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					The Evolution of UK Technology & Innovation Policy since the late 1970s
• • This paper underlying this presentation began as an historical account of UK Technology & Innovation Policy since the late 1970s by John Barber. In cooperation with Luke Georghiou it was then rewritten as a book chapter describing the relationship between the development of UK Technology & Innovation Policy and the construction of an explicit policy rationale – plans for the book fell through. Although several other government departments had an influence on UK technology development the Department of Trade & Industry had prime responsibility for explicit formulation of technology and innovation policy until 2007. The Treasury was closely involved during various key episodes. EU funding via the Framework Programmes and Structural Funds became increasingly important and exceeded DTI expenditure in some areas. John Barber worked in DTI from 1984 to 2006 and Luke Georghiou acted as an adviser and consultant to DTI from the early 1980s onwards. The paper also draws an a wider study of UK industrial policy during this period by Margaret Sharp. The paper remains work in progress.

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Timeline of developments in UK (DTI) Technology & Innovation Policy-1
• • • Fears that UK Business Enterprise R&D might collapse in the 1980/81 recession induced the Conservative Government to introduce Support for Innovation (SFI) the main elements of which had been put in place by the previous Labour Government. A joint review of industrial support carried out in 1984/5 by DTI and Treasury introduced a codified policy rationale and laid the foundations for systematic evaluation. In 1988 a white paper Command 278 ended support for single company R&D projects except for the smallest firms and placed the emphasis on support for collaborative R&D. In 1993 a review by the new Chief Adviser on S&T resulted in the refocusing of support for collaborative R&D on early stage technology (LINK programme) and adaption of technology for transfer to SMEs. The election of a Labour government in 1997 resulted in more emphasis on the exploitation of scientific research. In 2003 a set of reviews led to a complete revamping of Technology & Innovation Policy and Business Support more generally. In 2007 DTI was split between the Department for Business and Regulatory Reform and the Department for Innovation, Universities and Skills (DIUS). Support for the exploitation of science and longer term technology development (DIUS) is now separate from support for business innovation (BERR).
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Timeline of developments in UK (DTI) Technology & Innovation Policy -2
• In between these episodes of discrete change technology and innovation policy evolved more gradually. • New problems and issues were indentified and new policy instruments/schemes were designed to deal with them. • In most cases these were subjected to detailed appraisal by officials and those with weak rationales and indifferent chances of success weeded out. Final decision was taken by Ministers. • Monitoring and evaluation of existing schemes showed which offered good value for money and should be continued. • Some proposals for new schemes were conceived in response to high level political needs and were subjected to less rigorous assessment. They were less likely to be successful. • Policy making during these intervening periods was mainly bottom-up. Successful Technology & Innovation Policy requires that such bottom-up analysis be combined with top-down strategy
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Factors driving change in Technology & Innovation Policy
A move away from the interventionist subsidy driven policies of the 1970s towards more minimalist policies towards business. Strengthening of the belief in the efficacy of free markets and in the limitations of government action. Increasing belief that business knows best. Mistrust of anything which smacked of industrial policy or ‘corporatism’. Increasing Treasury suspicions about DTI support for, and relationships, with industry. Increasing adherence to a simple neoclassical models of resource allocations and economic growth. Continued adherence to a simple linear model of innovation. Privatisation particularly of PRSEs. Changing perceptions of the innovation process and its relationship to economic performance & social wellbeing. These partly reflected research into innovation processes and systems but mainly resulted from shifting views amongst ministers, senior civil servants and other stakeholders. Changing perceptions of world-wide developments in science, technology and innovation. Increasing focus on scientific research as the primary source of new technological knowledge. Emergence of naive visions of a ‘knowledge-based’ or ‘post industrial’ society. Emulation of policy developments in other countries particularly Japan in the 1980s and the USA more recently. Perception of these developments was often flawed. Assessment of UK performance at science, technology and innovation. Systematic monitoring and evaluation of policies and programmes. Main effect was during episodes of gradual change.
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Rationale for Technology & Innovation Policy
• • Identify some aspect of UK technology & innovation performance which is not regarded as satisfactory or some future worthwhile objective or strategy whose achievement is threatened. Identify a defect in the working of market forces, or in the functioning of the innovation system, that seems likely to prevent the weakness in performance from being corrected or worthwhile objective being realised (this is frequently called the ‘rationale’ by itself). Devise some form of government support or intervention which will eliminate or offset the defect at a cost which is expected to be less than the benefits thus realised. Marked emphasis on additionality both terms of inputs and outputs. Behaviourial additionality was often implied but not made explicit. Identifying the counterfactual was difficult as were the effects of displacement. Because many of the stakeholders thought about innovation in terms of neoclassical economics rationales for policy instruments relied heavily on market failure. An alternative approach would be to identify how Government might influence behaviour in ways which analysis of the National Innovation System (NIS) suggests have a good chance of being beneficial.
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The period to 1987 - SFI
