Chart 3.3 - The R&D Gap
3.53 Both
public and private sector research is important. Recent research
from the OECD shows that, in the short term, the return to R&D
spending in terms of patents is higher for privately funded R&D,
but that, in the long run, Government funded R&D has a higher
return.
3.54 The
Government has a central role in promoting and funding R&D
because of the spillover benefits that result from private R&D
effort - the firm undertaking the R&D appropriates some of
the gains, but other benefits flow to customers, other researchers,
and other firms. So the returns to society can be greater than
the private return. This means that it is in the interests of
the whole economy for the Government to encourage private sector
R&D.
3.55 Increasing
the linkages between centres of research, such as universities,
and business is vital. The experience of MIT in Massachusetts
and Stanford in Silicon Valley demonstrate the scale of the economic
return that can be generated by partnership between business and
academia.
3.56 So
the Government's strategy addresses the three key approaches to
getting the most out of R&D. The first is to provide adequate
funding to basic research. The second is to improve the commercialisation
of the research that is undertaken. And the third is to improve
the incentive for business to conduct research.
A better deal for basic
science
3.57 The
Government has acted to improve improve basic science infrastructure
through the creation of the £600 million Joint Infrastructure
Fund, endowed equally by the Government and the Wellcome Trust,
for new university equipment and buildings. This fund was announed
in July 1998 as part of a wider increase in funding for science
totalling £1.4 billion.
Joint Intrastructure Fund
3.58 To
further enhance the Government's efforts to modernise the essential
underpinning infrastructure of scientific research carried out
in universities, the Higher Education Funding Council for England
will add £100 million to the Joint Infrastructure Fund making
a total Fund of £700 million.
Encouraging exploitation
of research
3.59 Over
the past year the Government has taken a number of steps to begin
to generate a step change in attitudes towards the commercialisation
of university research. Initiatives include:
- the £50 million University
Challenge scheme, launched in last year's Budget, to provide early-stage
seed funding to help exploit the commercial potential of university
research. Over 40 bids for support from this fund were received
and it was over-subscribed by three times;
- the £25 million Science Enterprise
Challenge to endow up to eight centres of enterprise to act as
beacons of excellence in technology transfer and the teaching
of entrepreneurship to scientists and engineers. These will help
universities commercialise research and to foster a stronger culture
of scientific enterprise; and
- a review of commercialisation of
knowledge in public sector research establishments led by John
Baker, chairman of Medeva plc.
3.60 The
Government has now taken further measures to help improve the
exploitation of scientific research:
- the new Venture Capital Challenge
with £20 million of funding from the Capital Modernisation
Fund will be specifically aimed at financing innovative, high-technology
companies needing early stage financing; and
University Challenge
- the Government has allocated
further funding of £15 million to University Challenge; there
will now be a second round of the competition.
Encouraging business research
and development
3.61 The
Government has an important role in ensuring that the right incentives
are in place for business and finance sectors to exploit science
research. In particular the Government wants to ensure that the
SME sector is investing in the growth potential of R&D.
3.62 The
Pre-Budget Report set out some of the Government's initial proposals
on providing a tax credit for SME Research and Development.
R & D tax credit
3.63 The
Government intends to introduce for a volume-based R&D tax
credit for SMEs, with the aim of introducing the credit in Budget
2000. The proposed credit will:
- be open to small and medium sized
companies spending more than £50,000 a year on R&D;
- increase the existing 100 per cent
relief for R&D to 150 per cent. So, a company that is paying
tax at the 20 per cent smaller companies rate would receive a
total saving of 30 per cent on the cost of R&D; and
- also extend to companies undertaking
R&D but not yet in taxable profit. In return for this tax
credit payment, companies would surrender the right to carry forward
their R&D costs to offset against future profits.
3.64 The
details of this proposal will be set out in an Inland Revenue
technical note.
3.65 The
Government is also concerned to ensure that the tax treatment
of intellectual property is simple and fair. The Inland Revenue
will issue a technical note, on 10 March, which will discuss ways
in which the system could be simplified and reformed so that all
expenditure is relieved according to a common regime and clarify
the rules on when basic rate income tax should be deducted from
royalty payments.
