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Small firm policy in the U.K.
Tcchnovotion, 7 (1988) 231-247 Elscvicr Science Publishers Ltd, England-Printed
231 in the United Kingdom
Small firm policy in the U.K.* Mark Dodgson Research Fellow,
Science PO/icy Research Unit, University of Sussex, Falmer, Brighton BNl9RF
(Gt. Britain)
Roy Rothwell Leader, Management of Technology Group, Science Policy Research Unit, University of Sussex, Falmer. Brighton BNl9RF (Gt. Britain)
ABSTRACT Public policy emphasis in the U.K. has moved to favour small firms, and towarak creating a healthy and stimulating environment rather than trying to influence directly the rate and direction of industrial and technological change. Different types of policy initiatives lzave been tried with varying degrees of success: the DTI schemes were amalgamated into the “Support for Business ” programme, concerned with advice, innovation, investment and exports. Though specific technologies are being identified for support, and the MOD has increased its direct support for small firms, the authors argue that the I/. K. Government’s policies are piecemeal and lack true coherence as evidenced by the failure of innovation policies to redress the regional imbalances.
1. INTRODUCTION In this paper we will discuss the development of public policies in the U.K. designed to stimulate the generation and diffusion of technology in the small and medium-sized firm (SMF) sector’ and the creation of new technology-based firms (NTBFs). Figure 1 outlines the evolution of research and technology development (RTD) policies in the U.K. from the 1950s to the mid-1980s. During the 1950s and 196Os, the two main policy tracks were science policy (SP) and innovation policy (IP). Throughout this period, SP and IP were formulated and implemented largely independently of each other, and there was little coordination or active collaboration between the government departments Paper prepared for the Conference Augsburg. 17-19 September 1987. l
on Small and Medium-Sized
Firms in the EC,
232
Small firm policy in the U.K.
Evolution of AT0 policies in the U.K. 19509 and 1960s
Science policy Scientific education University research basic research in government labs.
Industrial policy Grants for R&D Equipment grants Industrial restructuring Support for collective Industrial research Technical education and training, etc. [Little coordination
Mid1970s
Increased emphasis 0”
science policy
Strategic innovation policy (Technology policy) Selection and support of generic technologies and high-technology product groups
: I= 3 I Z .=: ? e 3 5
or active collaboration1
Innovation policy Grants for “innovation” Involving collective research institutes in product development Innovation-stimulating public procurement, etc. [Increased inter-departmental coordination]
1980s
0 Firm size emphasis Emphasis on large Firms and industrial agglomeration creating national flagship companies, e.g. in computers
z
-4
Increasing emphasis on small firms
3.
.c t Emphasis on NTBFs and inter-firm collaboration
$2 :5 Z’ 5:
International (EC) collaboration [Inter-departmental initiatives]
Fig. 1. Derived from R. Rothwell and W. Zegveld, Medium-Sized Firm, Frances Pintcr, London, 1982; Rcindustrializntion and Technology, Longman, Harlow. 5(4), (Spccial Issue on Technology Policy), (1987).
Innovation and the Small and R. Rothwell and W. Zcgveld, 1985. Taken from Tcchnovation,
involved. Science policy focused largely on “big science”, i.e. astronomy, particle physics, atomic energy. At the same time, policy emphasis was generally on large companies: industrial mergers were encouraged and national “flagship” companies created in, for example, electronic computers. During this period, very little venture capita! was available to fund NTBF start-up and growth. From the mid-1970s onwards, public policy in the U.K. began to shift to favour small firms. This followed the work of the Bolton Committee,’ which illustrated both deficiencies in and the potential of the small firm sector in the U.K. During the latter part of the 1970s there were attempts to align better the aims of SP and IP, and a number of inter-departmental initiatives were undertaken to this end, e.g. the Teaching Company Scheme.3 The election of the Conservative administration in 1979, with support for the small business as a major element of their manifesto and political philosophy, increased the focus on small firms. Despite the increased policy emphasis on small firms the paucity of venture capital availability continued. From the beginning of the 1980s onwards, the public policy emphasis on small
Small firm policy in the U.K.
