HL Deb 03 March 2004 vol 658 cc713-43

6.42 p.m.

Lord Haskel rose to call attention to the role of innovation in enabling British industry to compete in the global economy, and to the role that government can play in creating the best possible conditions for it; and to move for Papers.

The noble Lord said: My Lords, it is particularly appropriate to debate innovation this evening because of the concern felt all around the country about the loss of jobs and business to east Europe and to Asia.

I spent 30 years of my working life in the textile industry and so I know a lot about business going to Asia. Some months ago I met someone I used to know who manufactured industrial netting. I asked him about business, and yes he had lost his traditional business to low-cost manufacturers in the Far East and, yes, his business was now more prosperous than ever. This all came about, he explained, not through importing but because he had met a chap in a pub who had spoken to him about fishing for chub. Apparently, when you fish for chub you throw the bait into the water and the more concentrated it remains, the better the catch. What was needed was a way of holding the bait together for a short while.

My friend remembered reading something about fibres that dissolved in water and so he went to his local university and initiated some work on fibres that dissolve in water but do not pollute. He soon captured the netting market for chub bait and went on to discover other markets in medicine and agriculture and construction where netting that dissolved was a distinct advantage and solved lots of problems. With typical Yorkshire understatement, he told me that it was a good product for repeat orders.

That is just one small example of innovation. I particularly wanted to give an example from the textile industry for two reasons: first, because it is an industry about which I have some experience; and, secondly, because it is a traditional industry trying to re-invent itself through innovation. Indeed, I declare an interest as honorary international president of the Textile Institute.

Most of the time that I worked in textiles, much of the industry tried to protect itself by controlling imports. In spite of effective lobbying and considerable support from successive governments, the industry declined by 60 per cent and many firms lost their business to low cost countries. But other firms prospered. They thought up ways of improving old products and inventing new products, discovering new markets and new ways of doing business—in short, innovation. And so today not only do we have new ways of fishing for chub, but the fishermen enjoy more comfortable clothing which is light and flexible and which keeps them warmer and drier but breathes and is not clammy.

The textile industry has revolutionised the treatment of burns and ulcers and other wounds by inventing fabrics that grow a patient's own skin cells and so speed up healing and recovery. By inventing fabrics that can be moulded or sandwiched into engineering components which are lighter and stronger than steel, in a modern car or aircraft many of the components and some of the bodywork are now based on textiles. Today you find innovative textiles or technical textiles everywhere. Indeed, in these kinds of textiles the European Union has a balance of payments surplus. All this is thanks to innovation.

However, all this cannot just be left to a fortunate encounter in a pub. It requires a lot more than that. It requires academia, science and business to work together. It requires business to carry out its own research. So my first question to the Minister is that while I very much support the Government's commitment to free trade, what is the DTI doing to encourage and assist our traditional industries to compete through innovation in today's global economy?

But innovation also means inventing new industries—industries that result from the flow of knowledge and information from our science and technology base to the world of business. I know that my noble friend the Minister is committed to this but in practice what can the Government do? Some would say that this is a matter best left to market forces but turning science into products and processes involves a lot of risk, a lot of money and a lot of commitment. But that is a combination that market forces do not like very much. Venture capitalists would prefer to fund things such as management buyouts where there is a greater degree of certainty. Financial institutions are reluctant to fund developments from new science as more fail than succeed. Then there is the role of skilled designers in translating science and technology into products and services. There is a great shortage of them. If innovation is going to produce these new products and services from our science base, then we need to know how all these different facets of risk, finance and knowledge are to be put together and helped along to overcome that kind of market reluctance.

However, it is even more complicated because much innovation draws on science from several sources. Cell communication technology drew on science not only from wireless communications but also from information technology, miniaturisation, the physics and chemistry of batteries and many others. But combined together they gave birth to the whole new industry of mobile phones. So as well as learning more and more about individual sciences, innovation must somehow draw them all together in order to create new industries. Can the Minister say what the DTI is doing about that because it has particular responsibility in this area?

But it is not only science which initiates innovation; society itself does it also. We do this by demanding higher and higher standards to improve our quality of life and to improve the surroundings in which we live. It is often innovation which can deliver these higher standards rather than rationing or controls. Let me give an example. It was thought that commercial flying would have to be restricted because of aircraft noise. To solve the problem, Rolls-Royce developed the Trent 600/900 engines to reduce considerably both noise and pollution, and this engine is now used in one third of all passenger jets. Perhaps the noble Lord, Lord Methuen, who worked at Rolls-Royce had a hand in this.

My point is that the Government should encourage this kind of outcome-based regulation which is both friendly to society and encourages innovation at the same time because, in addition, industry is encouraged to cut costs, to be more efficient, to eliminate waste and to achieve higher standards. All of these are essential factors in competing in today's global economy. So does regulation have a role to play in innovation or is innovation best left to competition? This is a very important matter and I hope the Minister can say something about it.

Achieving higher standards and solving environmental problems through science, technology and innovation have created a whole new industrial sector. I declare an interest as honorary president of the Environmental Industries Commission.

I mentioned Rolls-Royce aero engines. Of course other engineering companies could copy the engine and Rolls-Royce would find themselves in a price war. So an important part of innovation is to keep on innovating to hold on to your competitive advantage. What Rolls-Royce did was to stop selling engines and start selling flying hours. They established teams of trained and skilled engineers at all major airports who service and change the engines. This completely altered the dynamics of the aero engine market by combining manufacturing with service. It is this breaking down of the barrier between manufacturing and services which is the key to much new innovation, especially in the service sector—the service sector which, itself, is now feeling the effect of globalisation.

The sector is feeling globalisation through offshoring. What is different is that the impact is being felt in the service sector rather than in manufacturing. But this is not new. Smart and intelligent technologies have been replacing workers in banking, insurance and retailing for years. Call centres that are not moving abroad are raising their productivity by using voice recognition systems. Businesses today are a highly connected interdependent chain. You cannot just move one link offshore without any effect. In reality, it requires a sophisticated and determined management team to both offshore and maintain the value of their product or service.

I see offshoring call centres as one more reminder that even in the service sector we will not be able to compete simply on the basis of cost. Innovation applies here too. When innovation breaks down the barrier between service and manufacturing, offshoring can also be reversed. Let me give another example, from the textile industry. I do not know how many noble Lords buy their clothing at Zara stores, but those who do will know that nothing remains on the racks for longer than two weeks. This means that if you see something you like you had better buy it. Now, this 14-day turnaround requires very sophisticated management and planning. There is insufficient time to get the clothing from low-cost manufacturers in the Far East, so their clothing has to be made locally. They are one of the fastest growing retailers on the high street, and other firms are now trying to copy them.

However, innovation does not only affect the economy; it also affects society. Yes, it provides new and more interesting work, higher pay and better prospects, but in return it means more career changes. It demands more and better skills. It requires continuous learning with personal dedication and commitment. It demands higher professional standards and education in numeracy and IT. All this depends on how well we teach and encourage science and technology at school and university.

Thankfully today many firms are committed to training and developing their own staff so that they can meet the change and challenge of innovation. But other firms do not or cannot. They may rely on poaching or finding skilled staff from overseas. They may be too small. Certainly the textile industry has Skill Fast to help with training, while the engineering industry has SEMTA, but what about other industries and what about those industries that are only now in the process of being invented? Perhaps the Minister can say what the DTI is doing about this as it is part of its responsibility. What about those who cannot cope with innovation—those who are being left behind and form part of the two-tier society that exists in this country? Does the Minister have any thoughts on that?

At the end of the day, innovation is a matter for business. It is not easy. Many firms find it difficult to compete in the global economy because they see themselves at the mercy of impersonal forces—forces such as inflexible wages, fluctuating exchange rates, industrialisation in developing economies, unlevel playing fields, new technology, poor access to capital and overbearing regulation. But other firms seem to overcome this. What is it that they do that is different?

It seems to me that those firms create their own luck and good fortune by encouraging and rewarding ingenuity, creativity, resourcefulness and initiative without which there would be no innovation. In doing this they seem to sweep away the barriers of their own assumptions. In this way they grasp their destiny in their own hands and release the abilities of their people. They give people the tools, the time, the encouragement and the money to improve quality and productivity and achieve higher standards. Indeed they invest in productivity and skills and so introduce these competitive elements into their businesses. They use the proven techniques of continuous improvement and lean manufacturing. They eliminate waste and identify unused capacity and unused talent. Instead of complaining about regulation, somehow these companies seem to reflect and adapt to the values of their communities and their staff and build up a special kind of loyalty in this way. For years, data have been collected by business organisations, stock markets, financial institutions and researchers which show that this way leads to improved business success. Indeed it is this kind of spirit and outlook which led to the rebirth of the netting business that I mentioned at the beginning of my remarks.

