Select Committee on Science and Technology Fifth Report


CHAPTER 4: The Demand for SET

Introduction

4.1  Business is crucial in driving the regional economy, and SET has an important part to play in driving business. Companies — the engines of wealth creation — will exist and transact business whether or not the RDAs or other support agencies exist. They are driven by the markets, and their success depends on their ability to grow and create markets, within the Government-set regulatory and fiscal frameworks. Companies' location in a region, and their involvement in SET are significantly influenced by competitiveness and profitability factors.

4.2  This Chapter addresses, in a regional context, the particular issues relevant to business in relation to the exploitation and application of SET.

Demand issues

4.3  Government and regional policy relevant to our Inquiry is essentially about stimulating greater awareness of the value of SET in more businesses, within a broader context of encouraging innovation. It is business that, through the application and exploitation of SET, turns discovery and invention into new or improved commercial products and services. As these products stimulate or meet a market need, and are of the quality and price to compete in a global market, business will prosper. As business prospers so the regional and national economy prospers.

4.4  Measures of R&D investment are often used as useful proxies for such activity. The DTI produces useful analyses and benchmarks in the R&D Scoreboard[24] of company and sector performance. However, the level of R&D investment required varies from business to business.

The complexity of the demand

4.5  Demand for SET is complex. Technologically-dependent sectors or companies will have different requirements from those that are less SET-dependent. Within those broad categories, there will also be differences: the demands of chemistry-based industries, such as pharmaceuticals, will differ from physics-based industries such as electronics. In each case, emphases and issues will vary in relation to the importance and value of the SET base for the company's competitiveness.

4.6  Those considerations are not always straightforward. As noted in paragraph 2.18, we found helpful the division of demand factors by Mr Norman Price of AWM into companies' awareness of the potential, their ambition to realise the potential, their ability to do so and affordability (Q 76 and p 65). The last is determined largely by the investment community. While that community faces its own pressures to invest for a reasonable return, it must also keep pace with the way SET and technological innovation is changing the ways companies operate and grow.

Innovation Strategies for businesses

4.7  Such a demand can, as Pera International pointed out, be encouraged through companies' developing Innovation strategies, as part of which they can recognise and articulate their demands for SET in company growth. Pera noted that "a confident and articulate demand side can generate market driven developments in the SET base, which is preferable to expecting companies to respond to top-down planning of technology transfer mechanisms". They had identified a number of successful approaches that were beginning to emerge to support the development and adoption of such strategies within businesses (p 301).

4.8  The Small Business Service (SBS) and the Business Links provide a business support service that could help companies work through innovation strategies. DTI pointed out that it was working with RDAs on business support to achieve better coordination of business support services at the local level and ensuring that Business Links promote Regional Economic Strategies (p 17). Mr Bryan Gray of NWDA noted that a number of the RDAs were running pilots to deliver business support by taking Business Links into their organisations (Q 285).

4.9  We would strongly encourage the joint working between RDAs and DTI on intervention strategies to generate increased awareness of the value of SET, addressing in particular the value of helping companies develop their innovation and R&D strategies.

High-tech companies

4.10  High-tech companies are highly dependent on continuous SET discovery for survival and success in their own markets. As they generally produce high-value goods, they are seen as key in the success of the economy.

Importance of Innovation

4.11  Innovation is the sustaining life blood of industries such as aerospace, pharmaceuticals, software engineering and medical technology. As the Society of British Aerospace Companies pointed out:

"it is only when a strong science base is applied in some form or other that its value is realised, and it is industry that turns the pamphlets of universities into life-enhancing products and services for society." (p 327)

4.12  Harnessing the SET base is always high on the agendas of these high-tech and highly SET-dependent companies. Issues for such companies include:

(a)  access to an excellent science base;

(b)  the identification of commercial potential of discovery;

(c)  R&D work that begins to turn an invention into a commercial product; and

(d)  the continuous supply of skilled people.

