chapter two building UK capabilities “Innovation is the key to growth because it delights customers, giving them something startling, new and valuable.” Dr William Coyne, 3M 2.1 Our competitiveness depends on making the most of our distinctive and valuable assets, which competitors find hard to imitate. In a modern economy those distinctive assets are increasingly knowledge, skills and creativity rather than traditional factors such as land and other natural resources. 2.2 This process must be led by the private sector – the main wealth creator – by investment in new business development, research, information technology and skills. The Government has a critical part to play in building the capabilities the UK needs to compete by: . strengthening Britain’s capacity for innovation and risk-taking . investing in the knowledge base, particularly in science and engineering . improving the skills and capabilities of the workforce including by raising educational standards . helping business make the most of information technology and research and development both at home and abroad. The new Regional Development Agencies (RDAs) in England will have an important role to play in all this. Entrepreneurshipand innovation Why entrepreneurship and innovation matter 2.3 Entrepreneurship and innovation are central to the creative process in the economy and to promoting growth, increasing productivity and creating jobs. Entrepreneurs sense opportunities and take risks in the face of uncertainty to open new markets, design products and develop innovative processes. In the knowledge driven economy this process is even more critical, in small and large businesses alike. The Government already aims to ensure that we have the right macro-economic and fiscal climate to help people to develop entrepreneurial skills, and to remove barriers to growth. The pace of innovation means that competitive advantage has to be refreshed constantly. The UK needs more risk takers who can rapidly turn ideas into products and businesses. 2.4 The UK needs more high-growth businesses. As many people as possible should have the skills and support to set up, run and grow businesses – whether young or old, men or women and regardless of ethnic origin or where they live. How does the UK stand? 2.5 The UK has more people who want to start a business than many other countries. We have talented entrepreneurs who have created world-class businesses. However, compared to the US, too few of these businesses achieve high growth. They lack a competitive edge and their founders often lack the ambition or capabilities to manage growth. 2.6 Too few people with innovative ideas and knowhow come out of universities and large businesses to start growth businesses. New entrepreneurs face too many barriers. To spread a spirit of enterprise we have to remove: . fiscal and cultural barriers which lead people to avoid or misjudge risk . lack of access to the right finance for growth and the business skills to manage it . regulations which impose excessive or unnecessary burdens on new business. Entrepreneurial culture 2.7 The Government’s aim is to create a broadly-based entrepreneurial culture, in which more people of all ages and backgrounds start their own business. In the US, entrepreneurship is widespread because entrepreneurs are highly regarded and well rewarded. In the UK, entrepreneurs are still too often viewed as mavericks. 2.8 Many factors contribute to an entrepreneurial culture and some will take time to turn around or are difficult for the Government to influence. One powerful lever that the Government does have is its fiscal policy which can increase the rewards of success. 2.9 The Government announced in the March 1998 Budget a package of tax reforms to encourage enterprise, including the introduction of the Capital Gains Tax taper and a new, more generous Enterprise Investment Scheme. The Government announced in the Pre-Budget Report1 published in November that it would review how these measures can together encourage serial investments in smaller growing businesses. It will also review, for decision in the next Budget, the case for continuing with enhanced first year capital allowances, and other issues such as the effective rates of tax borne by small businesses. 1 The Pre-Budget Report 1998, HM Treasury. 2.10 Big business needs to become more entrepreneurial as well. Businesses are more likely to become entrepreneurial if their employees stand to share in the wealth they create. The Government is examining ways to encourage more employees to take a long-term stake in their businesses and to provide incentives for more high-calibre managers to join and stay with smaller, dynamic businesses. The Treasury is issuing a consultation document and conclusions will be announced in the 1999 Budget. 2.11 Other measures taken by the Government to contribute to improving the culture for enterprise will include: . support for a review of the Queen’s Awards for Industry, which will be looked at in the context of the Government’s drive to promote entrepreneurship and innovation . support for a National Campaign for Enterprise, to be led by the British Chambers of Commerce and aimed at everyone who could be a successful entrepreneur; this will build on the success of the Alan Sugar/Lloyds TSB tour to encourage enterprise among young people . a joint conference in 1999 with the US Government and business people to share lessons on how enterprise can be promoted . in Wales, to help strengthen the enterprise culture, a new Entrepreneurship Action Plan is being developed (see end of Chapter 3). Tackling fear of failure 2.12 We are too afraid of failure. People worry that business failure will create a lasting stigma. Investors are too rarely willing to back those who have failed and want to try again. Fear of failure is lower in the US, where entrepreneurs who learn from their honest mistakes are more easily able to launch other ventures. casestudycasestudy Entrepreneurship in education Micro Society is a twelve-week programme of work designed for primary pupils. It has been used in schools in South London for three years with good results. It develops an awareness of entrepreneurial skills by involving the children in Businesspeople are recruited by the Merton Education Business Partnership to join Micro Society as visiting speakers at various stages of the programme. Speakers include a personnel manager, a local bank manager, a tax inspector and a politician. “I was very impressed with the interest of the children in the ‘society’. The questions they asked were very perceptive and already it seemed that they were applying what I had told them to the next stage of their society’s development. Micro Society is an excellent programme that seeks to introduce children to economic concepts at an early age – and it works! It deserves further support and to be widely used.” Michael Bragger, Manager, Midland Bank plc. 2.13 Changing attitudes will take time. The Government can start this process by ensuring that a business in trouble has a fair chance to pull itself round and making sure that the law does not contribute to the stigma of failure. The Government proposes to: . legislate for a stay on creditors’ action to allow a business in difficulties up to three months to come to an arrangement with its creditors . review arrangements for business rescues, and reassess the relative rights of creditors in insolvencies, including the costs and benefits of any changes to the Crown’s preferential status . consider whether our bankruptcy and insolvency laws need to be changed to ensure that they support enterprise, including whether any of the current restrictions on bankrupts could be eased. 