• Prior to May 1979 the main emphasis of UK Industrial Policy was support for fixed investment and industrial restructuring plus some support for dissemination of best practice in industrial and business practices. Fears that the 1980/81 might result in a collapse of UK Business Enterprise R&D caused the Conservative Government to implement the innovation support schemes left behind by the previous Labour Government. The emphasis of Industrial Policy switched to “Support for Innovation” (SFI): - Selective grants to both large and small companies of up to 25% of the eligible costs of R&D projects; - In the case of the largest companies memorandum of understanding were negotiated which set out what the company would do in exchange for support; -Schemes designed to build up the UK capability in a particular area of technology via support both for R&D and investment in advanced equipment; -The Microelectronics Applications Programme (MAP)which provided a range of support for technology transfer & the spread of best practice. These programmes were supplemented by the introduction of support for collaborative research: the Joint Optoelectronics Research Scheme (JOERS) in 1982 and the much bigger Alvey Programme in 1983.
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Industrial Support Review 1984-5
• • Joint review of industrial support (ISR) by DTI & Treasury. Not published but many of the conclusions were reflected in “Current policy practice and problems from a UK perspective” by John Barber & Geoff White in “Economic policy and technological performance” edited by Partha Dasgupta and Paul Stoneman, CUP 1987, reprinted 2005. – Set out a five point market failure rationale for technology and innovation policy. – Risk & Uncertainty; – Information possessed by market is limited/inadequate e.g. in respect of novel technologies; – Barriers to competition and non-competitive market structure e.g. High upfront R&D costs; – Externalities . – Path dependency/dynamic inefficiency. This list reflected the concern at the time to justify single company support for innovation in a situation where the government was strongly committed to the free market. Also by 1984 increasing demand for SFI by industry was threatening to outstrip DTI’s budget. The ISR also contained a recommendation for a proforma which would govern the appraisal, monitoring and evaluation of DTI industrial support. This proforma developed into the ROAME system which first appeared in 1986. In returned Treasury agreed to leave the detailed formulation of policy to the DTI.
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1985 to 1987 (1)
• • • • ISR was a codification of policy rather than a root and branch review. But after 1985 there was a significant shift of emphasis away from single company support towards support for collaborative R&D and technological transfer. Decision to reduce amount of support going to projects ‘near the market place’ on the grounds that it generated fewer externalities (and was less risky). It is not always true that ‘near market’ implies a weaker ‘market failure’ rationale. Evaluation of those large companies which received most support experienced difficulties in establishing its additionality and value for money. In any case large corporates were now in a much stronger financial position than they had been in 1980/81. There was evidence that the methods of financial control used by many large UK companies could result in sub-optimal capital rationing, short-termism and myopia leading to insufficient investment in R&D. However using public money to offset this could involve significant moral hazard. In 1986 the DTI Assessment Unit (AU) was established to undertake evaluations of Technology & Innovation policy. In 1987 it carried out an evaluation of single company SFI given to small and medium sized firms. This was shown to have yielded excellent value for money.
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1985 to 1987 (2)
• • • • • The Conservative Government’s Next Steps Initiative was designed to improve management of the functions carried out by government and where appropriate to privatise them or vest them in arms-length agencies. As a part of the initiative a review began in 1986 of the four DTI Research Establishments – NPL, NEL, LGC and Warren Springs Laboratory – the end of this episode only came in 1994 see a later slide. Much of their work was concerned with measurement standards so DTI undertook an analysis of the economics of measurement standards – there was little extant literature at time. This revealed the importance of public goods as a rationale for technology and innovation policy – about a third of the budget consisted of support for standards and associated statutory and regulatory activities. In 1986 DTI with the help of PREST helped the Advisory Committee on Science & Technology (ACOST) to undertake a study of ‘The Barriers to Growth in Small Firms’. This showed how complex interactions between market failure and the problems of change and management bureaucracies in small firms can inhibit growth. This report did not find favour with DTI at the time and although various measures have been introduced over the years to encourage the creation and development of innovative small firms the systematic approach suggested in Barriers to Growth has never been properly adopted.
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ALVEY PROGRAMME 1983-1987
• • • • • Collaborative programme of IT research with a planned spend over 5 years of £350m - £200 government + £150 Industry but not all new money. A response to the introduction in 1982 by Japan of the ICOT 5th Generation Computer Programme. Included research into VLSI, Software Engineering, Intelligent Knowledge Based Systems, Man-Machine Interface plus a programme of large-scale demonstrators. The inability to find a document setting out the rationale for Alvey was another reason for the ISR. The Director of Alvey established a programme of real-time evaluation at the outset. This was undertaken by PREST & SPRU with help from LBS. Evaluation continued until 1990 to allow time for the results of the research to be embodied in new products and processes. At this stage Alvey had mainly succeeded in its technical objectives but failed in its commercial/industrial objectives. However additional benefits have continued to flow even up to the present day. The Alvey evaluation developed many of the methodologies for evaluating long-term collaborative R&D programmes. Several members of the SPRU (who subsequently set up Technopolis) and PREST teams became international evaluation experts and made major contributions to the evaluation of the Framework Programmes and of similar collaborative research programmes in other countries.

