The New Frontiers of Innovation Policy Richard Halkett, NESTA Policy & Research Unit

1. The New Frontiers of Innovation PolicyRichard Halkett,NESTA Policy & Research Unit SPRU, Freeman Centre Seminar Series 30th November, 2007

2. The UK’s ‘poor performance’ in innovation • Policy has focused on improving the UK’s ‘poor performance’ • The UK lags behind its competitors on traditional indicators • Overall per capita expenditure on R&D • Business expenditure on R&D • Business levels of innovative activity • Extent of patenting activity • The overall impression is that the UK wastes its potential by failing to invest in innovation, particularly the commercialisation of ideas

3. The ‘linear’ model of innovation Knowledge creation Knowledge transfer Commercialised product Consumption What: Product manufacture Where: Industry Policy response: None What: Use/ consumption Where: Individual consumer Policy response: None What: Basic science + R&D Where: Universities, industry R&D labs Policy response: R&D tax credit, science budget What: Applied research, development Where: Spinout companies, start-ups Policy response: Lambert agreements, TTOs, KTPs, KTNs

4. Hidden innovation Innovation that goes uncounted by traditional indicators

5. Six ‘low innovation’ sectors • SectorSales/revenue R&D intensity* • Oil £360 billion 0.2 per cent • Construction £17 billion 0.5 per cent • Retail banking £82 billion 0.9 per cent • Education £36 billion <0.1 per cent • Legal aid services £2 billion <0.1 per cent • Rehabilitation £2 billion+ <0.2 per cent * R&D intensity refers to amount spent on R&D divided by sales Source: DTI/DfES/Home Office

6. Type I hidden innovation • Based on science and technology but excluded from traditional indicators

7. Type I: Technology development • Life-of-Field Seismic was developed by BP and ten other contractors • It uses permanent sensors on the seabed to create time-lapse movies of fluid and pressure changes to show recovery processes working in near real-time • This could increase recovery from Valhall by 60 million barrels, and by one billion barrels worldwide The Integrated Subsurface Information System (ISIS) in the Valhall Field in the North Sea Source: BP Hidden Innovation How innovation happens in six ‘low innovation’ sectors

8. Genetic testing in the NHS Pre-implantation Genetic Diagnosis (PGD) and Pre-implantation Genetic Haplotyping (PGH) procedures can weed out genetically defective embryos before pregnancy Initial PGD research was conducted in the UK in the late 1980s. Guy’s Hospital Genetics Centre and Kings College London have recently refined PGH techniques DNA analysis of Duchenne muscular dystrophy (DMD) Source: Science Museum The Innovation Gap Why policy needs to reflect the reality of innovation in the UK

9. Type II hidden innovation • Innovation in processes, organisational forms or business models

10. BAA’s Heathrow Terminal 5

11. Type III hidden innovation • Innovation from the novel combination of existing technologies and processes

12. Type III: Exploiting technology in new services The first direct building in Stourton, Leeds. first direct launched in October 1989 as the UK's first branchless telephone bank

13. Type IV hidden innovation • Innovation that takes place ‘under the radar’ of many surveys

14. Type IV: Locally-developed small-scale innovation

15. Engineering consultancies The Boston Central Artery/Tunnel Project site looking eastwards towards Logan International airport. The last section of jacked tunnel can be seen on the lower right. Source: Mott MacDonald The Innovation Gap Why policy needs to reflect the reality of innovation in the UK

16. Hidden innovation in ‘traditional’ sectors • Rolls-Royce TotalCare contract covers technical support, management of spares, and product development • Rolls-Royce now makes 53 per cent of its revenues from ‘aftermarket’ services • 10-year £1 billion contract with the Ministry of Defence

17. Users as innovators

18. What is user-centred innovation? • Traditional, Manufacturer-Centred Innovation Paradigm • Manufacturers identify user needs, develop products at private expense, and profit by protecting and selling what they have developed • User-Centred Innovation Paradigm • ‘Lead users’ innovate to solve their own needs at private expense and then freely reveal their innovations

19. Users innovate here First manufacturer product appears here # of users perceiving need Target Market Time

20. It has been shown that important innovations are often developed by pioneering users • John Heysham Gibbon – physician, USER – inventor of the heart-lung machine. • The death of a young patient in 1931 motivated Dr. Gibbon to develop a heart-bypass machine, to enable more effective heart surgery techniques. • Gibbon was dissuaded by all with whom he broached the subject but perservered. • In 1935 he successfully used a prototype heart-lung bypass machine on animals. In 1953 he first used a heart-lung machine on a human patient. • Why did a USER have to develop the first heart-lung machine? • At the start of something really new there is no “proven” market!

