The Innovation-Exploitation Barrier: Science and Technology Committee Report

HL Deb 19 June 1997 vol 580 cc1372-400

5.5 p.m.

Baroness Hogg rose to move, That this House take note of the report of the Science and Technology Committee, The Innovation-Exploitation Barrier (3rd Report, Session 1996–97, HL Paper 62).

The noble Baroness said: My Lords, I am most grateful to have this opportunity to draw your Lordships' attention to this report of the Sub-Committee of the Science and Technology Select Committee of this House. It was an honour to chair the sub-committee on a subject of such importance, particularly at a time when all economies are undergoing dynamic transformation, ascribed to the digital revolution though perhaps more correctly associated with the impact of the falling real price of computer power.

But I should like to start by thanking human power—the members of the sub-committee—for the energy and good humour with which they applied their formidable intelligence and accumulated expertise to the task of completing our inquiry by mid-March. My particular thanks go to our clerk, Dr. Don Rolt, who had to hit the ground running when he was parachuted into committee life from our embassy in the United States, as well as to Dr. Tim Bradshaw and our special adviser, Professor Peter Swann of the Manchester Business School. Those thanks are more than usually heartfelt, in that it was entirely due to their combined drafting marathon that we kept to the very tight timetable imposed by the looming advent of Prorogation.

Since the subject of our inquiry straddled both industry and finance, I should declare a number of interests. I am currently chairman of the consultancy London Economics. I am also about to become chairman of the Foreign and Colonial Smaller Companies Trust. I am a non-executive director of NPI, GKN and the Energy Group, and a member of the international advisory board of NatWest.

We were stimulated to engage in our inquiry by the Bank of England's recent report on the financing of technology-based small firms, in which the Bank called for wide debate on the height and—I should say—permeability of the innovation-exploitation barrier. But with limited time, our focus was necessarily narrow. We concentrated mainly on the interface between universities and new businesses, although we took the opportunity to review some of the issues related to the provision of capital raised in the Bank's report, whose conclusions we generally supported. We were extremely fortunate in the quality of our witnesses from industry, the venture capital business and the universities, many of whom appeared before the committee at extremely short notice, itself perhaps evidence of the increased attention paid to these issues on all sides.

To a certain extent we attempted to benchmark our findings against those which followed an earlier investigation by the Select Committee into innovation in manufacturing industry, which was conducted in 1991. Our general conclusion was that the climate had indeed changed for the better. We were greatly encouraged by the amount of evidence on the impact of a change of attitude towards risk taking, part of a general change in culture in this country since the beginning of the 1980s, which I hope all sides of the House would wish to acknowledge. Many of our witnesses indicated that research partnerships between industry and universities were increasing and that business incubation was hatching out bright ideas into viable enterprises.

But it was not all good news. Our report highlights important remaining obstacles to development. We believe that a number of the support schemes funded by government have not yet realised their full potential. In this country, we have clearly still further to go in dismantling the barrier before we can match the powerful academic-industrial relationships seen in the United States.

The committee identified a number of outstanding concerns. We believe that a funding gap continues to be faced by certain start-up businesses because of the disincentive effect of the relatively high cost of carrying out "due diligence" for small investments, although some of that cost may be self-imposed by investors at inappropriately high levels. New data from the enterprise investment scheme provide the opportunity for a more detailed evaluation of the contribution made by business angels and an assessment as to how their role could be expanded, which we urge the Government to carry out.

The committee also believe in the need for review of an area which we did not have time to investigate fully: the system supporting venture capital trusts. The intention was clearly to encourage risky investments in start-up businesses and we were warned of the need to ensure that it continues to meet its primary purpose. Other noble Lords may have more to contribute on that point.

We were surprised to discover how little hard evidence there was on the effectiveness of a number of different developments which carry the fashionable label "science park" or the slightly more clearly defined notion of a "business incubator". We were most fortunate in that our adviser, Professor Swann, is a recognised expert in the analysis of clusters and their impact on economic development.

Since we concluded, a report has been published urging the creation of more technology parks in the capital, commissioned by the London Planning Advisory Committee. This reinforces my view that some rigorous appraisal is needed in this area. As Microsoft pursues its widely-advertised intentions to create Silicon fen, Cambridge may provide a particularly useful case study. This area is one in which I know the noble Lord the Minister takes a great personal interest, so I hope that he can be prevailed upon to respond to our recommendation that government should help the spread of best practice by leading or initiating some serious research.

We also remained concerned about the patchy quality of management skills in high-tech start-up businesses. I hope business schools—perhaps indeed the new Oxford School of Management—will take note of our encouragement to promote the study of innovation. Business education and management theory tend to be disproportionately concentrated on the organisation (and re-organisation) of large companies.

In the time available we could not conduct a serious investigation on the condition of the science base, which is clearly the seed-bed of high-tech innovation. But we did receive some warning signals. A number of witnesses raised concerns about the standard of equipment in universities, arguing that this might lead industry to seek research partners elsewhere in the world. Although there is inevitably a danger of special pleading in such evidence—no doubt many businesses would like to see universities carry more of the capital costs of the exploitation of scientific ideas—we believe there is an issue here for the funding councils. We urged them not to spread gain or pain too evenly, but to ensure that a higher proportion of funds be channelled into creating centres of excellence. The corollary is that such special equipment should be available to researchers not merely from the university in which the centre is located, but those of high calibre from other institutions. We received a good deal of evidence about certain weaknesses in the operation of the Foresight programme. Certain lines of research fall across or between sectors on which Foresight is focused, and we recommended that a clear policy of seeking out "misfit" lines of research, and evaluating them separately if necessary, should be established. We also believe that this programme suffered from a common weakness: it was insufficiently well known by potential users. Communication is critical. We recommend that future Foresight reports should be made more accessible to small businesses.

An important theme of the report is the need for more rigorous evaluation of systems intended to support innovation in order to ensure their objectives are met. If I may be permitted a brief personal note, my experience inside government taught me that our system of administration is better geared to initiation than follow-through, and that conscious effort has always to be devoted to rebalancing this tendency. Monitoring and measuring the results of programmes, and feeding this information back into their application, may be a lot less exciting than announcing new ones, but it is crucial to the effective use of taxpayers' money. I beg to move.

Moved, That this House takes note of the Report of the Science and Technology Committee, The Innovation-Exploitation Barrier [3rd Report, Session 1996–97, HL Paper 62].—(Baroness Hogg.)

5.13 p.m.

Lord Winston

My Lords, it was a privilege to serve on the committee. The noble Baroness, Lady Hogg, has been very fulsome in her praise of the intelligence of the committee. I am sure that she is correct, but perhaps with one exception. Therefore, I apologise for the short interjection that I shall make during this debate.

I wish to draw attention to a couple of issues which are highlighted in the report which, from some personal experience, I believe are important in the academic sector. The first concerns the crucial question of the attitude of universities and university departments to intellectual property rights and their exploitation. As the report quite justifiably and correctly says, there is a very real need to increase awareness of the essential task of universities to draw on intellectual property rights, IPR, benefit from them and increase their budgets. But there also has to be a degree of realism in the universities. At the moment and in general, in my limited experience, there may not always be the right balance. It is fair to say that in some cases the universities are still somewhat unrealistic and we need to address that issue.

I wish to draw the attention of noble Lords to two examples that I came across recently. The first relates to a venture capital company I spoke to two or three weeks ago. I tried to interest the company in my work and some IPR in which I am involved. The company discussed with me its experiences in dealing with a university department with which I was connected. The company had spent over a year negotiating with the department, but finally accepted the fact that the percentage of return was not realistic. That simply held up the possibility of investing in that research. That is certainly still a risk.

