Ingenious Britain Making the UK the leading hightech exporter in

Ingenious Britain

Making the UK the leading

high tech exporter in Europe

A repor t by James Dyson

March 2010

Foreword

When David Cameron invited me to help the Conservatives reawaken Britain’s innate inventiveness

and creativity I did not hesitate. Here was an opportunity to put forward my own views and those of

some of Britain’s leading industrialists, scientists, engineers and academics in a coherent form – a way

forward rather than a nostalgic glance back. There has been much debate and even more common

ground. The clear consensus is that action is required now. I am immensely grateful for the contributions

of these individuals.

The mission David set was clear and ambitious but undoubtedly within reach: for Britain to become

Europe’s leading generator of new technology. A challenge, yes. But forgive the mechanical analogy,

we have the right components: the chassis, an engine and all four wheels. We just need fuel, perhaps a

bit of tuning, and most of all, a sense of direction. Britain is not in a so-called “post-industrial” state, nor

is a science and technology niche. I am not an enthusiast lobbying to return to a bygone era. Industry,

science and technology create jobs and create wealth – beyond the Square Mile.

The task was broken down into five key challenges, challenges that a future Conservative government

must tackle if Britain is to generate and export more technology. Very simply:

Culture: How can a Conservative government bring about a culture where science, technology and

engineering are held in high esteem?

Education: How can a Conservative government inspire a future generation of scientists, engineers and

technicians? And how can we nurture those young creative brains so that they go on to pursue Science,

Technology, Engineering and Mathematics – the STEM subjects – in further and higher education?

Exploiting Knowledge: We have world-renowned universities, but how can a Conservative government

encourage the practical application of blue skies research in order to create world-beating products?

Financing High Tech: How can a Conservative government establish a financial system that actively

invests in high tech companies and projects?

Supporting High Tech: How can a Conservative government incentivise R&D investment by companies

and support British exports?

Not every opinion will be echoed by the Conservative team, nor will all of our ideas make it into the

final manifesto. Policy suggestions that clash with those developed by other taskforces could have been

weeded out, but that would be disingenuous and perhaps disloyal to the scientists, engineers, inventors

and manufacturers whose flag I am attempting to fly. My hope is that the Conservative team will see

that Britain’s talent for researching, developing, producing and exporting new technology is alive

and (relatively) well. With long-term government vision, focus and support, I believe that the nation’s

instinctive talent can propel Britain forward out of recession and towards sustainable growth.

We have brilliant, brilliant minds and a good dose of obstinacy. Ideal really.

James Dyson

INGENIOUS BRITAIN Making the UK the leading high tech exporter in Europe 1

Sir John Rose, Chief Executive Officer, Rolls-Royce Group Plc.

James Dyson has done an excellent job in identifying some of the steps the UK needs to take to rebalance its

economy. To be successful we must ensure that our education system produces the skills required to support

high value manufacturing and services. It is also important to recognise that Governments have a direct

role to play in shaping and developing economic activity. Whether by tax credits, grants or other incentives

the UK Government needs to compete for investment with other countries where this type of intervention is

considered entirely usual.

Sir Christopher Gent, Non-Executive Chairman, GlaxoSmithKline Plc.

Science and engineering are vital for the rebalancing of the British economy. James Dyson’s report is a

thorough and thoughtful review of how to further strengthen the UK’s excellence in these fields and to

create related economic benefit. Deeper, more strategic relationships are needed between universities and

business to encourage the translation of research into products and services. Removing barriers to cluster

development and creating increased opportunities for movement of staff between industry and academia

are both important measures but as well as strengthening translation, we must not neglect ‘blue skies’

research, the stimulus for many useful industrial applications. Overall, the focus must be on excellence,

providing increased support to those areas where the UK is globally competitive. Also key to increasing

investment in the UK by innovation-intensive companies is the development of a more competitive tax

regime; GSK is very supportive of the creation of a patent box and welcomes the support for this policy

measure by the Dyson report.

Sir Anthony Bamford, Chairman, JCB

I know from my personal experience over many years that Britain is a great place to design and engineer

products for customers all over the world. Talent and creativity are not in short supply in this country – what

we lack is a forward-looking supportive framework for companies that want to translate invention into

enterprise. All British manufacturers will welcome James Dyson’s report, and in particular his proposal for

enhanced tax credits on research and development. James is to be congratulated for flying the flag for

British industry at a time when it really needs to be championed.

Professor Sir Peter Knight, Deputy Rector, Imperial College

James Dyson is right. We have some inherent strengths. The UK is the sixth largest manufacturing economy

in the world and has four of the top ten global universities. If we harness the best of both worlds, we can

grow our high value add industries. Recognising the important role that universities have in delivering new

ideas and new opportunities is the first step. The measures that James has set out to encourage industry and

academic collaborations are important and necessary steps to allow us to transform our economy.

Professor Shirley Pearce CBE, Vice-Chancellor and President, Loughborough University

Sir James’s report builds upon the excellence we have in the UK, both in industry and in our universities. Strong

partnerships between business and education have already led to innovative, world-leading initiatives. The

removal of remaining barriers to collaboration is a vital step that will help ensure the UK has the knowledge

base and the people needed to build a strong economy, based on creating new technology and exports.

Richard Green, Chief Executive, The Design and Technology Association

This is an important report that should be taken seriously by any government. It shows how STEM education

provides all young people with essential skills to live and work in an advanced technological society. What

the report also does is to highlight the importance of STEM’s silent D (for design) that is provided by Design

and Technology in both primary and secondary schools. A subject that can combine scientific, mathematical

and technological rigour with design, creativity and innovation is educationally very powerful.

2 INGENIOUS BRITAIN Making the UK the leading high tech exporter in Europe

On Ingenious Britain

Table of Contents

1. Culture: Developing high esteem for science and engineering

2. Education: Getting young people excited about science and engineering

3. Exploiting knowledge: Collaboration, not competition, between universities,

companies and not-for-profits

4. Financing high tech start-ups: Turning good ideas into world beating products

5. Supporting high tech companies: Creating the right conditions for R&D investment

INGENIOUS BRITAIN Making the UK the leading high tech exporter in Europe 3

Now, more than at any time over the past twenty

years, I sense there is a real opportunity to set a new

vision for our economy. To do this, a new government

must take immediate action to put science and

engineering at the centre of its thinking – in business,

industry, education, and, crucially, in public culture.

David Cameron and George Osborne have rightly

highlighted the need to build a sustainable economy

based on investments, exports and savings. I believe

that it’s high tech companies that can contribute the

most to this new economy. From my perspective, high

tech companies are those who, regardless of the

sector they are in, are making genuine investments

in research and development to gain an advantage

over their international counterparts. The UK has

numerous examples of these companies – our goal

must be to expand their size and number. And we’ll

do this by combining our entrepreneurial culture and

ability to innovate.

What should a Conservative government do to make

it all happen? There aren’t any magic bullets – there

rarely are. In contrast to previous reviews, rather

than focusing on one component, we’ve tried to tackle

issues across the board. Considered and implemented

together, they have a chance of working for the

long-term economic prosperity of the country.

This requires a shift in public consciousness towards

science and engineering – a challenge that requires a

strong government.

Culture: Developing high esteem for science and

engineering

Culture. I know that’s a challenge. But I worry that

too much time is spent coming up with buzzwords

and initiatives like ‘Creative Britain,’ without much

substance to back them up. Britain can’t PR its way

out of the financial black hole. It’s absolutely right to

encourage creativity in all its forms, but why limit it by

defining which sectors are creative and, by passive

association, those which are not?

• To remain internationally competitive, government

needs to get serious about engineering and science

– in its commitment to research, delivering skills and

backing significant infrastructure projects. High tech

exports create real wealth and will help us recover

from our deficit.

• We don’t need to look hard for excellent examples

of science, engineering and invention. We simply

need to celebrate them and the ingenious people

who develop them. Future Conservative ministers

need to be vocal about these examples both at

home and abroad – where ministerial advocacy

can reap benefits. Bringing together key parties

to consider campaigns, prizes and the role of

the Design Council must be the first step for a

new government.

• Commitments to grands projets, such as high-

speed rail, nuclear and offshore wind power,

will demonstrate to the public the Conservative

government’s ambitions for the country.

Commitment needs to be matched with better

decision making by ministers. This requires a

greater appreciation across government of the

challenges facing companies in different sectors.

Education: Getting young people excited about

science and engineering

The cultural assumptions of de-industrialisation

extend to education. Design and technology education

is struggling to shake off a dreary image, and core

science subjects are being sidelined in the rush to

expand the curricula. I believe that we must give our

schools and universities the freedom and flexibility

they need to deliver the future generation of scientists

and engineers.

• Great teachers are the single most important factor

in successful teaching. Facilitating the transition into

teaching for other career professionals through a

new programme, Teach Now, will be an important

step. Utilising the expertise and goodwill of

independent schools can also lift the standards of

the whole system. But fundamentally we need to

ensure that teaching is attractive to our top science

and engineering graduates by paying off their

student loans over time and giving Head Teachers

greater scope to pay Science, Maths and Technology

(STEM) teachers more.

• An urgent review is required to ensure that all

STEM teachers are able to refresh their basic

training and learn of the latest advances in

industry and academia through Continuous

Professional Development (CPD).

• Teachers want to teach the three science subjects –

a Conservative government must let them. Kids

get turned off by dumbed down teaching, but rise

to the challenge of mastering something difficult

and satisfying.

• Technical, as well as academic, qualifications

must be promoted. For too long they have been

pigeonholed. A Conservative government needs to

4 INGENIOUS BRITAIN Making the UK the leading high tech exporter in Europe

Executive Summary

promote a variety of routes to better jobs

and securing degrees.

• Universities need to have greater freedom and

flexibility in how they are funded and regulated to

develop courses best suited to their strategies – be

it high quality research-led teaching courses or

more vocational courses with industry experience.

• Better careers advice will help more young people

go into study STEM subjects at the undergraduate

level. We should go further by offering industry

scholarships to foster more engineers, schooled in

the theoretical and experienced in the workplace.

Exploiting knowledge: Collaboration, not

competition, between universities, companies

and not-for-profits

Many of the best new ideas are being created in

university labs and the UK has far more than its fair

share of leading universities. And the fact that more

than 70% of full time engineering and technology

postgraduates are from outside the EU shows that our

universities provide world-class research-led courses

in engineering. But, with a few exceptions, we are not

world-class at taking ideas out of university and into

the market. While support for our strong research

base needs to be maintained, we need to take action

to:

• Give universities greater autonomy by creating

a less bureaucratic assessment system – one

that provides a diverse range of incentives and

the space for universities to pursue their own

research strategies.

• Promote knowledge transfer offices as a

springboard for collaboration by focusing funding

on successful offices and providing broader support

to other researchers.

• Develop new ways of promoting collaboration.

Public-private research institutes, capable of

developing the next millennium’s breakthrough

research, are a powerful way of doing this.

Financing high tech start-ups: Turning good ideas

into world-beating products

High tech start-ups, with great ideas, burn cash.

There’s no getting away from that. I believe that more

can be done to provide the right financial architecture

for innovative businesses. We need to unlock the

potential of angel investors and encourage lending by

commercial banks by:

• Increasing the Enterprise Investment Scheme

(EIS) relief available to 30% for angel investors

supporting high tech companies.

• Encouraging more lending by banks to innovative

businesses through a government guaranteed

business loan scheme – provided that the borrower

and lender are at risk too.

Supporting high tech companies: Creating the right

conditions for R&D investment

Companies know that investment in R&D delivers long-

term sustainable advantage. But often an emphasis

on short-term gains scuppers these investments.

A Conservative government needs to back those

companies investing in R&D – through the tax system,

better procurement and good export advice.

• Tax credits can be an excellent way of supporting

companies willing to risk their own capital in R&D.

The current system is well-intentioned but not well-

targeted. A Conservative government should refocus

R&D tax credits on high tech companies, small

businesses and new start-ups in order to stimulate a

new wave of technology. When the public finances

allow, the rate should be increased to 200%. Loss

making small companies also need greater help,

and the claim process must be streamlined. These

changes need not necessarily lead to a higher

overall cost to the exchequer.

• Conservative ambitions to deliver 25% of

procurement and research contracts through

small and medium sized enterprises (SMEs) are

admirable. Implementation will be crucial and

an urgent review should be launched to highlight

how a Conservative government will deliver on

these ambitions.

• UK Trade and Investment (UKTI) support for export

ready companies needs quickly to bring in the

expertise of our overseas embassies to promote

exports and inward investment.

These actions need to occur alongside the much

needed deficit reduction that the Conservatives

have argued for. Taken together the reforms and

recommendations suggested will put the UK on course

to become the leading high tech exporter in Europe.

INGENIOUS BRITAIN Making the UK the leading high tech exporter in Europe 5

The UK has an innate creativity, inventiveness and

competitive spirit. We need to harness these attributes

to develop new products that create nationwide

wealth. Our need is greater than ever. The UK has to

earn its way out of twin black holes – its yawning trade

and fiscal deficits – and forge a new economic future.

Can we achieve it? My answer: an emphatic ‘Yes’.

I strongly believe that the UK can develop a

prosperous high tech future, driven by science,

technology and engineering (we are actually very

good at them) and that we can end our over-

dependence on the volatile paper wealth created by

the property and financial services sectors.

As Rolls-Royce demonstrates with every engine it sells,

innovation is the absolute key to its success.

The same is true of every successful high tech

company. They all show that these are activities at

which the UK can excel. According to 2008 OECD

analysis of trade statistics of the G7 group of leading

economies, the UK and the USA have the edge when it

comes to developing and exporting high technology.

But decades of de-industrialisation mean there’s a lot

of ground to make up. In the medium-high technology

bracket, the UK barely makes an imprint on world trade

(see Figure 1). Unsurprisingly, Japan and Germany are

the global leaders in this important segment.

The same study shows that, between 1970 and 2003,

the UK suffered the sharpest decline in manufacturing

as a share of total employment of any advanced

economy. A collapse that has seen employment from

The UK’s Challenge

OECD, Staying Competitive in the Global Economy: Compendium of Studies on Global Value Chains (2008)

6 INGENIOUS BRITAIN Making the UK the leading high tech exporter in Europe

Ibid.

Geroski et al, The Profitability of Innovating Firms, RAND Journal of Economics, Vol 24, No. 2 (1993)

manufacturing fall from nearly one third of total

workforce to just over a tenth.

Does this matter? Yes, for three reasons:

• Re-balancing away from financial services

and property.

The banking crisis and subsequent recession

showed that the UK had become over-dependent on

financial services and property. Even worse, it is now

clear that the banking and financial services sectors,

taken as a whole, did not generate as much added

value as has been supposed. Instead, paper profits

were reported which were based on leveraging

the price rise of financial assets. Economists tell us

that exports can play a central role in reducing our

current account deficit. Manufacturing, the sector

that produces half the UK’s exports, is capable of

generating more exports in the future. Additionally,

the public can have greater confidence that the

profits high tech companies generate are genuine.