Supply chain links

4.13  New discoveries and technologies are giving rise to new companies and even new industrial sectors. New products make impacts on the supply web in various ways. For example, components manufacturers for cars or aircraft require more technologically sophisticated products from their suppliers; new industries in biotechnology require particular technologies to meet their needs; and public transport or health systems require products to address safety and health issues. They all require people with the right knowledge and skills.

4.14  Some of these sectors, and companies within them, are major employers in a region both directly and as a result of multiplier effects. For example, the Midlands aerospace cluster generates 45,000 jobs, many of them highly-skilled (p 81).

RDAs and the Growth of High-Tech Industries

4.15  The high value-added from successful high-tech businesses means that RDAs aim to support their growth. RDAs provide a range of services such as:

(a)  support for business spin-out from the SET base;

(b)  incubation facilities and services;

(c)  development of science parks; and

(d)  assistance with IP management services.

Some RDAs also provide additional support in the form of specific seed-corn funding or regional venture capital funds. RDAs both initiate new developments and build on existing ones to strengthen them.

4.16  Collectively, RDA activities such as these help to establish the development of high value-added industrial clusters that are dependent on advanced technology. RDAs' general aim in doing so is to achieve critical mass to impact on the regional economy. Such a focus attracts companies; provides specialist facilities for spin-out companies from the SET base; and can also provide a magnet for Venture Capitalists. An additional advantage of such physical groupings is that they also provide a support network in themselves for start-up and spin-out entrepreneurs.

Funding the exploitation gap

4.17  Recognising a commercial SET opportunity is, of course, only the first stage. The crucial next step is for companies to be able to finance the desired developments. It was disappointing to hear Mr Gavan's general view that the cost of doing numerous small deals in early stage companies was too high to support a commercial rate of return (Q 327), and we have discerned two particular aspects of the financing needs of new high-tech growth companies.

(a)  The first concerns the funding of the exploitation gap in the very early stages of technological development and proof of concept. As Dr Keaton of Campus Ventures noted, "there is a lack of pre-seed funding to establish the market potential of a product and this seems to be a key constraint" (p 203). AWM also identified this as a key concern in their evidence (p 24), and Mr Gavan made the point that "there is enormous pent-up demand for investment in the lower range from £100K-£500K. Business angels support is patchy" (Q 322).

(b)  The second relates to the growing gap for the next stage of equity development capital financing in the range £¼m to £5m, usually provided by private sector venture organisations.

We deal with each stage separately below.

Early stage financing

4.18  We received evidence from HE knowledge-transfer professionals (QQ 125-170) and from RDAs about very early stage financing, when up to about £¼m is needed. HE and RDAs each provide financial assistance. Examples include University Challenge funds and various regional initiatives such the Government-funded (but with private sector leverage) Regional Venture Funds. Such financing — augmented by other initiatives of a national (e.g. SMART[25] Awards) or local nature (networks of local "business angels") — often helps the proof of concept of a technological innovation. However, the proof of concept may not be completed, thus leaving uncertainty about the innovation's market potential.

4.19  We draw several conclusions about this stage of financing.

(a)  Funding available at both regional and national level rarely exceeds £¼m.

(b)  RDAs have a necessary role in not only facilitating and sponsoring such financing but also in advising about it. We were encouraged by the good start made by all RDAs and welcome, in particular, the NWDA's incubation programme (p 203).

(c)  However, we believe more could be done to spread examples of best practice. For example, during our visit to Scotland (Appendix 5), we found that Scottish Enterprise's Enterprise Fellowship Scheme and the Proof of Concept Fund were well-received and yielding results. English RDAs might find these initiatives of interest.

Second stage financing

4.20  Turning to the next stage of financing need (£¼m to £5m), we found evidence of a greater need for innovative sources of equity finance. The lack of interest from the more conventional sources (high net worth individuals and UK financial institutions) is both recent and significant. Several witnesses noted that the Venture Capital risk climate had changed following the dot.com bubble, leaving investors even less willing to invest in higher risk high-tech industries among the investment community.