These firms are the seed bed of innovation. They can be large, medium or small enterprises, or even a single individual. I hope that my noble friend will do all he can to encourage them. Mine has been a simple business "hands on" approach to innovation. I look forward to the remarks of other noble Lords who have far more special knowledge than I and a much deeper understanding. I beg to move for Papers.

6.59 p.m.

Baroness Warwick of Undercliffe

My Lords, I thank my noble friend Lord Haskel for that timely and compelling introduction to this debate. I want to concentrate on the role of universities and higher education in innovation so I declare an interest as the chief executive officer of Universities UK.

I am sure that the importance of innovation to the UK and global economy is now clear to government, business and universities alike. Both the recent Lambert review and the Department of Trade and Industry-led Innovation Review have highlighted the importance of increasing innovation and business-led R& D in the United Kingdom. This is because the UK's performance, by level of business R&D and patenting, is only average compared with our international competitors. The UK is well behind the USA and roughly equals the EU average.

The Lambert review stated: Compared with other countries, British business is not research intensive, and its record of investment in R&D in recent years has been unimpressive". UK business research is concentrated in a narrow range of industrial sectors and in a small number of large companies.

All this helps to explain the productivity gap between the UK and other comparable economies. Factors such as increasing competition, lower labour costs and well-educated alternative labour forces—wages in China are 5 per cent of those in the UK—mean that the UK faces a transition to a new phase of economic development. It is notable that after many years of decline in UK investment in R&D, it is now increasing.

At the same time, companies around the world are increasingly outsourcing their R&D activities, often to universities, so that the role of universities in economic development everywhere is becoming more important. Improving competitiveness in the UK means that we need to combine the excellence in teaching and research with the will and ability to convert science and technology into commercial enterprise.

The research output of UK universities compares very favourably with that of many other developed countries and a wide range of business-university collaboration already exists. Richard Lambert's report celebrates this success by universities in engaging with business. All HEIs are now engaged in collaboration with business at some level. In 2000–01, for example, they earned £126 million from UK industry and commerce.

The 2003 higher education-business interaction survey shows continuing improvement in HE-business interactions by almost every indicator and a 19 per cent increase in higher education staff dedicated to commercialisation and related activities. Spin-out firms of all types from higher education institutions are estimated to have had a turnover of £340 million in 2000–01 and the income from the sales of shares by higher education institutions in such companies was around £30 million.

Indeed, United Kingdom universities are far more efficient than their American counterparts at producing spin-outs. Higher education research expenditure per spin-out is much lower in the UK at £12 million than it is in the United States at £46 million.

It is also worth making the point that the UK higher education sector is a major "business" in its own right. In 2000–01, institutions attracted a total income of £12.8 billion; they generated output worth £34.8 billion; and they created 563,000 jobs either directly or indirectly. That is equivalent to 2.7 per cent of the UK workforce in employment. Indeed, income in 2000–01 from the UK private sector accounted for £3.7 billion, or 27 per cent of all higher education institution income. HEI overseas income, or gross export earnings, was £1.3 billion.

The Lambert report recommended that universities should do more to provide continuing professional development to business employees. I am delighted to say that the 2003 higher education business-interaction survey, not available to Richard Lambert when he wrote his report, shows a marked increase in university planning for business support provision, and, indeed, university provision of courses for business. These statistics illustrate just what the sector has achieved. They show just what a positive impact the higher education sector has on the UK economy.

It is important to recognise that the university-business collaboration has been under-way for years—decades even—and that the UK higher education sector is proud of the achievements that have already been made to support the economy.

In the past decade, aided by government support, almost all universities have added a third leg to their traditional activities. The third leg is outreach to business, especially local and regional businesses. Universities are actively seeking to play a broader role in the regional and national economy. The quality of their research in science and technology continues to compare well against most international benchmarks and much more attention is being paid to governance and management issues.

I welcome recognition by the Government in the Innovation Report of the need for an increase in investment in the knowledge-driven economy to create competitive advantage through a strong science and technology base, incentives for knowledge transfer and business research and development, and high standards of education at all levels, a point reinforced by my noble friend Lord Haskel. I also welcome Richard Lambert's proposal for a new stream of business-relevant research funding—between £100 million and £200 million—and his clear recognition of the achievements of universities.

Entrepreneurship, competitiveness and innovation in the UK are dependent on building the next generation of collaboration between industry, academia and the public sector. There are barriers to this collaboration, and improved communication and understanding between these sectors are the only way to boost entrepreneurship and the commercialisation of new ideas.

Of course I recognise that there are improvements which need to be made to ensure that business-university collaboration is strengthened and that these changes need to occur across the board, not just in universities but in business, in government and the regional development agencies.

With gradual devolution, regional strategies and initiatives such as centres of excellence are becoming increasingly important as they seek to bridge the business academia gap and identify technologies that have commercial potential.

There is also the Government's regional agenda to be considered. Of course all the regions need appropriate support, but it is imperative that government understand that institutions are competing internationally with countries like the USA and Japan, not just with other regions in the UK. In order to promote high-quality research and effective collaboration, appropriate support is required for universities, for business and for the regions.

Universities need consistent and appropriate levels of funding, businesses need appropriate support to help them approach universities for help in meeting some of their technology and skills needs, and the Government need to have a clear agenda which promotes international and UK-wide collaboration.

It is for these reasons that I welcome the recent announcement by the Treasury of a fundamental review of funding needs and policy priorities for science, engineering and innovation, with a 10-year investment plan to be announced as a central priority for this summer's spending review. I am also pleased that this will provide an overarching strategy for research. The review will take stock of the current framework for funding science, covering the Office of Science and Technology and the research councils and the funding for research provided to universities through the funding council. So it is vital that universities are central to this debate.

Universities UK's recent spending review submission outlines the success of UK universities' research performance. They have continued to deliver an outstanding performance both in terms of quality and value for money and their importance to the economy at regional, national and international level through links with their communities and business is beyond doubt.

The Government have recognised this success in their strong commitment now to science and the science base, but they will be judged on how far they create the conditions—of resources and support—to enable that to be sustainable. I look to my noble friend the Minister for reassurance that that support will be made available.

7.9 p.m.

Baroness Byford

My Lords, I am most grateful to the noble Lord, Lord Haskel, for gaining today's important debate. He reflected on his many years working within the textile industry, which is something in which our family have shared for many years. Sadly, our family company is no longer. The noble Lord also recognised that innovation needed money, commitment and a willingness to take a risk. That is hugely important. He also acknowledged the importance of teaching science and technology in school and university. I greatly support that.

Innovation is a function of the individual being free enough to innovate; in other words, a minimum of taxation and regulation. Nanny does not always know best.

Only last week, my noble friend Lord Vinson initiated a debate calling attention to the unintended consequences of regulation. It was a pity that the noble Lord, Lord Sainsbury, was unable to be present because, without doubt, he could not have failed to hear the clarion call from all sides of the House for the need to create a regulatory framework that is, above all, proportionate and that is applied intelligently and realistically. As my noble friend said, no one is against sensible regulation. The noble Lord, Lord Haskel, also spoke in that debate. He said: That does not mean that more regulation is good … it must be balanced. It must reflect the aspirations of our community. It must have reasonable lead times".—[Official Report, 25/2/04; col.288.] My noble friend Lord Hodgson of Astley Abbotts stated that there appears to be no overview or cross-departmental view of regulatory burdens. There is duplication, overlap, inconsistency and, sometimes, outright opposition between regulations from different departments.

The CBI calculates that since 1997, Labour has introduced £54 billion in new business taxes. The British Chamber of Commerce estimates that Labour's actions have cost business more than £21 billion. The employment firm, Penninsula, sponsored a survey which implied that red tape has cost businesses more than £20 billion since 1997. Will the Minister state on the record whether he accepts those estimates? If not, why not, and what are the correct figures?

I ask the Minister to recognise that the Government can make a major contribution by freeing up businesses wherever possible. This would be of great help to small businesses which carry a proportionately higher burden and which have a good record of innovation.

