GO BE AN ENTREPRENEUR

Another great sketchbook on entrepreneurship from the Kauffman Foundation

 

WELSH BUSINESS R&D PERFORMANCE AND WHAT BUSINESS CAN DO TO IMPROVE IT

This week, the Office for National Statistics released the latest UK business R&D expenditure data a few days ago and this gives us the opportunity to benchmark the UK against the Global Innovation 1000 report discussed in an earlier article.

The good news is that, as with the overall global data, spending on innovation is increasing within the UK.

According to these statistics, spending on industrial R&D by British companies had actually increased by eight per cent in 2011 to £17.4 billion, which is a higher growth rate than for Europe as a whole.

As demonstrated in the Global Innovation 1000 report, the sectors that had grown the most were computer and information service activities, motor vehicles and parts and the pharmaceuticals industry. Collectively, these three industries had increased their R&D expenditure in the UK by £750m in the last twelve months.

And whilst large firms remain the big spenders, the proportion of expenditure by SMEs has actually grown from 14 per cent in 2006 to 23 per cent in 2011, showing the growing impact of entrepreneurial firms on innovation.

For Wales, the data provided a mixed picture.

Whilst business spending on R&D has increased by 77 per cent since 2000 (as compared to 51 per cent for the UK), growth has been relatively flat over the last few years (see graph below). Indeed, Welsh companies provide less than 1.5 per cent of the total amount of business R&D undertake within the UK, well below what would be expected proportionally. This demonstrates how dependent the Welsh economy has become on its university sector as the main source of research and how important it is to get the mechanisms right to get new products and processes from the laboratory into the marketplace.

More relevantly, the Welsh Government’s aim of having business R&D as one per cent of the economy remains a distant target, with the data suggesting that firms would have to spend an additional £200m per annum to reach this target.

Of course, politicians can only do so much to support innovation within the business community and firms themselves need to develop new ways of exploiting research findings and transferring them into the marketplace. And that is where some of the more detailed findings of the Global Innovation 1000 study may prove useful.

Through detailed interviews with major innovators, one of the most important (and perhaps more obvious) findings from the survey is that there seems to be no long term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance.

What is more important is how businesses use that money and the quality of their talent, processes, and decision-making. Therefore whilst Welsh businesses spend comparatively less than firms in other regions on R&D, this does not necessarily mean that they are not using those funds productively.
Another key finding is that over half of those innovative companies interviewed said that they actually weren’t very good at it. In fact, only a quarter of the firms believed that they generated ideas effectively and, at the same times, converted those ideas into new product development projects.

But what is important about these firms is that they have a consistent set of principles and processes to turn ideas into potential commercial projects and, crucially, any company in any industry to get the most out of the money they spend on innovation can use these tools.

For example, the most common method for coming up with new ideas was “direct observations of customers”. In addition, the main internal mechanism that companies used to support commercialisation was the employment of “innovation champions” within organisations, namely employees who are assigned to coordinate the capture, development, and promotion of new ideas.

I wonder how many Welsh organisations have such individuals employed to boost innovation internally?

One of the more interesting findings is that major companies use open innovation in idea generation sparingly. This is unexpected given that this has been a major source of discussion as the new paradigm for accessing new ideas. However, the fact that a small but growing number of firms are seeking out new ideas from a variety of sources outside their conventional domains, including innovation contests and social networking, does offer opportunities for Welsh companies, especially if the whole concept of open innovation can be adopted by senior managers within these firms.

Therefore, whilst R&D expenditure by private companies in Wales has slowed down in recent years, there are certainly lessons that can be learnt from other businesses to make the most of the money spent on innovation. In particular, there needs to be a greater emphasis on the development of innovation skills that, ironically, no Welsh university currently offers to the business community.

There are certainly plenty of opportunities for Welsh firms to make the most of innovation as a competitive tool and hopefully, through its new innovation policy, the Welsh Government will be able to provide the support necessary to access these opportunities wherever possible.

INCREASED INVESTMENT IN INNOVATION CAN LEAD TO GLOBAL ECONOMIC RECOVERY

Innovation is key to the competitiveness of nations, which is why the recent Global Innovation 1000 study by the strategy consultants Booz and Company into corporate research and development (R&D) spending is a critical indicator as to how the world economy is emerging from the worst recession since the First World War.

And contrary to the doom and gloom peddled by some on the future prospects for the global economy, the encouraging news from this report is that the world’s most innovative businesses are again beginning to invest in research that will lead to new products and services.

According to the study, R&D spending by the Global Innovation 1000 increased 9.6 percent to £380 billion in 2011. Whilst this may have been expected after the slowdown in spending that occurred during the global recession, this recovery is, contrary to expectations, actually stronger than that following the last major economic downturn after the dot.com crash back in 2000.