You create value by making things and then selling

them for more than they cost. The profits and wealth

this creates are real.

• Regional imbalances.

The speed and scale of job losses in manufacturing

since the early 1970s inevitably had a

disproportionate regional impact. Over-reliance

on the financial services led to a concentration of

economic activity in London. The example of Derby,

with its Gross Value Added (GVA) 25% higher than

the national average, highlights how a strong high

tech manufacturing base can transform the fortunes

of a city.

• Cyclicality

Growing high tech companies, who by their very

nature are more innovative, can help the UK

develop a more diverse economy – one that is

more resilient to cyclical downturns. Studies have

demonstrated that innovative firms are less sensitive

to recessions: ‘Whatever it is that creates generic

differences between innovators and non-innovators,

the consequence is that the former are likely to be

quicker, more flexible, more adaptable, and more

capable in dealing with market pressures than the

latter are.’

INGENIOUS BRITAIN Making the UK the leading high tech exporter in Europe 7

The UK’s long-term performance depends on our

ability to generate new ideas and bring them to the

market. And yet, India and China are producing

hundreds of thousands of engineers each year in a

bold move to increase their share of the value chain.

To compete in the future, the UK must use its ingenuity

and creativity. But we are fast losing any advantage in

these areas we may have had.

Meeting the challenge requires changing economic

policy. It means recognising that the policies that have

been pursued for the last 30 years are not enough.

After the demise of industrial planning policies at the

end of the 1970s, policymakers unduly focused on

improving efficiency – achieving growth by making

existing processes and businesses more efficient.

My only quibble with this is that it’s not what the

best firms actually do. Of course, successful firms

are always seeking ways to improve their efficiency.

But it’s not what makes them the best. Successful

firms are in the business of harnessing innovation

to gain sustained competitive advantage: new and

better products that deliver more value to customers,

priced to reflect this higher value. This drives long-

term wealth creation and rising living standards. New

inventions and new products define economic eras.

Does that mean the liberalising policies of the past

were a mistake? It’s not a question of whether pro-

competition, market liberalisation policies were wrong,

because they were not; it’s that by themselves, they are

not sufficient.

This is now widely understood. In his 1985 book,

Competitive Advantage, Harvard Business School

professor, Michael Porter’s focus was all about

improving the efficiency of the value chain. Seventeen

years later, Porter’s focus had shifted from efficiency

to product innovation. Saying that, for advanced

economies with relatively high labour costs, producing

standard products using standard processes would not

sustain competitive advantage:

Advantage must come from the ability to create

and then commercialize new products and

processes, shifting the technology frontier as

fast as their rivals can catch up.

I couldn’t have put it better myself.

Government policies need to catch up with the reality

of how wealth is created in today’s world. Policies

should aim at moving the UK up the value chain.

A return to centralised planning is not the solution.

Equally, as a recent Cambridge University study has

highlighted, we need to move away from fixed policy

notions about innovation occurring only in universities

and being financed solely by venture capital.

Instead, the focus must be spurring enterprise and

innovation to develop the next generation of wealth

creators - high tech companies and entrepreneurs,

across all sectors.

We need more entrepreneurs. We need more

innovators. We need more scientists, engineers and

designers who can turn ideas into working products.

We need to be better at supporting the ecosystems

that transfer new ideas from universities and which

incubate new firms. We need an education system

that equips young people and germinates the seeds of

industrial ambition in them. And we need government

to support innovating firms, especially smaller ones,

both through the tax system and the power that comes

from being Britain’s single largest customer.

Changing the Policy Setting

Michael Porter and Scott Stern, National Innovative Capacity, The Global Competitiveness Report 2001-2002, (2002)

8 INGENIOUS BRITAIN Making the UK the leading high tech exporter in Europe

Culture:

Developing high esteem

for science and engineering.

4% of teenage girls

want to be engineers,

14% want to be scientists,

32% want to be models.

New Outlooks in Science

& Engineering.

Our challenge is to stimulate science and engineering to generate wealth for the UK. Fiscal and

education policy is an obvious place to start, but I’m starting with something trickier: culture. It is not

a new debate, and it hasn’t been cracked – yet. But breeding a culture of appreciation, of esteem, for

technology (and those developing it) sets the wheels in motion for government policy.

And government is the place to start. Government must publicly celebrate technology: new inventions,

ambitious engineering projects and the pioneers propelling Britain forward. Their role in generating

wealth for the nation has to be underlined because there’s a creeping danger that people only

believe money can be made from money; the quick deal rather than the slow burn of generating new

technology. Slow, but thrilling.

But government must go further – actively pushing forward ambitious infrastructure projects, through

quick and timely decisions. Such schemes can be risky, but they galvanise and inspire. In 2008, the

Large Hadron Collider was among the Times’ most popular online topics (so what if there were some

teething problems – that’s engineering and people are interested in the fix as well as the fault). The

Conservative Party has already taken the initiative, committing to a new high-speed rail link linking our

major cities. Moreover, it is proposing to open the project up as a national competition. This is exactly

the kind of venture that inspires both understanding and enthusiasm for science and engineering. But

more than that, it instils pride in British ingenuity.

We need active leadership, setting the tone in language and action. Terms like ‘post-industrial’ and

‘creative industries’ only serve to reinforce misconceptions. In two words, they render invisible the

significant contribution of science and engineering to the economy. They must go. As long as we

continue to invent and make things (no matter if they’re assembled in the UK or elsewhere), we’re

industrial. Less chat about what songs are on the PM’s iPod, more about the British brains who actually

developed MP3 player technology (no, it wasn’t Apple).

I strongly believe that people are fascinated by technology and there is no need to dumb it down. If we

need to rally interest, then create a serious and prestigious prize to match the Stirling Prize, but only if it

can reach beyond the knowledgeable and interested few that other engineering prizes currently reach.

People need to know that we’re not technological has-beens or heroic failures. Britons are developing

new materials, creating greener energy and pioneering breakthrough medicines. There is an awful lot

to marvel at and be proud of.

And in terms of opening the eyes of the public and young people to engineering’s opportunities, we

already have a committed cadre of organisations out there doing some outstanding work to promote

the value of science and engineering. The key is to coordinate their activities so that the whole is greater

than the sum of the parts.

By leading in word and action, government can unlock the UK’s latent enthusiasm for design and

engineering. The young are innately curious about how and why things work. We must capitalise on this.

James Dyson:

12 INGENIOUS BRITAIN Culture: Developing High Esteem for Science and Engineering

Making the UK a leading high tech exporter requires

aptitude: a talented workforce, an inspirational

education system and effective research. It requires the

right resources: supportive financing and incentives

to innovate. But it also requires the right attitude. If

changes proposed are to be effectively implemented, it

will require the will to make them work. This can only

come through fostering a culture of understanding

and appreciation for science and engineering in the

UK: in government, education, industry, media and

the British public.

The UK has a great tradition of science, engineering

and invention; new ideas were the driving force

behind industrial and wartime Britain. Brunel and

Stevenson are British icons. This ingenuity and

potential still exists today: in the buildings and bridges

of Wilkinson-Eyre; Formula One cars of Williams

and McLaren; the high tech submarines of BAE;

and the pharmaceutical breakthroughs made at

GlaxoSmithKline and Astra Zeneca. UK companies

and universities are alive with many other compelling

examples of high tech ingenuity.

Yet despite these examples, the public perception of

science and engineering is of geeks and mechanics.

The achievements of scientists and engineers are

rarely recognised or sufficiently commended.

Unsurprisingly, this continuing misconception does

not inspire young people to study these subjects, nor

does it encourage high tech companies to flourish in

our economy.

If the UK is to capitalise on its strengths as a high tech

exporter, it needs to change the perception of science

and engineering. This cannot be done overnight.

Policies are important, but a new government should

first set the tone of the debate and signal a real

commitment to science and engineering.

Science and engineering have become progressively

less valued and understood since 1945. People

struggle to define what it means to be an engineer.

Only 4% of teenage girls are interested in training as

engineers and 14% as scientists compared to 32%

who want to be models.

While Lewis Hamilton and Jensen Button received

the plaudits for winning Formula One titles, it was

their British engineering teams that developed the

technology that secured victory. Apple’s iPhone is a

consumer phenomenon – but it’s not widely known

that much of its technology is designed by British

companies. In fact, the MP3 player was invented thirty

years ago by a British innovator, Kane Kramer.

Young people’s perception of engineers and scientists

would be comical if it were not tragic. Look at the

national stereotypes. Scientists are egghead lab-

coated geeks; engineers are metal-bashing factory

workers or mechanics fixing broken appliances.

It’s no wonder careers in science and technology

are deemed unappealing by both parents and

their children. By contrast, countries like the USA,

Germany and France hold these careers in much

higher esteem. A 2009 Harris Poll found that the USA

public thought being a scientist was the second most

prestigious occupation while engineers were 9th –

scoring significantly higher than lawyers, Members of

Congress, athletes and entertainers.

The problem is not confined to the school playground.

Many parents have no idea of the value and

excitement of science, technology, engineering or

maths careers – they assume that to succeed, their

children must become bankers, lawyers or accountants

(probably in that order). We must add engineers and

scientists to that list.

But even more worryingly, this lack of understanding is

shared by too many of our leaders and policy makers,

as well as many in the media. The James Dyson

Foundation experienced this when it tried to establish

a school for 14-19 year-olds, focused on engineering

and science in Bath. Its efforts were constantly rebuffed

by bureaucrats despite the strong support it enjoyed

from local Head Teachers.

Media reporting on manufacturing is weak. While high

street sales and UK bank profits are important, they

are not the sole barometers of UK’s economic success.

The Challenge

The Evidence

Royal Academy of Engineering and the Engineering and Technology Board, Public Attitudes to and Perceptions of Engineering and Engineers (2007)

New Outlooks in Science & Engineering (Noise) survey cited in The Guardian, 3 October 2008

Royal Academy of Engineering and the Engineering and Technology Board, op. cit.

Harris Interactive Poll (August 2009)

INGENIOUS BRITAIN Culture: Developing High Esteem for Science and Engineering 13

This is not to criticise science coverage in the media

(The Times’ Eureka supplement and the BBC’s

‘Bang Goes the Theory’ are two recent examples

of new, mainstream science reporting), but it does

highlight that the media rarely links high tech to

economic success.

British science and engineering is world class. But the

good work in our laboratories, factories and research

centres is not being sufficiently communicated. In their

annual Skills Surveys, the Institute of Engineering and

Technology (IET) asks employers what needs to be

done to address skills shortages in engineering. For

four consecutive years, the top response from industry

is ‘improving the image and profile of engineering’. It

needs a concerted effort to boost the public image of

these subjects.

As Ian Taylor noted in his review in 2007, government

must take science and engineering seriously. It must

lead the change and show that wealth creation

– economic and social advancement – can occur

through long-term investment in technology and those

people developing it. By doing so, more young people

will be encouraged to study science and engineering

and become the entrepreneurs that are vital for the

future of the UK as a high tech economy.

Getting the language right

A Conservative government should focus first on

using the correct language when referring to high

tech companies – to instil public confidence and

awareness. Talk of “post-industrial Britain” or

“creative industries” should end. Design is not simply

aesthetics; it’s the rigorous process that links new

technologies to business – creating things that work

properly. And manufacturing isn’t just assembly; it’s

intellectual property, technology, design and specialist

engineering. Creativity exists in all sectors, not just

media, fashion and art. It’s high tech and high value.

And it’s essential to both our economy and society.

But it requires more than rhetoric. Ministers, MPs

and civil servants must champion British science and

engineering both at home and abroad. There must be

a clear understanding of each sector of the economy

where we have a chance to lead internationally (such

as aerospace, defence, pharmaceuticals or nuclear).

This must be applied to language and actions - each

Cabinet Minister should contribute to the debate on

improving science and engineering. Proposals in this

report should only be viewed as the beginning of the

development of a comprehensive policy framework

where science and engineering are woven into the

fabric of government activity.

The Way Forward

14 INGENIOUS BRITAIN Culture: Developing High Esteem for Science and Engineering

Commitment to fast decision making on

infrastructure

It is essential that a new government is clear and vocal

about its upcoming infrastructure, technology and

manufacturing requirements and that it makes early

and bold decisions on large projects. The government

is in a unique position to stimulate innovation and

generate growth through infrastructural investment

and it should take full advantage of this. Plans for

high speed rail are an example of how a government

initiative could set a vision for industry and academia

to follow. This long overdue upgrade will help put

Britain on a par with its competitors and provide

significant stimulus to the individuals, companies and

industries responsible for the project.

Endless discussion and indecision on the costs and

benefits can needlessly delay essential projects.

Assertive, forward looking action is required. The

French nuclear industry is a good example: at the time

of Chernobyl the French took a lonely path ploughing

ahead – now they are reaping the rewards, exporting

both power and expertise.

Championing success

Good high tech products should be celebrated. A new

government should work with high tech businesses to

make sure the right stories hit the headlines. Projects

like HMS Astute submarine and the UK engineered

Bloodhound, the world’s fastest car, are examples of

British ingenuity that should be widely publicised and

lauded by ministers.

We need leadership and agreement amongst the

diverse institutions, industries, universities and royal

academies to present a coherent, collaborative

and convincing message – that can be marketed

to the British public and media. In 2004, the

current government set up the STEM programme,

assigning specific actions to different government

departments, as well as bodies like the Royal

Academy for Engineering. Given the right support

from communication professionals, actions like the

STEM ambassador scheme have the potential to

provide a strong platform to promote the UK’s cultural

understanding of science and engineering.

A new government needs to ensure the message

is reaching people, with a senior cabinet minister

convening the various different interested STEM

bodies to:

• Coordinate initiatives:

Get the buy-in of the major UK engineering and

science firms, charities and organisations: use

the skills of their PR and marketing professionals.

Continue to streamline initiatives. Encourage more

proactive engagement: promoting free resources

and activities.

• Develop role models:

Ensure young engineers and scientists are trained as

STEM ambassadors for use beyond education (like

the Science and Engineering Ambassadors scheme

run by STEMNET) – reaching out to the media,

parents and the wider public. Encourage high

profile industry leaders and TV personalities with

STEM backgrounds to front campaigns.

• Communicate great stories:

Work with broadcasters like the BBC and Channel

4 to promote great British science and engineering

stories, both historic and contemporary. The aim

is to help children and parents understand science

and engineering, without oversimplifying.

• Make science and engineering a product:

Science and engineering needs to be made relevant

and tie in with contemporary issues that will

make an impact on their future, like robotics and

climate change. Support industry and SMEs in a

coordinated approach to public engagement work,

particularly with local schools.