21. Examples of lead user-developed innovations Biocompatible implant for hernia repair Robotic system for neurosurgery

22. Of course, users aren’t always the innovators

23. Many users innovate

24. Open innovation

25. Open innovation “Closed” Innovation “Open” Innovation

26. Companies like InnoCentive help open innovation clients like P&G search “outside the firm” InnoCentive ‘Seekers’ ‘Solvers’

27. Other exciting areas…

28. Public and social innovation There are four factors for sustainable growth: ‘pull’; ‘push’; strategies that connect pull to push; and learning and adaptation. Many social innovations have foundered because these are missing or ‘out of sync’. However, maximising social impact is not the same as growing organisations Spectrum of models of diffusion and growth In and Out of Sync The challenge of growing social innovations

29. Creative and cultural industries The UK has the largest creative sector in the EU, and probably the largest in the world relative to GDP. Innovation and creativity in the wider economy are stimulated by the creative industries. This captures a shift in which a critical mass of economic activity is knowledge production, as firms deploy new techniques and technologies to meet changes in demand. The creative industries: a stylised typography Source: Work Foundation Staying Ahead The economic performance of the UK’s creative industries

30. Rural innovation Rural innovation is likely to be an important area for innovation, for example in environmental and sustainable technologies. In part this is being driven by the need for the diversification of traditional sectors, such as farming. The resulting forms of innovation are likely to impact on both rural and urban areas. Harlock Hill, Cumbria, the site of five turbines owned by the Baywind Energy Co-operative

31. Cities and regions • Cities offer the advantages of proximity, density and variety. • Some are ‘urban hubs’ which attract business and generate innovation through critical mass. Others offer ‘local links’ where clusters of businesses and connections make the whole greater than the sum of the parts. • Actors must play different roles along the ‘regional innovation journey.’ Innovation in UK Cities

32. Findings & policy implications

33. Importance of framework conditions 7,000 350 Tax changes 6,000 300 5,000 250 4,000 200 Total resource discoveries, million barrels of oil equivalent (mmboe) Exploration and appraisal wells 3,000 Promote licences 150 Oil price crash 2,000 100 1,000 50 1970 1975 1980 1985 1990 1995 2000 2005 Year Source: DTI/UKOOA

34. Hidden innovation policy Despite the focus on ‘generic’ interventions such as R&D support, there are many examples of interventions to stimulate and support innovation in specific sectors. These are rarely considered (or coordinated) as mainstream ‘innovation policy.’ Constructing Excellence has acted to coordinate and support improvement and innovation initiatives in the construction sector

35. Recommendation: Develop sector-specific innovation agendas with industry UK construction industry innovation agenda

36. Recommendation: Create a UK-specific Innovation Index UK construction industry benchmarking KPIs

37. What we’re learning • There are not always policy recommendations… • Government cannot do this alone • Policy must move beyond science-based manufacturer-led innovation to encompass other forms that come from elsewhere in the supply chain • Policy needs to support systems and include diffusion and adoption, not just invention • Developing a full innovation strategy will depend on working closely with industry to identify the innovation that matters most to each sector • A sector-relevant Innovation Index would better guide policy development • Innovation needs to be at the heart of – and across – policy

38. Recommendation: Place innovation at the heart of government

39. Many dimensions of comparison • What organisations say they do • What organisations actually do • Which portions & linkages of the innovation system they are positioned to address • Coverage of relevant stakeholders • Coverage of the UK • Size & source of budget • etc…

40. Four broad groupings around innovation

41. Influence-led Research-led x RCUK x RSA x Commentators x PREST x Demos x SPRU x CBI x Design Council x IPPR x BVCA x Arts Council Practice-led x DTI x Enterprise Insight Policy/ governance x HMT x UCSF x DCMS x Pembridge x RDAs x IP2IPO A functional Ecology of Innovation

42. Each group has strengths and weaknesses

43. Recent policy developments • Changes in machinery of government • Reformed Technology Strategy Board • Lord Sainsbury’s Review of the Government’s Science & Innovation Policies • Comprehensive Spending Review & Pre-Budget Report • Likely White Paper/DIUS strategy Q1 2008

44. You are invited to...NESTA’s Place Summit: Making Innovative PlacesWednesday 12th December from 9.30am to 7pm at NESTA, 1 Plough Place, London • We will be launching three new pieces of research looking at the role of regions in stimulating innovation. • The day will be rounded off with a keynote speech by AnnaLee Saxenian, author of “Regional Competitive Advantage” and “The New Argonauts”, on the attributes of innovative regions, with a particular focus on the role of policy in stimulating (or preventing) innovation.