The other experience concerns my own medical school, which involves only a small amount of money. I negotiated with a drug company in relation to a particular research experiment. I was perfectly happy to receive the money that the company was offering, but felt it appropriate to put the money through the medical school company that deals with that kind of work. I was clearly going to gain the financial benefit I needed, plus a little bit of overhead. The medical school was so hard-headed in its negotiations that eventually the drug company went elsewhere. I lost the money and the research, lock, stock and barrel. That experiment was finally carried out in another university department in Europe and the results were published last month. That is rather irritating.

In my experience, there is a slightly more flexible attitude in the United States. In biotechnology we are competing mostly with the United States and we need to look to their example for the moment. I should declare an interest as a university academic. I have been very interested in the notion of gene transfer and transgenics, not in small mammals (mice) but in rather larger animals, and have been looking at that technology in some detail. Some of the preliminary research has been done in my own department and some by a colleague in California. Patent applications are proceeding from that work and the work looks extremely promising. There is a great deal of interest in it.

It is very interesting to see the difference of approach between my American colleagues in California and the speed with which their lawyers got together and looked at the patent application, and the degree of flexibility that they showed, compared with the approach in my own university department.

The other concern I have works both ways. I was at a meeting in the United States on gene therapy at, I regret to say, a ski-ing resort, Snowbird, about two months ago. One of the net results of the interest in exploitation can be a degree of secrecy, which is very counterproductive to scientific research and basic research. I sat through one all-day session trying to unravel the secrets of gene technology, but found again and again that a series of commercial companies were clearly interested. Therefore, each experimenter in turn was not prepared to divulge the specific nature of the experiment being carried out. That is always a problem when we are trying to exploit a project, but clearly we have to try to find a balance in the universities on this issue.

The report makes a very important point about the creation of centres of excellence. There is very clear evidence from Professor Roberts that we are in a very critical state in the universities where most of our basic research is currently carried out. It is clear that the fabric of our universities is deteriorating. Laboratories are finding it extremely difficult to maintain equipment. There is increasing worry in the higher education sector, not least because decisions are currently being delayed. We await with anxiety the Dearing Report to find out what the fate of university spending will be. We are in a very competitive situation.

Europe as a whole spends less than 2 per cent. of its GNP on research and development. If we are to remain competitive in the world as a whole, particularly in biotechnology, we must look at how we can best focus our research. The report emphasises the need for that and the fact that in concentrating expertise in departments, we shall need to open up our university departments so that students and researchers from different universities can have access. Clearly, that will be a problem because, as has been pointed out, the money that is allocated by the higher education funding councils is not adequate to meet all our objectives. One of the real issues facing exploitation from academia is the serious concern about our lack of equipment and research facilities which are becoming inadequate.

We are living in an increasingly competitive world economy, as many of us have said repeatedly. It is clear that in the next century we shall live on brains, not brawn. This is a vital report. The exploitation of intellectual property is one of the most important areas not only for the development of this country, but for European development also. Because of the very nature of our science base which, particularly in the field of biotechnology, is one of the best in the world, we shall have to lead in Europe. We must therefore address this issue carefully. The report goes some way to helping, particularly with regard to focusing on such good university centres.

5.21 p.m.

Lord Kirkwood

My Lords, the ground covered by this report from the Sub-Committee of the Select Committee on Science and Technology, most ably chaired by the noble Baroness, Lady Hogg, on the innovation-exploitation barrier—sometimes described as the innovation or development gap—has been dug over many times in the past, including in a previous report by the Select Committee in 1991. Therefore, we cannot expect to have discovered any radical simple solutions to the problem.

The premise from which we start is that the UK is a fertile ground for generating new scientific ideas but is poor at nurturing them to sturdy plants in a commercial environment which is capable of producing abundant fruit. That view has been challenged by Mr. Ian Harvey, of BTG, previously the British Technology Group, who believes that the UK does pretty well in comparison with our European neighbours in exploiting new ideas. The culture certainly seems to have changed recently in the United Kingdom, particularly in the universities where academics are now much more aware of the importance of intellectual property rights, the need for patenting and the potential for the exploitation of their work.

Having said that, we are not as successful as the United States. Clearly, there is no room for complacency. The report points to a number of areas where fairly small and painless improvements might be made with little public investment. From the broad survey of the report which the noble Baroness has given us, the two areas which I should like to single out and to which I should like to draw the attention of the House relate to the provision of seedcorn funding and the need for business incubators at an early stage of innovation. The two are interdependent because the incubators provide a protective environment for company growth, with facilities which reduce the perceived risk of a new business venture and therefore encourage the investment of venture capital.

It is generally acknowledged that the difficult step in proceeding from the original laboratory concept or invention to a successful commercial product or process lies at the development stage where sums of about £100,000 are required—that is, after personal and family funds have been exhausted. At that stage, classic venture capital finds that the cost of "due indulgence", as it is called—that is, in assessing the risk—is just too high relative to the investment that is required to be made.

It is at that point that business angels can make an invaluable contribution. Business angels have often made their money by running technically-based companies themselves and they are well placed to make a rapid assessment of the technical viability of a new enterprise in fields of which they may have experience. Therefore, they are happy to accept the assessed risk and to invest small but significant sums in the enterprise, given the tax advantage that is available to them. Additionally, and importantly, business angels may wish to provide management advice and hands-on involvement at the early stage of growth. Having brought the company to a more viable stage, normal venture capital can then be attracted to allow further expansion. The rapid development of small ventures is another attraction provided by the business angels because at that stage the speed at which a venture grows is often important in securing a new market niche.

The problem then lies in bringing together innovator and investor in the form of the business angel—in other words, establishing an effective dating agency or service. That function is beginning to be undertaken by some banks and other bodies. However, it seems that there is a barrier which has not entirely been removed. The report makes the important recommendation that the role of business angels should be further examined by government in order to identify ways of expanding their role.

A complementary concept to that of the business angel is that of the incubator, to which the noble Baroness referred. An incubator is defined as a property with small work units, providing a supportive environment for entrepreneurs and investors during the start-up stage of their businesses. Incubators are often associated with the universities and provide a symbiotic relationship in which some technical problems can be fed back to the university departments as research projects, and where the staff can readily interact and migrate between the two. That is an exciting concept for bridging the innovation gap. The evidence of success in the United States is encouraging. However, there is limited experience of such ventures in the United Kingdom and the report makes the strong recommendation that research into the effectiveness of incubators is required.

It is to be hoped that the Government will examine all the recommendations presented in the report as well as the two to which I have referred as a contribution to improving the capacity of UK industry to create wealth from our very successful science and engineering base.

5.30 p.m.

Lord Dixon-Smith

My Lords, it was a great pleasure and privilege to take part in this particular examination under the leadership of our chairman. I commence my remarks outside the scope of the examination by acknowledging the tremendous drive for technological improvement that exists in the majority of commercial enterprises. "Innovate or die" is not a bad precept for any business in today's world. That thrust which often spills over into small firms and university research departments, and which is a continuous process for dynamic business, is not the focus of our attention but is a very important sector for innovation.

The report is directed particularly at an examination of the reasons for the often expressed criticism of British society that it is long on ideas but short on implementation, to explore the validity of that assertion and to see what steps might be taken or are being taken to improve matters. Critical to the future of our country's economy is success in developing new businesses, particularly in the new technology fields. While many new small firms may not become global businesses and some will fail altogether, a number will grow and become the giants of the future, so we neglect this area at our peril.

It is my opinion that first and foremost what we are discussing is a problem of human motivation. What is it that turns a researcher in a laboratory into a thrusting entrepreneur; or, if that question is inappropriate, how does one motivate university research departments to look for opportunities for commercial development and the establishment of new businesses that might result from their work?