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1988 to 1997 (1)
• In 1997 of Lord Young & Kenneth Clarke became DTI Ministers. Review of Business Support including that for Technology & Innovation undertaken by Treasury & Cabinet Office with limited involvement of DTI officials. Results set out in White Paper Cmnd 278 “DTI- The Department for Enterprise” published in January 1988. Cabinet commissioned review of DTI R&D support programmes (Hicks) accompanied by parallel reviews of other departments R&D programmes: – SFI and all single company support abolished except for firms with < 25 employees (SMART). – Evaluation evidence was pointing towards abolition of single company support for large companies but retention for small & medium sized firms: evaluation of single company SFI support for the latter was not published. – Main emphasis to be on support for collaborative R&D and technology transfer. – Alvey Programme which was originally intended to last for 10 years replaced by much more modest scheme the Information Engineering Advanced Technology Programme (IEATP): IT86 (Bide) committee recommendation for applications programme rejected. UK firms left to apply to ESPRIT II much larger than ESPRIT I.

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1988 to 1997 (2)
• The white paper envisaged four types of support four collaborative R&D – LINK: Collaborative research undertaken jointly by forms & HEIs. – Advanced Technology Programmes (ATP) :Longer term industrially-led collaborative R&D projects between UK firms into advanced technologies. – EUREKA: Support for international R&D collaboration. Never high priority. – General Industrial Collaborative Projects (GICP) aimed at helping low and medium technology SMEs vi an RTO or industrially orientated university department. Such programmes take much more time to set up than allocating support to single company R&D projects. Thus the budget was significantly under-spent in the several years after 1988. Fears that Treasury might cut allocation led to lax ex-ante appraisal plus extensive recruitment of industrial secondees in order to administer the budget. Many new ATP schemes were of doubtful merit and a review carried out in 1993 by the then DTI Chief Adviser on Science & Technology recommended that many be closed down. Thereafter support for collaborative R&D was mainly via LINK and GICP.