Clearly, we need action. As the noble Lord, Lord Haskel, said, manufacturing employment has fallen under Labour by nearly 700,000 jobs. The year 2002 saw the biggest trade deficit since records began three centuries ago. If Great Britain plc is to remain solvent we need ideas, applications and developments leading to sales and a healthy return on capital employed—both human and financial.

I am sorry that the noble Lord, Lord Sainsbury, has been unable to take part in our deliberations on the Energy Bill which yesterday completed its Committee stage. Amendment No. 132A, headed "Application of renewables obligation to coal mine methane" was spoken to ably to my noble friend Lord Jenkin of Roding. If that waste gas were to be captured and used for generation, it would cut its global warming potential (GWP) by more than 100 per cent. It would save nine times more CO2 equivalent per kilowatt hour than wind power. The amendment was not accepted. That is an example of where government policy means that innovation in that field will not take place in the UK. Germany has forged ahead, and I understand that UK firms in the sector, disappointed by the lack of support in Britain, have moved to develop their interests elsewhere.

I am particularly concerned with "proof of concept" funding. This is needed to establish whether an idea is commercially viable. It may also be of benefit in identifying changes that would enable an original concept to become acceptable. Such support is crucial but not easy to obtain privately. It is one area where the Government can make a definite contribution to innovation. The Lambert report of December 2003 made this point among others which were equally important.

I give an example of innovation. A couple of years ago, there was a proposal to use sheep's wool to insulate houses. The Minister may be able to tell us whether there has been significant progress in that area. It has the potential benefits of using a commodity for which demand has fallen drastically. It is a commodity that is not normally produced in urban areas but in those parts of the country where job creation to replace a rapidly declining agricultural sector is increasingly urgent; and a commodity whose revaluation would help a sector under great threat. Were it to be successful, it would be a regional development with large chunks of the country having little or no interest in it.

The balance of regional development makes a fascinating study. In times past, Yorkshire was associated with wool and coal, Lancashire with cotton, Sheffield with steel, and so on. Modern-day equivalents are the Thames Valley and Cambridge with marked concentrations of modern technologies. Should the Government attempt to manipulate that? If so, how should they regulate their own interference?

The north-east and north-west have plenty of housing available. They have an abundant, skilful workforce ready for retraining as necessary. They have airports, seaports and road links. Is it not possible that astute direction and use of innovation might build on these assets and relieve some of the pressure on the south-east?

The important of government assistance and support for the maintenance and development of skills in our workforce has been highlighted during the passage of the Energy Bill and by the Royal Academy of Engineering. In its response to the Energy Futures Task Force consultation paper, it states: The Academy's response expressed concern at the shortfall occurring in the numbers of newly qualified entrants to the disciplines of importance to the energy and environment sector. Overall, this situation was due to the general malaise in the perception of engineering and science by young people. What are the Government doing to improve that?

One of the ways of helping innovation is through government policy. I refer to the lack of policy with regard to energy production. At present, we are pushing for wind farms. That is but one sector. We can gain energy from waste, combined heat and power, and non-food crops.

Rural districts of England contain more than 577,000 businesses which represents 30 per cent of England's total. One way in which the Government can help is to encourage the spread of broadband, or high-speed electronic communication. In debate on the Queen's Speech in December, I cited the figure of 3 per cent access in the rural areas compared with 11 per cent in urban areas. What is the current position?

At page 90, the DTI innovation report recognises the difficulty experienced by small and medium-sized enterprises in gaining access to research funding. In 2001, the Government established the small business research initiative and set government departments the target of purchasing at least 2.5 per cent of their R&D from small and medium-sized enterprises by 2004–05. What progress has been made to date?

Finally, over the years British industry has been good at inventing ideas but not so successful at developing them. While much research is undertaken by our universities, many new projects come from businesses throughout the UK. Of course, we can all pay lip service to innovation. But the reality is that innovation needs innovators; and innovators need freedom from regulation and to have incentives to succeed.

7.19 p.m.

Lord Layard

My Lords, as has been said, this debate goes to the heart of one of our greatest national problems—the problem of low productivity. As we know, productivity per hour worked in Britain is approximately 20 per cent lower than it is in France, Germany and the United States. If one asks what is the biggest reason for that, the answer is chronic lower investment compared with those other countries. However, if one then asks what is the cause of the low investment, the answer is poor levels of innovation and poor skills. Those are the issues that we are discussing. As we know, the Government have come forward with major initiatives in those areas, as documented in the excellent Innovation Report. However, as the report also makes clear, there is still a very long way to go.

Perhaps I may start by referring to our universities, the knowledge that they produce and the way in which they transfer it to business. As has also been said, in the generation of knowledge, our universities have an excellent record in terms of value for money. I shall give some facts. When compared with GDP, our universities receive more citations in academic journals than universities in any of the other countries that I mentioned. Yet our universities receive less in research funding—that is, a lower share of GDP— than universities in any of those other countries. If one compares those two facts, one can see that we have a comparative advantage in university research: we produce the most for the least. But we are not exploiting that advantage as we should because we are not being given enough resources to do so.

Fortunately, the Government are improving that situation step by step. The news that we read yesterday about a further initiative in the funding of science is extremely welcome. I shall give some more information on what can be expected. The best evidence that we have on the economic rate of return on university research shows that it is higher than the rate of return on R&D carried out in business. That means that it would have been completely wrong for the Government to give many hundreds of millions of pounds to business in R&D tax credits unless, at the same time, they gave extra research funding for university science, as we know they intend to do. In that connection, I hope that the funding bodies will have the guts not to spread the money too widely as evidence shows that the value for money is greatest in the highest-quality departments.

However, the biggest problem relating to research in universities—especially in the research universities—is not the funding of research staff and equipment but the abysmal level of salaries, which are paid out of general university income. Roughly speaking, the top US universities have four times the general university income per student of our top universities, and they pay double our salaries. That has had a long erosive effect, which will, we hope, be stopped if the Government's Bill on variable tuition fees is accepted. That is why that legislation matters so much.

Turning to the universities' record in transferring their new knowledge to the outside world—especially business—one has to say that it is not good but, as we have learnt, it is improving. Let us see what can be done. In the US, the impact of universities is extremely impressive and it shows how university research can help local industries. One piece of research shows that every dollar spent on research in universities in a US state stimulates 4 dollars of business research and development in that same state. That extra R&D generates an increase in the number of patents which are obtained by businesses in that state. That is a measure of what universities can contribute to the local economy, and that is what the Innovation Report and the Lambert revaew are aiming to promote in Britain.

I fully endorse the suggestions in both those reports, including the importance of a third stream of university funding dedicated to knowledge transfer. However, I want to raise one matter. The key issue is always: what is the incentive for the individual academic? The proposals in both the documents that I mentioned rely largely on financial incentives. But academics also care a great deal about their personal recognition and promotion. Currently, that depends essentially on their performance in the research assessment exercise. If we want them also to look more widely, we should consider far more seriously a parallel exercise which involves an assessment where each academic sets out his contribution to knowledge transfer and to the life of the community.

So much for universities. Of course, when we think about innovation, it is easy to focus too much on the innovators and not enough on the environment within which they innovate, and especially the people who have to do the work—those on the shop floor and in the office. Potential innovations will be generated and adopted only if there are workers skilled enough to make the investments profitable.

Unfortunately, our national approach to the supply of skills below graduate level has, until recently, been a total disaster. We relied on the local TECs to do a job that they could never do. Instead, we always needed a national framework delivering high-quality skills by the apprenticeship method. Thanks to David Blunkett and his successors, we now have much of that framework in place and a surprisingly large number of people are embarking on modern apprenticeships. I wonder how many of your Lordships know what that number is. I attended a meeting with some senior civil servants—some were from the Department for Education and Skills—and I asked them what they thought the number was. They were all amazed that the answer is that 28 per cent of all young people are embarking on apprenticeships.

I believe that that story illustrates both the strengths and the weaknesses of the situation that we have reached. We have the apprenticeship framework and we have substantial numbers of apprentices but, in many areas, the quality and commitment is not there. The drop-out rate is around two-thirds, and the knowledge content of many apprenticeships is not yet up to scratch.