I believe that there are three factors: mutual interest, peer pressure and money. I place no order of priority on those factors. I first became aware of this issue when in the United States undertaking an earlier examination by the Committee of Careers for Academic Researchers. In that country there appeared to be a fairly common approach in the university field where a circle of mutual interest had come into being. Universities funded research and researchers, and held the intellectual property rights to any discoveries. The researcher who made a discovery with commercial potential would set out to establish a new business. If successful, he would gain from the capital appreciation of the business and perhaps by salary. Of course, in so doing he would generate a stream of revenue that flowed back to the university, and investors gained through capital appreciation in the way that investors do. While it is becoming more common to see this pattern in the UK, there is still a wide variety of practice. As the noble Lord, Lord Kirkwood, has said, the committee received encouraging evidence in this area.

However, I raise two points that cause me concern. First, there is a strong temptation for the holder of intellectual property rights to sell them for immediate capital gain. Although this may appear to be beneficial in the short term, I suggest that it may well result in long-term loss. It is almost impossible to assess the true value of intellectual property rights in a market-based economy. It follows that inevitably sellers are weak sellers. In addition, if the intellectual property is sold abroad—Japan is particularly active in this field, and paragraph 3.6 on page 18 illustrates what is going on—the benefits of enhanced commercial activity, employment and tax revenues are lost to this country. I can only urge all who are working in this field to think very carefully what they are about.

The second potent factor is the background fiscal climate. Starting up new businesses in this field is high risk. Market potential is a slippery commodity and failure is always in the background. We tend to regard failure as unacceptable, but if we wish to encourage greater activity in this field attitudes to failure must change. In addition, one must recognise that because it is a high-risk process, it needs to be a high reward area if one is to see it expand. In particular, the successful entrepreneur needs an exit route that is not penalised by the tax system. If society at large wishes to encourage for everyone's benefit a high level of activity in this way, it must put in place a tax regime that encourages the activity.

Mr. Quysner, chairman of the British Venture Capital Association, gave evidence to the committee. I quote from page 63. Perhaps I may take the liberty of adding a couple of phrases in brackets to clarify his evidence: If I make an early stage investment in the [new] company alongside 3i and the entrepreneur, and the company is successful. then I exit [the company is taken over], 3i will pay no capital gains tax because it is an investment trust, my partners will pay no capital gains tax because they are exempt and the entrepreneur will pay capital gains tax at 40 per cent., having created a great deal of wealth and having created tax revenues". Ouch, my Lords!

As we run up to another Budget we can only hope that the Government, and in particular the Chancellor of the Exchequer, will bear in mind that the impact of action in this area in the wrong way may quite literally kill the goose that lays the golden egg.

I end where I began. This is a problem of individual attitudes, whether they be among those who control research establishments, direct investment or actually undertake research. It is vital for the future of this country that there should be great activity in this area, and it is essential that we create the conditions that encourage that activity. It was a great pleasure to take part in this particular examination.

5.38 p.m.

Lord Tombs

My Lords, I, too, took part in the deliberations of this committee. I add my congratulations to the noble Baroness, Lady Hogg, who chaired the proceedings with great patience and considerable purposefulness. She needed to be purposeful because it was decided that, in view of the pressure of time caused by the electoral timetable, we should restrict ourselves to a limited part of the subject. That was a good decision, because innovation and its exploitation constitute a series of very complex problems. The fact that we had to focus on one particular area was valuable in concentrating our minds.

Over the past 15 years or so I have spent a great deal of time on this subject as an industrialist on various government bodies and, more recently, as chancellor of the University of Strathclyde, which has a very good record in this field. I have come to the conclusion that people try to be too prescriptive. It is not possible to be prescriptive on this barrier and the climbing of it because of the variability of the factors involved. Present in each case are considerations of financial needs, technological needs, market knowledge or lack of it, and management experience or, more often, the lack of it. Therefore one should not provide a prescriptive solution but a useful environment, encouragement and effective support in the areas where the workers—those who are trying to climb the barrier—are themselves deficient.

There are a number of ways in which this barrier can be surmounted. One route on which the committee received some evidence was via the supply chain of large companies. Some companies—not enough—encourage their suppliers to innovate. They guide them, help them and encourage them to extend their market to others. That is a great source of strength for those companies. The process could be extended by the Government's adoption of the US small business innovation scheme which is described in the report. Large customers, such as government or large industries, can encourage smaller companies to develop high quality and self-confidence in their products. They can also provide a useful seal of approval which those companies can use in the market.

A second way of overcoming the barrier is licensing. It is a short cut which involves sacrificing some of the potential rewards in exchange for the financial strength, marketing and technological resources of large companies which they license. The role of the British Technology Group has been mentioned. It is a valuable and highly effective one, with feedback both of advice and of finance.

The problems of inventors, whether they are individuals or universities, seeking to exploit their ideas correctly are manifold. They have been explored fully over the years, and they are well known. The provision of finance may, understandably, have attracted much attention and probably because of that the development of the venture capital market has been rapid and constructive. Other support is necessary for the overloaded entrepreneur, and the role of the recently developing participating business angels—individuals with experience of building their own companies who then invest in new, often similar companies—is a powerful one. They bring not just money but experience to people who are themselves almost, by definition, inexperienced. They provide an insight in management which is deeply lacking.

The role of universities is well developed (though unevenly so) as innovators. Some are good at raising their own seed capital and at preserving their intellectual property. Others are not so good. There is a need to spread best practice.

The report also mentions the long-standing problem that small and medium-sized enterprises are too often unaware of university resources. Universities have to market their skills to a diverse and preoccupied audience in small and medium-sized companies. That is often not an easy task. There are things that can be done. The chemical industry has for long been active in this sphere, and the initiative of the Royal Society of Chemistry in running a series of conferences and exhibitions, imaginatively titled "Technology Car Boot Sales", is to be commended. It could be emulated by other learned societies in other disciplines.

The report mentions the lack of awareness in small and medium-sized enterprises of the Foresight programme. Frankly, I am not surprised at that. There is a similar lack of knowledge in large companies, I am sorry to say. The effects on small and medium-sized enterprises of Foresight will, at best, be second-order because of time pressures. Generally speaking, there is not time to read the reports that come out, valuable though they might be. We are baying at the moon when we hope that Foresight reports will be read by small and medium-sized enterprises.

The programme itself has had considerable influence on the way in which research funds are allocated but it is far too early to judge what effect it has had on wealth creation, which is its primary objective. It is probably too early to evaluate it, but that should be done in the next couple of years because we are changing the direction of science investment in a dramatic way and we need to be reassured that it is achieving its ends.

Britain is rich in innovation. It has become better at exploiting its commercial applications. The task remains to encourage it with sensitivity and discrimination by offering effective support in a way that does not increase the load on heavily burdened entrepreneurs seeking to be everyone in a company with only 24 hours in a day. The report makes a useful contribution to solving the problem.

5.44 p.m.

Lord Craig of Radley

My Lords, the subcommittee is to be congratulated on producing a readable and interesting report. The topic is one which has attracted a great deal of attention, interest and activity over the past decade or so.

Rather than dwell on many of the sound specific recommendations in the report, I should like to stand back for a moment to consider what has been going on. Even if we go back only as far as the committee's 1991 report on Innovation in Industry, I am amazed at the large number of initiatives, studies, reports and conferences which have been devoted to that topic. Those have not been confined to government, or even one government department. Scientific and trade associations, academics, the Bank of England, the CBI, and many others have all spent goodness knows how many hours and days on those issues. The question we must ask ourselves is not whether we have been giving enough thought to those problems, rather why have not all those efforts, and the man-hours devoted to them, produced the right results in the field? Perhaps we are not so good at spotting the successes.

Many of the studies start with a basic premise. Indeed, the report we are debating sets the scene in its title. It refers to a barrier. The premise, of course, is that there is a real problem which faces the UK. We are going to slip genteelly into industrial oblivion. The writing is on the wall. Everywhere else in the world seems to be able to do it better. Countless witnesses, in evidence to the committee, set the scene for their remarks, either overtly or by inference. That scene is that there is this barrier; that things are bad—perhaps worse than they have ever been before.

