Innovation and Public Policy in the North of England
The rise of innovation as a theme within public policy debates has been striking. It is nebulous in this context,
but nevertheless it exists, and policymakers hold an increasing desire to place innovation at the centre of a
variety of strategies.
It has not always been thus. Until relatively recently innovation was considered to be exogenous from the
neoclassical economic model. In other words its emergence and development were not influenced by factors
over which we as humans have control; instead it appeared like manna from heaven. The acceptance and
recognition of innovation as something akin to an additional factor of production undoubtedly opens up new
possibilities for public policy interventions.
Innovation is typically considered by economists to be a ‘public’ good, as it can be considered non-rival. This
means that any benefits derived from an innovation can be felt multiple times without each ‘user’ diminishing
the propensity of the others to gain from the innovation. This is in one sense remarkable; one innovative
improvement in the provision of public services can theoretically be replicated ad infinitum to the benefit of
numerous service users. This is very much the case in the UK; of the 50% of firms that are considered to be
innovators, 80% of these are follower innovators and only 20% are novel innovators. However, innovations
don’t just appear. They typically arise as a result of often sustained and targeted investment, and it is natural
for firms to seek a return on this investment wherever possible.
Moreover, the industries that display the highest levels of innovative activity are typically somewhat
oligopolistic (Aghion et al) and have sophisticated ways of protecting their investment in developing
innovations. The pharmaceutical industry presents the most compelling, but by no means the only, example of
this. The industry is dominated by large multinational firms that are adept at utilising an advanced patenting
system to protect the returns to their investment, principally in research and development.
Whether public agencies should seek to capitalise upon the market value of innovations that arise from public
investment is a whole debate in itself. If public investment stimulates an innovation that is then capitalised
upon by firms for private gain, is this an appropriate use of public money? The answer is probably yes, because
positive spillovers – despite being notoriously difficult to quantify – are generally considered to offer social
benefits beyond the attributable monetary value of the innovation. In other words, the free market often
innovates at a rate which is below the socially optimum level.
So, the government responds. A raft of strategies later – including a very recent one dedicated to innovation –
and innovation is firmly established as a driver of productivity (HMT 2004) and a crucial component of the
new, knowledge economy. As this debate has progressed, there has been a growing realisation that a national
approach to innovation performance is useful only up to a point. The UK’s innovation performance is
geographically non-uniform. Some areas generate a large number of process innovations, others are more
adept at product innovations, and some struggle to produce either. Although analyses of innovation should
not begin and end at levels of R&D investment and patenting activity, the quantitative data available on
investment in R&D are strong and readily available at a sub-national level. This makes cross-comparison
straightforward, likewise with patenting activity. ippr north’s Entrepreneurship and Innovation in the North
(Johnson & Reed 2008) explored the economic position of the three regions that make up northern England. In
short, levels of innovation by conventional measures are way below those in the South of England. Levels of
business investment in R&D remain strikingly low in the North East and Yorkshire and the Humber, and
government investment in R&D is absent in the North East.
As for direct policy interventions, further work has shown that returns from venture capital investment
outperform government investment (Kortum and Lerner). On this basis, the government’s policy of
encouraging private investment in R&D through tax credits makes a lot of sense. This programme has cost the
Exchequer £1.8billion over 6 years to 2006 in forgone revenue, but the evidence suggests that incentivising
private firms to invest in R&D is ultimately more effective than directly funding government schemes. The
counter argument might be that the firms that have taken advantage of the R&D tax credit might well have
undertaken the same programme regardless, so the incentive has served only to weaken the position of the
public finances. Furthermore, if take up of the initiative has been predominantly by firms who were already
conducting R&D this is likely to exacerbate territorial inequalities, as the majority of these firms are located in
the Greater South East of England.
To conclude, innovation is a welcome addition to the framework used to understand the development of the
UK economy in the 21 century. Despite its increased exposure, it remains a complicated term and it appears
that the policymaking fraternity are not within touching distance of a comprehensive understanding of what
stimulates innovation. Should we ever get there, it’s important that the economies within the UK that are
underperforming are treated sensitively, and that this enhanced understanding leads to a more sustainable
economic future for all nations and regions within the UK, and not just for those that are currently excelling.
Michael Johnson is a Research Fellow at ippr north. www.ippr.org/north