Cultivating a knowledge-based economy I
What is a knowledge-based economy?
For society to exploit ‘knowledge’ in its crudest sense is nothing new; long an essential part of the economy the know-how of both consumers and producers, steeped in generational tradition, has permitted primitive economies to survive through challenging conditions (Lundvall and Johnson, 1994). A knowledge-based economy however, is one where the key resource is knowledge, and though this too is not a new idea, the ‘explosion’ of ICT communications and globalisation has amplified the extent to which knowledge is increasingly incorporated as a key input in the economy (Glasson, 2003).
The expansion of the knowledge-based economy has brought with it a reliance on the process of innovation and institutional learning, with localised tacit knowledge in particular framed within economic geography as now integral to the course of regional development (Kitagawa, 2010). What has changed in the last few decades is the extent to which knowledge and innovation are now considered key resources, the key inputs in the process of economic growth for industrialised, globalised and digitalised societies. Moreover, factors such as human capital, economic impact, and knowledge spillovers are given increasing attention, as too are emerging concepts such as the ‘learning region’ and ‘the triple helix’ of university-industry-government relations increasingly viewed as crucial drivers for regional development (Harrison and Turok, 2017).
In a recent paper, Professor Richard A. L. Jones of the University of Manchester contextualises the current debate, asking what relative weight should be given to developing knowledge-based economies. For Professor Jones, a central axis to this discussion circles around the question of value and how one can measure it effectively. For example, a sector like health care offers an alternative value to society than a high technology sector may offer in terms of financial or research related dividends. The knowledge-based economy thus sits in contrast to what researchers at the Centre for Research on Socio-Cultural Change laid out in their 2013 Manifesto for the Foundational Economy. This Manifesto outlines in detail the relative space in the economy that is “very large, mostly unglamorous, rather heterogeneous” and comprises of sectors which meet the everyday needs of the population, employing almost 40% of the workforce. The paper calls for an industrial strategy that recognises the importance of the foundational economy, challenging current models to reframe this section of the economy in terms of social franchising. The Foundational Economy naturally represents a critical component of economic development. This post however focuses on the other side of the coin, which as articulated by Professor Jones, seeks to highlight the fact that policy makers in general agree that knowledge-intensive sectors, propelled by innovation and open competition, are a key component to economic prosperity in a modern economy.
The innovation process possess a strong regional dimension, supporting sustained economic growth and featuring as a key component of regional economic policy (Galbraith et al, 2017). However, in developed nations the ‘regional’ element has historically referred to the innovation centres in cities and metropolitan areas (Park, 2004; Pelkonen and Nieminen 2016; and Suorsa, 2007). Innovation ‘hubs’ have traditionally been how the knowledge-based economy has been politically constructed, involving a critical mass built around high-tech agglomerations instead of primary production which dominates rural and peripheral areas (Ederer et al, 2011). In terms of peripherality, while a knowledge-based economy has the potential to counter many of the limitations associated with peripheral areas (Mcadam et al, 2014), institutional thinness implies that there is often a scarcity of surrounding institutions engaged in the Research and Development (R&D).
Peripheral regions are often characterised by small and medium-sized enterprises (SME’s) which as a general rule possess fewer resources they can contribute to R&D, thus innovation is often small scale and incremental (Asheim and Coenen, 2005).
Table 1: Data released in March 2020 by the ONS detailing gross domestic expenditure by sector on R&D, in terms of region. Available here: http://url.ie/1ioub
Moreover, a lack of knowledge providers, research institutions and support infrastructure compound to form a climate hostile to innovation (Pelkonen and Nieminen, 2016). Above, Table 1 illustrates the total spending on R&D per region in England throughout 2018 - the latest figures available from the Office for National Statistics. The striking figure shows that almost 60% of total R&D funding in England goes to London, South East and East of England.
