The UK’s innovation ‘crisis’

16th July 2012

The report showed that business had a ‘crisis of confidence' in the 2000s, leading it to prioritise property and cash reserves over investment in innovation: "The collapse in private sector spending on innovation since the recession began is equivalent to five times the amount the government spends each year on science and technology research."

Chief executive, Geoff Mulgan said that innovation was ‘the only route to long term growth', adding: "The concern is that today's report and Investment Index show that investment in the future didn't just fall during the immediate aftermath of the financial crisis, but also continued falling as the economy appeared to stabilise."

Nesta's report highlighted in particular the importance of manufacturing for the UK's continued innovation efforts: "Representing 17% of GDP, manufacturing accounted for 77% of business investment in R&D and 23% of total business innovation investment."

The traditional response is to blame funding problems. Certainly, banking lending to small businesses has been in decline and a lot of policymaker time is being exercised trying to work out how to reconnect those credit lines.

The most recent initiative in this is the Funding for Lending Scheme. The details and FT verdict are here : "The joint BoE and Treasury £80bn scheme will offer incentives to banks of even more cheap funding if they increase lending rates, while those that do not use it to grow their lending will have to pay more – though this will still be at less than the market price.

Simon Ward, chief economist at Henderson believes that the scheme is ‘unexpectedly generous' and will benefit banks and existing borrowers. However, he adds: "Its impact on new lending…may disappoint unless the Bank simultaneously revokes its recent guidance to banks to raise their capital ratios further."

That said many small businesses are, understandably, looking to by-pass the banking sector and here too there has been progress. The Centre for Financial Innovation has recently published a book on non-bank sources of lending for SMEs.

But others have dared to suggest that the problem may not be with funding sources, but with the companies themselves. In particular, the Institute of Chartered Accountants of England and Wales, has said that may small and medium-sized companies ‘lack aspiration'.

In a recent study, many were found to be positive about the prospects for their businesses, but that any expansion would come from concentrating on core markets and gradual organic growth rather than developing new markets: 

"Of the two thirds questioned who said they were exporters, only half said they expected to increase overseas trade. Only 6 per cent of companies which do not export said that they planned to do so in the next two years."

The more uncomfortable question is ‘does it matter?'. There has been a common view of innovation that it is universally good. This document from Michael Mainelli suggests that innovation for its own sake is not necessarily welcome: "Today we emphasise innovation's creative power and neglect its destructive effect. Hyman Minsky, the American economist, worried about the way financial innovation creates more interdependence, reduces transparency and increases unregulated trading and complexity. More seriously it encourages speculation and Ponzi finance."

It is clear that some innovation is good and some is bad and any initiative to encourage innovation needs to make that distinction. Mainelli, for his part, believes that government policy cannot direct innovation, but needs instead to focus on education and diversity with low risk and high rewards for entrepreneurs. He concludes: "It is the little folk that matter. The ones that will grow need the older ones to die. If we can clear the forests of policies, financiers will find the good little firms themselves. If we want to finance innovation, paradoxically, we should just focus on getting the basics right."

In this context, Nesta's research looks over-simplistic. It is not innovation for its own sake that is needed, but innovation of the right sort


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