The Design Council

A future Conservative government should

review the funding, objectives, and impact

of the Design Council. In an age where design

is celebrated in the windows of Selfridges to the

headquarters of large multinationals, the role of the

Design Council in promoting good design is difficult

to pin down. With the Design and Victoria and Albert

museums both running excellent design education

programmes, practical assistance for designers and

engineers is more likely to be useful. For example,

activities to help design and engineering students

commercialise their products through incubators – a

successful model pioneered by the Design London

programme. The Council’s role in delivering these

sorts of programmes should be examined.

INGENIOUS BRITAIN Culture: Developing High Esteem for Science and Engineering 15

Engineering prize

Celebration of achievements will undoubtedly

stimulate cultural interest. The Stirling, Booker and

Turner prizes, in architecture, literature and the visual

arts respectively, are effective promotional tools:

creating awareness and understanding of subjects

often outside mainstream debate. A new government

should consider setting up a major national prize

scheme for engineering, or better yet, work with

established STEM bodies to raise the profile of existing

engineering prizes such as the Royal Academy of

Engineering’s MacRobert Award.

A good prize will take time to establish itself and

government would need to be prepared to start small

and learn from early mistakes. Key design aspects to

consider include:

• Be people and project focused: like the Stirling

prize, the interesting stories are the projects, but

there has to be a human interest too.

• Be supported by strong communication including

a central website and educational links. ‘Important’

engineering projects are not necessarily immediately

interesting to the public. Ideally, this would involve a

media partner, rather than simply industry, to give it

profile (as with National Lottery’s Living Landmarks:

The People’s Millions, which was broadcast on ITV

in 2005).

• Be suitably supported by a large prize fund and

funding for logistical support.

• Provoke debate, like the Turner prize.

• Have a strong philosophy behind it. This could

be Dyson’s problem-solving approach.

• Consider the long-term. The Stirling Prize judges

new buildings, which haven’t had the chance to

establish their worth. This engineering prize could

look at a project that, through problem solving,

has done the most to make an environment

substantially better.

16 INGENIOUS BRITAIN Culture: Developing High Esteem for Science and Engineering

Education:

Getting young people

excited about science

and engineering.

Almost one in four

secondary schools in England

no longer has any specialist

physics teachers.

University of Buckingham.

Making wonky matchbox holders in woodwork lessons didn’t inspire me to pursue a career in design

and manufacturing. I discovered engineering by accident at the Royal College of Art. And I was hooked.

At Dyson, we have a team of young, dynamic and creative engineers, developing new technology. I

look for a particular type of engineer: a polymath, a ‘hands and brains’ person.

‘Hands’, in that they can solve problems, have no fear of failure, and follow their theories through into

practice by actually making things. ‘Brains’, in that our best engineers and scientists have the theoretical

and scientific foundations to inform their work. And the intelligence and creativity to follow a logical

course of development.

But it is getting harder to find these people. Why? Science teaching has been compromised and

arguably watered down, and Design and Technology in schools has been marginalised (it was made

non-statutory in 2004). Over the past two decades, young people have flocked to fashionable subjects

such as media studies and sociology, leading to increasingly disappointing numbers of graduates in the

STEM subjects.

Halting this migration from science and technology must start in schools and continue at university and

beyond. Without long-term change, we will be failing to offer our young people the education they

deserve, and the higher salaries that come with STEM training. And fundamentally, we will be failing our

economy which needs STEM graduates to exploit the opportunities of high tech.

In schools and colleges, we must focus on great teachers and great curricula. We can do this by:

• Teaching real science, not quasi-science courses. Seek to ensure every state school offers

triple science courses: physics, chemistry and biology at GCSE level. And teaching Design and

Technology courses which demand creative responses and are technologically rigorous.

• Harnessing the knowledge of mid-career professionals through the Conservatives’ ‘Teach Now’

programme. Providing our schools with subject specialist teachers by encouraging our top

STEM graduates to go into teaching by paying off their student loans and offering

competitive salaries.

• Using the expertise and goodwill of independent schools through reform of the Independent

State Schools Partnership.

• Promoting technical qualifications and apprenticeships as a route to better jobs and degrees.

At universities, we must attract more students into degrees in STEM subjects and then encourage our

talented young scientists and engineers to stay on track for careers in these fields. We can do this by:

• Attracting more students by offering industry scholarships to engineering students and, in the

short-term, ensuring that we allow our high tech companies to recruit the best of the foreign

STEM graduates and postgraduates from our universities rather than forcing them to return

home after their studies.

• Encouraging more internships and placements so that students and researchers gain hands-on

experience of the technologies used by industry, better preparing them for the world of work.

• Exploring radical reform of university funding and assessment to give universities the flexibility

and freedom to develop courses tailored to the needs of their students. We don’t treat students

as one homogeneous mass, so why do we do this with universities?

James Dyson:

20 INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering

The desire to increase the number of STEM – science,

technology, engineering and mathematics – graduates

is not new. Over thirty years ago, the Finniston Report

urged immediate action to increase the supply of

engineers. It did so, because Finniston and others

realised that STEM graduates are wealth creators in

our economy – whether through the higher wages

they earn, the high tech start-ups they establish or the

valuable skills they offer companies outside the high

tech sector.

The analytical and numerical skills derived from a

STEM education are highly valued by employers. So

much so that leading management consultants, like

McKinsey & Company, actively target engineering

graduates at leading universities. The City of London is

awash with physics and maths graduates. The value of

engineering graduates is reflected in the fact that over

their lifetime they earn more than all other graduates,

apart from doctors.

Beyond this, grounding in STEM

subjects is vital in an age where technology pervades

all aspects of life. The physicist and novelist, CP Snow

foresaw this, arguing that those in government cannot

make informed, crucial scientific decisions without

foundations in scientific training.

Currently, the need for more STEM graduates is most

starkly seen in the field of engineering, where there

is a serious skills shortage, with 43% of companies

finding it hard to attract the right graduate recruits.

This situation is likely to become worse as the

proportion of engineers requiring degrees is predicted

to increase to 47% in 2017, compared with just over

32% in 1987.

There has been heavy investment in education in

recent years, with mixed results. Examination of the

pipeline of STEM graduates does not engender hope

for the future:

• Schools and colleges: The scientific performance

of students in UK secondary schools was described

as being considerably above the international

average in a major study by the OECD. However,

our place is slipping – since 2001, the UK has

dropped from 8th to 12th place in Maths, and

from 4th to 14th place in science.

We also have

real problems attracting students to study STEM

subjects. The number of young people taking

A-levels in Chemistry, Biology and Maths has not

increased significantly over the past ten years.

In England, the numbers taking A-level Physics

fell from just under 30,000 in 1992 to 24,730 in

2006. These sharp falls now appear to be halting.

Even so, just one in ten pupils from maintained

schools achieved a single pass in an A-level

science subject.

Equally, there is an immediate

need for qualified technicians. We already have a

far smaller proportion of technicians in high tech

companies than our European counterparts, a

situation compounded by a high level of unfilled

positions in the industry – 71% of current vacancies

in engineering are for professional technician and

process operative roles.

Engineering UK 2009/10

highlights declining numbers of technicians up to

2004. Since then, numbers have started increasing

– we must ensure that this continues.

• Universities: In the past five years, there has been a

16% increase in the number of students taking first

degrees in the STEM subjects, and a 35% increase

in students getting masters degrees. However,

this overall trend disguises a more worrying trend

concerning UK students. More than a third of

this increase in STEM undergraduates has come

from overseas. In engineering, the trend is more

dramatic, with the number of UK engineering

undergraduates actually falling.

To a large extent, the STEM agenda has also ignored

its silent D (design). Used as a tool to make products

a reality, design links engineering to business. At

school level, Design and Technology should receive

the same priority status as Science and Maths.

And in higher education, it must receive the same

preferential funding treatment by the Higher Education

Funding Council for England (HEFCE) as Science and

Engineering. Dr Paul Thompson, Rector and Vice-

Provost at the Royal College of Art:

To cast academic disciplines within such rigid and

artificial moulds does not mirror the way in which

technologists, engineers, and indeed scientists

work these days. Very often, it is in close concert

with designers, architects, automotive designers,

industrial design engineers and software designers.

Beyond the numbers of graduates and technicians,

there is also an issue of quality – specifically,

The Challenge

Universities UK/ PWC, The Economic Benefits of a Degree (2007)

CP Snow, Science and Government (1961)

IET, Engineering & Technology Skills & Demand in Industry Annual Survey (2009)

Engineering UK, Engineering 2009, (2009)

OECD, Programme for International Student Assessment (2007)

House of Commons Science and Technology Select Committee, Third Report (2002) and data from jcgq.org.uk.

Adrian Smith, Developing the STEM Agenda (2009)

Department for Business Innovation and Skills, Skills for Growth, (2009)

INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering 21

recruiting graduates and technicians with the skills

companies need.

A singular focus on improving both the quantity

and quality of STEM graduates is required. This can

be delivered by tapping into the innate curiosity of

children. It will mean taking positive action from

schools to universities. Reform needs to encourage

more students to study STEM subjects, through

the provision of better careers information and

appropriate incentives. Finally, we need to ensure

students are learning the right mix of skills. Quality

of STEM teaching needs to be improved through

the adoption of a ‘hands’ and ‘brains’ approach –

ensuring that students are skilled at making things and

have a good grasp of the underlying theory. All of this

needs to be delivered by a new cadre of motivated,

subject-specialist teachers.

22 INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering

In their McKinsey report on top-performing schools,

Michael Barber and Mona Mourshed highlighted how

the quality of an education system cannot exceed the

quality of its teachers.

Students placed with high-

performing teachers consistently progress three

times faster than those placed with low-performing

teachers.

And low performing school systems rarely

attract good teachers.

England suffers from both teacher recruitment

shortage and a large number of poor quality

graduates.

Government figures show that Maths and

Science continue to have higher teacher vacancy rates

than other subjects.

Good quality graduates, as well

as individuals with work experience, must be recruited

to reduce these shortages.

Many of our teachers aren’t subject specialists. Almost

one in four secondary schools in England no longer

has any specialist Physics teachers.

Less than half

of recently qualified Maths teachers has a degree in

maths, only 41 per cent has a 2:1 or better in any

degree, and 16 per cent had a third class degree or

worse.

Science teachers who aren’t specialists have

been found to be far more likely to adhere to schemes

of work tailored to passing examinations – to the

detriment of creative and inspirational teaching.

Steps taken by the current government have had

some impact. Teach First – a programme targeting

top graduates into teaching in inner city schools for

at least two years – is a successful campaign, which

the Conservatives have already pledged to expand.

The number of accepted applicants for initial teacher

training courses in STEM subjects has also increased

as a result of golden hellos for new teachers – by

7.7% for Science courses and 32% for Maths courses

between 2008 and 2009.

However, there is a

considerable way to go. In 2008, only 77% of Maths,

86% of Science and 61% of Design & Technology

PGCE training places were filled.

The increase in

the numbers in training must be maintained if we are

to reduce the shortfall, but we must ensure we accept

only the brightest of applicants.

Therefore, the first priority of a new government

should be to ensure that the right teachers are being

recruited and developed.

People go into teaching primarily because they want

“to help a new generation succeed in a world in which

skills and knowledge are crucial to success.” For

professionals and senior managers coming from other

professions, salary was seen as the main deterrent to

becoming a teacher. Other major deterrents included

safety in the classroom and teacher morale.

These findings form the basis for action. The recent

Conservative Party proposal to repay student loans

for the best STEM graduates who go into teaching,

is welcome. As is Michael Gove’s proposal to take this

approach further with the introduction of Teach Now,

a fast-track programme similar to Teach First for high

calibre experienced and retiring professionals. As

well as the promised creation of an online fast track

application system, removing bureaucracy and getting

teachers straight into schools, in the first instance,

Teach Now should target senior STEM professionals

– the success of the Teach First campaigns

demonstrates how this can be done. This should be

coupled with attractive salaries and a continuation

of the existing ‘golden hellos’, with the removal of

barriers to entry such as formal in-university training

and micromanagement in schools. For areas with

significant difficulties, like Physics, a new government

should seek to ensure that head teachers are using

flexibility in pay to recruit teachers with Physics

degrees. To monitor progress on recruitment, the

Department for Children, Skills and Families and

Ofsted should examine whether they can publish

statistics for individual schools on the number of STEM

teachers with relevant degrees.

Making recruitment routes more flexible will yield

results in the medium-term. In the short-term, a

new government should seriously consider how the

independent sector can support the maintained

sector. There is much to learn from the successful

model pioneered at London’s St Paul’s School. St

Paul’s acts as a centre of excellence, where young,

inspiring mathematics teachers are released to spend

a small portion of their timetable running extension

classes for the most able local state school children.

These classes don’t teach to the national curriculum,

but inspire in the children a passion for the subject,

and an interest in pursuing it beyond GCSE and

Great Teachers:

The Evidence

Great Teachers:

The Way Forward

A. SCHOOLS AND COLLEGES

McKinsey & Company, How the World’s Best Performing Schools Come Out on Top (2008)

Ibid.

NCEE, Tough Choices or Tough Times (2007)

Policy Exchange, The Labour Market for Teachers 1997-2008 (2008)

Full-time classroom teacher vacancy 1 rates in local authority maintained secondary schools by subject, 2009. (DCSF)

University of Buckingham, Physics in Schools IV, Supply and Retention of Teachers (2008)

Hansard, 13 October 2009: Col 868-870W

Lyn Haynes, Studying STEM: A Literature Review of the Choices Students Make (2008)

Graduate Teacher Registry, Provisional end of year applicant acceptances

Policy Exchange, More Good Teachers (2008)

Ibid.

INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering 23

A-Level. A Conservative government should review

the functions and impact of the Independent State

Schools Partnership, and prioritise funding towards

STEM programmes. A programme such as that run

by St Paul’s should first be piloted, and if successful,

implemented nationally. At around £5,000 per

independent school per year to fund the wages of

cover staff, the programme would be cost effective,

and have immediate impact in enthusing young

people to study Maths and Science.

The McKinsey report

highlighted how successful

education systems first identify the right people to

become teachers and then develop them. Great

individuals are the place to start, but professional

development is vital to keeping teachers up to date,

motivated and invigorated. In the short-term, it can

radically improve the standard of teaching in schools,

and longer term, support teacher retention. A new

government should review the national provision

of teacher training for STEM subjects, especially

Design and Technology, to ensure all teachers can

refresh their basic training and learn of the latest

advances in industry and academia. A report from

the Wellcome Trust

noted that half of the secondary

science teachers interviewed had not participated in

any subject-specific CPD (continuous professional

development) in the previous five years. The model

employed by the National and Regional Science

Learning Centres is working well, but the Design and

Technology programme is currently under-funded –

relying on the generosity of a small number of funders

such as the Gatsby Charitable Foundation and the

Royal Academy of Engineering.