EDUCATION AND SKILLS
3.66 Education
and skills are important for growth both in terms of directly
increasing labour productivity, and through influencing the impact
of new technology and innovations. Improving skills at all levels
is vital. For example, weaknesses in basic skills will inhibit
the diffusion of new technology and mean the UK will gain less
from its research and development effort.
3.67 Skills
deficiencies can also impact on other productivity drivers. For
example, investment in physical capital - such as machinery -
has often been seen as a substitute for investing in workers.
But it is increasingly clear that investment in human and physical
capital can be complements rather than substitutes - a shortage
of skilled labour is a key constraint on investment in physical
capital.
3.68 The
UK's historic weaknesses in skills have been well-documented and
apply throughout the system. Too many people leave school with
no qualifications at all; and there is an under-developed culture
of lifelong learning. For example, over a quarter of young people
still fail to achieve the equivalent of a good GCSE by the time
they leave school.
3.69 Tackling
this skills gap involves coordinated action across every part
of the education sector:
- in pre-nursery, nursery and primary
education to provide a sound base for later learning;
- in secondary schools, to ensure
that all pupils have the skills necessary to succeed when they
enter the workplace;
- in further education to provide
accessible opportunities to improve basic and intermediate skills,
including for those already in the workforce; and
- in higher education to ensure that
courses are relevant to the needs of a modern economy and a modern
society.
3.70 The
Government has acted to tackle this national priority. The Comprehensive
Spending Review allocated an additional £19 billion for the
next three years for education, an increase in real terms of 5.1
per cent a year between 1998-99 and 2001-02. The Government has:
- established the Sure Start scheme
and is expanding nursery education;
- begun to provide more modern facilities
and equipment through an additional £2.2 billion in schools
capital funding over the next three years;
- helped make lifelong learning possible
for everyone with the establishment of the University for Industry
(UfI) which will use the latest technology to bring education
and training into the home, the workplace and the community; and
- continued the expansion in higher
and further education with a commitment to add over 700,000 extra
students a year in further and higher education by 2002.
3.71 Budget
99 builds on the important steps already taken with a major announcement
setting out how Individual Learning Accounts will improve skills
training in the existing workforce.
3.72 Some
13 million adults have yet to achieve "level 2" -
the equivalent of five good GCSEs. The 1998 Labour Force Survey
shows that, compared to those with no qualifications, adults with
five good GCSEs are:
- up to four times more likely to
get further training from their employers;
- likely to earn more than those with
no qualifications. Men with five good GCSEs earned on average
£110 a week more than those with no qualifications; women
earned £80 more; and
- one third as likely to be unemployed.
3.73 The
Government's proposals for Individual Learning Accounts (ILAs)
are designed to provide lifelong learning opportunities for everyone
in the workforce, ensuring people can receive the training that
they need to succeed in today's dynamic labour market.
3.74 ILAs
should help correct market failures that can lead to under provision
of training even when it is clearly in the employer's and the
employee's interest. For example:
- some employers do not provide training
that would benefit their company because they are afraid that
the trained worker will be poached by another firm;
- employees may under-invest in training
because they have difficulty in financing it: investment in training
does not create a tangible asset which a bank can use as collateral.
Individual Learning Accounts
3.75 Individual
Learning Accounts will bridge both sides of this problem. An
initial one million accounts will be opened with the first starter
accounts opening in 1999. The first million accounts will
match £25 from the ILA holder with an additional £150
for spending on education and training.
3.76 Every
adult in Britain will be entitled to open an Individual Learning
Account in 2000. These ILAs will comprise:
- a discount of 20 per cent for all
ILA holders, on spending on eligible courses of up to £500
a year;
- generous discounts of 80 per cent
on the cost of certain key courses, including computer literacy;
and
- tax reliefs for employers and employees
on employers' contributions to ILAs.
COMPETITION AND REGULATION
3.77 Competition
is a key driver of productivity both in individual companies and
across whole sectors. The need to compete in terms of price, product
and service drives companies to innovate, to improve efficiency
and to pass savings on to consumers and the wider economy. Work
by Stephen Nickell, for example, has demonstrated the link between
higher competitive pressures and higher productivity[5].
And this link was often cited by business participants at the
Productivity Roadshows and seminars.