Even if someone starts their evidence by grudgingly admitting that things may not be as bad as they used to be, goodness, that is still no reason for complacency—shudder the thought. We have to do a great deal more, we are being told, if we are not to be overtaken and marginalised by the nearest developing world nation. I do not believe that I need to say more to sketch my point. It has been made by other noble Lords this evening.

Noble Lords who have read the report will have seen those pitches time and time again. Even Mme Cresson, the European Commissioner responsible for research and education, has spoken of an innovation deficit in Europe and the need to foster a genuine innovation culture. Has that British disease, too, crossed the Channel?

What we need to ask ourselves is why it is, despite all the many efforts, from Realising our Potential, through Foresight to SMARTS and SPURS and so on, we are not yet at the top of the pile. One reason is that the participants in many of those exercises, or those who take a close interest in them, are few in number, and keep reappearing, like well known actors and actresses, in each new initiative. It is all a bit esoteric—of deep interest to some, but not always very specific.

Universities are urged to do something. Funding councils are given some advice. Someone, usually the Government, needs to refocus their ideas or efforts. I am not sure how all that grabs the managing director of a small business, where cash flow and bottom lines, to say nothing of markets and staff problems, will be the issues which fill his or her in-tray. We have often seen good advice given to concentrate on a few key issues, to avoid spreading research funds too widely, and so on.

Always assuming that the basic assertion upon which so much of that work is based is correct—that is, that there are barriers and poor interfaces, and a serious widespread lack of enterprise—my feeling is that the messages that we are trying to transmit need to be given a great deal more thought; thought, not about their content or importance, but how to publicise and interest the real wealth producers and potential wealth producers in those topics. I fear that the ability, or the lack of it, to get the key points across too often goes by default. We are on to the next study or conference before we have succeeded in getting the findings of the last one to the real audience. I welcome the emphasis of the noble Baroness, Lady Hogg, on that crucial point. I was glad to note that the Royal Society of Chemistry recognises that there is "an awareness gap" and is working on closing it.

Finally, a passing thought on the reasons for clusters and science parks. Paragraph 6.18 of the report recommends that a study of science parks should be undertaken to determine the elements which are crucial to success. I ask myself why it is that antique dealers seem to group their shops together in a town; sometimes in one town but not in another. Why do we get half a dozen or more fast-food outlets within a few yards of each other? Why in souks and other bazaars, whose existence spans the centuries, do we often find shops and stores which sell the same product—for instance, carpets, material or gold—grouped together? If we knew the answer to that perhaps we would know the answer to the success of science parks.

Perhaps it has nothing to do with the reputation of the main institution, the accommodation on offer, the infrastructure, or easy access to public transport. Perhaps environmental and cultural features are an enjoyable extra, not a reason for a successful cluster. Perhaps, put simply, it is because customers like to go to a place where they will find what they want, be able to compare prices and strike a real bargain. Mind you, that does not explain why some towns are full of antique shops while others have none; or why in the souk gold shops are to the left and the carpets for sale are to the right of the centre alleyway. Perhaps it is all a matter of chance and is not scientific. If we knew the reasons for that perhaps the studies would produce better ideas. Perhaps the whole thing is as unscientific as the reason why No. 11 buses often travel in clusters.

5.52 p.m.

Lord Cuckney

My Lords, as a member of Sub-Committee II of the Select Committee whose report we are considering, I too wish to begin by paying tribute to our chairman, my noble friend Lady Hogg. She exercised her role in a particularly apt and constructive way when we take into account the severe time constraints under which we had to operate.

The report is clear and explicit in its recommendations. I do not wish to take up your Lordships' time by unnecessarily repeating what is stated so clearly in it. However, I wish to emphasise one or two particular points which I believe should receive continuing attention.

First, there remains a tendency too often to attempt to eliminate risk, yet risk is an essential feature and characteristic of entrepreneurial activity. By all means, expose areas of potential risk; by all means, identify areas of risk. However, it must be up to the potential investor to exercise judgment, and one must remind him of caveat einptor.

Attempts to minimise risk have, for instance, led to the apparently anomalous situation which has developed, and to which attention was drawn in our report, of the venture capital trusts which provide tax relief for investors. They are intended to invest in a range of small companies in order to spread a risk, but are founding asset schemes with a high property content. I emphasise the word "apparently" because our committee did not have time to look into the issue in any detail. I have no particular trust in mind, but one must recall that one of the reasons for the ending of the BES schemes was the number which became involved not in risk-taking propositions but in strong asset-backed schemes.

Secondly, the deterrent to the establishment, growth and development of small companies, in particular when trying to raise extra funding, is the high cost of due diligence. I recognise the fact that that poses a problem for professional firms providing due diligence services, particularly in the light of the problem of the costs of professional indemnity cover—that is, if they can obtain professional indemnity cover. It is a growing problem. There needs to be a fresh approach to due diligence, concentrating much more on identification and highlighting areas of risk in much broader terms rather than attempting to provide such excessive and costly detail. I recognise that that could conflict with the justifiable need for greater investor protection, but, again, it must be left to the investor to asses risk, provided that there has been no deliberate concealment.

Thirdly, I do not believe that there has been a shortage of venture capital, but I do believe that there is a shortage, on acceptable terms, of working capital and loan capital. I am therefore greatly in favour of strengthening and extending the small firms' loans guarantee scheme. I understand that in 1992–93 there were 2,342 loans worth some £52 million. In 1995–96 those had risen to 7,478 loans worth approximately £274 million. Of course, some encouraging changes were made to the scheme in March 1996.

Finally, I believe that the newer universities, especially in the former polytechnic sector and often with strong local connections, can do much to help not only themselves but also small businesses in their area, particularly with the development of business incubators. I and I am sure other members of the committee were particularly impressed with the developments by the University of Strathclyde in those areas—and it is pure coincidence that its Chancellor is a member of our committee.

5.58 p.m.

Lord Cobbold

My Lords, I, too, welcome the excellent report and congratulate the noble Baroness, Lady Hogg, and her team on its preparation and presentation. Two of the subjects with which the report deals are particularly close interests of mine. The first is the importance of developing relationships between the universities and industry. I have the honour to be president of the development committee and a governor of the University of Hertfordshire, which, perhaps together with the University of Strathclyde, is leading the way in its efforts to promote productive links with industry. As Hatfield Polytechnic, the university's foundation was closely linked with de Havilland and the aerospace industry, now sadly no longer at Hatfield. But as aerospace has declined, Hertfordshire is rapidly becoming a cluster of pharmaceutical and information based high-tech. industries. The university regularly tops the league tables of the new universities and it has already had many research links with industry. It is an active partner in Hertfordshire Business Link, working closely with the Hertfordshire TEC, Hertfordshire County Council and the chamber of commerce.

The university has long promoted sandwich placements of applied science and technology students in local industry so that theoretical knowledge is underpinned by practical experience. Such students have regularly found subsequent employment with those firms.

More recently, the university has been promoting teaching company schemes under which high quality graduates are placed in companies to tackle strategic issues under the dual supervision of a member of the university staff and a senior executive in the firm with financial support from the DTI. Ten such schemes are in operation or under negotiation and more are in the pipeline. I mention that because I believe that we are moving in the right direction and I welcome the report's support for those initiatives. I hope that those initiatives will be extended.

My other particular interest in the report is the problem already mentioned by several noble Lords of the availability of seed capital for start-up entrepreneurs. Through its various mechanisms, the City of London is an ample provider of venture and development capital to companies and entrepreneurs which have already established a track record of success. The problem area, as the report points out, is the first £100,000 which can transform an idea into a prototype, which in turn can begin to create a market.

The problem is not new. The various schemes identified in the report have all helped. I should mention in particular and welcome the small firms loans guarantee scheme, which the noble Lord, Lord Cuckney, mentioned and the SMART scheme. Both those schemes have achieved a great deal and I trust that the new Government will follow the committee's recommendations and give further support to those schemes.