233
firms intensified and, in particular, considerably more emphasis was placed on NTBF formation. as shown in Table 1, the growth in NTBFs in the U.K. has been marked. During this period, venture capital in the U.K. has been available in increasing quantities which, as will be described below, owes a great deal to public policy interventions in the capital market. In general, the thrust of U.K. public policy has been indirect rather than direct. In other words, public policy is directed towards creating a healthy and stimulating environment for U.K. firms to operate in, rather than with attempting to influence the rate and direction of industrial and technological change. Increasingly, however, programmes are being devised to encourage technology transfer and collaboration between industry and research institutes, and specific technologies targeted by policy-makers. An analysis in 1980 [l] of two major public innovation policy documents illustrated the indirect approach of the current British administration. Analysis of the main policy tools, targets and target levels recommended in the two reports showed Emphasis on S&T education and financial and taxation Main tools measures Emphasis on technical knowledge and manpower, the R&D Main targets environment and financial resources Main target levels Emphasis on industrial performance, industrial innovation and small firms More recently, dc-nationalization and de-regulation have become increasingly important elcmcnts of U.K. policy towards stimulating the competitiveness and vitality of the small firm sector. These wider economic and political issues, along with other means by which the small-firm sector has been assisted, such as cuts in
TABLE 1. NTBF formation in NTBFs
the
U.K.,
1950-1~85
in the U.K.
1950-1975” Number
1970-1985~
in
cxistcncc
200 (Only
7,0(K) manufacturing
probably
considered;
an underestimate)
Total employment
15,tluo
120,ooo
Start-up
LOW
“Explosive”
rate
since the mid-1970s
Most are “very young”; Sectors of
Mainly
electrical
operation
and electronic
Electronics; and software; recentlv.
‘AD
Little,
New Technology-Based
computer
Firms in the UK and FRG,
post 1979
hardware
instruments;
more
biotechnoloev
Anglo-German
Foundation,
London,
1976. b Segal, Quince
and Wicksteed
and ISI,
New Technology
Based Firms, SOW,
Cambridge,
1986.
233
Small firm policy in the U.K.
personal taxation and “reducing the burden” of the small firm, will not be considered in this paper, which will concentrate instead on measures specifically targeted at small firm innovation. creation and growth: in particular, changes in the availability of investment finance and on the role of the Department of Trade and Industry (DTI) will be considered.
2. IMPROVING (a) Capital
THE ENVIRONMENT
FOR SMALL
FIRMS
markets
Venture capital One of the key features of the current U.K. Government’s industrial policy is the stimulation of the small-firm sector. In order to stimulate both the growth of existing small firms and the establishment of new small firms. several venture capital schemes have been introduced since 1980 [2]. These highlight the Government’s emphasis on an indirect approach towards stimulating industrial and business development. The first vcnturc capital schcmc is the Loan Guarantee Schcmc (LGS). Under the LGS. loans made by private banks to small tirms are guaranteed for 80% of the value of the loan. The aim of the schcmc is not only to increase the volume of invcstmcnts in small firms, but also to encourage more adventurous Icnding. thereby releasing innate cntrcprcncurial potential. Under the original conditions of the schcmc, loans of up to f75,000 could be made in return for an annual premium equivalent to 3% of the guaranteed portion of the loan. Bctwcen 1981 and 19X4 roughly 16,000 loans were made totaIling nearly 1520 m 131: just under one half of these loans went to manufacturing firms. Stud& of the LGS loans at this time estimated that their failure rate was around 30%. Whereas it was intended that the scheme was to be self-financing, by 1984 the Government had to pay out around f34m to the banks. Criticisms levelled at the scheme include: poor initial appraisal by the banks and inadequate monitoring of performance, and declining “additionality,” i.e. the scheme is being used increasingly as an alternative, rather than an additional, form of finance. The current rules of LGS applications have been tightened and altered so that 70% of the loan is guaranteed, and the borrowing premium is reduced to 2.5%. Some of the problems with the scheme have been removed: however, there remain considerable regional discrepancies in loan allocation, the more prosperous South-East of England receiving nearly 40% of total loans. The second scheme, the Business Expansion Scheme (BES, set up in 1982 as the Business Start-up Scheme), was introduced in the 1983 Budget and is designed to inject development capital into unquoted businesses across all sectors of industry. It allows individual investors to claim tax relief on equity investments of up to f40.000 and pay no capital gains tax on these investments provided that funds arc committed for a minimum of five years in unquoted companies. While
Small firm policy in the U.K.