2.14 These changes will not create a rogues’ charter. On the contrary, the Government will legislate so that it can get quicker results against directors guilty of misconduct. Developing entrepreneurs 2.15 Entrepreneurs often fail to realise the potential of their ideas because they lack the business skills they need. The Government has a part to play through the education system. . It will enhance employability and develop key skills including entrepreneurial skills. The Department for Education and Employment (DfEE) is spending £15 million in 1998/99 to support links between education and business including business experience for school pupils and teachers. . The Government has restored tax relief to businesses on the salaries of employees seconded to schools and other educational establishments. creating their own society within the classroom. They set up the institutions required by that society: government, an economy, businesses, a civil service and a legal system. The programme has been adapted for use in British primary schools from an American programme called Mini-Society, developed by Dr Marilyn Kourilsky in Los Angeles. 16 How Business . The DfEE is looking at ways in which schools can encourage the development of skills and attributes essential to entrepreneurship. The Qualifications and Curriculum Authority is considering how best to achieve this. A similar approach will be pursued in Scotland. . The Government will pilot and expand the Young Enterprise Scheme into higher education, refocused to meet the needs of undergraduates. They will run their own businesses with a lecturer and two local small businesses acting as business advisors. The DTI is co-sponsoring this development with KPMG. . It will fund up to eight new enterprise centres in universities to bring entrepreneurship training and business skills into the science and engineering curricula (see paragraph 2.42). 2.16 Links between education and business are being developed throughout the UK. In Scotland, business leaders have made a commitment to a programme of visits to schools, which was announced by the Chancellor of the Exchequer at the inaugural meeting of the Scottish Business Forum in April. The Scottish Office is investing £1 million in each of the next three years in a programme of industry and enterprise awareness for teachers and schools. The programme will be managed by the new National Centre: Education for Work and Enterprise at the University of Strathclyde. DTI, working with DfEE and other partners, will encourage: . more businesses and schools to work together to support higher educational standards, especially in the teaching of work-related and entrepreneurial skills . the development of learning and support materials, which will help teachers and pupils appreciate business needs and improve the relevance of education to tomorrow’s job market. casestudycasestudy Links help smaller businesses Careersoft produces multi-media software for career education and guidance, including a new series of products, “Startup”, which aims to encourage entrepreneurship among school leavers. Bob Gledhill, Careersoft. The company have developed a “Digital Careers System” in which extra information about careers is signposted to sites on the Internet. Careersoft sought help from Business Link Calderdale and Kirklees to develop a management structure and skills base to ensure their future success. Together, they produced a new business plan and a training plan to improve employees’ management and IT skills. The Business Link has also helped the company to develop and implement an improved corporate identity and design policy. This has already resulted in a 27 per cent increase in sales and five new jobs. 17 2.17 The Government will also address deficiencies in entrepreneurial skills through the business advice services provided through Business Link partnerships. It will make funds available to Business Links to support innovative start-ups with real growth potential, including one-to-one specialist help. The Government target is that at least 10,000 businesses a year will receive such support by 2001. This is in addition to the work Business Links already do with 8,500 different businesses each week. Independent research2 has found that businesses which have received advice from Business Links have significantly increased their turnover, profits and export performance. 2.18 The Secretary of State for Scotland has recently set a target of 100,000 new companies to be established in Scotland over the next ten years and work is underway to review the Business Birthrate Strategy to improve business survival. In Wales, the Government is encouraging the creation of good quality new businesses under a New Business Starts Programme co-ordinated by Business Connect partners. This aims to help 1,000 new ventures start and grow in 1998/99, through the provision of key business skills. Finance for growth 2.19 Too many small UK businesses with good ideas have problems finding appropriate, affordable finance. The pace of change in the knowledge driven economy requires financiers to be as enterprising as entrepreneurs. 2.20 US entrepreneurs are backed by a strong venture capital industry. The UK venture capital industry is the largest in the EU and is growing. However, relatively little UK venture capital goes into early-stage and technology-based investments. Institutional investors need to consider how they might invest more funds in venture capital to stimulate the emergence and development of businesses with high-growth potential. Larry Sonsini, a leading US venture capitalist, highlights the difference between the attitude of UK and US venture capitalists: “These US venture capital firms do more than provide capital...they are prepared to support the enterprise with recruiting, management, and business development. They develop business plans. They even incubate start-ups. They will find a successful technologist, or an engineer, or manager.” 2.21 Bank lending remains the most important source of finance for small businesses. Commercial banks are paying more attention to innovative, high-technology businesses. But UK banks are not as proactive in seeking out innovative small businesses as their US counterparts. Against the background of changing business needs, the Government has initiated a review of innovation, competition and efficiency in UK banking. This work will be led by Don Cruickshank and will report to the Government and Parliament next year. 2.22 Banks and venture capitalists need to develop better ways of assessing risk, particularly for innovative or high-technology businesses. They need to review how their products respond to businesses whose key assets are in know-how, not land and buildings. 2 Business Links Value for Money Evaluation 1998, Public and Corporate Economic Consultants (PACEC). building UK capabilities 2.23 Business needs to play its part in addressing financing issues. Many entrepreneurs are afraid of incurring significant debt finance after the damaging experience of the last recession. They are also reluctant to raise equity finance either through ignorance of the products available or because it involves ceding a degree of control over their business. These businesses need help in accessing the most appropriate form of finance for their needs. They need the financial and marketing skills to communicate more clearly to the financial community the opportunities offered by their ventures. 