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1988-1997 – Rationale for Collaborative R&D
• • • • Concentration of R&D support for collaborative R&D required development of appropriate rationale. From the firms point of view the benefits of long term research are uncertain in kind and in who can benefit from them (externalities); Much of the output of research is knowledge which is a public good. Even if the firm can exploit this knowledge others can too; Collaboration can reduce uncertainty by increasing the breadth of the research and by partially internalising externalities. It also allows the sharing of knowledge and expertise; But there are barriers to collaboration – finding the right partner, increased transaction costs and risk of disputes e.g. over IPR; Much collaboration takes place without government intervention but in other cases government can facilitate collaborations which offer the prospect of net economic/social benefits; This can be achieved by matchmaking, by enhancing participants vision of what research should be undertaken, by acting as a referee to ensure fair play as well as by the provision of financial support.
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1988-1997 Evaluation of DTI’s four International Technology Transfer Schemes
• These schemes were small but their evaluation in the late 1980s and early 1990s made DTI think carefully about the process of technology transfer. With help from Peter Swan was described as consisting of five stages: – Awareness by the firm of a technology relevant to its needs; – Investigation by the firm of exactly how acquisition of the technology in question might improve its performance; – Transfer of the technology from the identified source to the firm; – Absorption of the technology by the recipient firm; – Exploitation of the technology by the recipient firm. Only when the exploitation stage has been successfully completed will the firm have fully acquired the technology concerned. Firms may need help at each stage with different ‘market failures’ applying. The recipient firm will require the complementary knowledge and skills to absorb and adapt the technology and an actual or potential presence in the markets in which it can be exploited. Required more careful consideration by DTI economists of the nature of knowledge and information (with help from Stuart Macdonald who was then working in DTI). A similar model was develop by John Bessant et al in a study carried out for DTI in 2005

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Effect of Cmnd 278 on the distribution of R&D support
• Recommendation 21 of the 1988 Hicks Review was to “Monitor the effects upon small and medium sized enterprises of the changes in innovation policy and to consider whether further measures should be introduced” and to report by June 1990. The report concluded that while the real total value of R&D support for all firms fell by one-third it fell by 65% in the case of firms with 50-199 employees and 80% in the case of firms with 200-249 employees. The value of support going to firms with less than 50 employees remained unchanged because of the introduction of SMART Support for large firms fell by only one-fifth since they were the main recipients of grants for collaborative R&D. Consequently in 1991 support for single company R&D projects was restored for independent companies with 25 to 249 employees (the DTI had in the meanwhile come into line with the EU definition of an SME ) with the introduction of the SPUR scheme. SPUR never seemed to be a great favourite with Ministers and later become the SMART Special Facility which was subsequently abolished.
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1988 to 1997 Manufacturing into the 90s
• • • • • • The Manufacturing into the 90s programme organised a road show in which videos of SMEs facing particular but common problems was shown to their peers. These were followed up by workshops which discussed how SMEs facing similar problems could solved these along similar lines to the examplar firms. The road shows were very successful in inspiring SMEs to take effective problem solving action. Indeed many of them were impatient with the workshops wishing to proceed immediately to the action phase. The existing rationale for Man90s appeared to offer no justification for its success (worked in practice but not in theory). It quickly became clear that DTI was faced with instances of bounded rationality. Managers of SMEs are very busy people can only focus on a limited number of issues at any one time and have a limited capacity to absorb and process information. Show them an example of a firm like themselves which found an effective solution to a problem which is also troubling them and they will adjust their focus and take action. This is a good example of how policy makers can improve business performance by holding up a mirror in which business can see itself. Advice from consultants does not in general appear to be so effective partly because many SMEs do not trust them. However consulting organisations which run inter-firm benchmarking clubs are improving the performance of participating firms in a roughly similar fashion.

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1988 to 1997 (3)
• In April Michael Heseltine was appointed President of the Board of Trade. • He appointed Geoff Robinson, Director of the IBM Hursley Laboratory, as DTI’s Chief Adviser on Science and Technology. • In 1993 Geoff led a review of DTI Technology and Innovation Support Schemes which concluded many of the Advanced Technology Progammes (ATPs) introduced following the 1988 White Paper were not likely to offer value for money and recommended that many of them be shut down. • Future support for collaborative R & D was mainly confined to LINK and adaptation of technology for transfer to SMEs. The main emphasis was to be on awareness, technology transfer and spread of best practice mainly, though not entirely, to SMEs. • There was to be a much greater emphasis on improving the climate for innovation. • Geoff Robinson is said to have put proposals to Heseltine for new technology support but the President does not appear to have been interested

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1988-1997 DTI PSREs
• DTI had four research establishment which had become Next Step Agencies in the late 1980s :
– National Physical Laboratory (NPL) mainly concerned with measurement standards; – Laboratory of the Government Chemist (LGC) responsible for analytical measurement; – National Engineering Laboratory (NEL) had responsibility for flow measurement but mainly did engineering research; – Warren Springs Laboratory which covered environmental issues.