The way forward

4.21  This matter also emerged strongly in the Committee's recent Inquiry into innovations in microprocessing[26] in which we made wide-ranging recommendations to the Government and the financial community to remedy the situation.

4.22  We are aware that the Government recognises the need for equity financial support for high-tech growth companies to fill the needs described above. The recent Government consultation paper Bridging the Finance Gap[27] sought views on whether the creation of Small Business Investment Companies (SBICs) along the US model would help. SBICs have access to public sector loan capital, with repayments on easier terms than otherwise available, to part-finance vehicles to invest equity capital for early stage growth companies. We await the Government's conclusions with interest.

4.23  In the meantime, we recommend that RDAs should collectively establish a small working party of officials and private sector financial advisers to draw up and propose to HM Treasury and DTI innovative solutions to funding the exploitation gap for early-stage financing of high-tech enterprises. Given the urgency of the needs, we suggest completion of the task by the end of October 2003.

Less SET-dependent companies

4.24  The crucial importance of SET to the survival and growth of high-tech companies is self-evident. Less immediately obvious is the relevance of SET for companies more generally. Almost any company can benefit from technological innovation — to improve not only their products but also their production processes and operating systems (through, for example, adopting IT solutions).

4.25  A good example was provided by the Institute of Food Science and Technology. Companies in the food and drink sector are very significant in a number of regional economies. They can benefit from SET to improve performance and products. "They want proven, trusted and relevant knowledge and science that they can apply practically in context. Much of this may not be novel per se, but may well be new to the businesses, and is therefore innovation" (p 285). This position is relevant to many sectors and clusters.

SMES

4.26  Engaging SMEs (80% of which employ fewer than 50 people) is a particular challenge for RDAs. Clusters and Business-led Networks could help address this.

4.27  The middle market (that is, medium-sized companies at a particular stage of growth) seems under-utilised as a area for SET exploitation. It has existing infrastructure and routes to market. There is relative stability, an ability to cross-subsidise and access to more discretionary resources. Its members have an advantage of scale over smaller companies. If understood and focused, technological innovation could lead to relatively rapid modernisation and diversification — transforming existing medium-sized companies into real growth opportunities. As Mr Norman Price of AWM noted, the issues for them are mainly awareness and ambition (p 65).

4.28  RDAs can help support both the middle and small business market for SET by addressing the key issues for them. As Mr Wren-Hilton noted, Business Link and RDA activities appear to concentrate on general business issues and do not have a particular focus on innovation (Q 318). The new arrangements between the SBS and the Business Links noted in paragraph 4.8 could help to redress this.

The role of intermediary technology institutes

4.29  A recurring theme in the evidence from business interests is the need to address applied research and technology — the translation of ideas into products. This means developing a national research base which has an industrial focus, giving as much attention to innovation or the successful exploitation of ideas from the SET base as to original scientific discovery. Such a base could provide a particularly interesting context for multidisciplinary work.

National intermediary organisations

4.30  One of the ways that RDAs and other organisations have sought to address technological development is through intermediate organisations. One example is the Faraday Partnerships[28], set up by the DTI through a national programme.

4.31  The Association of Independent Research and Technology Organisations (AIRTO) pointed out that it was the largest community of SET knowledge-transfer companies in Europe. Its member bodies employ some 20,000 scientists and engineers across the country and have an annual turnover of £2 billion (p 241). European equivalents include Germany's Fraunhofer Institutes[29] and the VTT in Finland. Examples of good practice are beginning to emerge for collaboration between AIRTO organisations and the RDAs, and we would encourage the wider dissemination of these.

