How do we encourage the innovation that will drive the recovery?

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Recent weaknesses in consumer spending, and upcoming government cuts mean that any growth will have to be driven by two things: exports and business investment.

As I mentioned on Tuesday, the government has recognised how important innovation is for export competitiveness, and as a part of business investment. So how can we encourage more innovation?

Innovation isn't easy. It's a frequently repeated phrase, and it's true for three key reasons:

  • Innovation is inherently risky
  • Innovative companies often do not reap all of the benefits of their ideas
  • Technical barriers and skills shortages

Developing new ideas is expensive, and it can be a somewhat open-ended task, making returns on investment uncertain. When the returns are not clear investors may be inclined to steer towards tried-and-tested lower-risk alternatives. Sometimes this applies to the type of innovation. It is less risky to make incremental changes when game-changing innovations can require new infrastructures which can take time to put into place.

If companies will not reap all of the benfits from their investment, it can reduce the incentives to make an investment in the first place. This point is perhaps more academic but if something will benefit people beyond those who pay for it, this can lead the market to underinvest. A potential example of is low-carbon technologies, where some of the potential beneficiaries are people who have not yet been born.

Technical barriers and skills shortages can prove costly to firms which need to innovate quickly. In many cases this can be overcome by collaboration with customers or a company's supply chain. Other companies work with universities, but some still find it difficult to find the right partners to work with.

Of course manufacturers will innovate anyway, most find that they have to do so in order to compete, but there is – and the government has recognised this – a role for the government to play in reducing barriers and providing opportunities. In our Innovation Monitor (2010) we made three key points for government:

  • Funding is best targeted towards existing clusters and centres that already reflect a future competitive advantage.
  • The UK's research is already world-class: an increased focus on development and commercialisation is needed.
  • Prizes can stimulate investment in innovation (more on this from last month's blog)

There have been movements in the right direction: the government has moved towards developing existing clusters with its new Technology and Innovation Centres, which should also support collaboration between business and universities. In addition, David Willets has also expressed an ambition for the UK to run a high-status Engineering Prize.


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