GLOBAL INNOVATION - ARE LOW LEVELS OF R&D HOLDING UK ECONOMY BACK?

Last week, the information specialists Thompsons Reuters launched their latest list of the “Top 100 Global Innovators”.

Using a complicated but impressive methodology, the study identifies the most innovative organisations in the world through a series of patent-based metrics including overall patent activity, success rate, globalisation and influence.

It is a great read in itself but perhaps the most important finding for both businesses and policymakers is that being focused on innovation does seem to have a positive effect on the performance of the business.

In spending 8.8 per cent more on research and development (R and D) than the 500 largest firms in the USA, these one hundred innovators outperformed the market in terms of simple stock price by 4 per cent over the year. In terms of other performance measures, they created 266,152 new jobs and generated £2.8 trillion in revenues – twice the annual GDP of the UK.

In terms of the industries that make up the list, the semiconductor and electronic components sector – including companies such as Corning, Intel, Sharp and Texas Instruments – continue to dominate with twenty three businesses, an increase of over a quarter on the previous year. It is followed by the computer hardware sector, which includes global giants Brother, Canon, Hewlett Packard, Hitachi and Toshiba. Interestingly, there are only three pharmaceutical businesses present, despite the recent hype over life sciences by most governments.

Innovation can be a driver for competition (or vice versa) and that seems to be borne out by the intense rivalry within the growing smartphone market.  Innovators such as Apple, Microsoft, Samsung, Google and BlackBerry are involved in an intensive patent war to ensure they gain the upper hand in an increasingly aggressive and intensive global battle.

And whilst Apple and Samsung continue to slug it out in courts all over the World, Microsoft quietly spent £1 Billion, as part of their acquisition of some of Nokia’s mobile phone business, to license around 30,000 patents held by the Finnish company and enable them to start taking a more competitive position in the market place.

With regard to the location of the most innovative firms, the USA is where forty-five of the top 100 Global Innovators are to be found, a trend which seems to be founded on the many pro-innovation policies that have been developed over the last fifty years.

Not only does the US Government directly fund billions of dollars of research and development within businesses, they also have a tradition of R and D tax credits to encourage greater innovation and ground-breaking legislation such as the Bayh Dole Act which, over thirty years ago, opened the floodgates to increased commercialisation of intellectual property.

In more recent times, the Obama administrations have looked to build on this by encouraging greater collaboration between businesses and government, most notably through the creation of fifteen new manufacturing public-private innovation hubs across America focused on emerging technologies, from 3-D printing to genome mapping.

Whilst the Japanese economy has suffered during the last decade, it still has 28 businesses on the list, no doubt boosted by a new and more generous R and D tax credit regime along with greater incentives for links between universities and industry.

But perhaps the biggest surprise is that for the second year in succession, there are no British companies on the list. The reason for this, argue the authors, has been the trend over several years of low levels of R and D spending as a percentage of economic wealth and the evolution of the UK economy away from manufacturing and towards more services.

In contrast, our nearest neighbour France has twelve companies, including Alcatel-Lucent, L’Oreal, Michelin and Thales, in the top 100. This, according to the report, is testimony to the £30 Billion spent annually on R and D in France, a sum that is 53 per cent higher than the UK despite the fact that the French economy is only 14 per cent bigger.

Therefore, the pro-innovation R and D tax policies of the USA, Japan and France are, according to the authors of the report, having a major effect in developing and attracting innovation businesses. More importantly for these economies, over 70 per cent of R and D spending in all three countries goes into the high value added and export-oriented manufacturing intensive sectors.

To be fair on the UK Government, there have been recent incentives from the Treasury, such as the Patent Box (which aims to cut the tax on income from patented technologies). The Technology Strategy Board has developed a group of technology and innovation centres known as “Catapults” where business and academia can work together to commercialise ideas in key sectors (although there are none in Wales).

The Welsh Government has also recently launched an innovation strategy, and developments such as Ser Cymru, which last week funded a new solar energy research centre at Swansea University, are to be welcomed.

However, the fact remains that we spend far lower levels of our economic wealth on research and development, certainly compared to our competitors. Unless that changes, then it may be some time before we are perceived as a nation where innovative companies thrive.

ENTREPRENEURS, INNOVATION AND THEIR INSTINCTS FOR THE FUTURE

Zach Kaplan, CEO of Inventables, tribute to the innovative nature, instinct for the future, and unconventional approach that enables entrepreneurs to create something new.

WALES CAN LEAD THE WAY IN PUBLIC SECTOR INNOVATION

Last week, a report was published that, woefully, received little attention from the Welsh media but could, if implemented, have a transformational effect on the way that public services are delivered here in Wales.

Funded by NESTA, 'State of Innovation: Wales Public Services and the Challenge of Change' should be compulsory reading for every senior manager within government and the public sector in Wales. Authored by Matthew Gatehouse and Adam Price, the facts from the report were startling.

More than two thirds of our economic output comes from the public sector, a situation that is compounded by low private sector productivity, which means Wales remains the poorest part of the UK.

Nearly a fifth of the Welsh population is aged over 65, which is a higher proportion than the UK as a whole, putting pressure on an already stretched health and social care system that will only increase as life expectancy improves.

