Opinion

Should the UK invest more in university-linked innovation to promote economic growth?

11 min read

03 July 2015

Economists have long proposed many channels through which education may affect growth, but with the UK's universities being under threat from international rivals and global businesses starting to pick up speed, now might be time to start listening.

The UK has a very ambitious growth agenda for the next decade. To succeed, the nation will need to make significant progress in a number of areas, including productivity, skills, competitiveness and innovation. 

Of course, it already performs well on most of these fronts, ranking first in Europe and fourth in the world for entrepreneurship, second in the world for innovation and the quality of its scientific research institutions, and can be found within the world’s top ten countries for business competitiveness. However, its potential might be held back by a number of “weaknesses”.

Perhaps the single most challenging issue is that of productivity. In the IFS’ Green Budget of 2013, it was found that the UK’s labour productivity gap with other G7 countries was the widest reported since 1992. The analysis showed that output per hour had fallen by nearly 12.3 per cent in 2012, compared to its pre-recession trend.

The answer, the government suggested, could be found in Britain’s education system. In Philip Stevens and Martin Weale’s report, “Education and Economic Growth”,  it suggested that there were two reasons for expecting to find a link between education and economic growth. First of all, there seems to be a correlation between scientific advance and the way in which education facilitates the development of knowledge. At the same time, education is needed for people to benefit from scientific advance as well as to contribute to it.

Secondly, if people with education earn more than those without, shouldn’t the same be true of countries? If spending on education delivers returns of some sort, in much the same way as spending on fixed capital, then it is sensible to talk of investing in human capital, as the counterpart to investing in fixed capital. 

It’s more than a viable option, given that the UK is home to ten per cent of the world’s top 100 universities. Furthermore, between 2011-12 universities generated an estimated £10.71bn of export earnings for Britain, and contributed over £36.4bn to GDP.

These figures alone do not fully capture the contribution that universities have made to the UK economy. Universities play an important part in supporting economic growth. For example, analysis by the Department for Business, Innovation and Skills (BIS) estimates that a one per cent increase in the share of the workforce with a university degree raises the level of long-term productivity by 0.2-0.5 per cent. The National Institute of Economic and Social Research in 2013 also revealed that 20 per cent of UK economic growth spanning from 1982 to 2005 came from increased graduate skills. 

See also: The world's top ten business schools

But by 2022, BIS has projected there to be two million additional jobs in occupations requiring higher level skills, such as managers. The total employment share requiring higher skills will increase from 42 per cent to 46 per cent of all those in employment.

This change in the labour force requires the UK to ensure that it develops the higher-level skills required by the market. And while higher education (HE) has expanded significantly between 1982 and 2005, the share of the workforce holding a university degree in the UK remains below that of Finland, the US, Japan and Canada. This is possibly due to Britain’s investment in research and development being below the OECD average, and too little compared with other developed nations. 

This disparity threatens the long-term ability of the UK’s leading universities to compete with the best institutions elsewhere. 

Sally Hunt, general secretary of the University and Colleges Union, said: “We have to recognise that our standing is under threat if we don’t match our competitors. We have to increase support for young academics and ensure people are properly rewarded for working in one of our most successful sectors”.

The point was further echoed by Phil Baty, editor of Times Higher Education World University Rankings, who suggested that key East Asian nations were emerging as “powerhouses” in global HE and research. This loss of power and influence would not be good for the UK’s overall competitiveness, he maintained.

To keep the UK’s high standing, former business secretary Vince Cable had previously said that Britain needed to continue to attract international students and promote the UK as a knowledge economy. As it stands, a recent British Council found that international enrolment in British higher education fell in 2013 for the first time in 29 years

The US HE sector has outpaced all other major markets by a considerable margin since 2009, making the US the greatest source of competition for the UK sector over the long term. This is especially true given that the US now enrols nearly as many international students in HE every year as the UK does even with EU students combined. Undergraduate and postgraduate students also generally enrol in the US for periods lasting at least one year longer than in Britain. 

What we shouldn’t forget, however, is that “the research conducted by universities underpins innovation by industry, supports improvements in public policy, and contributes to breakthroughs in health and quality of life,” suggested a Russel Group report. In other words, that very same use of innovation that the UK is so famed for should be taken advantage of when it comes to university research and development. One can’t help but agree given that the UK’s economic competitiveness has become increasingly dependent on leadership within high-tech and knowledge-intensive industries. 

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Essentially, businesses and universities could be helping one another achieve economic growth. And, as further suggested in a report commissioned by Universities UK, businesses that engage with universities on innovation are much more likely to report a better performance on product range, market share and product quality than those that do not.

“Firms very rarely innovate solely on their basis of their in-house knowledge capabilities, but increasingly depend on external sources of knowledge and research,” the report noted. “As such, there has been a continued expansion of more traditional forms of R&D collaboration and partnerships.”

Aside from contributing to business innovation directly by collaborating on the development of new products or services, universities also play an important role in facilitating innovation indirectly. For example, they provide space for innovative firms to interact closely and assist in the development of networks. Increasingly, universities are investing in spaces, equipment and facilities that are open to, or shared with, the local innovation community. This is an effective way for them to accommodate the needs of the local innovation community and help maintain the world-class facilities that are needed to attract talent and investment from other parts of the UK and the world. 

In a report commissioned by BIS, Dame Ann Dowling said the complexity of the existing support mechanisms has “created frustration and confusion” and means the UK is not reaping the full potential of its opportunity to connect businesses with the research being done in UK universities.

Dowling said: “We need a change of culture in our universities to support and encourage collaboration with industry. In the UK we can be a bit dismissive about research that actually has an application, but in reality such use-inspired research can be truly excellent. Access to industry projects was cited very positively by the researchers we consulted – they want to be working on these challenging and interesting projects with demonstrable impact and excellent career prospects.”

The review proposed a new “Awards for Collaborative Excellence” scheme that would provide funds on a competitive basis to enable strong relationships between individuals in academia and industry. Dowling suggested that such schemes would be likely to provide a good return on public investment, and would go a long way in raising the UK’s competitiveness once more.

She said: “Solutions to everyday problems could be sitting in a lab right now, but without the conversation with industry they could be missed. It is vital that research students in appropriate disciplines spend some time in industry in order to get a new perspective on their own research, expand knowledge, and build relationships. They should also receive training, particularly around entrepreneurship.”

Universities and science minister Jo Johnson said that fostering greater collaboration between businesses and universities will provide the new technology and higher-level skills that are vital to raising our productivity. 

“This could ensure we make Britain the best place in Europe to innovate, patent new ideas and set up a business,” Johnson said.