Through a glass, darkly

The quiet rebirth of industrial policyStian Westlake, Nesta T: @stianwestlake

The problem

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1685

90

95

100

105

110

115

120

1980199019732008

Productivity growth after major UK recessions

Quarters since start of recessionYear 1 Year 2 Year 3 Year 4

The first rule of industrial policy club is you do not talk about industrial policy club

“This is not about picking winners; it's about backing technological leaders, creating capacities, and building on the strengths of the economy” – Peter Mandelson

“This isn't about 'picking winners'. It's about picking the races in which to focus scarce resources on, and Government doing what only it can do, but doing it better” – George Freeman

How to talk about industrial policy – a guide for politicians

A common element is innovation

Labo

ur q

ualit

y

Capi

tal i

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tmen

t

Inve

stm

ent i

n in

nova

tion

TFP

(wid

er b

enefi

ts o

f in-

nova

tion)

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l0123

Make-up of UK economic growth

Source: Nesta, The Innovation Index (2009-12)

Innovation: 67% of growth

%/yr, 1990-2007UK Business growth, 2004-08

InnovatorsNon-innovators

Revenue growth, %/yr

Source: Nesta, The Vital Six Per Cent (2009)

Product

Innovation

Proce

ss Innovation

Wider In

novation0

2

4

6

8

10

12

The government’s to-do list

Expand SBRI (how?)

Hack R&D tax credits

Get the

system

working

better

Start-ups? Hmm.New

agency!

A lab

Innovation policy is technocratic

Romantics

Futurists

Creatives

Realists

Sceptics

19%

12%

19%

34%

16%

TechnophilesLike the word “innovation”Less concerned about pace of change or controversyDisproportionately male, ABC1

Innovation : “it makes a country great”Unlikely to be involved in innovationOlder, C2DE

Early adopters, creativeInterested in innovation to the extent it solves problems they care aboutYounger, less political

Not excited by innovation per seCare about the ethical &social context of innovationsAware of drawbacks : desocialisation, “throwaway culture”

Concerned about impacts of radical innovation on jobs & the futureWorried about impact of innovation on consumerism and employmentMore female, C2DE

…with a narrow audience

Technocratic innovation policy is a Faustian bargain

+ –

Consistency of policy (cf NHS)

Safe from ideology

Ring-fencing of science budget

Not part of the national narrative

A hard sell at a time of austerity

Opening the Overton Window

1. Go large

€579m

£440mInnovate UK

TEKES (Finland)

OCS (Israel)$450m

0.2%

0.02%

0.15%

Public technological development spending, 2013 As share of GDP

1. Go large

What might you do? What would you need to believe?

To match Finland’s level of public investment:

• £10bn on research• £3bn on Innovate UK• ~£100mn on risk capital

(You could perhaps save a couple of billion by cutting R&D tax credits)

That you can find ~£8bn from somewhere: good luck.

That the UK’s economy can internalise the benefits.

That you can keep it up.

2. Go downstreamUK Experimental development has decreased from 54% of the total R&D

funded by government to 24% over 20 years.

Basic R&D funding has increased by more than 5 times, the equivalent of a 9% annual growth rate.

In nominal terms, experimental development funding has decreased by almost 20%.

USA US Federal funding has maintained a much larger share of

development spending, falling from 68% to 52% over the same period.

In nominal terms, spending on development has increased by 60%.

Development

Applied research

Basic research

Development

Applied research

Basic research

14

What might you do? What would you need to believe?

Redirect funding from Research Councils to Innovate UK(“Arrow projects”, supply chain vouchers, more SBRI?)

Increase HEIF at the expense of QR

That you can find ~£8bn from somewhere: good luck.

That UK businesses can rise to the challenge.

That you can keep it up.

2. Go downstream

3. Get in on the upside

(sort of)

AUD$430m

€650m

€100s m

State revenues

3. Get in on the upside

What might you do? What would you need to believe?

Get Innovate UK and RCs to take stakes in companies they fund (or royalties, or income-contingent loans).

Perhaps borrow up-front against future revenues to allow an increase in innovation funding.

That our investments will be as good as Israel’s or Finland’s – or perhaps they need to be better.

That the bureaucratic hurdles aren’t too big.

That company behaviour won’t be badly distorted.

But money isn’t everything

What’s going on here?

UK businesses have trouble growing (Nesta/NIESR)

Some sectors are uncompetitive (banking?)

New technologies won’t increase productivity without disruptive innovation (Field)

4 & 5. Germany…or AustriaBusinesses use excessively high hurdle rates (Christensen)

UK businesses have trouble growing (Nesta/NIESR)

Buybacks may discourage R&D (Lazonick)

Intangibles are undervalued and R&D falls in the year CEO options vest (Kay, Edmans)

UK’s skills problem is longstanding and well-known (Leitch Review)

German businesses self-organise

4 & 5. Germany…or Austria

What might you do? What might you do?

Reform Anglo-Saxon capitalism• State investment bank• Establish state pension funds

and invest them in illiquid assets• Spend on apprenticeships• Put workers on boards• Delegate BIS power to local

business chambers• Split up HM Treasury!

(But: can you make Britain Germany? Would you want to?)

Abolish Innovate UK, R&D tax credits, etc (except for SMEs or new businesses?)Use the proceeds to reduce taxPrioritise regulatory barriers to new entrantsExempt SMEs from various taxes

(But: goes against a lot of what we know about innovation.)

6. Citizen innovation

Eight per cent of people in the UK are “user innovators”

Lucas Industries, 1970

Eric von Hippel

+

7. Get creative

The UK creative economy is fast-growing, internationally competitive and big

It is relatively cheap to promote

It is complementary to many STEM skills

UK industrial policy in this area (shhh!) seems to have worked

What might you do?

Direct public funding to arts and culture, and relevant STEM:• BBC commissioning• STEAM crossover skills and

projects• Generous arts funding• Platform development

(Good luck selling this to the public.)

8. Go green

What might you do?

• Major investment in energy R&D

• Downstream investment to increase deployment of low-carbon tech

• Recapitalise the Green Investment Bank

• Prizes and challenges

9. Gimme clusters!

What might you do?

• Intervene in property markets and planning systems to help clusters grow

• Provide better local infrastructure (FTTP, fablabs, incubators)

• Sponsor business networking• Delegate more power to local

government

…the ‘how’ matters too

So what should we do? 2. Get more value from public tech funding

• Emulate Finland’s TEKES and Israel’s OCS by seeking capped repayment from successful technology grants.

• Allocate 1 per cent of Innovate UK’s budget to market intelligence and technology futures.

1. Rebalance government funding away from research towards development.• Reallocate £0.5 billion from research

councils to Innovate UK.• Government investment in research and

development should be more prioritised towards downstream investment.

3. Fix the wiring of government to make better industrial policy possible.• Split up the Treasury, moving budgetary

responsibility to a Prime Minister’s Department and economic and industrial policy to a new Ministry for Growth.

• Expand the use of randomisation and testbeds in economic policy – they should be the default.

4. Fight short-termism.• Work with the LSE and banks to

encourage companies to provide better information about intangibles and to facilitate lending against them.

• Make a clearer distinction in the Budget between government investment and current spending – and increase the former.