2.24 The Government will work with the banks and the venture capital industry to address these issues. It will, in partnership with the private sector, support an Enterprise Fund worth some £150 million over three years. . A national venture capital fund will support very early-stage, high-technology businesses. This is currently under discussion with six leading financial institutions, Lloyds Bank, NatWest, the Bank of Scotland, the Royal Bank of Scotland, the European Investment Bank and the European Investment Fund. . New regional venture capital funds will specialise in providing small-scale equity to businesses with growth potential, drawing in local expertise. The Government will work with the Regional Development Agencies on how to take this forward. . More help will be provided using the Small Firms Loan Guarantee Scheme for businesses without the collateral or track record that banks normally require. . The finance industry will be helped to develop innovative financing ideas to assist growth businesses. 2.25 The new Enterprise Fund will take full account of existing support in this area. In Scotland, a new Business Growth Fund has been established with £12 million over three years to provide loan funding mainly for start-up and early-stage companies. Scottish Enterprise and private sector investors will together invest around £25 million over six years in the Scottish Equity Partnership. This funds investments below £500,000 in new and early- stage businesses in key sectors and technologies. 2.26 In addition, the Government will look at other ways to increase the availability of finance. It will: . consult on how to make it more attractive for large businesses to become expert investors, “corporate venturers”, in small, growth businesses, possibly using the tax system . look at how to strengthen the public markets for small businesses to provide the kind of liquidity available in the US . improve small businesses’ access to equity finance by facilitating cross-border public offers of securities within the EU . promote best practice to enhance the development of risk capital markets in Europe. Global ambitions 2.27 Many growing businesses need to export in order to expand output, increase productivity and spread risk. Through exporting they are exposed to tougher competition and more demanding customers which in turn improves their competitiveness. Contacts made through overseas trade also help businesses tap into new ideas and knowledge. Exporting requires the acquisition of skills, knowledge of markets and marketing. To make this easier, the Government is modernising its assistance to make it more accessible and coherent, particularly for smaller businesses competing in the knowledge driven economy. 19 casestudycasestudy Britain’s new generation of entrepreneurs Jason Kingsley, Rebellion Jason Kingsley and his brother Chris started their computer games company in a basement five years ago. The company has grown rapidly and plans to quadruple turnover in the next two years. The brothers have taken a long term view of Rebellion’s development as a corporation, developing partnerships with global players such as Microsoft and 20th Century Fox. Paul Walker, Sage Group Paul Walker is Chief Executive of the Sage Group plc which more than doubled in size Hilary Cropper, FI Group Business technology services company FI Group works predominantly with FTSE 100 organisations in the financial, retail and leisure and services sectors. Deputy Chairman and Chief Executive Hilary Cropper attributes the Group’s 50 per cent growth in annual pretax profit for the last five years to its innovative approach to building long-term partnerships, and to the fact that over 40 per cent of FI Group is in the hands of the workforce - giving it a vested interest in the Group’s performance. The Government will modernise its services for exporters by: l increasing its use of the Internet, including a new DTI web-site on Europe which will provide easy access for exporters to information about EU initiatives and help to those who come across unfair barriers in the Single Market l better targeting on markets which offer the best scope for exporters or where opportunities are not being exploited l relating UK sectoral strengths to particular markets and placing greater emphasis on opportunities for outward investors and service providers l improving its responsiveness to the customer including using ICT, more sophisticated performance measurement and customer surveys and restructuring export services to make them more coherent, consistent and customer focused. A review by the Cabinet Secretary will report shortly. from 1994 to 1997. Sage is the world’s leading supplier of PC accounting software and related products to small businesses and has achieved this prominence through being marketing-led, remaining dedicated to its core products and services and understanding the value of long term relationships with its customers. 20 Britain’s new generation of Reducing regulatory burdens 2.28 Excessive or poorly conceived regulation means higher costs, less choice and fewer jobs. Smaller businesses bear the brunt. They have fewer staff to cope and are less able to bear the costs. The Government is acting to reduce the burdens of unnecessary regulation. . It has set up the independent Better Regulation Task Force which is looking at the impact of regulation on productivity. The Government has accepted many of the Task Force’s recommendations on specific regulatory issues; for example, DTI will simplify the complex weights and measures legislation. . It has introduced stringent requirements before new regulations can be made. These include: full assessment of the risks, costs and benefits and environmental impact; consultation with all those who might be affected and consideration of alternative approaches. . It is considering extending the deregulation order- making power to remove even more out-of-date and unnecessary legislation. 2.29 The Government is committed to cutting bureaucracy to help business, including by much greater use of electronic government. . In April 1999, the Inland Revenue and the Contributions Agency will merge. Customer service will be improved, easing the compliance burden on business. . The Cabinet Office is upgrading the Direct Access Government web-site (www.open.gov.uk/gdirect) which provides a single point of access to regulatory guidance and forms. . The Government is proposing to develop a Single Business Register to simplify businesses’ interactions with government. casestudycasestudySimon Bell, New Covent Garden Soup Company Simon Bell is Managing Director of New Covent Garden Soup Company. It has created and established a market for fresh chilled soup, which is showing dramatic growth. The company’s range is the clear branded market leader in the UK, with 41 per cent of a market worth around £55 million, and a developing export market in Europe. Bushra Ahmed, Joe Bloggs Company Bushra Ahmed and her brother Shami set up the Joe Bloggs entrepreneurs Christopher Shokoya-Eleshin, Shokoya-Eleshin Construction Christopher Shokoya- Eleshin is chief executive of Shokoya- Eleshin Construction, a prominent ethnic minority business based in Liverpool. Christopher is an authority on urban regeneration and securing socioeconomic benefits to targeted communities. He stresses the participation of black, ethnic minority and disadvantaged groups throughout the construction process. The company aims to employ 75 per cent of its workers from the local area. Company 11 years ago, though Bushra had been involved in the clothing industry from an early age. At fifteen she was buying for all her father’s retail shops. The company has achieved great success through devising striking and innovative ways in which to promote its image, including endorsements by leading figures in music and sport. 