235
the BES encourages investments by individuals, a significant percentage (estimated at nearly 50%) of funds committed have been through professionally managed funds established specifically for this purpose. There are now some 40 such funds in the U.K. with available investment capital of about f.50 million. By the end of the 1983-1984 financial year, some f80m had been invested through the BES in some 400 companies, over half of which were start-ups. Data on the U.K. venture capital industry are given in Table 2. The figures do not include LGS funds. Until recently about 70% of BES funds have gone to areas outside of manufacturing. In 1983- 1984 farming schemes predominated, and in 1984-1985 property development schemes received most funds. Both of these types of scheme were excluded from BES in 1986, and manufacturing industry may, therefore, begin to receive an increasing proportion of BES funds. There has been some lack of additionality with the scheme and there remains an equity or seed capital gap for small ventures requiring f50.000 or less, despite the lower than average loans awarded under BES. Despite its various problems, the BES has played an important part in the recent development of the “new-wave” venture capital industry. In the first place, it has underwritten the entry costs to the venture capital sector of indepcndcnt vcnturc capital funds and individuals, effcctivcly
reducing
their
financial
risk.
Secondly.
it has biased
invcstmcnts
towards early stage-an d probably thcrcforc higher risk-financing. And thirdly, and perhaps most importantly. it has hclpcd to crcatc in Britain a growing body of experienced capital managers AS of Dcccmhcr 1985. the failure rate for BES vcnturcs funded in lW3-I9X-l was about 14%. An analysis of BES invcstmcnts in 1983-1984 [5] showed
that of those firms 88% were located in England, 2% were l(>catcd in Wales, I I o/o were in Scotland and 0.5% wcrc in Northern Irclnnd. Of the 26 Managed Funds then in existcncc, 22 were in England and four were in Scotland. These
rccciving
finance
distributions illustrate the very strong regional bias in availability of venture capital, which has important implications for would-bc entrepreneurs based in locations other than the South-East.
TABLE
2. U.K.
venture capital (VC) industry and the Business Expan-
sion Scheme (BES) [4]
Total U.K. VC investment BES investments
No. of firms backed under BES Average “specialist” VC investment No. of BES related funds
Total no. of “specialist” n BES average f 16Ok.
VC funds
1981
1983/M
1984185
fll4m -
f215m f40m 207
f2Mm f50m 220
-
f265k”
f3Y9k
-
30 -
40 100
236
Small firm policy in the U.K.
A parallel, and perhaps even more crucial, Government-encouraged initiative was the establishment in 1980 of the Unlisted Securities Market (USM). USM-quoted companies require a three-year trading record rather than the five-year record for a full listing. They can also issue a smaller percentage of equity (10% rather than 25%), and they do not need full accountants’ reports. The USM effectively provided an accessible exit mechanism for venture capital investors, thereby giving a considerable stimulus to the growth of new venture capital funds. By 1987, the USM had about 500 companies quoted with an aggregate market capitalization of f5OOm [3]. and this despite the fact that BES-backed ventures had yet to be allowed access. This development is all the more remarkable when it is considered that in the five previous years there were only sixty new quotations on the U.K. stock market. To a significant degree because of the two comp/e~nerzfary initiatives, establishing the USM and introducing the BES, Britain currently has a larger and better-developed venture capital industry than any other European nation, as illustrated in Table 3. In 1987 a new market, the Third Market, was opened by the Stock Exchange specifically to cater for smaller, younger business than the USM. Companies have to be sponsored by individual members of the Stock Exchange. There is no restriction on the percentage of equity to be issued, and BES-backed vcnturcs are allowed to join. It is too early to determine how successful this market will bc in stimulating small firms, but as it is gcarcd towards riskier start-up vcnturcs, and
TABLE
3. Estimated [3]
(lWWH6)
size of national
venture
No. of VC lirms U.K. France Netherlands West Germany Denmark Ireland
Total
capital
VC pool ($m)
110 45 40 25 1-t
4,5ou 750 650 500 170
10
100
Sweden
31
325
Austria
11
51)
Norway
35
185
Canada
44
Japan
70
United
States
EC total VC
1 ,oW 850
550
20.000
in 1985, f4.75b;
growth
U.K.
rate in 1985. about
times the total European very considerable tise and efficient
industries
total.
accumulated inter-fund
about 38%.
