Willets is answering the wrong questions on innovation

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At EEF, we do our best not to get caught up in the circumstances of individual companies - it's the breadth of manufacturing that matters, and in most cases, we're not close enough to the details of a particular company to comment credibly on their issues.

Yet there is a story on the cover of the FT today about a plastic electronics company that got its start in Cambridge, but is headquartered in the US, bases production in Germany and has now received over £400 million in investment from a state-backed Russian company.

Unfortanetly this is an all-too-familiar story - a new technology is created in the UK, but is financed and produced outside the UK. That means the value of innovation - the jobs, the profits and the growth - aren't captured in the UK, but by our competitors instead.

In these instances, the policy debate becomes about what the UK government should or shouldn't be doing to support innovative, growing companies: in other words, should the state take stakes in innovative companies?

This was the starting point for Lord Mandelson's industrial activism and is the basis for Science Minister David Willets comment in the FT:

...there was "no way" any UK government agency would invest £400 million into a technology company to help its expansion. "Plastic Logic is a fantastic company which has developed its intellectual property in the UK and will continue to have deep roots here."

But this is the right answer to the wrong question.

Even if government did have the cash to invest in 100 such companies, the UK government shouldn't be taking these stakes - it leads to a picking winners approach that isn't likely to deliver value for taxpayers' money.

So what are the right questions? There are two that spring to mind:

  1. Why do companies like Plastic Logic leave the UK in the first place?
  2. What does it say about the UK's business environment that start-up after start-up finds it easier to create jobs and grow by expanding overseas?

These are harder questions to answer than whether government should simply splash cash around.

Just because a company develops IP in the UK, doesn't mean that the innovation is complete. Once a company proven that a new technology can work, they need to prove it is commercially viable. Put simply, innovation doesn't stop with the first prototype. It keeps going as companies try to prove they can produce the technology quickly, to cost and to scale. Otherwise the market will look elsewhere.

The UK is a great place for companies beginning to innovate, but problem for the UK is that we don't have a business environment that supports the costly and relatively risky, but complete process of innovation.

Russia has to use state-controlled companies to make investments because it doesn't have an entrepreneur-friendly business environment. That's fine - that's the decision Russia is making to remain competitive in the global economy.

But if the UK isn't going to compete on state-backed finance (and we don't think it should), then it needs to compete on the business environment - through substantive reforms to the tax system, by moving beyond bank-bashing to increase lending through greater competition in the finance sector, by actually getting rid of regulations and improving adult apprenticeships. Because we don't have a competitive business environment, the UK's innovations are being bought by the highest bidder.

While some of this is going on because of the government's Growth Review, the challenge for government is to ask the right questions - about how to keep the value of innovation in the UK - as it consults with businesses on how to support growth.


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