December 15th: innovation is (mostly) not about R&D

I do understand why “innovation policy” so often gravitates towards a discussion about inputs (rather than outcomes). It particularly gravitates towards a discussion about R&D expenditure. Indeed, R&D expenditure is a decent predictor of productivity growth by country and sector, and even at the firm level. [One has to consider, though, that the causal link could go in the other direction: businesses growing, expanding and making more money being able to spend more on R&D.]

But there is a big “but”. Just like baking powder is necessary to make a certain kind of cake, it is not sufficient. You need lots of other ingredients for successful innovation — that is, innovation that actually has an impact in the real world. From an economic perspective, you could even say that innovation that doesn’t make money is irrelevant (in the short term — of course, in the long term, it could turn out to be transformational). Such innovation requires a large number of complementary inputs, nicely summarised in this ScaleUp Institute framework.

And this is not just a conceptual point of view. The data backs it up. Today’s chart is one illustration and a rather stark one. Among the 40% or so of UK businesses that were classified as innovative (because they said they undertook at least some kind of innovation activity in the years 2016–18), only 3% said that “Scientific journals and trade/technical publications” were a “highly important” source of information in their innovation process. Contrast this with the 29% who said private sector customers, and 17% who said public sector customers, were “highly important”. Unsurprisingly, suppliers and competitors were also quoted as being an important source of innovation.

Now, it is completely legitimate — in the context of a public policy debate — to say that the government and its various institutions can’t do much about many of the other ingredients of success or the other sources of innovative insight, so it should focus on R&D funding. Fair enough (even though I still wonder whether the balance between different types of funding is right, given this picture). I would bet my own money that the following question gets raised at a frequency that does not match the chart above: “But is this R&D investment going to help UK businesses make money?”

[Sorry to be so crude. I do realise that R&D is aimed at a lot of other good outcomes — such as a healthier and more sustainable planet. But where it is considered part of the country’s economic strategy, the emphasis really does need to be on whether it unlocks additional sales, profits, employment and returns. This leads us straight into the argument about “picking winners”, which there’s no space to elaborate on, other than to say — as Michael Heseltine once put it — “Would you rather back losers?”]