Innovation Matters and so does how you measure it....

Brian MacAulayDirector of Innovation Index

Innovation Matters - Overview

• The UK’s ‘poor performance’ in innovation

• Innovation matters, and so does how you measure it

• Innovation Gap & Hidden Innovation

• The Innovation Index

• Linking Macro and Micro measures of innovation

• Next steps

Closing the productivity gap is one of the Government’s priority objectives

Productivity is key to economic growth. Higher rates of productivity growth in the UK are essential to sustaining high and rising rates of economic growth, improving the standard of living of UK citizens and maintaining the UK’s position as a dynamic, open and thriving economy.

Innovation is one of the main drivers of productivity growth. Achieving world class levels of innovation in the UK economy and encouraging the development of new products and processes is essential for the UK’s long-run economic success.

The UK is still behind its main competitors, but has improved its position since 1990. To close the productivity gap, policy must focus on promoting innovation that contributes most the productivity growth in the UK.

Innovation is a main determinant of productivity and economic growth

The UK’s ‘poor performance’ in innovation

• Policy has focused on improving the UK’s ‘poor performance.’

• The UK lags behind its competitors in key indictors.

• Overall per capita expenditure on R&D

• Business expenditure on R&D

• Business levels of innovative activity

• Extent of patenting activity.

• The overall impression is that the UK wastes its potential by failing to invest in innovation, particularly the commercialisation of ideas.

Using R&D Intensity the UK performs badly compared to international competitors

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Scientific R&D expenditure as share of GDP

Scientific R&D expenditure

The Innovation Gap

Hidden Innovation

Innovation matters, and so does how you measure it

A better metric would measure the innovation that matters most to the UK’s economic success:

Innovation that contributes most to productivity growth• Investment in innovation is about increasing the knowledge capital in firms, for instance through R&D or software• But by focussing on R&D alone, the largest investments in knowledge capital go unnoticed• Measuring all investment in innovation and its contribution to productivity growth will allow the Government to better focus its efforts to promote the innovation that drives productivity most

Innovation that is hidden• Innovation occurs in science labs and R&D facilities – but it also occurs in back offices of banks, Board rooms of manufacturing firms, and studios of architects• By focussing on specific types of innovation in a few sectors, most innovation that happens in the UK is missed• Identifying how specific sectors innovate and where their strengths and weaknesses lie will significantly improve the Government’s ability to support sectors to innovate

Type I: Technology development

Life-of-Field Seismic was developed by BP and ten other contractors.

It uses permanent sensors on the seabed to create time-lapse movies of fluid and pressure changes to show recovery processes working in near real-time.

This could increase recovery from Valhall by 60 million barrels, and by one billion barrels worldwide.

Source: BP

The Integrated Subsurface Information System (ISIS) in the Valhall Field in the North Sea

Hidden Innovation

How innovation happens in six ‘low innovation’ sectors

Type II: Organisational innovation

The T5 Agreement between BAA and its 60 key suppliers has ensured increased efficiency, productivity and transparency through integrated expert teams in the construction of the £4.2 billion Terminal 5 project. The first phase of the project is on time and on budget to open in March 2008.

Source: BAA

The main Terminal 5 building at Heathrow

Type III: (Re-)exploiting technology

Corus’ Living Solutions fully-fitted steel-framed modules are manufactured in North Wales and delivered to site ready for assembly. Off-site manufacture is cheaper, faster, results in less faults, and reduces waste and transport costs. The metals company formed a joint venture with construction contractors Mowlem and KBR to access the tacit knowledge and networks of the sector.Source: Corus

Corus’ Living Solutions off-site manufacture of accommodation units for the Ministry of Defence. 10,700 units are being manufactured for MoD personnel near Salisbury Plain and Aldershot

Type IV: Locally-developed small-scale

In October 2005, the Specialist Schools and Academies Trust launched Development and Research (D&R) networks to support schools in developing ‘next practice’ in personalising learning. In each region, five hub schools were chosen to lead D&R networks.

Greenford High School, Ealing, became the London regional hub for ‘student voice’, and developed new ways of working with students.

Students engaged in action research and helped to develop a new curriculum and assessment, which offers new ways of working, greater choice and flexibility.

Source: SSAT

The Pilot Innovation Index draws together four strands of research into one report.

The Innovation Index 2009

Innovation Growth Accounting

Firm-level innovation performance

Measuring User Innovation

Wider Framework Conditions

• Why is Innovation important? • The Shape of Innovation in the UK• The Benefits of Innovation to the economy• The key assets and strategic context for Innovation• The contribution of innovation to productivity growth

• The scale of investments in knowledge capital in the UK

• The strengths and weaknesses of innovating UK firms

• The most innovative sectors

•The scale of user innovation in the UK

• The most innovative sectors

•The conditions for innovation in the UK

Project extends growth accounting methodology to new key areas of innovation investments

Project What we did Key findings

Innovation Growth Accounting

• Measured investment in intangible assets (Knowledge Capital)

• Calculated contribution to labour productivity growth (LPG)

• Investment in intangible assets combined with Total Factor Productivity Growth gives measure of innovation contribution to productivity growth

• Investment in intangible higher than in fixed assets.

•Investment in training largest category followed by organisational capital, software & design.

The full picture shows the UK leading international competitors

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5%

10%

15%

Investment in Innovation as share of GDP

SoftwareInnovative PropertyEconomic Competencies

Project provides framework for comparative measure of firms’ innovation capabilities within and between sectors

Project What we did Key findings

Firm-level Innovation Performance

• Used the Innovation Value Chain to develop indicators

• Ran a survey of 1,497 UK firms across 9 sectors

• Innovation takes very different shapes across different sectors

• Good performance on “accessing knowledge” and “commercialisation” but poor on “building” innovation

A different approach to innovation, the project highlights important contribution that ongoing innovation has through user engagementProject What we did Key findings

User Innovation • User innovation identified as innovation where the initial benefit and motivation comes from its use by the innovator rather than commercial exploitation

• Defined as modification of existing product or creation of new product. Can originate from firms or consumers.

• Surveyed 1,004 firms and 2,109 consumers to measure the prevalence of user innovators

• User innovation contributes a significant amount of investment in new and modified products.

• Scale of activity varies between sectors with software

Project framework highlights the complexity of the wider conditions that support successful innovation

Project What we did Key findings

Wider Framework Conditions for Innovation

• Synthesis of innovation literature

• Scoping and mapping of identified external conditions for innovation • Developed criteria for WFCs and constructed indicators

• The three most important are “talent”, “demand” and “competitive conditions”

• UK in mid-table compared to US, EU and South Korea

• Limited regional data identified

Next steps: 2009 -2010September – November 2009

Exploratory projects commissioned for Public Sector Index. Consultation on findings

December 2009 – May 2010

Commissioning of full Public Sector Index study

November 2009 -June 2010

Stakeholder consultation and development of indicators; refinement of Phase 1 indicators

Autumn 2010 Final report/outputs: indicators, methodological ’toolkit’ and outcome measures

Stakeholder Engagement

Senior economic policymakers in Whitehall and the devolved administrations

Those responsible for the delivery of public services in Whitehall, the devolved administrations and local authorities

Leaders of institutions who play a leading role in the UK’s ecology of innovation, notably university Vice-Chancellors, educators, business leaders, skills bodies, regulators and investors

Those responsible for regional economic development across the UK

Output must be credible with the private sector and the academic community

Contact: Brian MacAulayDirector Innovation Index Brian.MacAulay@nesta.org.uk

www.innovationindex.org.uk