Pockets of Wales, especially in postindustrial areas, have some of the worse health of any parts of the UK, with 27 per cent of economic inactivity due to long-term sickness.  In addition, we also have higher comparative levels of child poverty.

Whilst in the past, governments have dealt with such issues by merely throwing money at them in the good times, that scenario is now at an end. Welfare spending is set to fall dramatically over the next few years and the funding that the Welsh Government receives from the Treasury will continue to reduce.

In the past, such government cuts have been accepted with largely a shrug of the shoulders, some industrial action but then a quiet acquiescence that we might as well accept it as there is little that can be done ‘in the current circumstances’.

However, this report blows that comfortable complacency out of the water by showing that stronger and healthier communities can be created if we embrace greater innovation within the public sector.

And we already have some strengths in place.

According to the report, Wales is big enough to scale beyond the purely local but small enough to organise a coherent national strategy.

Indeed, a radical programme of transformational change is possible because of this “Wales effect” i.e. the common sense of belonging, the strong personal relationships between the main players, the much shorter communication distances between national government and local delivery, and close connections between policymakers, practitioners and academic institutions.

This natural advantage, along with a dominant public sector, a strong academic base and close communities, means that there is a real opportunity for Wales to become a global leader in public service innovation.

And it is not that we are beginning from scratch.

There are already several cases of excellence of innovation within public services in Wales, including the “Your County Your Way” strategy led by Monmouthshire County Council; Time Banking Wales which is transforming local engagement in the South Wales Valleys; and the Gwent Frailty project which, as a partnership between five local authorities, Aneurin Bevan Health Board and the voluntary sector, is reshaping services in primary and community care around the care needs of people.

But despite such examples, there is more that can be done to ensure such innovation does not remain within isolated areas across the nation but becomes a normal part of the delivery of public services in the future.

There is also the opportunity to incentivise new partners in the private sector, such as technology providers, to turn Wales into a global test bed for those wishing to develop innovative solutions via digital technologies in areas such as health and education.

This of course, will require acceptance of greater risk within the public sector where innovation and accountability can go hand in hand, and failure is an chance to learn from mistakes rather than an opportunity to apportion blame when something goes wrong. With a new Permanent Secretary who, in his public statements so far, embraces such a culture, the Welsh Government could be leading such change across the public sector in Wales.

But it is not only the public sector alone itself that can make a difference to this agenda.
For example, with the creation of a new University of South Wales, there is an opportunity for this institution, with its roots in some of our most deprived communities, to become a catalyst for change in driving forward innovation within public services in Wales, especially by making innovation skills centre stage in management and leadership programmes in order to create a new cadre of innovators across Wales’ public services.

There is also a greater role that can be played by the third sector in Wales, especially in the creation of new social enterprises that can help deliver local services around their communities in a far more efficient way than many public bodies. Indeed, could the current review of mutuals and co-operatives by the former minister Andrew Davies herald a seismic shift in the way some public services are delivered in Wales?

In 2011, the economist Gerry Holtham wrote in an article in the Western Mail that instead of bewailing the fact that our public sector is too big, why don't we make virtue of necessity? As he noted at the time, whilst industries rise and fall, there will always be a need for good government in every part of the World.

UNIVERSITIES AND ENTERPRISE DEVELOPMENT

As regular readers of this blog are aware, I am a passionate advocate of having universities as catalysts for enterprise and innovation in the Welsh economy.

Indeed, much of my own professional career over the last twenty years has focused on trying to identify and develop the best instruments for driving forward change in these areas.

That is why I was very interested in the publication of a recent report which, by examining the world's most highly regarded universities in entrepreneurship and knowledge transfer, attempted to identify the key factors needed for an enterprise ecosystem in which higher education played a major role.

As would be expected, some of these relate directly to the strategy of the higher education institution itself, and most experts interviewed for the report cited a strong institutional enterprise and innovation culture within the university as an essential ingredient of a successful local ecosystem.

Of course, it is not unexpected to find both Stanford University and the Massachusetts Institute of Technology (MIT) in the USA used as examples where enterprise and innovation was "sown into the fabric of the universities from their very foundation" but is also worth noting that there were a number of UK institutions mentioned as a result of the considerable change that has been taking place in the British higher education system during over the last few years.

One example is one of our great institutions, the University of Cambridge. Despite being over 800 years old, it has overcome its traditional academic focus to create an  unexpected entrepreneurial culture. This has been achieved by celebrating enterprising faculty role models, encouraging a relatively unstructured mix of innovation activities across campus, and giving faculty the freedom to devote time to entrepreneurial ideas.

The role of those at the top of the university was also seen as pivotal in sowing the seeds of a strong enterprise culture within the institution as without such leadership, changes rarely happen. In just eight years, Imperial College London was changed by Sir Richard Sykes, formerly CEO of the pharmaceutical giant GlaxoSmithKline, into a powerhouse for academic entrepreneurship. Not only did he transform the technology transfer office into a coherent vehicle for commercialisation across the university but, in doing so, encouraged world-class researchers to become entrepreneurs.

But it is not only university staff that are critical for ensuring changes within the institution. Equally important is the role of student-led entrepreneurship activities that, in many cases, create an environment in which enterprise can thrive.

