Innovation and Competitiveness: the Role of Trade and Industry Ministries

Date December 6, 2004
Speaker Robin YOUNG(Permanent Secretary, Department of Trade and Industry, British Government)
Moderator NEZU Risaburo(Director, RIETI / Senior Managing Director, Fujitsu Research Institute)


The subject of today's discussion is how the Department of Trade and Industry, which is the equivalent of METI, is working to try to make sure that Great Britain remains competitive. The more I learn about the role of METI, the more I feel our agendas are very, very close.

Our key role in the DTI should be to help business perform better in a free and flexible business environment. We have to compete by offering better, more innovative, more forward-looking, more exciting and adventurous products.

The old DTI supported the old British industry. It supported coal mining, shipbuilding, and various parts of ancient manufacturing, such as steelmaking. These are not businesses now in which the UK today can make its living. So we have to transform the department to reflect this new picture. We made our new ambition "prosperity for all," and we will work to achieve this by helping people and companies become more productive by promoting enterprise innovation and creativity.

The purpose of the department is to help British business become more productive. We, the government, will invest heavily in science and technology, but also, in my department, we have a responsibility for employee protection, worker protection, and consumer protection. Perhaps my impression is that we have much louder and livelier consumer bodies in Great Britain than, as I understand it, you may have here? We argue that a loud voice for consumers is as important as an effective legal and regulatory system. We need loud consumers to make business more productive and more competitive, just as we need strong competition.

Within the EU, as colleagues here well know, we in the United Kingdom are fighting for a much more open market than some of our other member-state colleagues would want. Similarly, in the WTO, we will usually be supporting more and quicker movement to open markets.

It was very interesting this morning at the JST (Japan Science and Technology Agency) to see how similar the challenges for our two countries are. We in Britain are doing very well. But, although we have invested a huge amount in technology in our universities, we still need to do better, as I believe you in Japan need to do as well, to get greater exploitation of the technological excellence in our universities to transfer across to our businesses. We are very strong in Great Britain in the areas of science and technology, but there is no evidence that we are equally strong in transferring that knowledge to our business sector.

I dared to say the same when I was at JST this morning, that you are better at promoting excellence in universities than you are yet at transferring it to your businesses. All of us have got to get a lot better in making our universities more business-friendly, and also in making our businesses more willing to learn from universities. We used to say our universities were too academic and out of touch with business. Now, however, we say our businesses are too slow to get to know the innovators or universities and to get together early enough to exploit the new inventions. I expect the same applies here.

We also think that we want our DTI to be different. When I got there three years ago you saw the Ministry of Energy, the Ministry for Consumers, and the Ministry for Automotives. These days most things the government deals with in business are not restricted to a single sector. We need to get much better in making ourselves more flexible, more horizontally communicating, and less in old columns. UK companies need to upgrade their productivity by competing on more unique and more innovative products and services.

Now if I say this to British business, they agree. And if I say, "Where is the evidence that you are doing anything about this?" they have to try quite hard. I am seeing representatives of Japanese business tomorrow, and I am going to ask them the same question: If you agree that innovation is the key to success in this country, where is the evidence throughout the economy, not just in the leading five companies, which even I can name - where is the evidence throughout the economy that Japanese business realizes that its only future is in innovation and enterprise and unique new products?

There is something rather peculiar about a government department saying that it should help the private sector to be more innovative. In most countries, business thinks it knows more about new ways of working than the government departments.

We are focusing our efforts in the new DTI not only on strengthening science in universities, but on also boosting the universities' capacity to join up with businesses and innovate. We also are trying to deregulate. Our businesses say the United Kingdom is overregulated. We have a big deregulation program where we are trying to reduce the number of regulations and red tape. We are trying to, in our legal regulation, drive out any opportunities for monopoly or cartels.

The very small percentage you have of inward investment does mean that you do not have in front of you the lessons of innovation that come from competing countries investing in your country. A major driver of innovation in the United Kingdom has been watching the performance of foreign-owned companies coming into Britain and making us do things better. By having such a small amount of inward investment here, you may be missing out on opportunities. I would argue that the three most important drivers of improvement have been our universities, our foreign inward investment, and our system of regulation, which forces competition through the system, which has to be good for making businesses more innovative. I am not sure I see those three things forcing change as much in this country.

Innovation - the successful exploitation of new ideas - should cover the successful exploitation of everything we do, including new ideas in the services sector, which is of course very important in the UK and will become very important for this economy too.