RDAs and Intermediary Institutes

4.32  RDAs are also stimulating the development of Intermediary Institutes, Centres and Ventures to address the exploitation of SET for commercial products. The North East, for example, is developing Centres of Excellence in five major areas related to their sector growth (p 167). As Professor Green noted, Yorkshire and The Humber has Centres of Industrial Collaboration (Q 139). There are also Regional Food Technology Transfer Centres based in HEIs with strong involvement in food and drink education. EEDA has supported an Innovation Centre in plant biotechnology, linked into the University of East Anglia (Q 116).

4.33  RDAs are collaborating over a networked Nanotechnology centre (p 20). AWM announced a new £70m Automotive Research Centre to support the manufacture of premium/luxury products, to which the RDA has committed development and financial support (p 65). The NWDA has invested £25.7m to develop Daresbury's Science Park to help secure its future as a Centre of Excellence for R&D to link science and industry in a direct and effective way, supported with an additional grant of £11.5m from the DTI[30]. AWM suggested that Development Institutes for SET development activities might usefully be set up as charitable bodies (Q 87 and p 65).

4.34  We agree that, as a concept, intermediary technology institutes and the like are excellent. However, to achieve their purpose, they must relate closely to markets and have exceptional leadership. In the longer term, those that are good should become substantially self-financing from royalties or other income from their innovations.

Innovation Partnerships

4.35  Professor Sir Gareth Roberts drew our attention (Q 177) to the proposal in his April 2002 Report Set for Success[31] to provide a more substantial and coherent approach to innovation by developing regionally-focused Innovation Partnerships. He was pleased that the Government had accepted the thrust of the recommendation[32] and the general principles that such partnerships should: include the training and development of people for SET; pursue research that was business-led and focused on commercially oriented R&D; be focused on regional clusters of businesses with particular research interest; and receive Government investment, alongside that from the prime funders.

University centres

4.36  Universities also have centres of expertise that have a particular interest in applied issues. The Warwick Manufacturing Institute[33], directed by Sir Kumar Bhattacharya, is an often-quoted example. There are many other applied research groups in universities that have a particular interest in working with the industrial base on the development of new products or processes, and some of the research groups intimately relate to particular industries or sectors that can impact on regional development. One example is CATE (the Centre for Aviation, Transport and Environment) at Manchester Metropolitan University which addresses environmental quality issues for the airport industry. Manchester Airport is a significant economic driver for the North West, and its ability to take account of environmental considerations is crucial for its future growth.

Clarification of interconnections

4.37  We were struck by the range of initiatives and ideas aimed at encouraging industrial or applied research that turn scientific discovery into products. However, sectors and clusters have differing needs for industrial research aimed at developing products from SET discovery. We recommend that DTI and RDAs should, in consultation with the providers and users of research, jointly ensure that means are available to identify and address gaps in the provision of applied and industrial research in relation to different SET-dependent sectors and clusters.

Facilitating mechanisms

4.38  A variety of ways to facilitate development were brought to our attention during the Inquiry. These all aim to ensure that SET resources are effectively harnessed for business growth, but some concerns were expressed about how effective these were in practice.

Support Schemes

4.39  There is no shortage of support schemes to encourage businesses to innovate through technology. (SMART is one example.) Indeed, there are far too many schemes, leading to high transaction costs in applying for and administering them, and wasteful confusion and lost opportunities under complicated rules.

4.40  Dr Keaton of Campus Ventures captured the concern, highlighting the duplication and making the case for simplification by putting the multiple funding sources into a single pot (p 203). The Better Regulation Task Force noted[34]:

"when we looked at the delivery process from Whitehall to the ground level, we found too many initiatives, confused accountabilities and overly bureaucratic monitoring and delivery systems."