21 casestudycasestudy Investing in R&D Renishaw is a company which puts investment in R&D at the heart of its strategy. Its products allow manufacturers to machine components accurately and perform measurements traceable to International Standards. The use of Renishaw’s products ensures that exacting specifications are met with cost- effective solutions. Renishaw exploits the latest technology in designing and Since the company’s formation, 25 years ago, there has been a high commitment to research and development which annually, together with engineering expenses, amounts to some 12 per cent of sales. Eight of its products have been selected as Millennium Products – a DTI funded programme, managed by the Design Council, to identify and celebrate world-class products and services created in Britain. Creating andexploitingknowledge 2.30 Business needs new and better-designed products and services, and improved processes to achieve sustained growth and greater profitability. This is as true for businesses in mature sectors as for high-technology start-ups. 2.31 Businesses obtain knowledge from many sources – their own research and development (R&D), watching competitors, purchasing new equipment, talking to customers and suppliers and training and bringing in new employees. It is for business to make the most of such sources of knowledge and actively seek new ideas and knowledge from around the world. Government has a role as a direct investor in the economy’s knowledge base, as well as in shaping an environment in which businesses can invest in R&D. How does the UK stand? 2.32 The UK has a world-class science, engineering and design base, which provides a pool of talented people to work in and with business. We win more major science prizes than any country apart from the US3. But university R&D is too rarely translated into UK commercial success. In addition, UK industry spend on R&D has declined relative to our major competitors (see Chart 2.1). Apart from a few sectors such as pharmaceuticals, UK businesses invest much less than their foreign competitors. 3 The Quality of the UK Science Base, Office of Science and Technology, DTI, March 1997 manufacturing its own products, developing much of this in-house. An example is the award-winning RAMTIC (Renishaw’s Automated Milling, Turning and Inspection Centre) which gives in excess of 130 productive hours weekly, with assured quality. 22 building UK capabilities Chart 2.1 Industry financed Business Enterprise R&D as percentage of GDP, G7 1981-96 per cent of GDP 2.5 2.0 1.5 Germany 1.0 Canada 0.5 0.0 Japan US France UK Italy 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 The challenge 2.33 The UK must sustain excellence in research, improve training in the science and engineering base and promote the exploitation of knowledge. The Government is strengthening its commitment to these goals; business needs to do the same. Knowledge creation 2.34 The Government, in partnership with the Wellcome Trust, will spend an extra £1.4 billion on research over the next three years to modernise the UK science and engineering base and equip it for the next century. This will: . modernise the neglected research infrastructure with facilities and advanced equipment that enable scientists to work more effectively . fund priority research, particularly in the biomolecular field, including how we can use the map of the human genome, and underpinning disciplines . support other vital areas of research such as environmental technologies which improve our quality of life and our competitive position. 2.35 Through this investment, the Government will maintain or improve the international ranking of the UK science and engineering base in terms of quality, relevance and cost-effectiveness. Exploiting knowledge 2.36 Scientific and technological knowledge needs to be combined with other forms of expertise, such as knowledge of markets and customer needs, to create innovative new products and services. We have to manage innovation more effectively and be more ambitious in exploiting our ideas to the full. The ability to market products and services successfully both at home and abroad is essential to ensure properly targeted innovation. It is only when ideas are commercialised that jobs and wealth are created. 23 casestudycasestudyDr Andrew Rickman formed Bookham Technology in 1989, with the aim of developing a technology that made the production of integrated optical circuits cost-effective. He studied for a PhD at the University of Surrey, where he successfully completed the basic research. Dr To move the technology forward from pilot production into full manufacturing required considerable funding. Dr Rickman made use of venture financing and received From research to commercial success Rickman then leased facilities from the Rutherford Appleton Laboratory in Didcot to work on the pilot production process. During this phase, the company received funding from various sources, including the SMART Programme, and benefited from the research and development of several British universities. 24 backing both from institutional funds and IT entrepreneurs. In 1997 Bookham Technology moved into its own offices and manufacturing facility in Oxfordshire and successfully launched its first product range aimed at the telecommunications market. Today the company also has offices in the US and Japan and employs over 150 people. 2.37 The Government is increasing the DTI’s Innovation Budget over three years by more than 20 per cent to some £220 million to fund many of the new and enlarged programmes set out in this White Paper and drive forward a fundamental change in the UK’s climate for innovation. RDAs will also prepare regional innovation strategies to provide an improved framework for innovation in their regions. 2.38 The Government is determined that the public sector Research Establishments make the most of the commercial potential of their research outputs. The Government will investigate existing practice and make recommendations in 1999. 2.39 Creative individuals also have a key role to play. In recognition of this, the National Endowment for Science, Technology and the Arts (NESTA) was set up earlier this year with an endowment fund of £200 million from the proceeds of the National Lottery to support talented individuals. NESTA’s trustees will soon be consulting on their policies and programmes, which should start next year. Transferring knowledge 2.40 The most dynamic economies have strong universities, which have creative partnerships with business. The Government wants more UK universities and businesses to learn from the experience of universities with strong track records of commercial exploitation. In the US there are 4,000 MIT-related companies, employing 1.1 million people with annual sales of US$232 billion4. 4 MIT: The Impact of Innovation, BankBoston Economics Department Special Report, March 1997. building UK capabilities 2.41 To help English universities work more effectively with business, DTI, DfEE and the Higher Education Funding Council for England will jointly create a new reach-out fund, rising to around £20 million per year. The fund will reward universities for strategies and activities which enhance interaction with business to promote technology and knowledge transfer, strengthen higher skills development and improve student employability. It will help recognise the importance of university interaction with business alongside teaching and research. Scottish Enterprise (SE) and the Scottish Higher Education Funding Council (SHEFC) will devote an extra £34 million over the next three years to these issues. This will be in addition to the existing SE Technology Ventures Strategy and SHEFC’s current Research Development Grant. Know-How Wales will be implemented in April 1999. It will help Welsh universities and colleges to transfer technology and knowledge to Welsh businesses. 