Is it time to go public?

Mike King, an economist based at the National Physical Laboratory explores the benefits that working with a public research establishment can bring for companies.

The positive impact of innovation on commercial success has long been recognised. Maintaining close ties with the research base helps businesses stay ahead of curve by exploiting the latest technological advances and getting scientific developments to the end user more quickly.

On a national scale, research drives improved processes and new products that allow the UK to be competitive on an international business stage and drives the creation of high-skill jobs. These in turn contribute to the welfare and standards of living of the population as a whole. The future growth of our economy depends on a steady stream of new research and innovative products.

Significant government investment is required to kick start and maintain innovation efforts in the UK. UK investment in R&D is fairly low when compared to similar countries but must contend with questions of how to best spend money from the public coffers. The question in this case is whether the money invested in public support for innovation is reaping the benefits desired, and creating new commercial success?

A recent report from the Department for Business, Innovation and Skills – Estimating the effect of UK direct public support for innovation – sought to find out just that. The report, perhaps unsurprisingly, found that firms benefit significantly from active engagement with universities or Public Sector Research Establishments (PSREs). Businesses that cooperate with universities or PSREs are 70% more likely to generate revenue from the sale of new products relative to a control group composed of firms with the same characteristics and history but who failed to make use of such institutions. Similarly, R&D intensity (R&D as a fraction of turnover) increased by 160%. (The focus of this study was to look at the effects of public support for innovation. The estimates of the size of these effects have significant uncertainty e.g.  R&D intensity (R&D as a fraction of turnover) increased by 160% ± 30%.)

The National Physical Laboratory (NPL) is the UK‘s National Measurement Institute and one of the UK’s leading PSREs, and therefore serves as a good example of what public sector collaboration can offer for companies. NPL works in partnership with more than 200 firms on research projects spanning all sectors, from advanced medical treatments to environmental monitoring. A recent customer survey found that companies working closely with NPL receive direct financial benefits worth £634M a year, with 63% of collaborators having introduced a new product or developing an existing one during the period of the collaboration. Over the next few years NPL is committed to increasing this to deliver £1 billion a year of financial benefit to organisations.

Like many PSREs, NPL contributes innovations at an early stage, teaming up with companies to conduct cutting edge research and help get innovative products to market more quickly.  For example, last year, NPL teamed up with SME, Colour Holographic, to develop a revolutionary optical component for augmented reality devices. The patent-pending optic, incorporates two holograms, meaning images can be displayed in high definition, full colour, in perfect focus and in 3D (with a different image for each eye) through the centre of a field of vision.

Working with NPL gave Colour Holographic access to cutting edge research and technical information, accelerating the development of the product and also contributing to the development of wider augmented reality devices, a rapidly growing market.

Working with PSREs can also aid sales and marketing and help build customer confidence in products, by providing validation. The Centre for Carbon Measurement at NPL for example validates environmental technologies, independently assessing their performance claims. The validation process allows companies to market their product using the proven performance data supplied by an established and impartial third party.

It’s not just in the conception and development of new technologies that innovative thinking and public sector support can hold value for companies. As part of its product verification programme, NPL works with companies to optimise their processes. Product verification services account for between 10% and 20% of the cost of finished products so improving these activities can have a significant impact on production and revenues.

In one instance, NPL saved a UK business a potential £500,000 risk by using a thermal imaging method called 'pulsed thermography' to reveal invisible problems with its turbine blade coatings and prevent a failure shutting down their power station.

In another case, NPL advised an engineering company in Oxford to install a system to analyse the accuracy of their Computer Numerical Control tools to improve customer confidence. This allowed the company to demonstrate its capability to a major customer and protect £1.28 million in annual business.  Scrap was also reduced on one machine from 20% to 5%, resulting in an additional annual cost benefit of £18,000.

The most significant impact for companies of working with NPL came through tangible products and services provided to companies, such as good practice guides, training, using measurement services and networking events with scientists. For example, 92 % of organisations attending NPL training sessions saw improvements in their organisations as a result.

As well as improving revenue through their own products and services, the BIS report found that companies that collaborate with research institutes were more likely to secure funding through public sector grants. 45% of grant-holders also collaborated with the public sector, whilst 32% of firms that collaborated with universities and government agencies were also grant-holders. Grants support the broader development of firms’ absorptive capacity (the ability to innovate as captured in the skills, networks and experience of its people).

Companies receiving public sector grants substantially increased UK firms’ innovation performance, in a number of categories. Collaboration and public sector support made these groups more likely to invest more in R&D (122%), employ high-level STEM graduates (29%) and introduce novel products to market (41%).

Receiving a public sector grant doubles a company’s spending on innovation. Some argue this would mean the company itself relies on this funding and doesn’t fund innovation itself – that public funding ‘crowds-out’ private funding. However, the report found that the opposite was true, with public funding crowding-in around 30% more private funding (in addition to the public funding provided) across three years. NPL has seen evidence for this in its own partners. For example, NPL worked with Toshiba Research Europe on a test bed demonstrator to build trust in future cryptography systems - a project to provide UK industries such as the finance and digital media sectors with the most advanced, secure and future-proof trading networks in the world. Toshiba received £330,000 in grant funding, which it matched equally with its own investment.

There is of course more work to be done to assess all of the impacts, of collaboration over the long-term.  However, all evidence points towards the fact that public support and grants have a positive impact on UK innovation and subsequent economic growth. Companies who forge ties with universities and public sector research establishments, like NPL, can gain significantly from these partnerships, both financially and otherwise, giving them the edge over the competition.

‘Estimating the effect of UK direct public support for innovation’ was a report published in November 2014 by the Department for Business, Innovation and Skills. The Government Office for Science and HM Treasury and the National Physical Laboratory (NPL) played a major role in developing an econometric methodology for the report, working out the best economic models to estimate the impact of collaboration.

The Author:

Mike King is an economist based at the National Physical Laboratory - one the UK’s leading PSREs –he has also worked for BIS