In Finland, the newly created Aalto University has, in just over three years, established an incredibly powerful engagement by its student population in enterprise and innovation activities. These are supported by resources such as the "Start Up Sauna" incubator on campus and the annual SLUSH conference, which brings together early-stage startups to meet top-tier venture capitalists and media from around the world. In 2012, SLUSH gathered more than 3.500 attendees, 550 companies and 250 investors and journalists for two days in Helsinki, an incredible achievement for a university.

Various external factors are also important in encouraging a more innovative local ecosystem. In particular, the local quality of life is a key issue for attracting and retaining academics as well as entrepreneurs and investors.

In France, the area of Sophia Antipolis has managed, through creating a technology park on a wonderful green field site, to take "the Silicon Valley summery lifestyle and setting it up in the south of France”. And as economic development planners in Wales should take note, this success has also been helped by a strong tourism industry that made the region “open to the world”, an international airport and high-speed train lines to the rest of Europe.

Finally, many of the best universities in the world of enterprise and innovation have not done so alone and have benefited from considerable external support from local and regional governments, usually through generous financial grants. However, what seems to be most important in maximising such a relationship is openness between government and higher education in working to together to achieve similar goals.

In Russia, a Siberian university managed to combine its own facilities with those of the city and local businesses so that all three actors benefited and contributed to the enterprise ecosystem.

Certainly there are lessons there for Welsh universities in working alongside councils and businesses in developing local facilities that benefit the whole community.

Whilst some may say that the ecosystems in Silicon Valley and other innovation hotspots where entrepreneurial university flourish may be hard to replicate in more disadvantaged areas such as Wales, the report does show that an increasing number of successful institutions were to be found in more challenging economic environments. These universities had, despite their location, managed to overcome an internal culture that did not support entrepreneurial behaviour and risk-taking, a lack of venture capital or multi-national companies in the region and a limited local market.

Therefore, with Welsh higher education in Wales facing specific challenges as a result of new configurations, reorganisation and alliances, university leaders and educational policymakers could do worse than learn from some of these examples globally and ensure that their institutions not only stimulate enterprise and innovation internally but play a major role in driving forward their local economies.

WELSH FIRMS NEED TO COLLABORATE TO INNOVATE

The great Jack Welch, former CEO of global giant General Electric (left), once said that while people often think innovation is limited to practical scientific advances, it’s about much more than that.

In fact, Welch always believed that to innovate something is as important as inventing it.

And that is essentially the message that emerges from the latest findings from the Global Innovation Monitor, sponsored by Jack Welch’s old employer GE.

Released last month, the report is based on interviews with over 3,000 senior executives across 25 countries and shows that businesses around the world are beginning to refocus their efforts on the ways innovation can be used to develop a competitive advantage in a global economy that is slowly emerging from recession.

In this respect, it has some valuable lessons for those in Wales looking to either develop a more innovative business approach or to support innovation across the economy.

First of all, there is clear evidence that increasing collaboration between businesses is seen as a major competitive tool, with over two thirds of the respondents having already developed or improved a product with others.

Not surprisingly, the main reasons quoted for collaboration are access to new technologies and markets, although lack of confidentiality, trust and talent-poaching are perceived as barriers to greater co-operation between businesses.

For Welsh firms, this presents a particular challenge, especially given our location on the periphery of Europe, although the relative openness that is found in many innovative companies in Wales could, if developed properly with the right support for global interactions, enable growth in some key sectors such as life sciences and creative industries.

Certainly, greater collaboration with universities, as well as with other companies, could begin to make a real difference to the relative innovativeness of Welsh business.

For creative organisations looking to develop greater opportunities, the report finds that business leaders are rejecting the old orthodoxy regarding innovation, namely that the linear model of first creating a product and then continuing to develop it is no longer sufficient. Instead, senior executives are putting increased efforts on better understanding their customers and anticipating the evolutions of new market spaces as the key prerequisites for successful innovation.

Of particular importance to Welsh executives looking to enhance their businesses is the finding that developing these new approaches and models requires courage of conviction, a greater tolerance for risk and a leadership culture willing to think and act dramatically differently.

Another major consideration for the innovative organisation is the development, attraction and retention of talent, especially as the report suggests that improving the creativity and technical prowess of the workforce is seen as key to unlocking innovation potential.

Eight out of ten of those executives questioned suggested that better alignment of the education system with business needs remains a top priority, especially in training individuals with the skills and abilities to unlock the new business environment being created around the world.

For the Welsh Government, there is certainly a challenge to realign its skills policy to ensure that businesses, academia and government can work together to cultivate a more innovative workforce that has the ability to react quickly to changes in the world economy. There is also a real opportunity for at least one Welsh business school to break out of the traditional model and develop a more entrepreneurial and innovative curriculum that is more in step with the changing needs of business.

However, talent is not only developed internally and senior executives also expressed concern that governments, through misplaced immigration policies, are restricting the flow of global talent and thus having a negative impact on the ability of businesses to innovate.

Certainly, the UK Government is as guilty as others around the world of this and, if it is to ensure that the best entrepreneurs and innovators make Britain their location of choice for their future careers, then it needs to dramatically rethink some of its current approaches in this area.

Indeed, the global business community sees a clear role for government as a steward of the innovation ecosystem, and for creating a policy framework that fosters innovation, creates stability and supports robust international trade.