To maintain and increase the UK’s competitiveness

in STEM education, a Conservative government will

need to look at how science, design and engineering

is taught in schools.

Science

From its inception in 1951, the take-up of O-level

Physics increased more than eightfold to 1989.

However, following the introduction of combined

science GCSEs, it has fallen back to less than a

quarter of its peak. The Royal Society of Chemistry

has described the devaluation of the GCSE science

syllabus as ‘catastrophic’

. While all pupils in

maintained schools now study some Physics as part

of science, fewer specialise than in the past. The

switch from GCSE Physics has occurred mainly in

comprehensive schools.

Students in independent and grammar schools are

more likely to take A-level Physics (14.4% and 10.2%

respectively in 2004) than those in comprehensives

(6.2%) or sixth form colleges (4.0%). And second year

sixth formers in independent schools are 52% more

likely to read Physics at university than those from

comprehensive schools.

Design & Technology, engineering and

vocational routes

The greatest shortages in UK engineering industries

are within the technically skilled areas; with 71% of

vacancies from the skilled trade, professional and

technical occupations and process operative roles.

It’s clear that the school system needs to better deliver

young people who are able to solve problems and

create solutions – practically. In his speech to the RSA,

Rolls-Royce CEO, Sir John Rose said:

In Britain, we must revisit past decisions and

recreate technology colleges or their equivalent to

improve vocational learning. Their curricula must

be defined by industry’s needs and provide the sort

of well-educated workforce that can support the

high value activities of the future.

Design & Technology, the Engineering Diploma,

apprenticeships and vocational courses at Further

Education centres can all help young people find

their way into engineering careers, at technician or

Great Curricula:

The Evidence

McKinsey & Company, How the World’s Best-Performing School Systems Come Out on Top (2008)

Wellcome Trust, Believers, Seekers and Sceptics: What Teachers Think About Continuing Professional Development (2006)

The Daily Telegraph, 26 November 2008

University of Buckingham, Physics in Schools and Universities, II. Patterns and Policies (2006)

Engineering UK, Engineering UK 2009 (2009)

24 INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering

chartered level. These courses also provide the UK

with young people who are technologically literate –

essential to an advanced technological society.

Practical lessons

STEM lessons are also becoming less and less

practical, due to health and safety fears, and they

are consequently less engaging. Professor Sir John

Holman, Director of the National Science Learning

Centre, believes that trainee teachers spend too little

time preparing exciting experiments:

There is much less practical work now

because of a huge focus on exams. Schools

are so aware of health and safety — they

will say, ‘That’s too dangerous.’

Both Professor Holman and David Phillips, Emeritus

Professor at Imperial College believe that without the

stimulation produced by making elements combust

and fizz, pupils won’t continue science beyond GCSEs.

“All the evidence points to practical work being the

thing that pupils like to do,” Prof Holman said. “This

isn’t about how do you get more Grade Cs in GCSEs,

it’s about how you inspire more young people.”

The STEM curriculum as it’s currently taught doesn’t

always engage young people – who often don’t see

the practical application of what they’re learning. The

fall in popularity for the physical sciences is partly due

to “a curriculum that is often perceived by students as

being too theoretical and not relevant.”

A Conservative government must reform the

curriculum to teach pure science, rather than ‘How

Science Works’ or ‘Science for Citizenship.’ Reform

of curricula is never quick or easy to implement,

particularly if results dip in the short-term. However,

it is vital if we are to ensure that schools teach the

theory well and engage students with exciting practical

experiments. All state schools should be expected to

offer separate science GCSEs – and these courses

must be rigorously assessed. Clearly, having high

calibre, subject specialist teachers is fundamental to

success of this policy.

Successful reform of the curriculum can occur only

if health and safety concerns are challenged and

addressed. Former Conservative trade secretary Lord

David Young is leading a review into how the health

and safety culture could be curbed. It should include

the Health and Safety at Work Act being amended

to ensure the danger of prosecution does not put

teachers off from encouraging children to engage in

adventurous experiments.

Allied with these reforms, a new government must

emphasise the validity of technical and academic

skills, regardless of age or level, as a route to better

jobs and degrees. We welcome the Conservatives’

commitment to expanding and improving the

apprenticeship programme so that all 14-16 year olds

have access to genuinely vocational qualifications.

This would involve funding 30,000 places a year

(compared with the present 10,000) and allowing

schools to offer self-funded places if there is demand

beyond 30,000 places.

The Conservatives plan to build a new University

Technical College in each of the 12 largest urban

areas in England, with the long-term ambition to

have one in every area of the country, is a good one.

These high tech academies would raise the status of

technical qualifications, boost Britain’s science and

engineering base, and provide real choice for parents

and young people. These Colleges would be funded

from within the £4 billion set aside for new Academies

from November 2009 – 2013.

A Conservative government should also support the

Engineering Diploma. The qualification has been

welcomed by the Royal Academy of Engineering

and the Institute of Engineering and Technology as a

vocational qualification more likely to provide students

School lab health and safety rules could stop future scientists, The Times, October 5, 2009

Shell Education Service, Learning to Love Science (2008)

INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering 25

Great Curricula:

The Way Forward

with a better understanding of industry. This Diploma

is also recognised as a valid route into engineering

degrees by elite universities, such as Cambridge.

Launched in 2008, it has not yet been given an

opportunity to prove itself fully, though an initial report

from the Institute of Engineering and Technology is

extremely positive.

Whilst the overall number of applications for STEM

subjects at university has started to grow again, this

increase has lagged behind overall student growth,

and significantly behind growth in social sciences and

communications subjects.

From 2003 to 2008, all

STEM subjects showed annual growth of 1.6% with

engineering first degrees having marginally lower

growth of 1% – compared to 3% for all subjects, 5%

for social studies and 6% for media studies.

Postgraduate education is particularly important

in STEM. It offers a significant route to industry, as

well as producing the next generation of lecturers

and researchers.

While overall numbers of STEM PhD students have

risen over the past ten years, the trend masks some

significant problems. Engineering and technology

doctorates have risen by an average of 2% per year,

but the number of overseas postgraduate students

has risen much faster. This is likely to mean that in

engineering, the number of UK-resident PhD students

has more than halved.

If all postgraduate degrees are considered, the

picture is even starker. Students from outside the UK

now make up more than 70% of all engineering and

technology postgraduates. Although their numbers

have risen by almost 20% in the last five years, the

growth has almost entirely been made up of overseas

students. In other words, of the additional 3,825

students in postgraduate engineering education in

2008, only 70 came from the UK (Figure 2).

The Institution of Engineering and Technology, Transforming Engineering Education (Sept 2009)

Higher Education Statistics Authority (HESA)

Higher Education Statistics Authority (HESA), STEM subjects excludes medicine and veterinary

Quantity of STEM Graduates

and Postgraduates:

The Evidence

B. UNIVERSITY EDUCATION

26 INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering

The lack of UK engineering students and the

recruitment problems that this causes are serious

problems for the UK economy. Although the additional

earnings potential of an engineering degree is second

only to medicine, this message is not getting through

to students choosing degree courses.

Engineering and technology are the most popular

subjects at universities for international students,

with around 24% coming from outside the EU in

2007/08.

This attractiveness of our engineering

courses is a great indicator of their quality, but

overseas students frequently take their knowledge

and expertise back home, setting up in direct

competition with British firms. The benefits of

keeping overseas students in the UK when they

graduate are apparent from studies of migration in

the USA, where the number of foreign born migrants

creating high tech start-ups and registering patents

has grown dramatically.

In the last academic year, 42,000 students from

outside the EU obtained visas to stay on after

obtaining a degree through the Post-Study Work Route

of the immigration system. This route is now being

re-examined by the Migration Advisory Committee,

with a view to restricting the institutions and types of

degree eligible. If the system becomes more restrictive,

we could have a significant economic cost if we fail to

keep the best overseas STEM students in the UK after

their graduation.

The need for increased numbers of STEM graduates

and postgraduates requires bold thinking from a

Conservative government. Short-term policy actions

such as encouraging overseas graduates to stay in the

UK need to be combined with longer term initiatives to

increase the overall numbers of UK students studying

STEM subjects, particularly engineering. Immediate

action to improve the attractiveness of STEM subjects

at A-level will deliver more STEM graduates in the

medium-term.

The first step needs to be to improve the quality of

careers advice to all students and school pupils,

and the Conservative proposal to ensure students

get information on routes into STEM subjects is

welcome. Expecting 16-year-olds to make informed

decisions without providing them with a basic level

of information is negligent. Improved careers advice

at school needs to be founded on better information

from universities. This should include data on the

average salaries following graduation for each subject

area, as well as the range of careers that graduate

leavers have reported.

Beyond school, we need to attract more engineering

students by offering widely available industrial

scholarships, as soon as public finances allow.

Offering golden hellos has been shown to be

successful in recruiting science and maths teachers.

The future demand for STEM graduates and

postgraduates means that we must act now to ensure

that we have the right skill set for our high tech

companies to succeed.

With students in England now facing average debts

of £23,000

(under the existing fees system), costs

of doing courses have now become a real factor

for students in deciding what course to select. The

Government’s own survey

reported that one in

three students say their decisions about higher

education were affected by the availability of funding

and financial support and 25% of full-time students

indicated that concerns over debt had nearly stopped

them going to university.

The immediate focus should be on engineering, as

this subject has the most serious recruitment problem.

Offered through companies, these scholarships would

have the following advantages:

• Increasing the attractiveness of engineering

courses over others by offering a financial

incentive to students.

Engineering UK, Engineering 2009 (2009)

Applied Research in Economic Development, Skilled Immigration and Economic Growth (2008)

PUSH, Student debt survey (2009)

Institute for Employment Studies and National Centre for Social Research, Student Income and Expenditure Survey 2007/08 (2008)

INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering 27

Quantity of STEM Graduates

and Postgraduates:

The Way Forward

• Ensuring that industry has a strong voice in the

way courses are designed and taught to the

students they sponsor.

• Leveraging funding from industry towards the

costs of these scholarships.

• They would be unlikely to distort the current

funding mechanism beyond the current bias

towards subjects like biology and geography.

The scholarship scheme could be modelled on the

Institute of Engineering and Technology’s Power

Academy.

Under this initiative, energy companies

provide students at seven universities with an annual

bursary of £2,200 and a paid summer placement.

For our proposed scholarship scheme, government

would provide half the funding for the bursary,

allowing industry funding to go further. Awareness

campaigns and criteria, developed with industry,

could target these scholarships to high achievers or

those from less privileged backgrounds. For example,

the scholarship could be used as an incentive for

successful apprentices to move onto degree courses.

The alarming shortage of UK students taking

engineering and technology postgraduate courses

warrants further attention. Again financial incentives,

potentially in the form of an enhanced postgraduate

fellowship, need to be considered. Many UK

engineering undergraduate courses now result in

a Masters qualification. Therefore it may be more

appropriate to target a fellowship at doctoral students

who currently receive an annual stipend of £13,290

from the annual Engineering and Physical Sciences

Research Council (EPSRC). It is important to recognise

that the brightest students will have opportunities to

study abroad, where they can earn $30,000 each year

in Hong Kong, or command good starting salaries

in industry. If the UK is to continue to attract the best

home students to advanced research, increases to

the EPSRC stipend to make it competitive with other

options for engineering graduates must be considered.

In the short-term, we should seek to ensure that

routes for the best overseas STEM students to stay

in the UK, such as the Post Study Work Route,

remain open. These individuals are highly skilled by

definition. The key will be to ensure the best students

have flexibility in choosing employers and that the visa

system is more efficient.

The quality of the UK’s STEM graduates and

postgraduates has been vital for the ingenuity

and enterprise of our high tech companies.

In an era when India produces over 170,000

engineering graduates each year

, the ongoing

success of our high value-added companies

relies increasingly on delivering STEM graduates,

postgraduates and technicians of a very high calibre.

In the UK, this is critically dependent on universities

continuing to deliver graduates and post graduates

who have a firm grasp of the latest advances in theory

and the know-how to apply this knowledge in an

industry setting.

The Institute of Engineering and Technology (IET)

argues that a shortage of adequately skilled

candidates is one of the major barriers to recruitment

over the next five years. In particular, 25% of

employers cite a lack of practical experience in

graduates as their main weakness. This inexperience is

also an issue for postgraduates with 17% of employers

citing it as a problem.

Dyson has seen this trend first

hand – compounded by an over-reliance on computer

software. The workforce is also very male dominated

and as high performing companies are recognised to

have a diverse workforce; this too, is a problem.

New challenges will require graduates to work in

interdisciplinary teams.

GlaxoSmithKline seeks

to sponsor interdisciplinary research to identify

drug targets. For example, they are sponsoring a

Cambridge University team drawn from members

of departments of Psychiatry and Experimental

Psychology and the Institute of Metabolic Science

to optimise the early clinical development of new

GSK medicines for obesity and addictive disorders.

Graduates leaving universities will need to be well

versed in working in such teams to prepare them for

their careers.

www.theiet.org/about/scholarships-awards/power-academy/

Vivek Wadhwa et al., Issues in Science, Where the Engineers Are (2007)

IET, Engineering & Technology Skills & Demand in Industry Annual Survey (2009)

Ibid.

NESTA, Technology Policy and Global Warming (2009)

Quality of STEM Graduates

and Postgraduates:

The Evidence

28 INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering

Businesses value the graduate output of the UK

highly but it is important that universities continue to

respond to business’s demand for high quality STEM

graduates. The CBI reports that 35% of employers

are dissatisfied with the business awareness of

graduates

, making those with business awareness

or industry experience through an internship or

placement highly prized.

Professor Christopher Snowden, President of the

Institute of Engineering and Technology, and Vice-

Chancellor of the University of Surrey:

The most valuable thing that universities

produce is the people - not just undergraduates,

but at all levels. This is the output that businesses

most appreciate.

The key to delivering improvements in the quality of

teaching is the promotion of greater autonomy and

competition for universities. This will allow individual

universities to identify where their competitive

advantage lies and develop courses to meet the

needs of their particular set of students.

This cannot be achieved without radical reform of

how universities are funded and assessed. In turn,

this will require deep thought and analysis into the

fundamental question of what public funding for

universities is seeking to achieve. This is ever more

pressing in an environment where universities are

being asked to cover several different functions

and are attracting greater numbers of overseas

students. Universities now have on average 10%

of their student body drawn from non-EU overseas

countries, with the figure getting as a high as 49%

for some individual institutions

A more flexible funding and assessment system for

universities should make it possible for universities to

offer a greater variety of course structures, and cater

better to the variety of student and employer needs.