3.78 Entrepreneurs
need to know that the competition authorities will be vigilant
in preventing incumbent firms from seeking to restrict market
access. Otherwise potential entrepreneurs will be unable to grow
new firms successfully, and may be dissuaded from even trying.
3.79 The
existing competition framework does not set the right environment
for competition giving insufficient powers for the authorities
to tackle anti-competitive practices and abuses of dominant positions.
This is perhaps exemplified by the persistence of price differentials
across a broad range of sectors with the US, though there are
clearly a number of other factors involved.
3.80 The
Government has acted to improve the intensity of competition in
the UK through the new Competition Act (which comes into force
in March 2000). This will provide the competition authorities
in the UK with the powers to fine firms by up to 10 per cent of
turnover, and make it a criminal offence to obstruct an inquiry.
3.81 Tough
competition regulation is only possible if it is underpinned by
sufficient resources. The Pre-Budget Report announced a 20 per
cent increase in funds for the Office of Fair Trading to enable
it to take a more pro-active approach.
3.82 The
full benefits of competition require markets to be open to trade
and investment by overseas firms. This increases competition and
facilitates the spread of leading edge technology, thereby stimulating
UK firms to deliver productivity improvements, operate at maximum
efficiency and continuously innovate.
3.83 The
Government has concluded however that more needs to be done to
take forward the competition agenda. The Secretary of State
for Trade and Industry will therefore be making announcements
on the framework under which mergers are controlled. The Deputy
Prime Minister will review competition in airports in following
up proposals in the Government's Integrated Transport White Paper.
In addition, starting with industrial and commercial consumers,
the Deputy Prime Minister will review competition in the water
industry.
Regulation
3.84 The
Government believes that sensible regulation can help to balance
economic, social and environmental needs. But over-regulation,
or regulation that is confusing or contradictory, risks preventing
innovative ideas from reaching the market. Many participants at
last year's Productivity Seminars suggested that it was important
that the impact of regulations on productivity was properly considered.
3.85 The
Government has asked the Better Regulation Task Force under Lord
Haskins to launch a detailed investigation into the impact of
regulation on growth and productivity. The Task Force has already
produced its interim report, which emphasised, among other things
the need for Government to target the needs of SMEs right through
from initial consultation on the need for regulations to final
implementation and enforcement. This Budget has begun to address
these concerns with measures to help businesses comply with tax
and regulation.
3.86 The
Deputy Prime Minister has been undertaking a comprehensive examination
of the planning system to ensure that it is attuned to the needs
of enterprise and business, while still meeting the Government's
wider environmental objectives. He will shortly publish a report
on progress. The Government attaches particular importance to
the development of clusters of business enterprises. A review
is currently underway to identify whether the planning system
creates any barriers to the development of clusters. Planning
guidance issued last month highlighted the need to make "provision
for the location, expansion and promotion of clusters or networks
of knowledge driven industry."
PUBLIC SECTOR PRODUCTIVITY
3.87 The
Government also has a part to play by working to improve productivity
in the public sector. In the past the public sector has focused
on reducing costs rather than improving the quality of the service
provided and has not had the management systems to implement a
productivity enhancing strategy.
3.88 The
Government has taken forward its commitment to improve public
sector productivity with the publication of the Public Service
Agreements which set out key targets for improving efficiency
and productivity in service delivery. Progress against the PSAs
is being overseen by a Cabinet Committee (PSX) chaired by the
Chancellor of the Exchequer. This Committee is advised by the
Government's Public Service Productivity Panel, a body of private
sector management experts.
3.89 Public
private partnerships (PPPs), bringing the public and private sectors
together in partnership for their mutual benefit, are another
element in the Government's strategy. By bringing in private sector
management, finance and ownership, PPPs help improve the efficiency
and quality of public services and deliver the best return for
the economy as a whole from assets and enterprises currently in
the public sector.
3.90 The
Government is taking forward public private partnerships for many
of the remaining commercial organisations in the public sector
- for example London Underground, air traffic control, British
Waterways and the Commonwealth Development Corporation. The Government
believes that such businesses should be structured so they invest
and operate effectively, so improving their services to customers
and their own chances of long-term commercial success, while delivering
value for money for the taxpayer.
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