This point was reinforced by the Royal Academy of Engineering:

"simplification of access to processes and opportunities would greatly enhance the RDAs' effectiveness." (p 309)

4.41  There were also concerns that the Government takes too short-term a view on innovation. As Mr Wren-Hilton noted:

"the funding sources that occur in the UK tend to be fairly short-term, the stakeholders change on a fairly regular basis and you are not sure who is administering the grants. … It is very much a piecemeal, patch-it approach, there is not the integrated longer-term approach which companies actually require … we need to be able to plan." (Q 344)

4.42  DTI had recognised the need for a rationalisation of schemes and, at the time of our Inquiry, was undertaking a review (p 17). We welcome this, and the Minister's aim to reduce the schemes from around 150 to about 20 (Q 396).

Networks

4.43  A major role for RDAs is facilitating connections — between businesses, between them and supporting agencies, and with the SET base. A significant part of RDAs' delivery mechanisms for these interactions and developments are their cluster policies, informed by the works of Professor Michael E. Porter of Harvard Business School and encouraged by the DTI. RDAs also encourage the formation of networks.

4.44  Businesses have their own extensive networks. These can be local, regional, national and international. Companies are located in sectors and sub-sectors that are networks in themselves. They may also have particular network organisations or institutions to support them, or clubs and events to bring businesses together and sometimes together with the supply base. They are part of supply chains, supply webs and supply networks and have intermediaries such as Chambers of Commerce, the Institute of Directors (IoD) and the Confederation of British Industry (CBI).

4.45  All these afford significant opportunities for acquiring knowledge, information and intelligence for companies, that are important for knowing the competition and for influencing their own competitiveness. Mr Liversidge pointed out the importance of networks such as Medilink (for the medical technology sector) for business to be able to talk to business on specific areas of common interest relevant to their specific sector (Q 313). Dr Toon noted the importance of being involved in a network (resulting from biotechnology cluster developments in the North West) as a start-up business.

"To recognise you are not alone, even if it is just once a month over a cup of coffee talking to people in similar situations, is a tremendous help and that leads to contacts and Government funding." (Q 316)

4.46  The Institute of Physics (IoP) drew our attention (p 287) to its recent report on The Importance of Physics-based Industry to the UK economy[35] This identified the importance of clusters and networks in the sustainability of new physics-based industries (such as photonics and nanotechnology), noting that cluster effectiveness was enhanced by proximity to universities.

4.47  The existing networks are useful vehicles, if appropriately harnessed. They might provide the answer to EMDA's question about how to "create systems where brokerage is second nature, where people are actually connected up with the specialisms they need, without a whole series of intermediate processes that somehow block them off from those centres of expertise" (Q 91).

Access to University expertise

4.48  Universities have increasingly addressed the issue of access to their expertise through the establishment of specific offices that provide gateways for business and through web site information. Although a number of Regional University Associations are helping to provide comprehensive gateways for business, it is not clear how these link together to provide a coherent picture of the resources available to businesses from universities.

4.49  Business still experiences difficulties of access to universities. As Mr Wren-Hilton noted, one of the difficulties facing SMEs is knowing how to find out from universities and colleges what R&D is being pursued and who specialises in what innovation (Q 317).

4.50  From the university perspective, an interesting point was made by Professor Sir Gareth Roberts:

"83% of industries never set foot in a university and have no idea what a university can offer. They are not just SMEs. They are the medium to large companies. I think we should have RDAs searching them out." (Q 172)

Coordinated information

4.51  Against the background of the preceding paragraphs, we recommend that RDAs work with SBS, Business Links, businesses, universities, Research Councils, charities and other relevant organisations to produce, publicise and keep up to date a web-supported intelligence service on SET support. The service should cover both regional and national perspectives and provide intelligence and interpretation in relation to sectors and clusters on:

(a)  relevant intermediary research institutes and their equivalents;

(b)  the particular strengths of universities (as recommended in paragraph 5.57);

(c)  the access points and gateways into universities;

(d)  collated information on current and recent research projects;

(e)  the networks and clubs for business; and

(f)  schemes and initiatives — regional, national and European — that support innovation.

