Response to the BEIS Building our Industrial Strategy green paper

Written evidence submitted by The Research & Development Society

Background

Submitted in response to Building our Industrial Strategy green paper, which was published on 23 January 2017. Submitted by Nico Macdonald, 17/04/2017

The consultation ran from on 23 January until 17 April 2017

This working paper builds on the Response to the BIS Select Committee inquiry on Industrial Strategy which was submitted on 27/09/2016

Introduction

Founded more than 50 years ago, the underlying aim of the R&D Society has been to be the authoritative and representative voice of R&D in the UK. In this context, as the R&D landscape has changed, we have recognised the need to embrace such influences as globalisation and the need for multi-faceted collaboration, the reduction in budgets and changes in funding mechanisms, and the need to link development effort with end-user driven innovation. Our focus is on making the UK one of the most attractive global environments for R&D, with a particular emphasis on realising its potential to make a positive impact on social and economic wealth in the UK. The R&D Society welcomes the opportunity to make a response to the Government green paper.

Contact

The R&D Society would welcome publication of this response to enable greater open debate and would appreciate the opportunity for further discussion with the Secretary of State on the issues raised.

Further contact: Nico Macdonald, Chief Executive, R&D Society nico.macdonald@rdsoc.org +44 7973 377897

Executive summary

The case for defining an explicit national industrial strategy is self-evident: transforming science and technology-enabled innovation into social and commercial value is not something that can happen in a policy vacuum. The classical arguments for industrial policy in mainstream economics are based on two different justifications — market failure and system failure — which have constrained the nature and potential impact of intervention. We believe we need a third way of looking at the formulation of industrial strategy not constrained by these factors and base our approach on the widely acclaimed work of Dr Uday Phadke and Dr Shailendra Vyakarnam in their recently published book Camels, Tigers and Unicorns, an approach not constrained by systemic problems of boundary definition or the primacy of capital markets.

The green paper has identified 10 pillars on which it is basing the industrial strategy and has proposed some 107 actions, 43 of which are already underway. However, there appears to be limited recognition of the close coupling between fundamental research, applied research and development, innovation, the commercialisation of new products and services and the creation of new firms and industries. As a result much of the discussion still addresses science and technology policies in isolation without understanding the overall commercialisation narrative.

We are concerned that the wider set of drivers, and the relationships between them, which frame industrial strategy, are poorly understood and articulated. The potential policy levers available are much broader than those indicated by the proposed actions and questions. In the attached working paper submission, we expand on the points above and illustrate the sparse policy response in relation to the wider set of drivers in the commercialisation process. We have illustrated this using one of the pillars as example but the same conclusions can be drawn for other pillars in the green paper.

Towards a national industrial strategy

Authored on behalf of the Research & Development Society (www.rdsoc.org) by Board members Dr Uday Phadke and Dr David Hughes

This working paper is based on the extensive research carried out by Uday Phadke and Shailendra Vyakarnam over the last 15 years and reported more extensively in their recently published book ‘Camels, Tigers and Unicorns’. It provides an initial framework for building on the Government green paper on an Industrial Strategy.

1. Articulating a national industrial strategy

The case for defining an explicit national industrial strategy is self-evident: transforming science and technology-enabled innovation into social and commercial value is not something that can happen in a policy vacuum.

We believe that the remit for a national industrial strategy needs to be broad, as defined for example, by Warwick [1].

Industrial policy is any type of intervention or government policy that attempts to improve the business environment or to alter the structure of economic activity towards sectors, technologies or tasks that are expected to offer better prospects for economic growth or societal welfare than would occur in the absence of any such intervention…

We also believe, in line with the views expressed by Hughes and Crafts[2], that while it has been conventional to distinguish between ‘horizontal’ and ‘selective’ industrial policies, the distinction is not always clear-cut or helpful. All definitions of industrial policy have at their core a concern with economic growth, and especially productivity growth. Productivity performance depends on decisions to invest, innovate, and adopt new technology, which in a market economy will be sensitive to incentive structures: a wide range of government actions which comprise ‘industrial policy’ can impact on productivity growth. Science, technology and innovation policies need to be an integral part of industrial policy.

2. Current Approaches to the formulation of industrial strategy

The classical arguments for industrial policy in mainstream economics are based on two different justifications, which have constrained the nature and potential impact of intervention.

