FINNOV study provides food-for-thought on innovation policy

I spent yesterday afternoon and evening, and this morning, at the fascinating conference, ‘Financing Innovation and Growth: Reforming a Dysfunctional System’, first at the House of Commons and then at the Italian Cultural Institute in London. The Science Minister, David Willetts, and his Labour Shadow, Chi Onwurah, both spoke at the event. What is most important is that policy makers from all parties, as well as Treasury Ministers, learn some lessons from the FINNOV study.

This study looked at the link between the financial sector and the real economy. It considered the extent to which financial activities either promote or impede industrial growth and innovation. The project was co-ordinated by Professor Mariana Mazzucato of the University of Sussex, who some readers might know from her DEMOS pamphlet, The Entrepreneurial State, which considers how, contrary to popular belief, the public sector drives and bankrolls much innovation activity.

I have always found innovation to be the trickiest part of the growth policy jigsaw. Putting together an active skills policy isn’t theoretically difficult (witness Germany’s success in this area) although politicians, of every stripe, have lacked the will to really make this happen in the UK. We could have a major push on procurement policy if we really wanted to (there’s that problem of political will again). But innovation is hard enough to define, let alone to develop policy in support of. For this reason, FINNOV’s conclusion are vital.

I won’t list them all here, but take a look at the FINNOV website: Key among the study’s findings, however, are that tax rules that currently penalise innovative companies should be changed. Key financial instruments are needed to allow funding to reach innovative firms – the Green Investment Bank is a start, but it is not enough. Blanket support for small businesses is misguided – government support for SMEs should be sector specific and targeted at the small percentage of high growth firms, in all sectors, which have an impact in terms of jobs and/or new products. And the green economy is the next ‘big thing’ after the internet and is likely to produce high returns for those companies that get in there first.

I think these are excellent conclusions. In the TUC’s recent report, ‘German Lessons’, we talk about the need to grow more small firms into medium sized enterprises, capable of forming part of the supply chain for larger, world class exporters. In the UK, small firms are seen as a good in themselves, a sign of vibrant capitalism, even though most fail in the first five years. I’ve nothing against small firms as such, but I question their automatically important role in a modern economic model. Instead, there are some companies that are naturally small and will remain that way, but others that have the potential to grow and that the rest of us need to grow. That should be the area of government focus.

‘German Lessons’ also talks about support for key industries in the context of climate change. The TUC has long talked about building the strategic industrial sectors where the UK can become and remain competitive in the decades to come. Green technology is self evidently one such sector and it is right for FINNOV to call for focus on this part of industry. It’s great for the TUC and FINNOV to be on the same page on most of these areas. I hope they get many of these policies taken up in the corridors of power.

This article was originally published in the Touchstone blog.