Does investment in innovation really lead to economic prosperity?

Blogs

Much is made of the need for the UK to invest in innovation to drive prosperity. It’s a straightforward message, and a beguilingly easy solution to sell at a time when the UK is facing severe pressures on currency, supply chains, workforce, skills, and access to markets. It’s been a plank of government policies since the 1970s/80s as a driver to reverse a long period of relative UK economic decline against our international neighbours. Can innovation continue as a catalyst to enable the UK to prosper? If it might, is investment in more innovation beneficial?

I won’t attempt to review 100 years of econometrics and national policy in a short article. I will get straight to the point: investing in innovation DOES unlock national prosperity.

Yes, it does …

“Think Tanks” of various political colours and ideologies have produced lengthy papers on innovation for prosperity. Some that come quickly to mind are the OECD 2007 “Innovation, Growth and Equity: The Equation for Prosperity”, Brooking Institute 2011 “Technology and the Innovation Economy”, National Institute for Economic Review 2013 “Investing for Prosperity: Skills, Infrastructure and Innovation”, CIFAR 2019 “Innovation, Equity & The Future of Prosperity”, and NEISR 2021 “From ideas to growth”. The majority accepted view is that there is a strong correlation with some known causation that indicates that increased investment in innovation leads to higher national prosperity in the medium to long term.

The UK Government finds that each £1 of investment in innovation generates a 20% rate of return. This is within the bounds of OECD, World Bank and EU studies over decades that find that rates of return to private investment in innovation of 0% to 60% with most firms seeing 20% to 30%, and national prosperity returns to public sector investment are in the range of 0% to 100% with most being in the band of 30% to 50% because of the amplification and spill over effects on the rest of economy.

Innovation activity may be a relatively small proportion of the economic and social activity in the United Kingdom, it has a disproportionately fast-growing effect on everything around it. Which is why we pay it so much attention and try to nurture the fragile little sparks into useful flames.

By the magic of compound growth, every year builds upon the year before. Over 20 years, a 20% rate of return turns £1 million into £32 million, and a 50% rate of return creates £2.2 billion. Clearly, we are highly motivated to ensure we target the top end of that range of returns.

… but not always and not without help.

It’s a big, complex, and confusing area of study, and it is what is under the headlines that really matters. Let’s look at a few of the most important areas:

Investment alone does not automatically lead to innovation

Common sense, backed up by multiple studies, suggest that merely throwing money at a problem will not solve it. Investment yields higher returns in areas where there are positive pre-existing conditions. You always get more back in social and financial terms where you already have universities, connectivity, bandwidth, a reasonably dense built environment, and a concentration of industries that have already recognised the need to innovate. Fortunately, the Oxford-Cambridge Arc, and the Southeast Midlands region is blessed with those factors.

Innovation does not happen without help

Innovation is a learned skill. It is not the same as invention. It is not the same as random creativity. It is a focused collaborative process over many years which seeks out and identifies opportunities, creates concepts that can be developed, validates those concepts against the real world, develops working solutions for those concepts, and then deploys those working solutions in profitable manners.

It requires that the region, and the nation, has the skills, management, built environment, data collection, systems of releasing value, and ways of assigning investment to valuable propositions that all function seamlessly and without friction.

Benefits are not distributed evenly

The truth of innovation is that before it generates prosperity it generates disruption. It is true that jobs may be lost when a more efficient processes discovered, it is true that some regions benefit more than others from the introduction of new technologies, it is true that different demographics benefit at different times and in different ways from the spread of prosperity. In the long run, the evidence is overwhelmingly that innovation generates social and national good. In the short to medium term, compromises need to be made. Managing that is the thing that we like to call politics.

It is not all about money

Many of the examples above have been given in financial terms, but the effects go much wider. Innovation can change our health, our journey to work, the way we spend our leisure time, how we process waste, how we get water, what pollution we generate, and how we are educated.

A laptop with the word survey typed on the screen

What SEMLEP does with this

As Board members of SEMLEP, we work hard to ensure that this region has a powerful base of skills that can manage innovation, innovate, and exploit innovation effectively. We have a great team focused specifically on skills with a depth of experience across universities, industrial training, and broader life learning. They produce the excellent Skills Strategy for the region.

A core team creates the evidence base from which the Regional Economic Plan emerges, by way of broad and deep studies from existing reports, and by the regular Business Survey across the region. When the team is faced with sudden changes in the economic environment, as we just had from BREXIT and COVID, it is able to pivot and produce Recovery Strategies as well.

Importantly, all that information enables SEMLEP together with our partners – locally and nationally from the public and private sector – to focus effort on unlocking innovation in areas and sectors that have proven abilities to deliver returns locally:
* high-performance technology
* future of mobility
* zero carbon future
* manufacturing and advanced technology

* logistics and supply chain
* creative and cultural industries
* aerospace and space technology

Inward Investment

Armed with that, and powerfully so, SEMLEP can reach out across the Economic Development Officers in local authorities to coordinate and facilitate inward investment, whether from foreign or national sources. Precisely because the region has such deep and rich advantages it has a long history of capturing significant amounts of inward investment and directing it towards the innovation challenges that will really matter; both for the SEMLEP area, and for the United Kingdom as a whole.

Is it all worth it?

Investment can create additional innovation if it is put in the right place with the right skills, and the right people, and the right sector. That innovation can drive financial and social gain that compounds and grows dramatically if it is managed and nurtured correctly.

Relatively small investments, and relatively small changes, can have substantial benefits in the future.

So, while the short answer is “yes”, the long answer is “yes, but only if a lot of dedicated people put a lot of time and effort into managing the detail carefully.” and that, I think, is part of why volunteering for SEMLEP has been so amazingly rewarding for me, and each and every one on the SEMLEP board.

Written by David Bailey, SEMLEP Board Director

Are you interested in a non-exec board position? We’re seeking four new business leaders to join our board. Download our applicant information pack today for more information. The closing date for applications is 30 September 2022.

About David Bailey

David is an expert in structuring and strategy. “I find the pathways and components of unexpected solutions to enable founders, investors, and property owners to fix the hardest of problems. I help them to unblock and accelerate growth; unlock and realise value rapidly; and invest wisely for maximum gain.” Through his role as Private Sector Board Director of SEMLEP, David is also a member of Northampton Enterprise Zone, Luton Airport Enterprise Zone, Finance Risk and Advisory Committee, and chairs the SEMLEP Inward Investment Group.