This should result in a more diverse university sector –

with individual institutions competing to offer shorter

courses, more part-time provision and greater industry

involvement in curricula and in providing industry

placements. In particular, it could help develop three

improvements in the types of courses on offer:

• Shorter courses with real industry experience:

Internships or sandwich courses are an important

way of incorporating industry knowledge into the

student experience, but are increasingly hard to

find. By combining a year of industry placement

with two years of teaching, based on a longer

teaching year (for example, with four terms

instead of three, as pioneered by the University of

Buckingham and other institutions), it would still

be possible to achieve a full degree in three years

whilst still accruing valuable industry experience.

While not suitable for all universities, this could be

an attractive course programme for some students.

• Equivalent or lower Qualifications:

Most engineering degree courses last four years

and culminate in an MEng. HEFCE currently regards

this as a postgraduate qualification. Under current

HEFCE rules, MEng students wishing to continue

to pursue engineering at postgraduate level, for

example on the Royal College of Art and Imperial

College’s successful Innovation Design Engineering

programme, no longer qualify for funding for

postgraduate qualifications. This has impacted

the IDE course negatively, and greater flexibility in

the funding system should recognise courses like

IDE as providing a qualification higher than an

engineering masters.

• Courses designed with industry in mind:

Loughborough University has a customer-focused

approach which it develops through close

relationship with industrial partners. Dyson staff are

involved in the engineering department’s Industrial

Advisory Committee, helping to shape course

content. The committee forms a reliable feedback

loop, ensuring that on more vocational courses,

graduate skills and behaviours are meeting the

needs of industry. In a freer market place, this sort

of interaction can provide individual institutions with

a competitive advantage. More universities need to

develop courses directly with industry.

• More courses which mix science and business:

The interdisciplinary nature of the 21st Century

workplace also has important consequences for

teaching at our universities. Forward thinking

universities already encourage students and

researchers to attend different courses and

seminars and undertake research across disciplines.

Design London seeks to stimulate joint research

between designers from the Royal College of

Art and engineers and business school students

CBI, Nord Anglia Education and Skills Survey (2009)

Higher Education Statistics Authority 2007/08

INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering 29

Quality of STEM Graduates

and Postgraduates:

The Way Forward

from Imperial (see box below). Arrangements like

this could be important in preparing our future

engineers for work in industry, and our future

business leaders with a firm grasp of science

and engineering.

The underlying principle of reform needs to be giving

universities the freedom and flexibility to identify what

students and industry want. Under the current system,

the number of students the leading universities can

teach is capped with penalties imposed for exceeding

your quota. Equally the university assessment

framework – the Research Assessment Exercise (RAE)

– perversely incentivises all universities and teaching

departments to undertake some level of research even

if this would not be the core activity for a teaching

department. Flexibility to offer courses of varying

lengths is also restricted. While the RAE will need to

change, these changes will not themselves necessarily

provide the right incentives for some universities to

specialise in teaching or research. Therefore options

such as a high quality vocational STEM teaching

accreditation scheme may need to be considered

as part of wider reforms. The university assessment

system and suggested changes are discussed in more

detail in the next chapter.

Additionally it will be important to consider how

changes in funding, assessment and other incentives

impact on what universities seek to do. The current

system incentivises all universities to pursue both

research and teaching. Changes in the RAE will not

necessarily provide the right incentives for some

universities to specialise in teaching or research.

Therefore options such as a high quality vocational

STEM teaching accreditation scheme may need to be

considered as part of wider reforms.

Funding will also need to follow the wider aspects

of reform. Knowledge is most effectively transferred

between universities and businesses through

placements and recruitment.

Incoming graduates,

postgraduates and researchers are a critical driver of

innovation within businesses. An increased emphasis

on internships and placements can be achieved by:

• Examining how funding could be better targeted

through the Technology Strategy Board (TSB) for

postgraduate and postdoctoral placements into

industry. Currently Knowledge Transfer Partnerships

place researchers into businesses to conduct

research there, generally for a year or more.

They are very highly regarded by businesses that

participate, but are currently limited to around

1,000 places.

• Working with industry to identify how

undergraduate internships in industry can be

promoted. There are benefits for the student,

company and university in developing internships.

Companies paying undergraduate interns are

more likely to use them effectively and deliver a

rewarding experience for the undergraduate. A new

government should seek to identify where there

is greater scope for industry financed internships,

how this can be capitalised upon and where co-

investment from government would increase the

number of internships.

Cambridge: MIT institute, UK PLC: Just How Innovative Are We? (2006)

30 INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering

DESIGN LONDON – INNOVATION AND INCUBATION

Design London blends design represented by the

Royal College of Art, engineering and technology

represented by Imperial College Faculty of

Engineering and the business of innovation

represented by Imperial’s Business School to share

knowledge and create new businesses. Funded

by NESTA and HEFCE, Design London is clustered

around four strands of work: education, research,

incubation and an Innovation Technology Centre.

• Education: Teaching promotes the sharing of

knowledge between postgraduate students at

the RCA and Imperial.

• Research: Exploration of how design can

be integrated more effectively with business

and technology.

• Incubation: A facility has been developed to

enable entrepreneurial graduates, from the

RCA and Imperial, to hone and develop their

ideas in a multi-disciplinary environment. The

range of skills contained within Design London

will provide unique support and the chance of

unexpected collaborations between different

disciplines, organisations and places.

• Innovation Technology Centre: The Centre is

home to world leading design, visualisation,

modelling and rapid prototyping technology,

helping students and partners to maximise

their innovation capacity through simulation

exercises, digital tools and facilitation.

Links across industry and academia foster

conditions for creating world-beating products

and services, ensuring London stays at the cutting-

edge in a competitive international field.

Initiated in 2008, Design London has already

led to a better understanding of how different

disciplines can work together – establishing a new

way of incubating companies. Although it is still in

the early stages of development, three incubated

companies are already showing signs of success,

all expected to exit successfully from the incubator.

A Conservative government should learn the

lessons from Design London over the next year to

examine how the model can be applied to other

universities, courses and incubators.

INGENIOUS BRITAIN Education: Getting Young People Excited About Science and Engineering 31

Exploiting knowledge:

Collaboration,

not competition, between

universities, companies

and not-for-profits.

We have the raw material.

Nobel Prize winners:

116 – UK

320 – US

The US population

is around five times the

size of the UK.

Britain has historically led the world in scientific knowledge – most of it generated in universities.

Cambridge, one of our best engineering universities, celebrated its 800th birthday last year. Our

researchers are internationally renowned for being the most efficient and productive in the world –

and we’re second only to the USA in the number of Nobel Prize winners we cultivate. There’s much

to be proud of.

I’ve seen this excellence first hand. It’s one of the most exciting things about working at Dyson.

Newcastle and Cambridge universities are helping us develop new technologies. You might not see or

hear about them for years, but at the moment, I am confident that they are the most advanced in the

world. The knowledge from university ‘blue skies’ research can eventually result in new applications and

great products. But Britain needs to do more of this.

The challenge for a UK government is to harness the potential of breakthroughs in scientific research

and – though it may sound ‘impure’ to some – use this potential to create products. To do this we need

a flexible approach. Just as the best engineers are polymaths – creative, academic, scientific and

practical – our system must develop its various strengths to meet diverse requirements. Universities must

work with industry and investors to capitalise on our world-beating research and to accomplish the

equally exciting task of commercialising ideas. Pure research on its own will not be enough.

And, what is the government’s role? To help this collaboration flourish by providing an environment free

from the barriers of adversarial negotiations over IP and short-sighted demands on universities to prove

their impact.

I’m privileged to be involved in Design London – a partnership to bring together students from the Royal

College of Art, Imperial Engineering departments and Imperial Business School. It is early days, but

seeing the results of these disciplines working together is exciting.

As Sir Chris Gent, Chair of GlaxoSmithKline, has stressed: “Removing barriers to cluster development

and creating increased opportunities for movement of staff between industry and academia are both

important measures. But as well as strengthening translation, we must not neglect ‘blue skies’ research,

the stimulus for many useful industrial applications. Overall, the focus must be on excellence, providing

increased support to those areas where the UK is globally competitive.”

In the short-term, I believe we need to:

• Draw back on the plan to judge funding applications on the basis of their short-term

commercial impact. Instead, we should seek to promote collaborations between academics,

industry and not-for-profits to allow an open exchange of ideas – whether this is done through

research partnerships or having academics spend more time in industry.

• Signal a long-term commitment to ‘blue skies’ research by maintaining funding through the

research councils.

• Change the way knowledge transfer offices work to free up resource and aid researchers and

entrepreneurs in and around the university.

Our work must be long-term. A Conservative government must take the first steps to help our university

sector meet the challenges of the future by:

• Establishing new university/ industry institutes (similar to those in Germany and Japan) to

promote collaboration in technology development. The focus should be on five or so centres

capable of becoming world leaders in their fields.

James Dyson:

34 INGENIOUS BRITAIN Exploiting Knowledge: Collaboration, Not Competition, Between Universities, Companies and Not-For-Profits

Our universities are among the most highly regarded

in the world, renowned for their world class research

and excellent teaching. Our creative approach to

science and engineering is highlighted by the fact that

the UK has had 116 Nobel Prize winners, second only

to the USA’s 320 prize-winners from a population

around five times the size.

The success of our high tech companies has been

achieved through a combination of a good grasp of

‘blue skies’ research, creative application of research

and entrepreneurial spirit. Stimulated by the important

policy steps outlined in the Sainsbury and Lambert

Reviews

50/51

, the UK has made much progress in each

of these areas:

• UK researchers are the most efficient and productive

researchers in the world according to leading

scientific indicators.

• Student numbers in the UK have grown rapidly over

the last 10 years from 1.8m to 2.3m. This has not

compromised teaching at our leading universities

which have improved their positions in global

university rankings.

• Improvements have been made in technology

transfer. However, universities in other countries

outperform the UK in applied research and its

commercial exploitation.

Research is the basic starting point for all

technological innovation. While the UK excels at

basic research, there are often breaks in the chain

of development that mean we do not fully capitalise

on this expertise. Smoothing the transitions between

the stages of technology development could

enhance the ability of the UK to capitalise on our

scientific expertise.

A Conservative government should protect the

excellence of British research and encourage

productive relationships with industry and not-for-

profits. These goals need to be recognised as

separate but complementary. The current system

places perverse incentives on academics and

technology transfer officers which need to be

changed if universities are to continue to be a

wellspring of ideas and knowledge.

Universities’ approach to intellectual property

highlights the current confusion over what they are

being asked to deliver. Licensing and spin-outs are

perceived to be the most important commercialisation

work that universities can undertake. Statements

from universities and government frequently quote

patents and licensing as a measure of success in

generating economic gains from research. This

reinforces this confusion.

This emphasis on intellectual property (IP) is unhelpful.

Income from patents and licensing represents only a

small proportion of income generated by universities

(see Figure 3). Access to patents represents a small

part of why businesses choose to collaborate with

universities, and IP is frequently cited as a barrier to

collaboration by businesses.

54/55

Research

The proposed Research Excellence Framework

(REF), which will form the basis for distribution of

approximately £1.5 billion of research funding in

2009/10, introduces the notion of ‘research impact’

into the evaluation of research quality. The REF pilot

requires academics to identify where they have built

on research “to deliver demonstrable benefits to the

economy, society, public policy, culture and quality

HM Treasury, Lambert Review of Business-University Collaboration (2003)

HM Treasury, The Race to the Top: A Review of Government’s Science and Innovation Policies (2007)

Department for Business, Innovation and Skills, International comparative performance of the UK research base (2009)

Times Higher Education World University rankings (2009)

Advanced Institute of Management Research, Examining the attitudes of EPSRC industrial collaborators towards universities’ (2009).

NESTA, Connected University (2009)

Higher Education-Business Community Interaction Survey (2008), excludes spin-outs

INGENIOUS BRITAIN Exploiting Knowledge: Collaboration, Not Competition, Between Universities, Companies and Not-For-Profits 35

The Challenge The Evidence

of life”. There is a risk that this becomes a fruitless,

bureaucratic exercise which fails to recognise

that the time lag between research and when it

will make an impact can be impossible to predict.

Even relatively ‘applied’ biomedical research, with

a clear intended purpose, may find its application

in an unexpected area.

The application of the full economic cost to research

proposals has made the UK one of the most expensive

places for industry to fund research. This can act as a

major disincentive for companies seeking to sponsor

research and can drive privately funded research to

foreign universities.

Knowledge Transfer

Universities engage in a range of activities that

disseminate the latest advances in the field to

businesses, non-profits and government – in recent

times, this has been termed knowledge transfer.

In the last few years, government funding has helped

establish a knowledge transfer office (KTO) in almost

every university in the country. Most KTOs are funded

through the ‘third stream’ of HEFCE funding: the

Higher Education Innovation Fund (HEIF)

. This

funding is allocated based on academic staff numbers

and knowledge transfer income, with an upper

funding limit.

Some KTOs undertake valuable work

to facilitate business uptake and commercialisation

of research developed in university laboratories.

For example, they provide back office support for

collaborative research agreements with companies,

co-ordinate industry networks, arrange training to

businesses, and support student entrepreneurship.

However, the security of government funding has

arguably engendered in KTOs a curious form of

risk aversion when it comes to patents – their staff

are often content to lose income rather than expose

themselves to claims of failing to capitalise on a

‘blockbuster patent’. This is evident in surveys, where

businesses complain of unrealistic expectations by

KTOs in IP discussions.

Good KTOs clearly divide commercial work

from knowledge transfer work that has wider

economic benefits, but does not generate profits

for the institution. Meanwhile, ideas with significant

commercial potential need careful evaluation, IP

protection and commercial funding. This function

can be successfully outsourced: the University of

Glasgow works with the IP Group and industry

partners to decide whether an invention is worth

protecting with a patent. IP that doesn’t have the

potential to attract commercial funding is then made

freely available. Similar outsourcing occurs through

Imperial Innovations, a limited company working

with Imperial College.

Teaching and research are the other two ‘streams’.

http://www.hefce.ac.uk/news/hefce/2008/heif4.htm

Bruneel et al, The Search for Talent and Technology: Examining the Attitude of EPSRC Industrial Collaborators Towards Universities (2009)

36 INGENIOUS BRITAIN Exploiting Knowledge: Collaboration, Not Competition, Between Universities, Companies and Not-For-Profits

‘Blue skies’ research is critical if the UK is to develop

high value added industries, as is improved interaction

between universities and companies. A Conservative

government should seek to preserve the excellence of

UK ‘blue skies’ research, by maintaining funding levels

through the Research Councils, whilst encouraging

collaborative relationships between businesses and

universities. This approach will require a coherent

policy response focused on ensuring that academics,

industry and university administrators have a clear set

of objectives and the tools to deliver them.

