The Role of Government in Building Absorptive Capacity Ken Warwick DTI Knowledge Economy Forum VI 17 April 2007

Ken Warwick Knowledge Economy Forum VI What is absorptive capacity? The capacity to acquire, understand, develop and exchange knowledge from external sources (competitors, collaborators, customers, public research base) Concept relevant to both individual businesses/organisations and to regions/nations.

Ken Warwick Knowledge Economy Forum VI How do we measure absorptive capacity? Firm level: –Technological capability (R&D, people) –Engagement with external knowledge sources (e.g. Higher Education, metrology system, networks) Regional/national level: –Business R&D Researchers –Highly skilled labour Employment of S&T graduates –Degree of interaction between business and external knowledge sources Knowledge sourcing Depth and scale of networks

Ken Warwick Knowledge Economy Forum VI Measures show considerable variation even within developed economies We will insert couple of charts for OECD/EU, perhaps researchers and CIS data on collaboration with HEIs

Ken Warwick Knowledge Economy Forum VI What is the role of Government? Create the conditions for businesses to succeed (e.g. macro stability, consistent competition policies) Invest in knowledge creation and innovation infrastructure (e.g. funding of education and research system, measurement system, IP agencies, standard setting) Targeted interventions to address incentive, information, co-ordination failures

Ken Warwick Knowledge Economy Forum VI Rationale for Government's role Increasing integration of international economy presents challenges and opportunities for all businesses Considerable amount of analysis across Whitehall on the drivers and impacts of globalisation on the UK economy Primary role for government in setting framework conditions within which businesses themselves can respond Key policy challenge to ensure government also provides the right kinds of support

Ken Warwick Knowledge Economy Forum VI Economic evidence - trade Entry into exporting gives firms a step productivity boost – average 34%; e.g. learning from overseas customers, exposure to new ideas, technologies, up-grading approach Trade and inward investment can give rise to beneficial knowledge spillovers Importance of networks and reputation effects –Difficulties in gaining access to key knowledge networks can lead to lower levels of investment in R&D –Young innovative and high-growth potential firms unable to fulfil potential without capabilities and access to networks needed for internationalisation

Ken Warwick Knowledge Economy Forum VI SME access to international markets Barriers to trade exist Some evidence SME exporters experience problems accessing finance Market failures: –information problems –missing markets –coordination failures Wider benefits (e.g. reputation effects, knowledge spillovers)

Ken Warwick Knowledge Economy Forum VI UKTI role in providing support Strengthening internationalisation capabilities of innovative and high growth SMEs Access to information and advice which private sector would not or could not provide Access to contacts overseas, strengthening social networks for trade, including support for group participation in overseas trade fairs and missions Facilitate beneficial co-operation – e.g. showcasing UK capabilities, building UK reputation overseas

Ken Warwick Knowledge Economy Forum VI InnovationEnterprise Framework conditions General business conditions Ease of firm creation Regulation (including IP) Public receptiveness to technology Availability of finance Incentives for innovation/enterprise Knowledge exchange & exploitation Ease of co-operation/collaboration (B2B, B2KI) Transit of information flows Innovation infrastructure (metrology, standards) Demand for innovation Return on investment (potential & actual) Business attitude and capacity Responsiveness of public services Framework conditions General business conditions Ease of start-up and exit Better Regulation Availability of finance Access to markets Culture (risk/failure v opportunity) Knowledge exchange & exploitation Personal networks Work experience Education (inc enterprise education) Role models Migration Demand for enterprise Need for independence/control Business ideas Opportunity entrepreneurship Necessity entrepreneurship Public services – social enterprises Innovation/Enterprise Environment:

Ken Warwick Knowledge Economy Forum VI Policies to raise absorptive capacity in businesses Address market failure that leads to private under- investment in R&D: –Tax incentives present in many OECD economies –Most economies supplement with targeted programmes providing support for individual projects [UK example: Collaborative Research and Development programme].

Ken Warwick Knowledge Economy Forum VI Policies to raise absorptive capacity in businesses Build business awareness of value of interaction with external knowledge sources (possible information asymmetries): –Initiatives to demonstrate the value that skilled researchers can add to a business (UK example: Knowledge Transfer Partnerships). –Reduce the initial “transaction costs” of engaging with research base, especially for SMEs (Netherlands example: Innovation Vouchers).

Ken Warwick Knowledge Economy Forum VI Policies to increase capacity of research base to engage with business & other users Provide incentives for Higher Education Institutions and other research organisations to engage with business and users: –Financial support to develop capacity (Technology Transfer personnel, staff training) – UK example: Higher Education Innovation Fund –Collaborations to reduce costs of collaboration (UK example: “Lambert” model IP agreements).

Ken Warwick Knowledge Economy Forum VI UK Technology Strategy Board Responsibility for delivery of Government programme of financial support through collaborative R&D and knowledge transfer Objective - to promote and support research into, and development and exploitation of, science and technology for business benefit for economic growth and quality of life Knowledge Transfer Networks part of technology programme strategy

Ken Warwick Knowledge Economy Forum VI Role of international institutions International institutions also play number of important roles Traditional role – helping countries cooperate to reach international agreements Helping build support for good governance/policies in member countries Role around building absorptive capacity

Ken Warwick Knowledge Economy Forum VI International institutions - building absorptive capacity Can take a number of forms: –Undertaking global studies (economies of scale) –Providing third party expertise – e.g. experts visiting a country and providing expert opinion on a policy area –Facilitating exchange of best practice between countries Important challenges in this work

Ken Warwick Knowledge Economy Forum VI Signs of progress in developing UK capacity [chart of HEBCI outputs of business-university collaboration] [chart of increased innovation activity from UK Innovation survey]