40% The
1Iowcver, evaluation
informal
of the total. U.S.A.
U.S.
European
has about
three
VC is hands-on,
and management
communications
with expcr-
networks.
Small firm policy in the U.K.
237
to providing smaller amounts of capital (which venture capital funds are often unprepared to fund), this market could valuably contribute to the limited sources of seedcorn capital available in Britain (estimated at 1.4% of total venture capital in 1985). (b) Property English Estates
English Estates, originally a subsidiary of the DTI and now a separate government corporation, has responsibility for industrial and commercial property in rural and assisted areas. Recognizing the specialised property requirements of the growing high technology sector and the benefits of partnerships with universities and other centres of specialized technology, since 1981 it has financially assisted the setting-up of a number of science parks [6]. In 1987, English Estates has a budget of f47m, of which f12.6m is from a government grant. There are now nearly 200 science parks/technology parks/innovation centres in Britain, many of which have benefited from English Estates’ assistance. Enterprise
Zones
There arc 26 Enterprise Zones in Britain. These are areas designated to attract new enterprise through a ten-year exemption on local authority rates and the freedom to relax or accelerate some planning and administrative controls. (c) Legislation Small firms have exemption from some of the requirements legislation, in particular those related to maternity rights.
of employment
(d) Local initiatives There are around 300 local Enterprise Agencies in Britain. These are centres where small businesses can obtain business advice and consultancy, financial brokering, and training courses. These agencies are receiving increasing amounts of government support. 3. DIRECT SMF POLICY INITIATIVES The government department responsible for most of the schemes designed to support small firms is the DTI. In March 1985, and following a moratorium on all expenditure for a number of months, the DTI rationalized all its schemes under the rubric “Support for Business”. Before describing this reorganization-which, in effect, pulled the considerable number of diverse existing schemes together-
Small firm policy in the U.K.
238
some of these individual small firms examined.
Technology
schemes will be described,
and their significance for
transfer
A major thrust of the Department of Trade and Industry’s technology policy has been the stimulation of technology transfer to SMFs. A number of the DTI’s principal technology transferschemes and their pattern of take-up are described below [7]. (i) Manufacturing Advisory The MAS was introduced
Service
(MAS)
in 1977 to improve the efficiency of small and medium-sized engineering establishments, although subsequently it was extended to all sectors of manufacturing and later to most of the service sectors. It operated by providing subsidized consultancy on manufacturing and related problems. MAS was based on the observation that many SMFs were unaware of the benefits, in both production efficiency and product quality, which can be obtained by applying the best available technology and techniques to their manufacturing processes and organization. Until 1983 the service offered up to 15 person-days’ free consultancy with an option on a second 15 days’ at half cost. In December 1985 the half-cost facility was withdrawn and, since August 1984, firms have had to pay 25% of the cost of a 13 person-day consultancy following two free days’ for the preparation of the terms of reference for the project (firms’ contributions have now increased to 33%). Initially firms with between 100 and 1000 employees on site were eligible. The minimum establishment limit was lowered to 80 in 1978 and 60 in 1982. From April 1985 the service was limited to establishments employing between 1 and 500 on site. MAS was operated on behalf of the DTI by the Production Engineering Research Association (PERA) and, in 1982, Salford University Industrial Centre Ltd. (SUIC) took over the responsibility for operating the service in the North-West. An in-house evaluation of MAS indicated several benefits from the decentralization of the service - SUIC had detailed knowledge of the structure and needs of local industry. - SUIC had good links with chambers of commerce, enterprise agencies and industry sections of local authorities. - SUIC’s local linkages provided a high profile for MAS in the region leading to high levels of enquiries about assistance from local firms. Between 1987179 and 1984185, 7,128 firms had been assisted by the MAS scheme at an average cost of f4,500 per firm. An evaluation of MAS has indicated a benefit to cost ratio of about 7: 1. Seventy per cent of all grants were offered to small firms.
