Science-based Innovation

HC Deb 11 May 2000 vol 349 cc265-300WH

[Relevant document: Second Report from the Science and Technology Committee, Session 1999–2000, HC 195.]

Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Clelland.]

2.31 pm

Dr. Michael Clark (Rayleigh)

It is my pleasure to start the debate. I sympathise with you, Mr. Deputy Speaker—the electronics in the Chamber are still being proven and the clocks are wrong. We understand that it will take a little time to get the technology working properly.

I am grateful for the opportunity to debate the Science and Technology Committee's report on innovation in the physical sciences and engineering industries. My contribution will be modest and short because other Committee members, past and present, want to speak. It is only right that they have a chance to do so because I have the privilege of being able to speak in every debate on such matters. The Minister has kindly accepted my apology for the fact that I shall have to leave the debate at 4.10 pm to Chair the Finance Bill at 4.30 pm. I will not be able to hear her response, but I promise to read it in Hansard as soon as I receive it.

Innovation starts with invention and goes on to development. I shall illustrate that by taking from my top pocket my orange Sainsbury's card—I hope that no one will reveal to the Minister responsible for science that I am using this piece of plastic for my demonstration. Way back in the early 1960s when I was a research chemist for ICI, I worked on co-polymers of polypropylene. To test the co-polymers that I was making, we used to mould a comb, which was a good mould to use because if the plastic flowed properly, it would go into the teeth of the comb and fill the comb mould. We used to test the combs—red, blue or yellow combs—in a variety of ways, one of which was to bend the comb to see whether there was any stress whitening. As hon. Members can see, as I bend my Sainsbury's card, the orange changes to white where it is stress whitened. As a research chemist, that worried me.

I had discovered that, when bent, coloured plastic would whiten through stress, but it did not please me that the combs or anything else made from my plastic, for which I obtained various patents, would distort and whiten in that way. I worked on my co-polymers until I found some that did not whiten when subject to stress. Was I not clever to work out how to get rid of that alleged defect? How much more clever would I have been had I realised that I had invented Dynotape and had I gone on to market it. Dynotape works by stress whitening coloured plastic. I used my science to get rid of the problem instead of turning my discovery into an invention and marketing it. Therefore, although I can claim to be a scientist, possibly a poor one, I cannot claim to be an innovator because I failed to discover Dynotape, even though I had the knowledge some years before the product came out.

Innovation is an inherently dynamic and evolutionary process. Somewhat like a creative idea, it can be encouraged and the correct environment can be provided to allow it to mature, but it cannot be forced. There is no doubt that innovation depends on a good science base, and we have a very good science base in the United Kingdom. Why, therefore, do we have successful innovation in biosciences but not so much innovation in the physical sciences and engineering? If we are to have innovation in the physical sciences, we must focus on marrying together scientific advances with products and processes.

For many years, the manufacturing sector has not been our strong suit, and if the manufacturing sector is not strong, there is not always a specific outlet for engineering invention. By contrast, innovation in biosciences depends on developing links between the UK's world-class biosciences base—that includes universities, charities and industries—and commercial organisations, where strong, mature links with specific applications exist, particularly in the case of applied biosciences such as drugs.

The Government's response to our report was fair and of great interest. The Government accept that they have a role to play in promoting innovation. They quoted the fact that there is an innovations unit at the Department of Trade and Industry, with 25 secondees who come from small and medium-sized enterprises, large companies, finance houses and academia. The Government readily admit that those secondees to the DTI contribute their wide experience to the Government's work on external and general policy.

The Government also accept the point made in the report that, in all aspects of engineering, whether it is electronic, civil or mechanical, the engineering community provides wealth creation and improves the quality of life for UK citizens. Only through inventiveness and keeping a technological edge on other countries—and thereby ensuring engineering sales abroad as well as at home—can the community provide that quality of life and wealth creation.

The Government-I am not speaking specifically of this Government, but of the previous one also—accept that engineering and the physical sciences are important to our national well being. However, it is disappointing to note that since 1993, UK expenditure on research and development has fallen as a percentage of the gross domestic product. The UK has had the biggest fall of any country in the G7. The Government will argue—we may hear it from the Minister—that one reason for the fall in research and development expenditure as a percentage of GDP is that GDP is rising. There is no doubt that that is one reason. However, if GDP is rising, it is beholden on the Government to try to lift research and development expenditure in line with that rise. It is easier to achieve that when GDP is rising than when it is falling. I am sure that the Government will wish to continue research expenditure.

We are fifth out the seven countries in the G7, and behind us are Canada—surprisingly—and Italy. The good news is that since 1997, there has been a check in the decline in research and development expenditure. I hope that that stable situation will now become an upturn.

Despite the disappointingly low funding for research and development, we concluded in our report—and no witnesses denied this conclusion—that our relatively poor innovation record in engineering and the physical sciences is not the result of a weakness in our science base. On the contrary, our science base is good. The science base produces more innovative ideas than are taken up commercially. The UK is strong in scientific invention, but weak at applying and exploiting those inventions. We said in our report that, to a large extent, industry is responsible for the failure to exploit inventions. We generally found a weakness in exploiting close to the market and what is close to the market is an industry rather than a Government responsibility. The Government said, fairly, that that may be true, but they did not accept that the science base itself had no responsibility for turning a good idea into an exploitable product. Indeed, the Government have gone out of their way to make it clear that the science base must turn some of its ideas into products that can be exploited and sold.

The Government say that they are encouraging that by such things as university challenge, science enterprise challenge, higher education reach out, community fund and so on, and I am glad to hear that. However, I suggest to the Minister that, excellent though those schemes are, they are diverse, rather small and poorly understood. Perhaps it would be helpful if, instead of having so many disparate schemes, the Government considered combining them, as far as possible, into larger schemes. That would cut out many of the administration costs and some of the red tape, and probably reduce some of the bidding problems that organisations experience when they are looking for money. It would be easier to understand the funding mechanism if all the schemes were rolled into one.

The Government can also help through research and development tax credits. The Select Committee discussed tax credits in the previous Parliament. The hon. Member for East Carmarthen and Dinefwr (Mr. Williams)—I am tempted to call him my hon. Friend because he is that in the Select Committee—will recall that that was discussed by the Committee before I joined. We welcome the fact that a tax credit scheme is in place for small companies. We said in our report that we thought that the Government should consider introducing a similar scheme for larger companies, although we accept that such a scheme would be expensive and that its effects would be difficult to monitor. There could also be a danger of the scheme and the money becoming unfocused. As, by and large, large companies will do research and development anyway, Government money or tax concessions are best targeted on small and medium-sized enterprises.

It is said that fear of bankruptcy and the associated stigma hinders risk taking. The United States and some continental European companies have more of what is called an enlightened approach to bankruptcy and insolvency. We asked the Secretary of State to review legislation on bankruptcy and insolvency and to introduce a distinction between responsible entrepreneurs who get into trouble and people who engage in reckless business activities. He has agreed to do so, and we look forward to considering the review and its findings in due course.

We know that the Government are thinking of relaxing the rules on exemption of personal property. In other words, if people put up their houses as security when they are inventing a product or taking risks for which they need capital, their houses will be exempted from bankruptcy proceedings. That is a good way of helping entrepreneurs. If they are risking their savings, they should not have to risk their houses as well. We must, however, be careful of taking too casual an approach and of upsetting creditors. We do not want to encourage entrepreneurs to the extent that creditors do not get paid. The creditors who supply entrepreneurs are often entrepreneurs in their own right. Driving creditors to the wall by being more lenient on some larger entrepreneurs might end up hurting the smallest of the entrepreneurs-the creditors. I urge the Government to bear in mind while they are considering new bankruptcy rules that the smaller creditors must always be remembered in any changes.

Finally, we stressed that the Government should have two key goals. First, they should ensure that there is a strong public sector and that education and the science base are properly managed and adequately financed. That is how we can find the scientific and engineering staff who are necessary to help entrepreneurs along the way. Without staff, we can have nothing. Secondly, a sound economic and fiscal environment is necessary to support those who innovate and take risks. After all, a stable environment and economy is one risk less for the serial risk takers. I know that the Government take seriously their responsibility in that regard. The additional £1 billion in the comprehensive spending review is a demonstration of their earnestness.

The population's health and living standards depend to a large extent on our innovations. The country's affluence depends on the trading products that originate from innovation and a large part of the Government's revenue comes from taxing companies and people associated with innovations from the last century. The Government would be wise to continue to ensure that the scientific goose is well looked after and properly fed if they want to maintain a steady supply of innovative golden eggs.

2.49 pm

Dr. Ashok Kumar (Middlesbrough, South and Cleveland, East)

As a member of the Select Committee, I must say that it is a pleasure to serve under the chairmanship of my hon. Friend the Member for Rayleigh (Dr. Clark). I say that in the same spirit as that in which he spoke of my hon. Friend the Member for East Carmarthen and Dinefwr (Mr. Williams).

Producing the report has been an exciting experience. It took a long time to do so—I think that 18 months passed between the moment that we started and the point at which we reached our final deliberations. The report makes many recommendations—38, I think. I want to focus on the way in which the report relates to the area that I represent: the north-east and Teesside.

As my hon. Friend the Member for Rayleigh said, the report talks about ideas of innovation and manufacturing, both of which have gone hand in glove. I want to highlight some of those ideas, discussing in particular paragraphs 56 to 58 and recommendations (1), (m), and (n). They articulate the spirit of creating a climate of innovation and technology for small and medium enterprises.

The paragraphs deal with the need to develop proper and lasting links between innovation and finance capital. State institutions can help directly. Seedcorn funding for innovative ideas can come from universities, which in turn are helped by Government in establishing funding streams. My hon. Friend referred to the university challenge scheme, which is cited in paragraph 56 as a key agency.

Funding can come from other agencies. Local authorities may give funds directly and establish technology companies. European structural and know-how funds can assist. Money can come from local branches of Business Link and special funds directed by local training and enterprise councils. Those measures are welcome but they do not meet the central needs of small and medium employers involved in developing science-based industries. They do not help those employers to access cash to generate innovation over a longer time scale.

