13
Examination of witnesses
Professor Giorgio Fazio, Robert Husband and Dr Nicola Searle.
Q46 The Chair: This is the Communications and Digital Committee, and we are continuing our inquiry into the future of creative industries. The first of our two sessions is about how technology is changing business models in the creative sector. We look forward to hearing from our witnesses on that. In the second panel today, we will be talking to practitioners, people who run and have set up creative businesses, and someone from one of the public national and cultural institutions. May I invite our witnesses, please, to introduce yourselves before we move to questions?
Dr Nicola Searle: I am an associate professor at the Institute for Creative and Cultural Entrepreneurship at Goldsmiths, University of London.
Robert Husband: I am a partner at Moore Kingston Smith, the media specialists, accountants and tax advisers here in London.
Professor Giorgio Fazio: I am a professor of macroeconomics at Newcastle University and a co-investigator in the AHRC-funded Creative Industries Policy & Evidence Centre where I lead the internationalisation work strand of the creative industries.
The Chair: Thank you. I am very grateful to all three of you for being here. I am going to go straight to Baroness Rebuck.
Q47 Baroness Rebuck: Thank you all, and welcome. As a scene setter, it would be good to hear from all of you on how you see the new technologies affecting business models in the creative sector in the future. I remember when Napster jumped into the middle of the music business. Since then, subscription streaming models have become normalised with Netflix, while newspapers have had to find alternative means of financing their activities when much of their advertising went to the tech platforms. In other evidence sessions we have begun to hear about the use of AI and algorithms in targeting audiences, as well as a little about the metaverse and NFTs. Would you agree there has been a democratisation of creative endeavour with organisations such as Kickstarter and Patreon, Substack and self-publishing of books becoming very popular? What do you see as the most important shifts in business models over a five-to-10-year period? What is coming up on the horizon that we should be aware of?
Robert Husband: For the creative sector and its business modelling, we have to look at the individual strands of the creative sector. Technology is not going to fit to strands such as theatre, which is very much a live, shared experience. Because of the restrictions relating to theatre tax credits, we are very unlikely to see any major shift in what has been a format for the last 400 to 500 years. Immersive theatre and dance productions, however, are adapting a different way of building and monetising the output.
We need to recognise that these new technologies are about the distribution of the creative outputs, which is an important part of it, making it much more reachable for many more people. It changes the way in which people experience art and thus what they are prepared to pay. There is a level of a differential pricing for people, so that the subscriptions you are prepared to pay regularly are almost tiered. We are experiencing that in the TV sector with Netflix, Prime and Disney and others competing for that space and their content. The cost of producing the output also plays a role. In film and TV, we have the ability to put things in green screen, which will continue and allow businesses to experiment at a lower cost in generating their creative output.
There are algorithms in subscription models that are teasing and making production of creative material much more commercially rewarding, particularly for musicians, as it allows them to see how their output is being used. Being able to track where you derive your income sources from is making a huge difference, particularly if your output is being utilised worldwide.
Baroness Rebuck: You talked about the cost of producing in reference to television. If you think the metaverse will shift business models in the next 10 years, surely the cost of producing content for the metaverse will be more expensive.
Robert Husband: You would expect so. As yet, nobody has shaped the metaverse to an extent where we know what it will be. It is an opportunity for all—an extension of what we have experienced over the last two to three years in how people connect together. You would expect that to continue, with brands exploiting people's experience, but it is up to the individual to decide how much they engage and therefore whether the cost of production for the brands is actually worthwhile or not.
Baroness Rebuck: Dr Searle, what is your perspective on this scene-setting question?
Dr Nicola Searle: I am glad we started on cost because that is one of the points I also wanted to talk about in terms of business models. Just to note, I shall speak mostly about digital media, as opposed to cultural and performance types of art.
One of the most important impacts that the internet and digital technologies had was the reduction of the cost of making and distributing copies. Making and distributing copies became a lot cheaper, which allowed for a lot more experimentation in business models—the democratisation you were talking about. However, in reality, the experimentation was largely at the end of the value chain, with the consumer-facing technology platforms and services benefiting most from this change in the cost of making and distributing copies because that is what they were into. We lost physical retail as technology and streaming services replaced brick and mortar stores, and the situation continues to evolve.