Developments in information technology and new materials, and biotechnology and new fuels, create a whole new wave of innovation and opportunity. Curiously, it might be that the new economies are more able to embrace these changes, because they don't have the years of experience like the United Kingdom and Japan have in setting up structures and regulatory systems.

We have seen a fundamental shift as we lose jobs to the emerging nations of the world through technology and off-shoring, moving jobs out of Great Britain elsewhere. Accounts, financial transactions, many of them are done now, not in Great Britain at all. It must be the same here. Now, the only response to that is to make our jobs and our offerings of higher value.

Fortunately for us, and certainly the same is true here, we have the leading sectors, for example, aerospace, pharmaceuticals, biotechnology, financial services, and many of the creative industries. We have an aging population with more and more interest in the better health agenda, pharmaceuticals and biotechnology. These are opportunities for profit and successful business in those areas.

It is very hard to measure innovation. All of us have a lot to do in getting proper indicators that really measure how innovative a country or a business or a university is. We tripled science projects in UK cities between 1997 and 2007, but we have too few ways of measuring what we are getting for that money. We must all become much more expert at measuring money spent on science.

We have produced a 10-year science and innovation framework that includes clear targets for achievement. Because you have some firms in your private sector that invest very heavily in R&D, you in Japan have a much higher base in R&D than we have in the United Kingdom. But I was told today by JST that if you take out some of your big spenders in big sectors, then the rest of Japanese business is probably investing insufficiently in the area of R&D. So it seems in Britain, British business invests too little in R&D in our view.

We have a new target for the growth rate of business in R&D spending, and we are adjusting the way in which we finance our universities so that in the future, the university will only get more money for research if it can convince the government that it is collaborating more with business. It is just a way of giving a financial incentive to universities to improve their act. Obviously it is a little controversial because there are some academics who think that money should be distributed on the basis of academic excellence only and that collaboration with business is actually likely to reduce academic excellence.

We really do believe that putting pressure on businesses, and government departments, and on the public sector in particular, is the best way of making us innovate to deliver high-quality services. We have funded consumer organizations in the particular areas of energy and banking and transport, so we finance or encourage consumer organizations to complain loudly. We tell them to go and look at the best practice in foreign countries and come back and force our businesses to follow that.

We have now got a system of product and labeling market regulation, environmental regulation, health and safety regulation, intellectual property rights, and standards and measurement frameworks which, in our view, are all designed to maximize the impact and incentive for firms to innovate. We have plenty of evidence that where there is not fair and true competition, there is less innovation. The only way of getting fair and true competition is to have a tight anticompetitive practices regulatory system.

Thirdly, and this is where I think we have a lot to learn from you, is the atmosphere of entrepreneurship. Historically in British society, schools didn't teach the value of entrepreneurship or a career in the private sector. Somehow, going into business was less fashionable or a lower aspiration for British school kids. I don't think that was ever the case here. Somehow I believe you have fostered a spirit of enterprise and entrepreneurism that is missing from parts of our school system.

We probably have stuff to learn from you also about networks, whether they are regional networks or networks within sectors. A lot of the academic research will tell us that firms and businesses flourish where there are other firms and businesses trying to do the same thing.

We, of course, have innovation hubs like you do. We have innovation centers. We have small business and start-up places. So we share a lot of the same approaches which you have here. But I think the mid sectors, businesses helping other businesses to flourish, not by subsidy but by being next to them, are I think an important opportunity for us to learn from you. We think we can do more of that in Britain and in the EU as a whole.

Knowledge transfer networks, collaborative R&D, grants to investigate new ideas, transfer of partnerships, these are all things that we are pursuing, and I know from my meetings with JST that they are things you are pursuing also. It is really useful to come and exchange ideas with us about what you think the best practices are in your country.

We also have a particular challenge on skills. It is the case now in Great Britain that our unemployment rate is so low or our employment rate is so high that those who have not got jobs are usually those with really low skills, both adults and also young people. So we now have a major complaint, which is although we have people unemployed in this region, we can't employ them because they don't have the sufficient skills. I am sure that is not an issue here because I have read so much about your school system. Nevertheless, I think a challenge for both countries, both the United Kingdom and Japan, is to make sure that our school system also produces people who are creative and innovative and who feel early on in their lives that their creativity and innovation are welcomed.

Now I don't know if it is true, but I am told that the Japanese school system is excellent at producing people with basic skills, and there is a question mark as to whether any of us have the answer on how to adjust our schooling system not only to give everyone the basic skills, but also to enhance and accelerate a spirit of enterprise and innovation. Certainly in our case, as we try to drive up the basic skills, we feel we risk driving down the more creative parts of the curriculum. I wonder if that is something that you share as well. I will be interested to hear whether you are making the changes now to the educational system that will produce the creative innovators of the future that the economy here will need.