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It became clear that Mr Heseltine was not a fan of government laboratories and a study was undertaken with a view to privatising them. Because of the public good nature of their standards work it was accepted that NPL and LGC must remain independent of commercial interests. NPL remains in government ownership but is privately managed and LGC became a company limited by guarantee owned by the Society for Chemistry. NEL was sold to Siemens while Warren Springs was merged into AEA Technology. Guarantees as to the level of future government funding were made in respect of the next few years. DTI funding of standards remained an actively debated issue for some years afterwards.
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General Policy towards PSREs
• • • One of the weaknesses of the rationale for Technology and Innovation Policy throughout the period has been the inability to define a role for technology-base institutions which were not universities but were not wholly in the private sector. These include public sector research establishments (PSREs) and industrial research organisations. The experience of other European countries and the US show these institutions can play a useful role in filling the gap between academic research and fully commercial R&D and in anticipating the needs of firms before the latter are fully aware of them. They can also be a source of disinterested advice on technologies with which a particular firm or sector is unfamiliar. They can play a useful role in developing networks and promoting collaboration between firms and universities, in leading collaborative research projects and in the implementation of technology and innovation policy. The inability or reluctance to define a rationale for such organisations has led the UK to privatise many of them and their relative absence on the UK scene may be seen as a relative weakness in our technological infrastructure. Their absence can put the UK at a disadvantage when applying for EU funding. In recent years universities have been somewhat encouraged to move into this role particularly at the local level but there are limits to which they are able or even should play this role.
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Policy towards RTOs
• The UK has a strong set of private Research and Technology Organisations (RTOs members of AIRTO) but policy towards them has tended to oscillate. • Too much reliance on government support sustained some inefficient and non-dynamic industrial research associations. Reducing that support revitalised some RTOs, turning them into effective commercial RTOs, and contributed to the demise of those unable to stand on their own feet. • However some of the more successful and technologically sophisticated RTOs have become highly reliant on custom from abroad as UK firms fail to appreciate the value of what they have to offer. • Lack of consistent public financial support inhibits RTOs from developing and maintaining the capacity to help smaller, less technologically sophisticated and less innovative UK firms. • Helping such companies is often not a commercially attractive proposition. • Government support can contribute to the costs incurred by a RTO in defining what such firms need and make the latter more confident and better equipped to source those needs commercially.
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Realising our Potential: A Strategy for Science, Engineering and Technology
• • • • White Paper Command 2250 published in May 1993. Cmnd 2250 ushered in the current era where the direct exploitation by industry of the results of scientific research is seen as the key objective of innovation policy. Office of Science & Technology (OST) became part of DTI in July 1995. Industry-Science Relations (ISR) is sometimes seen as merely a matter of improving linkages between the two. However it is more important – (a) to ensure that industry has the complementary knowledge, capabilities and assets to exploit the results of scientific research and – (b) that universities are given the frameworks and incentives to work with industry. Also important to recognise that the process of innovation differs between sectors and often between small and large companies and that this significantly affects the way in which firms in different sectors or of different sizes can and need to interact with the Science Base. Command 2250 also introduced the Foresight process.
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1994 to 1996 Competiveness White Papers
• • The 1992-97 Conservative Government placed a strong emphasis on Competitiveness and the contribution which Science, Technology and Innovation could play in maintaining and increasing the international competitiveness of the UK Economy. This was presented in a series of Competitiveness White Papers under the title ‘Forging Ahead’ in 1994, 1995 and 1996. In addition to the promotion of ISR these white papers placed emphasis on: – Raising awareness of the importance of innovation; – Securing access for UK companies to the widest range of world technologies and knowhow; – Facilitating co-operation between organisations at home and overseas; – Spreading best practice amongst firms; – Encouraging a supply of people with the right skills; – Ensuring that regulation in the UK and in the EU does not inhibit innovation and the legislative framework is permissive rather than restrictive; and – Ensuring that the Governments activities in Science and Technology contribute to National Competitiveness. The White Papers introduced a number of new technology & innovation policy measures but these were often dreamed up at short notice and were not subject to rigorous ex-ante appraisal. Those drafting the White Papers lack knowledge of innovation processes and systems and slipped too easily into a framework based on the linear model of innovation.
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1988 to1997 - Policy Formulation (1)
• During most of the 1990s changes in DTI Technology & Innovation policy was largely driven by a bottom-up process whereby DTI Industry & Technology Divisions put forward proposals for new schemes. They had a positive incentive to do this in order to preserve budgets and jobs when existing schemes finished (normally after 3 years) and where possible to increase the scope of their activities. These proposals were submitted to a programme committee in the form of a ROAME statement which described the proposal, set out the rationale, objectives and appraisal and how the new scheme would be monitored and evaluated (in outline only). The proposal would be examined at a meeting in which the main interrogators were DTI economists, programme managers from other areas and sometimes a member of the Finance Directorate. The key part of the discussion was to establish clearly what the scheme was trying to do, how it propose to do it and what the key deliverables might be. Once this was done the economists could define a valid rationale if one existed. Subsequent evaluation showed that proposals which stood up well to this process had a good chance of success.
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1988 to 1997 - Policy Formulation (2)
• Proposals which were handed down from on high (to give something to announce in a White Paper on ministerial speech) usually escaped the full rigours of the appraisal process and had a more patchy track record. The Competiveness White Papers should have provided an opportunity to inject some top-down strategy but this was not taken. Top-down proposals for new technology and innovation support programmes which are conceived after a thorough analysis of innovation performance & processes, opportunities and threats are a key part of policy formulation. The ROAME process then becomes the means by which the details of such proposals are properly tested. Not all well-founded top-down proposals will survive this process as the devil is often in the detail. At the same time proposals for new programmes can properly emerge from evaluation, research or detailed analysis. These should then be tested for how well they fit the overall strategy and vision. Good policies and programmes are most likely to emerge from such iteration between the top-down and bottom-up approaches.