The Learning and Skills Council has now decided to make apprenticeships the top priority, and I greatly welcome that. However, to make that happen requires constant effort and serious promotion of the idea to young people by senior Ministers. I should like to hear Ministers say, "Please come to university if you want to but, if you don't want to, go into an apprenticeship". That is the only practical method of acquiring a skill other than going to university. On paper, we now have guaranteed access to apprenticeship for every qualified young person, and the qualification is low. However, the task is now to make all that happen. Unless we do, our innovators will not go ahead because they will not have the plumbers, and so on, to carry out the innovation which is being proposed.

A huge general deficiency in our workforce is innumeracy. We cannot have innovation when we have innumeracy at all levels in our society, including among university graduates. Starting at the bottom, something like 30 per cent of the adult population has less numeracy than we expect in an 11 year-old. That is unbelievable. Of course, this is the only country in the world where one can go to university with no maths beyond the age of 16.

Therefore, the report on mathematics by Professor Adrian Smith is very timely but, unfortunately, he has left to the Tomlinson inquiry the vital question of which university entrants should take mathematics beyond the age of 16. The answer must be: all of them. We cannot wait for that to happen until the Tomlinson proposals are implemented in 2010 or whenever. There is already an excellent Use of Mathematics paper, which is designed specifically for people who do not want to study mathematics at A-level but who need the kind of maths used in business or in government. That paper was introduced in 2001 with the hope that it would become a standard requirement for university entrance. I hope that Ministers will seriously pursue the plans envisaged when the qualification was adopted.

Finally, I congratulate the Government on having established two of the most essential conditions for innovation: a competitive environment and a stable economy. Bravely, the Government have done the right thing in intensifying our rules on competition and, with regard to a stable economy, they have achieved the best record of any government in recorded history.

7.30 p.m.

Lord Ponsonby of Shulbrede

My Lords, I too thank my noble friend for initiating this debate. I shall never think of a chub in the same way again; I have never thought of it as a source of innovation before. Today's debate is about innovation in industry and we have heard much about the key drivers to achieving innovation. A variety of speakers have spoken about the various building blocks that make an innovative industry. I want to talk about another building block, one that would not naturally be covered in this type of debate: the innovation of changing one's working practices. I have two specific examples of companies that have changed their working practices and have generated wealth as a result in industries normally considered to be mature industries where it is difficult to innovate.

The first example is of a construction company in the West Midlands called Farrelly Facilities and Engineering, a business that installs ventilation and heating systems. One may not consider that to be a natural area in which to introduce progressive working practices, but the managing director strongly believes that his introduction of the practices has benefited his company. I quote what he says: We realised that the services we offered were no different from our competitors—it was our people who would give us our competitive edge". The managing director changed his working practices. Now the new rules within the company are that no one starts work before 8.30; everyone knocks off at 5 o'clock and at 4 o'clock on Fridays; no one is allowed to take work home at the end of the day; and there is total flexibility for family emergencies. A variety of other soft management approaches have been introduced and the net effect has made employees feel that they own their jobs.

The result has been a cascade of effects. First, there has been a huge reduction in staff turnover, a big improvement in the relationship between clients and the staff which, in turn, has led to an increase in the sales' figures. The managing director is very happy for me to quote him as saying that customers' complaints have almost become a thing of the past. He is a strong advocate of changing working practices; his innovation has led directly to increased sales.

My second example is different. It concerns an oil company of which I am a director, as I have declared. It is one of a new breed of small and agile companies in the British North Sea. About two-and-a-half years ago my colleagues acquired some boxes of unwanted and dusty data which was of no interest to any other oil company. The data was on the old Argyle field which had been abandoned about 10 years ago and had been overlooked ever since. Over the past two-and-a-half years they have worked up a development proposal; worked very closely with the DTI to acquire approval for a licence; the field has been renamed as the Ardmore field; they have secured funding; and they have entered into innovative contractual arrangements with the largest contractors to try to spread the risk. The net effect is that there was first oil in October 2003 and the field is now producing 15,000 barrels a day. That is a huge achievement in two-and-a-half years and totally unprecedented for a start-up oil company.

The key to that success is not just the innovation of my colleagues, but the innovation of all the stakeholders in the North Sea. The company itself was innovative, as was the DTI, which was extremely innovative in acquiring the licences and working with the company; the finance parties were also innovative in backing the company and in understanding the economics involved; and the contractors were engaged in innovative contracts in order to make the project work. Across the board there are examples of people changing their working practices as a mature market changes, so that wealth can be created. Other larger, better capitalised companies, were walking away from the oil.

In conclusion, the point that I am trying to make with those examples is that, whether one is talking about flexible working with ventilation engineers or about a group of oil company executives having; an idea and being able to pursue it, the changes in the working practices themselves generate wealth. In my experience on the oil side, the DTI needs to be quick on its feet to recognise the changes in the market conditions and to support those who lead that innovation.

7.36 p.m.

Lord Hunt of Chesterton

My Lords, I am grateful to my noble friend Lord Haskel for initiating the debate. I want to emphasise how the Government contribute to innovation and make some points about the role of government funding and the management of science and technology, where I believe that there has been much progress. I also believe that the UK could do better still by not forgetting the special role in innovation of public research and development institutions in the UK and in Europe.

My qualifications are that I worked at the bottom of a government laboratory in the 1960s and at the top of one in the 1990s. Even in the 1990s there was only limited thought of commercial innovation and even now the heads of such institutions in Britain have no general mandate to help UK innovation.

I spent the 1970s, the 1980s and this decade in universities, where there has definitely been a progressive shift towards applying knowledge. During that period government policies for applying research have changed from Harold Wilson's white heat of technology to Lord Rothschild's customer-contractor principle, to Mr Waldegrave's interesting mixture of foresight and disengagement, to what one might describe as the Sainsbury-Brown expansion of basic research and financial measures to help innovation. But a feature of the past 20 years has been an absolute decline in the number and scale of major public laboratories; for example, in energy and waste technology. However, some of the greatest successes have been associated with those public laboratories: for example the MRC laboratory in Cambridge, the Hadley Centre and the Meteorological Office.

That UK phenomenon contrasts completely with the United States, the continent of Europe and Japan, where universities and industry have always benefited from the strong continuing support and knowledge provided by openly funded—not commercially funded—organisations. The European Space Agency laboratories provide a vital input to the work of universities across Europe, including those in the UK.

I echo the noble Lord, Lord Haskel, in emphasising the huge possibilities for science and technology to help innovation in new areas of technology which is where one sees the greatest opportunities for wealth creation—he mentioned some himself—and improvement of the quality of life here and around the world. I acknowledge that the Minister, in a recent parliamentary Question, redefined "quality of life" as referring to the quality of life all round the world: for example, in health, environment, new energy and agriculture.

However, one of the puzzling features in government documents and speeches on science and technology and innovation is that they always seem to omit the point that 40 per cent of the economy relates to the government and the Government's role. Their policies and procurement are extremely important in science and technology and innovation. I looked through the Lambert report—page after page—and to my astonishment I could find nothing; nor could I find anything in the Innovation Report. Maybe I did not see it so perhaps the Minister can explain that. However, I gave him credit for a helpful Parliamentary Question on 26 January, when he said that government procurement is very important in this area.

Another major role of innovation, as our US friends always like to point out, is that the use of science and technology often helps to depoliticise difficult political decisions; for example, for reducing greenhouse gas emissions by technology, for exploring alternatives to animal testing by technology and for dealing with foot and mouth disease problems.

The capabilities of the UK Government and university institutions to help with these difficult problems should provide huge opportunities in the future for commercial development. A witness to the House of Lords Committee recently said that the United States is boasting that it will win the race for energy efficient, non-polluting systems—one of the world's biggest drivers for the future.

This Government have greatly increased funding for universities, as my noble friend Lord Layard emphasised, for research and for helping them to apply this knowledge to industry and commerce. For example, London Metropolitan University is helping furniture business in London by knowledge transfer initiatives. The Design Council has emphasised the vital role of these new specialisms in universities. I cannot tell noble Lords how bitter the arguments were in a certain university just north of London when these issues were discussed in the 1980s. That argument has been won. With colleagues, it has been exciting to see small, spin-off companies forming and marketing their products world wide.

Another important development has been the international high quality of UK universities, which have had a beneficial effect by attracting foreign companies to invest in their research. As noble Lords know, the rest of the world always follows the timetable of the House of Lords. To coincide with our debate today, Le Monde had a special supplement on research and innovation. Noble Lords can see there that the UK is at the top of the graph. It has the highest rate of attracting foreign investment into research institutions. We see the Hewlett-Packard laboratory in Bristol and Schlumberger and Microsoft in Cambridge.