With AI, there is a distinction between the sunk cost of buying all the technology and creating the infrastructure to use AI, but the actual cost of making a new piece of content is likely to be cheaper than it is right now. It is cheaper than using actors, which I know you spoke about at length last week. I would expect a similar thing to happen now. We have an era where content creation—not just copies, but the actual creation—will be cheaper, so we could see some new business models. We are already seeing bespoke, on-demand creation of images with DALL·E where you can go online and get your own art. We might see more in that area, but the broader picture here is that we will see a similar impact where the business model experimentation and the changes happen more towards the end of the value chain.
We are already starting to see those technology platforms and services expanding and experimenting further up the value chain, going more and more into content creation. We might also see some of the intermediaries, such as labels and publishers, going further up their value chain and using more AI for content creation. Last week’s discussion focused on the impact on artists and creators. We will see a lot of experimentation towards the end of the value chain, but that cost impact is not going to benefit everyone.
Baroness Rebuck: It is interesting. We seem quite a long way from AI creating really valuable and interesting content. In the areas in which I used to operate, subscription models are often not particularly valued. Some creative industries—such as books—do not prefer a kind of “all you can eat” for a certain amount of money, apart from audiobooks, of course. The author wants to be paid for the consumption of their work, whether in physical or digital form. It does not seem to be one size fits all in terms of an optimistic vision of the future.
Dr Nicola Searle: Streaming was originally put forward as the solution to the music issue with the infringement of copyright and Spotify is yet to turn a profit. There was an inquiry[1] into the economics of music streaming, and we have similar discussions here about where that is actually going to benefit. It is certainly not one size fits all.
Q48 Baroness Rebuck: Professor Fazio, what is your perspective on the future? When you look at the international scene, we are said to be leaders in the creative industry. What should the UK be looking out for to maintain its position?
Professor Giorgio Fazio: We definitely are and for a reason. I agree with many of the comments my colleagues have already made. Digitalisation has completely changed the way businesses operate and the way they produce content. There is now a lot of user-produced content that needs to be protected. Previously, this was less of an issue. You have the emerging rise of platforms and a small group of intermediaries, which poses challenges in terms of market power and the ability to negotiate between creators and distributors, for example.
According to some commentators, digitalisation is going to cause a “death of distance”. It is going be a lot easier to service markets anywhere, even at great distance. Digitalisation will also cause a “death of size”, which is usually important in order to export and be internationally competitive. We know that the creative industries have a very long tail of small firms. It should be easier for these firms to access international markets, but this is also true for our competitors; we have an emerging global south that is waiting to be able to exploit the same benefits of digitalisation and therefore compete with the UK.
There are megatrends. Technology always reduces costs—trade costs in particular—and will create even further globalisation. As usual, one has to look at issues under the surface that may have to do with redistribution effects. Whether digitalisation is going to benefit all firms, sectors and regions of the UK in the same way depends on infrastructure, availability of human capital and so on. With respect to the role of platforms you mentioned earlier, there are a number of open questions. For example, there are very few platforms, which could lead to a harmful asymmetry of power in the market. You have economies of scale and network effects on one side, but you could have bottlenecks on the other.
Baroness Rebuck: Some of the points you have raised will come up in subsequent questions so I shall hand back to the Chair.
Lord Young of Norwood Green: I felt that during the pandemic people became more and more experimental. They used smartphones to bring down production costs, so it seems to me that they will utilise AI in the same way. Do you think this is a good sign of people's ability to use the new technologies in a creative way and to market them?
Robert Husband: For my part, that is certainly the case. TV production broadcasters have control over format, and if you are using an iPhone or your own equipment, you can get to market much quicker through YouTube and other channels. That will have an impact on the production costs.
Dr Nicola Searle: I would add that there is talk of social media—TikTok being one of the great outlets with its own record label now—being the future of the music industry. There is a lot of activity and experimentation in music. It will be interesting to see how social media develops as a business model and a platform for the creative industries to distribute their work.
