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.

WALES NEEDS NEW FIRMS NOT WHITE ELEPHANTS

As governments around the World look to reignite their economies, there is increasing interest in developing policies to encourage greater entrepreneurship. This is not surprising given that a range of studies have demonstrated the impact of both new and small firms on the economic prosperity of many nations.

Earlier this week, a major study from the European Commission showed that 85 per cent of net new jobs created in Europe between 2002 and 2010 came from small and medium sized enterprises (SMEs), far higher than their 67 per cent share of total employment. That, in itself, shows the vital importance of small firms at this critical time for Europe.

However, the one statistic that screams out for politicians to take notice and reach out for new policies immediately is the finding that all net employment growth has been generated by newly born SMEs (i.e. those aged up to five years old). In fact, the number of jobs created by new firms – 17.5 million - more than compensated for the 8.9 million jobs lost through business failure.

In contrast, employment in businesses over ten years old declined by seven per cent over the same period. This is a critical finding and demonstrates unequivocally that entrepreneurship, rather than large firm expansion, is key to the job creation potential of the Welsh economy. More importantly, entrepreneurial activity is not limited to a small number of people.

According to the latest edition of the Global Entrepreneurship Monitor (GEM) released on Thursday, it is estimated that 388 million entrepreneurs were actively engaged in starting and running new firms in 2011. And who are these entrepreneurs?

The average profile of the individual running new businesses remains largely unchanged from previous GEM studies. Through a survey undertaken in fifty-four countries, the results showed that most were often young to middle-aged (25-44 years) although there is a tendency toward younger entrepreneurs in many developing economies. In terms of gender, they tend to be overwhelmingly male although it does vary by nation.

For example, Singapore and Switzerland have comparatively high levels of female participation in entrepreneurship whilst only one in four of the entrepreneurs in France and the Republic of Korea are women.

The GEM study also confirms the findings of the European study in that new firms are job creators, with 141 million early-stage entrepreneurs expecting to create at least five new jobs in the next five years. Given this, it is not surprising that a proportion are also innovative and export-driven - 69 million new firm creators are involved in developing new products and services and 18 million sell at least a quarter of what they produce to international markets.

So what does this mean for policymakers in Wales and the UK? Certainly, it is time for politicians to start walking the talk if the economy is going to recover from its current doldrums during the next 12-18 months.

The Westminster Government should continue with programmes such as UK Start-Up to encourage a greater number of new businesses. But there needs to be more urgency to ensure a greater focus by legislators on reducing red tape and simplification. In particular, ensuring that the needs of new and small firms are taken into consideration when any laws or regulations are developed is critical.

There is also a desperate requirement for better long-term finance for new firms, something that has been sadly missing since the banking crisis despite the efforts of the Coalition government through the Merlin project. In Wales, the recently published report on micro-businesses is a step in the right direction and some of the recommendations could make a real difference. But whilst it is a valuable study in itself, it mainly deals with the issues of firms already in existence rather than addressing how a greater number of new businesses can be created and supported.

And as this blog has been stating time and time again during the last eight years, Wales, through its Entrepreneurship Action Plan (EAP), already has the structure and strategy that is light years ahead of anything else globally in terms of driving forward the creation of an enterprise culture. Through the implementation of that plan between 2000 and 2004, the number of new firms increased considerably in Wales and, not surprisingly, so did private sector employment.

And this was not done by concentrating on a ‘picking winners’ strategy of focusing on high growth start-ups, as the Welsh Government has recently adopted but by developing an enterprise culture in which more people would be encouraged to start a new business.

Unfortunately, the EAP was abandoned in 2005 by a Government that was more in favour of a “Fields of Dreams” strategy which focused on building expensive white elephants such as Techniums rather than having a comprehensive approach to developing an entrepreneurial nation rich in new employment opportunities.

And whilst attracting inward investment is of some importance to Wales, encouraging more entrepreneurs is more critical to the nation’s future, an issue that the Institute of Welsh Affairs seems to have singularly ignored as part of the theme of its third Welsh Economy conference in March.

More importantly, if the new Minister, as she has stated on numerous times, is focused predominantly on creating new jobs, then with the evidence showing that the vast majority of these come from start-ups, it is surely time for the resurrection of the EAP to create more new firms, and therefore more wealth and prosperity, in the Welsh economy.