Much central and local state funding is geared towards direct job creation. Although high-quality jobs have been and will be created in science-based industry, they cannot always be created in the time scale required by state funders. The need for widening access to private capital funding for innovative industries is therefore imperative. Nowhere is that more important than in the manufacturing heartlands where the presence of finance capital firms is arguably weakest. I am sure that finance capital is thriving and pulsing on the M4 corridor, silicon fen and the City of London, but whether the same is true in the north-east, west Cumbria or south Yorkshire is debatable. What is not debatable is the fact that there are science and innovation-based companies in those regions.

According to the Organisation for Economic Co-operation and Development, an estimated 23,000 people work in the sector in my region of the north-east. As one would expect, the sector is varied, ranging from pharmaceuticals to surgical instrument manufacture; from innovative chemical processes to the manufacture of optical equipment; and from software development and publishing to aerospace component manufacture. The sector is growing. The gap in high-tech employment between the north-east and the United Kingdom average reduced from 0.9 per cent. to 0.2 per cent. from 1991 to 1997.

There is still room for growth. Growth in key areas has been aided by the strategic decisions of companies based in the region to diversify their product range and to move from core products to higher value-added manufacturing. That has been especially true of the chemical industry, which is still the major player on Teesside. At £28,750, the emerging bio-science sector has, with the pharmaceutical sector, the highest research and development investment per employee in the region, especially compared with the software and IT industries.

The regional firms are based on the logistics of what some wish to call the old economy—characterised by large size, defined production and supply-chain requirements. Paradoxically, those firms provide lucrative opportunities for small IT companies in the application of bespoke software and systems. A local pool of talent has been established, often based on the original work of the regional universities in setting up specialist computing and software centres.

The regional IT industry continues to grow apace. It is often driven forward by spin-offs from the academic and business worlds, which have the flexibility to map the market and to attach themselves to the needs of large companies and key players in the public sector that have the same IT needs. However, as I said earlier, those new players need capital financing if they are to overcome structural issues in their field of work. The most important one is that core professionals, whether IT specialists, graduate engineers or chemists, are in a sellers' market. They can attract premium salaries from anywhere in the UK or, indeed, the world. They work in a global environment and have no cultural inhibitions about doing so. We want them to stay in the region or in our country, so that their expertise can be used for its economic and social good.

The ways to make that happen are, first, reinforcing their core employment, through the work of regional universities and technology and innovation centres, and secondly, enabling their potential to be fully backed by finance capital, which can help employers grow and prosper, as well as, in future, back the ideas of key people for the creation of new companies and firms. That was the type of research and finance infrastructure that underpinned the development of silicon valley. That valley around Santa Clara grew into one of the world's economic powerhouses.

There is no reason why we cannot recreate that effect in my region, the north-east of England, or in other regions. Perhaps the key issue is the cultural conservatism of the finance sector. It is all too easy to demonstrate the innate profitability of a new property development, a new out-of-town shopping or leisure park or executive housing. It is probably slightly harder to convince a hard-headed banker of the innate profitability of a new manufacturing process—even one in a mature industry or promoted by a market leader. Now that the dot.com bubble has burst, it will be much harder to convince a venture capitalist of the worth of a new and untested approach to production innovation or an entirely new product or new IT application that exists only in cyberspace or the head of the program writer.

How should we go about breaking down that cultural barrier? The Science and Technology Committee's recommendation in paragraph 57 of the report makes a start. The suggestions of the Bank of England witnesses about the creation of a new breed of intermediaries, whom they call venture catalysts, could help. Those people could act as points of reference for scientists and high-tech entrepreneurs and for the finance capital industry. They could help to demystify science-based projects for the venture capitalists, to show that seemingly arcane ideas can have both relevance and profit potential. They could also help to prepare people whose only previous experience of planning has been in marshalling scientific and technological ideas for development to explore the arcane arts of preparing robust business plans.

The Committee suggests that the vehicle for setting up and resourcing a network of such venture catalysts could be the local branches of Business Link. I strongly agree. It is an excellent idea and I recommend it to the Minister. The Business Link network in the north-east, which is changing into the new small business service, now possesses the range of contacts and institutional advisers needed to undertake such a task.

Recommendation (n) in paragraph 58 of the report argues in support of business angels, because they have a valuable role to play in helping to provide risk capital to small unquoted companies. The report defines business angels as people who possess a specific expertise in an area of industry, a good informal network of like-minded people and access to liquid reserves. Such people often have the flexibility to fill the gap between normal SME debt finance provided by the clearing banks, and the higher amounts deemed worthy by venture capitalists who, as ever, must look to future rates of return. They are becoming increasingly important in backing high-tech firm formation.

According to the Bank of England, registered business angels have made 227 investments in 223 registered companies, the majority of which were technology-based companies. That is a good start, but it is still below the level in competitor countries, most notably the United States.

The Department of Trade and Industry has researched the matter and argues that the need to create a network of intermediaries to match such active finance entrepreneurs with science-based fledgling businesses is the key to squaring the circle. However, we do not want to create yet another charmed circle of advisors and mentors who are based in areas where science-based industries are already flourishing. Left to market forces and identified opportunity alone, the cash will merely gravitate to the south-east.

The Committee and I believe that the key is to house such activities in the new regional development agencies. The RDA in my region—One NorthEast—has already risen to the challenge and identified the growth sectors that it wants to back. Those sectors are coterminous with the nationally identified, high-tech and emerging sectors in the competitiveness White Paper that was published in December 1998. One NorthEast's regional economic strategy boldly gives prominence to backing the region's universities and building on the interface between science, universities and local business institutions. It recognises the opportunities that can arise from the spin-out and licensing of university research and development, and the way in which the network of innovation centres and technology institutes that are based in the north-east can help those opportunities to be realised.

The Committee seeks to build on those living, breathing initiatives by introducing a new role that marries scientific and innovation know-how to the availability of cash backing for growth. I know that the One NorthEast board, senior management and the technology community in my region will greet that enthusiastically.

Historically, the north-east has been the birthplace of technology in communications, mining, engineering, technological applications in metal manufacture and in chemicals and electronics that has changed the world. The regional finance networks of town banks brought those technologies to the market. Unfortunately, that finance network no longer exists. However, the region now stands at the dawn of a new technological age. Marrying the skills, talents and abilities that I know exist in my region to the availability of finance capital is the key issue.

The report contains many exciting proposals that should all be implemented regionally, to provide finance, as well as across the country, with the support of business angels. I urge the Government to adopt many of the new ideas. I know that my hon. Friend the Minister for Small Business and E-Commerce has already responded positively. I hope that the points on which I have focused regarding the north-east will receive a warm welcome from her.

3.4 pm

Mr. Alan W. Williams (East Carmarthen and Dinefwr)

I am pleased to take part in this debate on innovation in physical science and engineering, and to follow both the hon. Member for Rayleigh (Dr. Clark), the Chairman of the Select Committee on Science and Technology, and my hon. Friend the Member for Middlesbrough, South and Cleveland, East (Dr. Kumar), who placed such a strong emphasis on manufacturing. I know that you, too, Mr. Deputy Speaker, believe strongly in our manufacturing industries. I read a chart yesterday in which Wales was the third of all regions in Britain in terms of the overall percentage of gross domestic product based in manufacturing industry. The west midlands ranked the highest.

The report is an important document. I have taken part in Select Committees during my 12 years in Parliament, and in the Science and Technology Committee in particular since its inception in 1992. During the previous Parliament, we undertook a major inquiry into genetics, particularly the human genome project, and we also examined the work of the Natural Environment Research Council and the Particle Physics and Astronomy Research Council.

At the outset of the present Parliament, the Select Committee realised that it had left engineering and physical science relatively uncovered in the previous Session, so we set out to make up that shortfall. When we took our decisions in 1997, I did not realise that we would be so thorough in examining engineering and physical science. Our terms of reference were drawn up in October 1997 and the report was published in February this year—two and a half years later—after a mammoth effort.

Several visits took place. I particularly remember our visit to Gordon Edge at his impressive establishment at Generics in Cambridge. We also visited Oxford Instruments and St. John's innovation centre at Oxford. We went to the United States, where we visited the Massachusetts institute of technology in Boston. It was a culture shock to encounter in Massachusetts the attitude towards applying science to innovation in manufacturing. The visit was most illuminating. The Committee also visited Germany: unfortunately, I could not go on that occasion, but I had been there on an earlier Select Committee visit. Germany is certainly a world leader in technological innovation and the quality of its engineering industries. We also conducted 20 oral evidence sessions with a variety of bodies. All that is distilled in our report.

The first question put to me, as to our Chairman earlier, was why we are more successful as a nation at innovation in the biological than in the physical sciences. I do not know exactly why, although I had some preconceptions. As the report mentions, we need to invest far more heavily in development for the physical sciences. The majority of investment in the biological sciences is for research. The development side of research and development is more expensive in the engineering and physical sciences. I shall return to that issue later.

There may be a problem with our research council structure. The Particle Physics and Astronomy Research Council necessarily does pure, blue-sky research. It is 100 per cent. academic, but there are massive spin-offs from its academic pursuits. The Biotechnology and Biological Sciences Research Council and the Medical Research Council are obviously more medical and have strong links with the pharmaceutical industry. The linkage between industry and academia is stronger in those research councils. It is a bit of an anomaly that the Engineering and Physical Science Research Council is rather blue sky. One would have expected it to have stronger links with our manufacturing industries.

I visited Oxford with Peter Williams, the chairman of Oxford Instruments, who is a distinguished figure on many committees. It was a revelation to discover that he felt that the work of the EPSRC is blue sky. Its entire emphasis is academic. He is greatly involved in the application of research ideas, but he felt that, if we train scientists to think, learn and understand science and pursue research at the highest level, they can turn their minds equally efficiently to applied science once they have completed their degrees or doctorates. I still feel that the EPSRC needs to be looked at by its senior members. It is something of an anomaly that the MRC is more focused on applied science than the EPSRC.

The Government, in their reply to the Select Committee's report, refer to the need for a greater onus on the science base in those areas to reach more strongly towards innovation. Like our Chairman, my feeling throughout our inquiry was that the science base in Britain is strong. Obviously there are some concerns that, as higher education has expanded, there has been a large influx of students in the arts and non-sciences, but no equivalent expansion in physical science and engineering. I am reassured that the quality of people in universities is good and that the science base is producing people with plenty of ideas.