For example, expenditure on R&D in the first three years after that global shock increased by an average of 3.5 per cent as compared to 9.5 per cent between 2009 and 2011.

In fact, three quarters of the companies surveyed actually increased their R&D spending in 2011, with only 19 per cent spending less.

It is worth noting that  R&D is increasingly focused within a small number of companies globally, with 10 per cent of the Global Innovation 1000 accounting for two thirds of the total expenditure of R&D in 2011 and half of the increase in R&D spending.

There is also a concentration in terms of R&D intensive sectors, with computing and electronics, automotive and healthcare being responsible for two thirds of all spending in 2011.

Of these three key sectors, computing and electronics continues to dominate innovation, spending £105 billion on R&D in 2011 (or 28 per cent of the global total).

Interestingly, it was not an American firm that led the way in this expenditure. Instead, it was Samsung, driven by its mission to overtake Apple within the smartphone industry sector, that increased its spending by almost 14 percent to £5.7 billion.

And with advances such as cloud computing changing the way that consumers will be accessing and using their electronic devices in the future, it is not surprising that even traditional players such as Hewlett Packard, Sony and Texas Instruments have increased their R&D intensity over the last year in order to keep up with newer companies on the block.

However, it is not only emerging technologies which are R&D intensive and many analysts remain surprised by the Lazarean recovery of the automotive sector during the last four years and its renewed enthusiasm for innovation.

Indeed, the increase of 15 per cent in R&D expenditure contrasts with the 14 per cent decrease experienced in 2009, and has been led by companies such as Volkswagen, Daimler, General Motors and Honda, with Toyota becoming the largest corporate R&D spender in the World in 2011.

In contrast, the healthcare sector seems to be treading water in terms of research investment, with major companies instead choosing to return money to shareholders.

And whilst companies such as Roche, Pfizer and Merck remain in the top ten R&D companies in the World, they have all reduced spending in the last 12 months as regulatory uncertainty means that they are reluctant to invest in R&D without a clearer path to market

In terms of expenditure by region, the data continues to have some bad news for Europe, especially relative to other parts of the World.

For example, the largest overall increase in absolute spending continues to be experienced in North America, where R&D spending grew by ten per cent in 2011, thanks to companies such as Microsoft, Intel, Merck, Pfizer and General Motors which, between them, spent £27 billion on R&D.

In contrast, R&D spending in Europe increased by only five per cent in 2011, well below the average seven per cent increase experienced during the previous five years. This is despite having two companies – Novartis and Roche – in the top three corporate R&D spenders in the World.

And given that the European Union has targeted increased research and innovation as a key part of its growth strategy over the next few years, much remains to be done in terms of ensuring that we keep up with the rest of the World, never mind overtake it.

In fact, the emerging economies of China and India posted an impressive 27 per cent growth in 2011, although this was from a low base and their overall contribution to global R&D remains low at less than three per cent of the total.

And worryingly for the West, this does indicate that those developing countries previously seen as sources for cheap manufacturing are now beginning to move the value chain by investing in innovation.

Therefore, the report shows that the overall global picture for innovation seems to be one of recovery and renewal, which would have been the last thing anyone would have expected four years ago.

However, the question for European policymakers and corporate leaders is whether they will be able to close the growing gap in R&D spending with the rest of the World and, more importantly, develop new innovations that will have a real impact in the marketplace?

DONE PROPERLY, NEW SCIENCE PARK COULD MAKE A REAL DIFFERENCE TO NORTH WALES ECONOMY

Due to its failure to win a majority at the last Assembly election, the current Welsh Government has to make a deal, around this time every year, with one of the other parties in order to pass its budget.

This time, Labour has agreed a compromise with Plaid Cymru which, in exchange for passing its financial plans, will result in thousands of additional apprenticeships and a new science park involving Bangor and Aberystwyth universities.

Given the way that the new Secretary of State for Wales has hit the ground running with his announcements on Wylfa and rail electrification in North Wales, it is not surprising that Plaid has made an effort to demonstrate that the region remains important to them electorally.

Indeed, the unexpected announcement that £10 million of capital funding is to be committed to the science park has enormous potential for the economic development of the region if managed properly.

Of course, there have already been earlier attempts to connect both universities with the business community through the Technium programme that, to be blunt, failed badly.

Both the CAST building on Parc Menai and Aberystwyth Technium, which cost the Welsh taxpayer over £30million to build and operate, were closed down by Ieuan Wyn Jones when economic development minister, having generated considerable debts and having had very little impact on the local economy.

Despite this, I think that the new science park can work if its leadership and location are prioritised.
First of all, it is fortuitous that Bangor has a Vice Chancellor with an excellent record in linking industry and academia from his time in Ireland. Certainly, if he takes the lead on this project and drives it forward, then the chances of success are increased considerably.

