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Rethinking how innovation drives start-ups

A must-read report on innovation policy, with lots of lessons for Ireland.

R&D contracts for customers the key to successful hi-tech start-ups

UK Government innovation policy should be refocused to reflect the crucial role played by customers in stimulating and funding the development of new hi-tech companies, claims a major new report on the Cambridge hi-tech cluster.

For many years, the “Cambridge Phenomenon” has been associated in most peoples’ minds with academic spin-off firms, established to develop new products based on intellectual property created within their university laboratories, and with Silicon Valley style venture capital providing the finance.

But a two year research study at Cambridge University has found that the key to the success of hi-tech firms generating the most employment lies in developing solutions to customer problems.

“The business of carrying out R&D contracts to solve customer problems and develop new products has been highly tuned by leading Cambridge firms”, says David Connell, one of the report’s authors. “But besides generating thousands of jobs in its own right, this kind of paid R&D often also leads on to ideas for standard, proprietary products that can be commercialized through subsidiaries or separate spin off companies.”

The research team studied successful companies in a wide range of sectors, from IT to instrumentation to biotech and found that solving customer problems and paid R&D contracts have played a key role in the creation of all of them.

“Over the last thirty years Cambridge has seen the development of whole new sectors of industry – in printing technology, semiconductors, wireless technology, software, and scientific instruments, for example. But in each case it is R&D contracts for customers that have generally played the key role in building teams, developing intellectual property and usually in financing early growth”, says Connell.

“These are exactly the sorts of high wage rate, export intensive industries we need to rebuild the UK economy. But if we want to extend and repeat Cambridge’s success elsewhere we must put much more emphasis on policies that encourage these natural, demand-led innovation processes.”

The report found little enthusiasm amongst successful, fast growing high-tech firms for the kinds of multi-partner research grants involving university-industry collaboration that are favoured by UK policy makers and, in contrast to the US, a dearth of R&D contracts with public sector customers. It argues that for decades UK Government policy has been based on three fundamental myths about how new hi-tech firms are created:

–       that university research is the key source of technology and innovation for new hi-tech firms

–       that venture capital is the primary source of finance

–       and that the best way for Government to support technology development in companies is by funding multi-partner research collaborations between universities and private sector firms

The authors argue that Government policy thinking has been heavily influenced by these intuitively attractive, but actually misleading assumptions. As a result, they believe that the balance of innovation policy expenditure has been out-of-kilter with the needs of emerging high-growth companies. Instead their report proposes a series of new policies to encourage more R&D contracts between small companies and lead customers, including a new grants scheme and increased use of procurement to meet Government innovation needs.

“The discipline of delivering on a technology contract with a lead customer is crucial to the development of a strong commercial orientation in SMEs”, says report co-author Jocelyn Probert. “In previous decades Government placed R&D contracts with some young SMEs that eventually became very important economically, but these types of public sector contract are now a rarity. We believe that this represents a major lost opportunity for the Government to exploit this country’s science base, though the recently established , and still very small scale, Small Business Research Initiative is trying to address this.”

In addition the report argues for the establishment of “Intermediate R&D Institutes”, similar in some respects to the Fraunhofer Institutes in Germany, to provide a more mission orientated environment than is possible in universities to develop and commercialise technologies with long lead times.

Paul May, Director of Innovation at EEDA, comments: ‘This report is an excellent piece of research, which helps redress the balance of commonly held views by emphasizing that there are many significant start-ups that do not directly originate from universities and which do not use venture capital. At EEDA we also see the importance of market-led procurement and have played a leadership role in launching the first regional public procurement programme with the regional SHA to address regional health priorities through innovation.’

Exploding the Myths of UK Innovation Policy; How “Soft Companies” and R&D Contracts Drive the Growth of the Hi-Tech Economy; David Connell and Jocelyn Probert, Centre for Business Research, University of Cambridge.

About the report:

The study was commissioned on behalf of the East of England Science and Industry Council by the East of England Development Agency. Additional funding for the research was provided by the Isaac Newton Trust, and the UK Innovation Research Centre co-funded publication of the report.

The research included 52 in-depth interviews with founders or senior managers of successful science and technology firms within Cambridge and the wider East of England Region, together with a separate survey of small firms who had been awarded (single firm) R&D grants.

The report includes 14 detailed case studies examining the role of R&D contracts and lead customers in the formation and growth of firms in different industries.

A full copy of the report can be downloaded from:

About the Authors

David Connell has been a Senior Research Associate at the Centre for Business Research at the University of Cambridge since 2006. He was previously a founder and Chief Executive of TTP Ventures, a Cambridge-based venture capital fund specializing in early stage science and technology-based ventures with funding from Boeing, Siemens and financial institutions. From 1989 to 1997, David was Head of TTP Group’s Strategy Division. Today, he combines directorships with TTP Capital Partners and small technology companies with his academic research position. His earlier report on the US Small Business Innovation Research (SBIR) programme and other US procurement based policies has had a major influence on UK Government thinking and his detailed proposals form the basis of the revised UK SBRI programme launched in 2008. David is advising the TSB on implementation.

Jocelyn Probert is a Senior Research Fellow at the Centre for Business Research at the University of Cambridge. Prior to the current research on innovative high tech firms and the role of customer-funded research contracts, her work for the CBR explored the impact of national institutional frameworks on the global production networks created by UK, US, German and Japanese firms. From that research she co-authored with Christel Lane several journal articles and book chapters; their book, National Capitalisms, Global Production Networks: Fashioning the Value Chain in the UK, USA, and Germany, focusing on the clothing industry, was published by Oxford University Press in April 2009. Jocelyn worked in Japan as an equities analyst for an investment bank and for INSEAD’s Euro-Asia Centre in Fontainebleau, France, before coming to Judge Business School, University of Cambridge in 1998, for her PhD on the restructuring of Japanese firms.

Centre for Business Research (CBR)
The Centre for Business Research (CBR) is an independent research institution hosted at Cambridge University’s Judge Business School. It began originally as the Small Business Research Centre, and to this day, the study of smaller enterprises remains a key area of research.

With Imperial College Business School CBR it also manages the UK Innovation Research Centre (See below).
See also: http://www.cbr.cam.ac.uk/

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  1. October 8, 2010 at 11:17 am

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