2.42 These funds will be complemented by a £25 million Science Enterprise Challenge which will create up to eight enterprise centres at leading UK universities. These centres will equip scientists and engineers with entrepreneurship and business skills to develop the transfer and exploitation of knowledge and know-how. 2.43 The knowledge and expertise of the many researchers working on fixed-term contracts in UK universities represent a valuable resource to help businesses improve their record of innovation. The Research Careers Initiative, chaired by Sir Gareth Roberts of the University of Sheffield, is helping to forge more effective links between research staff and businesses. From collaboration to real results The INTErSECT Faraday Partnership was formed in 1997. This brings together a network of companies, research organisations and universities to pursue research focused on the development of sensor technology. The Partnership is led by the National Physical Laboratory and Sira Ltd and includes 13 leading UK companies in partnership with 12 universities. Eleven SMEs are collaborators in the four projects that are now underway and over 390 other SMEs are kept in regular contact with INTErSECT developments. The participants benefit from the network and joint research effort by identifying, developing and undertaking a common, themed research agenda. One of the SME partners is EM Technology. It develops and produces optically-based instrumentation for the monitoring and control of aircraft engines. The company previously had limited experience of collaboration in research projects. Professor Beverley Meggett, Managing Director of EM Technology says: “We are looking forward very much to working with City University and being involved with leading British companies such as British Steel, BNFL and Kidde International. It represents a major opportunity for a small company to contribute to the technology in optical instrumentation. Unlike our experience in a previous collaboration, I can see real results developing from our participation.” 25 casestudycasestudy Transferring technology and know-how Autosmart Ltd manufactures vehicle cleaning and maintenance products. The company is currently engaged in its second TCS Programme. Finance Director Sophie Atkinson says: “I recommend the use of TCS to any company in the UK that is forward-looking and wants to improve its competitive edge, not just domestically but internationally too. We estimate that our sales will increase by £1 million as a result of TCS and that we will have a sustainable competitive advantage.” 26 2.44 The Government also plans a national network of Faraday Partnerships building on the initial work of the Engineering and Physical Sciences Research Council. Each Partnership will bring together up to 40 innovating small businesses with scientists and engineers to share ideas and commercialise research. 2.45 DTI will also double its contribution to the highly- regarded TCS (Teaching Company Scheme) which, through collaborative partnerships, facilitates the transfer of technology and knowledge between the science and engineering base and businesses. The new money will enable around 200 extra projects per year to be backed. In addition, the DTI will provide £10 million to promote high quality research partnerships between universities and business, particularly small businesses, through a second round of Foresight LINK Awards. 2.46 The Government aims through these measures to increase by 50 per cent the number of businesses spun out each year from the public sector science and engineering base by 2002. Exploiting overseas research and development 2.47 UK science and business must have an international outlook. Ninety-five per cent of R&D is 5 done outside the UK. Business people and scientists must build alliances with the best on offer across the world. To stimulate this, the Government will back strong UK participation in the EU’s Framework programmes for research and ensure that UK businesses are able to exploit the research effectively. The Government will also make attracting high quality R&D projects to the UK a priority for its inward investment strategy. Science and technology counsellors in our Embassies also promote international technological collaboration. 5 The Quality of the UK Science Base, Office of Science and Technology, DTI, March 1997. Business research and development 2.48 To stimulate business research, some countries offer tax incentives. The Government will consider new tax incentives for investment in R&D by smaller businesses, including businesses not yet making a taxable profit. 2.49 The Government is considering extending the popular SMART scheme to help small businesses finance the development of their own technologies and tap into scientific resources. The extended scheme would help businesses to commission research, secure intellectual property rights and develop prototypes. Glaxo Wellcome’s labs in Stevenage – the company invested £1,148 million in world-class R&D in 1997. organisations are working in partnership in Foresight Vehicle, creating a critical mass of knowledge and expertise. casestudycasestudyForesight in action The Foresight Vehicle’s mission is to secure a globally competitive UK automotive industry that meets society’s aspirations for cleaner, smarter, more efficient transport in the next millennium. The programme is developing the technology which will enable the UK to design and manufacture the vehicles of the 21st century. Over 250 organisations including manufacturers, suppliers, universities and consumer The telematics group of the Foresight Vehicle is using the innovative application of IT and telecommunications technologies to develop vehicle-control systems which will support safer, more efficient driving. The programme will ensure that the cars of the future can process traffic information, read lane markings and detect objects on the roads, even other moving vehicles. It is already helping to develop the technologies underpinning future products to assist driving in a modern intelligent transport system including applications for collision avoidance and speech recognition. 27 Understanding the future better 2.50 The Foresight Programme builds bridges between business, the science and engineering base and Government. It aims to identify new opportunities in markets and science and technology over the next 20 years, and the action the UK has to take to grasp these opportunities. 2.51 The Government will develop the Foresight Programme to make it more effective. The next round starting in April 1999 will focus on key issues for all businesses. . It will have underpinning themes of sustainable development and education, skills and training. New cross-sectoral panels will address issues such as the ageing of the population, and the future of manufacturing. . It will create a new national knowledge pool – a virtual library of strategic visions, opinions and information about the future to encourage knowledge-sharing and networking. . It will seek to inspire interest among young people in the challenges of the future and the role of science and technology in shaping it. People and skills 2.52 Successful modern economies are built on the abilities of their people. People are at the heart of the knowledge driven economy. Their knowledge and skills are critical to the success of British business. People are the ultimate source of new ideas. In a fast moving world economy, skills must be continually upgraded or our competitiveness will decline. How does the UK stand? 