What works for generating ideas and improving productivity?

Following the success of our first series of workshops on how to develop effective local industrial strategies last year, we have been busy for the last few months running a second series with the support of the Cities and Local Growth Unit (CLGU).

Policy context

The government has committed to working with all places to develop Local Industrial Strategies by early 2020. These strategies will be developed locally and agreed with the government. They will map out distinctive strengths as well as local responses across the Industrial Strategy’s ‘foundations of productivity’.

We held four workshops in four different UK cities, each one focusing on one of the ‘foundations of productivity’ – people, ideas, business environment and infrastructure – and its interaction with our foundation of interest, place.

Local Industrial Strategies

The Government’s Local Industrial Strategies Policy Prospectus (October 2018) set out two objectives. Government is committed to Local Industrial Strategies so that all places:

• Are able to increase productivity and realise their potential: building on well-evidenced and distinctive strengths aligned with the national Industrial Strategy.
• Set out the spatial impacts of national and local policy across our cities, towns and rural areas: informing priorities and choices and demonstrating how they will allow all communities to contribute to, and benefit from, economic prosperity.

The policy prospectus set out that Local Industrial Strategies will inform the approach of LEPs/MCAs to maximise the impact of future funding, including the UK Shared Prosperity Fund (UKSPF). The UKSPF will look to tackle inequalities between communities by strengthening the foundations of productivity.

Our second session, held in Leeds, was all about ideas. We heard from a range of speakers – including Nesta, Leeds City Region Enterprise Partnership, the Cities and Local Growth Unit (BEIS/MHCLG) and Innovate UK – on the importance of innovation both locally and nationally.

The importance of ideas

New ideas, new ways of thinking about things and new ways of doing them are crucial for improving productivity. But innovation in a vacuum is not enough – these ideas need to spread, to diffuse so people can make use of new knowledge and new techniques in what they do and build on them. Innovation and diffusion are key to long-term, sustained productivity growth.

Recognising the existence of externalities – the impact of individual actions on others – is integral to understanding why we need innovation policy, what it needs to target and how we evaluate it.

Ideas are worth more together than they are in isolation – bringing together knowledge helps people build on each other’s work and generate further ideas. This means that in a lot of the cases, the social benefit of an individual investment is greater than the private benefit due to knowledge and network spillovers. Such externalities make the case for government intervention to correct market failure and address potential underinvestment.

Some of these spillover benefits may be felt locally. But many may be felt elsewhere, nationally or even internationally. The balance of local and non-local benefits needs to be considered carefully especially when considering investing local resources in supporting innovation, the benefits of which may materialise outside the local area.

What we know about what works

Interventions to encourage innovation activity could be pecuniary (grants, loans, subsidies, tax credits) or non-pecuniary (co-location of researchers, university spin-offs). The effectiveness of these interventions is hard to evaluate precisely because of the externalities that can see benefits spill over across an innovation ecosystem.

• Our evidence reviews suggest that financial incentives do work in increasing R&D expenditure, but the evidence suggesting that this always follows through to innovation is weaker and weaker still that this results in increases in productivity or employment. They also suggest that support may have a greater impact on smaller firms.
• For non-pecuniary interventions, programme design can matter, but it’s not always clear how. For example, the evidence on the allocation of property rights and the impact on spinoffs is roughly split on whether university owned or researcher owned intellectual property is better.
• The relevant toolkits provide a lot more details.

By their nature, and given the state of the evidence base, many interventions to boost innovation and R&D, especially at the local level, will be experimental.

Nesta’s ongoing work through the Innovation Growth Lab and the connected toolkits are a very useful resource for thinking about the design of similar experimental interventions.

The most important principles to bear in mind

Our work on Local Industrial Strategies identified 10 principles to consider in designing effective strategies. Here’s an example of how just one of these plays out in thinking about innovation policies.

When developing Local Industrial Strategies, places need to be very mindful of the balance of risk and reward between the private and public sector.

In practice, this means thinking carefully about relationships with the private sector and the incentives of partners. For example, do local anchor institutions have the right incentives to help identify area level innovation strengths (as opposed to promoting their own interests)? Cross-cutting or ‘horizontal’ policies are a good way to avoid these problems but there will be a tendency for Local Industrial Strategies to favour more targeted interventions. Areas need to think about how to balance the incentive problems that will arise.