Again, this will be a significant challenge for the Welsh Government as it develops an innovation policy that clearly must not be focused on adopting a narrow sector approach but must instead embrace the wider concept of innovation.

However, this can only succeed if we have leaders across government, business and the university sector that are willing to champion innovation across the Welsh economy as well as within their own organisations.

And as Jack Welch famously said, the future “will not belong to ‘managers’ or those who can make the numbers dance. The world will belong to passionate, driven leaders – people who not only have enormous amounts of energy but who can energise those whom they lead”.

Those are the people we need in Wales to drive forward and innovative economy over the next few years.

THE WORLD'S GREATEST INNOVATOR?

In the period following the Second World War, the development of Western economies was characterised by the growth of knowledge intensive industries in electronics, computing, medical technologies and advanced manufacturing.

Whilst large companies have played their role in this development, at the heart of many of these changes have been technical entrepreneurs, namely those individuals who operate within technologically advanced industries that, with a degree of technical expertise, have branched out by themselves and set up organisations that base their competitive advantage on focus on their skills and experience.

With the rapid technological progress occurring in the last decade or so, particularly with the growth of the internet, technical entrepreneurship has become a primary consideration for governments at a regional, national and even transnational levels seeking to encourage, stimulate and sustain increased levels of growth in the field. For example, the Welsh Government has recently announced a £100m fund to help support technical entrepreneurs and the companies they have created in the life sciences sector in Wales.

During the last fifty years, it can be argued that the most famous examples of technical entrepreneurship have emerged from Silicon Valley – the birthplace of modern computing, social networking and online searching – where companies such as Hewlett-Packard, Apple and Facebook have made fortunes for their owners and changed the way we live our lives today.

Yet, in my opinion, the most influential technical entrepreneur that ever lived is not Bill Hewlett, David Packard, Steve Jobs or Mark Zuckerberg. Instead, that accolade should go to a humble English potter born over two hundred and eighty years ago in Staffordshire

The youngest of thirteen children, Josiah Wedgwood was born in 1730 and started in the pottery industry at the age of just 11.  Working in the family firm, he built up his expertise until he left his father’s business when he was 29 to set up on his own.

By this time, Wedgwood had mastered the art of pottery and set about introducing new products, processes and services that resulted in myriad inventions and commercial success on a hitherto unseen scale.

As would be expected of a technical entrepreneur, he came up with new scientific devices for his industry, such as the pyrometer for measuring very high temperatures in kilns.

But he also revolutionised the entire retail industry through introducing a myriad of innovations that we are all familiar with today, including money back guarantees, free delivery, illustrated catalogues, buy one get one free offers, regular sales, travelling salesmen and self-service.

He created the first real mass market by manufacturing affordable and desirable ceramics for the growing industrial classes who couldn’t afford the expensive Chinese porcelain that had dominated the markets for over 200 years previously.

He was also centuries ahead of his time in the way he considered innovation. For example, rather than patenting as most technology entrepreneurs today remain obsessed with, Wedgwood preferred to be first to market and was an early proponent of the open innovation model.

And pre-dating Steve Jobs’ synergy of art with technology by more than two centuries, he encouraged collaborative research through working with artists, customers, friends, rivals, architects and sculptors to develop his products.

He also demonstrated a remarkable aptitude for marketing and branding, and was the first in the ceramic industry to mark his products with his name, denoting ownership of his designs.  He also sought patronage from politicians and royalty alike and using this in his advertising.  Indeed, he used the royal patronage to develop overseas clientele as well, resulting in 80 per cent of his total production being sold abroad by the mid 1780s.

But he was not satisfied only with his business and like Bill Gates two hundred and fifty years later, he wanted to use his fortune to help society.

He took on a prominent role in public life, particularly in the battle for the abolition of slavery. He also helped to create the first British Chamber of Manufactures and played an important role in the development of infrastructure in England during the industrial revolution, building canals, turnpike roads and communications through personal investment in the ports and towns in which his goods were transported through.

Therefore, from inheriting £20 from his father, Josiah Wedgwood built up a very profitable and long lasting dynastic firm that resulted in a personal fortune of £500,000 (around £50m in current prices).

Indeed, it was this legacy that gave his grandson, Charles Darwin, the time to undertake his scientific
studies as a young man and to eventually come up with the theories that would result in one of the most important books ever written, the “Origin of the Species”.

And whilst the firm was hit hard as a result of the global crisis four years ago, collapsing into administration, Wedgwood has thankfully emerged from the rceession with a new owner determined to carry on the legacy of the original founder of the business in Stoke on Trent.

So the next time you are sitting having a cuppa, give a small toast to the man who not only created the ceramic vessel from which you are drinking but who, for his achievements in manufacturing, management, marketing and retail, should rightly be recognised as ‘the world’s greatest innovator’.

NESTA IN WALES

Last Thursday, I was privileged to speak at NESTA’s annual roadshow to encourage greater innovation in Wales.

As a charity devoted to promoting and developing innovation across the UK, the event was a perfect opportunity to showcase the work they are already doing in Wales and to consult on how to promote further innovation in the economy.

This includes a research project at the University of Wales that is examining regional innovation within peripheral economies, using Wales as a case study of how academia, industry and government can work together to develop a more innovative economy.