The report stresses also the importance of business angels, as has already been mentioned by the noble Lords, Lord Kirkwood and Lord Tombs. It promotes the development of networks of business angels. In this computer age, it is theoretically easy to develop a national database of business angels. The problem is that many such persons are naturally reticent and often highly individualistic. They would not take kindly to being bombarded with hundreds of schemes. Therefore, it is likely to be difficult to persuade such people to allow their names to be included on such a database.

However, I believe that it may be possible to overcome that difficulty by having some sort of confidential filter; that is, a manager or a dating agency, as the noble Lord, Lord Kirkwood, suggested, to preserve the confidentiality of the business angels and also to act as an assessor of the projects submitted. Such a body could be funded by government, the private sector or jointly. That is a matter for debate. But I hope that the report will prompt serious consideration of that and similar ideas.

I believe that another possible source of that elusive initial £20,000 to £50,000 is the National Lottery. The new Government have promised already to divert some of the lottery proceeds to health and education. Backing young entrepreneurs with seed capital is another appropriate and positive use for lottery resources. Converting an idea into a successful business is itself something of a lottery and winning or losing is always a gamble.

The Prince's Trust does valuable work in that area but there is room for more. Two years ago, with the support of 3i, I put the concept of a millennium technology fund to the Millennium Commission for that purpose and 3i had agreed to evaluate the projects on behalf of the proposed fund. The idea was rejected by the commission as being outside the scope of the Millennium Fund as defined. However, I still believe that the concept has merit and I hope that the Government will give it some consideration in their review of the lottery.

As I said before, I welcome the report and again I thank the noble Baroness and her team. I look forward in particular to the winding-up speech of the noble Lord, Lord Simon of Highbury, for whom I had the pleasure of working for several years and whose presence in your Lordships' House I have welcomed already on an earlier occasion but it is now a pleasure to be able to repeat the welcome to him in person.

6.5 p.m.

Lord Lucas

My Lords, I too am very grateful to my noble friend Lady Hogg and her committee for coming forward with this excellent report. It seems a long time now since I was involved in venture capital and a great deal has improved in that time. I hope that I can offset, to some extent, the pessimism displayed by the noble and gallant Lord, Lord Craig of Radley. Things are now much better. I can scarcely recognise the present scene from that which existed 12 years ago. But there is clearly still a great deal left to do, as the report outlines. I hope that the report will prove to be a helpful catalyst in producing the changes which are required.

I wish to confine my remarks to two principal areas: the DTI and business angels. But perhaps I may first make a few asides. As regards diversity, it is extremely important to have a lot of different schemes providing help. Entrepreneurs have all sorts of different needs. It is extremely important to have different sources of advice and funding. It is very often the oddball who appeals to some other oddball who has money who turns out to be the most successful entrepreneur of all.

Secondly, there is the importance of celebrating failure because 80 per cent. of small companies will end in failure. That must not be thought to be a stigma by the people who have put their heart and soul into it. They must be encouraged to get up and try again. We should honour the people who are prepared to take those risks for taking them. They are not some kind of nuisance to society when they happen to go down, having done their best to succeed.

We must extend that tolerance of failure to the Government. If they are to be successful in promoting and backing such companies, they will fail on occasions and we must allow them to fail as part of the price of success.

I turn first to the DTI. It seems to me that the DTI has a very crucial role to play in technology transfer. A small business which needs technology needs to know where to go for it. It does not have the time to find out or the time to dig around and see what is going on. It needs to be able to go to one source for advice. That obvious source of advice should be the DTI, or an arm of it.

The DTI is also in a position to command the respect and admiration of most academics and those who are involved in research. They will feel comfortable in entrusting the DTI with information about what they are doing and what sort of applications that research may have. Perhaps the DTI should take on itself the task of providing a database of information on companies which are likely to be in the market for research and those providing it. It may perhaps be something based on the worldwide web, although one hopes it will not be designed by the person who designed the present world-wide web site, which is difficult to use. It seems to have been designed by someone who knew what was in it but was unaware that it would be used by people who did not know what was in it. That aside, the DTI could provide such a database and make it available to a range of intermediaries who would be paid by small companies to find the research they wanted or by entrepreneurs to find the people who could use their innovations. That would seem to me a very useful road for the DTI to go down. The one-stop shop concept has been a success as regards general business advice and such a database would fit very well with the DTI's portfolio, especially in view of the great improvement that has come about in that department in the past few years.

Secondly, there is the question of business angels. I pause briefly to pay tribute to the Prince's Youth Business Trust which has been such a successful source of such angels for so many companies during the past five years and which I am delighted to see has been taken under the wing of the new Prime Minister in a way which augurs very well for its future.

There are two aspects of a company which needs £50,000 to £100,000 of new capital which stand out. First, there is the risk. The risk is very high. Therefore, those providers of capital who are large providers of capital and whose capital comes from fundamentally risk-averse sources, such as pension funds, are faced with the problem that they want to carry out a lot of due diligence to assure themselves that the risk is not really as large as it seems. However, they do not have the people to undertake that due diligence and they come up against the familiar problem that arises with people who tip shares in newspapers; namely, that if those people were any good at tipping shares, they would not be doing so in newspapers.

It is the same problem that you face if you are running a venture capital business. If you are any good at picking companies and if you are any good at carrying out the necessary due diligence, it is far better to spend your time doing the due diligence on a £10 million company than on a £100,000 company. Indeed, you would make far more money out of it for yourself and for your investors. The limitation on due diligence is not a financial matter. It is not a question of: if the Government paid you to do it you would do more of it. It is a personal matter. A good individual with good judgment only has so much time in the year and, however much anyone pays him, in a business like venture capital where you are making your money on capital returns you will do a great deal better if you concentrate on the big opportunities.

Then there is the problem that a business of that size needs all sorts of extra help. It probably only has one or two principal people in it and there will inevitably be areas of business expertise which it does not have. Its days will be full of trying to build the business and it will need help as well as cash. No institution is set up to provide that, except, looking back to the old days, the 3is. I believe that the 3is is the exception to the rule and that probably stems from the way that it was founded. Certainly in the old days I remember it being prepared to make investments of as little as £20,000. I believe that that is fading now, although I am not totally up to date with what is happening in that respect. I believe that even those concerned with the 3is are finding the strain of making small investments quite significant. It is possible that the gap is opening up again at the bottom of what they can do.

It is into that gap that the business angel fits perfectly. First, business angels will assess the risk on the basis of what they think of the entrepreneur. That is the risk in such businesses: is he good or bad? He can draw up a business plan but, if he is any good, the actual business that he is doing in three years' time will bear no resemblance to that business plan because he will have found all sorts of new opportunities and he will find new problems arising for which he will have to find new solutions. Indeed, the whole concept will have changed out of recognition. At that level, you are investing in the person, not in the business. That is a judgment which is best made by a business angel rather than by some kind of venture capital organisation.

Secondly, the business angel will be in a position to provide the personal help which is required. If the Government are to consider providing the help and support that such business angels need, I believe that that would be a very profitable way to go. The help that they need is two-fold. First, they need a network. If you are a business angel you will need to know where to go to find opportunities. Similarly, if you are an opportunity, you will need to know where to go to find business angels. It need not be a network in the usual sort of sense; indeed, it could be the souk mentioned by the noble and gallant Lord, Lord Craig—somewhere where you know you will find what you want. It could perhaps be the regional development agencies proposed by the new Government or the new site in Cambridge proposed by Microsoft. What better place for punting than Cambridge, unless perhaps it is Oxford?

Further, business angels need financial fairness. By that I do not mean a lot of tax incentives. If you look back in history at tax incentives, it will be seen that they have not worked well in the area because they tend to attract the sort of investor who is not really interested in personal participation and risk. I certainly remember the days of the BES when that was true and, if it is also true with venture capital trusts, I shall not be surprised.

