A giant paradox cripples industrial Britain: we are a nation of inventors, and yet manufacturing is in decline. We nurture brilliant engineers, and yet commercialisation too often goes offshore – including to other advanced economies.
This is a disaster for national prosperity. Collectively we spend a fortune on science and research. But if commercial exploitation drifts overseas, what’s the point?
To see what’s happening, look no further than pharma. Every year, pharmaceuticals is the single biggest recipient of research and development in the UK. It got 17% of the total in 2023. And yet gross value added in UK pharma manufacturing is totally stagnant. Today, the UK pharma industry is smaller than it was 15 years ago. Exports are falling.
This picture – or versions of it – repeat like a nightmare across advanced manufacturing in the UK. Brilliant research; hopeless commercialisation.
So, what’s going on?
In February, a group of 27 engineer-entrepreneurs met in London to figure out this paradox. The engineers were members of the Bessemer Society. This is a national grouping of ‘serial’ entrepreneurs. The London gathering was a serious bunch: two had built fusion reactors; one had a business worth £70 million that employs 250 people.
Their goal was to identify the challenges to successful innovation in the UK. And their insights can be found in my new report for Civitas – ‘A Nation of Innovators’.
The message is fundamentally positive. We are still a nation of innovators. But to wrench Britain into embracing a commercial culture that unleashes our innovation’s full potential, four things must change.
First, the biggest challenge is access to growth capital. Funding for research in the UK is abundant, but it starts to dry up as innovators embark on late-stage development and commercialisation. This is the most capital-intensive stage for innovator-entrepreneurs.
Scarcity of venture capital (VC) has multiple causes. On a macro level, government debt hoovers up savings and the domestic housing market hoovers up investment. There simply isn’t much left around for people to blow on risky hard-tech.
But innovators also cast envious eyes at how VC works in the US. Our entrepreneurs reckon US VC is more mature because it’s dominated by entrepreneurs themselves. In contrast, our own VC industry is run by ‘money people’. This needs to change.
Could tax incentives help?
There’s a powerful precedent. As members pointed out, Nigel Lawson’s Personal Equity Plans (PEPs) – launched in 1987 – blatantly preferenced investment in the UK. They required 50% of funds be invested in the UK.
If a similar policy applied to capital gains, that would channel funds back into AIM and British VC. The Treasury would recoup its concession via an increased taxable base. After all, what’s the point of the taxpayers subsidising research if the Treasury can’t tax the resulting products?
The big take-home is that access to capital is a deal breaker. Improve access to growth capital, and UK entrepreneurship stands a chance. Fail on that, and nothing will change. The fruits of our national genius will continue to be harvested overseas.
The second big challenge area is how the state buys new technology. Readers would think that gigantic procurement budgets at Health and Defence would aid the rapid development adoption of game-changing UK technology. Err, no.
Entrepreneurs report that over-centralised procurement means slow adoption, a preference for major incumbents and zero interest in ‘factoring in’ the benefits of UK suppliers in a competitive procurement.
UK governments prefer not to nurture home-grown tech.
On a macro level, this is crazy. Small UK entrepreneurs are ideally placed to partner with hospitals, warship designers, regiments – actual operative units – to adopt technologies that deliver an immediate capability improvement. But they don’t – or hardly ever.
What would have to change to make this possible? First, innovation units (the UK is just setting one up for defence) should be able to curate challenges within specific fields, and then proactively engage with small companies. This means staffing innovation units with veteran entrepreneurs, not risk-averse officials with defensive attitudes.
Also, Defence and Health should try moving away from competitive procurements in some instances and adopting a partnering model. This involves working directly with an innovator to bring a minimum viable product into service/operation.
Work it that way round, and VC will be keener to fund expansion, because there’s a proven customer. Again, US agencies offer pointers, especially the Defense Innovation Unit. Above all, bits of government should just give it a go.
Third, there’s the universal complaint: poor skills availability.
UK universities have a gift for creating graduates the workforce doesn’t want. For anyone in advanced manufacturing, the core deficiency is in systems engineering. This is the discipline of integrating all the elements of a design into a workable product.
In the UK, university-trained engineers are uniquely deficient at it, according to the people who hire them afterwards. According to one: ’70-80 per cent of engineering grads do not understand the basics of the practical skills that industry needs.’
Connecting workforce demand with academic supply isn’t for the squeamish (although other countries – say, Australia – do it as a matter of course). It would be easier if entrepreneurs were welcomed onto university teaching staff. But this doesn’t happen either, apparently.
Innovators reckon in-work schemes are the best way forward. At least young people gain skills that are in demand. Sadly, UK apprenticeships are often too high risk for SMEs. But how about a quiet pivot of education budgets to support in-work training?
Last, there’s industrial clusters. That they work is no shock to a historian. Late Victorian Britain was the acme of regional specialisation. From shoes in Northampton, to ships in Belfast, men of the same trades clustered together – just as Adam Smith observed. And the net result was global competitive advantage on an epic scale.
Today’s generation of innovators report that where modern clusters exist, they work. Small companies share facilities as well as know-how. Niche skills become more accessible. And successful entrepreneurs become local investors.
The UK has several modern industrial clusters: Sheffield for advanced manufacturing and nuclear engineering; the West Midlands for autos and motorsports; Cambridge for tech.
But clusters also work on a micro level. Who – outside London – knew that Hammersmith and Fulham Council had created a life sciences cluster? And yet Upstream London is a roaring success, with £6 billion of investment since 2017.
It has everything that entrepreneurs like. Meaningful ties with a local university department (in this case, Imperial College). Real engagement with schools, so pupils can gauge STEM-related prospects. And a culture of cross-investment. Bingo.
The time for reflection is now. Soon, the Government will publish its Industrial Strategy. This will at least show where it thinks the future of British industry lies and what it’s prepared to do.
But the basics won’t change until public policy creates an environment that encourages innovators to build their businesses in the UK. Achieve that, and everything else that the Government wants will follow: investment, growth, advanced manufacturing, exports and the thing on which they all stand, competitive advantage.
As a country, we have the brains to do it and the commercial nous. But there are blockages. The biggest is access to growth capital. Change that – and develop an agile approach to skills, procurement and clusters – and extraordinary things will happen.
‘A Nation of Innovators’ is published by Civitas.
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