A broader consideration involves how any policy avoids crowding out. The evidence suggests that support can generate additional innovative activity, but this consideration still needs reflecting in the policy design process.

It is also important to be mindful of how the policies affect competition, being careful not to continually favour incumbents or raise artificial barriers to entry.

Things to bear in mind when articulating the policy response

Here are some key things to bear in mind as you think about how to generate ideas and improving productivity in a place:

1. The Industrial Strategy’s target is to increase UK R&D spend from the current 1.7% to 2.4% by 2027 and 3.0% in the longer term. It is well understood by BEIS and MHCLG that the current 1.7% average hides big differences across regions and even wider differences across LEPs. There is an opportunity for LEPs to articulate their area’s distinctive role in achieving the target while recognising this will look very different in different places. This does not mean reiterating the national target at the local level, but setting out the key drivers and barriers to R&D growth. Ultimately, Local Industrial Strategies should think ambitiously about both the generation of ideas (R&D) and their diffusion to the area’s wider business base.
2. The relationship between ideas and place is not straightforward and this complicates the case for intervention. On one hand, experts and facilities tend to concentrate together so it makes sense for the strategies to consider whether and how to foster and support these ecosystems. On the other hand, the ideas generated from these are not bound by LEP or even national boundaries so it may be the case that the economic benefits of the investment are actually accrued elsewhere. It is therefore very important to understand not only the geography of this activity but also the relevant outputs and the extent to which they spill over across areas. This is particularly important when areas think about committing their own resources to support local innovation. Nesta’s existing work on innovation mapping and our forthcoming data piece might be useful in this regard.
3. In many cases, different elements of the innovation ecosystem – the research facilities, the commercial firms and the workforce – are spread across LEP areas. In such cases, it may make sense for the LEPs to encourage cross-border consortia and even combine bids for schemes such as the Strength in Places fund.
4. Local Industrial Strategies will also need to think about how innovation and technological change will impact local areas. The four grand challenges (AI, Clean growth, Ageing society and mobility) provide a useful framework to think about this. Our Innovate UK speaker referred to Local Industrial Strategies as the ‘golden thread’ that needs to connect the answers to the questions: Which industries and jobs are going to be affected by the changes to come? Are local firms and individuals in a position to contribute to these technological changes? Or is the key consideration the way in which they will need to adopt and adapt to these changes? There will be a temptation to focus strategies on the contribution areas can make – particularly if there are specific funding schemes attached to grand challenges. But places need to consider whether they have the relevant strengths, in the context of other places to address the grand challenges before going ahead. For many, if not most areas, the bigger challenges may arise from the need to adopt and adapt.

Things to do when implementing the policy response

Presentations from BEIS, Nesta, Innovation UK and WYCA, and subsequent discussions, also highlighted some key messages for implementation:

1. Work with external partners such as UKRI and Innovate UK to access alternative funding sources. For instance, Innovate UK both fund projects themselves and also support innovating firms to access potential collaborators and funders. This relationship was cited as being useful and constructive by WYCA. Local areas should coordinate local firm activity and external support to build a network that connects people to patient capital.
2. The ideas foundation is closely linked to the other four – investment in people and the business environment can be especially important in spurring innovation. BEIS encouraged places to bear this overlap in mind, especially when allocating and bidding for funding.
3. Co-ordinate and work with a range of actors from local and national levels and private and public sectors. Innovation by nature is collaborative and the process of developing strategies needs to acknowledge and embrace this throughout to ensure that the interventions are well informed and that there is buy-in from all actors. This means sharing both knowledge and risk across the actors involved and using innovative models to do so, some of which are showcased by Nesta here.
4. Finally, experimentation is not just tolerated but encouraged within Local Industrial Strategies – it is important to try new interventions and also to monitor and evaluate them always, to improve our understanding and hence long term effectiveness of these interventions.

Conclusion

By their very nature, ideas are different to other ‘resources’. They are intangible and their value increases as they are shared. This presents unique challenges when it comes to the design of effective policy, especially at the local level.

When designing innovation policy, places need to focus on identifying and fostering existing ecosystems, on carefully assessing the case for intervention, and on coordinating across the board– this means working with private and public sector institutions, within and across LEP boundaries.

All the presentations from the day can be obtained by emailing Lahari Ramuni at l.ramuni@centreforcities.org.