Innovation for the nation

Rebalancing the economy will be tough, but finally the political class is aware of the challenge
April 27, 2010

Britain has the highest level of property debt compared to national output in the world. It urgently needs to wean itself off its addiction to borrowing on homes and commercial real estate. It also needs to sharply raise its exports, growth rate and private sector employment. It must reconfigure its industrial and business structure, which is still based on over optimistic expectations of consumer spending. And it must manage down its public deficit. This will all require economic management skills of the highest order—and a willingness to discard much of the laissez-faire economic thinking that has informed policy over the last generation. One good sign: there is an unusually broad consensus in the political class about the nature and extent of the problem. There are even traces in each of the main party’s manifestos of a recognition of what has to be done. As I know from my own personal exchanges with the party leaderships in recent weeks, each of them is aware of the challenge. But that it is only a start. For 30 years Britain has dodged deep-seated flaws in our economic institutions. We are poor at translating new scientific and technological research into commercial products. We have far too few entrepreneurs like Andrew Ritchie, founder of Brompton Bicycle, or James Dyson, inventor of the bagless vacuum cleaner—and far too many hedge fund and private equity partners. Too few of our small companies become medium sized; too many of our medium-sized companies sell out to conglomerates before they reach maturity. Our banks are good at mortgage lending; some £1.6 trillion out of £2 trillion of sterling lending is represented by residential and commercial real estate mortgages—a far higher share than other leading industrial countries. But banks are hopeless at financing enterprise. We have no system for supporting innovation. We are not at the economic races. We were bailed out of the consequences of this first by North sea oil, and then by the credit boom—but the industries that have done well over the past 15 years—construction, retailing, estate agency, buy to let, financial services—cannot do as well in the future. Banks can no longer grow faster than the economy. Britain has to find new ways of making its living. The question is: with what? For decades the fastest growing sectors in modern economies have been those that are “knowledge intensive”: computer software, advertising, mobile phones, aero engines—all characterised by a high intellectual content, with sophisticated workforces and consumers. It was the knowledge economy sectors (from hi-tech manufacturing to financial services) that led Britain out of recession in the 1980s and 1990s, before cresting into two credit-driven bubbles in the late 1980s and late 2000s. It will be these same sectors that lead the way, with less emphasis on financial services, in the 2010s. Innovation theorists believe that there may be as many transformatory “general purpose technologies” created in the next 60 or 70 years as since the industrial revolution—in fields ranging from energy and health to infomatics and transport. Growth in the future will be driven by these technologies, and most advantage will fall to the first movers. The question is how—and whether—Britain is set to benefit. The political parties should not be focusing solely on deficit reduction and revenue increases (on the latter it seems clear that a VAT increase to 20 per cent is inevitable). They should be talking about how we are to create the growth that makes deficit reduction more manageable. They should be discussing how Britain can build an innovation ecosystem to support its knowledge economy. We need a network of specialist business banks. We need a new technology transfer institution—modelled on German Fraunhofer Institutes—that broker scientific advances from our universities into our business community. We need a radical overhaul of our competition and skills institutions. We must redouble our investment in our research-based universities. We need intelligent public regulation and procurement to help create new markets. We need the tax system to reward entrepreneurship. Building an innovation ecosystem requires an eclectic mix of policy drawn from both the right and left. These are the preliminary conclusions from The Work Foundation’s Knowledge Economy programme, and over the past six months I’ve presented them not only to company boards but to senior politicians across the political spectrum. There are signs of movement. The Labour party manifesto, for example, commits to building a nationwide network of British-style Fraunhofer Institutes; hearteningly so does the Conservative party, following the recommendation of the Dyson report commissioned by David Cameron last year. Yet “big innovation” should have loomed even larger in this election campaign than either the danger of ballooning public debt or the “big society.” It is the answer to both. I’d like to say that the story will end happily because it is so self-evidently the direction in which the country must go. But there are a lot of vested interests, not least in the City, to be challenged—and despite the positive signs, I’m not sure if our old political class really has the stomach for the fight. That will take political insurgents—one of the reasons, perhaps, why the country has sensed a case for the Lib Dems.