Britain is as inventive now as it was 20, 50 or 100 years ago. Without doubt, we are producing the ideas. There is unanimity this afternoon and all our witnesses were unanimous in believing that the British genius for invention is abundantly there. It is a question of harnessing those ideas. The inventiveness that we associate with our universities can be developed in their research departments. It is found in individuals too, sometimes quite surprisingly. One thinks of James Dyson and his Cyclone and how he produced an entirely new type of vacuum cleaner. He went into manufacturing and learned the skills as he went along.

I do not know whether Trevor Bayliss has any academic qualifications in physics or in engineering, but his presentation to us and his clockwork radio and other inventions were very challenging. Those of us who have come through it think that school, A-levels and higher education is the conveyor belt that produces inventors. Obviously there is another conveyor belt, or perhaps it is not a conveyor belt at all. People out there are thinking all the time in a challenging way. Trevor Bayliss's idea of an academy of inventors sounded a bit strange; nevertheless, I see what he means. That idea is moving forward.

At the evidence session that I chaired with the Defence Evaluation and Research Agency, I was greatly impressed by its director, John Chisholm. He said that, for the past decade, DERA and the defence establishment had been bursting with ideas that could be applied. Those ideas have been thought out and developed with their application to defence in mind, but they would be available to harness if we had different objectives. The public-private partnership that we are developing for DERA might, therefore, give the organisation the commercial freedom to consider other objectives, release some of its energies and develop.

It is important that there is a multiplicity of organisations to develop ideas and turn them into useful products. In that respect, Generics in Cambridge has a wonderful structure. We had a presentation on the Cambridge phenomenon and how dozens of highly successful companies at the forefront of technology have set up there and created tens of thousands of jobs—so many that they are running out of space. I wish that such centres of excellence existed around all our universities. Obviously, there are examples in Oxford, too, such as St. John's innovation centre. Science parks are developing around all our higher education centres.

My visits reminded me of the visits that we made to the Fraunhofer, Steinbeis and Max Planck institutes in Germany in 1995 in connection with an inquiry into parallel areas. We are making the necessary changes a little later than Germany, which has a well-evolved middle tier that combines universities and higher education in one broad stream. Industry is out there, too. That middle tier permits the fertilisation of ideas, and networks are developing between higher education and industry. That middle tier is important because it is where ideas can be developed into useful products.

The topic of technology foresight was raised with most of the Committee's witnesses. It was introduced in 1993, and the forward look which is published every year is of value. There were some critical assessments of it, but its great value is in establishing more and more networks. There are opportunities for people to meet and exchange ideas across disciplines. Members of the Royal Society of Chemistry talked to the Committee, and one idea that stuck in my mind was car boot sales—inexpensive collections of scientists in different areas meeting to discuss topics—

Dr. Michael Clark

Stolen ideas.

Mr. Williams

To share and develop ideas that they found successful.

One criticism of technology foresight was that ideas were not filtering down sufficiently to small and medium enterprises—the SMEs. Large companies have their own technology foresight and their own ideas, and they learn something from the relevant publications and the work that goes into preparing them. However, those ideas require greater diffusion downwards.

As regards the Committee's American visit, the MIT has an incredible record in setting up businesses. I cannot remember how many of the world's great multinational companies had their origins in Boston. I read chemistry at Oxford; it was a very good course and I carried on for my DPhil, but it was a purely academic discipline. We did not talk about industry, or about pollution and so on; nothing was said on the application of science or on its downside. I learned about those after I had left university. I enjoyed all the work, but 5 or 10 per cent. of the course should have been about application, and the importance of ICI, Glaxo and the other trading companies, and about the negatives, the problems of pollution, chemicals in the environment and so on.

At MIT, applied science is as important as pure science and great pride was taken in the application of science to improve the quality of life and the economy of the United States. Management is taught as a component of degree courses. That was certainly not the case when I was at university. I visited a school of manufacturing industry in Cambridge where management is part of degree and postgraduate courses.

During the 1960s and 1970s, MIT had public funding from defence industry projects, but in the 1980s and 1990s, because of the peace dividend, the amount of available public funding on which MIT could draw diminished, so it had to diversify. It went to companies in different parts of the United States, looked at their products and offered its services to improve product design. It was a kind of outreach from MIT into industry. The contracts resulting from that innovation replaced much of the defence money that was lost. That was a culture change; no British university or science park has done quite the same thing, although having the institutions on which to develop is a start.

The American approach is more adventurous and risk taking; the word "entrepreneur" came up many times. The venture capital industry is much more developed in the United States than it is in Britain, but in the Department of Trade and Industry and the Treasury such thinking is being put into practice. We know what works in the United States, and if we want to take its good features and incorporate them into the British economy we can do so.

The Guardian on 8 May, quoting the prelude to a speech by my right hon. Friend the Chancellor of the Exchequer about venture capital, stated: UK pension funds invest only 0.5 per cent. of their funds in venture capital, compared to 5 per cent. in the US. We all know that, but in the past few years there has been a tenfold difference in the proportion of Britain's wealth that is available for new ideas and new companies in venture capital. It was no surprise to me that, when the dark clouds loomed over the west midlands and the Government and the Secretary of State for Trade and Industry were working on the rescue of Rover by the Phoenix group, the money came not from a British bank but from an American bank, which eventually guaranteed the £200 million required. Unfortunately, the City is risk averse. I do not know how we can tackle that, but my right hon. Friend the Chancellor made suggestions in his speech last Tuesday to the trustees of pension funds and the consultants whom they hire. Something is amiss institutionally when we are afraid of putting the wealth that we have created behind British industry or the newer ideas and small ventures in British industry.

The Select Committee's Chairman, the hon. Member for Rayleigh, mentioned the role of tax incentives. In a previous Select Committee, Jeremy Bray, the former Member for Motherwell, South and science spokesman for the Labour Opposition for several years, was a regular and powerful advocate of tax incentives for research and development. He produced research evidence showing how effective they can be. I was pleased that, in earlier Budgets, the Government recognised that fact and offered considerable help to small and medium enterprises. I echo the words of the hon. Member for Rayleigh. The Government should consider extending those schemes to large companies.

Even given the expense, the problems of definition and other matters, our record on research and development in industry is disappointing. In the scoreboard that is published every year, we are fifth out of the seven. We languish there, just about holding our own, and we should not be there. People in Britain have many ideas that could be developed, and we should be climbing that league. If the Government used our surpluses to extend some of the schemes that already exist for research and development, they would receive a good return on that investment.

The report also discusses the role of demonstration projects, about which I hope my hon. Friend the Member for Bexleyheath and Crayford (Mr. Beard) will talk later. That is another difference between engineering and physical sciences and biological and medical research. In scaling up, development involves large costs. The Government should offer more help for those demonstration projects.

I have called for Government help, so I must mention the £22 billion that the mobile phone licences will raise. All sorts of people have made all sorts of claims on that money.

Dr. Kumar

People such as pensioners.

Mr. Williams

Yes, pensioners and the health service have claims, and Wales has asked for matched funds. However, I understand that my right hon. Friend the Chancellor is wisely thinking of using the money to pay off Government debt, so there will be no quick decision on its use.

I suggest that the best use of the money would be to help science research and development. The money came from innovation in the engineering and physical science—based industries, and the best support for long—term development would be to put that £22 billion—which will, I believe, arrive in a cash stream of about £2 billion a year for the next 10 years—into the science budget. It could provide incentives for research and development and improve the infrastructure. Our report describes many of those ideas in detail, and I hope that the Department of Trade and Industry will seriously take them into account.

Several hon. Members

rose—

Mr. Deputy Speaker (Mr. Nicholas Winterton)

Having called three doctors in succession, I now intend to break that sequence, although I shall call somebody with considerable experience of an important industry.

3.30 pm

Mr. Nigel Beard (Bexleyheath and Crayford)

Thank you, Mr. Deputy Speaker. As this is my last connection with the Science and Technology Committee, I should like to say how enjoyable and stimulating it has been to work with other Committee members, especially the Chairman, the hon. Member for Rayleigh (Dr. Clark), whom I also regard as an hon. Friend in this context. The experience has been exhilarating and enjoyable.

Innovation is a topic on which much has been written and on which there is a substantial body of research. The high reputations and hands-on experience of the witnesses who mapped out common ground were a distinctive feature of the inquiry. There was a substantial consensus on innovation, although it was not entirely uniform. The volume of evidence that is published with the report will be a good source of information for planners, policy makers and students. The report is a good distillation of the understanding that was derived from witnesses and of the conclusions that flowed from that understanding.

We began by considering why Britain is good at innovation based on the biological sciences but poor at innovation based on engineering and the physical sciences. That clear perception shaped our terms of reference and the course of the inquiry. If we contrast the history of the pharmaceuticals industry in Britain with the history of the motor car industry, the machine tool industry, the electronics industry and engineering more generally, we see that the truth of that observation is beyond question. That view came out strongly from our witnesses. No one dissented from it.

There was also substantial agreement on the nature of innovation. There was common agreement among the witnesses, but the word "innovation" is often used loosely. Therefore, it is important to say what it is not: it is not synonymous with research and development, science, invention or technology. Academic discussion often equates innovation with academic interests and research or with research that is sponsored by the Engineering and Physical Sciences Research Council and the Biotechnology and Biological Sciences Research Council. Those perform vital functions that generate ideas, but in themselves they are not innovation.

Innovation involves the presentation of a new product to a market or a new process to commercial production. It means generating new ideas and understanding the function of research, including research that is supported by the Government through research councils and universities. Innovation identifies what a defined market is likely to require, which is the process of market research or market investigation. It brings together various technologies to satisfy that market demand as part of the process of design and development. Innovation establishes a manufacturing process, known as process development, which is sometimes overlooked. Finally, it means commercially launching a product on to the market. Innovation can fail at any one of those stages. To discover the cause of our poor performance, we must take into account that range of stages, and not purely the scientific beginnings of research.

