Written evidence submitted by Neil Lee and Max Herbertson (IGR0010)

Neil Lee (Professor of Economic Geography, LSE)

Max Herbertson (Policy Officer, LSE International Inequalities Institute)

Innovation, growth, and the regions

Innovation can be an important driver of regional economic growth and the UK has many innovation strengths. Yet the UK innovation system is not, at present, driving national economic growth or improving living standards across the country. Our great strengths in frontier research are not matched by sufficient focus on the diffusion, adoption, and adaptation of innovation in the private sector.

In this submission, we outline our response to the questions in the call. Much of this is based on academic work including comparative studies of highly innovative economies including Sweden, Singapore, Switzerland, Germany, and Taiwan.[1] We are more than happy to provide further detail on any point and discuss in person.

1. How does the Government drive research and innovation in our regions?

●        How effective are the government’s policies in supporting the innovation ecosystem across the UK’s nations and regions, particularly through commercialisation initiatives?

The UK economy has gone through a period of stasis and there are major regional disparities in innovation. While we have many strengths, given these basic facts it is hard to conclude that the current system is optimal. Fundamentally, most commercially successful innovation happens in the private sector - the government plays a vital role in research and is important in ‘driving’ innovation, but for this to lead to growth requires partnerships with the private sector. Indeed, many of the UK’s innovation problems are likely to be private sector problems, which the state can help address.

Two characteristics of the UK’s innovation policy are (1) a strong belief that scientific excellence will lead to growth, and (2) support for firms tends to come through R&D tax credits rather than direct support. As a share of GDP, the UK provides more  public support for business R&D than any other  OECD country. This is disproportionately driven by generous R&D tax credits rather than direct funding. There are strong justifications for these approaches. Scientific excellence should clearly be a core focus of government research policy, and academic studies have shown that R&D tax credits shift firm behaviour. Both approaches shift decision making to experts - scientists and firms - and this is entirely appropriate for the bulk of support.

Yet it is also important to consider the trade-offs with other forms of innovation policy. In particular, the current system makes it harder to integrate innovation policy in industrial policy, and it means there is less focus on applied research and more focus on ‘frontier’ work. Other countries, such as Austria, have a stronger focus on applied, government-funded research institutions. These can be more easily tailored to the specific economic circumstances of particular regions. The government needs to consider whether the current balance of support is optimal.

Added to this, there is insufficient robust evaluation of existing policy measures. There is too little systematic work to establish ‘what works’ on innovation policy - the recent ESRC metascience call is potentially an important step forward here, but the evidence base on the effectiveness of interventions is still weak. There are too few robust counterfactual evaluations of innovation policy interventions and too little effort at synthesis of what is a large public spending. The government should commit to a clearer understanding of ‘what works where’ in innovation policy.

●        How should devolution be harnessed to support innovation across the regions and nations, and what role should local government play in supporting research and development?

Few local economies in the UK, or anywhere, have the foundations to be successful in frontier parts of the economy, such as artificial intelligence, advanced computing, and robotics. Instead, for innovation to lead to regional growth it needs to be better tailored to ‘real places’. A rough distinction here is between (1) radical or frontier innovation, which creates entirely new products or processes, (2) incremental innovation, which means more minor tweaks to existing technologies, and (3) efforts to improve diffusion, technology adoption, and adaptation. All of these are valuable but have different policy implications.

Efforts to improve radical innovation are best done nationally, with resources concentrated in established hubs that have the necessary infrastructure, talent pools, and networks to compete on a global scale. However, policies to encourage incremental innovation and technology diffusion can be highly effective even in weaker local economies. These places may not have the capacity to lead in creating cutting-edge technologies but they can still benefit significantly from adopting and adapting existing innovations to improve productivity, competitiveness, and job creation.

By focusing on improving technology adoption and building absorptive capacity in these areas - through skills development, applied research, and fostering collaborations between local firms and universities - weaker local economies can move closer to the innovation frontier. Such a multi-tiered approach would recognise the varied starting points of different parts of the UK and ensure that innovation policy contributed to economic growth both in stronger and weaker local economies.

2. How does research and innovation in our regions drive growth and prosperity in those regions?

●       How effective are regional innovation hubs and clusters in supporting regional growth and prosperity for local communities?

Complementary policies are needed for innovation hubs to create inclusive growth. Policies to increase innovation in local economies have a mixed record. However, if successful, they can have a powerful impact on local living standards. In research for the Resolution Foundation, we showed that each ten new high-tech jobs in a local economy create seven ‘multiplier’ jobs in the local area in areas such as services, construction, or health. This reduces unemployment but these jobs are not always well paid. This means that policy should consider complementary actions around employment quality as well as job creation from innovation clusters. In particular, the countries which have been most successful at increasing innovation at the same time as increasing shared prosperity have tended to focus on both advanced and intermediate skills.[2] 

●       Should there be region-specific innovation and growth policies, and what should local government’s role be in this?

Innovation support should be included in the new Local Growth Plans due to be developed by devolved authorities.[3] A key problem with the current system of local economic development is that it does not fully incentivise local and devolved governments to promote economic growth or innovation. Instead these areas are largely dependent on bidding for sporadic and centrally-directed policies (such as Investment Zones and Freeports) which are often unrelated to local conditions.

