Written evidence submitted by the Competition and Markets Authority (IGR0074)

Response to the Science, Innovation and Technology Select Committee inquiry: Innovation, growth and the regions

Overview

1. The Competition and Markets Authority (CMA) is the UK’s principal competition and consumer authority. The CMA helps people, businesses and the UK economy by promoting competitive markets and tackling unfair behaviour. Innovation is an engine of economic growth. Promoting innovation through competitive markets is therefore at the core the CMA’s work.

2. The CMA has a UK-wide remit, with offices in Belfast, Cardiff, Edinburgh, London, and Manchester, in addition to the Microeconomics Unit based in Darlington. As part of our role, we provide independent and expert advice to government and policymakers at UK, devolved and regional levels.

3. The UK has significant economic inequalities between its regions, compared to comparator economies.[1] Reducing these gaps, and realising the potential of regions outside of London and the South East can play a major role in promoting productivity, and achieving the kind of growth whose benefits are felt by people and businesses across the UK. The CMA therefore welcomes the Committee’s focus on policies to support innovation across the UK’s nations and regions.

4. This submission provides a high-level summary of several aspects of pro-competitive policy design in this context. These draw from the CMA’s response to the UK government’s recent green paper Invest 2035: the UK’s modern industrial strategy (enclosed as an annex).[2]

The role of competition in driving innovation

5. Competition provides a key incentive for firms to develop new or improved products or methods of production. Where markets work as a meritocracy, with all businesses having a fair opportunity to succeed, they will invest in innovation to gain the edge on their rivals. Conversely, where markets are not contestable, firms will lack incentives to innovate to strengthen their position, Firms with established positions will then face little incentive to innovate to keep ahead of would-be rivals.

6. Competitive markets are not the sole pre-condition for innovation. Innovation can be subject to market failures, meaning that policy responses have an important role in shaping the market to produce better outcomes. In particular, businesses investing in innovation may not capture all of the returns of the investment for itself. Generally, the benefits of a good idea will be wider than a single firm, and will provide benefits to other businesses and wider society. This creates a risk that businesses making individual investment decisions based on their private returns may invest less in innovation than would be best for society as a whole.

7. A long-standing policy solution to this problem is to create intellectual property rights. Intellectual property rights increase the private returns to innovation, and therefore they raise the incentives to engage in innovation to a more socially optimal level. Accordingly, the creation of intellectual property rights can intensify the competition between businesses to generate new ideas. Separate to intellectual property rights, other policies can also have an important role in increasing private incentives for innovation, such as subsidies or awards.

8. Separate to the question of incentives, businesses also need the ability to innovate. Innovation can be risky and expensive, requiring access to capital. Innovation may also require specialist expertise, meaning businesses will require access to workers with the right skills. Regulation can enable innovation through rules which give firms space to try new approaches and products. On the other hand, regulatory rules – even if well-intentioned - can create additional costs, or prohibit entirely, new products or business models, which can hinder firms’ ability and incentive to undertake innovation.

9. In summary, competition can provide a key incentive for innovation, and works together with other factors and policies to help drive optimal levels of innovation overall.

Implications for policy

10. The upshot of the relationship described above is that policies to promote innovation will benefit from working with the grain of competition, to achieve maximum overall impact.

11. At a general level, policies that confer unearned advantages on a subset of market participants, relative to their actual or potential competitors, can risk harming the competitive process, and thereby incentives to innovate. Particular risks to competition and innovation arise where policies are shaped by the interests of incumbent, established players in a market, who are often better connected or resourced to engage with policymakers. Broad-based engagement - including with new and potential entrants, and firms with new technologies or different business models – is key to mitigating these risks.

12. Care also needs to be taken in respect of policy affecting markets at more dynamic stages of development – for example, those that are affected by technological innovation or changing business models. In these dynamic or fast-moving markets, it is particularly important to design policies which support innovation across a broad base of market participants, including potential new entrants.