Q49 Baroness Harding of Winscombe: I shall focus on intellectual property rights. Last week in our hearing on AI, we heard a number of different views on whether the UK's proposed intellectual property framework will appropriately balance the rights of the creators and the need for digital innovation. I would be very interested in all three panellists’ views on how new technologies affect the way in which intellectual property should be licensed and monetised in creative industries.
Dr Nicola Searle: The discussion here is largely about copyright, although trademarks and design rights are also relevant. The short answer is that the market forces are going to dominate a lot of these conversations, so the discussion we have just had on business models also applies here.
The two points I would address are how technology affects licensing and which end-user platforms are being used. Because we are looking at this next wave of technology, the internet is a very informative story to look at. The introduction of digital technologies did not have a dramatic effect on licensing practices. We see some changes now, with a shift in licensing contract structures from per unit to per stream or labels and copyright owners asking for equity and start-ups. That is relatively new, but kind of marginal. We have some ideas that the metaverse could be a great outlet for things such as fashion design, but those are all fairly small things in terms of the wider picture.
I do not see a fundamental shift in what is happening. At the end, the licensing of content will still be towards another third party with a consumer-facing business model. Generally speaking, the copyright licensing practices have been relatively stable.
The interesting part here, as you mentioned, is how AI and the copyright interact. Again, looking back to what happened before, the early days of business models were based on the use of copyrighted content for experimentation and development of new technologies. The development of Google Books, Napster and the early days of YouTube were all based on the use of massive amounts of copyrighted content, sometimes with ambiguous legality, and generally used in a way that did not provide remuneration to the copyright holder. It looks like the same story is happening now. One of the ideas put forward is that the AI will be developed on the mass use of unlicensed copyrighted content without remuneration to the owner.
The challenge lies in identifying where to put the balance. Do you put the balance on enabling the new technology, or do you put the balance on supporting existing copyrights holders? It is a difficult question, and what I think will happen internationally is that inevitably, these AI technologies will develop whether or not copyright is fully up to speed on how they are being used.
As you said, the UK is a thought leader in this area. I know that one of the points raised last week was the focus on the fact the UK is working on being clear about this. Of course, the more clarity you have, the better it is for firms because we do not want uncertainty. We are heading into another somewhat confusing area. If we look to what happened before, I am not sure that changing the way copyright was licensed for those early days would have made much of a difference in terms of the technology output. However, we do now have good licensing schemes for things such as YouTube.
Baroness Harding of Winscombe: That is a very erudite essay on the subject, but I am left not quite knowing what you think of the UK’s proposals.
Dr Nicola Searle: The EU has the opt-out version, which is essentially what the YouTube version is right now: you opt out to have your content taken off it. I am looking down sort of shamefully because I really like the creative industries and I really like copyright, but it is hard to see how individuals will be able to license this in any practical way that will enable technology to happen. If the UK tries to change that—and being in line with the EU would be the general thrust—it will not bode well for the UK AI industry, and it is inevitable. As much as I would love to say that each and every copyright holder should be remunerated for their contribution to AI, I am afraid that from a practical perspective it is unlikely.
Baroness Harding of Winscombe: Mr Husband, do you have anything else to add?
Robert Husband: For copyright holders, business risk needs to be considered. Digitalisation is providing a platform by which this business risk is reduced. As a consequence, people are able to track the material they have produced, which will have a beneficial impact on the production of new material. That is my view on the economics of it. At a very macro level, people are interested in protecting what they have produced—whether in design, theatre, music, or film and TV—so certainty is something we should be looking for as far as our legal framework is considered.
Professor Giorgio Fazio: I would like to add something about cross-country regulation and regulatory alignment. One of the factors that clearly emerged in terms of the impact of digitalisation and the relationship with IP is the importance of IP strength all over the world and in countries you want to trade with. Clearly, the more you digitalise, the easier it is to be affected by piracy. There is some empirical evidence that the strength of IP regimes can affect the way companies decide to export, whether it is in the movie sector or in their mode of servicing, through streaming or other means. Clearly, in thinking about digitalisation and IP, we also need to think about territoriality of IP and the importance of strengthening co-operation globally so that IP can be protected in other territories too.