Small firm policy in the U.K.
239
(ii) Design Advisory Service Funded Consultancy Scheme (DASFCS) The DASFCS was introduced to assist manufacturers to improve the design of
new and existing products and to encourage them to use assistance for this purpose. It was operated on behalf of London-based Design Council. Its terms and conditions were which apply to the MAS scheme. Up to March 1985, DASFCS firms at an average cost of about f3,500 per firm.
specialist outside the DTI by the the same as those had assisted 2,796
(iii) Small Firms Technical Enquiry Service (SFTES) The aim of the SFTES was to provide small manufacturing
firms with a readily-available source of assistance in solving minor problems related to manufacturing techniques and organisation. In addition, it was designed to encourage small firms to use specialist outside advice. The scheme was limited to England, Scotland and Wales. Manufacturing units with between 1 and 200 were eligible for the SFIXS scheme. Initially, answers to up to four technical enquiries, involving a maximum of 40 hours’ work, or up to five days’ free consultancy on manufacturing techniques and organisation were available. After 1984, applicants were required to contribute 25% towards the cost of consultancy time after the first free day. By March 1985, 9010 firms had used SFTES. This scheme has been discontinued. (iv) The Microelectronics
Application
Project
(MAP)
[8]
MAP was launched by the DTI (then the Department of Industry) in July 1978. It had an initial budget of f55m. MAP was aimed at raising the national lcvcl of awareness within British industry of the potential of microelectronics, at increasing the supply of skilled people, and at increasing the rate of applications of microelectronics in firms’ products and processes. All manufacturing companies were eligible; there was no minimum level of expenditure but there was a maximum level of f500,OOO. The scheme was essentially in three parts Part A Awareness and training, including the setting up of a MAP Information Centre by the DTI Part B MAPCON, which provided support to meet the cost of authoriscd consultants to undertake feasibility studies of microelectronics applications (currently f2,500) Part C Financial assistance towards the cost of developing products or processes involving the application of microelectronics (currently a grant of up to 25% of the costs incurred) Between July 1978 and April 1984 a total of 1,359 firms had received offers of support, which represented about 1% of all manufacturing establishments in the U.K. During this period the average size of grant was f47,000, although one-third have been less than f20,OOO. More than f2OOm was spent under the MAP scheme.
240
SmaIl firm policy in the U.K.
(v) Software Products Scheme The Software Products Scheme,
subsequently renamed Support for Software Products (SPS), was introduced in 1972. Its aim was to encourage the development and subsequent marketing of software products which have a high innovation content. Up to 1977, the scheme was operated on the basis of 50% shared contracts. Subsequently applicants were given the option of 50% shared contracts or grants totalling variously a maximum of 25% and 33.3% of total project costs: the 50% option was latterly withdrawn. In total, some f35m was committed to the scheme. Two-thirds of applicants for SPS have been independent companies, mainly very small firms. (vi) Small Engineering
Firms’ Investment
Scheme
(SEFIS)
SEFIS was inaugurated in 1982 to assist small engineering firms with investment in advanced manufacturing technology, such as CNC machine tools. Initially f20m, and eventually E30m, was made available to finance capital grants of one-third of the costs of certain types of advanced capital equipment, mainly concerned with metal working. The original scheme was massively oversubscribed, and was succeeded in 1983 by SEFIS? with an allocation of flOOm to be used in both small and medium-sized firms. (vii) The Robotics
Support
Programme
(RSP)
The RSP was launched in 1982 alongside the programme supporting Flexible Manufacturing Systems (which was a almost entirely the preserve of larger firms). Three areas were supported by RSP: (a) feasibility studies for the USCof robots (up to 50% grants were available), (b) robot purchase (up to 33.3% grants), and (c) R&D costs of robot manufacturers (25% grants). In 198.5 the level of funding for purchasing robots was reduced to 20%, and the RSP was integrated into a wider Advanced Manufacturing Technology (ANT) Programme, which provided advice, information and training as well as financial support into a range of etc. In 1986 the AMT promanufacturing technologies, CNC, CAD/CAM, gramme was integrated into the wider Support for Business Programme which offers assistance for the development of new products and innovative processes, but not towards the purchase of equipment such as robots. A survey of robot use in British Manufacturing [9] found that less than a quarter of robots in British industry are in establishments employing less than 200. It found that whereas small firms were as aware as large firms of support for robotics, they were less likely to apply (fearing delays and bureaucratic procedures). The DTI, however, tended to award more feasibility grants to small rather than large applicants. The above schemes give some idea of the range of direct measures that were available to small firms. Other schemes include the Product and Process Development Scheme (PPDS), the Innovation-Linked Investment Scheme (ILIS), the Microelectronics Industry Support Programme (MISPl and MISP2), the Fibre Optics and Opto-Electronics Scheme (FOOES), The Flexible Manufac-
Small firm policy in the U.K.
