Competing in the Global Economy ?The Innovation Challenge
The DTI drives our ambition of rosperity for all?by working to create the best environment for business success in the UK. We help people and companies become more productive by promoting enterprise, innovation and creativity.
We champion UK business thesis at home and abroad. We invest heavily in world-class science and technology.
We protect the rights of working
people and consumers. And we stand up for fair and open markets in the UK, Europe and the world.
The recent DTI strategy showed that to be truly effective, policy must be based on a
rigorous analysis of all the available evidence. At the start of the Innovation Review,
economists and statisticians in DTI抯 Innovation Group came together to review the
available evidence on the UK抯 innovation performance and the factors that help
explain it. This paper sets out the findings of their assessment, and provides the
evidence base and analytical framework for the overall Review. This paper is being
published, as part of a general publication of the DTI evidence base, in advance of
the full Innovation Review and the Lambert Review of Business-University
Many issues, such as innovation, cross the boundaries between different Departments?
areas of policy responsibility. To ensure that this Review took into account the whole
picture, officials from DTI, HM Treasury and other Government Departments worked
together with research bodies ?such as the Advanced Institute of Management (AIM).
A distinguished panel of academic experts was also established to guide, and comment
on the work as it progressed.
The paper identifies key UK strengths such as the strong Science, Engineering and
Technology (SET) base. However, the main message is that UK innovation performance
is, at best, average compared to its peers. It is likely that UK firms are unable to make
best use of the advantages presented by the strong SET base because of low levels of
innovation spend. Historic weaknesses in skills, macro-economic and competition
policies, public sector procurement practices and the framing of regulations have also
On the basis of this analysis, two main policy conclusions are reached:
?Government financial support for innovation can, if properly designed and targeted
at market or systemic failures, deliver wider economic benefits in addition to those
that accrue to beneficiary firms; but
?A major change in UK innovation performance will require co-ordinated action
across a wide range of policy areas - many of which fall outside the responsibility
of DTI. This reinforces the case for greater 慾oining up?of Government policies.
The challenge now is to build on this analysis. Making the changes suggested should
help to improve the UK抯 innovation performance, which in turn will boost productivity
and hence prosperity for all. I hope this paper will stimulate further debate amongst the
academic, policy and business communities both here and also abroad, reflecting the
fact that many of the issues facing the UK are also relevant, to varying degrees, to our
trade partners in the EU and elsewhere.
Chief Economic Adviser and Director General, Economics. DTI
Innovation and productivity growth
?Businesses engage in innovation when they perceive profitable opportunities or are
faced by problems. Innovation can lead to productivity growth through the
development of more valuable products or services or new processes that increase
efficiency. As such it is one of the five drivers of productivity used by Government to
frame analysis of how policy can increase productivity. Innovations can also lead to
improvements in people抯 lives through changes to the environment in which they
live and work.
?Although there are difficulties in accurately measuring productivity, the evidence
shows that UK labour productivity levels are below those of major advanced
economies. The productivity gap is substantial and exists across almost all sections
of UK manufacturing and services. Services account for most of the gap in line with
their share of output. UK firms are generally less productive than their foreign
?Differences in innovation performance explain a significant part of the productivity
gap. Differences in R&D investment alone accounts for a quarter of the gap with the
US. But measurement difficulties mean that this is likely to under-estimate the
importance of innovation.
UK innovation performance
?There is no single indicator of innovation performance. A range of indicators is
required. These provide our best estimate of innovation performance, but it is a
partial picture since some aspects are not captured well.
?But across measures, covering R&D, patents and indicators drawn from innovation
surveys, UK innovation performance is around average ?or below average ?of
other advanced economies. Performance worsened during the 1990s, although
business expenditure on R&D as a percentage of GDP stabilised after 1998. UK based
firms, particularly larger firms, spend less on technological innovation compared to
their major competitors and consequently receive less in the way of outputs. As a
group, UK owned firms appear to be less creative and less able to introduce
workplace changes because they lack skills and appear to place less emphasis on
developing a learning culture. In some areas the UK lags in the adoption of new
business best practices. The data show the potential for improved innovation
performance and higher levels of productivity across, and within, all sectors.
Key factors determining UK innovation performance
?Innovation systems are a set of actors (e.g. firms), institutions, markets and networks
which jointly and individually contribute to the development and diffusion of new
technologies. And which provide the framework within which governments form and
implement policies to influence the innovation process.
?The performance of an innovation system can be assessed by its capacity to generate
innovation and translate that innovation into economic growth. The system includes
incentives provided by the economic and regulatory environment, access to critical
inputs and the internal capacity to seize market and technological opportunities.
Innovation systems do not usually coincide with national boundaries. They can exist
in a variety of geographical settings. But national Governments have an impact on
system performance through national policies. The main role for Government is to
improve the efficiency of innovation systems and facilitate their formation.