It is clear that rural and peripheral regions, away from these core innovation areas have historically lacked strategies and policies that seek to increase their innovation competitiveness (Suorsa, 2007). Despite the rise of the digital economy fixing innovation, knowledge and creativity as key components of regional competitiveness, rural regions have traditionally been viewed as “the black hole of the knowledge-based economy” (Park, 2004: 1).
Recently however, the creation of innovation centres and the adoption of knowledge-driven economic growth in peripheral areas has been increasingly employed as a model by the European Union (Pelkonen and Nieminen, 2016). The European Commission has for the last decade been committed to involving all regions in the innovation process, especially SME’s across all sectors with each region focussing on its unique strengths. Horizon 2020, with a budget of nearly €80 billion, is the EU’s flagship financial initiative of the Innovation Union between 2014-2020, which aims to remove barriers to innovation and promote world class science and networking among all member states.
However in many cases, policy in general has ignored the difference between areas and innovation policy documents often neglect the concept of the regional or defining a particular region’s boundaries (Suorsa, 2007). Academic literature increasingly points towards using the internet and innovation to cultivate new strategies of practicing regional development where the periphery is concerned (Park, 2004). There are calls for a different approach to policy, acknowledging that at a national and regional level, the development of policies have historically comprised of a ‘one size fits all’ model which have often failed to include the particular characteristics of peripheral regions (Galbraith et al, 2017). Innovation policy in peripheral areas needs to focus on “catching up learning” (Suorsa 2007: 18) and attracting new businesses to regions, thereby strengthening potential clusters and correcting the geographical imbalance.
As Professor Jones points out, innovation ecosystems in the UK have withered over the last thirty years. Deindustrialisation has initiated a trajectory whereby many regions are not just economically lagging, but locked into a ‘low skills, low innovation, low productivity equilibrium’, trapping workers into a system of regional employment immobility. Moreover, since the 1980’s total spending on R&D has stagnated, with the UK falling starkly behind other research intensive economies. The Figure 2 below represents this stagnation, pitching the UK alongside international competitors like the USA, China, France and Germany. Despite Chris Skidmore reinstating the government’s commitment to levelling up R&D in a speech earlier this year, doubling the public R&D budget, this three decade stagnation is the background to which the R&D levelling up agenda must be set.
Figure 1: Details the intensity of research carried out by selected countries, in terms of gross expenditure as a percentage of GDP. The graph is taken from “A Resurgence of the Regions: rebuilding innovation capacity across the whole” (Jones, 2020) with the original data from the OECD.
The levelling up target, revealed in the 2017 Industrial Strategy White Paper, is to increase R&D to the current OECD average of 2.4% of GDP, reaching a total spend of around £54 billion by 2027, with a large increase coming from the private sector. In July 2020 the Government released their UK Research and Development Roadmap, which lays out in detail the ambition to level up innovation. It notes the importance of strategically investing in new technologies, supporting entrepreneurs and start-us, retaining talent through establishing an R&D culture, driving up the UK’s competitiveness and developing a “world leading knowledge economy”. The Roadmap also acknowledges the regional dimension to the innovation problem, committing to place-based results in recognising that “research and innovation activity, and funding is highly concentrated in certain parts of the UK” and addressing this imbalance will improve productivity and promote resilience. A key tool in tackling the regional question will be the Government’s release of their R&D ‘Place Strategy’, promised later this year. This strategy will supposedly lay out how investment in research and innovation will contribute towards levelling up across all corners of the UK, aligning with devolved priorities and speeding up our economic recovery.