If we were to keep the words DTI in the future, we might well want to call it the Department of Technology and Innovation to get away from the rather old-fashioned sounding "trade and industry." It means, therefore, that we need a very different organization. We want a DTI that is more customer-focused, more focused on what the customer wants, more professional, and one that knows better the new sectors in which it is going to operate. We have too many experts on traditional industries and sectors in DTI and lack people who have enough experience with the new sectors on which the United Kingdom will depend. I think this is true of many departments of trade and industry, certainly in Europe, and I would be surprised if it wasn't true here.

The more I hear about the situation or the position here in Japan, the more I see the opportunities for close cooperation between Japan and Britain, which is why, obviously, I am here today and why I am so pleased that the embassy does so much to cement and improve the relationship between Japan and Britain. The relationship between us has always been a good one and I think there is scope for it to become better still.

There is a huge international dimension to our innovation policies. Research shows that businesses that internationalize are more competitive and that innovation benefits from international collaboration. So I was delighted to talk with JST about the various things that they are doing with Cambridge University and other things in Britain with modern technology. They were very keen to share with us everything they are doing to promote knowledge transfer here, and the opportunity of and perhaps the new independence of some of your universities to become more expert themselves at collaborating with business, which I see as a real opportunity rather than as hitherto the university-business collaboration, which has been slightly, as I understand it, encouraged or controlled from the top by the JST. Actually, by giving universities more freedom or independence, I think that might be a better way of encouraging a bottom-up sense of collaboration and business, rather than having it only imposed from above.

I would like to say that British companies based in Japan are giving every support for this better collaboration, going down from Vodafone to small companies such as Lexica, et cetera. I am happy to say, too, that Japanese businesses investing in Britain - and of course you know there are many, and very successful ones too - are doing a huge amount to work more closely with our universities in Britain. And indeed, I was suggesting to JST that if JST were to ask a bit more about the experience of the major Japanese investors in Britain and what can happen with our independent investors, there may be some lessons to be learned about what firms here can do by working with universities.

I hope that sort of agenda was the one that you wanted me to talk about. It is the agenda that we most share, I think, with this ministry. And what is so striking, even after one day, is how right everybody is to see what similar cares and concerns we both have. Thank you very much.

Questions and Answers

Q: Regarding company reform, the concept of inclusivity says that as far as company law is concerned, shareholder privacy cannot be denied. What is the status of corporate law reform? Has it been enacted in the form of the extension? And if it has been enacted, what will be the impact on the innovation of British companies?

A: Indeed this is an important aspect of the DTI's effort to make the UK economy more competitive. The draft legislation will come out in February. The effect will be to greatly simplify what you have to do to set up a business in the UK.

The point being raised about inclusivity is particularly important. It sets out the duties of the company, the board and directors of the company, and it sets them out in the context of their duties to their workforce and their duties to their shareholders. There will be an annual statutory statement that will explain to everybody what the company is doing, not only its financial results, which of course are private, but also what it is doing for its workforce, what it is doing for the environment, and other things of that nature.

I will make quite sure that when the bill comes out, everyone here knows about it and that the embassy knows about it, but I don't know whether it is something you need to imitate or not.

Q: You mentioned promotional collaboration in some specific industries such as pharmaceuticals and aerospace. Could you tell us about the UK experience with PPP - public-private partnership? Also, could you comment on the euro?

A: I think private finance, private-public partnerships, privatization, these are all different and really important new techniques for, first of all, saving the taxpayers money, but also more importantly, I think, for producing a better product. We had a big privatization period when the energy companies, railway companies, and water companies were all privatized. In all cases, the consumer has benefited from a more professional and more private-sector-like approach to the division of these services. So the combination of private finance and professional management, which you get from any mixture of these private finance initiatives is, I would have thought, the best way of providing services.

We need a mature partnership between a customer who knows what he wants, and a private finance organization that behaves in a responsible way. I don't think we should any longer go for the model of pure privatization or the old-fashioned model of pure state control, but some mixture - and there are various gradations - is the best way of producing the best service for the customer at the least expense to the taxpayer. That certainly is something we are trying to help other countries with.

The embassy has got a list of cases where British inward investors, who were welcomed here in words, then came across a series of obstacles. So there is an issue for us here because if we have a need to teach, it would probably be in financial services. There would be teachers if Japanese firms were ready to learn from that.