Knowledge Transfer Offices

Universities are important sources of new ideas and

improvements for businesses. There is a role for

bodies within universities who ensure that businesses

can make contact with relevant research groups, and

that researchers are able to find commercial outlets

for their ideas. Subsidies from government will be

important to ensure that good universities’ investment

in teaching and research is not to the detriment of

promoting knowledge transfer. However, there is

considerable scope for reform of the current system:

• Concentrating on fewer offices. Not all universities

have sufficient research activity to justify a dedicated

office. HEIF funding should focus on those offices

with sufficient flow and a proven track record in

knowledge transfer. Other universities should be

encouraged to outsource or share resources with

high performing offices. Exploitation of patents and

other IP for commercial benefit should be measured

on returns, and decisions should be informed by

industry expertise. Equally, knowledge transfer

offices should seek to identify and promote best

practice in the recruitment, training and support for

university-business go betweens.

This will free up resource for other important

activities. For example, a portal that aggregates

information on university research across the UK

could be developed to make it easier for businesses

to locate relevant research partners. Such a portal

already exists for 13 Scottish universities. Similarly,

offices could also be funded to help entrepreneurs

emerging from postgraduate courses and the wider

community to take the first steps toward realising a

potentially valuable technology.

• Proof of concept funds are needed in order to

undertake initial stages of development – in

advance of securing commercial funding.

This would bridge a significant gap between

university research funding and commercial

application. Scottish Enterprise already runs a

similar fund

, and Cambridge, Oxford, Imperial

and University College London have previously

collaborated on pool funding for this purpose.

Funds should be drawn from current RDA budgets

for innovation and combined with those of the

Technology Strategy Board to deliver a nationally

coordinated programme.

Improving collaborative research

A Conservative government needs to ensure that

collaborating is a simple, straightforward and

rewarding process for academics, industry and

not-for-profits.

• The current REF pilot is flawed and decisions

should be delayed until lessons can be fully learnt

from the pilots. As part of this learning process,

a new government should examine whether

an element of the assessment should focus on

measuring and promoting networks with industry,

other UK universities or not-for-profits. This would

develop real incentives for academics to spend time

in industry and identify useful research projects

which could be jointly funded. In some areas,

collaborations could be more limited (e.g. pure

mathematics) and this will need to be factored into

the overall assessment framework.

• Perverse contractual arrangements which prohibit

or limit collaborations with UK based companies

should be removed. Prohibitions often exist on the

amount of time an academic researcher receiving a

British research grant can spend with industry. This

ignores the fact that no restrictions are placed on

collaborations with international universities – both

public and privately funded ones. This effectively

allows companies in other countries to access and

exploit ideas developed in the UK.

• As part of measures to increase the autonomy

of universities, the case should be examined for

universities being able to apply full economic

costing or have freedom to set fees based on their

own circumstances and the prices charged by their

international competitors. Obviously, the current

fiscal environment and the challenges it poses to

university funding may constrain what universities

Scottish Enterprise Proof of Concept programme: http://www.scottish-enterprise.com/poc

INGENIOUS BRITAIN Exploiting Knowledge: Collaboration, Not Competition, Between Universities, Companies and Not-For-Profits 37

The Way Forward

can do over the next few years.

• New university/industry research institutions

capable of becoming centres of excellence

in a particular research field should be given

government sponsorship. These institutions should

provide space for interactions, promote staff moving

between business and academia and allow sharing

of expensive resources. Government funding

could be matched by industry, with any VAT issues

resolved in advance. The key to success of these

institutes is that industry will work in partnership

with leading universities to identify priority areas

for research and bring commercial expertise in

developing emerging technologies from these

institutes. In the current fiscal climate, this proposal

would need to be considered alongside other

spending capital and revenue commitments on

research centres. Professor Sir Peter Knight has said:

Our industry partners have told us they would like

to be able to identify experts who can provide

solutions to their problems through a single, one-

stop-shop, Centres of Expertise. We would argue

for focusing funding for research on such centres

through a ’hub and spoke model’ with the UK’s

top universities at the heart of this model.

http://www.imec.be/wwwinter/mediacenter/en/SR2003/docs/iiap_brochure/iiap_brochure.pdf

Discussion with Jörg Überla, German venture capitalist.

MODELS FOR NEW RESEARCH CENTRES OF EXCELLENCE

The Rolls Royce University Technology Centres

provide a template for new university-industry

research centres of excellence. Rolls Royce has

fostered a network of 27 centres worldwide,

the majority in the UK. The centres each focus

on a key technology and cover a range of

engineering disciplines from hydrodynamics

to composites. Rolls Royce has also invested in

other partnerships, such as the UK Manufacturing

Technology Centre in Coventry and the Advanced

Manufacturing Research Centres.

Other models include IMEC in Belgium, which

preserves proprietary IP, while sharing the benefits

of generic innovations. IMEC also transfers a

researcher from the industry partner to work with

the internal team.

The Fraunhofer Institutes

in Germany are well-respected public-private

institutes that serve industry research and act

as a valuable source of knowledge and new

technologies.

The new Academic Health Science

Centres (AHSC) and the evolution of a number

of the UK’s Public Sector Research Establishments

(PSREs), such as Daresbury, provide a useful

model for academic-public sector collaboration.

38 INGENIOUS BRITAIN Exploiting Knowledge: Collaboration, Not Competition, Between Universities, Companies and Not-For-Profits

LETTING UNIVERSITIES AND BUSINESSES LEAD IN

DEVELOPING CLUSTERS

Clusters are local concentrations of companies

and public institutions from a particular sector or

group of sectors, often around access to shared

expertise or facilities. The co-location – and

repeated exchanges between organisations –

promotes both competition and co-operation, and

promotes innovation and entrepreneurship.

Clusters typically spring up around universities.

The Cambridge high-tech cluster is one of the

most admired in the world: a vibrant community

of academics, investors and entrepreneurs.

The cluster has taken more than 30 years to

become established after early steps were

taken by enlightened academics, investors and

entrepreneurs in the late 1970s. There are other

less well-known clusters in the UK. For example, a

biomedical cluster has developed around Dundee

which now employs 4,000 people and accounts

for 16% of the local economy. The cluster began

as a result of pharmaceutical companies seeking

to collaborate with Sir Philip Cohen’s laboratory.

Whilst government interventions to promote cluster

development and growth are mixed, there are

some good examples from around the world of

how other governments have played an important

role in creating the conditions for new clusters:

• Israel: Beginning in the late 1960s, the Israeli

government poured significant funds into

Israeli university-led research. This led to the

development of a highly skilled workforce,

supplemented by military engineers and

scientists. The catalyst of company growth

and cluster formation was arguably the

establishment of a venture capital industry.

This was made possible by the government’s

establishment of Yozma, a publicly funded

venture capital company.

• Germany: Germany has announced plans to

develop offshore wind in the Baltic Sea.

At Bremerhaven, they are putting together

all the elements of an innovation and industrial

cluster, designed to attract inward investment.

Specifically, coordinated investment has

been made in developing demonstration

sites, support for private sector facilities and

R&D facilities.

In the UK, the recent announcement of a

life sciences cluster, anchored by the large

GlaxoSmithKline R&D facility at Stevenage,

represents a similar approach.

• GSK partnered with the government, Wellcome

Trust and the East of England Development

Agency (EEDA) to develop a new biotechnology

science park at GSK’s site at Stevenage.

The project aims to create a world-leading

hub for early-stage biotechnology companies.

The company hopes that the campus will

compete with those in Boston, California and

North Carolina in the United States, and will

eventually become home to 1,500 scientists.

GSK see the establishment of similar SME

biotech clusters around the UK as a priority

for a future government.

These examples point to an approach which

aligns with Conservative principles on the

government’s role as an active facilitator

of private and corporate efforts. Successful

cluster development and growth under a future

Conservative government will depend critically

on ensuring that industry and universities lead

on developments, and are supported with fast

decision making on infrastructure, planning

and seed funding for commercially sustainable

business incubators.

INGENIOUS BRITAIN Exploiting Knowledge: Collaboration, Not Competition, Between Universities, Companies and Not-For-Profits 39

Financing high tech start-ups:

Turning good ideas into

world-beating products.

The annual rate of lending

to business fell by a record

8.1% in 2009.

Bank of England.

Research and development takes time and it takes money, with many dead ends before breakthroughs

occur. But it is how new technology is created; it’s a long slog – ideas are instant but invention is long-

term. Early debt for new companies is almost inevitable, which is why they require support.

The cash-flow pressures facing many start-ups hinder R&D, suffocating good ideas before they become

world-beating inventions. Dyson vacuum cleaners would not exist were it not for Mike Page, my bank

manager, who personally lobbied an initially reluctant Lloyds Bank to loan me the £600,000 I needed

for tooling – the only way to start out on my own. Other businesses such as Autonomy or ARM relied

on venture capital to fund the initial stages of development. So it’s clear: for UK technology to thrive,

financial support is required: lenders and investors with patience and risk-tolerance.

But too often, UK investors are reluctant to take a punt on technology, science or engineering. Private

equity is drawn to larger, less risky leveraged buy-outs, and banks shy away from innovation. The

credit crunch has only amplified the situation, our once overactive financial services sector lacking the

foresight to promote economic growth.

We need an approach that relies on the good judgment and sharp eyes of already successful

entrepreneurs and technology developers – angel investors. Angel investors bring not just funds but a

wealth of understanding and experience, too. I would like to see a Conservative government focus the

Enterprise Investment Scheme on benefiting those who invest in high tech, R&D-intensive businesses.

A Conservative government should address clearing banks and their apparent unwillingness to

lend to small, innovative businesses (Mike Page was a bit of rarity). Clearing banks have a unique

understanding of small businesses and have the infrastructure to monitor small debt financing. The

process of obtaining a clearing bank loan is simpler and more easily understood by fledgling start-ups.

A loan guarantee scheme similar to the Conservatives’ National Loan Guarantee Scheme proposal to

stimulate small-business lending, especially to those exploring new technology, should also be explored.

Both actions can deliver immediate benefits and leave a lasting impression.

James Dyson:

42 INGENIOUS BRITAIN Financing High Tech Start-ups: Turning Good Ideas Into World Beating Products

Investment in high tech research and innovation is

inherently risky. These risks are compounded by the

fact that many of the most innovative companies

are young, small firms with little cash flow and few

assets against which to raise money. This makes the

availability of entrepreneurial finance crucial

for innovation.

But the supply of this finance, whether in the form of

angel and venture capital funding, or small business

loans, is doubly constrained. The credit crunch has

hit financing for innovative businesses hard, as

witnessed by the collapse of both venture capital

funding and business lending. But this merely

exacerbates a longer-term problem: the hesitancy of

investors to back innovative British entrepreneurs and

investment in research.

If the UK is to become the leading high tech exporter

in Europe, both new and existing high tech businesses

need access to sufficient affordable finance to fund

research and innovation. The time to do this is now, as

the UK rebuilds its financial architecture after the credit

crunch. A Conservative government should ensure

that the right incentives exist for our financial system to

fund investment in innovation.

The current government’s attempts to solve this,

particularly with venture capital, have had only

partial success. A new government should focus

on addressing those parts of the UK’s financial

architecture that offer most to innovators and where

least has been achieved. In particular, it should

look at how it can better support individuals willing

to risk their own capital to back excellent high tech

ventures, and how to ensure that debt finance reaches

innovative businesses.

Innovative businesses rely on a range of types of

finance. This includes both equity and debt finance:

equity in the form of angel and venture capital

investment, and debt in the form of small business

bank lending. It also includes informal ways of funding

investment like tax credits (such as the R&D tax credit)

or contracts from lead users.

Levels of both equity and debt finance for innovative

businesses have been hit badly by the credit crunch.

But this short-term impact should not be allowed to

obscure a longer-running need to improve the UK’s

ability to finance research and innovation.

Angel investment

Angels are wealthy individuals who invest either alone

or collectively into start-up businesses. Research on

the UK angel community has shown that successful

angels are disproportionately former or current

entrepreneurs, with relevant industry experience

they bring more to the table than just cash, and can

back up their money with an understanding of the

businesses they invest in.

Angels in the USA invest significant amounts of

money: over $26 billion (£18.3 billion) in 2007. In

the UK, by contrast, angel investment is on a much

smaller scale. The most recent figures available

show only £1 billion invested.

If UK angels invested

as much as USA angels, relative to the size of the

economy, they would provide £3.5 billion, as much as

the combined funding of the UK’s Research Councils.

The Enterprise Investment Scheme (EIS) has been

successful in stimulating individual investors to back

early stage companies. NESTA research identified

that over 80% of investors had made use of the EIS

scheme, with 24% indicating that these investments

would not have been made without EIS. However,

the vast majority of companies receiving investment

through the EIS have been in the service sectors.

High tech companies have received only 25% of

funds raised.

NESTA, Siding with the Angels (2009)

HM Treasury, The Race to the Top: A Review of Government’s Science and Innovation Policies (2007)

INGENIOUS BRITAIN Financing High Tech Start-ups: Turning Good Ideas Into World Beating Products 43

The Challenge The Evidence

Venture Capital

In the UK, venture capital funding is characterised

by two worrying phenomena: a long-term drift

away from financing innovative, entrepreneurial

businesses towards larger, leveraged buyouts, and

a sudden drought of investment funds caused by

the credit crunch.

Over time, private sector funds have grown larger

and invested in later-stage businesses, often using

significant leverage. Recent decisions by 3i and

Apax Partners to leave the UK venture market are

symptomatic of this trend. More recently, the credit

crunch has seen a dramatic fall both in funds

available for investment by tech venture capital

funds, and in the new venture funds being raised.

In addition, venture capital is skewed towards

particular high-profile sectors, with other sectors (in

which R&D may still produce significant commercial

advantages) less well represented. 70% of investments

are focused on IT, healthcare and telecoms sectors.

Less than 15% of investments go to other non-service

industries (see Figure 6).

To a certain extent, this bias represents the features of

markets which venture capital funds look for – large,

addressable, with scope for technologies to radically

transform them. Since venture capital funds generally

require a certain level of deal-flow to justify investing

in industry knowledge, they are unlikely to maintain

due diligence capability and experienced staff in

sectors that generate fewer deals. But it may lead to

good companies in underrepresented sectors being

missed. This highlights the importance of having other

forms of finance available than venture capital.

ONS analysis of EIS return forms

NESTA, Reshaping the UK Economy (2008)

BVCA, Private Equity and Venture Capital Report on Investment Activity 2008 (2009)

44 INGENIOUS BRITAIN Financing High Tech Start-ups: Turning Good Ideas Into World Beating Products

Public money has been invested into a variety of so-

called “hybrid” venture capital funds, such as Regional

Venture Capital Funds, Enterprise Capital Funds and

the newly launched Innovation Investment Fund. Their

track record has been mixed. Research by NESTA

and the NAO

has shown that many public funds lack

private sector expertise, focus on narrow geographical

areas and are too small. Small funds consume

disproportionate amounts of operating costs, and for

the same percentage of operating costs, attract weaker

managers, resulting in poorer investment decisions.