Public sector procurement

4.52  The growth of any sector depends on businesses securing orders. The public sector is one of the largest purchasers in any region. Government Departments, the NHS, local authorities and so on all require goods and services, often with a high level of technological sophistication, for a wide range of purposes.

4.53  As described earlier in this Report, RDAs are facilitating and supporting high value-added technology based sectors. The spin-out and start-up companies they are encouraging are part of the supply web of the public sector, and can supply goods and services that are technologically sophisticated.

4.54  In the Report of our recent Inquiry into innovations in microprocessing, we noted[36] that public sector purchasing power could neatly complement Government policies to encourage the start-up and growth of high-tech businesses. This Inquiry has, however, highlighted a significant gulf between what should be related policies.

4.55  We were concerned to learn from Mr Wren-Hilton that his Internet company was precluded from bidding for a project within its technical competence (and in which it had a good international track record) solely on grounds of turnover (p 218). Mr Liversidge told us of a small Yorkshire-based company making high-tech medical kit needed by a local hospital but which, because of purchasing policies, could sell to that hospital only through the German-based preferred contractor (Q 341). He and Professor Rhodes drew our attention to the American Government's Small Company Set-Aside Scheme (QQ 324 & 322), which addresses these points by ring-fencing some smaller procurements for SMEs and by penalising the prime contractors in larger procurements if a certain proportion is not sub-contracted to SMEs.

4.56  We put that interesting suggestion to the Minister (Q 407), but were disappointed in his quick rejection of the approach. This denies opportunities to small companies and, in hindering their growth, reduces dynamism in the regional and national economies. As smaller firms are lighter on their feet and can thus be the most innovative, it also denies the public sector the opportunity to benefit from their fresh thinking.

4.57  Accordingly, we recommend that the DTI should re-examine the case for arrangements like the USA's Small Company Set Aside Scheme to help small businesses to access and thus assist public sector procurement.


24   Details available from www.innovation.gov.uk/projects/rd_scoreboard/introfr.html Back

25   Small Firms Merit Award for Research and Technology. Back

26   See Chapter 10 of Chips for Everything: Britain's opportunities in a key global market, 2nd Report Session 2002-03, HL Paper 13-I.  Back

27   Bridging the finance gap: a consultation on improving access to growth capital for small businesses, HM Treasury and SBS, April 2003 - text available via www.hm-treasury.gov.uk Back

28   The business-driven knowledge base/industry Faraday partnerships were launched in 1997 as means of bringing together public and private sector SET research and exploitation on both industry-specific and cross-cutting subjects identified from Foresight priorities. The Partnerships bring researchers and businesses together through the involvement of intermediate organisations and "technology translators" (business-literate scientists and engineers). They use private capital and various support schemes to bring new products and processes to the market faster. Back

29   The 60 or so Institutes run by the Fraunhofer Society focus on priority areas of SET exploitation. As noted by the British Embassy in Berlin, the Society receives 40% of its funding from the Federal and Länder Governments, with the remaining 60% from contract research (p 252).  Back

30   DTI Press Notice P/2003/216, 2 April 2003. Back

31   Recommendation 6.7 of SET for Success: the supply of people with science, technology, engineering and mathematics skills, April 2002 - text available on www.hm-treasury.gov.uk Back

32   On page 120 of Investing in Innovation: a strategy for science, engineering and technology, July 2003 - text available on www.hm-treasury.gov.uk Back

33   A key partner in the Automotive Research Centre noted in paragraph 4.33. Back

34   In its July 2002 Report, The local Delivery of Central Policy - the text of which is available on www.brtf.gov.uk/taskforce/reports/LocalDelivery.pdf Back

35   Published in March 2003, text available at http://industry.iop.org/PBI.html  Back

36   Paragraphs 10.21 to 10.24 of Chips for Everything: Britain's opportunities in a key global market, 2nd Report Session 2002-03, HL Paper 13-I. Back


 
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