Whilst the project still has some way to go until it is completed, the preliminary results should hopefully have a direct impact on the way that innovation policy is developed within Wales, especially in terms of the commercialisation of knowledge from business and the university sector.

There will be more written on the results from this research project over the next few months.

But it is not only academic research studies that NESTA supports. A number of more practical innovation projects were presented on the day, all of which were very different to each other but showcased how innovation can make a difference.

One of these is “The Big Green Challenge”, a £1 million prize fund for communities across the UK funded by NESTA to develop a plan to reduce carbon emissions.

Only three winners shared this prize in the UK, and one of these was the Green Valleys community interest company in the Brecon Beacons.

With £300,000 to take its ideas forward, it has focused on using carbon reduction as a way to promote economic renewal within local communities through increases in renewable energy generation, developing sustainable woodland, reductions in fossil fuel dependency and promoting local sustainable food production. It is certainly a model that could and should be replicated across other local communities.

Another equally innovative but totally different project supported by NESTA is the Welsh Crucible project. Led by Cardiff University, this is a programme of personal, professional and leadership development for highly promising young academics who are building their careers in Wales.

It aims to help participants to discover how other early- to mid-career researchers in other disciplines are tackling the same issues as them, the skills and attitudes that are likely to make their research more innovative, and how thinking creatively can make a difference to their work and career.

And as readers of the Western Mail will have discovered through a series of articles last year, it is also supporting young researchers to transfer their knowledge to the public sphere to make an impact thus demonstrating the real value that exists within Welsh universities.

Finally, there is the Creative Councils programme that has been developed by NESTA and the Local Government Association to support innovators in local government across England and Wales to develop and implement radical innovations that address a long-term challenge that matters in their area.

With only six local authorities funded across the UK, it is great news that one of the most forward thinking councils in Wales has been chosen to participate in this public sector innovation programme. Monmouthshire has used the opportunity to develop the 'Your County Your Way' programme to implementing a cultural transformation within the council to listen and respond more creatively to the needs of its communities.


Central to this approach is an internal training programme, the Intrapreneurship School, which is building innovation skills across all departments within the council, and I am proud that my colleague Richie Turner has been working closely with the team at Monmouthshire to help develop opportunities in this area. Details of the programme are shown in the video below.



Therefore, NESTA certainly is pushing the boundaries when it comes to supporting individuals and organisations to develop new ways of thinking and doing here in Wales but more certainly needs to be done to encourage those with great ideas to come forward to help the economy.

Indeed, too often we have organisations purporting to be supporting innovation when it is merely words on a document rather than real action. As Paul Matthews, the Chief Executive of Monmouthshire County Council, noted in his excellent presentation, "innovation is a mindset" that needs to be adopted across the organisation.

Certainly we need to encourage more private, public and voluntary organisations to think more innovatively and, more important, to act more innovatively if we are to move forward as a nation. The fact that we already have some fantastic projects in Wales to act as trailblazers to others is a massive step in the right direction.

The last word of the event went to Geoff Mulgan, the chief executive of NESTA, who said in his closing speech that "We want to be an ally and partner to all innovators in Wales".

It is an invitation that should be taken seriously and I hope that Welsh innovators will take full advantage of this offer over the next few years.

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?

AN INNOVATION STRATEGY FOR WALES - LESSONS FROM FINLAND

Last week, I attended a conference organised by the Massachusetts Institute of Technology (MIT) to examine the future of manufacturing.

It was a timely event, as I am currently undertaking research into the development of advanced manufacturing in Finland during the last thirty lessons and the lessons that other small economies can take from this experience.

We heard from a range of experts in the field, including Professor Martin Schmidt of MIT, who has been advising President Obama on a new emphasis on manufacturing within the US economy.

The report from his review is fascinating, mainly because of the differences in the philosophy regarding economic development as compared to most parts of Europe. In fact, the conclusions to the report to ensure American leadership in advanced manufacturing comprehensively rejected a picking winners policy, either in terms of individual companies or specific sectors. Instead, it proposed pursuing an innovation policy for advanced manufacturing that would provide the best environment in which to do business, ensure that the most powerful new technologies are developed in the USA and that technology-based enterprises have the infrastructure required to flourish.

Given the way that manufacturing in the USA and many other advanced countries has been ignored in the last decade as financial services became the favoured sector and there has been rush to move production to low cost countries such as China, this report is long overdue.

Yet, during the two days in Brussels discussing the future of advanced manufacturing, there seems to be little appreciation of an example within Europe that could also act as a model for developing more innovative and competitive economy.

During the last fifty years, Finland has changed itself from an economy that was based largely on primary production and an unskilled agrarian workforce to one that is recognized as one of the most competitive in the World, particularly in the field of high technology manufacturing within key sectors such as information communications and telecommunications (ICT).

Most of this change took place during the early 1990s when the Finnish economy endured a major economic recession that included a major banking crisis, unemployment rates of 15 percent and high levels of government debt.

In response to these issues, the Finnish Government took a bold long-term view to focus its strategy on innovation and promoting, in particular, facilitating the development of high technology sectors such as ICT. Since 1995, the Finnish economy has been one of the fastest growing in the developed world, with an average growth rate of 3.5 per cent. Unlike other rapidly growing economies, most of the growth within Finland has been generated by the development of domestic companies.

