BIS ECONOMICS PAPER NO. 15 Innovation and Research Strategy for Growth DECEMBER 2011 BIS ECONOMICS PAPER NO. 15 Innovation and Research Strategy for Growth DECEMBER 2011 Table of contents Acknowledgements v Table of contents i List of tables and figures vi Foreword ix Overview and policy implications 1 Rethinking innovation 1 Rethinking the policy approach 4 1. Innovation as a Key Driver of Economic Growth 7 The central role of innovation in growth theory 8 The Schumpeterian approach 8 Neoclassical exogeneous growth models 8 Neoclassical endogeneous growth models 9 The evolutionary approach 10 Innovative activities as a source of business productivity growth 10 Data sources and model 10 Key findings 12 The multi-dimensional nature of innovative activities 12 NESTA’s Innovation Index and surveys 13 Case studies 16 Innovation as a source of economic growth 17 Growth accounting 17 Research and Development in econometric studies 20 Measurement issues 21 Conclusion 21 2. How Innovation Happens 23 Changing views of innovation 24 From linear to complex models of innovation 24 Innovation research outcomes 25 Basic components of the innovation system 28 Institutional structures 29 Administrative and regulatory frameworks 29 Education and R & D capabilities 29 Physical and knowledge infrastructures 30 Modes of innovation 30 Radical and incremental innovation 30 User-led innovation 31 i Innovation and Research Strategy for Growth The UK innovation system 32 Salient UK features 33 The global innovation landscape 38 Comparisons with leading innovation systems 40 Global competition and collaboration 43 The emergence of new scientific hubs 43 Capturing value in global chains 43 Global partnerships 45 Sourcing knowledge 48 Towards a framework for policy 51 Market failures 51 System failures 52 Conclusion 53 3. Strengthening the Sharing and Dissemination of Knowledge 54 Fostering open innovation 55 The knowledge system 55 National knowledge exchanges 56 Clusters of knowledge and innovation hotspots 57 Collaboration enabled by ICT 62 Promoting collaboration 64 Competition policy and innovative markets 65 Promoting competitive markets 65 The role of intellectual property rights 69 Conclusion 75 4. Supporting a Coherent and Integrated Knowledge Infrastructure 76 Improving connections with the science infrastructure 77 Performance of the university system 77 Role of the university system 81 Public Sector Research Establishments (PSREs) 84 The innovation information infrastructure 87 Information institutions 87 Performances of some information types 88 Conclusion 91 5. Encouraging Business Investment in all Forms of Innovation 93 Encouraging innovation across the economy 94 Variety of innovative businesses 94 Modes of innovation across industries 97 High growth businesses 99 Innovation patterns in Small and Medium size Enterprises (SMEs) 100 Managing risks and uncertainty 102 Risks and uncertainties associated with new technologies 102 The ‘short-termism’ debate 104 ii Table of contents Financing innovative businesses 107 Developing human capital 111 Defining skills for innovation 111 Changing skill requirements 112 Skills shortages and provision 114 Building and managing physical infrastructures 117 Communication networks 118 Convergence between communication and physical networks 119 Conclusion 121 6. Improving the Innovative Capacity of the Public Sector 122 Procuring or commissioning in ways that encourage others to innovate 123 Forms of procuring actions for innovation 124 Innovative procurement for SMEs 125 Lead markets 126 Procurement challenges 127 Fostering technological breakthroughs 130 Government role 130 Innovation for green growth 132 Incentivising innovation through prizes and challenges 136 The reward structure in science 137 Designing prizes 139 Innovating in public service delivery 139 User-led innovation in public services 140 NESTA’s public sector Innovation Index 141 Conclusion 143 Appendix: Global Innovation Leaders 144 The US innovation system 144 The Japanese innovation system 146 The German innovation system 147 The Swedish innovation System 148 BIS Economics Papers 150 iii Acknowledgements This paper was produced by a joint BIS team drawn from Innovation Directorate, and Economic Strategy and Better Regulation. The team would like to acknowledge the many contributions of colleagues within BIS, BIS partners, non-Departmental Government Bodies, and other Government Departments. We are grateful also to colleagues from the academic community and from the Directorate for Science, Technology and Industry in the Organisation for Economic Co-operation and Development (OECD). We have had too many inputs to acknowledge independently, but we would particularly like to thank Stian Westlake and his team at the National