The Evolution of UK Technology

1
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.

2
Timeline of developments in UK (DTI) Technology
Innovation Policy-1

• Fears that UK Business Enterprise RD 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 RD projects except for the
  smallest firms and placed the emphasis on support
  for collaborative RD.
• In 1993 a review by the new Chief Adviser on ST
  resulted in the refocusing of support for
  collaborative RD 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).

3
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

4
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.

5
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.

6
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 RD 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
  RD 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 RD 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.

7
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 RD 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 DTIs
  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.

8
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 RD 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 RD. 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.

9
1985 to 1987 (2)

• The Conservative Governments 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.

10
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 RD 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.

11
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 RD support
  programmes (Hicks) accompanied by parallel
  reviews of other departments RD programmes
• SFI and all single company support abolished
  except for firms with lt 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
  RD 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.

12
1988 to 1997 (2)

• The white paper envisaged four types of support
  four collaborative RD
• LINK Collaborative research undertaken jointly
  by forms HEIs.
• Advanced Technology Programmes (ATP) Longer term
  industrially-led collaborative RD projects
  between UK firms into advanced technologies.
• EUREKA Support for international RD
  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 RD
  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 RD was
  mainly via LINK and GICP.

13
1988-1997 Rationale for Collaborative RD

• Concentration of RD support for collaborative
  RD 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.

14
1988-1997 Evaluation of DTIs 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

15
Effect of Cmnd 278 on the distribution of RD
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 RD 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 RD.
•  Consequently in 1991 support for single company
  RD 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.

16
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.

17
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 DTIs 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 

18
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.
• 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.

19
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 RD 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.

20
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.

21
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.

22
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 know-how
• 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.

23
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.

24
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.

25
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 RD 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.

26
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.

27
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 RD
• 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 ex-ante
  appraisal, monitoring and evaluation.

28
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.
• 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.

29
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.

30
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

31
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.

32
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.

33
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 RD, 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 RD 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.

34
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 Kays 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 RD 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.

35
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 Norths 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.

36
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 RD
  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.