The other aspect of tax incentives is that, if they are at all significant, the Treasury tends to put terms on them which are so totally uncommercial that they ruin the point of tax incentives in the first place. That was certainly true of the BES scheme and the rules surrounding it which made it almost impossible to make a commercial investment of equity. The Treasury will always tend to try to do that if the tax incentive is too great and the opportunities for loopholes and misuse of the incentive make it too much of an opportunity for those who are not really interested in risk investment to miss.

I shall listen with great interest to the reply of the Minister from whom we shall be privileged to hear twice today. I shall listen with even greater interest to what my noble friend Lord Home has to say in what I hope will be the first of many appearances on the Opposition Front Bench. He is in a fairly unusual position today as he will be making the first speech from this Front Bench after the accession of the new leader of our party. I hope that his telepathy has been working well since 5.15 p.m., so that he knows what our policy is.

6.15 p.m.

Lord Phillips of Ellesmere

My Lords, I hope that your Lordships will excuse me for rising to speak briefly during the gap, but I feel I must add my own contribution to what others have said about the excellence of the report produced by the noble Baroness, Lady Hogg, and her colleagues against a very tight timetable. I should like to make some comments about the debate, to which I have listened with great interest.

My main impression is that, as is quite common, a good deal of the emphasis has been on what universities and university scientists do, can do and might do. That is a quite natural emphasis as it is undoubtedly true that schemes proposed by government, industry or anyone else—indeed, even reports in this House—are listened to and read very attentively by university scientists. They have the habit, rather like children in a large family sleeping in the same bed, of all rolling over at the same time when one of them says, "Roll over". The industrial reaction to these imperatives is generally rather more varied and different. That, I believe, is a great problem.

I should like to follow up a little on what the noble Lord, Lord Tombs, said about the degree to which exercises like the Foresight programme have been successful in networking. To my mind, there is no doubt at all that scientists in industry, in government service and in universities are very well networked. They meet at meetings, they know one another quite well; indeed, they are often colleagues of long standing. In as much as the Foresight programme was aimed at networking—and, in my view, that was its principal objective—it did not really have much to add to the networking of scientists. Where it did have a great role to play was in the networking of that scientific community with the management community in industry. There, I am afraid, it was manifestly much less successful.

There are, of course, good exceptions to the rule that management and science are separate in industry. Indeed, one only has to consider the chemical, pharmaceutical, electronic and, perhaps, aerospace industries to see that it is possible for companies to have managements which are in good contact with their own scientists and with the science base in general. But, unfortunately, there are many companies, even large ones—I have in mind the construction industry, or many of the utilities—in which the managements seem somewhat unaware of the potential benefits to them, their products and processes from contact with the science base.

An equally difficult problem for those companies—indeed, perhaps it is an even bigger problem—is that there are very many small to medium-sized enterprises which employ no scientists at all and who are, therefore, not on the science network. Again, there are exceptions; for example, the new biotechnology companies are certainly not in that category, but many others are. It is a great problem for government to devise schemes that will somehow embrace the management community in these somewhat backward looking large industries and in very many of our small to medium-sized enterprises. My question for the Minister at the end of today's debate is whether he has in mind any possible approaches that would reach areas of the problem that previous approaches have hitherto failed to meet.

6.20 p.m.

The Earl of Home

My Lords, having successfully avoided sitting on any technology committee throughout 30 years in banking, it is perhaps rather alarming to be standing here on the first occasion at the Dispatch Box to comment on a report of such an august body as the Select Committee on Science and Technology.

As others have done, I thank my noble friend Lady Hogg for initiating this debate. She has received many congratulations from other noble Lords. I, too, thank her for her hard work in chairing the sub-committee. I also add my thanks to those members of the sub-committee for their hard work in producing what is a thought-provoking document. We are also grateful to those people and institutions who took considerable time and trouble in amassing and producing the evidence. From these Benches we welcome the report and we are pleased that the general thrust of it recognises that progress is being made in breaking down the innovation-exploitation barrier while correctly pointing out that there is still much further work to be done and that the barrier, while shaky, is still far from destroyed. I do not intend to take up much time by going through the report in detail for both it and the evidence given to the sub-committee make fascinating reading. I commend both documents to noble Lords. The recommendations in those documents are succinct and to the point and are supported by the evidence.

I receive one clear message from this report which is that the relationship between the small businessman and the financier still leaves a lot to be desired. There is nothing in the evidence which points the finger of blame at either side, and that would indeed be a sterile exercise. It is obvious from the report that the small businessman, particularly in the science industries, finds the financier tough and often expensive and the financier does not really understand the business, possibly because the businessman has not explained it properly or has, in the financier's eyes, got his priorities wrong. That is an awareness gap, identified by the noble and gallant Lord, Lord Craig of Radley, and also by the Royal Society of Chemistry which recommended bringing together academia and industry. That is right but financiers should also be included in a tripartite effort.

I elaborate on these conclusions by taking a few examples from the report and adding some thoughts on what might be done. The report states that personal and family savings are likely to be used in the earliest stages, and then we move progressively through seed corn. SMART funds, small loan guarantees and on to business angels. I have been involved in two start-up situations, admittedly not in the scientific field, where family funds were needed not only at conception but well into start-up. Many families do not have the money to continue funding beyond conception. I must say that in my experience, angels—business or otherwise—in most families are normally outnumbered by rogues.

I have some sympathy with those who complained about the rigidity of the small loan guarantee scheme, already mentioned by two noble Lords. On one occasion I found the bank involved inflexible not only as regards the 70 per cent. it was lending under guarantee; it was also extremely tough as regards how the other 30 per cent. might be provided, in effect requiring the 30 per cent. to go in as equity. I am aware that there have been some recent changes to the scheme of which I have not had personal experience but I hope that the Government will keep it under review. I hope that they will consider extending the two year repayment holiday sensibly advocated by Barclays Bank and also greater flexibility within and during the running of the loan scheme. Most small businesses experience hiccups from time to time and certainly in the case of which I have experience there was no willingness, even if there was ability. on the part of the bank to extend anything other than sympathy which did not solve the problem.

The report touches on the cost of due diligence, and here I agree entirely with my noble friend Lord Cuckney. It is indeed a problem. The report rightly states that business angels can reduce the cost of due diligence through experience and instinct. However, I believe that much more can be done to keep potential investors and financiers up to date with what is going on in various scientific developments. I wonder whether high-tech industries should not spend much more time inviting bankers and financiers to their science parks and to their clusters to bring them up to date with what is going on. In 30 years in banking I have never been invited to a science park. I have invited myself and that was not much liked. However, the ignorance that arises as a result of not going to these parks is considerable. Financial analysts visit these companies and although they provide data on which investment and credit decisions are taken they are not the members of the committees who say yes or no to an investment and it is those members the businessman needs to educate.

I agree with the report that the evidence seems to be that science parks and clusters are much more effective than scattered units. I was pleased to note that Mr. Kent from the Bank of England mentioned Silicon Glen in Scotland, one of our biggest clusters. I am afraid that I am not well acquainted with the clusters in Wales and therefore I may be a short-term member of this Front Bench. I admit to being biased but I believe that Silicon Glen has great potential to grow to become a centre of scientific excellence both in innovation and in the attraction of all types of investment. In due course I believe it could rival Silicon Valley, provided that the Government do not undermine the hard work of previous Secretaries of State for Scotland in promoting it as a venue for investment.

