How the UK could boost growth through better innovation policies

The early sale of venture capital-backed science and technology-based startups is the most important problem facing UK innovation and industrial policy, says a report issued today (11 July) by the Centre for Business Research at Cambridge Judge Business School.

Although the loss of large, mature firms such as Arm and Micro Focus often create headlines, acquisitions of earlier-stage innovative British companies – such as Deepmind, Solexa, Skyscanner, Shazam and Neptune Energy – by overseas buyers are arguably more damaging to the British economy.

Such early acquisitions result in a truncation of subsequent firm growth in the UK, says the report, which calls for a shift in government funding away from blanket subsidies and towards policies, guided by a new independent innovation office, that are more focused on where they can make a difference over the long term.

“It is essential that ambitious entrepreneurs with the desire and ability to grow a major UK corporation are given as much help as possible to do so, whether this be as a public or private company,” says the 66-page report, entitled ‘Selling Less of the Family Silver’. Policies to help founders from a commercial background and encourage new corporate ventures are as important as university spinouts.

The report is authored by David Connell, Senior Research Fellow at the Centre for Business Research at Cambridge Judge, and Bobby Reddy, Professor of Corporate Law and Governance at the University of Cambridge. The report, issued a week after the election of Sir Keir Starmer as the UK’s new Prime Minister, is subtitled ‘An independent, post-election manifesto for a better UK innovation and industrial policy’.

Analysing UK startup success stories to inform a radical rethink of policy ideas

The report includes a detailed analysis of startups with different funding models and lessons from successful UK entrepreneurs who have avoided acquisition and become major businesses over the long term. This, together with examples from some non-UK models, underpins a series of new policy ideas and proposals.

While UK innovation policy has evolved over the past 25 years, it is still hampered by the aversion of politicians to being seen as ‘picking winners’. As a result, blanket subsidies through research and development (R&D) Tax and Expenditure Credits and the Patent Box tax-relief scheme to encourage firms to commercialise British inventions in the UK together now cost some £12 billion a year, over 80% of all support for R&D in businesses. However, while these programmes may support the growth of many VC-backed early-stage companies, they have little to offer ambitious founders wishing to retain control and build a major UK-based and controlled business over the long term, the report says. The authors also note that both schemes are subject to gaming and their overall impact on the economy is highly questionable.

The report instead recommends that government policy shifts part of the funding currently allocated to tax breaks and other blanket subsidies towards focused funding through contracts, grants and equity investments, requiring less matched funding from venture capital and in amounts which can have more impact.

How cross-government planning and management can be improved

The Treasury is currently the arbiter of policy spending decisions during budget cycles, but is not resourced to do the job effectively. This has led to a “bargaining approach to budget allocations focused on cost management, rather than objectives and policy effectiveness”. Cross- government coordination has been very poor. “As a result, policy debate has tended to be dominated by the best-funded and organised interest groups.”

To address this the report proposes the creation of a new Independent Office for Innovation and Industrial Policy to help ensure that policy is designed and monitored across government as a whole and based on data and evidence.

Among other policy recommendations, the report also calls for:

• a greatly expanded Innovate UK grants programme
• creating a US-style innovation procurement contracts programme
• encouraging private sector corporations to act as ‘lead customers’ for innovation
• abolishing the Patent Box
• British Business Bank funding to accelerate the growth of innovative firms that implement employee ownership trusts
• reconfiguring UK Catapult Centres so that they are closer to the German Fraunhofer Institutes on which they were supposed to be based, and become a possible source of spinouts
• using dual-class shares to give founders and early-stage investors an initial public offering (IPO) exit route in the UK while retaining control
• developing government-sponsored special purpose acquisition companies (SPACs) to create a mechanism to encourage growth companies on to the London Stock Exchange
• incentivising UK institutional investment in UK growth companies that are listed or considering an IPO, including government subsidies for better investment research on growth companies

How a new innovation approach could improve firms’ long-term growth

“Many promising and successful British companies will always be acquired by foreign corporations. It is a feature of the vibrant global economy in which we live and from which we benefit,” co-authors David Connell and Bobby Reddy say in a foreword to the report.

“However, if we want the UK’s economy, the savings and pensions of individuals, and society generally to fully benefit from the UK’s science, technology and entrepreneurial talent, we must also adopt policies that enable visionary individuals with the desire and ability to grow a significant UK-based business over the long-term to achieve that goal.

“Our analysis suggests that the current innovation policy mix is poorly aligned to this objective. This report offers a new approach.”