Q50 The Chair: None of you has raised NFTs so far, and I think there is a connection between NFTs and copyright. Dr Searle, if I understand you correctly, you seem to be erring more towards the tech side of this argument rather than the creative side. Where do NFTs come into this equation?
Dr Nicola Searle: I would like to err more toward the creative industries, but my pessimism is that the tech side will be inevitable. The main thing about NFTs and copyright is that people think they are related, but they are not. The NFT is essentially a digital receipt. Somewhere on blockchain, there is a proof that you have paid for an NFT but that does not grant you copyright over it. It is a rather strange creature.
It certainly went through a hype cycle. Artists were able to use it as a vehicle to sell their works and make quite a bit of money, which is great, but there was no copyright attached to it. Many consumers thought they were buying the copyright, but in fact they were not. My suspicion with NFTs is that they are a nice quirk. I saw a great comparison of them to Beanie Babies; I do not know whether anyone remembers them. Beanie Babies are collector’s items, but their inherent value was somewhat questionable. Separating NFTs from cryptocurrencies in the crypto boom and bust is also difficult. I think NFTs are a bit of a red herring. It is great that artists were able to make money out of it, but there is not much room to make profit in the long term, and it does not give people the copyright they think it might.
The Chair: Damien Hirst’s piece of theatre last week saw him burning some of his art because people have had the choice between an original and a digital version. Is that irrelevant to this?
Dr Nicola Searle: It was a great performance. It does not change the copyright, assuming the ownership of the digital versions was his. He would not have had easy control over the digital versions, which is a slightly different discussion, because that is copying them rather than the copyright. He would still legally have had the copyright over it, but in practice they would have been distributed. It is a bit of a distraction.
The Chair: I feel this is one of those topics where the more you ask, the less you understand.
Dr Nicola Searle: The Beanie Babies comparison is pretty apt.
The Chair: It is a good one. I know someone—I was not one of them—who collected Beanie Babies and made money from them.
Q51 The Lord Bishop of Worcester: Thank you for being here and your evidence so far. I want to come back to international competitivity. We know from Nesta and other sources that the UK is a leading exporter of culture and creative trade and an attractive destination for foreign investment. Foreign direct investment in the UK’s creative industries accounts for 10% of the UK's total. The creative industries represent about 6% of the UK economy, which is all good news. Professor Fazio, you have noted concerns that these benefits are offset by the risk that immediate and future profits from British IP will be moved overseas and referenced the global south snapping at our heels. Could you elaborate on that?
Professor Giorgio Fazio: You are referring to a recent piece of research we published on the nature of FDI in the UK creative industries. Since there was little to no prior evidence, we have done a scoping exercise and found that the most common mode of entry for FDIs is through mergers and acquisitions, which is something not shared by other sectors. We will need to dig deeper to understand the motives, but if we had to interpret this preliminary evidence, one could imagine that mergers and acquisitions could be a way to buy intangible capital. We have to remember that one of the key distinctive features of the creative industries is that they rely on intangible capital and IP. We also tend to see, especially in some sectors, a predominance of acquisitions by US firms, sectors where the US is more dominant. In terms of modes of entry, we found a larger share of mergers and acquisitions.
However, this is not necessarily all repatriated capital. You still have some reinvestment and there is evidence of investment continuing in the following years. Of course, one could raise doubts whether the UK creative industries are attractive because of their intellectual capital and whether mergers and acquisition are the preferred mode of entry for this reason. One thing that we can only speculate about is that we know that creative industries in the UK struggle to access funding, which affects scaling up.
The UK creative industries seem very attractive to investors, but they are not terribly large. If you put the two things together, maybe the weaknesses lie in access to finance domestically. Attracting funds or investment from abroad can be positive, except for the caveat—that needs to be investigated—about whether this could lead to a kind of cannibalisation of the intangible capital. It is not just a negative picture; it is a partial picture that we have at the moment.
The Lord Bishop of Worcester: Thank you. I shall come back to you in a moment if I may, but may I ask Mr Husband first?