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1997 to 2001
Election of a Labour Government in 1997 did not lead to much immediate change.
The broad pattern of support for Science, Technology and Innovation remained unchanged greater emphasis was placed on encouraging the commercial exploitation of scientific research. Science funding was significantly increased and the Treasury are took a much greater interest in Science Policy reflecting the concerns of the Gordon Brown. New schemes e.g. Science-Enterprise Challenge & HEIF were introduced to encourage knowledge transfer and the creation of spin-out companies from Universities which were encouraged to make more use of their expertise to help UK Business. An R&D tax credit was introduce in 1999 for SMEs and in 2002 for larger companies. The overarching objective of all micro-economic policies changed from Competitiveness to the need to increase productivity. While DTI Ministers and the Treasury were convinced of the importance on funding and exploiting scientific research there was a much weaker appreciation of the need to raise the technological competence and propensity to innovate of existing UK firms. Outside of a relatively small group of officials and experts and those in business directly concerned with technology and innovation understanding of the nature of innovation remain poor. Lack of a constituency for a well thought out technology and innovation policy. Spending on DTI support for technology and innovation remain flat. OECD figures suggested that the UK spent less as a proportion of GDP than nearly all other advanced industrial countries. 1997 to 2001 was typified by the announcement of minor and repackaged initiatives.
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UK Reviews of Innovation Policy and Business Support 2000-2003
• In 2001 Patricia Hewitt became Secretary of State and within a short period the following policy reviews were set in train: • Review of all Business Support Measures carried out by external consultants; • Innovation Review undertaken by newly created Innovation Group with participation of Treasury officials and outside experts; • A review by Richard Lambert of Science-Industry Links; • Innovation Report “Competing in the Global Economy – The innovation challenge” published in December 2003; • Supporting economic analysis published as DTI Economics Paper No. 7 “Competing in the Global Economy – The innovation challenge”; • Two internal reviews of organisational structure and budget management.