Impact of Covid-19
The enduring legacy of COVID-19 will be felt across industry, infrastructure, entrepreneurship, business and research for years to come. The Enterprise Research Centre suggest that innovation will suffer, as not only could volatile markets reduce innovation incentives, but firms tightening their purse strings may be less willing to make more precarious investments. Investors choosing to reserve funds and not seek out new opportunities will no doubt have a knock-on effect on the government’s levelling up agenda and getting the UK total spend to the OECD benchmark. Fragmented supply chains will impact through lost orders and those SME’s who have much narrower business margins will also need tailored, continual support as lock down lifts. For example, a loss of momentum in product development, combined with limited access to cash reserves impedes SME’s ability to survive the crisis (Royal Academy of Engineering, 2020). Many high-tech companies, those with specialist facilities, have been often classed as ‘non-essential’ throughout the previous months, thus shutting down their activities. Moreover, following the disruption to universities and colleges, maintaining the skills pipeline to R&D intensive businesses will be essential.
In their recent publication the Enterprise Research Centre reflect on the impact of the economic downtown in 2008, where product innovation fell by 27%, and process innovation by 23%. They note how the proportion of firms which undertook R&D halved throughout the recession, only recovering to around 20% of the loss by 2014-16. Figure 2 below details this innovation decline and rise from 2008-2016.
Figure 2: Shows the percentage of firms innovating, with 2008/10 representing 100%. Graph taken from Enterprise Research Centre, May 2020.
Moreover, not only were the falls in R&D activity higher amongst smaller firms, but the levels of recovery varied across regions, with the North East and North West fairing much worse than London, Scotland and West Midlands as Figure 3 below illustrates.
Figure 3: Graph showing total spending on innovation by region in the UK, with 2008 representing 100%. Graph taken from Enterprise Research Centre, May 2020.
Nevertheless, in their recent paper Stimulating R&D for a faster and better recovery the Royal Academy of Engineering argue that COVID-19 has brought the importance of R&D in the UK into “sharper focus”, recognised as a critical element to managing the economic recovery ahead. Moreover, it has been demonstrated that the firms which manage to continue their R&D activity throughout economic downturns have been in a stronger place to recover. As such, the March 2020 budget remained committed to increasing public investment in R&D and cutting-edge technology, increasing R&D tax credits for the private sector and providing the British Business Bank with the additional resources needed to introduce a £200 million investment programme. Moreover, Innovate UK continues to support innovation through funding, with a package of £750 million available to SME’s, including grants and targeted loans.
The Roadmap acknowledges that a greener, fairer, more innovative and more resilient society is the main goal following the aftermath of COVID-19. The Government recognises the essential role innovation will play in facilitating this transition, driving productivity, creating and applying new ideas and technologies, and providing exciting careers in a burgeoning new sector. Moreover, the regional dimension to innovation post COVID-19 is becoming increasingly documented in government strategy. Chris Skidmore spoke about renouncing the north-south narrative and adopting the “principle of subsidiarity”, developing a “one nation” R&D strategy that drives a common sense of purpose amongst government, academia and industry. Mentioned too were the shared priorities and the current importance of building networks and strengthening collaboration towards a “single direction of travel”.
For Professor Jones, a critical element will be driving innovation in areas which are at present economically lagging. A key mechanism for this will be establishing “new centres of translational research” that increase the productivity of existing bases of business, as well as attracting new ventures into these areas. This will take close collaboration with the private sector, establishing strong and sustainable links with academia and involvement with skills at all levels. Exploiting the global research bases of our universities is also key, with many new partnerships forming throughout the pandemic response (Royal Academy of Engineering, 2020). Thus strengthening the development and exchange of innovation ideas between universities and government will be a crucial component of the road to recovery. Establishing and maintaining vibrant, sustainable, globally connected and well-funded innovation ecosystems across the country has the potential to elicit innumerable social, economic and environmental benefits. Through such uncertain times the correct policy response from government will be essential to ensuring the levelling up agenda is achieved and the UK can effectively respond to the myriad of challenges the future holds.
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Ederer, P., Schuller, P. & Willms, S. (2011) Human Capital Leading Indicators: How Europe’s Regions and Cities Can Drive Growth and Foster Social Inclusion. Available at: www.lisboncouncil.net
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Royal Academy of Engineering, 2020
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