Robert Husband: My personal view is we have done a lot of analysis of particular sectors within the creative space, both in branding and gaming—MarTech and AdTech, certainly. We are undoubtedly presented with a substantial amount of external investment coming into what are relatively small businesses that have headcounts of 25 people. To maintain our competitive advantage in there, we certainly need to look—I believe this is on the Government agenda—at the R&D landscape here in the UK. Obviously, the creative sector is not within science and technology, but if you bring these new technologies under that remit, that may actually help to bring further investment here into the UK. A change that we face on a practical level from 1 April of next year in the R&D world is that jobs are going to be created back into the UK and that certainly helps to support the creative sector in bringing those jobs back onshore that have historically been subcontracted out of the UK and subject to the R&D regime. That is certainly an area that we need to continue to look at because it supports jobs here in the UK.
Dr Nicola Searle: Just to add to the mergers and acquisitions comment from Professor Fazio, with the depreciation of the pound we might expect some acceleration of further mergers and acquisitions. Many of the key, symbolically important organisations and firms are already not UK-owned. One thing we have not talked about in terms of competitiveness is the rich cultural heritage of the UK, which is not an easy thing to put into a competitive economics argument, but I know DCMS is doing work on valuing that more and thinking about how it can be taken advantage of.
The Lord Bishop of Worcester: You have all touched on this but, in a nutshell, could you articulate what you see, given our leading position at the moment, as the main barriers to growth and what could be done to address them?
Professor Giorgio Fazio: Do you mean barriers to growth in general internationally?
The Lord Bishop of Worcester: Yes. How can the UK's leading position be protected? What are the barriers to growth and what can be done to address those barriers? Some points have already been made.
Professor Giorgio Fazio: There are a couple of factors we have seen that are particularly important when it comes to exporting. In our research, we have found, for example, there is a quite good long-tail of firms that are exporting. Traditionally, you would think that size is a barrier to internationalisation, but it seems to be affecting the creative industries maybe a bit less than other micro and small enterprises. Yet, the ability to scale up, access funds and operate smoothly is really important. When we think about trade, there are clearly trade costs associated with exporting, and these trade costs will be relatively higher for smaller firms.
Any kind of trade assistance that can be provided which reduces these trade costs will be important. Enhancing access to digitalisation and digital infrastructures will be critical in the future to allow these long-tail of firms to access international markets. There is a lot of uncertainty at the moment—somebody mentioned exchange rates—and we know that firms, especially small firms, do not like uncertainty. This uncertainty could be a threat in the next few months for the creative industries, given their smaller size.
We find that creative industry firms, especially those that are innovative, tend to export a lot, and they seem to want to export to a lot of destinations. The relationship between innovation and exporting is very important. I know that the committee has been interested in hearing about innovation and R&D. There is clearly a link there, and it is really important to strengthen the ability of creative industries to invest in innovation and to protect their innovations through proper IP. There are a number of things that could be done to strengthen IP assistance and to identify champions, for example, among creative industries that are also innovators, because they tend to be the ones that want to export more. They are already exporting but they still want to increase it and export to further destinations.
Robert Husband: The particular views come from working with a lot of businesses in this sector with 25 to 50 people, typically at the whim of an entrepreneurial owner, and those people tend to go through a cycle where they create value and then they tend to exit value, which is certainly a barrier to growth. Mergers and acquisitions are quite prevalent at the moment and many of the businesses are going through it. We do not have the real platform for employee participation in that area. Obviously, if an employee ownership trust was the owner of a particular business, that business is going to go on into perpetuity, but you may then get a diluted offer to the market. You are effectively designing or creating by committee; that is not necessarily the vision and the branding that people want to buy in the market. Those are the things that we need to focus on.
The Lord Bishop of Worcester: Interesting, thank you.
Lord Lipsey: Could you explain exit value?
Robert Husband: A lot of these businesses grow quite quickly when they see opportunity in the market and they will build a communications business and those businesses, based on their financial performance, will then exit—that is, the shareholders will exit and they will become part of a much bigger business.
Q52 Lord Foster of Bath: May I just pick up a point Professor Fazio was making earlier about the importance of succeeding internationally and developing new innovations? You then added that it was therefore very important that those innovations are protected by an appropriate IP regime. You pointed out that we are doing that in an increasingly global market, so I would imagine that co-operation on intellectual property is so important. Do you share my concern that in many of the current trade deals that this country is doing, we are not giving sufficient attention to IP—for example, in the trade negotiations to join the CPTPP?
