Adding to the debate
In a major speech on Friday the Prime Minister will reflect on the role science and technology will play in Britain's future.
In preparation for his lecture, the fourth in the Our Nation's Future series, Tony Blair considered the following paper - one of those written by a range of experts in the field.
The authors are independent, and all views and opinions are their own. They do not necessarily agree with Government policy, but each makes an interesting contribution to the debate.
About the expert
Diana Coyle is a member of the Competition Commission and runs the consultancy Enlightenment Economics
Read the report
Science policy: barriers to entry facing innovative firms
There are many steps from pure scientific research to the successful commercialisation of products, each step dependent on the suitability of supporting institutional arrangements. These begin with the education and training of scientists and the structure of research and its funding in universities, and go on to the links from basic research to early stage R&D, and the ultimate commercial development of products and services for customers. (Economists refer to the whole as the 'innovation system'.)
This note concerns the final links in this long chain of innovation (and draws on both a vast economics literature and my experience in Competition Commission inquiries). If we train good scientists, and they have great ideas, and there are enough entrepreneurs with the ambition to develop them, what remaining barriers need to be overcome?
Access to finance is a well-known hurdle. Access to finance for science & technology start-ups has improved, but could be much better in two respects: more early-stage development ('proof of concept') finance; and a longer-required payback period by VCs, who in the UK are still typically looking to cash in their investment after 3-5 years.
Less well-recognised are difficulties in achieving viable scale and in gaining access to markets.
There are substantial economies of scale in science-based businesses due to the R&D and sometimes also capital equipment required. There might also be network externalities which reward large scale operation (eg in mobile telephony, software).
Economies of scale by themselves inhibit growth of new companies. The barriers are all the higher in highly regulated industries because being able to adhere to regulatory requirements is often only viable for large companies. This affects some important industries which depend on innovation, from financial services to energy and pharmaceuticals.
Almost all new entry in these industries within the UK has therefore been from large overseas companies. Growing from small to large in these markets is formidably difficult. The usual exit for start-ups is therefore to be bought out by a large incumbent company. The problem in this is that incumbents will tend to commercialise only the innovations which don't disrupt their existing business: mainframe computer firms didn't develop PC operating systems & IBM was the only one to adopt one, having been mauled by anti-trust investigations for years.
Barriers to entry might be less important if a new firm could quickly access a large enough market to cover high fixed costs. In the US science-based start-ups seem to succeed more often thanks to easier access to finance covering several loss-making years and the very large domestic market.
Is any of this amenable to policy changes?
There are (at least) three obvious avenues.
- Use public procurement rules constructively: include innovativeness as one of the criteria for awarding contracts; make contracts small enough to be within reach for a small innovative business; encourage consortia of small innovators rather than the usual pattern of a large business doling out sub-contracts or buying-in expertise.
- Help science-based start-ups address the whole European market from the start. There are several options for a package of measures, which will include market intelligence, export credit assistance, advice on regulatory compliance etc.
- Review key markets such as bioscience, energy or environmental technology to assess barriers to entry and growth in the round. What scale of investment would be needed to reach profitable sales within 5 years? Does the existing market structure inhibit entry? What is the regulatory burden? One possibility would be to ask the OFT to prioritise an investigation if there are any concerns; if necessary, it could quite swiftly reach a conclusion on whether or not there was a need for a full market investigation.
Diane Coyle
25 October 2006