Although the fees paid to fund managers are

comparable to those paid in the wider VC community,

these overheads represent a sizeable percentage

of the overall investment. The government’s new

Innovation Investment Fund attempts to overcome

the size and expertise issues by adopting a fund of

funds approach; but this approach risks overlaying

additional management costs. This new Fund is not

yet operational.

Bank Lending

It is notoriously difficult to prove definitively a shortage

of bank lending: the banks argue that any decline

reflects fewer businesses wanting credit as much as

a shortage of banks providing it. Nevertheless, there

is evidence that innovative small firms have had a

particularly hard time. Positive lending figures for

2007 and 2008 (where banks lent on average £7

billion and £4 billion more than they received) have

turned into negative figures in 2009. The annual rate

NESTA, Reshaping the UK Economy’ (2009), From funding gaps to thin markets (2009)

NAO, Venture capital support to small businesses (2009)

INGENIOUS BRITAIN Financing High Tech Start-ups: Turning Good Ideas Into World Beating Products 45

of lending to business has been rapidly falling each

month, with lending falling by a record annual level

of 8.1% in 2009

. Since the credit crunch, lending by

banks to “real” businesses – not other banks, insurers

or fund managers – has failed to recover, even though

inter-bank lending is back to its pre-crunch rates.

Survey data from the Engineering Employers’

Federation suggests that successful innovative

manufacturers found it harder to raise money than

less innovative business even before the credit crunch.

The credit crunch has unsurprisingly made the

situation more difficult with around 26% of innovative

manufacturers reporting more difficulty in obtaining

access to bank finance, compared to 19% of less

innovative companies.

Our future success as a nation of high tech innovators

depends on entrepreneurs getting the financial

backing they need to start and grow their companies.

The vibrant seed capital markets in the USA and Israel

have demonstrated the power of a robust financial

architecture to support high tech companies. The UK

needs to match their success by backing our emerging

community of angel investors. Venture capital and

bank lending also have important roles to play in

financing high tech companies, but the key here is to

get the right type and level of government support.

Encouraging angel investment

A Conservative government should signal its

commitment to promoting the best of UK innovation

by increasing the EIS relief available for investment

in high tech companies to 30%. High tech companies

could be defined on the basis of their levels of R&D

activity to ensure that companies across all sectors can

benefit. This could stimulate significant investment in

high tech companies.

This announcement could be coupled with a long-

term signal that EIS would focus solely on high tech

companies by 2015 or earlier. This would provide

a clear signal to individual investors and the wider

finance community about the value the UK attaches to

high tech companies.

Venture capital

Venture capital has been a particular focus of

government intervention over the past decade. While

these schemes have had some success, research has

shown that there is significant room for improvement.

With a total of 28 funds under management, a new

government should initiate an assessment of public

venture capital funds to ensure that sufficient funds

are available for meaningful initial and follow on

investments to be made.

Bank lending

The vast majority of companies, including high tech

ones, rely on debt financing for growth. The credit

bubble and subsequent crash have had significant

impacts on bank lending. The Conservative Party

has already called for a National Loan Guarantee

Scheme to underwrite around 90% of any new

loans to business, particularly on short-term credit

The Way Forward

Bank of England, Trends in Lending, February 2010

EEF, Innovation Monitor (2009)

46 INGENIOUS BRITAIN Financing High Tech Start-ups: Turning Good Ideas Into World Beating Products

lines, overdrafts and trade credit. It is vital that a

Conservative government examines better routes

to get debt financing to high tech companies.

If possible, this should involve using the power of

government guarantees to encourage lenders

(whether existing banks or new entrants) to extend

credit to innovative small businesses.

INGENIOUS BRITAIN Financing High Tech Start-ups: Turning Good Ideas Into World Beating Products 47

INVESTING IN LOW CARBON TECHNOLOGIES

The UK needs new and emerging Low Carbon

Technologies to meet its climate change targets as

existing technologies - energy efficiency, onshore

wind and nuclear - will only take us part of the

way towards it (source: Carbon Trust submission

to the taskforce). With demand set to grow, there

is also an economic imperative to developing a

thriving low carbon industry in the UK. NESTA

research estimates that by 2013 the global low

carbon market could potentially be worth £46

billion. In 2025, the world energy demand will

have increased by 50% compared to 2005 levels

and will reach the equivalent of 15 billion tons

oil. In 2030, the EU will import almost 70% of its

energy needs.

However, the UK currently has less than a 5%

share of the global market for green technology

– less than Japan, France, Germany, Spain or the

US. International companies are also beginning to

invest in low carbon technologies, as demonstrated

by Google’s announcement of a Proof of Concept

fund to address the lack of funding between the

R&D and commercialisation stage.

The UK needs to utilise its strengths by seeking

to exploit early science and technology research

and development, as well as the financing of low

carbon technologies. In developing proposals

for a ‘Green Investment Bank’, a Conservative

government should consider how it could play

a key coordinating role in bringing together

financers of low carbon technologies with early

stage developers in the UK. These discussions

should also seek to identify where the UK has a

comparative advantage in the development of

certain low carbon technologies, and identify an

appropriate response for the ‘Green Investment

Bank’ and other government support mechanisms.

Supporting

high tech companies:

Creating the right conditions

for R&D investment.

Patents filed in 2007:

330,000 – Japan

240,000 – US

17,000 – UK

World Intellectual

Property Organisation.

China and India’s rapid growth is impressive. Their bold ambition to be not only the factories of the

world, but its research laboratories too, is to be applauded. This growth and ambition (and therefore,

threat) has led many governments to concentrate on supporting local industries that deliver the

highest added value. If the UK is to compete and prosper as Europe’s leading technology exporter,

policies need to be developed that stimulate R&D investment across all sectors - policies focused on

procurement, concrete advice and tax.

Procurement

Selling to the British government is notoriously – and torturously – slow, bureaucratic and often

unproductive. When supplying the Royal Navy with landing craft (the Sea Truck) in the 1970s, I

once hosted ten civil servants from the Admiralty, and their main preoccupation was the colour of

the seat cushions. Suffice to say, no decision was reached that day. More seriously, the Royal Navy’s

approach was uncoordinated with each section (and various subsections) putting in their proverbial,

and often contradictory, oars. It was futile and ultimately expensive for both supplier and buyer. Other

governments simply bought ‘off-book’ without tinkering with (or more accurately, compromising) the

boat’s design.

A Conservative government must kick-start an in-depth review of state procurement (especially high

tech) and identify a way to support small to medium sized firms.

Advice

But amidst that quagmire, there was a glimmer – embassies. Through the decades, they have shaken

off diplomatic grandstanding in favour of offering practical help when exploring new markets. Today,

they are even more alert to the needs of British exporters, but are British exporters alert to them? Is the

approach coordinated?

A Conservative government must take steps to ensure quick and direct access to valuable on-the-

ground knowledge.

Tax

A lower corporation tax rate is prudent as the economy recovers. But if we are to rebalance the

economy, extraordinary action needs to be taken now. Tax credits can be an excellent way of supporting

companies willing to risk their own capital in R&D. The current system is well intentioned but not well-

targeted. A Conservative government should refocus R&D tax credits on high tech companies, small

businesses and new start-ups in order to stimulate a new wave of technology. When the public finances

allow, the rate should be increased to 200%. Loss making small companies also need greater help, and

the claim process must be streamlined. These changes need not necessarily lead to a higher overall cost

to the exchequer.

If technology is to fuel long-term growth and rebalance the economy, the touch-paper must be lit now.

James Dyson:

50 INGENIOUS BRITAIN Supporting High Tech Companies: Creating the Right Conditions for R&D Investment

In a global economy, UK markets are less important

for company growth, and there’s less incentive for

companies to base their R&D and manufacturing

sites here. As Sir John Rose vividly put it:

Companies need other reasons to locate in

the UK, whether it is the strength of our science

base, the quality of our people, our approach

to innovation or government support.

R&D investment is a key contributor to high tech

success. When coupled with measures to promote

innovation (e.g. training, encouraging risk taking),

investment in R&D

can lead to the success of

companies and act as a driver for wider

economic growth.

Yet, the UK continues to lag behind EU averages in

investment in R&D. This is also the case with R&D in

manufacturing sectors, contrary to the myth that our

lower R&D investment profile is due to the service

nature of our economy.

A key objective of a Conservative government must be

to put in place the right incentives for UK companies to

invest more in research and innovation. It is not for the

government to dictate how businesses should invest,

but to ensure that government action that affects

business – in particular tax policy and government

procurement of technologies – encourages rather

than discourages innovation. The current government

has provided some support for investment in R&D

by industry. However, the UK’s track record of using

procurement to stimulate innovation is poor, and this

needs to improve.

The strength of the UK’s exports also depends

significantly on government acting as an honest broker

to ensure that UK high tech companies can access

international markets using local knowledge wherever

possible. The role of UK Trade and Investment (UKTI)

is pivotal.

A Conservative government needs to adopt a

coordinated approach, focused on helping companies

undertake R&D by ensuring tax policy is conducive to

research, and making government procurement an

effective stimulus to high tech innovation. As is the

case throughout this document, the focus must be

on helping companies who are willing to invest their

own capital in R&D and exporting, not on providing

dirigiste subsidies.

INGENIOUS BRITAIN Supporting High Tech Companies: Creating the Right Conditions for R&D Investment 51

The Challenge

Speech at RSA, 2009

Hubert Strauss, R&D expenditure and capital in Europe, Economic and Financial Studies, (2009)

While overall levels of R&D investment have increased,

the level of investment as a percentage of GDP is

still only 1.79%. More importantly, analysis of R&D

investment by companies indicates that UK companies

invest less in R&D regardless of their size.

Equally,

R&D investment in manufacturing sectors trail

competitor countries (Figure 7 below).

David Cameron and George Osborne have made

it clear that a low corporation tax is a long term

ambition. This would offer companies the flexibility to

decide where to make investments – in plant, people

or R&D equipment. Similarly, a low corporation

tax could widen the pool of high tech companies

by encouraging entrepreneurs to start businesses,

attracting inward investment, and stimulating existing

companies to make new investments.

Alongside a low corporation tax rate, there is an

urgent need to stimulate high tech companies

to generate wealth for the nation, rebalance the

economy and capitalise on strong demand in

international markets. Therefore, targeted support

for companies investing in R&D needs to be the

immediate priority for a new government.

Support for the ‘patent box’ is an important first

step – one that recognises the additional value

added of high tech companies; the need to promote

R&D and manufacturing in the UK; and the fact

that UK companies operate in a competitive global

environment where several countries are actively

seeking to encourage R&D investment on their shores.

But the patent box is only likely to benefit a distinct

subset of companies.

For the wider high tech sector

to thrive, a new government needs to go further, by

enhancing and refocusing the incentives available

for companies investing in R&D. The CBI’s Tax

Taskforce recognised that while a low headline rate for

corporation tax was a key policy objective, this needs

to be supplemented by R&D tax credits to address

genuine market failures in the investment profile

of companies. Even countries with low corporation

tax have instigated a separate regime to encourage

R&D investment. For example, Ireland lowered its

Department for Business, Innovation and Skills, R&D Scoreboard (2009)

CBI, UK business tax: a compelling case for change (2008)

The Evidence

A. ENCOURAGING COMPANIES TO INVEST IN R&D

52 INGENIOUS BRITAIN Supporting High Tech Companies: Creating the Right Conditions for R&D Investment

corporation tax to 12.5% in 1998 but followed

that with a new R&D tax credit in 2004. Similarly,

Singapore has a twin policy of low corporation tax

rates supplemented by an attractive R&D tax credit

system. The swell of investment in France highlights

how countries with high corporation tax rates can

stimulate investment with the intelligent use of tax

credits.

Tax credits are preferable to grants. Grants are

used by governments to target investment into sectors

identified as strategically important, such as low

carbon technologies and nanotechnology.

The fact

that government has to decide who receives a grant

adds unnecessary bureaucracy and delays investment.

Getting a better understanding of industry in different

sectors could help reduce bureaucracy and speed up

decision making. However, these barriers suggest that

grants should be used intelligently where tax incentives

cannot practically be employed.

Of the various tax instruments available to

government, R&D tax credits have the advantage

that they seek to help companies that are themselves

prepared to invest in R&D. Government does not need

to choose sectors or companies, with the result that

R&D can be encouraged in the widest possible range

of sectors, taking advantage of businesses’

own insights into likely breakthroughs.

Tax credits can be effective in promoting R&D in

the UK. Economic papers highlight the difficulty of

assessing the impact of national and international

R&D tax credits. However, the existing evidence

suggests that R&D tax credits do have an impact on

raising levels of R&D investment and contributing

to long-term growth.

77/78

The value of the R&D tax

credit has also been underlined by Richard Lambert,

Director-General of CBI, who said:

As our economy seeks to re-balance over the

months ahead, the government must recognise

the value of the R&D tax credit and commit to

retaining it and encouraging more firms to

invest in research and development. It should

also go further by building on its success;

extending the rate and range of credit, enabling

more companies to apply and covering more of

their associated overheads.

The implementation of the R&D tax credit has been

lacklustre. It has been characterised by complex

eligibility criteria, constantly changing rules and a

profound lack of understanding of how research and

development occurs in companies. HM Revenue and

Customs’ attempt to rule that any object with saleable

value resulting from a pilot process in a manufacturing

company highlights how a good idea, such as the

R&D tax credit, can be betrayed by poor design.

Botched implementation of the credit, coupled with a

relatively low rate, dampen the impact of what should

be a significant stimulus for R&D investment

by companies.

http://www.oecd.org/dataoecd/35/15/2101604.pdf

Ientile and Mairesse, A Policy to Boost R&D: Does the R&D Tax Credit Work? (2009)

Hall and van Reenen, Effectiveness of R&D Tax Credits: A Review of the Evidence (2000)

INGENIOUS BRITAIN Supporting High Tech Companies: Creating the Right Conditions for R&D Investment 53

The importance of getting a well-designed and

implemented tax credit is demonstrated by its use

abroad. Several other countries are aggressively

attempting to attract high tech companies by providing

a range of incentives. R&D incentives are a particular

draw for these companies. In a recent OECD survey,

the UK ranked 19th in terms of the attractiveness of

tax credits for R&D, far below competitor countries.

Last month, Singapore took the bold step of changing

its R&D tax credit into an ‘Innovation and Productivity’

tax credit. Not only did the tax credit rate increase

from 150% to 250%; further changes were announced

to expand the range of activities eligible to include

other important aspects of innovation, such as design,

training and intellectual property protection

. France

also increased its headline R&D tax credit rate in 2008

with the ambition to be the most attractive research tax

regime in Europe. In contrast, the US R&D tax credit

is considered to be less effective as it is renewed each

year by Congress.