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Business Support Review
• • • Covered all business support including that for technology & innovation. Prompted by complaints that system was too complex, DTI had 400 schemes. Complaint was exaggerated; most money spent via a dozen or so schemes and most of the small schemes were technology transfer schemes customised to the needs of particular sub-sectors. Both research and evaluation results suggest that such customization is necessary. Mainly a signposting/marketing problem. Large number of schemes was a barrier to understanding by ministers, senior officials and other high-level stakeholders, a governance issue. The outcome was a rationalisation of DTI support. Ten new business support ‘products’ were introduced including: – Knowledge Transfer Partnerships (KTPs) replacing the longstanding and very successful Teaching Company Scheme; – Support for investigating an Innovative Idea which provided subsidised guidance on managing an innovation project; – Support for Collaborative R&D; – Support for Knowledge Transfer Networks which inter alia replaced Faraday Partnerships. All existing support schemes were closed. The review also introduced a new system of exante appraisal, monitoring and evaluation.
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Innovation Review (1)
• The Innovation Review used a National Innovation System Framework. This was characterised by seven critical factors which affect innovation:
– Access to sources of new technological knowledge including the Science Base and other firms; – Capacity to absorb and exploit new knowledge and improved cultural attitude towards creativity in firms; – Access to finance both external and internal; – Competition, which is both a driver and product of innovation, and entrepreneurship; – Customer demand for innovative goods and services and suppliers as a source of innovative inputs; – The regulatory environment including the role of intellectual property rights, and – Networking and collaboration.

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The Review attempted to assess how far UK innovation performance was meeting the challenge of intensifying international competition resulting from globalisation and the acceleration of scientific and technological change. UK companies will need to compete on the basis of unique value and innovation is central to this. The Review drew on analysis by DTI economists, on a range of academic and other research, on advice provided by an Academic Advisory Panel as well as on wider processes of consultation.
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Innovation Review (2) – Main Conclusions on UK Innovation Performance
• The Innovation Review Report was published in December 2003. It concluded that:
– UK productivity is lower than that of other major industrial countries. – UK Innovation performance is, at best, average compared to other major industrial countries. – The UK is unable to take advantage of is relatively strong science base because of low levels of spend on innovation. – The above is true despite the marked relative improvement in many aspects of UK economic performance e.g. macro-economic stability, micro-economic context for competition since the early 1980s. – The UK needs to move to new phase of economic development from competing on costs to competing on unique value and innovation.

• In arriving at these conclusions the Innovation Review also drew on a Report by Professor Michael Porter published in May 2003. • Porter pointed out that the UK needed to move to competing on unique value and because of earlier reforms was well placed to do so. It also pointed out a need to improve networking among UK businesses.
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Innovation Review (3): Policy Proposals
• • • • • • • • • • Introduce a Technology Strategy. Give Regional Development Agencies (RDAs) a greater role in stimulating innovation and in facilitating knowledge transfer from the Science Base. Make more use of public procurement to encourage innovation. Create a more demand led, responsive and flexible training system (Separate White Paper on skills published in 2003). Enhance exploitation of scientific research. Encourage Networks, clusters and collaboration. Foster the Spread of Business Best Practice. But the implementation of these proposals was to be through the ten new business support products (replacing around 400 schemes) introduced as a result of the Business Support Review. This has acted as a constraining influence since innovation differs considerably across sectors and the various aspects of the innovation process also need different approaches. The implementation of the reviews on organisation and budget management also imposed constraints on implementation