13. The CMA has published practical guidance for policymakers to help them identify whether and how their policies might affect competition and innovation, and how to design policies in a way that works with the grain of competition. [3] The guidance also lists a set of factors policymakers can use to consider whether a market is dynamic.

14. For our own part, the CMA is committed to expanding opportunities for innovation in the UK tech sector by using its new powers in respect of digital markets to create a level playing-field for start-ups and scale-ups to succeed. To achieve this, we will work both with the most powerful companies in digital markets as well as broader stakeholders from the digital ecosystem – in an iterative, participative process.

Delivering innovation policy at a regional and national level

15. The competition policy considerations set out above apply at a local, regional, and national level, just as they apply UK wide. The design and implementation of innovation policies in specific regions and nations should therefore take account of the impact of policies on competition, and it is important that policy makers have the capabilities and support to do so.

16. The CMA provides independent and expert advice to policymakers at devolved, regional and local level. For example, in recent years the CMA has carried our market studies of markets heavily shaped and influenced by policies set devolved, regional and local levels. These includes our recent market study on housebuilding, and our study into the provision of children’s social care. The CMA has also provided advice to policymakers on market management including on management of markets for local bus services, taxi licensing conditions and the installation of new electric vehicle charge points.

17. Our experience suggests that getting and maintaining the capability to assess the impact of policies on competition can sometimes be more challenging at a local level, particularly for smaller authorities. Capacity and knowledge sharing between authorities and between local and national governments can play an important role in supporting the design of market-shaping policies at a more local level.

18. Where policies are set more locally, there are opportunities to harness the efficiencies of a coordinated approach across areas. For example, in our market study on children’s social care, we found that ‘excessive fragmentation in the processes of forecasting, market shaping, and procurement are key drivers of poor outcomes in this market and must therefore be addressed if we are to see significant improvement in the outcomes from this market’.[4] Co-ordination between local policy makers, as well as at a national level, can support complementary pro-innovation policies, reducing the risk that policies (such as subsidies) simply move innovation activities between regions, without increasing the overall amount of innovation.

19. As noted above, it is also important that the development of innovation policies at a regional and local level takes account of a range of voices. The CMA has produced advice for local authorities on the developments of partnerships with operators of local bus services (‘Enhanced Partnerships’).[5] In that advice, we note that authorities should be alert to the risk of particular operators ‘capturing’ the decision-making processes or having undue influence to the benefit of themselves and to the detriment of other existing or potential operators (and ultimately passengers). We recommend that a mix of representation and wide visibility of the decision-making fora can help to mitigate this.

Further CMA research on the broader question of the relationship between competition and innovation

20. The CMA’s Microeconomics Unit – established in Darlington in 2022 – conducts economic research focusing on issues of competition, innovation and productivity to support growth in the UK economy. The Microeconomics Unit produced the CMA’s most recent State of Competition report in 2024, which considers how competition has changed in the UK on a cross-economy basis

21. The CMA’s findings in the State of Competition report highlight the importance of understanding the barriers that prevent smaller, younger, innovative firms from competing effectively with larger incumbents, and the value of taking corresponding measures to address these to support greater business dynamism – for example, through improving knowledge diffusion across the economy.[6]

22. The Microeconomics Unit will be looking to address gaps in the evidence available to policy makers on the relationship between levels of competition and the adoption and diffusion of innovations and technologies. through research into the barriers to the spread of new technology and knowledge across the economy. For example, the research areas currently being explored are:

1. Understanding how differences in competition between industries are associated with differences in the adoption of innovations and new technologies – both in aggregate and within a given industry
2. Estimating which factors influence the likelihood of technology adoption at firm level, particularly the influence of competition and market incentives.

23. The CMA expects to share this work by summer 2025 and this will form part of the Microeconomics Unit wider programme of work focussing on growth and industrial strategy.

24 January 2025

Annex: The CMA’s response to the UK government’s Industrial Strategy Green Paper (‘Invest 2035: The UK’s Modern Industrial Strategy’)

https://assets.publishing.service.gov.uk/media/674068bd53373262c0d825e3/Industrial_Strategy_Green_Paper_CMA_response.pdf