Nesta's Stian Westlake sets out how indust

1. Through a glass, darkly
The quiet rebirth of industrial policy
Stian Westlake, Nesta T: @stianwestlake

2. The problem
120
115
110
105
100
95
90
85
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1980
1990
1973
2008
Productivity growth after major UK recessions
Year 1 Year 2 Year 3 Year 4
Quarters since start of recession

3. The first rule of industrial
policy club is you do not
talk about industrial policy
club

4. How to talk about industrial policy – a guide
for politicians
“This is not about picking
winners; it's about backing
technological leaders, creating
capacities, and building on the
strengths of the economy” –
Peter Mandelson
“This isn't about 'picking winners'.
It's about picking the races in
which to focus scarce resources on,
and Government doing what only
it can do, but doing it better” –
George Freeman

5. A common element is
innovation
%/yr, 1990-2007
2.5
2
1.5
1
0.5
0
Labour quality
Innovation:
67% of
growth
Capital
investment
Investment in
innovation
TFP (wider
benefits of
innovation)
Total
Make-up of UK economic growth
Source: Nesta, The Innovation Index (2009-12)
UK Business growth, 2004-08
Innovators
Non-innovators
Revenue growth, %/yr
12
10
8
6
4
2
0
Product
Innovation
Process
Innovation
Source: Nesta, The Vital Six Per Cent (2009)
Wider
Innovation

6. The government’s to-do
list

7. Innovation policy is technocratic

8. …with a narrow audience
Futurists
Romantics
Creatives
Realists
Sceptics
19%
12%
19%
34%
16%
Technophiles
Like the word “innovation”
Less concerned about pace of change or controversy
Disproportionately male, ABC1
Innovation : “it makes a country great”
Unlikely to be involved in innovation
Older, C2DE
Early adopters, creative
Interested in innovation to the extent it solves problems
they care about
Younger, less political
Not excited by innovation per se
Care about the ethical &social context of innovations
Aware of drawbacks : desocialisation, “throwaway culture”
Concerned about impacts of radical innovation on jobs & the
future
Worried about impact of innovation on consumerism and
employment
More female, C2DE

9. Technocratic innovation policy is a
Faustian bargain
+ –
Consistency of
policy (cf NHS)
Safe from
ideology
Ring-fencing of
science budget
Not part of the
national
narrative
A hard sell at a
time of
austerity

10. Opening the Overton
Window

11. 1. Go large
Public technological development spending, 2013 As share of GDP
Innovate UK £440m
€579m
TEKES
(Finland)
OCS (Israel)
$450m
0.2%
0.02%
0.15%

12. 1. Go large
What might you do? What would you need to believe?
To match Finland’s level of public
investment:
• £10bn on research
• £3bn on Innovate UK
• ~£100mn on risk capital
(You could perhaps save a couple of
billion by cutting R&D tax credits)
That you can find ~£8bn from
somewhere: good luck.
That the UK’s economy can
internalise the benefits.
That you can keep it up.

13. 2. Go downstream
UK
 Experimental development has decreased from 54% of the total R&D
funded by government to 24% over 20 years.
 Basic R&D funding has increased by more than 5 times, the
equivalent of a 9% annual growth rate.
 In nominal terms, experimental development funding has decreased
by almost 20%.
USA
 US Federal funding has maintained a much larger share of
development spending, falling from 68% to 52% over the same
period.
 In nominal terms, spending on development has increased by
60%.
Development
Applied research
Basic research
Development
Applied research
Basic research

14. 2. Go downstream
What might you do? What would you need to believe?
14
Redirect funding from Research
Councils to Innovate UK
(“Arrow projects”, supply chain
vouchers, more SBRI?)
Increase HEIF at the expense of QR
That you can find ~£8bn from
somewhere: good luck.
That UK businesses can rise to the
challenge.
That you can keep it up.

15. 3. Get in on the upside
(sort of)
State revenues
AUD$430m
€650m
€100s m

16. 3. Get in on the upside
What might you do? What would you need to believe?
Get Innovate UK and RCs to take
stakes in companies they fund (or
royalties, or income-contingent
loans).
Perhaps borrow up-front against
future revenues to allow an
increase in innovation funding.
That our investments will be as
good as Israel’s or Finland’s – or
perhaps they need to be better.
That the bureaucratic hurdles
aren’t too big.
That company behaviour won’t be
badly distorted.

17. But money isn’t everything
What’s going on
here?

18. 4 & 5. Germany …or Austria
UK businesses have trouble growing
(Nesta/NIESR)
Some sectors are uncompetitive
(banking?)
New technologies won’t increase
productivity without disruptive
innovation (Field)
Businesses use excessively high hurdle
rates (Christensen)
UK businesses have trouble growing
(Nesta/NIESR)
Buybacks may discourage R&D (Lazonick)
Intangibles are undervalued and R&D falls
in the year CEO options vest (Kay, Edmans)
UK’s skills problem is longstanding and
well-known (Leitch Review)
German businesses self-organise

19. 4 & 5. Germany …or Austria
What might you do? What might you do?
Reform Anglo-Saxon capitalism
• State investment bank
• Establish state pension funds
and invest them in illiquid assets
• Spend on apprenticeships
• Put workers on boards
• Delegate BIS power to local
business chambers
• Split up HM Treasury!
(But: can you make Britain
Germany? Would you want to?)
Abolish Innovate UK, R&D tax
credits, etc (except for SMEs or new
businesses?)
Use the proceeds to reduce tax
Prioritise regulatory barriers to new
entrants
Exempt SMEs from various taxes
(But: goes against a lot of what we
know about innovation.)

20. 6. Citizen innovation
Eight per cent of people in
the UK are “user innovators”
Lucas Industries, 1970
Eric von Hippel
+

21. 7. Get creative
The UK creative economy is fast-growing,
internationally
competitive and big
It is relatively cheap to promote
It is complementary to many STEM
skills
UK industrial policy in this area
(shhh!) seems to have worked
What might you do?
Direct public funding to arts and
culture, and relevant STEM:
• BBC commissioning
• STEAM crossover skills and
projects
• Generous arts funding
• Platform development
(Good luck selling this to the
public.)

22. 8. Go green
What might you do?
• Major investment in energy
R&D
• Downstream investment to
increase deployment of low-carbon
tech
• Recapitalise the Green
Investment Bank
• Prizes and challenges

23. 9. Gimme clusters!
What might you do?
• Intervene in property markets
and planning systems to help
clusters grow
• Provide better local
infrastructure (FTTP, fablabs,
incubators)
• Sponsor business networking
• Delegate more power to local
government

24. …the ‘how’ matters too

25. So what should we do?
2. Get more value from public tech funding
• Emulate Finland’s TEKES and Israel’s OCS
by seeking capped repayment from
successful technology grants.
• Allocate 1 per cent of Innovate UK’s
budget to market intelligence and
technology futures.
1. Rebalance government funding away from
research towards development.
• Reallocate £0.5 billion from research
councils to Innovate UK.
• Government investment in research and
development should be more prioritised
towards downstream investment.
3. Fix the wiring of government to make
better industrial policy possible.
• Split up the Treasury, moving budgetary
responsibility to a Prime Minister’s
Department and economic and industrial
policy to a new Ministry for Growth.
• Expand the use of randomisation and
testbeds in economic policy – they should
be the default.
4. Fight short-termism.
• Work with the LSE and banks to
encourage companies to provide better
information about intangibles and to
facilitate lending against them.
• Make a clearer distinction in the Budget
between government investment and
current spending – and increase the
former.