Therefore, through indigenous growth in a number of key sectors, Finland has become recognised as one of the most innovative and competitive nations in the World and the World Economic Forum’s Global Competitiveness Report 2012-2013, which assesses the competitiveness landscape of 144 economies, ranked Finland third in the World in terms of a range of different factors driving productivity and prosperity.

And one of the main driving forces behind this success has been a specific government body that has driven and developed innovation throughout the Finnish economy.

Established in 1983, TEKES is responsible for administering public support for private and public sector R&D and innovation in Finland. Its mission is to promote the development of industry and services by means of technology and innovations. Its impact has been tremendous, being responsible for supporting more than half of Finnish innovations during the last thirty years. The latest report on its impact on innovation is shown below.


Whilst its programmes have been focused very much on supporting technology within companies and public institutions, there have been additional positive effects such as increased networking between companies and R&D organisations in targeted clusters and increased collaboration between researchers across different disciplines. Simply put, the focus on the innovation policy that the US Government now recognises as being critical to its own manufacturing sector has been one of the key successes in turning a small peripheral nation into one of the most competitive economies in the World.

And there are certainly lessons for Wales from this experience.

Indeed, whilst there are those who still hanker for the return of the Welsh Development Agency, it is clear that during its existence, its focus on attracting large foreign direct investment did little to support the long-term innovation performance of our nation. Its subsequent integration into the Welsh Government has also had a minimal impact on ensuring that Wales becomes the “small clever nation” which politicians have been calling for since the advent of the National Assembly.

As the Minister for Business is currently examining the development of an innovation strategy for Wales, one option in creating a more competitive Welsh economy would be to consider establishing a Welsh TEKES that would be an arms length organisation that would focus on developing the innovative potential that exists within this nation.

If we were to get only a fraction of the success that the Finnish economy has enjoyed during the last three decades, then it would be one of the more astute policy decisions that the Welsh Government will have made in developing the economy.

THE GLOBAL INNOVATION INDEX AND THE UK ECONOMY

Politicians and policy makers are always wary of league tables produced by independent organisations or academic bodies as they can have a major effect on the way that governments, and their policies, are perceived by the outside world.

For example, PISA - the Programme for International Student Assessment - has become the leading international benchmark for educational achievements.

As a result, education ministers await the results of these tests, which are carried out every three years, with all the nervous trepidation of an A-level student picking up their marks from school in August.

Given this, it is surprising that UK Ministers were not jumping up and down in joy at the latest results from the 2012 Global Innovation Index. Produced by INSEAD, one of the World’s top business schools, and the World Intellectual Property Organization (WIPO), the report ranks 141 economies on the basis of their innovation capabilities and results.

Whilst smaller countries such as Switzerland, Sweden, Singapore and Sweden led the world in overall innovation performance, the UK managed fifth place, ahead of other major economies such as the United States, Germany and Canada. Below is a comparison of the UK's performance on nine key indicators with Sweden and Singapore.

According to the index, the UK is No 1 in indicators such as the cost of redundancy dismissal, ease of getting credit and areas of online creativity. And at a time when our financial institutions are facing considerable difficulties due to issues such as the Libor scandal, it must be noted that they are vital to developing a strong innovative economy – the UK is ranked first on credit and third on investment with regard to financial markets.

There is also evidence that the commercialisation of knowledge is working well with high rankings for not only the creation of knowledge through patenting and scientific research, but also for the economic impact of these activities in the economy.

However, policymakers concerned with the internationalisation of British goods and services will be worried by the 57th global ranking in trade and competition. Certainly, there are lessons to be learnt from countries such as Singapore – ranked first in the World under this measure - that have always prioritised the exports of goods and services as a critical part of their economic and innovation policy.

In a wider context, the report shows worrying trends for the development of the World economy. For example, whilst it is generally accepted that investing in innovation during recessions is essential for enabling quick recovery, research and development expenditures in most leading nations has fallen by an average of 1.6 per cent since 2009. But whilst governments have continued to support investment in higher education research as part of their recovery strategies, the business community has cut back its expenditure in R and D by almost five per cent over the same period.

Going forward, the concern for policymakers is that unless there are changes to political imperatives, the public sector will no longer be able to keep up the same level of research funding to universities, especially if austerity measures continue to bite. As a result, it is critical that the private sector is supported in funding new technologies, products and services over the next few years to make up for any potential shortfall.

The issue of a two track Europe, which has attracted considerable commentary over the last year, also seems to apply in terms of innovation. Indeed, the  study suggests the emergence of a group of innovation leaders in Northern Europe (Sweden, Finland, the United Kingdom, the Netherlands, Denmark) as well as a second group of innovation laggards in southern Europe, including Spain (29th), Portugal (35th), Italy (36th) and Greece (66th).

The question for policymakers in Brussels is whether these four nations, given the state of their public finances, will ever be in a position again to develop their innovation potential and, more importantly, whether the European Commission should continue to spend large amounts of its vast R and D budget on these economies rather than on those economies, such as Finland and the UK, which can achieve far more in terms of their innovation potential.

But it is not only the poorer parts of Europe that are facing issues with innovation.

As economists continue to write volumes on the market potential of the so-called BRIC economies, the report suggests that a lack of investment in innovation could lead to a slowdown in their growth over time. For example, whilst China’s performance in terms of knowledge and technology is amongst the best in the World, there remain considerable weaknesses in the development of a strong innovation infrastructure, an issue that is also prevalent in India, Russia and Brazil.