Endowment for Science, Technology and the Arts (NESTA), Tony Clayton and his team at the Intellectual Property Office (IPO) and Andrew Wyckoff and his senior team at the OECD. Among the academic community we are particularly grateful to Professor Alan Hughes (UK Innovation Research Centre, Cambridge), Professor Stan Metcalfe (Manchester Institute for Innovation Research), Professors Mariana Mazzucato and Paul Nightingale (Science and Technology Policy Research Unit, University of Sussex), and Professors David Gann and Ammon Salter, (UK Innovation Research Centre, Imperial College London). The UK Innovation Research Centre organised a one-day workshop in the early phases of this project, which was extremely helpful in shaping the agenda of the work. We are grateful to all those who contributed comments, inputs and advice, but implicate none in the results. Keith Smith Agnès Estibals The Innovation and Research Strategy for Growth policy paper and related documents can be found at: http://bis.gov.uk/innovatingforgrowth v Innovation and Research Strategy for Growth List of tables and figures Tables Table 1: Tangible and intangible investment (£ bn) 13 Table 2: English clusters of international or national importance 59 Table 3: New modes of collaboration 64 Table 4: Scientific publication patterns 78 Table 5: Academic spin-off firms in the UK 82 Table 6: Academic participation in spin-outs in the UK 83 Table 7: Academic problem-solving activities in the UK 83 Table 8: Degree of engagement across types of interaction in the UK 84 Table 9: Percentage of innovative expenditure by sector, 2008 96 Table 10: Percentage of SMEs engaged in R & D 101 Table 11: High growth occupations by sector 114 Table 12: Sector rankings on skill-shortage vacancies, internal skill gap and updarting needs 115 Table 13: Government as purchaser by sector 124 Table 14: Assessment by the Committee on Climate Change of the UK institutional framework for green innovation 136 Figures Figure 1: Investment by UK firms in tangible and intangible assets, 1992 – 2008 14 Figure 2: Investment by UK firms in intangible assets by category – share of market sector Gross Value Added, 1990 – 2008 15 Figure 3: Contribution to GVA growth (1997 – 2007) 18 Figure 4: Breakdown of components for UK average labour productivity growth, 2000 – 2008 19 Figure 5: Components of annual labour productivity growth, 2000 – 2008 19 Figure 6: Percentage contribution to growth in total economic output (GVA volumes) 1992 – 2007 33 Figure 7: Key features of UK innovation system (UK-OECD average) 34 vi List of tables and figures Figure 8: Authorship of most cited 1% of published scientific articles, 2006 – 2008 35 Figure 9: % of total first-stage graduates with science and engineering degrees 36 Figure 10: R & D expenditure in businesses as % of GVA, annual average (2003 – 2006) 37 Figure 11: International comparisons by type of investment 37 Figure 12: Venture capital investment by stage of financing as % of GDP 38 Figure 13: Comparison of innovation performance (EU 27 countries) 39 Figure 14: Comparison of innovation performance beyond the EU 40 Figure 15: US and UK innovation systems 40 Figure 16: German and UK innovation systems 41 Figure 17: Swedish and UK innovation systems 42 Figure 18: Top 20 publishing cities 2004 – 2008, and their growth since 1996 – 2000 43 Figure 19: Value creation and capturing for Apple iPhone4 (retail price: $600) 44 Figure 20: Growth in internationally collaborative papers for selected countries and the proportion of national papers output that this represents 1996 – 2008 46 Figure 21: Location of co-operation partners 47 Figure 22: Percentage of business R & D expenditure financed from abroad 47 Figure 23: R & D expenditure of foreign affiliates as a percentage of R & D expenditures by enterprises 48 Figure 24: High and medium-high technology exports average annual growth rate (1998 – 2008) 49 Figure 25: Location of co-operation partners 56 Figure 26: Types of national co-operation partners 57 Figure 27: % Cumulative value of EU Patents: 70 Figure 28: Distribution of research funding across universities 78 Figure 29: Field weighted citation impact 79 Figure 30: Publication activity in 2010 relative to World compared with Field Citation in 2006 – 2010. 80 Figure 31: World shares of papers in top 10%, 5% and 1% cited articles 81 vii Innovation and Research Strategy for Growth Figure 32: Standards and design in innovating firms 91 Figure 33: Standards and patents in innovative firms 91 Figure 34: Proportion of innovative active enterprises in the UK, by sector (2006 – 2008) 95 Figure 35: Proportion of innovative enterprises in Europe (excl. UK) by sector (2006 – 2008) 95 Figure 36: Proportion of innovation active enterprises with no R & D, 2006 – 2008