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Move Aside Plan A and Plan B: it's Time for Plan I

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Nesta's new report sets out a plan for how innovation can deliver growth. Four whole years after the Lehman Brothers bankruptcy kicked off a global financial crisis, we are still agonising over how to jolt the economy back to life. The debate between Plan A and Plan B, austerity and stimulus, rages as fiercely as it did in 2008.

Today, 10 September, Nesta is publishing a report which argues that the debate over growth is missing a vital point. Fixing the economy in the short term is only half the battle. If we want the UK to return to growth, we need to look at what has gone wrong with the main driver of growth: our capacity to innovate.

Plan I argues that for the economy to grow in the future, the UK must create the right environment for businesses to invest in innovation, and it sets out a detailed plan for what government's role in this is, and what it should do.

The report has three main parts: a diagnosis of what's wrong, an analysis of what governments can (and can't) do when it comes to innovation, and a set of proposals for policies to get the UK innovating again.

The diagnosis: Nesta has been researching investment in innovation for several years, working with Imperial College London, the Office for National Statistics, the OECD and other experts. It's become clear that since 2008, UK businesses are investing far less in innovation than they used to. That means less R&D, less investment in designing new products, less training of staff to deliver new services: less of the investment that our businesses need to put them ahead of the competition both at home and abroad. The shortfall in 2011 was as much as £24 billion, four or five times what the UK government spends on scientific and technological research in a year.

But there's also a more worrying trend. Things were changing even before the crash of 2008. Investment in innovation by UK businesses started slowing in 2000, and decreased slowly but steadily as a percentage of output all through the last decade. Fixed asset investment was increasingly dominated by bricks and mortar, with less and less being invested in high tech kit.

We know some of the reasons for this: talent and capital were drawn into sector like financial services and real estate in the last decade; our financial system has been overly short-termist, with banks less willing to lend to high-growth companies and market analysts obsessed with the next quarter's figures. And despite two decades of liberalisation, there were still barriers to entrepreneurship in the economy, from entrenched businesses in some industries making it hard for new businesses to thrive, to restrictions on planning and immigration. But whatever the root causes, it seems the UK has a problem, and one that goes deeper than the 2008 crash.

What can government do about it? To some, hearing the words government and innovation in the same sentence triggers thoughts of the worst excesses of post-war British industrial policy: Concorde, the engineering marvel that was a commercial lame duck; the debacle of the Advance Gas-Cooled Reactor; the failed attempts to dictate where businesses located or what sectors they operated in. In their haste to deny that they are 'picking winners', politicians have often half-heartedly pursued industrial policy while giving businesses little certainty or clarity on what they are doing.

All of this would seem very strange in the world's most innovative countries. In places like Korea, Germany, Finland, Israel, and Singapore, it is widely understood that the government has a role to play in creating the conditions for innovation to flourish. Government can't create innovation on its own. But it can create the conditions for entrepreneurs and large businesses to succeed, which includes breaking down barriers to innovation, but also ensuring, for example, that the right financial architecture exists so growing businesses can raise money to expand. Government in these countries also invest in risks that business will not - in particular basic research and technological development. What's more, all these countries have been investing more in innovation since 2008, as an integral part of their plans for recovery.

The United States is perhaps the ultimate example. Although you wouldn't realise from the rhetoric at the recent Republican National Convention, the US taxpayer spends billions on both basic and applied research through schemes like the SBIR and STTR, backs banks and venture capitalists to finance businesses through the SBA and SBICs, and funds innovative research organisations like DARPA, which laid the groundwork for technologies from the Internet to the self-driving car.

It would be crazy and counterproductive for government to try to control the innovation system, but there are things it can do - and indeed, if we want continued economic growth, that it must do.

This leads us to Plan I itself. Nesta's 12 point innovation-led economic plan contains recommendations in three main areas: how to increase investment in innovation, to redress the £24 billion shortfall; how to make the innovation system work better, so businesses can more easily access research and turn ideas into commercial success; and how to improve the underlying culture of innovation.
All told, Nesta's plan would:
• Get more private finance flowing into innovation for both small and large businesses, through a combination of new incentives for venture capital investors, credit easing to get banks lending, and a new publicly-backed business bank.
• Quadruple the government's discretionary spending on innovation at no additional cost to the taxpayer, in particular by channelling 1% of government procurement to innovative businesses through proven, effective schemes and by using the proceeds of the upcoming 4G spectrum auction to invest in science and technology, and by building on some of the most exciting work being done to teach schoolchildren about science and technology.
• Break down the barriers to innovation that businesses complain most bitterly about, from immigration restrictions that stop businesses hiring highly skilled foreign workers, to planning and regulation rules that make it hard for businesses in innovative clusters to expand or for upstart businesses to break into established markets.
I hope this inspires you to read our executive summary and the full report itself. We believe Plan I offers a way to put the UK's economy back on a path to recovery. Please us know what you think.

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