Lord Sainsbury of Turville highlights the importance of investing in the right industries today to create innovation and future prosperity. He discusses the need to support the creation of a critical mass of innovative businesses.
Full speech transcript
Gordon, can I thank you first of all for those kind remarks and particularly for your promotion of my books. The only claim I can really make for this book is if you go on Amazon you will see that it outsells all other books called Windows of Opportunity, so there are an enormous number and it does very well on that. I’ve been asked by Gordon to say something this morning about how innovation and clusters contribute to economic growth and how they can be supported.
If we want to raise the UK’s rate of economic growth we need to ask ourselves first why our economy has performed so badly in the last 15 years. This is not because, as many conservatives believe, our industrialists will not work hard if the top rate of tax is not lowered, or that our workforce will not work hard if they’re not constantly at risk of losing their jobs, nor is it because our markets have become less efficient in recent years as many economists believe. If you look at the world economy all G7 countries have experienced lower rates of economic growth since around 1990 when China started becoming a market economy and India started liberalising its economy, and this is because since that time all G7 countries have experienced a vast increase in competition from newly developing countries such as China, India, Taiwan and South Korea.
These countries have learned from us how to produce the goods and services we’ve been producing and they have the advantage of lower wages. If you doubt this point look around your house, your kitchen, your living area, your study and your garage and ask yourself where your television, your computer, your fridge or your car come from. If I look around my study at home I see I have an Apple computer, I have an app which of course is made largely in China as indeed the Apple iPhone, a Casio telephone, a Canon printer from Japan and even the jar of coloured paper clips comes from China.
Almost all my clothes seem to come from Bangladesh except those odd moments when I’m wearing a tie in the study which comes from France, Italy or the UK. I’m actually wearing a UK tie for once just to show solidarity with British industry. But it does show you just look at what commodities you buy and you will see how much you’re buying from foreign countries and that is why we have a slow rate of economic growth. So how do we compete in today’s global economy? It makes no sense to try and compete by cutting the prices of our products and the wages of our workers.
That simply reduces our level of GDP and the standard of living of our workers. What we need to do is create new, knowledge intensive products and services by building on those areas where we already have a competitive advantage and by using our superior scientific and engineering knowledge and skills. The advanced countries of the world are today involved in what I’ve called a race to the top, a race for the industrial opportunities of the future.
These are new opportunities which are created by technology, R&D, innovation and workforce skills and they are to be found in sectors such as advanced computing, advanced materials and manufacturing, advanced communications, technologies, artificial intelligence, biotechnology, plant genetics and quantum computing. There are economists who will argue that it is investment that is the engine of economic growth, but we have to realise today that capital flows easily around the world and it flows as it’s always done to where the best investment opportunities are created by innovation. You can sit in London today and you can invest in Silicon Valley, indeed you can invest in practically any country.
Until recently you could even invest in China, Chinese venture capital, because that is what modern communications enables you to do. That’s why investment is not the real driver of the economy, it’s innovation. There are a number of ways that government can support innovation and one of them is by supporting new innovative high-tech clusters.
A basic question therefore is what are clusters and how can the government support them? Michael Porter, the Harvard Business School academic, who actually was I think the first person who really described clusters, described them as geographic concentrations of interconnected companies, specialised suppliers, service providers, firms in related industries and associated institutions, for example universities, standard agencies, trade associations, in particular fields that compete but also cooperate. They are important because they enable firms in the cluster to gain competitive advantage.
Why do clusters exist and why are they so important to a country’s innovative performance? If we analyse them in depth, the answer to these two questions can be found in the linkages, the complementarities and the spillovers of technology, skills, information, marketing and customer needs that are the basis of competitive advantage and are essential for innovation and the growth of firm productivity.
It was these features of clusters that Alfred Marshall, probably the last economist known to have visited a factory, recognised when he wrote about industrial districts in his Principles of Economics in 1920, where an industry has chosen a locality for itself, it’s likely to stay there long, so great are the advantages which people following the same skills get from their neighbourhood, near to one another. The mysteries of the trade become no mysteries but as itwere in the air, and children learn many of them unconsciously. Good work is rightly appreciated, inventions and improvements in machinery, in processes and in the general organisation of business have their merits promptly discussed.
If one man starts a new idea it is taken up by others and combined with suggestions of their own and thus it becomes the source of further new ideas. As this quotation suggests, clusters are not a new phenomenon and the industrial revolution in the UK was based on a series of such clusters. The cotton industry in Manchester, the steel industry in Sheffield, the ceramics industry in Stoke-on-Trent and of course the world-beating shipbuilding industry here in Glasgow.
It is however only in recent times that the success of high-tech clusters has attracted the attention of policy makers and raised the question of whether governments can raise the growth in their countries by supporting the growth of high-tech clusters. I think if it’s a question of setting up a high-tech cluster from scratch I think the answer is clearly that governments can’t do so. There isn’t a magic recipe which says take one great university, add in large amounts of venture capital, sprinkle with sunshine and an entrepreneurial culture and a high-tech cluster will spring up.