That definition or model of innovation was widely agreed by the Confederation of British Industry, the OECD, MIT and industry in general, so there is no ambiguity about the meaning of innovation. Against that background, why are bioscience-based industries different from engineering and physical science-based industries? The essential difference is this. If one takes pharmaceuticals as the most obvious bioscience-based industry, the risk lies in successful research and the effectiveness and safety of a drug being proved by the regulatory process. Once that has been done, the marketing is a subsidiary activity, because the disease targeted by the drug is self-evident. Marketing and manufacturing are not risky; research carries the greatest burden of risk. The situation is very different in engineering and physical science-based industries. Understanding what the market wants and adapting various technologies to meet that through the process of development is difficult, risky and increasingly expensive. There may be very little need for new research in the process of innovation based on physical science and engineering—much of the research may have been done years before, perhaps topped up by more recent research. The difference is that there is far greater dependence on market research and development, which distinguishes engineering and physical science-based industries from innovation in the pharmaceutical and agrichemical industries.

What is the diagnosis of why innovation is weak in engineering and physical science-based industries? The situation is summed up by a quotation from the Select Committee's report: Market research, design and development are skimped, under-funded and inadequate in engineering and physical science based companies.

Dr. Michael Clark

I am following the hon. Gentleman's speech with great interest. I am interested in the distinction that he makes between innovation in physical sciences and innovation in biological sciences. To put it in a nutshell, does he agree that, in the case of biological sciences, there is a market—namely, a disease—that desperately wants a product, but in the case of engineering and physical sciences, the product desperately wants a market?

Mr. Beard

There is a great deal of truth in that. To put it in similar terms to those used by the hon. Gentleman, the difference is that in the biological sciences, it is a matter of science push, because the markets are identifiable, but in engineering and physical sciences, it is a matter of market pull. That is where the difference in performance and complexity lies.

As I have mentioned, development is an expensive process. In many cases, that process must end with a prototype or a demonstration project to see how things work. It is frequently a matter of putting together disparate technologies, and the process of development is in making them work harmoniously for the purpose in hand. As my hon. Friends have mentioned, there is substantial evidence that expenditure on that is skimped. Aeronautical developments tend to be carried out by force of circumstances because people want to see aeroplanes fly, but in other areas development is not carried through to the extent that is necessary to demonstrate to a market that a product is viable and useful. It is in those areas of development and market assessment that Japanese and American strength lies. That is why, although Britain generates so many ideas from the fertile soil of research, things invented here are so often made commercial in America and Japan. We should aim to avoid that if we are to become a knowledge-based economy, with our prosperity benefiting fully from the fruits of our rich, national ingenuity.

A subordinate aspect to the question why we are not as good as America and Japan at developing ideas is summed up in a phrase coined by MIT—the "dignity of applied knowledge". Too often, the academic attitude in Britain is that pure science is more important, which is where the good brains go, and that the second-class brains go for applied science. That is futile, stupid and plainly wrong. I have spent a substantial part of my career in applied science, and I can say from first-hand experience that the intellectual challenge of applying science is just as great, and in many instances greater, than making the initial discovery and doing the research, because it is far more complex. That myth must be ruthlessly dispelled.

We must also stress—this comes up time and again in Government policy—that our failure is not a failure to generate new ideas. We may say it, but our actions go against it. As the report says, there is no evidence of any shortage of ideas and knowledge emerging from engineering and physical science research undertaken in universities and industry. The science base undoubtedly needs protecting. It was certainly going downhill, and it is to the Government's immense credit that they made £1.4 billion available, in addition to the money that came from the Wellcome Trust, to ensure that that did not continue. We must be vigilant to ensure that the science base remains healthy, but we should not pretend that we are doing something substantial to cure our failure in innovation, which is the subject of today's debate.

The position is not a happy one. Indeed, it is worsening. Nor is the problem new. It goes back at least to the 1970s, but it is getting worse. University research is directed to acquiring knowledge; so is the work of research councils. The development side of the process is universally the responsibility of industry. Only industry can bring together the technological know-how, the finance, the capacity to make a commercial product and the necessary market. No amount of extra money for universities will improve development: it is essentially a job for industry.

We should therefore consider the Department of Trade and Industry's research and technology scoreboard and some of the other published figures which are available. Business enterprise research and development—for the reasons that I gave earlier, it is the main source of development expenditure—has grown more slowly in Britain than in any other developed nation. In 1970, we were second to the United States, but we are now fifth. That is well illustrated by figure 2 on page xvi of the report. The DTI's scoreboard shows that trend to be concentrated in the industries that we are discussing. That is illustrated in figure 4 on page xviii, which shows that, in investment in research and development, the pharmaceuticals industry holds its own compared with its world competitors.

Calculated as a proportion of turnover, the engineering and machinery, electronics and electrical, software and information industries spend on what is called R and D, but is actually development, between a quarter and a half of what their international competitors spend. We cannot sustain that position. The picture will not improve if we fall further and further behind while our competitors in this era of development continue to build up more and more resources. The picture is clearly set out in paragraphs 16 to 35 of the report. For anyone who takes an interest in the future of manufacturing industry, as you do, Mr. Deputy Speaker, those paragraphs make grim reading. For anyone who believes that manufacturing cannot be allowed to disappear from the spectrum of economic activities, the report points to something that must be corrected.

I hope that those paragraphs will serve as the starting point for a plan of action when the Government publish a White Paper on innovation—one, we hope, without any tokenism or misdiagnosis. The Government response to our report is, at the least, complacent, if not monumentally complacent, and is redolent of a lack of understanding of the actual state of UK industry. Paragraph 10 on page 3 of the response states: The Government acknowledges that the UK expenditure on research and development is not as high as some of its international competitors and could be better. That is in the light of all the evidence in those other paragraphs and figures. The Government respond to our report as though they were a parent receiving a school report saying that their child had just fallen behind in class. Their response does not reflect the seriousness of the position. It does not reflect the fact that spending on research and development continues on a downward spiral.

A little further down in the same paragraph, the Government response continues: However, recent figures, just published, show an arrest of the 1993–97 decline in the UK's gross expenditure on research and development as a ratio of GDP. That decline has been going on since the 1970s and the figures in our report show that it continues. At best, the Government pick out one figure and claim that the past 20 years have been wiped out, that that one figure shows that the trend has changed and that we do not need to bother about this any more. That is exactly what is said in the third quotation to which I should like to refer: A continued improvement in gross expenditure on research and development into the future would indicate an increasing focus on innovation and research and development as key drivers in the knowledge-based economy. That is Dr. Chadman personified. We have one favourable figure, which is not quoted, and we suddenly live in the best of all possible worlds. The complacency reflected there makes one question the adequacy of the advice that the Government are receiving. They deserve immense credit for what has already been done for the science base, but that is not what we are discussing. I hope that, when the Select Committee responds to that Government paper, it will request a fuller reply to the points that it made in paragraphs 16 to 42 of its report. The scope for Government action may be limited, but that is no excuse for deceiving oneself and ignoring a major national issue.

I would not quarrel with Government policy in general. The central purposes of Government policy on science and innovation have been to secure a healthy science and engineering base—they have achieved that—and to provide trained and experienced scientists who can go out into industry or staff research organisations throughout the country. Those are proper priorities for the Government. Everyone in industry would recognise that there is no substitute for that work, as they cannot do it for themselves. Everyone in industry would also recognise that the research and development that is done by universities and research councils should be speculative, and that a large proportion of it should be blue-sky work, as industry cannot undertake such research itself. People in industry are the appliers of science, not the Government.

The Government aim to secure better transfer of science and technology from academia to small and medium companies, which is an excellent ambition. However, it should be plainly stated that, if those small and medium organisations do not put money into development, there will be nowhere for ideas from academia to transfer to. Something must be done to ensure prosperity in that respect.

I am a great supporter of the Faraday centres, about which the Government have set out some details. They are modelled on the Fraunhofer centres which we all saw in Germany, which are a good example of how transfer can be achieved and small and medium companies can improve their capacity for development. They provide a good bridge enabling scientists and technologists to come from academia. Such people can enter intermediate organisations, become familiar with the needs of industry and then move on; in other words, they have it both ways. We have an urgent problem in this respect. Germany is doing well with the centres and has a record of doing well with them. It has 40-odd institutions, whereas we are talking about eight. One of the besetting and pervasive sins in this field is tokenism. We see a problem on which everybody agrees and then say that we are doing something on the basis of one example. Such an approach does not deal with problems adequately.

The report provides an excellent model of innovation and an excellent diagnosis of where this country's problems lie. I hope that, as one of the major outcomes of the report, the forthcoming White Paper on innovation will take that model and diagnosis as a beginning and address the problems. In the past, we have put money into the early stage, but not into where the difficulty lies—development. We must tackle that problem one way or the other. It might be tackled by introducing the sort of tax credits that have been mentioned. I agree with my colleagues that such a scheme needs consideration in relation to larger companies. Although a large part of innovation comes through small companies, a substantial proportion will come from big, established companies, which are as guilty as anybody of not investing adequate resources in development.

The field of tokenism must go, so the White Paper on innovation must also provide a coherent policy and get rid of the bewildering array of schemes and devices. It should provide a single policy that clearly addresses the problems set out in the report and that everybody understands. We must stop the game of bidding here and bidding there, which makes securing work in the academic research field similar to visiting a fairground and bidding at various boutiques. That should stop. We must have a national viewpoint on where the issues are and on how we are addressing them. We should then monitor how well we perform against those targets.

Mr. Deputy Speaker

We now return to the sequence of doctors, so I call Dr. Lynne Jones.

3.54 pm

Dr. Lynne Jones (Birmingham, Selly Oak)

Thank you, Mr. Deputy Speaker. I agree with many of the comments made by the previous speakers, who went into considerable detail about the report and the Government's response. Like my hon. Friend the Member for East Carmarthen and Dinefwr (Mr. Williams) I was a member of the Science and Technology Committee in the previous Parliament and participated in the production of a report in 1994 on innovative and competitive technology. Between then and January this year, when the report that we are considering was published, I was struck forcibly by the fact that the Government have taken on board many of the concerns about financial incentives for more investment in research and development. However, as my hon. Friend the Member for Bexleyheath and Crayford (Mr. Beard) emphasised, the incentives and support still very much relate to the research phase.

