In a decisive decade, how can the UK reap the full benefits of its innovations?

As Harold Wilson knew all too well, nothing focuses the mind quite like a deadline. It was 30 September 1963, the night before the final day of the Labour Party conference in Scarborough, and the future Prime Minister didn’t have a speech.

He finally settled down to write it at 9pm, with a bold theme: the scientific and technological revolution that was poised to transform life in the UK.

Recent advances were, “Making it physically possible, for the first time in human history, to conquer poverty and disease, to move towards universal literacy, and to achieve for the whole people better living standards than those enjoyed by tiny privileged classes in previous epochs,” Wilson said.

“The Britain that is going to be formed in the white heat of this revolution,” he added, would require leaders of all stripes to embrace the spirit of “our scientific age”.

As back then, the new UK government will face some serious structural challenges. The UK economy has barely recovered to pre-pandemic levels. Demand on public services is increasing faster than the state’s capacity to keep up. Long-term productivity growth has lagged behind almost all of its major peers, with median household incomes now around 20 percent lower than in Germany. And issues such as the climate crisis and an ageing population loom large on the horizon.

Wilson was right: the best way to solve such systemic problems is through innovation. Generative AI, green energy, the nascent space economy, and advances in the life sciences such as mRNA vaccines and synthetic biology all have the potential to take policymakers out of the zero sum game that so often characterises a ministerial brief.

The good news is that innovation happens all the time, in offices as much as in labs, and Britain is good at it. The UK ranks fourth in the Global Innovation Index, and has produced up to 13 percent of the world’s most impactful research.

The bad news is that innovation isn’t enough. Back in the 1960s, our R&D strength didn’t stop us becoming the ‘sick man’ of Europe, just as today it is failing to translate into robust productivity growth.

As The Economist puts it, “Britain is a great place to start a company, but a bad one to scale it up”, meaning they often get snapped up or outmuscled by foreign competitors.

Whether originating in start-ups or larger organisations, the UK’s often groundbreaking innovations don’t diffuse rapidly or widely enough through the economy. They create jobs, profits, and investment, but much of it happens elsewhere.

Whatever their political stripe, the policymakers taking the UK into this next, decisive decade therefore share a common imperative to change this pattern, not by focusing on innovation as a standalone idea, but by improving the diffusion of innovations.

The challenge is how.

The public sector can innovate, if it adopts an experimental mindset

Contrary to Silicon Valley myth, the state has long played a central role in innovation, not least by bankrolling it. The internet, GPS, and the jet engine all came about through state-led innovation intervention. And the UK government, like the US, continues to fund much of the fundamental science and deep technology that fuels breakthrough innovation, although in areas like AI the private sector is increasingly taking a lead.

It can steer these innovations by the risks it takes with its funding. But diffusing them – taking them from the lab through to widespread application – is largely seen as out of their hands.

There are two primary ways for policymakers to change this. The first is to directly diffuse innovations through the delivery of public services, for example in healthcare and education.

Doing so requires a profound change in approach, from efficiency towards experimentation, but the results can be startling. “If you’re looking for recent reasons to be proud of Britain, it would be hard to find a better example than the Recovery series of clinical trials,” Stian Westlake, CEO of the Royal Statistical Society, wrote in The Guardian.

These were randomised control trials that brought together epidemiologists, health professionals and statisticians to test various promising anti-COVID-19 drugs at pace and at scale through the NHS, in the darkest, most frantic days of the pandemic.

“It worked wonders: Within three months, [Recovery] had demonstrated that dexamethasone, a cheap and widely available steroid, reduced COVID-19 deaths by a fifth to a third,” Westlake wrote, with four more effective drugs found in the following months. “All in all, it is thought that Recovery saved a million lives around the world.”

Global health emergencies aren’t a prerequisite for adopting a more scientific and experimental approach to public sector delivery. Similarly, civil servants don’t need to take huge risks to make it work. Singapore, for example, trialled and then rapidly implemented QR codes as a replacement for passport checks at busy borders, reducing wait times by 30 percent. It’s a small idea using an existing technology, but it’s gone a long way.

The key to such experiments is to iterate afterwards, enabling civil servants to improve on their ideas and to learn from them. Sometimes this involves thinking about the process of innovation as much as its subject. Small nuclear reactors, for instance, may not necessarily be more cost effective than conventional reactors today, but because their modularity allows for continuous improvement, they have potential to become cheaper and quicker to deploy in future.

Critically, it’s important not to rush, as that way leads to costly failures that will deter future innovation. Instead, use experiment and iteration to nail the innovation before investing to scale it.

Procurement systems that only compare the prices of products meeting tight but outdated specifications will hardly deliver meaningful innovation; nor will performance reviews that penalise failure and deter risk. Policymakers can set the direction and expectation of experimental innovation, but only by strategically removing such barriers will it take hold.

Even then, public sector innovation cannot solve every problem, because so much is outside of its direct control. To go further requires applying policymakers’ second lever: helping diffuse innovations indirectly, through the private sector.

Back races, not horses

Massachusetts is a great place to do life sciences, but it wasn’t always a great place to make a living out of it.

Before the 2010s, the US state was known for its thriving cluster of start-ups, spun out from Harvard, MIT, Northeastern, Boston College, and other leading universities in the area. Much like the UK today, relatively few achieved major scale or investment, and most of those that did ended up being bought by companies based elsewhere.

In 2008, local authorities decided this had to change, and established an arms-length body called the Massachusetts Life Sciences Center to make it happen. Its first CEO, Susan Windham-Bannister, quickly diagnosed the problem.

“It wasn’t enough [for Massachusetts] to be a cluster. A cluster is just a collection of assets. We needed to be an ecosystem, a supporting environment that enables the innovation life cycle at every stage from research to commercialisation,” she told Management Today.