If we look at successful clusters in the making, whether it’s in Silicon Valley, in other parts of the United States or in other parts of the world, we find that a cluster emerges in a specific area due to an entrepreneur or group of entrepreneurs coming together with a potential new source of competitive advantage. If you take Dundee for example, I think the story there is that Dundee as you know was famous for jam, journalism and I can remember Jute was the third and in fact the video games cluster started because the cartoonists who worked for the various newspapers in Dundee got together with the high-tech people in the university and that was the start of this extraordinary cluster of video game people from Dundee. I remember when I was a minister being in China and I had to visit a British delegation of people there on a trade mission and I asked them you know what are you here, what are you selling, thinking and they said we’re from Scotland so I thought you must be selling whisky and they said no no it’s video games and I realised then that Scotland has this extraordinary cluster of video games people which is world class.
This explanation of clusters, i.e. that it’s people, entrepreneurs getting together with a technology is valid for Silicon Valley in the 1950s and the 1960s but also for other more recent well-researched clusters in the United States such as those in North Carolina, San Diego and Seattle as well as those in places outside the US such as Taiwan, Israel and Cambridge in England. In the Silicon Valleys of the 1960s in the other United States innovation clusters and indeed also in Cambridge, England the technology was the integrated circuit industry. In Israel it was the internet and network security markets while in Scandinavia and Taiwan it was hardware and equipment opportunities in new kinds of devices such as cell phones and personal digital assistants.
This kind of entrepreneurial matchmaking is not something that government should try to do, it’s not something that remotely government officials can begin to do, it’s something that has to be left to entrepreneurs but where such an innovative cluster has been formed governments I believe can play a role in supporting them. Turning now to Scotland there are a number of potential high-valued clusters which government support which with government support could flourish. They are precision medicine and the space tech clusters here in Glasgow, as I’ve said there’s the video games in Dundee and financial services in Edinburgh, also the whisky industry in the tourism and clusters while in Aberdeen that there is the whole energy services for an energy industry which supports North Sea Oil and I suspect there are other potential clusters if one looks carefully for them.
A major challenge which government faces therefore if it wants to increase Scotland’s rate of growth is a way to find and support such clusters. All the evidence from other countries suggests that the only way to effectively support clusters is to do so at a city region level. I appreciate in Scotland unlike in England metro mayors have not yet been introduced but if you want to support high-tech clusters this is something I think you should seriously consider with Greater Glasgow being given powers similar to those devolved to Greater Manchester and the West Midlands.
If you do introduce them there are three policy changes which the government can make which will materially help the development of high-tech clusters. They are firstly promoting local economic growth by joining up transport and spatial planning at a city level. Joining up transport and spatial planning at city level can make commuting cheaper and quicker which in turn generates two major benefits.
Firstly it widens labour markets and secondly an efficient transport system enables employment and businesses to cluster densely where they have the best access to knowledge such as in city centres. I have to say when I make this remark I also think yeah I’d have great benefits for the people who use the transport and it really is one of the most idiotic things that we do in England and Scotland which is not to make certain that the same people do spatial planning and transport planning because if there’s anything which is sensible it is those two things are done at the same level by the same people. To achieve such an improvement in city transport the government must move statutory platform planning authority up from local authorities to metro mayors and some transport planning responsibilities down from central government to metro mayors.
Secondly I’d like to see the job of coordinating courses run by FE colleges with the labour market needs of a city given to metro mayors. The budget for FE colleges should therefore be devolved to metro mayors rather than being allocated by the central government which cannot possibly have any clear idea of what are the specific needs of say the manufacturing sector in the Glasgow region. I should say in this context that I think the Scottish government would do well also to look at the new system, a national system of T-level qualification which has now been induced in England.
This is a single national system of technical qualifications which is quality controlled by government and where the knowledge and skills which must be acquired are set by industry. Again you would think a rather basic sensible thing to do. This is replacing a system where there were thousands of qualifications of varying quality which did not necessarily meet the needs of industry.
Also students didn’t know which qualifications to take and businessmen didn’t know what skills a young person had acquired by getting a specific qualification. If one wants technical qualifications to have the same reputation as academic qualifications this is the route one has to take. I should say that I played a part in devolving, in producing this new system and it was based very much on doing something which I don’t think the British government does nearly enough which is to look around the world, see who has the best system in this case, well who has the best technical education system and then see what they’re doing which we are not doing.
When we did that in doing this report what we discovered is that all the best technical education systems in the world have a national system of qualifications and so that’s what we’ve introduced and which has now been rolled out much too slowly by the government. Thirdly we need to find a way to strengthen research done in universities which is an important input to a specific cluster. The last Conservative government invented such a scheme called strength in places fund which did just that and I which I think did help the precision medicine initiative here in Glasgow early on but for reasons which I don’t understand the last Conservative government stopped using it.
This was clearly a serious mistake and I hope the present government will bring it back in some form. So finally can I say a growth strategy for a country needs to have three pillars. Firstly industrial sector strategies, secondly strategies to support industries with the scientific and technological knowledge, the skills and the infrastructure that they need and thirdly support for clusters.
Only if industry in Scotland is given support in all these three areas does it have a chance of growing rapidly in the world race to the top. Thank you very much.