It is still early days to judge whether the tax incentives will have a substantial impact. More important is that people in companies and research organisations should understand the importance of research and development and of good market research and management in the creation of wealth. People in organisations are the driving force behind investment in research and development, development of new technologies and putting research ideas into the market. The Government have worked to create incentives for investment, but perhaps we have not focused enough on the importance of well-trained people and of the movement of people between sectors, for example from universities and research institutes into business and vice versa.

Many witnesses from business pointed out how difficult it was for them to recruit people who not only had academic qualifications but were of high calibre. There was a distinct shortage. I echo the comments of my hon. Friend the Member for Bexleyheath and Crayford about the Government's complacency in their response—that we are perhaps doing as well as other countries. Even on our visit to America, the country that we are supposed to emulate, people spoke of a shortage of highly educated people with innovative ideas and the research experience and management understanding needed to get them off the ground. We can see that effect, because in the United States and, to an extent, in this country, Governments must relax visa requirements for foreign nationals to come to the developed world. Germany is looking to recruit the well-educated work force of Russia and the United States also wants to recruit abroad. Unfortunately, many of our best people are being enticed by those recruitment activities.

That does not matter, as long as the necessary to-ing and fro-ing of people goes on. If it is a two-way process, that is all well and good. People go to other countries, pick up experience and come back. The problem in this country is that it is a one-way process. The important role of scientists and engineers is not acknowledged. People get poor rewards, especially in the public sector, in our universities and our research institutions, in terms of not only salaries but equipment and technical support. People used to come back but are now staying away.

I hope that at the next comprehensive spending review the Government will consider the need to do something about the poor pay and conditions of our academic staff, especially in science and engineering. Many of the vice-chancellors who have provided evidence to our Committee and in written communications to me have noted how difficult it is to retain trained staff. That is especially true in IT, a sector in which people can double their salary by leaving academia. There is no problem with people leaving academia and having experience in the private sector. The problem is that they should also be coming back—there should be a two-way process.

The Government need to be even more hands on. They have been careful in their response to distinguish the role of the private sector in the marketplace. They have wanted a hands-off approach to business development and market investigations. I was struck when we went to Boston, and to the United States generally, that there is far more public-sector intervention in such areas.

We met representatives of the Massachusetts Technology Collaborative, which was founded by the state. It is an independent public economic development organisation. The state governor appoints the board members. It has gone out and sought to identify and develop clusters. In the Government's response to our report, they say that they cannot create clusters, but that has been shown not to be the case in countries such as the United States.

We saw evidence of the success of the Massachusetts Technology Collaborative. It has been behind the establishment of five clusters. Its encouragement of the clusters in health care especially, but also in other areas, has promoted spontaneous development elsewhere. It took public sector intervention to get matters moving.

We visited the Massachusetts Technology Development Corporation, which is also a state institution. It started more than 20 years ago with a $10 million endowment. The organisation provides small sums of venture capital—between $750,000 and $2 million—to start up companies with a technological idea. Interestingly, the corporation told us how important it was for it to be involved in the management of the companies. It had a policy of taking a share in companies' equity. As a result, the initial endowment has turned over several-fold. For every $1 invested in venture capital, $17.50 is coming back for investment, so the cycle can continue.

We met the director of VenturCom, one of the companies that had been helped. It had the advantage of state support, venture capital and business advice, which brought the engineer—the scientist with the ideas—together with managers. A British manager was involved in that company and the state had provided it with the assistance. The fact that it was close to the Massachusetts Institute of Technology meant that the company had access to cutting-edge research and skilled technicians. So the state created the means by which those companies could thrive.

When we went to Germany, we visited the Herzogenrath technology park. Herzogenrath is a small town with a population of 44,000. Its technology park helps to start up companies by providing business advice as well as a physical infrastructure. It was set up with public money of DM80 million. That level of investment in a small town of 44,000 people would be the envy of cities as large as Birmingham, which cannot secure such an amount.

In our recommendations, we asked the Government to ensure that regional development agencies in conjunction with local authorities had access to adequate capital to develop such business parks and other incubator programmes for new companies. It is disappointing that the only response was that the Chancellor had announced additional funding of £50 million for research and development agencies throughout England. It is better than nothing, but nowhere near the level of state support provided in other countries such as the United States and Germany, which have a better record than we do in promoting links between companies and the engineering and physical sciences.

My final point was not specifically addressed in our report. After it was produced, I attended a seminar at the Royal Society, which was promoted by the Foundation for Science and Technology. The seminar was entitled "UK Missing a Multi-Billion Pound Industry?", which referred to the environmental industry. An important theme that emerged was the Government's role in passing legislation to help new technologies to flourish.

John Waters, the director of an environmental resources management company employing environmental consultants, told us that legislation was the driving force behind the development of environmental technologies. He pointed out that the United Kingdom has only an 8 per cent. share of environmental technology services world wide, compared with Germany's 21 per cent. and 18 per cent. in the United States. Governments in countries where those technologies had taken off had imposed stricter regulations—perhaps providing greater disincentives to polluters—and had invested with the private sector in these important technologies, which have so much potential for future wealth creation.

When talking about future wealth creation, I must mention the car industry. I represent a Birmingham constituency. We are extremely pleased that the Phoenix consortium will continue to run Rover at Longbridge and that there is some hope for the future of that organisation. However, in the long term we must diversify our industries and look at new technologies. Companies like Rover should be at the cutting edge of the development of new environmentally sound vehicles, whether for public or private use. The Government must do far more to encourage such developments.

That brings me on quite neatly to endorse the point made by my hon. Friend the Member for East Carmarthen and Dinefwr when he mentioned the large capital asset that the Government are sitting on as a result of the sale of the mobile phone licences. It may surprise hon. Members, but I am not one of those who support spending some of that £22.5 billion on increasing pensions. It is unsound economics to use a capital sum for expenditure that has on-going revenue consequences. Equally, if that money is just being used to pay off the national debt, it would be a wasted opportunity to use it for investment in activities that will create more wealth in this country in terms of business and tax revenues for the Chancellor.

It would be a terrible waste to use all that money merely to pay off debt. Of course, it will mean that an extra £1 billion a year will come in for the Chancellor that could be used to support increased pensions, but the tax revenues are buoyant enough to increase pensions without resorting to such methods. If that money were invested in our public organisations, universities and research institutes, notwithstanding the extra £1 billion that was put in as a result of the comprehensive spending review last year, it still does not get us back up to the proportion of our national wealth that went into research and development 20 or 30 years ago.

I entirely endorse the comments made by my hon. Friend the Member for East Carmarthen and Dinefwr on this matter. This windfall has come as a result of technological advancement. The first time I had a mobile phone was when I was a parliamentary candidate in the 1992 election. We hired them for a few weeks and they were great big things. Technology has advanced so much that we now have a tremendous product that has created jobs and wealth in this country and this remarkable windfall for the Chancellor.

I commend the Government for the way in which they managed the auction and succeeded in getting such a large sum. It would be a terrible waste to use that for redeeming debt when there is no pressure on Government borrowing and we are well within the Maastricht criteria for debt. Pension funds and the private sector are crying out for more Government borrowing because they need more Government gilts, of which there is a desperate shortage. Using the money to pay off debt would be a bit like the servant in the parable of the talents who buried the money that his master had given him rather than investing it for real returns in the future.

My plea to the Government is to fund science infrastructure. I know that our report said that the problem was business development, not science infrastructure, but that still has to be maintained and improved. Putting money into infrastructure will assist business and that is the kind of advice given in other countries.

The Government take seriously their role in fostering innovation and wealth creation; I hope that they will look again at the report and at some of the suggestions on how to use the massive windfall to ensure that the country prospers in the future.

Mr. Deputy Speaker

Following the reference to the parable of the talents, we now turn to the talents of a civil engineer. I call Mr. David Chidgey.

4.16 pm

Mr. David Chidgey (Eastleigh)

I am not a member of the Committee, and I congratulate its members on an excellent report. You have already alluded to the array of talent on that Committee, Mr. Winterton; no fewer than six PhDs served on the Committee. The more modest engineers among their number have not revealed themselves, but I believe that the Committee includes at least three chartered engineers. It is the strongest and longest array of talent in the scientific and engineering field ever assembled in a Committee and, as one might expect, they produced a thorough, exciting, but depressing, report.

I speak as an engineer, but that is not the main thrust of my contribution. I have been through the fire; I know what it is like to get innovation going and to try to recruit talented people to fulfil the requirements of an organisation in meeting customers' needs and working at the cutting edge to survive in the harsh, real world. I know the frustration felt when competitors in other countries have much more support, because those countries recognise how important a company's success is to the economy and to the well being of their fellow citizens. That is why I am pleased to have an opportunity to make a small contribution to this debate.

I shall pick out three recommendations from three and a half pages of recommendations and conclusions. I cannot remember a Select Committee report with so much to say on the subject, all of which is extremely worthy and relevant. I shall refer to recommendations (d), (x) and (ii) in the conclusion and say a few words about them.

First, recommendation (d) in paragraph 17 is about the fall in expenditure on research and development. The hon. Member for Bexleyheath and Crayford (Mr. Beard) rightly referred to the importance of paragraphs 16 and 35, which say it all about the dire straits in which our manufacturing industry finds itself. The reasons are to a large extent dependent on the decline in investment in research and development.

It is worth putting on record the sorry tale of that decline as a percentage of our gross domestic product. In 1988, Germany, the United States and Japan spent about 2.7 per cent. of their GDP on research and development. Even in 1988, we were trailing with investment at 2.1 per cent. of GDP. Less than 10 years later, in 1997, investment in Germany, America and Japan had fallen—perhaps they are more efficient—to between 2.4 per cent. and 2.7 per cent. of GDP. In this country, which had been falling behind its main competitors since the 1970s, as the hon. Member for Bexleyheath and Crayford said, the sorry tale continued. By 1997, we were investing 1.8 per cent. of GDP, instead of 2.1 per cent. I stress those figures because they reveal a sorry tale of lack of action by the engines of our economy—state, public and private—and we need some action.