Germany has a different set of support programmes

for its companies. For example, the renewable energy

feed-in tariff has provided a substantial subsidy for

electricity producers to stimulate their investment in

technologies. In a recent EU wide survey, 28% of

German manufacturing companies reported receiving

state support, compared to 12% in the UK.

A Conservative government needs to promote

technical excellence in all sectors, starting with

measures to stimulate investment in R&D. The R&D

tax credit risks becoming overlooked when companies

consider which country they should make their R&D

investments in. The current system is well intentioned

but not well targeted. It needs to be reinforced if

we are to secure the future of the UK as a high tech

hub. Too much money currently goes to the wrong

companies and too little to the right companies. It

needs to be refocused to those companies where the

barriers to a sustained R&D programme are greatest

and the potential spillovers to the rest of the economy

are greatest. That means high tech companies, small

businesses and start-ups.

• Refocus R&D tax credits on hi-tech companies,

small businesses and new start-ups. When the

public finances allow, the rate should be increased

to 200%. This will have a substantial impact on

company investment decisions and send a far-

reaching signal to both national and international

companies about the Conservative government’s

belief in science and technology. Start-ups invest

heavily and can be loss making for a few years.

This type of investment must be encouraged by

enhancements to the level of relief available for

loss making small companies. These changes

need not necessarily lead to a higher overall cost

to the exchequer.

• Improve the ease with which the R&D tax credit

can be claimed. A recent CBI research paper on

the impact of the R&D tax credit in the UK found

that 42% of firms surveyed identified the cost and

the information obligation for claiming the tax credit

on R&D as the main hurdle to filing a request.

Canada has simplified its processes and introduced

standard guidance to assist filing. This has been

reported (anecdotally) as leading to increases in

claims – although empirical evidence of this is

scarce. Options for simplifying the claims process in

the UK include allowing external audits of the credit

or pre-agreeing projects or activities with companies.

Sir Anthony Bamford supports this approach.

Talent and creativity are not in short supply in

this country – what we lack is a forward-looking

supportive framework for companies that want

to translate invention into enterprise. All British

manufacturers will welcome the proposal for

enhanced tax credits on research and development.

Singapore Ministry of Finance, 2010 – 250% credit is eligible for a range of innovation related activities. Claims are capped at 300,000 Singapore dollars

EU Community Innovation Survey (2000)

CBI, Impact of the R&D Tax Credit – Adding Value, Reducing Costs, Investing for the Future (2008)

The Way Forward

54 INGENIOUS BRITAIN Supporting High Tech Companies: Creating the Right Conditions for R&D Investment

Kristian Uppenberg, R&D in Europe: Expenditure across Sectors, Regions and Firm Sizes (2009)

HM Treasury, Accelerating the SME Economic Engine: Through Transparent, Simple and Strategic Procurement (2008)

Government procurement contracts can provide

companies, particularly start-ups, with a powerful

incentive to develop new technologies. In the USA,

the government was responsible for aiding the

development of the internet through the procurement

functions delivered by DARPA. The current government

is relatively poor at accessing the market for high-tech

products, compared to countries with thriving high tech

sectors like the United States or Finland (Figure 9).

While large contractors can deliver a wider range of

services and quicker response times, it is important to

recognise that using a number of smaller companies

could also deliver a range of benefits. Doing so

could reduce risk, improve service and lead to more

innovative and technologically advanced outcomes.

With little reputation to trade on, small firms are often

more responsive and more innovative. Procuring with

several small companies also encourages competition

between them, which can lead to quicker delivery

and improved solutions. Frequently, using several

small companies to spread risk can also be more cost

effective than placing one large contract with a large

company. This is certainly the experience at Dyson.

This runs counter to the tendency for procurement

staff to rely on ‘safer’ large firms, but the evidence

is positive.

Despite the benefits of dealing with smaller

companies, the UK government’s track record of

doing this is poor, and the schemes available to help

SMEs compare unfavourably with those in America.

In the UK, only 16%

of the total value of central

government contracts in 2005/6 was won by SMEs

(firms with 249 or fewer employees), compared to 22%

in 2004/05. This amounted to half of all contracts.

SMEs gained a larger percentage of procurement from

local government and in the same period gained 60%

of the total value of these contracts.

In the USA, the Small Business Innovation Research

(SBIR) programme awards contracts for the

development of technologies that federal agencies

believe they will require. It provides 100% of the

funding required, plus a profit for the company. This

is underpinned by legislation requiring 2.5% of all

federal government agencies’ external R&D budgets

be distributed through this programme. Combined

with other programmes, the SBIR delivers $1.5 billion

in R&D contracts to small businesses.

INGENIOUS BRITAIN Supporting High Tech Companies: Creating the Right Conditions for R&D Investment 55

STRENGTHENING THE TECHNOLOGY STRATEGY BOARD

The Technology Strategy Board (TSB) supports

innovation at its applied stage and through its

technical development. It achieves this through

providing grants for collaborative research

and fostering industry/academic partnerships.

Their investment is focused where the UK

has technological capability, a large market

opportunity exists and other measures (e.g. R&D

tax credit) are insufficient to get the project off

the ground.

As a relatively new body, the TSB is doing valuable

work and must be given time to fully develop its

role. They should consider providing funding for

placements and internships for undergraduates,

postgraduates and post-docs into industry.

In addition proof of concept funding should be

pooled and awarded through the TSB. Funds

should be drawn from the RDAs innovation

budgets, and combined with the money

already made available through the TSB – this

would simplify access to the funds and provide

significant support to firms in the initial stages of

development of their technology.

The Evidence

B. USING GOVERNMENT PROCUREMENT TO

STIMULATE HIGH TECH INNOVATION

The UK’s equivalent Small Business Research Initiative

(SBRI) scheme has previously been accused of being

significantly less effective and more limited in its scope

than its American counterpart. The Richard Report

criticises it for its focus on policy studies and quasi-

academic research rather than “hard R&D”.

A recent

restructuring of the programme may help address

some of these issues. But a more serious limiting

factor remains: it has no identified funding, and relies

on departments to earmark budget to spend on SBRI

contests. Moreover, it does not apply to all types of

procurement: merely novelties, which represent only a

small percentage of overall government spending.

If procurement is to play a role in rebalancing the

UK’s economy, government policy needs to set a bold

ambition. The Conservative Party’s recent procurement

briefing note makes an important step in this direction

by setting the following aspirations:

• At least 25 % of the procurement budget of each

government department should be spent with small

and medium sized enterprises, either directly or

through main contractors.

• 25% of government research and development

contracts should go to early stage, high technology

SMEs, either directly or via main contractors.

Achieving these ambitions will require a Conservative

government to identify new ways of delivery.

Increasing transparency through online advertisement

and challenge-based procurement currently used

in procuring architecture services offer two possible

mechanisms which could be used to greater effect

by government. Typically, several short listed

candidates are partially funded through the initial

stages of a project, before one is selected for the

NESTA, Innovation Index (2009)

Small Business and Government: Richard Report (2008), http://www.bl.uk/bipc/pdfs/richardreport2008.pdf. The report provides a good critique of the UK SBRI by David Connell.

The Way Forward

56 INGENIOUS BRITAIN Supporting High Tech Companies: Creating the Right Conditions for R&D Investment

final architectural design. This approach could

have significant benefits when government procures

innovative technologies from small companies. These

companies would benefit from having both funding

and a target client to work for. The Richard Review

highlights the value of using this method to procure

high tech products through the SBRI. So far SBRI

has had limited traction with departments. A new

government should consider a range of options

to increase participation in the SBRI, such as

highlighting success stories, engaging the SBRI team

in helping define challenges or allocating specific

funding for SBRI procurement rounds.

But the billions of pounds spent annually on

government procurement offers a much more powerful

lever to encourage innovation. Determining how to

make the most of this requires more detailed work.

Therefore, a new government should immediately

commission a detailed review to identify how the

measures to promote innovative procurement can

be implemented. Led by an industrialist with real life

experience of working with government procurement

rules, the review should:

• Identify barriers to implementing innovative

procurement – for both large and small companies.

• Identify international examples of best practice in

innovative procurement.

• Analyse how procurement of high tech products

can assist with lowering risk and provide value

for money.

• Address how key issues, such as risk averseness

and poor level of skills, can be overcome.

INGENIOUS BRITAIN Supporting High Tech Companies: Creating the Right Conditions for R&D Investment 57

HARNESSING PUBLIC SERVICES TO ENCOURAGE

INNOVATION

The UK is unique in the world in having leading

‘blue skies’ and applied research. This is often

not well coordinated with government activities.

Nowhere is this more apparent than in healthcare

where the UK has excellent clinical experts in

world class hospitals and an incredible asset in

the NHS. The NHS can act as the global catalyst

for pioneering new treatments and care – as

well as delivering real economic benefits for the

UK. The key to unlocking this potential is to give

clinicians and researchers both the time and space

to work with industry and patients to develop these

new treatments.

The creation of the Academic Health Science

Centres is an important step towards realising

the ambition of making the NHS a global leader

in translational medicine, as are changes being

instigated in the clinical trials approval process.

A Conservative government, committed to giving

front line staff more freedom, could implement the

reforms which realise this potential. The reforms

need to ensure that researchers and clinicians

have the right incentives and support – both in

terms of finance and time – to affect the changes.

A new government should work with clinicians,

researchers, patient groups and industry to realise

the potential of the NHS.

Export support and effective sign-posting for potential

investors are critical if the UK is to become the leading

high tech exporter in Europe. Support for exports

and inward investment is currently provided by UK

Trade and Investment (UKTI). The body has improved

in recent years and is valued by companies it deals

with.

However, UKTI has suffered from a lack of

prioritisation by government and too many ministerial

changes in the past few years. Coupled with

organisational changes, this has left UKTI responding

to changing demands and priorities.

Service delivery is complicated by the activities

of devolved administrations and the Regional

Development Agencies: there are multiple offices

representing different RDAs in cities such as Mumbai

and Shanghai. This competition is counter productive

and creates confusion for potential investors seeking

to invest in UK businesses. Businesses are also often

unaware of UKTI services.

Its website is difficult to

navigate and does not readily identify the types of

support or services that UKTI or individual embassies

can offer.

The vision for UKTI should focus on delivering services

with high impact for the UK economy. The Shadow

Minister for International Development, Geoffrey

Clifton Brown, will publish a paper shortly on trade

and our conclusions are identical. Manufacturing

attracts more foreign investment to the UK than to any

other country in Europe and globally the UK is second

only to the USA. A Conservative government needs to

ensure this continues.

The future of support for exports and inward

investment needs to be based on delivering a sharper

focus for UKTI’s work. Trade promotion needs to be at

the core of the role of an Ambassador and their staff.

Our network of embassies all over the world gives us a

tremendous platform to focus harder on promoting the

UK’s commercial interests. UKTI should seek to direct

companies quickly to advice from embassies in the

following areas:

• Providing overseas market intelligence, identifying

useful business contacts and support in the UK and

overseas, particularly on suitable innovative R&D

organisations in the UK.

• Export support to promote attendance at trade

shows, with market visits, develop relationships with

customers and partners, and provide related press

and marketing support.

• Matching foreign investors to UK companies:

help overseas investors gain a quick insight into

investment opportunities in the UK and match them

to appropriate companies or advisors.

This will require reform of the delivery of services.

There are two important elements to delivering services

for high tech companies.

• A user-friendly, flexible website: UKTI’s website

needs to be thoroughly upgraded. It must act as the

first point of contact for companies seeking help to

export, and provide the right level of information

(e.g. identify individuals in embassies who can help).

• Paring back regional offices: Reform of the RDAs

provides an opportunity for UKTI to assess the

right level of presence required in the regions to

promote inward investment and identify savings

which can be deployed more effectively elsewhere.

In parallel, there should be opportunities to cut back

on international RDA offices. This should ensure

that there is a coordinated presence in major cities

across the world and will free up resources.

Underpinning these changes must be a renewed

commitment to the promotion of exports by ministers.

UKTI, Annual Report 2008-09

CBI briefing, Improving Government Services for Small and Growing Businesses (2006)

The Evidence The Way Forward

C. SUPPORT FOR EXPORTS AND

FOREIGN INVESTMENT

58 INGENIOUS BRITAIN Supporting High Tech Companies: Creating the Right Conditions for R&D Investment

Sir Anthony Bamford, JCB

Professor Lord Bhattacharyya, Warwick Manufacturing Group

Simon Bond, Bath University

Sir Leszek Borysiewicz, Medical Research Council

Richard Butland, Goldman Sachs

James Bardrick, Citigroup

Sir Andrew Cahn, UK Trade and Investment

John Clare CBE

David Cairncross and Tim Bradshaw, CBI

Sir Anthony Cleaver, Engineering UK

The Conservative Party

Professor David Cope, Parliamentary Office of Science and Technology

Dr Kevin Cullen, University of Glasgow

Atti Emecz, Engineering and Physical Sciences Research Council

George Freeman, 4D Biomedical

Sir Christopher Gent, Jackie Hunter and Sue Middleton, GlaxoSmithKline

Iain Grey, Technology Strategy Board

Duncan Guy and Samir Brikho, AMEC

Andrew Hargreaves, EADS

Peter Harman, UK Business Investment

The James Dyson Foundation

Jonathan Kestenbaum, Stian Westlake, Shantha Shanmugalingam and Louise Marston

National Endowment for Science, Technology and the Arts

Oliver Blair, Helen Cole, Charles Collis, Daniel Crowley, Paul Dawson, Guy Lambert, Gill Smith, Martyn

Smith, Helen Williams, Dyson

Jonathan Labrey, Institute Chartered Accountants England and Wales

Paul Leonard and Ian Harvey, The IP Institute

Tony Little, Eton College

Dr David Lynn, Wellcome Trust

Rupert Lywood, Matrix Group

David O’Keefe, KPMG

Professor Sir Peter Knight and Chris Thompson, Imperial College

Sir Richard Needham

Alistair Nolan, OECD

Jon Page and Susan Searle, Imperial Innovations

Professor Shirley Pearce, Professor David Williams, Professor Michael Caine, Loughborough University

David Richards, LGC

Doug Richard, Entrepreneur

Sir John Rose, Rolls Royce

Sir Alan Rudge, the ERA Foundation

Shargil Ahmad, Pierre-Alexandre Greil, Karl Havers, Chris Sanger, Ernst and Young

Martyn Sene, National Physical Laboratory

Annette Smith, Association of Science Education

Professor Christopher Snowden, Institution of Engineering and Technology and University of Surrey

Marcus Stoddard, AIM, London Stock Exchange

Terri Telford, Science, Technology, Engineering and Mathematics Network

Alex Thompson and Helen Thorne, The Russell Group

Jörg Überla

Lord Waldegrave, Science Museum, Eton College

Teri Willey, Cambridge Enterprise

Acknowledgements

60 INGENIOUS BRITAIN Making the UK the leading high tech exporter in Europe