The second issue is that of location, which may be slightly trickier. Indeed, some may argue that a largely rural area such as North West Wales is the wrong place for a successful science park.

However, my own experience of working with colleagues at Linkoping in Sweden disproves that theory.

With only 105,000 inhabitants, this former market town currently has the largest science park in Northern Europe, being the base for 250 firms employing more than 6,000 people, with the majority of those generated from the local university.

But the real question is where will this new science park be located, given that Aberystwyth and Bangor universities are eighty seven miles apart?

In my opinion, it is unlikely to be based around Aberystwyth so will it be based around Bangor itself building on current developments such as Parc Menai?

Alternatively, will Lord Elis Thomas use his considerable powers of persuasion to get his University, and his Plaid colleagues, to put it into Trawsfynydd which is diplomatically half way between Bangor and Aberystwyth but which also has the added attraction of recently being granted enterprise zone status?

However, in my opinion, there is only one viable location that will make this project a success.
The recent announcement that a new power station at Wylfa B is likely to go ahead gives Anglesey a once in a lifetime opportunity to maximise the economic benefits for the region.

If the ‘energy island’ also had a science park, then it could become one of main centres for sustainable energy in Europe, attracting companies in the sector to the region, creating hundreds of well-paid jobs and taking real advantage of the academic expertise within the local university sector.

I am also convinced that this development could attract considerable additional funding from the science and technology budget of the UK Government.

Hopefully, such joined up thinking in taking advantage of a major infrastructure and energy project could, and should, add real value to the local economy and ensure that North West Wales has a bright economic future.

GO WALES HAS POTENTIAL TO SUPPORT GREATER UNIVERSITY-INDUSTRY LINKS

Earlier this year, I was delighted to work with the OECD on a project to examine the state of entrepreneurship education in Tunisia.

It was an intensive but enjoyable experience that enabled the international team to examine the strategies adopted by Tunisian universities to encourage greater entrepreneurial activities, as well as the start-up support offered within enterprise centres and incubators.

As expected, the main conclusions from the research showed that the key to success in developing greater number of new businesses depends on increasing the intensity of entrepreneurship support for those students who have the motivation, ideas and capabilities to make a success of entrepreneurship.

However, in various focus group meetings with other students, it was clear that the main concern of those graduating was not always whether they could start a business, but whether they could actually get a job within an existing small firm.

Indeed, one of the key issues identified in a number of universities was the gap between the theoretical competence that students acquire in class and the competences needed within the workplace, particularly in the private sector.

In particular, higher education institutions in Tunisia have been functioning without any real medium-term plan for how to manage this issue and there was clear lack of appreciation, from the university sector, that the majority of SMEs in Tunisia are family-owned enterprises and have very little understanding of the benefits that graduates can bring to their businesses.

This gap in knowledge between universities and industry is clearly not limited to Tunisia and there have been various initiatives developed to try and close this gap across the World so that students can learn and appreciate the competences required by industry.

One of the more successful, and one that I recommended as an exemplar to the Tunisian Government, is the Graduate Opportunities (GO) programme.

It’s not often that initiatives that originated in Wales are seen as best practice but, in my opinion, this is a successful intervention that could be easily adapted for the encouragement of greater links between industry and universities in Tunisia or any other developing country.

So what is GO Wales?

Simply put, it is a scheme run by the Higher Education Funding Council for Wales that makes it possible for students and graduates to develop their careers in Wales through quality work experience and training opportunities with businesses.

The project contributes significantly to the development of a knowledge economy in Wales enabling businesses to have access to higher-level skills and fresh ideas to support growth and development.

The flagship programme - Work Placements for Employers - offers businesses the opportunity to employ someone with a degree (or studying for a degree) to complete a project while working for a company for around 10 weeks. Placements are primarily aimed at SMEs, as they often do not have the time or resources to develop ideas and new projects and, more relevantly, often do not have the necessary specialist skills to complete a specific task. By hosting a placement, each business receives a choice of subsidised high quality students and graduates with specific knowledge and skills that can add value to the business during a 6-10 week project.

It sounds an excellent scheme but more importantly, it works.

For example, a recent evaluation of GO Wales by the consultants DTZ found that all of the identified objectives for the project are either being achieved or have been achieved. In terms of hard impacts, it has created 1,071 jobs, £2.7 million in wage premiums and £42.4 million of business turnover in Wales over the period 2009-2011.

It has also helped to bring about changes in the perception of the owners of small firms regarding the role of graduates in their business that could create the potential for further benefits in the future. There are more positive attitudes from small firms towards employing graduates, working within SMEs, undertaking further training and development activity, and engaging with universities. And given that more than a third of participating businesses utilising work placements had never previously employed a graduate, this is an excellent outcome for the programme.