Therefore, one can conclude that the Global Innovation Index is good news for the UK economy.
It shows that we are doing well on a number of indicators whilst demonstrating that there is a need to do far better in terms of export-related activities. It also suggests the UK has the potential to be a major player in terms of driving forward European innovation policy and, more crucially, remains ahead of the game when it comes to competing with BRIC nations.

However, it also demonstrates, unequivocally that politicians and policymakers should not rest on their laurels. Certainly, any hard earned gains made in innovation in the UK during the last few years can be easily lost if government, because of fiscal pressures, fails to incentivise business to invest in R and D or cuts its own budget to support innovation in the economy.

INNOVATION IN WALES - 3D EDUCATIONAL TECHNOLOGY

Last week, I was delighted to be among the 200 invitees to No 10 Downing Street for a celebration of Wales, hosted by the Prime Minister.

Attended by representatives from all political parties as well as celebrities from Gavin and Steacy and our rugby captain Sam Warburton, it was a wonderfully eclectic evening for all present.

However, what was most pleasing to me about the event was the presence of a large number of Wales Fast Growth 50 firms, the companies creating wealth and employment across the economy, including a number from North Wales.

One of those present was Anas Mawla, founder of Gaia Technologies of Bangor. A highly innovative business, it assists schools to make the most effective use of information technology in order to improve learning experiences and provide a more stimulating environment for young people in the classroom.

The story of Gaia is one that many young entrepreneurial graduates today should aspire to. Anas Mawla and his brother Ayad graduated from Bangor University’s Electronics Department where they studied Computer System engineering. Together with Katerina Patochea, herself a graduate of the Bangor University Marine Biology Dept, they borrowed £800 from Katarina’s credit cards and started the business while still enrolled as students.

Today, Gaia employs over 80 highly skilled and talented individuals and is forecasting that its annual turnover growth will reach £24m in the next two years. I recently visited Anas at his offices in Parc Menai and was struck by the commitment of the company to the local region. In fact, the key motivation for establishing a computing business in North Wales was their desire to contribute to where they live by employing and develop skilled IT graduates, as well as using the company to leverage in additional resources and interest to the region.

Such dedication demonstrates that great businesses can be grown anywhere regardless of location and the company is committed to further developments in the Gwynedd area through building on a service that realistically budgeted, innovative and friendly. What was most exciting about the company was the way that they have developed 3D technology for the educational market, with the funding of this innovation coming from Gaia’s own surpluses.

All cinemagoers will know about the 3-D revolution started by James Cameron in his groundbreaking film Avatar. However, the real application of 3-D technology is not in the movies but in education, especially as some subjects are far easier to teach if you can visualise them. As someone who thought he had seen it all, putting on a pair of 3D glasses at Gaia’s headquarters in Bangor was an incredible experience.

In history, you could walk down a street in plague-infested London in 1665, find yourself in the World War 1 trenches or see ancient Rome in all its glory. In science and engineering, there were 3-D depictions of various creatures, the inner workings of a sports car and even the doomed nuclear reactor in Fukushima, Japan. It is an amazing learning experience that allows students to enhance their understanding of difficult subjects by learning through observation and investigation rather than by instruction. It also helps teachers simplify complex issues making them easier to understand and speeding up the learning process.

Simply put, it is a fantastic technology within a highly innovative business that is currently the World leader in the generation of 3D interactive images for the education sector and, most importantly, is based in Bangor not Silicon Valley!

 We should be exceptionally proud of a company such as Gaia that is not only a world-beater, but is committed to the local economy and I am sure we will all be following their developments with interest as they take the best of North Wales out to the World over the next few years.

GLOBAL INNOVATION BAROMETER

Last week, the American industrial giant GE published the results of its “Global Innovation Barometer”, a survey of 2,800 senior business executives in 22 countries.

It is a fascinating study, in that it gives an insight into how the business community views innovation and, more importantly, its impact on the competitiveness of individual companies.

Not surprisingly, the USA is viewed as having the best reputation globally for innovation, followed by Germany, Japan, China and South Korea.

The UK is ranked seventh, behind India, with 39 per cent of British respondents stating that government had not been successful in supporting research and innovation. What should be of interest to policymakers is that the study shows the belief of businesses in innovation as the main driver of competitiveness, prosperity and job creation, although the current uncertainty within global markets is having a major effect on their ability to innovate.

In fact, nine out of ten respondents saw increased challenges at the current time in accessing venture capital, private investment and government funding. Despite this, the study emphasises the links between innovation and competitiveness, showing that countries where innovation policies are perceived as more competitive actually delivered higher growth i.e. markets where business is most satisfied with the perceived political and social environment for innovation delivered higher GDP growth than those markets where business feels anxious or threatened by policies.

Indeed, many businesses seem to be influenced by the government’s approach to innovation, with companies indicating that their internal investments in innovation, from research and development budgets to the pursuit of new products or business models, are at risk when there is a perception of a negative shift in government policies that support innovation.

For the Welsh Government, there is a vital lesson in communicating its innovation policies effectively and coherently to the business community, something that has been sadly missing during the last few years.

