27 June 2014

Back the Innovators


Innovation is the fundamental factor which increases living standards. From curing diseases to speeding up our daily commute to improving crop yields, innovation makes us healthier, wealthier and happier. Innovation is thus one of the key ingredients of productivity growth which in turn is the key ingredient for economic growth and acceleration of real wages. Without innovation, our economies might grow for a while as we feed in more inputs but if we don’t get better at turning those inputs into output, then in the long term, we can’t become richer.

So it is the innovators pushing at the technology frontier who are the heroes of capitalism. Their creativity and entrepreneurialism are the perfect antidote to the dreary, social-democratic tinged corporatism which is so in fashion. Unfortunately, innovation in the UK has seen an alarming decline relative to its competitors.

Productivity has stubbornly refused to recover alongside the rest of the British economy and is still about 4% below its pre-crisis peak when measured on an output per hour basis. Weak innovation must to some extent explain this shortfall.  The UK Innovation Survey shows that the percentage of businesses which are classed as product innovators has fallen from 24% in 2008 to 18% in 2012 and the Bank of England estimates that product innovators are about 20% more productive than businesses which are not product innovators.

Research and Development spending in the UK has seen a worrying divergence from the rest of the European Union. By 2012, total R&D spending in the UK had fallen to 1.72% of GDP compared to 2.26% in France and 2.92% in Germany. This must surely be one reason why productivity is more than 30 percentage points higher in France and Germany than the UK.

Intellectual property rights are a key driver of innovation and, in the UK, patent-intensive industries create 13.6% of GDP and 10.1% of employment. Wages are also higher in patent-intensive industries with the average weekly wage being 64% higher than in non-IP intensive industries. However, the number of patent applications by residents has fallen by more in the UK than any other G7 country since 1992 – an 18.5% fall in the UK compared to a 29.4% rise across rest of the G7. By contrast, in China there has been a spectacular 500-fold increase.

It is clear that there is a problem which needs fixing and whilst the level of innovation depends on many factors, an overly burdensome, complex and expensive patent system is quite obviously one of them. The current UK government has made some good decisions to help reform the patent system; for example the introduction of the ‘patent box’ which gives innovators a reduced 10% corporation tax rate on the profits of patented products. Also, the introduction of court cost caps means SMEs can litigate in the confidence that it won’t bankrupt them. However, there is much more which can be done to reduce the UK’s innovation deficit.

For example, patent renewal fees are a poll tax on innovation which can and should be abolished. Regardless of the size of a business or its profitability, renewal fees are the same flat charge for patented products. This means that they place a disproportionately heavy burden on start-ups, SMEs and fast growing firms which have yet to turn a profit. Not only do they add to the cost base of these innovators (adding up to £4,550 even before the extra bureaucracy) but in the worst cases they can act at the margin to deter future innovation.

By abolishing patent renewal fees, the Government would send a powerful signal globally that Britain is the place to do business and could provide a boost to innovation amongst growing start-ups and SMEs. Whilst it is true that patent renewal fees are only a part of the overall cost of innovation, such a clear step may go some way in reversing the declines that we have seen in recent years.

Furthermore, it really makes no sense for innovators to face the burden of providing funds for the Intellectual Property Office. To plug the funding gap, a new mechanism should be set up which allows the IPO to collect new fines from entities which have been found guilty of deliberately infringing IP rights. Given that UK patents renewals raise just £13 million per year for the IPO, (although this will of course rise with the number of granted patents) then replacing them with fines on infringers certainly seems feasible.

Alongside this, some simple steps could be carried out to encourage licencing which will help boost the commercialisation of patents. Removing the arbitrary £50 charge for filling out the necessary licencing forms at the IPO would be a good start.

The patent application process which can take three to four years from start to finish should also be simplified. Some of the steps in the process should be made opt-outs instead of opt-ins which would cut out some of the bureaucracy for serious applicants. The various application, search and examination fees should also be consolidated into one flat deposit which will help speed the process and should be paid back to those whose applications are granted.

New accelerated applications can be established for small businesses which face the greatest burden of the application process. There is already a fast-track process for ‘green’ patents so it should not be difficult to open the same process for small businesses. There should also be a push for improvements to EU policies and in particular, the Government must vigorously defend the patent box from any EU led attempts to curtail it. The Government should also push for the new Unified Patent Court to keep court and renewal costs as low as possible.

Reducing the UK’s innovation deficit will be one major step in restoring productivity growth. Effective patent reform which supports and promotes British innovators could be a powerful tool to do just that. We need to back the innovators if we want to increase living standards.

 Adam Memon is Head of Economic Research at the Centre for Policy Studies and his new report can be read here.