I accept that the Government have recognised the problem and are making efforts to tackle it, as other hon. Members have said. However, complacency is the disease at the heart of this problem. As the hon. Member for Bexleyheath and Crayford said, it is not enough to quote only one year's figures. We have been facing this problem since the early post-war years. For some years after the second world war, repairing the damage that global conflict had done to our country and others kept our economy afloat. As soon as that was done and we had to compete in the real world for projects and exports, our investment in research and development started to slow down when it should have been speeding up.

I recognise that the Government are aware of the problem and have made some effort to tackle it, but it is not enough to assume that one year's figures represent a new golden dawn. I suggest that we are merely treading water—if we are lucky. I want the Government to understand just how deep the problem is and how much needs to be done to make Britain more competitive and innovative so that we can survive as a major player and benefit our communities and citizens in the years ahead.

Therefore, I turn to paragraph (x) of the conclusions. Again, it is worth reflecting on the points raised by Committee members. In particular, they noted that Government policy should be focused upon…a strong public sector research and education base, at all levels, to provide industry with leading-edge research and the highly trained staff "which is the life-blood of technology-based industry". They go on to say that the Government must provide an economic and fiscal environment that supports those who innovate. I am old enough and ugly enough and was in industry enough years to remember when Monty Finniston produced his report in the 1970s. He had previously been the chief executive of the steel industry. I was much younger then and full of ambition to succeed in my industry, but that is another story. However, I well remember that the Finniston report promised a new golden age for the innovators—engineers, technicians and, in particular, chartered engineers. Whatever happened to the Finniston report? I believe—I can say this in the House, if not outside—that the chief executive of GEC was so worried about having to pay his 20,000 chartered engineers a wage that would keep them attracted to their industry and which would attract the best brains to it, that he somehow managed to persuade the powers that be that Mr. Finniston's report should be discarded. Perhaps that is one reason why we find it so difficult to attract high-quality people from pure science into applied science. The rewards in applied science are still nothing like comparable with those in pure science or with those that people can receive in other countries if they happen to be sufficiently articulate in different languages. It is clear that we must still establish an atmosphere, ambience and environment in which being an engineer is a success in itself and a successful career path.

I recently had the interesting experience of being at a meeting with an eminent person in the engineering world who proudly said that engineers were successful, because they sat on the board of every company in the top 100 blue chip companies. I asked him, "Well, what as?" That is my point: they were all there in a management capacity; not one was there as an engineer in his own right. That perfectly demonstrates the fact that people still see engineering as a platform from which to launch a more attractive, better paid and perhaps more respected career.

One hon. Member—I am not sure whom—referred to investment in industry and blamed the City for not investing in our industry and innovation. That may be true; perhaps we could expect more from the City. However, we must understand that it has never invested in industry. A short trip through history will show us that the City was investing in commerce and trade when it was established and eminent on the world stage back in the 17th century. It was funding ships to go off to the east and west to bring back produce that we could trade for profit. The City had nothing to do with investing in industry—it never even noticed the industrial revolution. The organisation was set up to invest in trade and commerce, which has always been its role.

If we want the City to be something else, that is fine. Perhaps the Government and Parliament have a role there. However, let us understand and accept the City for what it is. We must not use the fact that it is not more than that as a convenient excuse for the failure by the broader institutions of this country to recognise the need to invest in innovation and research.

Paragraph (ii) of the Select Committee's recommendations says: The Government must recognise the need to increase the quality and levels of competence of science, engineering and technology graduates. The Committee notes that the number of personnel employed in research and development fell by 23 per cent. between 1986 and 1996. It also notes that the number of technicians, laboratory assistants and draughtsmen has fallen by even more—30 per cent. The hon. Member for Bexleyheath and Crayford said that poor marketing was part of our problem. However, he also made a point about this country's lack of recognition for the dignity of applied knowledge. The two go hand in hand.

The contribution about the Massachusetts Institute of Technology was interesting. It has always recognised that applied science and pure science are equally important. The role of the scientific professions must be to contribute to the creation of wealth and the economy of a country for the benefit of its citizens as a whole. That is what we do. This is not about some esoteric exercise, but about improving people's lives. If we fail to realise that applied sciences have a vital role and are as important as our pure sciences, we will never achieve that aim. We have lost sight of that in recent decades.

The fall in the number of trained and qualified people working in research and development and in innovation at the cutting edge of industry is perhaps the most serious problem that we face. We cannot solve it simply by adding 10 per cent. to the average wage of a technician, engineer or scientist, or by increasing particular universities' budgets for research and development. The problem goes far deeper than that.

I was fortunate to have the opportunity late last year to attend a conference in Washington, where research fellows from the Hudson institute presented a paper on research into employment potential in this century. The paper, entitled "20:20 Vision", clearly demonstrated the endemic problem in the industrialised western world of not producing sufficient numerate and literate people to drive our economies at the levels expected by our citizens to maintain our current rate of progress. If we do not revise the way in which we fund and produce not just educated, but trained and qualified people, with sufficient skills to drive our cutting-edge technology in our high-tech, high-skilled, knowledge-based economies, our economies will fail. As I said, it is not a question of a little more here and there: we need a fundamental review of how best to invest in people to acquire the skills that our economies need.

The hon. Member for Birmingham, Selly Oak (Dr. Jones) mentioned the pressures experienced in America in trying to recruit people on the green card system. In Germany—not just in Russia—they are issuing tens of thousands of visas to IT-literate nationals from the Indian sub-continent, which was unheard of 10 years ago in that part of Europe. That shows how serious the problem is. My worry is that if we start to suck in the skills and knowledge of developing countries for the benefit of our own economies, what does it do to them—to the rest of the world, falling off the edge of technological development? In this country, we should recognise the problem and take the lead in producing people with the requisite numeracy, literacy and IT skills to drive our economies.

I congratulate the Government on encouraging local schools to bid to become centres of excellence in various areas. That is exciting as well as encouraging. It is a means of trying to make young people want to study mathematics and science. The Wyvern community school in my constituency of Eastleigh has done just that and won a competition to become a centre of technological excellence. The local aerospace industry—well represented in Hampshire, which is so defence-dependent—is coming in to provide matching funding. That is good, but it is not enough. It is exciting and enthusiastic, but does not deal with the underlying problem of producing people with the requisite talents and enthusing and encouraging them to stay in industry to produce the economic benefits that our citizens expect.

I am glad that the Government seem to be recognising the problem, but I am worried that they might become complacent. I finish by stressing that time is running out.

Mr. Deputy Speaker

I call Mr. Richard Page.

4.32 pm

Mr. Richard Page (South-West Hertfordshire)

We have all attended debates in the Chamber, at which hon. Members stand up and say how delighted they are to take part. On this occasion, those sentiments are genuine. All too often, a Select Committee labours and slaves over a report, which then gathers dust on some forgotten shelf. That is not true today, and I am absolutely delighted that we are debating the report.

I am wounded, Mr. Deputy Speaker, when you introduce so many doctors, engineers and other experts, but just read out my name.

Mr. Deputy Speaker

Order. From the Chair, may I apologise to the hon. Gentleman? I had intended to introduce him as a business man, so I hope that that will help and suffice. I am aware, of course, of his immense interest in science and research, as well as in business.

Mr. Page

I am now only slightly wounded. My initial training was as a mechanical engineer, so I know a little about the subject. I did my training in the real world rather than in the ivory towers of academia, but I leave that to one side. I have had a long-standing interest in the fortunes of engineering, which dates back to long before I came to the House, and I maintained that interest as a Back Bencher. I continued with it for the short time that I spent as a Minister at the Department of Trade and Industry, before I was given the opportunity to spend a little more time with my family. I still maintain that interest in my more recent role. I am delighted that we have the chance to debate the subject today. My comments will therefore be made with conviction rather than as a result of dogma, although several hon. Members will doubtless feel that my comments are indivisible between the two.

The Science and Technology Committee report makes about 39 conclusions. The Committee will be delighted to know that I intend to speak about only three or four of them. We all understand the long-term factors that are at work in determining the economic record and future prospects of engineering and manufacturing companies. The Government have little direct control in the matter. I echo the point made by the hon. Member for Eastleigh (Mr. Chidgey); those factors run through our education system and the training of engineers, information technology specialists and specialists in the many physical sciences—and those who are often forgotten: the laboratory assistants, draughtsmen and technicians who play a vital supporting role. Also important is the funding of the nation's research and design and development, a stage through which all products must go before they can be marketed, and business men's requirements to make the products available and saleable.

One reason why the United Kingdom is less successful in supporting innovation in engineering, manufacturing and physical sciences is that, as the hon. Member for Bexleyheath and Crayford (Mr. Beard) said, the dignity of applied knowledge is more important in countries such as Germany, Japan and the United States. They do not have that hang-up and seem to avoid our apparent preference for pure science and the humanities in the education system.

I was profoundly depressed to read in the report that it is less acceptable in the UK to follow a career in emerging technology-based companies or start-ups, and that only 7 per cent. of UK graduates, compared with 68 per cent. in the United States, consider starting their own business. That adverse culture, which is against engineering and manufacturing, still exists deep within the education system. That is why the report, although valuable, is fundamentally depressing. I am reminded of the apocryphal story of the schoolteacher who took her charges to a factory but who, on the bus back to school, told them, "That is where you will end up if you do not pass your exams." The report seems almost to underline that attitude to engineering industry.

That attitude must be changed. The Government's responsibility is not only to secure the training of the work force in high-quality skills, as the Royal Academy of Engineering has pointed out; they must also promote a change in entrenched attitudes. How else can we secure the supply of those technically educated and trained people whose job will be to drive innovation forward in companies and higher education? It is possible to do that.

The Engineering Employers Federation report on engineering general national vocational qualifications published last month showed that young people between the ages of 14 and 16 can be attracted to engineering. Almost half of those taking engineering GNVQs were considering engineering as a career. I am delighted that the girls were particularly interested in product design and development, two areas in which industrial companies have suffered over the years. Two thirds of participants said that they would be prepared to recommend it to their siblings as a career path. I shall not pretend that there is not more work to be done on that and other schemes, because parents and quite a few teachers have still to be persuaded of its full benefits. Some schools surveyed by the Engineering Employers Federation clearly perform better than others and a high proportion of those students—about half—who stay on in education after 16 go on to take A-levels rather than completing the full engineering GNVQ. The important point is that the attitude of those who have taken it has changed and they were more positive about engineering than they had been before.