In terms of recognising new trends in innovation that could benefit Wales in the long term, the study suggests that companies are moving beyond the traditional closed model of innovation and are instead enthusiastically embracing the open innovation model, where collaboration between several partners, including smaller organizations and individuals, is the norm. However, there is a so-called partnership paradox in this trend in that whilst 86 per cent of the businesses surveyed believe that partnerships are important to innovation, only a fifth believe that finding partners is an immediate priority on a day to day basis. Again, there could be a role for the Welsh government here in providing a matchmaking service between different organisations wishing to develop their innovation, given the payback on wealth and prosperity to the economy.

In terms of business competitiveness, it was heartening to note that 77 per cent of executives acknowledge that small firms have the ability to be as innovative as large firms and whilst R and D is seen to be important, nearly three quarters of businesses agreed that innovation will not be driven by scientific research but by people’s creativity.

A more in-depth study, conducted by the Milken Institute, examined key innovation indicators in the UK. Their findings make interesting reading:

• University-Industry Collaboration (Leading): University-industry collaboration is strong in the United Kingdom. In the GE Innovation Survey,  78 percent of respondents agreed that it is quite easy for firms to partner with universities. The Higher Education Funding Council for England (HEFCE) recently launched the Economic Challenge Investment Fund, which will enable universities and colleges to provide specialized training, development, and professional support to individuals and businesses. The government has also supported innovation vouchers that allow businesses to purchase engagement with knowledge-based institutions. 
• Venture Capital Deals (Leading): The venture capital market in the United Kingdom is one of the strongest in the world, equaling 0.2 percent of GDP. In nominal amounts, the United Kingdom is second only to the United States, and as a percent of GDP, the United Kingdom ranks third, behind Finland and Sweden. Some continue to worry, however, that the government has not fully addressed financing for early-stage, high-growth businesses. Respondents in the GE Innovation Survey were mixed, with 45 percent stating that private investors are supportive of companies that need funding, 41 percent disagreeing, and 14 percent uncertain.
• Gross Expenditures on R&D [GERD] (Leading): At 1.8 percent of GDP, the U.K.'s R&D spending was below the OECD average in 2008.  Industry financed 45 percent of GERD, while government funded 31 percent. Business expenditures on R&D (BERD) equaled 1.1 percent of GDP. Boosting the intensity of innovation activity in enterprises is one of the nation's top policy challenges as cited by the INNO-Policy TrendChart report.
• High-Technology Exports (Leading): The United Kingdom performs comparatively well in high-technology exports, placing in the top of the first quartile globally. The top innovative sectors remain pharmaceuticals, defense, and aerospace. Going forward, the principal areas of growth appear to be in the green economy, the creative economy, and in advanced health care involving biotechnology. 
• Utility Patents (Leading): In 2008, the United Kingdom produced 27 triadic patents per 1 million residents, which was below the OECD average, but still in the first quartile of countries surveyed. While not typically highlighted, the manufacturing industry plays a large part in the U.K.’s economy. Between 1997 and 2009, the country's manufacturing productivity increased by 50 percent, and in 2009, manufacturing represented 13 percent of GDP. In the GE Innovation Survey, 60 percent of respondents agreed that the protection of copyrights and patents was effective.
• STEM Education (Above Average): In global rankings for science, technology, engineering, and math education, the U.K. places in the bottom half of the second quartile, ahead of Russia, the United States, and Germany, but still well behind countries like Singapore, Finland, Switzerland, and Canada. In 2008, the United Kingdom was slightly above average with eight researchers per 1,000 workers; 23 percent of all new degrees were in science and engineering. Respondents in the GE Innovation Survey were relatively negative; 46 percent believed the government had not been successful in improving education.
• Business Environment (Leading):A renowned international marketplace, the United Kingdom maintains one of the best environments for starting and growing a business. The financial markets are well developed and venture capital is abundant. In 2008, nearly 18 percent of gross expenditures on R&D were financed from abroad, greater than three times the OECD average. The governance system is also markedly strong, with significant stakeholder involvement and strong appraisal processes in effect. More recently, the government introduced the Enterprise Finance Guarantee (EFG), based on the previous Small Firms Loan Guarantee, which extends credit to companies with viable business plans that would normally be able to obtain funding in more stable financial circumstances

Therefore, if the UK is to increase its relative position in terms of innovation and catch up with nations such as the USA, government, academia and industry must all their part.

For policymakers, there needs to be a focus on developing an efficient tax system that provides incentives to R and D and investment. It must also ensure that a strong institutional framework is in place to protect intellectual property. However, the danger, in trying to deal with addressing the large public deficits is that education and R and D investments will not be fully supported.

For universities, there must be greater interaction with businesses, especially in terms of having a more open approach to innovation and commercialising knowledge more effectively rather than hoarding intellectual property in laboratories. Creativity must also be valued in education as much as scientific knowledge, as that is the key driver behind innovation.

Finally, businesses must continue to play an important role through encouraging an environment that addresses co-operation with smaller firms and the cross-fertilisation of ideas across different parts of the organisation.

But the clear message to politicians, vice chancellors and chief executives from the Global Innovation Barometer is that innovation is critical to not only restarting the economy, but in ensuring competitive advantage as the economy grows. Given this, it is critical that all of them must not only invest in innovation, but must put it at the forefront of their policies for the future.