggest market for innovators. This is a small market. The opportunities ultimately are not in the UK for many organisations. International interoperability needs to be in our language, and we need to alter this island mentality that we’ve built as a result of Brexit and open our arms to discussing the issue of scale up into other markets because that’s where the revenue opportunities are for commercial organisations.”

She questioned how the government can call Britain a ‘superpower’ in science and technology, when a huge number of UK tech firms are backed by US money.

“That isn’t a British superpower and I think we need to be frank about this. Wouldn’t it be amazing if we had British technology funded by British investors? But where are they?”

Conclusion

Apart from a few bright spots in both the Conservative and Labour manifestos – industrial strategy, national wealth fund, Great British Energy –  a majority of the panellists agreed that more detail was needed from the two main parties if either are going to ignite the spark for future economic growth.

Based on the assumption that Labour would form the next government, one said: “I don’t know how Labour are planning to implement anything they are talking about. There’s a lot of high-level strategy but no roll-out. I think we are going into a bit of a black hole; we just don’t know what’s coming.”

Ultimately, the panel agreed that there should be a role for government to play a part as a central co-ordinating force to help facilitate more and better innovative businesses that are comfortable to stay and grow in Britain.

One final and important point made by one academic related to a ‘big picture’ issue that successive governments have wrestled with – Britain’s creaking infrastructure.

He said: “Our cities, links between our cities, the lack of functioning of our cities as effective agglomerations holds back innovation and productivity growth. The most important innovation policy is getting the infrastructure of your country to work.”

The roundtable took place on the basis of the Chatham House Rule, whereby all comments are unattributable.