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Innovation Review (4)
• Core responsibility for appraisal of new technology and innovation support proposals was move to a business support analytical unit and taken away from the economists responsible for advice on science, technology and innovation. It became more likely that appraisal would constrained within a framework of textbook neo-classical market failures and not take sufficient account of the knowledge gained of the workings of innovation processes and systems in the last 20 years. However the Innovation Review did take forward development of the rationale for innovation policy in several respects. The recognition by, particularly by the Treasury, of the importance of demand in driving innovation was an important step forward. The mixture of ‘market failures’ which create a role for the customer in stimulating and facilitating the development of new products and services is complex involving uncertainty, asymmetric and/or limited information, capital market failure and missing markets. The adoption of an innovation systems approach and the recognition of the importance of networking introduced the possibility of coordination and systems failures.
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Lambert Review of Industry Science Links
• Drew attention to deficiencies in UK industrial demand for knowledge. • Stressed the importance of networking and collaboration. • For some time policy on Industry – Science Relations (ISR) had been dominated by a misperception of the ‘Silicon valley’ effect. Many of the key Valley firms were spin-outs from existing companies but UK policy focussed on spin-out companies from universities. • The review suggested that less stress be placed on university spin-outs. • There was also a belief that US universities were much better at transferring knowledge to industry but outside of a few elite institutions this is not true. • The review expressed some warnings that over-enthusiastic exploitation of IPR by universities may not be conducive to knowledge transfer and may inhibit research. • The problem of industry-science relations is a good example of an innovation system failure with a number of individual ‘market failures’ combining to produce a systems effect.
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Abolition of DTI July 2007
• • • • In July 2007 DTI was split with responsibility for Science and Innovation Policy passing to a new Department for Innovation, Universities & Skills (DIUS) Technology Strategy Board (TSB) given responsibility for managing business support and innovation development programmes costing around £200m p.a. These programmes include support for collaborative R&D, Knowledge Transfer Networks, Knowledge Transfer Partnerships, Innovation Platforms, Emerging Technologies etc. Substantial amounts of support for Technology & Innovation continue to be administered by the Regional Development Agencies (RDAs) including grants for R&D undertaken by individual SMEs. Policy responsibility for relations with business sectors and general business issues rests with the Department for Business Enterprise & Regulatory Reform. Split between DIUS and BERR plus delegation of responsibilities to RDAs and the TSB risks fragmentation of technology and innovation policy and may reinforce the tendency to concentrate to much on the exploitation of scientific research. TSB which is based in Swindon risks capture either by Research Councils or by certain business sectors. Increasing Important role in policy analysis and promotion of innovation of the National Endowment for Science, Technology & The Arts (NESTA) which is funded by the National Lottery.
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Development of Rationale(1)
• Market failure rationale set out in the 1985 Industrial Support Review listed risk & uncertainty, incomplete information, indivisibilities and externalities plus a version of path dependency. Discussion of SFI for large companies and the evaluation of Managing into the 90s added bounded rationality. The debate on short-termism in the late 1980s and early 1990s showed how it could result from a mixture of uncertainty, asymmetric information and bounded rationality. The review of standards laboratories begun in 1986 brought public goods into the picture. Discussions of technology transfer around 1990 encourage deeper analysis of the nature of information and how markets in information fail and drew attention to the importance of firms’ in-house capabilities. John Kay’s work leading to his 1993 book “Foundations of Corporate Success” drew attention to the role of pathological games, firm architecture and intangible assets. The expansion of support for collaborative R&D in the early 1990s required DTI to think more carefully about how various market failures combine to justify such support. The gradually adoption of a national innovation systems approach towards the end of the period focussed attention on barriers to networking and system failures more generally.

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Development of Rationale (2)
• The various ‘market failures’ overlap and are not fully independent of one another. Thus inadequate information may be both a cause and a result of missing markets and is a major cause of uncertainty. We do not have a fully specified dynamic model of a capitalist economy which would enable us to identify a list of precisely defined market failures and even if we did some of the market failures might not easily relate to real world features. Many of those involved in UK technology and innovation policy find this journey from standard economic textbook market failures to a broader view of the rationale uncomfortable. Typically this was because they were not familiar with the large body of grounded research into innovation processes and systems, into the internal working of firms and into the creation, diffusion, embodiment and exploitation of knowledge. Douglass North’s statement in his 1993 Nobel Lecture that Neo-classical theory is an inappropriate tool to analyse and prescribe policies to induce economic development does not appear to have impacted on many UK economic policy makers.

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Rationale(3)
• This history suggests that the development of the ‘market failure’ element of the rationale was mostly driven by the introduction of new programmes or the evaluation of existing programmes and that on the whole the identification of new rationales did not drive changes in policy. One reason for this is that until the 2003 Innovation Review, changes in policy regimes tended to be driven by high level political perceptions about what the Government should do about UK Technology and Innovation performance that were not based on an analysis of innovation as it really is. There has been no widely accepted diagnosis of the problems affecting UK Technology and Innovation performance, their implications for wider economic performance, and how they should be tackled. There has not been a constructive ongoing discussion in the media which would allow such a consensus to be created and there is an absence of an informed community of stakeholders able to provide the ballast needed to prevent inadequately considered policy changes from being implemented. NESTA appears to be trying to put this right. Innovation Policy remains a Cinderella area – R&D tax credits aside the budget has remained broadly unchanged in cash terms since the mid-1980s. A market failure sees government standing outside the innovation system intervening to correct ‘failures’. By contrast a NIS approach sees government more as part of the system itself. The UK needs to move towards this latter standpoint.
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