2.53 The UK has a high proportion of graduates in the workforce who have received a high quality education. Many OECD countries, however, have even higher proportions of people in higher education than the UK. Those with fewer people in higher education, such as Germany and Sweden, have substantial numbers of young people in highly structured vocational education.The UK has too many people with no or low level qualifications and too few people with intermediate level qualifications (see Chart 2.2). Also, despite an increase in participation in education and training, the UK still has further to go to match the best of its international competitors. 2.54 This lack of skills inhibits innovation and hinders investment. The problem is most acute among smaller businesses which find it difficult to attract good graduates or afford training. But in businesses of all sizes, managers often underestimate the value of skills, including management skills. Chart 2.2 Proportion of total population qualified to a given level in 1994 50 Level 2 but not level 3 or above Level 3 but not level 4 or above 40 Level 4 and above 30 20 10 0 UK Germany France US Singapore Source: Skills Audit building UK capabilities 2.55 In a knowledge driven economy we cannot squander 30 per cent of the potential workforce through poor education and social exclusion6. The Government is committed to fundamental reform of education at every level including through improved teacher training and performance. 2.56 Better education will take a generation to raise the quality of the workforce as a whole. It is essential that those already in work also develop their skills throughout their working lives and that businesses offer learning opportunities to all their workforce, not just the better qualified. The Government has set out its vision for lifelong learning in its recent Green Papers7 and published new National Learning Targets for England8 to be achieved by 2002, which include: . 50 per cent of 16 year-olds should have at least five GCSEs (grades A-C) . 60 per cent of 21 year-olds should have a level 3 qualification (2 A levels or equivalent) . 50 per cent of economically active adults should have a level 3 qualification . 28 per cent of economically active adults should have a level 4 qualification. It will publish a new learning participation target in the New Year. Scottish targets are currently being reviewed and there will be a public consultation in the New Year. Separate targets will be published for Wales following the consultation on the Education Training Action Group’s report. 6 Widening Participation in Further Education, Further Education Funding Council, 1997. 7 The Learning Age: a renaissance for a new Britain, DfEE, 1998. Opportunity Scotland, The Scottish Office, 1998. Learning is for Everyone, The Welsh Office, 1998. 8 National Learning Targets for England for 2002, DfEE, 1998. 2.57 To achieve these targets, the Government, businesses and individuals all need to take on the challenge of upgrading skills. This section highlights how the Government is helping individuals at work take up this challenge; how it is working with business to create a learning culture in the workplace; and what action it is taking to meet their demand for skills. It also sets out a new joint approach by DTI and DfEE to a number of key issues in developing the skills of the workforce. Creating a learning culture 2.58 Individual Learning Accounts will encourage people to invest in their development through learning. The first million accounts will each be launched with a payment of £150 from Training and Enterprise Councils (TECs), provided it is matched by £25 from the individual account holders. Among the first to benefit from these accounts will be those working in small businesses. DfEE is discussing how these accounts will operate with financial institutions and will prepare proposals for a national framework early in 1999 to encourage as many people as possible to use the accounts. 2.59 The Government wants business to encourage their employees to open accounts and to invest jointly in them. This investment should not replace the support businesses already give their employees. The Government believes that this promotes important benefits such as improved motivation, better performance, and greater creativity in the workforce. 2.60 The University for Industry, to be launched in 2000, will seek to improve the competitiveness of business. It will promote learning of all kinds from basic literacy and numeracy to specialised technological skills and business management. Businesses will be among its major customers and managers of smaller businesses will be a priority. 29 casestudycasestudy Learning in the supply chain British Aerospace are keen to harness the potential of New Deal recruits within their business units. Engineering and business administration were identified as areas where young people on New Deal could be offered opportunities, building on existing training programmes and areas of expertise. One of their first recruits, Samantha Jane Ramsay, is already close to achieving her NVQ 3 in Business Administration. British Aerospace are now seeking to involve their suppliers in New Deal. They have set up a network of 90 businesses, many of which are small. A series of supplier conferences around the country explains how British Aerospace’s training and development expertise might be used to help the suppliers’ New Deal employees. 2.61 The best businesses are already investing to help employees learn throughout their careers. Businesses learn best from other businesses, but the Government can help. . It is encouraging large businesses to work with suppliers and customers to improve the capabilities of their workforces. The Government is supporting a business group which is developing a best practice model for such initiatives. . It is giving businesses £750 towards the cost of providing one day a week’s training towards a recognised qualification for every New Deal participant in the employment option. . It will help benchmark investment in training in sectors. The first People Skills Scoreboard was published earlier this year by the engineering industry to provide a better understanding of training investment in the industry. DTI and DfEE are working with other sectoral organisations representing, for example, computer software, clothing and textiles, steel, printing, and estate agencies, to spread this approach. 2.62 The Government would like to see better guidance for companies of all sizes on assessing the strengths and weaknesses of their intangible assets, including the skills of their people (see paragraph 4.31), leading to guidance on disclosure of these assets in the Operating and Financial Review. DTI has asked the Accountancy Standards Board, in consultation with others, to take a fresh look at this issue. 30 2.63 Business has made it clear that more needs to be done to promote the benefits of skills development and good management to managers and to individuals. To meet this demand, DTI will shortly publish Creating a Great Place to Work. This will set out the benefits to businesses and individuals of modern approaches in these areas, such as Investors in People. It will also help business find its way through the maze of initiatives and advice on skills development and good management. Meeting businesses’ needs.... 