As I mentioned earlier, the report contains about 39 recommendations and conclusions. However, one point that was not fully considered, but which has been mentioned in the debate, is the fundamental difference between a marketplace requirement that pulls on focused research and general research that pushes through to the marketplace. One has an assured client, a home to go to and someone to pay for it, whereas the other has a more problematic future. I am sorry that the hon. Member for Rayleigh (Dr. Clark) is not in the Chamber because he talked about missing the opportunity to invent Dynotape. We all know that the microwave oven took a few years to follow on from the original discovery of microwaves.

In Japan, there are small groups of people—I believe that one group is called "the ghosts"—who sit down and try to imagine what people would like. When they have worked out what they think people want, they go into a certain area. That drives innovation. I believe that the Sony Walkman was the result of such consideration. That is one of my three pet concerns: the Sony Walkman, jogging and mobile phones. The Sony Walkman will be responsible for more deafness among youngsters than ever before; jogging will lead to people requiring more hip replacements; and the mobile phone is an unknown concern for the future. We have a report on mobile phones before us today, and I believe that legislation could provide an innovative push in that area. Only yesterday, Professor Ted Litovitz, from the Catholic University of America, was in the House. Using a research team, he discovered that the electromagnetic field generated by mobile phones induces biological changes in cells. He was unsure whether it is dangerous but it certainly produced dramatic changes in chick embryos. He discovered that if one could introduce into the phone a small random field, the biochemical response would be removed. In such a case, legislation could be introduced, which would drive the industry.

I want to mention two or three issues raised in the report and to comment and support the remarks made on technology clusters. That is the only way in which we can achieve the various critical masses that are needed to drive forward innovation. Several hon. Members have spoken about their away-day to Boston. About a year ago, I had an away-day to Boston, and I was singularly impressed with the way in which people there encourage innovation. They acknowledged—something that we do not do here—that if someone has an ability in a particular aspect of biotechnology or engineering, that person is unlikely to be an expert on property, running a company, finance and all tax matters. But that is what we require of people when they start a business. People who come up with ideas have to run around, get a lease or buy a property, raise finance and employ people. Young people in particular do not have the expertise.

In Boston, the city elders, including those on the city council and from academia and business, clubbed together and bought three or four research laboratories which were situated back to back. A manager was put in charge. A university professor who spotted someone with a good research idea would say, "Come with us and start your own business." A business manager and someone to run the centre were employed for a percentage of the shares, which was also the basis for raising finance. The young lad or girl could get their research idea up and running quickly without experiencing the learning curve of how to run a business. They were free to get on with developing their research. The record for taking someone from the university to a laboratory was 48 hours. The city elders have not had failure. Indeed, they have had considerable success, with every company spilling on to the marketplace and creating thousands of jobs. The report found a great deal of empirical evidence to support the idea that clusters are effective in fostering innovation, but there is a lack of knowledge on how clusters function.

I know that the Government have established a ministerial group on the subject. I hope that the Minister will expand on its thinking. The issue was raised during the synchrotron debate. By siting the synchrotron in Oxfordshire, Lord Sainsbury gave £50 million for the science base in the north-west. What was the reason for that? Was it a political consolation prize or was there a specific and understood motive? Do the Government intend to determine the location of scientific clusters from the centre? Are they looking for where organic growth in certain disciplines occurs? Will their decisions and policies relate to those clusters, however small? If the Government are to establish scientific clusters, they must have an overall strategy. It is not sufficient to toss a few pounds here, there and everywhere as compensation.

The Committee envisaged a second role for the Govt. The hon. Member for Birmingham, Selly Oak (Dr. Jones) mentioned the mere £22 billion that is being put into the engineering pot. My hon. Friend the Member for Esher and Walton (Mr. Taylor) came up with the auction idea when he was a Minister. I think that he regrets that he was unable to get a slice of the action on that brilliant and highly successful arrangement. The Committee thought that the Government should produce an economic and fiscal environment to support those who innovate. The hon. Member for Selly Oak explained her method to fund that, but the Government are failing to fulfil that role. A low-tax economy rewards entrepreneurs and investors who take risks and achieve success. I do not expect universal agreement about this in the Chamber, but we must bear in mind that the Government have increased taxation on companies by a substantial amount. We are given a figure of £30 billion, but I do not know how accurate that is. Business must cope with an extra £10 billion in new regulatory costs. I am going to make only one point—it is a completely different point of view. The Committee recommends giving research and development tax credits to large companies as well as small. I can see some merit in that, but an alternative solution to the lack of investment is to create a low-regulation, low-tax economy, which leaves companies free to invest.

The report does not say how the Government will address the challenges in the future. The relative decline in our spending on research has been mentioned by hon. Members. Hon. Members have mentioned the contraction in the numbers and, perhaps more importantly, in the quality of those conducting programmes of research and innovation. The disparity between the reward for careers in management compared to those in the City and other areas has also been mentioned. I know a group of young lads and one girl who studied engineering at Imperial college. They worked exceedingly hard and achieved good degrees. However, two years after attaining their degrees, only one is still working in engineering. The rest have been siphoned off into the City and other careers with much more profitable returns. One has gone to the United States and has caused immense jealousy among his former friends and colleagues because his new company has valued him at £40 million. For a lad of 28, that is not bad going. As others have said, there is disparity in salaries.

I hope that the Minister will comment on how she thinks we can try to change that culture, encourage people into engineering and the physical sciences, and encourage companies to give better rewards for those who take that route.

The Government's record since taking office has not been as satisfactory as some have claimed. The Department of Trade and Industry's own research and development scoreboard for 1998–99 shows that the overall increase in research and development, specifically in engineering and telecommunications, can be accounted for by spending by large companies. We want to see those companies grow. Most companies were and are spending less than the average. The big international companies among the 561 on the 1999 list increased their research and development spending by 12 per cent. That is double the rate of the domestic companies, which are also starting from a lower base.

In engineering, the commitment to fund research and development was lower than that of companies in other industrial sectors. Indeed, when compared with the world average figure, I would go further than the Select Committee's description of "particularly disappointing" and say that in engineering, R and D is largely D. We in this country cannot sit and watch the trend continue.

As I said at the start, I wanted to touch on only three or four points. The report is immensely valuable and the Committee is to be congratulated. I hope that, whatever else it might do, this report will help to drive forward innovation in our engineering and physical science base.

Mr. Deputy Speaker

Before I call the Minister, it is appropriate to tell hon. Members that the Chairman of the Select Committee on Science and Technology has had to leave in order to Chair the Finance Bill Standing Committee. That is the why he could not stay until the end of the debate.

4.54 pm

The Minister for Small Business and E-Commerce (Ms Patricia Hewitt)

I feel rather inadequate in responding to this debate as a mere arts graduate who does not even have a PhD. I must apologise to hon. Members for that omission. I hope that I shall at least be able to borrow some reflected glory, as I am the constituency Member of Parliament for the new national space science centre, which will build on the absolutely outstanding work of the University of Leicester's space science department and spread that into business and education.

The hon. Member for Rayleigh (Dr. Clark) explained that he would not be able to stay in Westminster Hall to hear the winding-up speeches and courteously informed me of that before the debate. I pay tribute to him for his work as Chairman of the Science and Technology Committee and for the experience that he has brought to that post as a scientist. I should like also to compliment all members of the Committee on their outstanding, long and hard work in producing an excellent report.

The debate is timely, as this week sees Celebration of Innovation 2000, a week-long series of national and regional events around the United Kingdom. The event celebrates and showcases innovation in all its different forms, and brings together more than 25,000 innovators, entrepreneurs, academics, scientists and engineers. It builds on what used to be only a single event on a single day. This debate is highly appropriate, taking place in the same week as an excellent series of events organised by the Department of Trade and Industry innovation unit.

In his excellent opening speech, the hon. Member for Rayleigh made the important point that a stable economic base must underpin science, research, development and the whole chain of innovation. It is the absence of economic stability and-to use a novel phrase-the depressing cycle of boom and bust that has inhibited investment in Britain. That instability is one of the main reasons for the decline in civil research and development expenditure, to which the hon. Member for Rayleigh and other hon. Members have rightly referred and to which the Committee devotes much attention in its report.

Of course, our research and development expenditure is nowhere near as high as that of a number of our international competitor countries. As several hon. Members have noted, our current gross expenditure on research and development is merely the fifth highest among countries in the Group of Seven. As I think the hon. Member for Rayleigh acknowledged, the most recent figures, which have been released since the publication of the report, indicate an arrest in that decline. Between 1997 and 1998, total research and development expenditure increased in real terms by 2 per cent. to some £15.5 billion. In 1998, total expenditure on research and development in the United Kingdom increased as a percentage of gross domestic product for the first time since 1993, to £10.2 billion.

As hon. Members have acknowledged, the United Kingdom's pharmaceuticals and aerospace sectors are world leaders in their field and continue to build on the large-scale investments that they have made in research and development. Civil expenditure on business enterprise research and development increased in real terms in 1998.

Our pointing out those facts, as we did in our response to the Select Committee's report, does not mean that we are complacent or that we think that one swallow will make a summer. However, the facts suggest that we might have bottomed out and that we might be turning a corner. Our intention in government is to do what is necessary to ensure that those encouraging figures are not simply a blip in a long story of continuing decline, but represent a turning point in research and development investment. That is one of the crucial issues that we are considering in the spending review 2000, especially through the cross-cutting review on science and innovation, to which we will return in the science White Paper.

Much of the increase in R and D is funded from abroad. That demonstrates the growing confidence of foreign-owned firms in our science and engineering base. The base is one of the many elements that attract them to this country and continue to make the UK the No. 1 destination, by a considerable margin, for direct foreign investment in the European Union.

There are also exciting examples to be drawn from UK business. I had the opportunity on Tuesday morning of spending several hours at BT's technology park—Adastral park—of which I am sure many hon. Members are aware. Engineers, physical scientists and scientists and innovators from many other disciplines are coming together, not simply to create new leading-edge scientific applications but, crucially, to start exploiting BT's research over many decades. The company has discovered that research has resulted in a stockpile—a gold mine—of patents that have never been commercially exploited. It invented and patented wonderful processes, and put them away because they were not directly relevant to the business. It was extremely encouraging to see at Adastral park a marriage of scientific research and entrepreneurship. That is leading to a spin-off of companies from the old patents, which are being nurtured at BT's new incubator at the park.