211
turing Systems Scheme (INS), The Computer-Aided Design and Test Equipment Support Scheme (CADTES), and the Quality Assurance Support Scheme (QAS). The examples also highlight the considerable number of changes in the conditions of application and awards made over the years: basically, the situation was complex and changeable. In March 1985, the DTI schemes were rationalized into four areas under the “Support for Business” programme: advice, innovation, investment and exports. The areas of relevance to small firms will be described below. 1. Business and technical Advice for small firms
advisory
services
This service offers small firms counselling by experienced three sessions are free, subsequent ones cost f30. Products
and process
businessmen: the first
consultancy
SMFs can apply for support in the form of 75% of the costs of 1.5 man-days consultancy to the firm to enable them improve the quality and design of their products, their manufacturing organisation and techniques, and also to resolve technical problems. Grants
for new technology
feasibility
studies
Grants of 75% are available towards the costs of feasibility studies by consultants into the exploitation of biotechnology, microelectronics applications, AMT for batch manufacturing, and the USCof integrated circuits. The upper limit of support is f2,500. 2. Support for innovation The DTI offers selective financial support for R&D projects leading to new products and processes, and longer-term research projects. The participating firms have to prove technical and managerial competence and satisfy the “additionality” clause that the work would not go ahead, or would be delayed, without public support. Support is in the form of grants: - 25% for projects involving single firms - 50% for collaborative projects Project costs should range between flOO,OOO and f5m, although projects below flOO,OOO are considered for small firms. 3. Support Grants studies
for national and regional investment for new technology implementation
studies
and
demonstrator
Grants are available to meet half the cost of studies into the implementation of advanced manufacturing technology of to assess opportunities and commercial risks in biotechnology. Grants for new technology
investment
projects
Grants of up to 20% are available for selected capital investment projects involving the production or design of advanced microelectronic, fibre optic and opto-electronic components and related activities. Twenty per cent grants are also available for the acquisition of CAD systems for the design of integrated circuits.
Small firm policy in the U.K.
242
Grants
for quality
assurance
projects
Grants of up to 25% are available to assist SMFs with the costs of implementing consultants* recommendations to improve their quality assurance procedures to comply with the relevant British Standard. Regional
grants
Both U.K. government and EEC grants are available to small firms starting up or already in business in Assisted and Development Areas. 4. Support Marker
for exports advice
Market advice and grants of up to 50% towards export market research are available to all firms. More specialized advice on tariffs, regulations and technical requirements are also available. He/p with getting
into the market
Market reports, status reports on foreign companies, assistance in finding overseas representatives, grants for overseas travel and for exhibitors at overseas trade fairs (up to 60% of the cost) are all available.
The British Technology
Group (BTG)
BTG is an important research and technology dcvclopmcnt policy implementation institution. It was formed in 1981 following a merger of the National Research and Development Corporation (NRDC) and the National Enterprise Board (NEB). Its main functions are the provision of “finance for innovation” (usually in the form of joint venture finance with invcstmcnts from f5,OOO to f5m) and technology transfer. BTG is currently financing more than 200 development projects with companies throughout the U.K. Under its five-year corporate plan, published in 1985, BTG will - Offer to take responsibility for patenting, or otherwise protecting, technology derived from universities and other public sector sources - Provide funding for developing that technology to the point where it can be taken up by industry - Transfer the technology to industry by seeking licensees - Offer project finance to help those licensees to launch the product on to the market - Offer project finance to companies that want to develop new products and and where a particular processes, based on their own new technology, technology requires the setting up of a new company, BTG will perform a catalytic role in promoting the creation of start-up companies - Attempt by various means to improve communications and linkages between academia/research laboratories and industry The plan provides for investment of about f15m a year in development projects.
