Competing in the Global Economy – The Innovation Challenge

Part II: UK innovation
performance
The previous section established that innovation is a major determinant of productivity
performance and that differences in innovation performance are a significant cause
of the UK’s relatively weaker productivity performance. This section reviews the
available statistical evidence on the UK’s comparative innovation performance.
No single innovation indicator gives a comprehensive picture of performance so it is
important to look across a range of indicators. The main shortcomings in the data are:
• Inputs to the innovation process, such as patents and R&D, are easiest to measure.
But they do not tell the whole story. Some sources of knowledge (like firm learning)
are not captured well and the coverage of non-technological innovation (e.g.
changes to business practices) must be measured in a more qualitative way.
• The relevance of different indicators will vary from sector to sector. In science-based
sectors, scientific research, carried out by universities, and R&D, carried out within the
firm, are important sources of innovation and are covered by the data. Other sectors 12
draw on different knowledge. For example, services will draw heavily on suppliers of
equipment and customers, and learning within the firm 13 . Aspects of innovation
performance in these sectors are likely to be captured less well and need to be
treated in a different way.
• There are wide differences between firms in their ability to turn inputs into
innovations. Data on the returns to innovation shows that the quality of innovation
also varies greatly 14 .
• The coverage of surveys, e.g. of different sectors or size of firm, is sometimes
incomplete.
More innovation is not necessarily better. Innovation involves the investment of
resources for an uncertain return in the future and, like all investments, is likely to be
subject to diminishing returns. In this sense there must be some point where firms gain
little or no benefit from additional investment. But the data shows that, in terms of
innovation investment or activity, UK firms are around the average – or below average
– of firms in other advanced countries. And UK performance worsened during the
1990s. Given this, and other data in section III, we judge that there is scope for the UK
to improve.
The available indicators, which provide our best estimate of performance, fall roughly
into the following groups:
• Direct measures of innovation such as indicators derived from the Community
Innovation Survey,
• Indicators of inputs to the innovation process, such as R&D and patents,
• Indicators of innovations in business organisation.
12 Pavitt K, ‘Sectoral Patterns of Technical Change: Towards a Taxonomy and a Theory’ Research Policy 13 (6) pp 343-373 (1984).
13 PREST/CRIC, Services and Innovation: Dynamics of Service Innovation in the European Union, University of Manchester/UMIST (2001).
This paper argues that standard measures of innovation – which are based on definitions of technological innovation – are less than
ideal for studying services since many firms do not see themselves as engaged in technological activities.
14 Scherer, FM and D Harhoff, Technology Policy for a World of Skew-distributed Outcomes, Research Policy 29, 559-566 (2000). Using
data on innovations and inventions the authors show that 10% of innovations account for between 48-93% of the total sample returns.
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