However, the one problem identified by DTZ is that not all universities had used the programme effectively to support local businesses. Whilst Cardiff and Swansea Universities had exceeded their targets, other higher education institutions were behind the curve when it came to placing graduates into businesses via GO Wales.

As a result, there still remain some challenges in hitting the output indicators set by sponsors such as European Structural Funds. However, feedback from participants and delivery staff in respect of the operation of the project has generally been very positive and it seems to be making a real difference to those companies that get the opportunity to participate in the scheme.

So will Tunisia adopt this excellent programme?

Well, the final report has been submitted and we had a wide-ranging discussion with government officials and academic leaders in September on how best to create a culture of entrepreneurship amongst young people and small businesses.

Certainly, they could do worse than to adapt a programme from Wales that brings tangible benefits to both groups.

A NEW DEVELOPMENT BANK FOR WALES?

During the last couple of months, I have had the opportunity to speak to Welsh entrepreneurs about the challenges facing their businesses over the next few years.

Many are heartened by the fact that inflation is falling, employment is increasing and consumer confidence is returning.

In fact, the recent economic doldrums faced by the UK economy have not dampened the opportunities for such firms in an increasingly globalised market place.

Yet, there remains a large dark cloud on the horizon that could prevent them from taking full advantage of such opportunities, namely access to capital.

Even the best businesses in Wales with enviable track records of growth and success are finding it difficult to get finance from their high street bank.

As one owner manager told me, it's like having a truck loaded up with goods to go to market and suddenly finding that your local garage won't sell you the petrol to get there, despite having an excellent credit record.

And such experiences seem to be the norm for small firms across the UK, despite recent initiatives such as the British Business Bank, which was recently launched by Vince Cable to provide up to £10 billion of finance for companies.

The Ernst and Young ITEM Club, an independent economic forecasting group, predicted earlier this week that lending to businesses will continue to decline and, by the end of this year, will have fallen to its lowest level since 2006. In fact, the levels of lending may not be back to pre-recession levels for another three years.

And the anecdotal evidence from small firms of the reluctance of banks to lend to business is supported by research which suggests that loan rejection rates from banks have increased to 38 per cent in 2012 as compared to the 11 per cent experienced between 2005 and 2008.

Given this, it is likely that the finance gap between the aspirations of growth firms and the willingness of banks to lend to them will continue to grow over the next few years.

It is estimated that the new British Business Bank will take at least 18 months to get going and even then, according to the ITEM Club, will only be able to provide half the funding required by the small to medium sized enterprise (SME) sector across the UK.

Indeed, whilst the new British Business Bank will operate at arms-length from Government and be professionally run and commercially focused, it will only provide loans through existing providers such as the high street banks.

The question is, of course, whether such access to government-backed finance will change the attitude of lenders who remain reluctant to support small firms, especially as it has been suggested that much of the new lending recorded by banks to business is merely a renegotiation of existing credit with companies.

Even small business lending programmes such as the Enterprise Finance Guarantee (ECG) scheme, where the Government guarantees up to 75 per cent of the loan, are not having the impact expected.

For example, a recent analysis of loans to small construction firms via ECG showed that only £3.5m was lent during the second quarter of 2012 as compared to £25m during the same period in 2008.

So where does this leave Welsh businesses?

Is there a better solution to enable Wales to get better funding in place for its SMEs?

I believe there is.

After creating the Welsh Enterprise Institute at the University of Glamorgan in the late 1990s, I was approached by the Federation of Small Businesses (FSB) to see whether we could put together a policy case for a Development Bank for Wales which would provide loans and financial support for small firms.

One of my colleagues at the time, Dr Helena Snee, produced an excellent paper which set out a clear case for an organisation along the lines of the Business Development Bank for Canada, which is mandated by the Canadian Government to promote entrepreneurship, focus on the needs of SMEs and maximise financing alternatives for businesses.

And whilst the first Welsh Government, along with the Welsh Development Agency, did not take all the recommendations from the paper on board, it did, thanks to sufficient pressure from the FSB, bring together all of the different financing schemes it managed to create Finance Wales which, of course, has gone from strength to strength since its inception.

With small firms across Wales continuing to complain of lack of access to funding to develop their businesses and having to wait until 2014 for the British Business Bank to be set up properly, will the Minister be minded to consider a Welsh solution to this issue?

In fact, should Finance Wales take the next step in its evolution to become a fully fledged Business Development Bank for Wales, along the Canadian model, and provide those companies with the ability to grow with the capital they badly require?

It would certainly be a bold move but as one that could make a real and positive difference to the potential of the Welsh business sector to grow, it is probably long overdue.