The good growth blog: why innovation thrives in clusters

In the second in this monthly series, BGF executive chairman Stephen Welton unpacks the idea of ‘good growth’, and considers the opportunities facing businesses in a rapidly changing landscape.

Innovation is something everyone says they want. But how do you make it happen? Is it true that adversity – war, disease and so on – is a necessary catalyst? For example, the Cold War gave us the Space Race; World War II accelerated the rollout of penicillin; the Covid-19 pandemic spurred the deployment of messenger RNA technology for vaccines.

Given that the pandemic is still far from over, especially in parts of the world where vaccine rollout is still low, the world is not short of adversity. But what else makes innovation happen?

We know what the UK Government believes is necessary for innovation, thanks to the new innovation strategy, published in July. This document contains useful background to the quest for innovation and some key policy proposals. Among other plans, these reaffirm the commitment to increase annual public investment on research and development to £22 billion, while promising to make visas more easily available for skilled workers from abroad, and to provide training for business leaders. These are measures that we at BGF, in partnership with the ScaleUp Institute, have previously highlighted as crucial. The private sector will be an essential partner in delivering the overall target of 2.4% of GDP going to fund R&D – without it, we will fall well short of impacting generations to come.

The current focus on innovation is encouraging, not least because it is doubtful whether humanity can overcome the challenges we face without it – climate change being the most pressing and a true international emergency. It is essential that we examine how and where innovation comes from and do our best not only to nurture it but to make a quantum leap.

But there is a caveat, which I don’t think many would dispute. I do not believe it is possible for innovation to be imposed from the top down. The government’s role here is to create the conditions in which innovation can occur and to set out overarching goals. However, to be successful there are two crucial elements: people and clusters.

The first one should be obvious. People create innovation. Therefore, we must ensure that talent is allowed to flourish, wherever it is found. That’s why the focus on visas is important. Knowledge knows no boundaries, and global talent can act as a catalyst to produce domestic talent – a virtuous and expanding circle. It goes without saying that talent can be found everywhere, irrespective of gender, ethnicity, sexuality and so on. An innovative economy must be equally diverse and creative. To paraphrase Adam Smith, this really is “the wealth of nations”.

In support of the second point, the shining exemplar is Silicon Valley, not just because it is in California, but because it is where a cluster of talented people with similar aspirations and attitudes – albeit very different backgrounds – created a fertile environment for innovation that in turn acted as a magnet to other global talent.

The Silicon Valley example is instructive for the UK. We already have an incredibly successful cluster, the City of London, which attracts talent in the financial services sector. But the City’s success is so overwhelming that it has arguably acted as a sponge, sucking in talent from across industries that might profitably be applied elsewhere.

As a counterweight to the dominance of the City, I would like to see more effort made to build business clusters around our excellent universities. Unlike the financial services industry, which is concentrated in the capital, universities are spread across the country. Exeter and Edinburgh are on opposite sides of the UK and yet both universities are in the Russell Group, for example. The UK can proudly boast 18 of the top 100 universities globally. These institutions are doing a fantastic job of nurturing talent and innovation. As part of the broad levelling-up agenda, I would like to see more business clusters in the cities and towns that surround universities, providing opportunities for talented graduates to counterbalance the lure of London.

What kind of opportunities? The UK generates more offshore wind power than any other country on the planet, led by the North East, which is home to Durham and Newcastle universities and many other great academic and scientific bodies. When we think about research, a good phrase is “proximal R&D”, linking research to relevant places, and creating far greater weight and impact as a result.

Returning to the government’s innovation strategy, what are the most important elements? To their credit, the government has identified the importance of life sciences, highlighting £200 million of investment through the British Business Bank’s Life Sciences Investment Programme, complementing the announced £800 million from the UK-UAE Sovereign Investment Partnership to target the growth-stage funding gap faced by UK life science companies. BGF recently passed the milestone of £100 million invested in life sciences businesses, so this is naturally an initiative we support and look to others to reinforce as well. Clusters should be of capital as well people.

But the key is not only to provide money. Perhaps the most effective tool of any government is, in fact, smart regulation, alongside the use of regulatory sandboxes.

Sandboxes are a useful tool in which a regulator creates a ringfenced area in which the normal rules don’t apply, allowing entrepreneurs and inventors to test out ideas, products and business models without putting the wider economy at risk. Sandboxes have been used effectively by the Financial Conduct Authority in the fintech space. We can and should extend that thinking.

I think there is a real opportunity to use sandboxes and other forms of test bed as a way to stimulate regional clusters. For example, there is a growing consensus that transport will undergo significant changes in the future due to autonomous vehicles and drones. In the UK, logistics centres tend to be in places that are near to our national transit arteries, the motorways – places like Northampton, for example. Could this city become a test bed for autonomy in the logistics industry, specifically as we think about robotics, increasing automation and artificial intelligence?

Northamptonshire is also home to a thriving motorsports industry, with the iconic Silverstone racing track and numerous Formula One teams headquartered in the county. Formula One has been a huge contributor to innovation in the car industry worldwide. There is a wealth of knowledge and experience to build on as we move from the combustion engine to electrification and, as the Innovation Strategy predicts, towards “jet zero”.

The critical point is that entrepreneurs, inventors and innovators need the space to trial their ideas. They need to be able to fail, to rethink their ideas, to improve them, and to try again. It is really no different to scientists working in the lab, who expect to go through countless failed experiments before hitting on an important discovery. Failure need not be seen as ‘waste’ but rather the overhead and investment ahead of success.

At the start of this blog, I mentioned that innovation often seems to arise out of adversity. The pandemic has provided plenty of that. As we prepare to reopen the economy and society, it is not enough to rewind the clock, rather now is the time to unlock innovation by feeding the clusters up and down the country where it will happen.