It is important to realise that innovation is to do with people. The Government's financial and social policies have enabled small companies to provide proper careers for women, who can now have six months paid maternity leave in a small company and then go hack and resume their career. I can tell noble Lords about that from personal involvement—not in quite the most relevant way, I should explain. The other important development of government policy that has not been emphasised is the increasing effectiveness of the overseas representation by the DTI and the Foreign and Commonwealth Office. This has certainly helped UK science and technology in overseas markets, and again I speak from experience. This programme could be stronger if there was a stronger connection between this initiative and the role of UK agencies. For example, the United States Environmental Protection Agency has its own office in Beijing, to push environmental exports. That kind of thing does not happen here.

I summarise by saying that there are about five ways in which we can use this public dimension of science and technology more effectively. It is extremely important that in such institutions there should be of the order of 15 to 20 per cent core funding—the point made by Lord Rothschild and my colleagues in the Netherlands— to ensure that such laboratories have strong continuing programmes, open access to industry and ensuring effective application to universities. The trouble is that many such institutions in Britain have something like 5 per cent core funding from the Government. That does not enable them to maintain their competitiveness and also provide open access.

Government procurement is another important point, which I have already mentioned. The third point is that the role of government agencies is important in promoting innovation abroad. It is not in the job description of many UK government agencies to do that, whereas it is in the United States. A simple development would be for the web page of every UK government agency to describe the connection between what they are doing and approved UK collaborating organisations. Foreign people often look at the web pages of our government departments and say, "Why do they not list the approved UK organisations working with them?". It is sometimes easier to find a company on the US Government web page than on the British Government web page.

The fourth point is that to recognise that such public institutions, with their long corporate memory, often provide an integral part of the Foresight process and part of the access of rapidly changing technology from universities. A previous Minister of Science, when asked why public institutions were not part of the Foresight programme, described them as part of the stage army. That attitude has changed and needs to continue to change.

Some House of Lords committees have noted that we do not have UK laboratories for important areas such as waste technology and new energy techniques, although a European one exists. Maybe we should not be thinking in terms of public laboratories in each European country, but rather on a European scale. I hope that that can go forward. Finally, the Government are investing considerably in major international programmes. One of the most important is through the World Bank, where we invest many hundreds of millions of pounds on projects for sustainable development around the world. From my experience as chairman of a non-governmental organisation, I can tell noble Lords that the UK may be contributing, but the way in which it contributes is such that UK business is not involved. Other countries are contributing in such a way that they have maximum leverage of their involvement. This is partly due to inter-relationships and different government departments not being joined up.

If we go back to Mr Wilson—who I am sure is listening to this debate—resurrecting the Ministry of Technology might not be everyone's solution. However, there might be some way of looking at these questions of the public university role and the industry role to see whether there could be some improvement there: but also looking at a European-wide scale, where we need to think as Le Monde tells us to today.

7.46 p.m.

Lord Peston

My Lords, the title of today's debate uses the word industry. I take that to mean all economic activity relating to competitiveness in the global economy. By innovation, I mean new methods, new products and new thinking of all kinds. An important part of that is good design, in the sense of products that are useful, user-friendly and a pleasure to own. The classic example, regrettably not British, is the Apple computer, which is a superb design compared to the Microsoft alternative.

In considering the Government's contribution, we must refer first, as my noble friend Lord Layard did, to the macro-economic framework. Here, the Government have been outstandingly successful. We have low and stable inflation and high employment, verging on full employment. Despite the usual siren voices, the Government have stuck to a policy of trade liberalisation in respect to both goods and services. They seem to have a bit of a problem on international labour mobility, but that too can be solved.

As the Economic Affairs Committee said in 2002, participating in the global economy is a necessary condition for economic success, although it is not a sufficient one. I emphasise that globalisation is not free trade in the old-fashioned sense of producing goods at home and exchanging them for goods made abroad. First, it is increasingly about services rather than goods. Secondly, it is very much about the ownership of assets, domestic and foreign, real and financial. Thirdly, the decision making of British-owned companies is to do with inputs of all kinds, including labour located abroad or brought in from abroad, together with the location of some of our plants abroad.

What is meant by innovation is much wider than British decisions makers using new British methods and ideas to generate new British outputs in Britain. Those who investigate these matters, together with policy makers and decision makers in industry, require a much broader vision than that. To get the perspective right, I add two further points. In the advanced countries of the world, the production of services now far exceeds the production of goods. There are problems of definition, but the ratio is about 2:1 or 3:1. I note en passant that the value added of the agricultural sector is tiny and is 1 to 2 per cent of the GDP. One notes with amazement the enormous amount of time and public resources wasted on that sector, not least the time wasted on it in your Lordships' House.

The second contextual consideration is the vital importance of competitive markets. Despite the existence of OFT and the Competition Commission, one views with despair the scale of restrictive practices that continue to exist. We have moved forward, but it is obvious, to take an example from the retail sector, that there still appears to be much abuse of market power. To quote the latest OECD report, the Government's recent approach to planning has made new large scale entry into that sector very difficult. Furthermore, despite its illegality, retail price maintenance still seems to exist to an alarming degree in that sector.

More especially on the role of government, my chief proposition is that their criterion should be first and foremost to avoid doing harm. If they do that they can then move carefully to trying to do some good. The main method of avoiding harm is that, while we all accept that it is impossible to remove uncertainty, the Government should at least not add unnecessarily to business risk.

Secondly, an important task for government is to generate appropriate conditions for the provision of a modern infrastructure. Unfortunately, because of disastrous privatisations by the earlier government, to too great an extent the Government are not in a position themselves to provide the infrastructure. The obvious example is transport. What we have there nationwide is a poor state of affairs verging on the primitive. The Government have a responsibility to see that the private utilities do something about that.

I am not an admirer of the current President of the United States. However, I am depressed when he can talk seriously about planning to send people to Mars while we in this country cannot manage to build a state of the art dedicated main line to the north and Scotland. The contrast is depressing beyond belief. I make a similar remark about environmental constraints. The ecological lobby in our country is too powerful and in my judgment is immensely damaging to the economic interests of this country. I see them as damaging to the environment, too; in terms of unforeseen consequences, they are masters at it. The remarks this morning by the Royal Society for the Protection of Birds relating to wind farms is as good an example as any. If I had more time I would give the House many more examples of the idiocy of the ecological lobbies.

I turn to some remarks on science and industry. My position is that although the relationship is important, it should not be allowed to become too close. It is of course useful for the two to get together, but such a relationship can also be damaging. Business interests are not the same as higher education interests, especially when it comes to fundamental work, and there is especially the problem—which I came across in my academic days—about the restriction on access to data, the restriction on publishing data used in PhDs, and the attempt which has happened more than once to restrict the dissemination of research results adverse to the profits of the sponsoring organisations.

I also believe very strongly—and if my own committee had not been meeting I would have said this in the debate initiated by the noble Baroness, Lady Greenfield—that science should not get too close to government either. I should add that I am somewhat disappointed by the lack of natural scientists who felt able to participate in this debate.

None the less, I welcome the remarks of the noble Lord, Lord May, set out in today's Financial Times. I am especially pleased by the balance he shows between bringing researchers' ideas to the marketplace as products and services while not jeopardising basic science. It may be, however—dare I say it in his absence?—that he might be somewhat naïve in thinking that it is possible to do one without risking the other.

This is not an area where we have no knowledge; economists have studied this subject very fully. The connections between scientific research, innovation and economic success turn out, not surprisingly, to be rather complex, and it has been hard if not impossible to establish what they are. However, the proposition that pouring more money into science which would then lead to more innovation in the country in question, which in turn would lead to greater economic success, does not stand up. Similarly, the argument that a country that has a poor science base and is not very innovative cannot succeed economically is not validated by evidence. That does not place me in the anti-science camp. Quite the contrary, I am convinced that we need more natural scientists and even more mathematicians. I strongly welcome Adrian Smith's report on mathematics which I hope we shall find time to debate in this House. However, it does cause me to plead that extra funds should be allocated with care and should certainly not be distributed to what used to be called "old boy networks".