Professor Giorgio Fazio: I shall try to elaborate on what I was trying to say. We have to think in a context where trade agreements, globally, are becoming deeper and deeper. By this we mean that they cover more and more areas. There are a number of areas that matter for the creative industries, IP, digital, e-commerce, data flows and cultural co-operation, which will all be relevant. We do not have sufficient evidence at the moment to understand how a particular IP regime, a particular IP chapter or provisions in an IP chapter might affect international trade in the creative industries, although there is evidence that IP regimes matter for trade.
Of course, the IP that matters for the creative industries may be substantially different from the IP for other industries, because the creative industries rely a bit less on patents and a lot more on copyright, trademarks and design. In some of our studies published by the Policy and Evidence Centre, design seems to also be a critical factor. There is clearly a need for stronger protection but, at the same time, some of these rights are among the weaker rights in IP law compared to patents, for example. Incidentally, this is also one of the key issues for creative firms when they want to access finance because they struggle to find collateral as they have a riskier business model.
There is evidence globally that there are countries, especially countries from the global north, that try to use free trade agreements to enforce stronger property rights protection. I am not necessarily in a position to comment on a specific trade agreement but, in general, that is the right approach. These trade agreements should be negotiated from the perspective of the UK and from the perspective of the developing country where the optimal IP regime may be substantially different. Finding a balance is extremely difficult. Perhaps one of the things you could do is try to strengthen enforcement in the context of already existing international treaties. A free trade agreement will try to make things already present in international treaties stronger or bilateral, but there is not sufficient enforcement. You can have some kind of moral suasion in terms of enforcement of rights, rather than just necessarily explicit provisions, because those can be more difficult.
The Chair: I was a little trigger-happy earlier. Lord Bishop, had you finished?
The Lord Bishop of Worcester: Yes, unless Dr Searle would like to comment on that last question about barriers and growth.
Dr Nicola Searle: I was going to reiterate the R&D comment. The UK has been below the OECD average for a very long time. We are at 1.74% and increasing to a 2.5% average would be a great step forward.
Q53 Lord Hall of Birkenhead: Following on from a theme which the Lord Bishop has begun, you have all talked very clearly about the strengths and weaknesses of the creative industries here and our world-leading position. On the other hand, we also know that when you are world-leading, it is also the time to be looking over your shoulder at others. We have some evidence showing us what South Korea, Singapore, Canada and, of course, the USA are doing to establish their own position, particularly in the screen sector. What can we learn from what others are doing—from those who may be equal to us or on the inside track coming to overtake us? What lessons can we learn from other countries that we should be thinking about as we talk about the creative industries and their growth and sustainable growth here? Dr Searle, could we start with you?
Dr Nicola Searle: I have spent some time thinking about this and what other countries are doing that we could do. Unfortunately, there is no magic way of overcoming some of the points that Professor Fazio made, for example, the UK market size. There are also several points specifically for the creative industries that are hard to get around because of the structure of the creative industries. My main point would be that other countries do a better job at investing in R&D. If we do not address that—some of the other points are useful, such as good use of tax credits et cetera—and continue to stay behind on R&D then, ultimately, we are not going to catch up and, importantly, we will eventually fall behind.
Robert Husband: I do not have a great deal of experience of the other markets and competition that we have. Anecdotally, I understand that the US is making great strides in terms of supporting its film and TV industry at the moment. Those other countries appear to be a lot nimbler than we are on making these policy changes. In the US, things are dealt with on a state-by-state basis rather than on a national basis, which makes it easier for them to be able to address specific and key issues, of which one is R&D. We have a very good suite of creative sector tax credit regimes and we should continue with that. Certainly, areas such as theatre are entirely dependent on it. Most people in that sector would be campaigning for the current regime we have, which is enhanced, to continue, which confirms that having the ability to invest in your content is the way to go forward in order to compete.
Lord Hall of Birkenhead: Professor Fazio, can we learn things from Singapore or South Korea? What is your judgment?