There is, however, one cluster where new concepts are constantly being invented and where cross-fertilisation of ideas occurs, often through exchanges in the pub or the canteen, and where the experiences of people from all over the world are shared to everyone's benefit and where co-investment happens because ideas are promoted by trusted and acknowledged experts. I refer to the City of London which initially thrived because of a requirement to be near the Bank of England. Although that requirement has long since gone, any financial institution with international aspirations will wish to locate in or around the square mile. I am not sure how far the analogy can be taken for I am not suggesting that each cluster should have a regulatory authority but it might be worth noting that centres of excellence attract investment. As has already been said, few would dispute that there are centres of excellence in science in the United Kingdom, especially in the universities.

Finally, the sub-committee noted that the CBI report Tech Stars suggested that new technology firms paid more attention to research and development than they did to sales and marketing. I believe that that is right. It is understandable that small firms should do so as marketing is time consuming. Whereas, in a small firm, R&D can sometimes be done late into the night or at home, marketing takes vital people off the premises and out of the office, and in some cases they do not know where to start with marketing. Some years ago the committee for Middle East trade took some small technical businesses to the Arabian Gulf, having already established through the assistance of the embassies that there was a potential market for their products. The embassies also contacted some potential buyers. As a result some of those small firms doubled their annual turnover in two days. Not all our embassies are in a position to do that. However, I hope that the Minister will ensure that the export promoters of his department are at all times fully briefed to assist small high-tech firms in marketing their wares.

It is an excellent report which I commend to your Lordships. I hope that the Government will take careful note of its recommendations.

6.30 p.m.

Lord Simon of Highbury

My Lords, first, perhaps I may say how pleased I am to reply, having listened to the noble Earl, Lord Home. I congratulate him on his elevation.

The Government recognise that innovation is central to improving the UK's competitiveness, be it in the industrial or the service sector. The President of the Board of Trade, in her recent speech launching Competitiveness UK, spoke of the Government's determination to build an innovative high-tech economy. She committed the Government to three important things: improving finance for emerging high technology firms; improving partnerships between industry, the science and engineering base and government; and encouraging greater investment by British business in best practice sharing and research and development. Those objectives are emphasised in the contributions made in this excellent report.

The noble Lord, Lord Dixon-Smith, is right. "Innovate or die" concentrates the mind wonderfully on the central challenge. We have our minds concentrated and the report has helped. It is excellent in its brevity and concise in its conclusions. I congratulate the noble Baroness. That is rare in reports on these difficult subjects.

To the noble Lord, Lord Phillips, I say this. We come with a fresh and positive attitude to innovation. From that new attitude let us hope that new ideas will flow. There may even be some in this reply, although there will probably be more later. For that reason I am delighted to be able to debate this excellent report so early in the life of the Government. I am also pleased to have had the opportunity to do so before the publication of our response. I am sure that today's proceedings have both raised the profile of the subject and brought many new and helpful insights to bear on the issues. In combination with the debate on 22nd May of the report on the EU's fifth framework programme, it would be appropriate today to say that we are off to a racing start in a discussion of the vital matter as regards how best to combine our science with the competitiveness that our companies need in world markets. Both reports have attended to those crucial questions.

As did the noble Lord, Lord Lucas, I think that the committee's report contains a great deal of encouraging news. However, while it is clear that the UK has taken significant steps towards effectively realising the commercial potential of our world-renowned research base, I agree that there is no room for complacency. We have much to do, and we have much ground to make up, as has been stated.

To achieve improved competitiveness and sustainable development, first, we shall have successfully to exploit a great deal more of our own research in this country rather than overseas. Too much of it is going abroad. I agree with the noble Earl, Lord Home. We must use our own research better; and we must proselytise that better in all our export discussions and drives. It is a crucial point. We have to encourage the successful launch and growth of many more small businesses. We have to take risks with that. Not all of them will flourish. But it is through them that we shall gain the benefits of increased employment. We shall have faster application of technology and more effective delivery of value added. That is really what international competitiveness is about.

We are convinced on this point and believe that we shall attain those goals only if we build lasting and productive partnerships. I speak here of the partnerships beyond the most crucial one. It seems obvious to say it, but the most crucial partnership is between the customer and the business. We should never forget that. Businesses will not exist without the customers. However, we must improve the crucial partnerships between the science and engineering base and industry; links between government and business; and in particular links between government and small business.

As the noble Lord, Lord Tombs, mentioned, it is important to understand the synergies between large and small businesses in the supply chain. It is an important point in successful regional or sectoral clusters such as those of which I am aware in California, Northern Italy and Bavaria. I now learn of the Fen Valley, Silicon Glen in Scotland, and Hertfordshire clusters. They are growing everywhere. It is important that we possess more examples of those highly dynamic, technology-based business centres. University research and small high technology firms, as the report makes clear, play key roles in developing such clusters which will sustain development longer. There will be failures, but that will sustain development longer. We must attend to the issues of the longer term growth and development which those partners must understand better. A stronger grasp of those issues would also help us to understand better the real nature of the spark in the science park, a topic raised in the report, which the noble Baroness, Lady Hogg, again emphasised today. It will be extremely interesting to see what additional impact will result from Microsoft's newly announced investment in Cambridge.

The report therefore addresses issues at the heart of government policy, and the Government warmly welcome this inquiry. As an aside, we warmly welcome, too, the small business task force which is to be set up following the Amsterdam Summit concluded this week. It was excellent to listen to one of the changes of focus that was reflected, I think from our own Government's urgings, on the importance of the development of small businesses in both technological and employment terms. I look forward to more stimulating work from that small business task force which, I am sure, the Commission will put in place quickly.

Your Lordships rightly identify three areas of major importance: the removal of barriers to the growth of high technology small firms, in particular financial barriers; the importance of extending industry/higher education links; and the future development of the Foresight programme.

Turning first to high-technology firms, the report, and that by the Bank of England on the financing of technology-based small firms, the CBI's Tech Stars report, and the Enterprise Panel's report on business incubation, pinpointed many issues surrounding the development of such small firms. The direction in which we have to go is much clearer now than in the past. We are on firmer ground, and action rather than extended inquiry and discussion is required on the issues raised.

The committee draws attention to a number of factors which are still inhibiting the birth and growth of high technology small firms, and we have taken those on board. We recognise that there is indeed a specific difficulty for high-technology firms in accessing finance initially. But simply bringing finance and technology together is not enough for success. We need to build a virtuous circle. There must be access to the right finance at crucial points in the lifecycle of a firm in order to allow it to grow. In addition, we need to be sure that there is a strong management. It would be wrong not to state that it is important that all of this is taking place in a sustainable and stable financial environment where inflation and the cost of money are low. We should not forget that the higher the volatility in general financial circumstances, the more difficult it is for smaller firms to make their way. After that—and I do not dismiss that task lightly—the challenge is that of the matchmaker, the midwife and the parent all rolled into one. (Perhaps the noble Lord, Lord Winston, is better at carrying us through that process.) I believe the DTI has that view of its potential role, and it is an important one. This is not merely a matter of start-up finance; it is the ability to help sustain what may be a lengthy process.

Finance is crucial in the early stage. It is a patchwork affair, drawn from many sources. No one financing package precisely resembles another. Studies confirm that, for all its success in growing such firms, that is the case in the United States as well. The patchwork seems to work. For that reason it would be wrong to be prescriptive in this area. As the noble Lord, Lord Tombs, made clear, a package needs to be available. It is also clear that the presence of one source of finance—venture capital, informal capital, business angels, bank financing or government research awards; we have heard much comment today on the different schemes—tends to draw more and more into the potential. So the more you have, the more you get. That is not a bad thing. It is also clear that all these different sources of finance depend upon investors' confidence in the managerial, marketing and entrepreneurial skills present in the management team. I keep returning to the people as much as to the technology and the idea itself. How we develop the skills of the people involved is a factor that we need to keep in mind as well as: is this just a financial barrier? The two are married closely together.