We must ensure that the increase in R and D expenditure that has begun is continued and built on. My hon. Friend the Member for Bexleyheath and Crayford (Mr. Beard) rightly notes, as does the Committee's report, that innovation is not a one-off event but a chain of activities. As the Government, we must help—and we are doing so—to strengthen every link in that chain of innovation. Our commitment to the first link in the chain is demonstrated by the increase in spending on the science and engineering base of £1 billion over the three years from 1999–2000 to 2001–02, as my hon. Friend acknowledged.

We have already achieved 47 of the 75 commitments that we made in the competitiveness White Paper. Achievements include not only the increase in the science budget, but the creation of the joint infrastructure fund. That is part of an exciting new partnership between the Wellcome Trust and the Higher Education Funding Council for England, which is beginning to reverse the chronic and long-standing under-investment in research infrastructure. We were able to announce last month support worth almost £130 million for 27 projects at 21 universities across the country. That brought the total spend to date to £600 million.

We introduced the R and D tax credit for small and medium-sized enterprises in this year's Budget. I note the Committee's view that it should be extended to larger companies, which I have heard echoed by industrialists in such companies. The Government will of course consider the issue. As hon. Members will surely realise, the difficulty is that one would run the risk of substantial deadweight costs if one were to extend the credit to very large companies. Tax allowances would be given for R and D investment that would have occurred anyway. There is a real issue for small companies that are part of larger conglomerates, particularly when the rest of the group is based overseas.

For that reason, small United Kingdom companies may find themselves excluded from the benefits of the tax credit and other programmes. We certainly need to consider that. The Department has also increased the budget for helping businesses to use new technology and to encourage innovation. We have strengthened the links between universities and businesses, including the crucial promotion of business incubators in universities.

The programmes have shown some startling successes. Even though we must be realistic about the challenges that we face, it is important that we do not talk down the successes that are already being achieved. For instance—I readily acknowledge that this was under the previous Government—Bookham Technology Ltd. obtained a smart grant from the DTI to help it to exploit an invention in optical networks. The founder and president of that company, Dr. Andrew Rickman, said that Bookham Technology could not have started without it. It started as a one-man company, consisting of Andrew Rickman, but is now a business with a market capitalisation of nearly £4 billion. I wonder whether a case might be made for taking just a tiny, tiny slice of equity in companies that are awarded such grants—although that, of course, is a matter for my right hon. Friend the Chancellor.

The hon. Member for Rayleigh—other hon. Members echoed the point—suggested that we need to simplify and streamline the large number of programmes that support links between the science base and industry. I have a great deal of sympathy with that view. We know that it is often difficult for the entrepreneur or the person running a small business to know where to go for help, or where to find the innovative science or academic expert needed to transform the business. The recently created small business service has a remit to consider how to simplify and streamline general Government support for small businesses. The issue of making our support for innovation even more effective, particularly as it is used by small businesses, will be dealt with in the science White Paper.

We have done and are doing more, particularly in electronic commerce and in support for small businesses. We have been working—I believe successfully—with small businesses to accelerate the rapid take-up of new information and communication technologies. We are helping to develop the UK venture capital industry; indeed, several hon. Members referred to the importance of business angels and the venture capital sector in supporting entrepreneurship. Through public investment in the enterprise fund, we are creating not only the high technology venture capital fund, but regional venture capital funds, which will help to close the equity gap faced by too many of our businesses.

We have been reviewing and reforming the laws on insolvency and bankruptcy, to reassess our approach to risk, and to ensure that honest, but perhaps unfortunate, entrepreneurs are not deterred from going back into business. The hon. Member for Rayleigh made the important point that, in reforming the insolvency laws to promote honest entrepreneurship and risk taking, we must not damage the interests of creditors, who may themselves be entrepreneurs and small businesses. He is absolutely right. We are ensuring that, in our arrangements to distinguish between honest bankrupts—the vast majority—and the minority of bankrupts who have indulged in fraudulent or dishonest practices, we not only protect creditors, but strengthen arrangements for them and implement more effective schemes for voluntary repayment. The small business service is already making strides towards delivering our goal of providing world-class business support services to small businesses all around the country.

My hon. Friend the Member for Middlesbrough, South and Cleveland, East (Dr. Kumar) spoke with a wealth of knowledge about science and innovation in the north-east, much of it gained from his experience before he entered the House. One phrase that I thought was hugely significant was his reference to what some people call "the old economy". The two phrases "the new economy" and "the old economy" have created a misleading impression of what is going on as we move into the knowledge-driven economy of the future. They all too often imply that the sectors of the old economy, particularly those of traditional manufacturing, are inevitably destined for decline and death. That is wrong and shows a complete misunderstanding of the technological revolution that is taking place.

The new technologies, including information and communication technology, are transforming production processes and products in every sector, including the most long-established manufacturing sectors. Part of our mission is to ensure that small and medium-sized businesses in every part of the economy, but particularly in the manufacturing sector, exploit the new technologies to the full so that we have a high-technology manufacturing base which will help to raise standards of living and quality of life, and to generate new and better jobs. He referred also to the importance of venture capital funding and I entirely agree on the need to ensure that equity funding is available right around the country, and not simply in the south-east.

My hon. Friend the Member for East Carmarthen and Dinefwr (Mr. Williams) rightly referred to the wonderful science "car boot sales" that have been initiated by the Royal Society of Chemistry. They are clearly an innovative way of spreading the spirit of innovation into small companies. We know from evaluation that they have been extremely successful in that aim. I entirely agree with my hon. Friend about the need to balance our support for pure research in the universities with our support for knowledge transfer and the exploitation of that research in the marketplace.

Our universities should be both stimulators and facilitators of knowledge transfer to business and to society more broadly. We want universities to adopt a diversity of missions so that they excel in their chosen areas of strength, whether pure research or knowledge transfer. We are trying to encourage that application of science and knowledge through new initiatives such as university challenge, the science enterprise challenge and the higher education reach-out into business and the community fund, all of which the Committee welcomed.

We have also increased funding for some long-established programmes, including the teaching company scheme programme, and are building on that in the new Faraday partnerships. My hon. Friend the Member for East Carmarthen and Dinefwr was a little too dismissive of the investment that we are making in the Faraday partnerships. Four pilot centres are up and running. We have just issued the call for the next four, but we will not stop there. The intention is to roll out new Faraday partnership centres at a rate of four a year.

My hon. Friend the Member for Birmingham, Selly Oak (Dr. Jones) rightly referred to the importance of people. Innovation is fundamentally about people at every point in the value chain. She and the hon. Member for Eastleigh (Mr. Chidgey) stressed the need to attract young men and women into science and engineering at university level and then into careers in those fields. Overall, the number of people graduating with science, engineering and technology qualifications has increased. More people than ever before are graduating in those disciplines. However, although the absolute number is increasing, those people represent a declining proportion of the growing number of students.

There are some mismatches between supply and demand. Employers are reporting shortages at graduate and postgraduate level in specialised forms of chemistry and electronic engineering, for example. Business needs graduates with broader business expertise as well as excellent scientific and engineering skills. That is one reason why we have encouraged universities and given them real financial incentives to include business skills and entrepreneurial education in the curriculum for science and engineering undergraduates.

There is a widespread shortage of people with intermediate qualifications, particularly in engineering and information technology. We have responded by creating the new foundation degrees, which broaden the higher education portfolio. They will provide specialist technical knowledge, employability skills and the broad understanding needed in the new economy. That will help to increase our national competitiveness by tackling the skills deficit at the intermediate level.

We are acting on the important issue of building high-technology science-based industrial clusters, which my hon. Friend the Member for Selly Oak and the hon. Member for South-West Hertfordshire (Mr. Page) raised. As we say in our response to the Committee's report, the Government have a clear role in providing the environment in which new and existing clusters can develop and grow. Lord Sainsbury is developing that work through the clusters policy steering group. It will make recommendations for new policy initiatives to the Cabinet, which held an extremely important seminar on clusters with Professor Michael Porter from Harvard university some months ago, because they are a crucial ingredient in a modern industrial policy. The group has a broad membership and is engaging in widespread consultation. It will also draw on a full mapping study of the clusters that exist or are emerging.

Regional development agencies will be the key delivery mechanism of progress. Every RDA's economic strategy is to begin to identify the clusters on which to build, and which they need to strengthen by attracting new inward investment. In the Budget, my right hon. Friend the Chancellor allocated £50 million of additional funding to help RDAs to promote clusters and business incubation.

My hon. Friend the Member for Selly Oak made an important point about environmental technologies and ensuring that we secure competitive advantage for United Kingdom businesses in developing such technologies, the production processes and the products which will become increasingly important in tackling enormous problems such as climate change. We are already undertaking a considerable amount of work.

My hon. Friend referred to the motor manufacturing sector. Through the cleaner vehicles task force, we have worked with the Department of the Environment, Transport and the Regions and the motor industry to pull through more rapid innovation in the development of less polluting and non-polluting vehicles that will help to meet the rapidly growing demand for better mobility. We have also introduced the climate change levy on a revenue-neutral base to give better environmental signals to business and encourage the innovation that she described.

I am all too conscious that I have not been able to respond to every point raised during this extremely interesting, informative and well informed debate. We are living at a time of fundamental discontinuity and witnessing an absolute revolution in technology and the economic system. Our country led the world into the first industrial revolution, and we are determined to ensure that it becomes one of the winners and leaders in the new knowledge-driven economy of the 21st century.

I am very grateful to all the hon. Members who helped to compile the Committee's excellent report. I assure them that we will draw on their recommendations when we finalise our science White Paper, and then move forward to deliver on its vision of the United Kingdom as a world-beater in the knowledge-driven economy.

Mr. Deputy Speaker

Order. This has been a very good debate on a most important Select Committee report. Such debates are one purpose of sittings in Westminster Hall.

Question put and agreed to.

Adjourned accordingly at twenty minutes past Five o'clock.