Massachusetts had intellectual capital in spades, and there were venture capitalists aplenty in both Boston and nearby New York. What it lacked was the market. In particular, the state wasn’t home to any large pharmaceutical companies that could partner with start-ups to develop and commercialise their research.

Armed with a billion-dollar budget, Windham-Bannister used tax breaks to entice these major players to locate there to “anchor the ecosystem”, alongside funding workforce training, capital investment grants, and start-up incubators.

The state is now home to the largest life sciences ecosystem in the world, with over 70,000 people employed, most of the world’s top pharmaceutical companies having a major presence, and billions of dollars of venture capital invested every year. Among the scores of scaled-up biotechs to IPO from the ecosystem are Moderna, Biogen, and Vertex Pharmaceuticals.

Investing in ecosystems of this sort is an example of what our colleague Frazer Bennett, PA’s Chief Innovation Officer, calls “backing races rather than backing horses”, supporting an already innovative, high-growth industry rather than pushing a particular technology or business. Freeports are a great example of this. They act as vehicles for growth – helping businesses benefit from tax and customs relief, offering access to seed capital funding, and coalescing skills that are rooted in local and regional economies.

How to cultivate an ecosystem

Like any complex system, a market-based business ecosystem can be hard to change, let alone grow from scratch. Consider this next time you get a flat tyre and have to wait for hours for a tow-truck.

In the late 1990s Michelin introduced a highly innovative run-flat tyre system, PAX, that allowed drivers to safely reach local garages instead. For a while it looked like it would become the norm after Honda adopted it as standard for its Odyssey minivan, with others like Audi and Renault offering it as a popular option.

But soon drivers found that when they did get a flat, most garages lacked the equipment to repair them, which meant they needed to buy an expensive replacement tyre instead. Following a series of class action lawsuits, the company stopped development of PAX in 2007.

“The failure of PAX was caused by misunderstanding how it would affect Michelin’s ecosystem of automotive relationships,” wrote Professor Ron Adner of the Tuck School of Business, in his book The Wide Lens: A new strategy for innovation.

Michelin had specifically offered incentives for garages to buy the new PAX repair equipment, but it wasn’t enough. “Even if PAX became standard on new cars, it would be many years before they would account for a meaningful percentage of repairs – and therefore years before buying equipment would be attractive,” Tuck explained.

Cultivating an ecosystem requires highly targeted interventions, based on a deep understanding of the market and its participants as well as the underlying innovation itself. Fortunately, policymakers have various tools to do this, even on a tight budget.

For a start, government can play an important role in facilitating the networks on which innovation depends. This can be as simple as making introductions and building physical spaces for people in the same ecosystem to collide.

For instance, Germany’s Fraunhofer Society, an arms-length body, coordinates universities, industry, public sector departments and its own 76 institutes to work on different fields of applied science, sharing skills, marketing, and risks. This partnership approach helps original ideas become effective innovations ready to be adopted by the market, with success stories including MP3 music files and advanced photovoltaics.

The public sector can also tackle structural problems that are too big for any one ecosystem participant. UK supermarkets all wanted to reduce plastic pollution, but only started working in earnest on reusable bags when the government introduced mandatory customer charges.

“Regulation can be a fantastic catalyst for innovation,” says Bennett, pointing to financial regulators’ use of regulatory sandboxes and introduction of open banking, which have helped fintech to flourish in the UK.

Rather, pro-innovation regulation tends to have three characteristics: the flexibility that comes with experimentalism, a degree of co-creation by participants around what is feasible, and a clear direction of travel.

The latter is particularly important. When policymakers set a long-term target – for example, 80 percent of new cars to be electric by 2030 – it gives businesses confidence to invest in innovations that, like Michelin’s tyres, could take years to pay off.

The state has other ways to instil this confidence. Public sector bodies like the NHS and Ministry of Defence have enormous purchasing power that they can use to encourage companies to engage with their innovation agenda.

A key reason that vaccines were developed and secured at such a pace during the COVID-19 pandemic was that governments pre-ordered tens of millions of doses, paving the way for companies like Astrazeneca, Pfizer, and Novovax to press ahead with development when there was still a high chance of failure.

Which ecosystems should the government support?

Britain has considerable assets that could be used to develop thriving innovation ecosystems. Its broad-based services economy is world-leading in the creative industries, IT, education, life sciences, finance and more, with many successful companies in advanced manufacturing and engineering too.

The UK’s universities excel at technology transfer: there were 1,166 active UK spin-out companies in 2022, according to Beauhurst, comprising 2.5 percent of the country’s high-growth companies and taking 9.1 percent of the equity funding raised that year.

The NHS, although often the target of criticism and debate, is a singularly large and efficient public health body, with unparalleled amounts of data, purchasing power, and capacity to conduct large-scale experiments.

In some respects, policymakers face too much choice of which ecosystems to back. But choice is nonetheless unavoidable. The UK is not the US or China, able to realistically aspire to have a globally significant ecosystem in every area of innovation. It has to pick its battles.

Challenges like decarbonisation, population health, or the happiness of the UK’s children cannot be solved within the confines of a single business ecosystem or public sector department. Having a bold mission with specific targets gives direction to innovation and its diffusion, through all the system-wide levers that the state has to pull. It’s something seen for example in Japan’s Realising Society 5.0 programme, which has a broad remit to tackle problems like low birth rates, an ageing population, and environmental change.

Perhaps most importantly, missions inherently focus on the things where innovation is needed, rather than the technologies the UK is capable of producing.

That was ultimately where Wilson went wrong, and where in this decisive decade we now have the chance to get it right. The white heat of scientific revolution isn’t what will save us, it’s the innovation we can forge with it. And getting innovation right, so that it spreads far and wide, means never losing sight of the problems you’re trying to solve.