Many noble Lords raised the question of the Small Firms Loan Guarantee Scheme as one option for finance. I was glad to hear the support that the scheme received from the noble Lord, Lord Cuckney. It is designed so as to attract lenders to offer finance to firms with no collateral which would fall outside the normal criteria. It is interesting that only some 8 per cent. of lending under the scheme currently goes to what we define as high-tech businesses. The Government are committed to refocus the scheme, within existing resources, so that more high-tech firms can benefit. To achieve that we are reviewing applications to join the scheme from new, specialist lenders with experience and expertise in providing finance to small high-technology firms. I hope that the introduction of such lenders will also help address your Lordships' concerns about the scheme being unduly risk averse—although in my banking days within my old company we used to regard a no-collateral investment as quite risk averse from the start. So we must keep some balance in this respect.

The committee also drew attention to the small business innovative research programme in the USA. Of course our own SMART programme is based upon that highly successful initiative, the value of which is universally understood. It was recognised as such by the noble Lord, Lord Cobbold, whom I am also pleased to see again. I thank him for his welcome.

The problem, as was pointed out in the report, is that, given that we have SMART and a partner scheme such as SPUR, there are sometimes difficulties in the borrowers getting clear in their minds which option is for what. To that end, the report commented on the confusion felt by some in dealing with the schemes; namely, there are too many options. Even if we want a thousand flowers to bloom in terms of the financial options available, we have taken forward a simplification process in regard to DTI programmes. SMART, SPUR and the regional enterprise grants for innovation have now been combined into a single SMART scheme. I hope that will help.

Business angels were acknowledged by many noble Lords to be very important to firms in their early life. Even the bankers in this Chamber seemed to agree on that, which I regarded as extremely encouraging. The British Venture Capital Association's directory of business angel and introduction services lists over 40 business angel networks, over a quarter of those run by the Business Links programme. We encourage and welcome co-operation between these networks. I wish to underline the importance of Business Links. In another context the One Stop Shop for information, mentioned by the noble Lord, Lord Lucas, is available. The Business Links System is something to which all of us should attend as being absolutely key to this process.

While on the subject of early stage financing, noble Lords queried the inhibiting effect of due diligence costs upon investments. We are in contact with the venture capital industry about these concerns but there does not seem to be a common view among investors. For those investing in start-up companies the due diligence becomes more complex because of the lack of a track record. The emphasis is then particularly on the knowledge and technology of markets as well as on assessment of the competence of the management team. The costs of such investigations is entirely dependent upon the existing knowledge of investors and may be much more significant for the individual business angel. The CBI's report, Tech Stars, has widened this discussion to include the prohibitive effects of disproportionately high transaction costs alongside due diligence. We were interested to see that it pointed to an initiative by the Oxford Investment Opportunity Network to reduce some of these costs by making legal and due diligence packs available as templates to its members. The Government will continue their dialogue with the industry to establish more firmly the nature of the fundamental issues and whether more of that approach, namely the pack solution, will bring down costs.

Finally, I do not want to leave the subject of financing without two "plugs", as they are technically known in the business. We are particularly keen to see the alternative investment market in the UK and the new European initiative, EASDAQ, successful. We think that they will create greater liquidity at the lower end of the financial markets and we wish both experiments well.

I wish to say a word on some of the venture funds. I am happy to see that Merlin ventures focusing on biotechnology are also springing up. In welcoming Microsoft's investment in Cambridge, I should have noted that its venture capital trust is worth £10 million. It will be extremely interesting to see how it does.

In that brief résumé of what are the financial barriers and how we can get through them, I hope I have left your Lordships with the idea that there are many flowers blooming, there are many opportunities and we are intent on ensuring that they are most usefully used by the small companies which we are trying to encourage.

I also wish to emphasise the importance of management. In that sense, the incubator system about which many noble Lords spoke is an important place for bringing together new management and. through that system, encouraging the idea that the people and the money understand each other better.

I wish to say a word on education. I have talked about the importance of the quality of management in small companies. It is important that we concentrate more on collaboration between higher education and business. The links between the business schools, the old polytechnic/university structure and small businesses are ones which we should encourage more. The work done by the polytechnic sector has been much more enterprising than people have given it credit for. That is not to gainsay our old universities and the academic structure. I believe that we need to pay attention to the capacity for small businesses in local areas to work with the local polytechnic.

While on higher education, my noble friend Lord Winston and other noble Lords picked up the issue of intellectual property rights. The Government agree that universities need to be aware of the importance of managing the intellectual property. We welcome the work being done by the industrial liaison officers and the guidance on the subject issued by the Committee of Vice-Chancellors and Principals in 1992. We should like to see the wider adoption of IPR management best practice among institutions so that it enhances rather than inhibits the effect of the IPR capacity.

I now revert to the emphasis which your Lordships put on Foresight. The Government agree that there should be a much wider awareness and take-up of the opportunities arising from this programme. In my business language, that means that we must market Foresight more clearly. I agree that reading long reports is not what most entrepreneurs enjoy, so somehow we must get the ideas marketed better to them. We shall do that. In the meantime, I note that Foresight has gone some way towards addressing the Committee's concerns about what it described as "misfit" lines of research, research which falls between sectors. I am glad to note, for example, that projects on nano-technology and investment science were among those funded by the £7.5 million Foresight package of initiatives in Scotland at the end of last month. Nano-technology is very small, for those of us who have to worry about the work. The Foresight programme needs better selling and better focus.

My next point is on relevance, which the committee made clear in its report. We have many initiatives, many options. The DTI is chasing lots of opportunities. I wish to revert to the noble Baroness's final thought: the important point is where these are adding value. Output matters as much as input, and output measurement, I have to say, is weak. I hope that my use of these economic terms is not confusing anyone. Where are we getting our bang for the many bucks we are spending? We must look at that; as the noble Lord, Lord Craig, said, entrepreneurs go for action, they do not go for reports. We must measure their action. I believe that we shall try to do that. We have evaluation systems in place whose findings help us to make improvements. We must do more work on them. These are not easy questions to answer but we must analyse what we are getting for our money and apply our limited resources more effectively. That will be a fundamental issue which we wish to develop in the Government's formal response to your Lordships.

In conclusion, perhaps I may say how stimulating I have found the help from the committee in painting the challenge as clearly as it did in its report, which the Government accept with enormous pleasure. Britain is changing, it is becoming more innovative and more competitive. We have work to do and the report helps. I thank all noble Lords.

6.56 p.m.

Baroness Hogg

My Lords, I shall not try the patience of the House much longer. First, I wish to renew my thanks to the members of the sub-committee for carrying me through the daunting task of chairing such a distinguished group and for their contributions to today's debate. I shall not single out any contribution for a response except to say to the noble Lord, Lord Craig, that I share his irritation with the gloom industry. I wish to reassure him again that the overall note of our report was positive. We concluded that the climate for innovation had improved which, no doubt, had the thoroughly admirable effect of ensuring that the report received no media attention whatever. That may, however, have had something to do with its coincidence with the prorogation of Parliament.

I wish to make one further point in responding to the gloom industry since it did not arise in the debate. We were impressed by the amount of evidence we received to the effect that the climate for innovation in the United Kingdom was now markedly better in many respects than in some continental European countries. Sometimes we are bemused by comparisons with the United States and the powerful engine of innovation created by the weight of strong industries and strong universities there and forget the comparisons with continental Europe on which we received much positive evidence.

My final remark in response to the intervention by the noble Lord, Lord Craig, is that whatever else we decide is the defining characteristic of a good cluster, I do not think that the behaviour of No. 11 buses constitutes best practice.

I wish to express my congratulations to my noble friend Lord Home and welcome him to the Opposition Front Bench. The debate was greatly enriched by his expertise and I know it will continue to enrich the quality of debates in this House on many issues where he has so much to bring to our discussions. I thank the Minister for his thoughtful and detailed response. I greatly welcomed his emphasis on added value and was delighted to hear that he will be keeping a sharp eye on what I think he called the "spark in the park". I beg to move.

On Question, Motion agreed to.