Professor Giorgio Fazio: I was also reflecting on this because in many ways, the UK is also leading in terms of policies. The Creative Industries Policy and Evidence Centre is an example, and everybody is trying to look at us and the way we do things. At the same time, there are things that can be done. When you mentioned, for example, Singapore, I think of the education system. I would like to go back and link this to what we were saying earlier about the impact of digitalisation and the disruptive impact it will have.
International trade and the rise of digital trade will pretty much dominate, so it is important to be digitally ready. There are things in the UK that are already good—for example, the start-up environment or ease of doing business. There are also things we could probably improve, for example, technological adoption and technology infrastructure. These also intertwine with the issue of the redistribution shocks of digitisation across the country, across strata of society and across firms. It is quite important that, at this stage, there is substantial investment in these areas to prepare the country for the digital revolution in terms of human capital and creating tech and “fusion skills” that will be critical, and to include education. I have to say, in passing, that I do not hear the kind of discussions on, or the doubts about, the importance of creative education elsewhere, which makes the UK one of the few countries where the benefits of creative education are put so much in doubt, not just for the creators but for the greater economy.
We have mentioned access to finance. There are countries that manage to get better access to finance, especially venture capital. New forms of finance will come in—for example, crowdfunding—enhanced by digitalisation, and so on. Getting the country ready for blockchain technology on the finance and contract side will also be very important, and my colleagues already mentioned innovation and R&D. In many of the other OECD countries, R&D tax credits exist for the arts, humanities and social sciences. It is quite important that this is also taken into account in the UK, especially given the importance of innovation for international competitiveness and exporting.
Q54 The Chair: Professor Fazio, you have just talked about venture capitalists being perhaps more willing to invest overseas in new businesses than they are here. Do you have a view on why our venture capitalists are less forthcoming than their American counterparts?
Professor Giorgio Fazio: I apologise. I did not mean to refer to the fact that UK venture capitalists invest more abroad in creative industries than at home. In terms of evidence, we published a paper recently on access to finance and the role of innovation and whether it acts as a signal. What we found is that although creative industries’ innovators tend to ask for finance from many different sources, they struggle to get it, including from venture capitalists. A number of reasons have been presented in the literature on why this could be the case; it might be a lack of understanding or knowledge of creative business models. It could have to do with the fact that, typically, you are dealing with firms that have most of their value in intangibles, which are difficult to price by the market. These could be the main reasons, probably not just in the UK but elsewhere, but anecdotal evidence is that venture capital probably works better in other countries, such as the US. That was my comment, not necessarily that UK venture capitalists invest abroad, but they do not seem to—
The Chair: I understood that. It was more about why you thought that UK venture capitalists were not necessarily as eager to invest in UK innovative businesses in the way that US venture capitalists are that much more open to risking investments.
Professor Giorgio Fazio: Of course, it could also have to do with the size of operations. Clearly, the creative industries in the UK and the US will probably share similar valuations in terms of intangibility, but the sectors where they operate or the scalability that they have could be substantially different from those of UK firms. Again, this is mostly in my opinion at this stage.
Q55 Lord Vaizey of Didcot: Sorry, I arrived late for the session, so I hope my question is not otiose. One of the problems we have with venture capital in this country is just a kind of chronology that there are more experienced founders and greater capital in the US. We are catching up, but it is quite hard for government to legislate on that. This is a random thought but does anyone have views on Innovate UK and its role in providing risk capital for tricky ventures as a government quango? Nicola, you are nodding.
Dr Nicola Searle: I am nodding because it is an important vehicle.
Lord Vaizey of Didcot: You have views. You are about to give them.
Dr Nicola Searle: Yes, okay. The fantastic thing about Innovate UK is that it provides a space for entrepreneurs to take on more risky ventures. Obviously, I am coming from an academic perspective; it also allows for the translation of research and knowledge exchange between industry and academia, which is great because that is what we need to foster technology. The UK does a fantastic job of encouraging impact; we have the impact agenda for universities. Innovate UK is a vehicle for bringing those two together—for encouraging new ventures, allowing people to fail and allowing direction of where research might go, which are all great things.
The Chair: Thank you, all three of you, including Professor Fazio on screen, for your evidence today. It has been very helpful. As I said at the start, we are very grateful for your time.