I very much welcome the extra funds that my right honourable friend the Chancellor of the Exchequer has promised, or indicated that he might promise the universities—I am not sure which. However, those funds, assuming they become available, should be dispersed as far as possible according to objective criteria—and here I disagree with my noble friend Lord Layard—with no bias in favour of a few self-important universities which praise themselves to the enormous detriment of the rest of us.

I am bound to say that my main conclusion is that the problem for our country is not science but industry. Apart from the fact that business leaders and their representative bodies spend more time complaining and not doing, we still find that short-termism pervades UK industry. They seem to want early rewards, preferably based on clever finance rather than anything else. Too many of them do not seem to see R&D based investment coupled with good design as the way forward. I also have to point out that scientists themselves are absurdly poorly rewarded in industry compared with lawyers, accountants and, dare I say it, economists.

This debate is about innovation in industry, but I cannot conclude without making a few remarks about the public sector, which does, after all, employ 20 to 25 per cent of the working population. We cannot argue that the private sector must be innovative, abandon old ways and be open to new ideas while at the same time the public sector is conservative to the highest degree. The Government have a direct responsibility to encourage innovation in the public sector and to ask in all cases whether present structures and methods are suitable for delivering the desired outcomes and whether new ways might not be more suitable in terms of lowering costs and improving results. No matter how well we think we are doing—and this is true of both the private and the public sector— we must create a culture in which we always want to do better.

7.57 p.m.

Lord Methuen

My Lords, I, too, welcome this debate on the role of innovation in enabling Britain to compete in the world marketplace. I think we can all agree that it has been a fascinating debate. I only regret that, because the subject of the debate was announced so late, I am the only Liberal Democrat speaker.

I thank the noble Lord, Lord Haskel, for his comments on Rolls-Royce. It is true that we had a very large noise department, and I was instrumental in trying to specify the computers for it. I had the pleasure of working for both IBM and for Rolls-Royce, both well known and innovative companies. I had access to all the shop floors of Rolls-Royce in order to see how they did things. The processes and innovative methods of making things were a marvel to me. I am an engineer and I was always fascinated to be part of that organisation. I shall have more to say about Rolls-Royce later.

This country has a long history of successful innovation. We were world leaders during the Industrial Revolution, the Victorian era, and the 20th century. Sadly, we seem to some extent to have lost our way. Our country's future depends on our ability to innovate, develop, exploit and bring new products to market. In many cases recently, we have made the inventions and others overseas have reaped the benefits. One can think of may such examples immediately following the last war.

Yesterday's announcement by the Chancellor of the Exchequer, Mr Clarke and Patricia Hewitt of the long-term strategy for supporting British science and technology and the commitment to make Britain one of the world leaders for science research, development and innovation are to be welcomed. The recent Science and Technology Select Committee report on Science and the Regional Development Agencies—which I hope we will debate soon—emphasised the importance to the regional economy of science, engineering and technology. Within the regions, universities and industry must work together with the relevant financial institutions to promote and exploit world class innovation and development. The formation of regional science councils that is beginning to occur, with a membership drawn from a region's university and industrial sectors, should be a major driver for the enhancement of science and engineering technology within those regions.

As was stated by the Government yesterday, it is essential that adequate funding is available in the education system. Many other speakers have mentioned that. It is essential to provide for teachers and lecturers to inspire and train our children and young people to believe that science, engineering and technology are subjects of interest, and that careers in those fields will be worth while and rewarding, both financially and personally. I had 45 years in industry and I enjoyed practically all of it.

It is appalling that universities can even contemplate the closure of a science or technology department because the cost of providing the courses and laboratory facilities is too high compared with arts courses. If we do not have those departments, how are we ever going to train the new scientists and engineers that we desperately need, or to provide the incentive for university spin-off companies, which are the seed corn for so many hi-tech companies?

Provision of finance for start-up companies is another matter that has been raised by noble Lords. Beneficial tax incentives from the Government can help allay the national aversion to financial risk-taking. Further, we need to induce the City to take a longer-term view of investments in R&D, which is an area where our EU partners seem to be better organised than ourselves.

During a Science and Technology Select Committee visit to California in connection with our Chips with Everything report, we went to the IBM Almaden research laboratory. When one of the researchers was asked the period of time before which some financial benefit was expected from his research, he told us that IBM were looking at a time scale of 10 to 15 years. How many UK companies are operating to those kinds of time-scales? The financial market is reluctant to support that type of basic research. Only a few UK companies, such as the pharmaceutical industry, Rolls-Royce and some others, are perhaps so forward looking.

I shall make one point about Rolls-Royce developments. It is interesting that the RB5211 family of engines, which includes the Trent engines that were mentioned by the noble Lord, Lord Haskel, is a continuing development rather than being a new idea. It incorporates new design techniques, but it is essentially the progressive development of a family of engines and that is one of the reasons for its great success in various airlines.

It is good to hear the Government acknowledge the need for long-term commitment to achieve a resurgence in UK innovation. Sadly, those long-term ideals are so often abruptly terminated by an unexpected hiatus in the economy or a change of government. To achieve those aims will require extensive cross-departmental co-operation—truly joined-up thinking. I look forward to the Minister's reply.

8.3 p.m.

Earl Attlee

My Lords, I thank the noble Lord, Lord Haskel, for introducing such an important and fascinating debate. His timing is remarkably good in light of the Chancellor's announcement of his 10-year plan for research and development.

I fear that my contribution may be a little thin as was informed of the debate only two days ago and I have had no time to read, for instance, the DTI Innovation Report of last year, which was so ably spearheaded by the noble Lord, Lord Sainsbury. I also regret that only my noble friend Lady Byford has spoken from these Benches.

I started out in industry in the late 1970s with Smiths Industries, manufacturing vehicle instruments for the motor industry. I am technically minded, but I cannot claim to be a professional engineer, far less to have worked for, or even with, Rolls-Royce. However, that was a difficult time. I did not realise it then, but my noble friend Lady Thatcher was restructuring British industry. From a junior level in the factory, I could not see how the UK would survive as an economic power without the traditional industries of steel, heavy engineering and self-sufficiency in manufacturing. Nor could I see how we would survive without the textile industry that was mentioned by the noble Lord, Lord Haskel. I now call that attitude "industrial romanticism".

However, our products of the time were not very good. Our markets were feather-bedded in a number of incestuous and uncompetitive ways. We wasted resources on "sunset industries" rather than investing in industries of the future. On top of that, considerable scientific effort and engineering resources were expended on the Cold War.

Now, of course, we have huge new industries that were not even thought of in the 1980s, and we are still the fourth or fifth biggest economy in the world. Nobody seriously considers returning to the interventionist policies of that era. It is unfortunate that some of our EU partners did not reconstruct as we did in the 1980s.

It seems to me that as long as we have ideas, capital and a highly skilled workforce in the widest sense of the term, we can be competitive in the world economy. The noble Lord, Lord Haskel, gave an interesting example from the textile and clothing industry of innovation in new products.

However, we still face the perils of bureaucracy, regulation and red tape, so ably described by my noble friend Lady Byford. Those perils can adversely affect research as well as industry. For instance, the medical devices directive is not entirely helpful to research. However, it is not clear what mischief that directive seeks to remedy. That is why we on these Benches are for ever banging on about the burden of regulation. Your Lordships had an excellent debate on that very subject last week and my noble friend Lady Byford reminded us about some of the concerns raised. In many cases, the best that the government of the day can do is to get out of the way or, as the noble Lord, Lord Peston, put it, "at least do no harm".

In his article in today's Financial Times, the noble Lord, Lord May, identified a worrying fall in the number of A-level entrants between 1991 and 2003. He cited an 18 per cent fall in chemistry applications, a 25 per cent fall in maths and a 29 per cent fall in physics applications for A-level examinations. That does not bode well for the future. That is not necessarily the Minister's responsibility, but it is a worrying indicator.

The noble Lord, Lord Haskel, made some interesting observations about technical textiles—a new material, if noble Lords will forgive the pun. One can only guess what Leonardo da Vinci would have achieved if he had all the materials that we have available to us now. The noble Lord mentioned the Rolls-Royce Trent engine. I well recall in the aftermath of the RB211 problems, a depressing TV documentary entitled, "Can we Afford a Rolls-Royce?" Fortunately, UK plc made a good judgment around that time.

The noble Lord, Lord Haskel, also asked the Minister about firms that cannot keep up, that cannot innovate. I think it is the Minister's duty to create a favourable environment, but the noble Lord will recognise a definite limit to what the Minister and the DTI can do to save firms, or even industries, that cannot innovate or be competitive.