The market failure justification for intervention depends on three main arguments, which in practice have been used to actually constrain the scope of interventions: ‘infant-industry’ related capital market failures; ‘agglomeration’ externalities based on clusters; and ‘rent-switching’ where the state can provide finance instead of capital markets. All three arguments, in our view, give undue prominence to the role of capital vs other drivers in converting innovation into commercial value.

The other main argument used for state intervention is the idea of systemic failure, as summarised by Edquist[3]. The problem with applying this justification rigorously, as Edquist himself has noted, is the difficulty in defining system boundaries, which makes it harder to build detailed evidence-based arguments.

We believe we need a third way of looking at the formulation of industrial strategy not constrained by these factors: the approach based on meso-economic vectors we outline below provides an approach not constrained by systemic problems of boundary definition or the primacy of capital markets derived from the pseudo-neo-classical economic paradigm[4].

3. Weaknesses in current approaches

The approaches used so far have three key weaknesses:

  1. The failure to understand the close coupling between fundamental research, applied research and development, innovation, the commercialisation of new products and services and the creation of new firms and industries. Much of the discussion still addresses science and technology policies in isolation without understanding the overall commercialisation narrative.
  2. Inadequate understanding of market spaces, and how incremental and radical changes in these can form the basis for the creation of new commercial and social value, as industries are re-shaped. Understanding these dynamics is critical when developing sustainable industrial strategies.
  3. The wider set of drivers, and the relationships between them, which frame industrial strategy, are poorly understood and articulated. The potential policy levers available are much broader than those based on the primacy of capital.

4. The meso-economic approach to Industrial Strategy Formulation

This new approach to industrial strategy formulation consists of three key elements:

  1. An integrated approach to the commercialisation journey based on the Triple Chasm Model[5] which describes how science and technology enabled innovation is actually turned into valuable commercial and social outputs. This includes understanding the difference between base and application technologies, modified technology readiness levels, the diffusion of products and services and discontinuities in the commercialisation process
  2. Market spaces and market-space-centric value chains which describe the environments in which science and technology enabled innovation is deployed. Market spaces enable players to be grouped into categories which display common structures, processes and dynamics, distinct from conventional ‘backward-looking’ historic market segmentation. This approach incorporates some of the elements described by Edquist in the context of a systems approach, in particular agents, institutions and connections, but defining them more precisely.
  3. Twelve meso-economic commercialisation vectors which govern the trajectory and pace of commercialisation. The four ‘external’ vectors are: market spaces; proposition framing, competitive environment and regulation; customer definition; and distribution, marketing and sales. The six ‘internal’ vectors are technology development and deployment; product and service synthesis; IP management; manufacturing and assembly; talent, leadership and culture; and funding and investment. The two ‘composite’ vectors are commercialisation strategy and business models. These twelve vectors (with a larger number of sub-vectors) effectively provide a much better description of the key drivers and enable features of the dominant economic paradigm to be clarified. This is a far more robust approach to characterising the economic environment than that proposed by Hall and Soskice[6] based on ‘varieties of capitalism’, where the suggested differences in approach are rather subtle and not easily characterised.

5. Broad Implications for framing a national industrial strategy

The meso-economic approach leads to the following general conclusions:

The industrial strategy needs to address the different problems encountered by firms at different stages of the commercialisation journey, which requires more precise targeting of government policy than is currently the case: this is more important than aggregate measures of productivity across the economy as a whole

The scaling challenge is not well-understood. The biggest need for structured intervention is around Chasm II and the focus should be on creating many more ‘mittelstands’, rather than fixating on the need to build a small number of globally competitive players: market pressures, working from an established business base, will then enable some of the mittelstands to grow into global players more quickly and effectively.

Government policy and interventions need to address the wider set of meso-economic vectors, not just the current focus on funding and research.

6. Insights for defining a UK national industrial strategy

Figure 1: Overview of UK Industrial Policy Interventions

Figure 1 above illustrates our views on the need for a more radical approach to developing a new industrial strategy. We have used the ‘Investing in science, research and innovation’ pillar of the Green Paper for this but major gaps in policy actions can be seen in other pillars in the green paper.