2.64 The Government must ensure that its resources are effectively and flexibly targeted to meet the needs of business. For example, the expansion of further education by 700,000 students will help address the deficit of intermediate qualifications in the UK workforce – a key business concern. 2.65 The Government wants to help businesses get the skills they want and to get the best out of education and training providers. The Government supports a wide variety of skills development schemes, which do not work together as effectively as intended. These schemes will be subject to a major cross- departmental review for the National Skills Taskforce, set up by David Blunkett to advise on the main skills gaps and shortages in England, and how they might be addressed. casestudycasestudyLearning in the workplace Many businesses have created corporate universities and are using distance learning programmes. Anglian Water developed their corporate university – the University of Water – to capture, disseminate and transfer knowledge within the Anglian group of companies. Anglian recognise that the knowledge, skills and commitment of their employees are crucial to their future success. The University of Water does not have a specific campus or one geographical location: it exists wherever Anglian Water do their business. Employees currently access the learning opportunities through Anglian’s intranet. Anglian plan to develop a comprehensive web- site that will enable all employees to enter a virtual campus. The University of Water offers a broad spectrum of learning activities, from basic skills to Masters’ programmes. Many of these programmes are delivered in partnership with conventional universities in the UK and abroad. 31 casestudycasestudy Learning for management Launched in 1996, the Bolton Business School MBA programme for senior managers of small businesses uses action learning sets, individual tutor support and management learning contracts. This makes the MBA programme flexible and relevant. Sue Yates joined the Bolton MBA programme in Barbara Roche MP, Small Firms Minister with staff and students from Bolton Business School. With the help of the programme, she improved the performance of the business in service delivery, planning and feedback systems 2.66 The Investors in People Standard provides business with a framework for focusing training and development on business needs. Businesses recognised as Investors in People have been found to outperform their non-recognised competitors in the same sector on profitability and productivity9. The Standard has proved extremely successful with medium and large organisations and over 11,000 are now recognised as Investors in People. The Investors in People Standard is currently being reviewed to make it more accessible to small businesses. The Government’s new National Learning Target is that 10,000 small organisations in England should achieve the standard by 2002. 2.67 Management skills have been identified as a key constraint on productivity. The Government has supported the establishment of the Management and Enterprise National Training Organisation (METO) to address the training and development needs of managers. It also supports the plan to create a Management and Enterprise Council, which is acceptable to all parties, to work with the Government to produce a management development strategy for the UK. 9 Investors in People, Winter 1995-96, Evaluation Series No.1, The Hambledon Group. September 1996. She founded CMC Marketing and Advertising over ten years ago and she wanted to develop her skills as Managing Director and to grow the business. Other MBAs she had considered were too theoretical or geared to larger businesses. 32 and grew the customer base. This year CMC successfully merged with the Precise Communications Group in Manchester, where Sue is now Head of Marketing. building UK capabilities ....at local, regional and sectoral level 2.68 The TEC National Council is working with DTI and DfEE to draw up a framework for integrated workforce development plans. This will focus TECs, Chambers of Commerce, Training and Enterprise (CCTEs) and their local partners on meeting the specific skills needs of their local businesses. The new strategic guidance for TECs will set clear priorities for addressing skills shortages and ensure that businesses have the support they need. 2.69 RDAs have been given a new £39 million fund to identify the key skills gaps affecting regional economic development. They will set out a plan for addressing these covering all the main sectors of education and training. 2.70 The Government will contribute to an expansion of the highly successful Modern Apprenticeships initiative. This will meet the growing demand for more sector-specific skills from both businesses and young people. Modern Apprenticeships provides industry- designed training to level three and above, together with key skills. National Training Organisations also have an important role to play in identifying skills needs within their sectors and in involving businesses in partnerships to deliver action plans. A new joint approach 2.71 Many of these initiatives reflect the close relations between DTI and DfEE in promoting workforce development. This partnership marks a new approach by the Government, bringing together business and training providers to create a better understanding of what skills are needed for the future. The pervasivepower of digitaltechnologies “Our nation has been experiencing a higher growth rate of productivity – output per hour worked – in recent years. The dramatic improvements in computing power and communication and information technology appear to have been a major force behind this beneficial trend.” Alan Greenspan, Chairman of the US Federal Reserve Board. 2.72 Digital technology is the nerve system of the knowledge driven economy. Huge advances have been made in our ability to collect, store, retrieve, analyse and communicate information. This revolution reaches into our homes as well as into our classrooms and workplaces. Semi-conductors are embedding intelligence in everyday products as well as in increasingly powerful computers. Silicon chips are at work in our telephones, cars and washing machines. Our ability to share information has expanded exponentially, through mobile communications, satellites and the Internet. 33 casestudycasestudy Selling ice-cream on the World Wide Web Arden Supplies and its sister company Exelquip – which together offer all the equipment and ingredients necessary to create an entire ice cream parlour – are now selling products as far afield as New Zealand, India and Tanzania as a result of going on line with a new web-site. What was previously a highly seasonal business, owned and operated by father-son partnership Phil and Brian Tomkins, has been transformed into a 24 hour a day, 365 days a year global business. 34 2.73 Information is cheap and plentiful. It is not enough, however, for business simply to collect information. It has to use it effectively to raise productivity, develop new products and processes and serve customers more intelligently. How does the UK stand? 2.74 To accompany this White Paper, the Government is publishing a detailed study benchmarking the UK’s performance in the digital economy. The UK is well positioned for the information age. It has: . a world-class IT and communications infrastructure . thriving digital industries . relatively low telecommunications prices, although the UK does less well on Internet access charges and PC prices. 2.75 The UK is on a par with the US and Japan in business ownership of PCs with modems, but we lag behind in their use for networking, as Chart 2.3 shows. Only 12 per cent of UK SMEs make effective use of networking technology compared with nearly 20 per cent in the US10. 