The noble Baroness, Lady Warwick, not unsurprisingly, talked about R&D and universities. She also painted a very encouraging picture from higher education.

My noble friend Lady Byford asked some very tough questions about the cost of regulation and bureaucracy. I am sure the Minister will have winced when she described the situation in the manufacturing industry. She also talked about the need to spread more evenly high-tech "sunrise industries' across the country.

The noble Lord, Lord Layard, suggested concentrating government research expenditure on fewer but higher quality institutions. I am sure he will be aware that a balance has to be struck, because concentration could threaten quality, which was based on the recognition that higher education teaching must take place in an environment of research and scholarship. This point excited the noble Lord, Lord Peston, who said that funds should be allocated objectively. The noble Lord, Lord Layard, also made some very interesting comments about apprenticeships.

The noble Lord, Lord Ponsonby, talked about innovation in working practices. One of the best military training courses I ever attended was a Total Quality Management team leader's course. It suggested a management philosophy very much along the lines suggested by the noble Lord.

While innovative business plans are not patentable, the Minister will be pleased that I will not be pursuing that concept during the passage of the Patents Bill.

The noble Lord, Lord Hunt, talked about overseas trade representation, among other matters. We see the Foreign and Commonwealth Office working closely with the DTI and we are receiving positive feedback. Of course, there is always room for improvement. The noble Lord also suggested research organised on an EU basis. One anxiety I have is about research that turns out to lead to a dead end. Is there any EU database of research that does not bear fruit? It worries me that various organisations may be researching the same dead end and everyone keeps quiet about it, for obvious reasons.

The noble Lord, Lord Peston, mentioned, en passant, the problems of railway development. It seems extraordinary that although railway signalling technical challenges seem relatively simple—perhaps similar to the management of air traffic control—railway signalling is fabulously expensive.

It would be bizarre for me to oppose the Chancellor's announcement. The Minister recognises the danger inherent in intervention and market distortion, and will be trying to avoid them. I hope that when he responds, he can say how the needs of funding blue sky curiosity-driven research will be met but balanced against the attractions of the immediate marketable results.

Finally, we on these Benches are deeply concerned about all-pervasive regulation and red tape. The Minister loses no opportunity to point to the high levels of employment in the UK. He is right, but we have been on a favourable economic curve since 1992. The problem is that the adverse effects of regulation take a long time to become apparent. It takes even longer for painful corrective action to take effect and to be seen to be taking effect. I look forward to the Minister's response.

8.12 p.m.

The Parliamentary Under-Secretary of State, Department of Trade and Industry (Lord Sainsbury of Turville)

My Lords, I am very grateful to my noble friend Lord Haskel for raising the challenge which British industry faces from low-wage fast-growth countries such as China and India, and the need for the Government to create the best possible conditions for industry to innovate, so that it can compete effectively. I believe that these are extremely important issues for the future success of our economy. This has been an excellent debate, which shows the House of Lords focusing on a key issue for the country. I should like to reply to the points made and set out the action the Government are taking to position the UK as a key knowledge hub in the global economy.

There are two fundamental reasons why innovation today is so vital to our future. The first is simply globalisation. Trade liberalisation and a rapid fall in communication and transport costs mean that the UK has increasingly to compete against countries with significantly lower labour costs and reasonably well educated labour forces. My noble friend Lady Warwick was right to point out that wages today in China are 5 per cent of those in the UK. Perhaps even more sobering is the fact that the hourly labour costs in Korea are just over half UK levels, but the proportion of graduates in the working age population is almost identical to that in our society.

The second reason why innovation is so important for companies and governments is the major advances that are taking place in science and technology. Today, technology and scientific understanding are changing our world faster than ever before, and developments in ICT, new materials, biotechnology, new fuels and nanotechnology are unleashing new waves of innovation, and creating many opportunities for entrepreneurial businesses to gain competitive advantage. On the one hand we have the challenge of emerging economies, and on the other the developments in science and technology and the huge opportunities that those open up for us.

The only way that we will be able to compete in this new world is by moving resources out of the low added-value areas into the high added-value ones. That is why the Government have put so much emphasis on knowledge and entrepreneurship, and why we want to see the start-up and fast growth of many more high-tech businesses.

As my noble friend said, earlier innovation is helping traditional industries, such as the textile industry, to reinvent themselves and compete successfully. The growth of the textile industry—particularly in the north-west of the country— is a real British success story, and a model of what we have to do in many more traditional industries.

At the same time, we have to build new industries, such as optelectronics, biotechnology, e-science and others, which will create jobs for the future. While the total manufacturing industry has reduced over the past 10 years, there have been high growth areas within that. That tells us where we ought to be going in the future.

In the period 1991 to 2001, the growth for computers and office equipment was 16.1 per cent; for communications, TV and radio it was 6.4 per cent per annum; and for pharmaceuticals it was 6.6 per cent. These are, of course, high-tech areas. Those figures compare with low-tech areas such as plastic and rubber products where growth was 1.4 per cent, and food, drink and tobacco where it was 0.4 per cent. I am not saying that companies cannot be profitable in low-tech industries, but only if they find sources of competitive advantage, particularly science and technology. I believe that there are no high-tech and low-tech industries, only high-tech and low-tech companies. What characterises the success stories is that they tend to have relatively high inputs of research and development and skilled labour forces, compared to those industries that only have a small growth rate.

If innovation is so important, what is our record in this country? The two best measures of technological innovation are business research and development and patenting. They show that the UK's performance is not good enough compared to our international competitors.

My noble friend Lord Haskel asked what we could do to stimulate innovation in traditional industry. The Government can do a lot. The same range of public goods are necessary to support a dynamic and innovative economy for both traditional and new, high-tech industries. Both require the same essential public goods.

The first of those is a dynamic science base. Over the past eight years we have doubled the science budget from approximately £1.3 billion to nearly £3 billion in 2005–06. We have also introduced research and development tax credits that are worth £600 million per year to business. The Government have made significant changes to the tax regime to encourage greater levels of investment by UK companies. I would say to the noble Baroness, Lady Warwick, that our record is good in trying to remedy the failures of the past, but there is still a long way to go.

We have also provided the universities with incentives for knowledge transfer through schemes such as University Challenge, Science Enterprise Centres and the Higher Education Innovation Fund. The noble Baroness, Lady Warwick, was right to point to the extraordinary culture change that has taken place in our universities in the past five years, and the way in which they have successfully responded to these incentives.

As the noble Baroness pointed out, there was a slight drop from 248 spin-outs in 2000–01 to 213 in 2001–02, but that compares with the situation five years ago when the average was about 70 per year. There has been a radical change.

Income from licensing increased from £18 million to £33 million last year, an increase of 83 per cent. There was also a substantial increase in the number of patents.

My noble friend Lord Layard said that the situation did not compare well with American universities, but I am not certain that that is true. If one decided simply to take any American university and picked MIT for comparison, it is true that we do not do as well. However, MIT is not a typical American university. As the noble Baroness, Lady Warwick, pointed out, in terms of spin-offs per one million dollars of research, we do better than the USA.

With business R&D, while the UK is well behind the US and roughly equal to the EU average, it is encouraging that after a steady period of decline from 1.5 per cent of GDP in 1981 to 1.16 per cent in 1997, there has been a move in the right direction. Business R&D has gone up to 1.24 per cent in 2002. We have also seen a huge growth of the number of incubators in this country; there are currently 220. That compares with a figure of 100 in 2000, and about 25 in 1996. So we are creating the conditions for the restructuring of business and the start up of new companies.

A number of speakers raised the question of skills. That is clearly essential if we are to move out of low added-value areas and into the high added-value areas. At the higher level we actually do very well, as we produce more science, engineering and technology graduates than any other G8 country except France. However, as the noble Baroness, Lady Warwick, and the noble Earl, Lord Attlee, pointed out, the overall improvement in numbers conceals a decline in specific subject areas such as materials science, electrical engineering, chemistry, physics and biochemistry. That is an area of real concern although, interestingly, it is a problem that one finds across the world. It is an extraordinary factor that as we enter this new world in which science and technology are going to be more important, young people are turning away from physics, chemistry and engineering in particular. That is true of Germany, Japan, South Korea and even China.

