Rebalancing the Knowledge Economy

Richard Holt

On taking office in 2010 one of the first acts of the coalition government was to dismantle many of the regional bodies that had been established in the previous decade – the screen agencies, regional arts councils, regional government offices and, most significantly, the regional development agencies (RDAs).

The decision to shut down the RDAs proved to be less unpopular than many of the other things that the new government did. Library closures brought people onto the streets, but there were no placards or petitions to mark the end of the RDAs, and the response from business groups, even those who received support from the RDAs, was subdued.

Four years on, and there are increasing concerns around regional economic inequalities. The imbalances between London, southern England and the rest of the country – whether measured in terms of growth, house prices or unemployment – is a familiar story in the media. The Chancellor has repeatedly said that he is seeking a ‘balanced economic recovery’, in terms of both industrial sectors and regional growth. Yet there is little evidence of success.

That is especially the case when it comes to business innovation, and those knowledge-intensive companies commonly highlighted as being crucial to the UK’s economic future. In 2012, the latest year for which we have data, 33% of all business research and development took place in London and the South East. Including the East of England (Hertfordshire, Cambridge, and so on) and the South West pushes the figure to 61%. The figures for total innovation, including intangibles, are similar. There can be no doubt that the knowledge economy is skewed heavily to the south.

This bias is reflected in patterns of government support. The Technology Strategy Board (TSB), the government’s ‘national innovation agency’, is one of the few public bodies to remain largely unchanged since 2010, and it does much what it did since its establishment as an independent organisation in 2007: investing in commercial research and development – principally in small businesses, and often in partnership with universities and research institutes. The table below, based on data provided by the TSB, shows how these funds are allocated between the nations and regions. Together, London and the other three southern regions account for well over half (56%) of the TSB’s grant funding, but only make up 44% of the UK’s population.

As the table also shows, TSB funding looks rather better balanced when compared to GDP rather than population. But what that means of course is that TSB funding acts to reinforce rather than offset existing regional inequalities. By way of contrast, central government funding for the English RDAs used to be biased towards regions with low GDP relative to their populations.  During 2006-07, the four southern regions accounted for only 40% of total RDA spend, while making up more than half of England’s population and GDP. Moreover, support programmes in London and the south were often targeted at businesses located in the most deprived local areas, such as east London or the Medway towns.

In its defence, the TSB is a national body with no geographical remit. It has no strategic objectives around tackling regional inequalities, economic regeneration or rebalancing the economy. Indeed it could be said that simplicity has been part of the TSB’s strength: its purpose is well-defined, and compared with many public bodies it hasn’t been hamstrung by multiple objectives. The TSB seeks out and supports innovation wherever it is happening – responding to applications which are assessed independently – and inevitably that is in those regions where there is a greater concentration of innovative businesses with good prospects.

For a government wishing to grow the knowledge economy across the UK as a whole, the challenge is to keep the Technology Strategy Board’s clarity of purpose while broadening its impact. To that end, here are three ideas for consideration:

  • The Labour Party is proposing to create a network of regional banks, to support a strengthened British Investment Bank and intended to help generate stronger growth outside southern England. Perhaps those banks could be encouraged to take into account whether or not a potential business customer was obtaining funding from the TSB, in making their loan decisions. There would be two advantages. First, the new banks would have the confidence of knowing that potential borrowers had already passed the TSB’s stringent vetting criteria for grants. Second, the likelihood that the TSB’s grants would generate commercial benefits would often be increased by the subsequent awarding of regional bank loans. The TSB itself would not need to change its decision-making, thus preserving its current simplicity of purpose.
  • The TSB could work with Local Economic Partnerships, and equivalent bodies outside of England, to develop ring-fenced funds for locations, regions and clusters. Recently, the TSB has run Launchpad funding competitions targeted at businesses located in specific industrial clusters, such as Tech City in East London. This policy could perhaps be extended, and could include nascent as well as mature clusters.
  • Establish a ‘TSB North’. The TSB’s head office and main functions are in the South West, although on a day-to-day basis senior management are often in London. A separate office outside southern England might help to refocus strategic thinking and resources towards the rest of the country.
Richard Holt, Regional Economist at Capital Economics
Note: Data on population and GDP from ONS; data on TSB funding provided by Technology Strategy Board. In line with TSB guidance, the funding data does not include ‘national centres’ established by TSB, but rather exclusively covers grants to businesses and other organisations.

3 thoughts on “Rebalancing the Knowledge Economy

  1. Edited comments received from Iain Bennett and John Howkins:

    There is a dangerous and long-standing hubris around most discussions of UK creative industries which, deliberately or not, assumes that a competitive, ‘world beating’ creative sector is some kind of national characteristic, if not a birth right. The risks and opportunities of that which lies ‘overseas’ are often ignored, and that is coming home to roost in the relative weakness and deceleration of export growth in the sector, where France has now overtaken the UK in terms of earnings.

    That problem of competitiveness – lack of skills, lack of market awareness, a monoglot and culturally ignorant approach to overseas markets and the individual producers and consumers in them, appalling and in many cases deliberately unprofessional management, reluctance to use professional services (particularly at one’s own expense), over-reliance on subsidy in various forms of business support, tax credits or honest to goodness hand-outs whose pursuit often has a higher opportunity cost than the investment realised (and I include some of the TSB R&D schemes in that) – needs to be addressed before any attempts to reposition the various support agencies.

    Any strategy for the creative industries should take into account that children entering primary school in September will be graduating from University in 2030. By that date, there will be an estimated 2.7 billion more urban dwellers in the world. Many of them will be competing with our ‘creative’ graduates but many more will be consuming creative products and services. That is the risk and opportunity to be addressed first……

    I strongly agree with this, especially the slow growth of UK markets and the declining competitiveness of UK companies (Germany as well as France are doing better than the UK), the country’s insularity (for example, six times as many Chinese go to France and Germany as come to the UK) and the amount, criteria and quality of many government interventions. The DCMS and BIS mean well but their political agenda can have negative side-effects.

  2. As my old boss used to tell me in the glory days of public funding: geography is an equalities issue. Any intervention which doesn’t take account of clusters, spatial externalities, barriers to entry, information flows and transaction costs is bound to fail by condemning half the UK population to a life without economic opportunity.

  3. What I’ve never understood is that if a venture passes the criteria for a grant, then why limit the grant to less than what they actually need to succeed? Why force them to take loans at all? Either the idea is a sound investment or it isn’t and if it is, why seemingly arbitrarily hand some of the proceeds of its success to the hands of private bankers and burden the business with the need to cover the interest on the loan? Why not simply fund the whole thing through grants? Why is it better that the fledgling enterprise carries the debt burden and not the government anyway? Surely the government can borrow at more favourable terms than a fledgling enterprise. Either we want successes or we want to tie their shoelaces together, for the benefit of private banks, who frankly haven’t kept their end of the bargain up, have they?

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