Local Growth Plans that include innovation should allow areas to determine what their core economic assets are and what their currently ‘adjacent’ assets that can be developed are. In the government’s industrial strategy green paper, Invest 2035, Local Growth Plans are already mentioned as ambitious plans to ‘grow their sectoral clusters and improve the local business environment’. Part of their focus should be on solving the binding constraints to growth and innovation in local areas, such as lab space and housing in Oxford and Cambridge, or public transport infrastructure in Leeds, Manchester, and many northern cities. Alongside this they should also identify existing niches that can be built on with coordinated and sustained investment from the public sector. This should be focused on diffusion and the more advanced stages of innovation, instead of the frontier innovation which is better supported at the national level.

In developing Local Growth Plans that include innovation, several points are worth making:

-          The government needs a clear national strategy, and then needs to be much less hands on for individual Local Growth Plans. The responsibility should be local.

-          Local Growth Plans should act as a mechanism for prioritising what is important and what is less important for growth and innovation in different areas; innovation support should look different in different places.

-          A consistent finding from past research on skills, innovation and infrastructure policy programmes is that the effectiveness of those policies is enhanced by complementary levers working in tandem. For example, transport policies that increase the potential labour force of cities will work best when combined with spatial planning so transport links are built where demand (including future demand) from residents will be highest.

-          Places have been working off existing strategies - Local Industrial Strategies, Covid19 economic recovery plans, inclusive growth plans, and others. These should act as starting points for Local Growth Plans.

-          Regardless of the starting point, use of evidence is essential when developing or renewing a Local Growth Plan.

3. How is research and innovation diffused or supported to drive productivity and growth in the regions, wherever it may come from?

●       What more can be done to ensure that innovation investments deliver tangible outcomes for both local and national economies, in terms of productivity and growth, and how should this be assessed?

The UK government makes major investments in research and innovation funding, but this does not always translate into local economic growth. For example, the University of Oxford received over £800 million in total research income in 2021, yet the OECD estimate that Oxford’s economic output was the same share (0.9%) of the national economy in 2021 as it had been in 2001. There may be good explanations for this: research in Oxford may be commercialised elsewhere or it may not have ‘growth’ as a primary purpose. But it is also vital, given current public spending constraints, that we can show a clearer link between spending and growth. Other countries have a much sharper and clearer expectation that government investments are expected to drive economic growth.

●       To what extent do Catapults support technology diffusion, and drive both national and regional growth?

There is evidence that the Catapults have positive impacts on national and regional growth. Work by Enrico Vanino and Stephen Roper shows that firms engaging with Catapults experienced  16% faster employment growth over six years compared to non-engaged firms. The growth is particularly pronounced for SMEs, which see a 40% increase in employment growth in the medium term. Engaged firms also see turnover growth rate that is 30% faster in the medium term compared to non-engaged forms. This effect is strongest for high-tech and service-based companies. Given the scale of similar initiatives in countries such as Germany, and the positive evidence on their success, there seems to be potential to expand the Catapult network further.

4. How does the UK’s innovation ecosystem compare to those of other countries, and what lessons can the UK learn from international models in terms of commercialising research and innovation to benefit both regional and national economies?

The UK is strong at science, generally, although our position is declining and should not be overstated. There are, as is common to many countries, concerns that our scientific success is not always matched by success in commercialisation. Our economy is dynamic and we have a strong tradition of entrepreneurship, we have produced some world leading scaling firms, albeit not enough. We have relatively strong provision of risk finance, and have produced highly innovative companies. There are world leading clusters of innovation, principally but not exclusively around London. However, compared to other countries, we are stronger at ‘frontier’ research and technology than the application, adaptation, and diffusion of new technologies into other parts of the economy. There are genuine concerns that our innovation system is focused on frontier science, with too little attention to research which serves our actual industrial base.

It is very important to be careful about naive policy transfer from other countries. Policy needs to be tailored closely to local circumstances, but there are some general lessons and more specific policy ideas which could help our system. For example, we can learn from other countries:

●        Greater coordination of policy over the long-term. Innovation policy needs to be highly coordinated with the industrial strategy and other forms of government over time. For example, Singapore’s ‘whole of government’ approach helped them develop an innovative digital technology sector, but required coordination across multiple policy areas.

●        Balance our focus on world leading research and innovation - but develop the function on applied research which considers local strengths and needs. For example, Swiss Applied research institutions have been shown to have important, long-term impacts increasing innovation and economic growth in the areas in which they are located. UK universities could be incentivised to play a similar role. Innovation does not need to be world leading to increase productivity.

●        Work with business, not just science. The UK has a powerful science lobby and some world leading science-focused universities. It is, of course, appropriate that innovation policy respects that. But UK innovation policy needs to be more than science policy: commercially successful innovation largely comes from the private sector, and many of our most innovative businesses are not science-focused. The government needs to engage with large, innovative businesses across all sectors - including in finance, professional services, and the creative industries. Otherwise there is a risk that we will continue to expect an economic return from investments in science, even as the economy stagnates.

10 January 2025