Choosing where to innovate: what matters?

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Innovation is crucial for growth, but in the UK spending on innovation has fallen since the start of the recession in 2008.

This raises the question, how can we encourage more innovation, and more innovation in the UK?

As with most activity, the main reason companies choose to innovate – and choose to innovate in a certain place – is because of the opportunities available in that marketplace. Fundamentally, it's about demand.

Mariana Mazzucato made this point in an article recently: arguing that technological and market opportunities are the main reasons companies will choose to locate in one place over another. She also mentions the importance of public funding for innovation. This can be key, as it signals government's committment to supporting innovative companies and technologies.

Below are a couple of examples of how competitor economies support innovation:

US policy recognises that government can boost demand through its procurement practices.

Mazzucato mentions the US organisations Defense Advanced Research Projects Agency and the National Institutes of Health, public sector bodies which are both actively engaged in procuring innovative goods and services. These act as a major spur for innovation in the US.

German policy provides an example that public funding through grants can boost innovation, especially when access to credit is tight.

Government can also provide an important spur to innovation through grants. In Germany R&D spending actually rose through the recession and the German grants schemes (ZIM and Thematic R&D) are credited with supporting this.

Importantly, both schemes are quite generous, both in terms of the total budget, and the amount available to individual companies. Grants are often also useful as they provide upfront funding for innovative projects, which companies can often struggle to finance.

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