There is a real challenge here to communicate to young people the excitement in the physical sciences. Young people see all the excitement being in biology and IT, but we need to convey to them the extraordinary excitement and changes in the physical sciences—in optelectronics, aerospace, satellites, nanotechnology, telecommunications and bioengineering. However, as my noble friend Lord Layard pointed out, the real problem is at the middle range of skills and particularly at the technician level, where we have a serious shortage of skills in comparison with Germany and France. While 27.7 per cent of the workforce have intermediate skills levels in the UK, that compares with 51.2 per cent in France and 65 per cent in Germany. There is no question but that that clearly has a serious impact on our productivity.

We have to make rapid and major improvements here, which is why we issued a new skills strategy last year. We have made a large and important change by putting business demand at the centre, whereas previously things have been driven from a supply side perspective. That is a huge move forward for industry and our economy, as it recognises that our education system has failed if it does not meet the needs of the workplace. Without the DTI, the voice of industry would not have been heard. We have made a real change to how skills are addressed by government.

A number of noble Lords made comments about government policy. Let me deal with those views. My noble friend Lord Haskel asked what we would do about those who lose their jobs because companies fail to innovate. It is absolutely key that we do not try to get back into the world in which we keep companies afloat that have been unsuccessful. Equally, however, it is essential that the Government create the opportunities for those people to retrain and move into new jobs. We must create opportunities for everyone throughout their careers, not only at the beginning of their careers. We need to make lifetime learning, as we are doing, a real reality for people, so that they feel that they can retrain during the course of their lives.

The noble Baroness, Lady Byford, raised the question of burdens on business and the question of regulation. I shall deal with the specific figure of the £20 billion burden on business since 1997. It should be clear that we are talking about two things here. The first is the administrative cost of the new regulations, which is a tiny fraction of that figure. The big figure are the benefits that people will enjoy as a result of the regulations, such as decent wages the minimum wage—paid holidays, time off to attend to family matters, and the working time regulations. I shall not apologise for any of those benefits. They are what modern business is about. We are happy to stand behind them as long as people understand that they are not costs of administration, but go towards what people are paid and decent working conditions.

Regulation is an enormously important subject. Government constantly have to work hard to make certain that there are no new regulations. The noble Baroness is wrong to suggest that there is no strategic overview of regulations. We have a regulatory impact unit in the Cabinet Office to take an overview and scrutinise departments. We set up the better regulation task force with independent members to challenge the Government.

It is also important to realise that regulation is not the only issue that hinders or causes problems with innovation. The Government need to do positive things. To omit to put alongside the issue of regulation the importance of education and training, science and competition policy is to show that one does not realise the key challenges facing British industry.

The noble Baroness, Lady Byford, also raised the question of methane gas being a renewable energy source. That is not correct; it is not a renewable energy source. We support it because it is a good thing to do for quite other reasons. It should also be said that in the total energy policy it will make hardly any difference because the amount is so small.

The noble Baroness also raised the question of the proof of concept idea. That is what University Challenge was all about. One of the new products from business support in the DTI covers the same field. The proof of concept idea has been successfully developed in Scotland. It is a great success story.

The noble Baroness referred to energy policy and the new sources of energy. We are putting considerable amounts of money into wave power, non-food crops and photovoltaics, which are all important. We are investing in the research for the future and setting up a special centre with the research councils to monitor and network that research for the future.

The noble Lord, Lord Layard, raised the question of motivation of academics. I do not think that we want another RAE to cover the subject of innovation, which is difficult to measure. There are financial incentives and the esteem of colleagues, which falls on people who innovate, who set up their own companies and work with large business successfully. That is doing a good job in motivating academics. The exciting thing is that there is no longer a sense among academics that to work in industry is something that reflects badly on one's academic career. On the contrary, it is now seen as reflecting well on one's academic background.

I agree very much with the noble Lord, Lord Layard, that mathematics is a key skill for undergraduates. I shall follow up the question of David Blunkett's idea that all young people should take mathematics at A-level as a qualification for university.

I agree with the noble Lord, Lord Ponsonby, that changed working practices can lead to improved business performance. Innovation is driven largely, but not exclusively, by science and technology. Innovation can take many forms, all of which are to be encouraged.

The noble Lord, Lord Hunt, raised a very interesting question on the decline in research institutes not located in universities. I think that this is the way the world is going and that the countries with strong research institutes not in universities, such as France and Japan, are now suffering in terms of the quality of the research.

The noble Lord also raised the question of the impact of government departments on innovation through knowledge transfer, procurement and output based regulations. I would simply draw his attention to Chapter 5 of the Innovation Report, which is entirely on that subject and is headed "Innovation policies across Government". It covers that in great detail because we feel that procuring £109 billion per year is an enormous resource which government can use to support innovation. We are very keen that that should take place.

My noble friend Lord Peston raised the question of competition policy. According to a recent survey, our competition regime in this country is reckoned to be one of the best in the world. My noble friend also argued that the relationship between science and business should not get too close. I had hoped t hat we had got away from that kind of view of science and business. We need to fund basic science extremely well so that scientists have the independence to pursue blue skies research without any considerations of its use or any pressure from anyone to exploit it. Equally, we need to have incentives for knowledge transfer because of its key role in the economy. I cannot think that there is any doubt that American economic success in the past 15 years has been based crucially on both the high quality of its basic research and the incentives for its exploitation. That has been its great strength.

There is no question of "old boy networks" in the way that science money is handed out; it is done through the most rigorous form of peer review in the research councils by the scientists themselves.

I agree with the noble Lord, Lord Methuen, that we need to scrutinise the closure of university departments very carefully, particularly those which are still attracting a good many students. It is very worrying if those are closed.

As far as concerns cross-government co-ordination, we have a cross-departmental ministerial group, chaired by Patricia Hewitt, which is doing just that in terms of implementing the Innovation Report.

I end by saying that our vision is that the UK should be a key hub in the global knowledge economy. That means that we should be a country famed not only for our outstanding record of discovery but also for innovation—a country that invests heavily in business R&D and education and skills, and which exports high-tech goods and services to the world. We also want to be a country with strong science and technology links with the best research around the world, so that we can stay always at the leading edge.

We should be a country to which talented entrepreneurs and world-class companies come from around the world to carry out research and to set up high-tech companies. We see these companies being attracted by the quality of our research, the strong links between universities, research institutes and industry, the geographic clusters of high-tech companies, the ability to raise finances—particularly venture capital—and our quality of life.

We have made much progress in achieving that vision, but there is still a long way to go. That is why at the end of last year we published the Innovation Report and why we are determined that in the next year to 18 months we will fully and properly implement that report.

Lord Haskel

My Lords, the debate was arranged at very short notice, so I am particularly grateful to all noble Lords who have spoken. In spite of the short notice, we seem to have debated the many facets that involve innovation. I am most grateful to noble Lords who have brought their specialist knowledge to the debate.

I am most grateful to my noble friends Lord Layard and Lady Warwick who spoke with their special knowledge about the contribution made by universities. Our economist, Professor Layard—my noble friend Lord Layard—and my noble friend Lord Peston spoke about the macroeconomic success that is necessary to underpin innovation. My noble friends Lord Hunt and Lord Preston spoke about innovation in the public sector. This is something that is quite new and is of increasing importance.

The noble Baroness, Lady Byford, and the noble Earl, Lord Attlee, spoke about regulation and its impact on innovation. They spoke about the debate last week on the Motion moved by the noble Lord, Lord Vinson. I spoke in that debate and I have the impression that in it the compensation culture was blamed on regulation. I think that this compensation culture is largely to do with the fact that if one does not win, one does not pay. I felt that a mistake was made about that in that debate.

I was most grateful to the Minister and the noble Earl, Lord Attlee, who spoke about the importance of not protecting industry by artificial means. That is important. The textile industry suffered from that and was set back many years by it.

The noble Lord, Lord Ponsonby, spoke about the importance of progressive working practices; I agree with him. The noble Lord, Lord Methuen, spoke about Rolls-Royce. One of the reasons why continuous development of the Rolls-Royce engines took place was that carbon-fibre fabrics were used for the rotor blades in the engine. It is another example of new textiles in engineering producing an improvement.

I am grateful to the Minister for his detailed reply. I think that he covered all the key issues. We all agree that he has done so much to champion science and we are all grateful to him for that. He referred to young people being turned away from science and technology but he started the ambassador scheme, which is very popular. The shortage of mid-range skills that he spoke about greatly affects our innovation. Our debate has covered all the important factors and I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.