I don't sense that you are getting the benefit of foreign competition as much in that sector as you could be getting. In other words, if you opened up more there would be some initial pain, but the result would be a better service sector here and a more modernized one, a more effective one.

Your final question was about the euro. The position is clear that in principle the government is in favor of joining and has said that we will join, but when the economic terms are right. About three, three and a half years ago, Japanese inward investors spoke again and again and again about the euro and we got really nervous that unless the UK joined, these big inward investors would immediately leave and go to some other member of the European Union. Because the euro and the pound sterling relationship is much more stable now than it was before, it is actually less of a problem for these companies.

But obviously it has taken forever for the United Kingdom to sell itself as an entrepreneur, and it would be better if we had the currency which the rest of the European Union has. That is why the government has said they do support the idea, in principle, of joining but the time is not yet right.

Q: I was very impressed with the business atmosphere you have created with your Ministry of Education. Our small enterprises are not very successful at growing into major corporations, unlike what is happening in the United States with Apple and Microsoft, for instance. Could you explain what your ministry is doing in terms of assimilating small businesses as enterprises?

A: As in Japan, a huge proportion of our economy is made up of small and medium-sized enterprises. What we find is we are quite successful at getting them up from one person to 50, but then it stops. Either the 50-person business is purchased, or they just get stuck at 50. Everyone says that the future of the economy is the small and medium-sized enterprises. If that is the case, the future is different; because I think neither of us have the solution for how to get the small and medium to become the big.

We put a lot of our energies into doing things in the small and medium-sized sector. It is going well, but only up to a point.

Q: My question is regarding the relationship between your country and the EU. In certain areas, there is a lot of EU influence on high-tech. Can you explain the relationship between the EU initial standardization and your country's industrial policies?

A: We have very high hopes for the new European Commission and the promise, at least, of greater efforts to force through more quickly open markets in the EU. We hope that we will get a sort of EU approach that is compatible with our government's approach; although it is clear we haven't always succeeded in bringing the EU round to our policies.

The 10 new members will be much more free market, and open market, and reforming, and liberalizing, I have heard. And with the backing of some existing members, I think the future of the EU will be better.

Q: I'm interested in the human side of your organization. In your department, what has been done in terms of developing people to orient themselves in innovation and to change the mentality of people to make them more innovative?

A: We have a five-year change program. For example, we are reducing the size of the department by 25%. Those who are leaving us are those least able to change to the new way of thinking. Every senior member of my department has to spend at least one week per year out with a business or another organization. All senior civil servants have compulsory training and personal assessment in assessment centers. They have to fit in their skills to a new set of skills that we have designed to fit the new DTI.

Q: The accreditation systems that the United Kingdom had were recently merged to become UKAS, which is pure private sector. Now half of the accreditation bodies are by your government and the other half are from the private sector. Should the accreditation body at the top level of technology approval be in the private sector or the government sector? European Union papers say the accreditation service should be limited to one body per country, one system service, which should be allowed for one monopoly. But I found that this is not the consensus of the European Union. It is not authorized by the Directorate General for Competition. How do the answers to these questions effect innovation and competitiveness?

A: We are in the group of member-states who say that we do support one accreditation body per country, and it should not matter whether it is state owned or privately owned. In the rest of the union, there is not only a lack of agreement on one per country, but there is certainly not agreement with the UK that the one per country can be private.

At the moment in Britain, the BSI and now the UKAS are held in such high esteem that I don't think we are having any problems so far in terms of having an effect on long-term innovation. But as we move into a more effective single market, the compatibility and consistency, both of regulations around competition, and the accreditation of the measurement systems, will become absolutely critical if we are all to make the most of the European single market. This matter will have to be sorted out somehow or other.

As you have probably noticed, we have not moved very fast on the EU patent law. I foresee precisely the same sorts of difficulties as we try and get agreement around the EU accreditation agency. However, I think ours is the best and therefore we will win.

Q: My question is regarding the policymaking process. Are most policy ideas generated inside your ministry, or do outside policy experts such as university professors participate in the policymaking process?

A: Broadly speaking, less internal, more outward-looking, more customer-focused, more business-focused, this is the new skill set, better at presenting outside.

So now in policymaking, you can't put a policy proposal forward unless you have discussed it both with representatives of the business or consumer or worker community and with any people that have written policy documents about it. And this means, of course, that our customers, whether they are businesses or trade unions, they know us more and therefore they have some faith that what we are advising within the government might be good. So those are ways in which we are trying to change the productivity and change the policymaking.

*This summary was compiled by RIETI Editorial staff.