This approach provides some specific insights:

  • The current actions defined in the Green Paper cover a small number of tactical measures but are mostly operational items. The only strategic component identified is a broad commitment to a headline number for increased R&D investment with little insight into how and where this investment will be made.
  • There is an urgent need to understand the difference between research and innovation-they are not the same thing. This means that the conflation of Innovate UK with the Research Councils is a mistake which is likely to hamper both fundamental research and the commercialisation of this research. For example, Innovate UK has chosen to work jointly with the Research Councils under the UKRI umbrella to define focus areas for the ‘Industrial Strategy Innovation Fund’. The result is a technology focus which is very similar to the ‘eight great technologies’ of the previous coalition government but expanded to a more general coverage. In so doing, it loses focus on which aspects offer the best opportunity for the UK. But equally important, this division creates technology silos which may prevent new opportunities from being recognised. For example, personalised medicine is almost certainly going to require radical manufacturing processes beyond what the current pharma industry use. Equally, the big prize from space is likely to be novel applications of the data collected, requiring innovative combination of satellite and digital processing capability.
Figure 2: New applications emerge from combinations of technologies

In particular, we believe that the acceptance of the need for an explicit industrial strategy provides the basis for creating a new more powerful innovation agency, distinct from the research councils, focused on the commercialisation and scaling challenges: we refer to this as Innovate UK II

  • The biggest obstacle to successful commercialisation is around Chasm II; this needs to be addressed in the industrial strategy-we believe the right way to do this is to beef up the Catapults, using them as a mechanism to create a significant number of new mittelstands. We refer to this as Catapults Mark II, which will clearly require a different business model.
  • Overall, understanding the twelve meso-economic commercialisation vectors should enable a more robust and calibrated set of government interventions to support wider components of the value creation process.
  • In particular, we note the huge potential impact arising from the state acting as a Charter customer, with this funding exclusively reserved for SMEs who will deliver the bulk of the innovation and new job creation in the future. This will require a much more radical approach to policies on ‘Improving procurement’ shown in the green paper which repeats old policies such as SBRI which have not demonstrated significant impact.

Notes

  1. Warwick, K. (2013), Beyond Industrial Policy, OECD STI Policy Paper №2.
  2. Hughes, A. and Crafts, N. (2013) ‘Industrial Policy for the medium to long term’, Foresight, Government Office for Science
  3. Edquist, C. (2005) ‘Systems of Innovation: Perspectives and Challenges’ in J. Fagerberg, D. Mowery and R. Nelson (eds) Oxford Handbook of Innovation, Oxford: Oxford University Press.
  4. Phadke, U. and Vyakarnam, S. (2017) Camels, Tigers and Unicorns: Rethinking science and technology enabled innovation, World Scientific Publishing
  5. The Triple Chasm Model identifies three chasms along the commercialisation journey for firms based on science and technology-enabled innovation: Chasm I describes the transition from product or service concept to working prototype; Chasm II describes the transition from early product or service to a fully functioning product or service with a commercially sustainable business model; and Chasm III describes the transition from early customers to the main body of customers as the firm scales significantly
  6. Hall, P. A. and Soskice, D. (2001), ‘An Introduction to Varieties of Capitalism’, in P. A. Hall and D. Soskice (eds.), Varieties of Capitalism: the Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press, 1–68

Biographies

Dr Uday Phadke

Dr Uday Phadke has worked in a wide range of academic, technical, commercial and strategic roles in Europe, North America and Asia over the last three decades. He has been actively involved in the building of over 100 technology firms over the last two decades, as an advisor, mentor and investor, working closely with technology transfer offices, innovation agencies, incubators and accelerators. He has also been part of the founding team at a number of technology advisory and consulting companies since the early 1980s. Since 1997 he has been Chief Executive of Cartezia, the technology business builder based in Cambridge, UK. He was Entrepreneur-in-Residence at the Judge Business School at the University of Cambridge from 2011 to 2016 and is now actively involved in several innovation policy development initiatives in Europe and Asia. His new book on science and technology commercialisation, Camels, Tigers and Unicorns, was published earlier this year. He has a wide and deep technical background in a number of technology areas, including aerospace engineering, digital signal processing, remote sensing, electronics, computing and software, medical diagnostics, engineering design, media and telecommunications, financial technologies and digital media.

Dr David Hughes

Dr David Hughes is currently a consultant advising on innovation strategy. He has held senior management positions with multinational companies including Ford, Lucas, GEC/Marconi and BAE Systems. From 2002–2006, he was the Director General, Innovation Group and Chief Scientific Advisor at the DTI and was responsible for developing the first Innovation Report (2003) and proposal to set up the Technology Strategy Board (now Innovate UK) which was launched successfully in 2004. He has a long standing interest in helping companies to maximise profitable growth through innovation strategies, hence his current interest in the industrial strategy debate. He is a Fellow and Trustee of the Royal Academy of Engineering, and a Chartered Director (IoD).