10 International Benchmarking Study 1998, Spectrum Strategic Consultants, and DTI analysis. Effective use is defined for these purposes as regular use of external networking applications such as the Internet, external e-mail, EDI. Figures exclude sole traders and partnerships without a business telephone line, which were not covered in the survey. building UK capabilities Chart 2.3 Business uptake of ICTs per cent 80 70 60 50 40 30 20 10 0 UK Germany France USA Japan Business with PC Business with Business with Business with web-site plus modem internet access a web-site for on-line selling Source: Spectrum Strategy Consultants 1998. Figures indicate businesses representing per cent of employees. 2.76 Two principal factors have held back uptake of digital technologies in the UK. . A lack of understanding. Around 30 per cent of smaller businesses are “indifferent or uncertain” about digital technologies compared to just 16 per cent of larger businesses11. IT is generally not a strategic function represented at board level: eight per cent of UK businesses have an IT Director, compared with 67 per cent in the US12 . . Insufficient skills. A survey of 75 multinationals operating in the UK, US, France, Germany, Japan and Singapore found that businesses rated the UK well on the IT skills of people leaving the education system, but rated the IT skills of the workforce as the weakest13. Skills shortages are endemic in IT professions. The challenge 2.77 The Government’s goal is that by 2002 the UK will have the best environment in the world for electronic trading. This will require a radical overhaul of the regulatory framework within which markets operate – as described in Chapter 4. But the UK also needs: . more businesses which are wired up to the digital marketplace . every school leaver to have the skills needed to use digital technologies . greater use of digital technologies within Government (see Chapter 5). 11 International Benchmarking Study 1998, Spectrum Strategic Consultants. 12 Business Attitudes to Information Technology, The Bathwick Group, 1998. 13 The Skills Audit, DfEE and Cabinet Office, 1996. 35 Action by the Government 2.78 To equip the UK for the digital economy we need co-ordinated action in Government and international agreement. The Prime Minister will appoint a Special Representative for the Digital Economy (the e-Envoy) for the UK to achieve this. He or she will speak for the UK in the international arena, promote the UK as a global hub for electronic commerce and drive forward the Government’s strategy for electronic commerce. IT for people 2.79 To make our living in the knowledge driven economy, all of us need to feel confident using digital technology. The Government’s programme of action starts with education. It includes: . effective delivery of digital technologies within the National Curriculum – by 2002, most school leavers will be able to use digital technologies . creating the National Grid for Learning – all maintained schools should be connected to a state of the art computer network by 2002. Skills in the workforce 2.80 The Government has asked the Information Age Partnership and the National Skills Taskforce to produce a national strategy to meet the skills needs of the information and communication technologies (ICT) sector. The Government will publish proposals for action next Easter. Capable communities 2.81 To prevent the emergence of a class of “information-have-nots”, the Government is working with Business in the Community to extend “IT for All” to the most socially disadvantaged. In addition, all public libraries will be linked electronically by 2002 to provide community access to digital technologies. Intelligent business 2.82 The Government is setting a new goal, to triple the number of UK small businesses which are wired up to the digital marketplace, from around 350,000 at the end of 1997 to 1 million by 2002. 2.83 Significant action is already in hand. . The Government’s Information Society Initiative (ISI) Programme for Business has worked with Business Links and their equivalents in Scotland, Wales and Northern Ireland to develop a network of 80 Local Support Centres, giving smaller businesses access to independent advice on the use of digital technologies. . TradeUK offers every small business in the UK which exports or is thinking of doing so an electronic shop window on the World Wide Web free of charge (see box). . The Government has set up Action 2000, with a budget of over £20 million to advise businesses on the Millennium Bug, which will cause many IT and electronically-controlled systems to malfunction as the year 2000 approaches unless action is taken. It is also providing £26 million to train “bug-busters” able to help small businesses identify and fix their Millennium Bug problems. In Wales, Business Connect is supporting activities to help smaller businesses including skills training, consultancy support and Millennium Advisors. . The University for Industry will target ICT skills in business as a key priority. building UK capabilities www.tradeuk.com TradeUK is a public/private initiative between DTI, the Dialog Corporation plc and ICL which offers: l a free entry on the TradeUK National Exporters Database l the TradeUK Export Sales Leads Service which alerts businesses by e-mail free of charge to export leads identified by commercial specialists in British Embassies around the world l an electronic commerce option, giving access to the software facilities needed for electronic commerce for as little as £300 per year. Launched in July 1998 with about 52,000 members, TradeUK’s target is to have at least 100,000 members by June 1999. 2.84 In addition, the Government plans to invest some £20 million extra over three years. l It will complete national coverage of ISI Local Support Centres by Autumn 1999, accompanied by an enhanced promotional campaign. . It will back a private-sector initiative to ensure that all advisors to small businesses, in the public and private sectors, deliver consistent and integrated advice on IT and business best practice. The Advisor Skills Initiative, being piloted by Microsoft, Intel, Compaq and BT in partnership with DTI, will create a network of quality-accredited SME advisors. . It will launch a new fund for partnership action to increase use of ICTs at local level and through supply chains. . It will develop, in partnership with the private sector, an "E-Commerce Resource Centre” on the Internet, available through the Enterprise Zone found at www.enterprisezone.org.uk. This will provide businesses with the information, tools and advice needed to exploit the opportunities of electronic commerce. . It will launch a national award to recognise excellence in digital business. 2.85 The Government also plans to build on the UK’s traditional strengths in broadcasting and publishing, which have potential to drive UK success in the digital age. The BBC’s GCSE Revision Notes web-site, for example, was accessed by 40,000 students daily this summer, giving many young people their first experience of the Internet. The Government will: . publish in January 1999 the results from a major study on the barriers and drivers faced by the UK digital content sector, and work with the sector during 1999 to agree an action plan for growth . work with UK businesses and other organisations to ensure they secure well over £300 million from a £2.5 billion European programme to stimulate new IT applications and content which we have been working closely with the European Commission to develop. 37