Small firm policy in the U.K.
243
Collaboration The DTI is shifting its pattern of support away from funding particular projects towards non-project support (e.g. advisory services, the encouragement of best practice and increasing the supply of skilled technologists) and collaborative projects. This trend is illustrated in Fig. 2. In this respect, U.K. policy is following the EEC model of collaborative European technology programmes (ESPRIT, RACE, BRITE, etc.). Collaborative projects attract a higher level of grant, normally 50%, compared with no more than 25% for individual company projects. Technology
targeting
As mentioned above, the U.K.‘s Alvey project reveals the increasing interest of policy makers in targeting particular technologies for support. However, the numbers of small firms participating in Alvey-supported projects are few, and limited mainly to software production [lo]. Another technology to be targeted is biotechnology, although the government’s enthusiasm in offering support is muted; preferring instinctively to rely on market forces.’ The Spinks Report in 1980 pointed to the immense potential offered by biotechnology, and called for greater research, teaching and technology transfer efforts. Dcspitc the government’s “market forces” approach, additional funds have been made available to universities and industry. In 1982/83, total government funding for biotechnology amounted to f45m [Ill: by 1984/85 expenditure by research councils alone (SERC, AFRC, MRC, NERC) amounted to f5lm. Govcrnmcnt expcnditurc has increased considerably, as has the number
70 65 ’ 60
_. -.
059 f so
_. -.
t l5 0 40 t 15
-’ -. -.
f JO
-.
15
-.
f 20
/ IS
-. -.
d10
t
+.. Iproject]
.,
..,..,\
I_, L-., 1 tollabarrtive
Lx.
a_._
._.-.
/~~+---______+
-.-a
_.‘._._.-O.-~-.
...p’
& l. ...’
1984/5
Fig. 2. Source: DTI, London.
./.’
,......’
. . ..N*-“’
19W6
,..,.,.,.*_,,.. .._..... . . . . . . . . l . . . . . . . . . . . . . . . . . . . . I /_....” Inon-projectl
198617
198718
199019
24-1
Small firm policy in the U.K.
of mechanisms by which funds are allotted, in particular, through the use of “industrial clubs” e.g. the Protein Engineering Club. One of the outcomes of the Spinks Report was the establishment of a company, Celltech, under the auspices of the BTG. It was formed with 50% industrial funding, and on the basis of an agreement with the Medical Research Council giving Celltech priority over industrial exploitation of discoveries. Celltech currently employs 200, and is a world leader in biotechnology development.
SMART The Small Firms Merit Award for Research and Technology (SMART) is another attempt by the DTI to identify key technologies; in this case biotechnology, and advanced instrumentation. SMART is a small-scale scheme developed along the lines of, and stimulated by the success of, the U.S.A.‘s SBIR programme. Advertised as a competition, small firms working in the two specified technologies were invited to apply for awards. The awards were in two stages: the first stage offered an award of 75% of eligible costs for product development of up to f50,OOO; the second, open to winners of stage 1, offered awards of 50% of eligible costs. Twenty firms were offered awards, and the DTI has been very impressed by the quality of the applicants and the potential of their projects. The DTI also has a support scheme for advanced manufacturing in electronics (AMIE). One part of this, the Support for Electronics Manufacture (SEM), has been allocated f2m to provide grants of 25% of project costs (up to f25.000) to assist small clcctronics companics to invest in computer-aided automated production equipment for electronics asscmblics and clcctronic products.
Military
expenditure
Reflecting a concern that SMFs receive little of the benefit of Britain’s large military R&D expenditure (about 27% of total national R&D), a recent Ministry of Defence (MoD) initiative, the Small Firms Research Initiative, has allocated flm in 1987/88 specifically to increase the opportunities for small firms to carry out innovative work of relevance to the military. This represents 0.6% of total expenditure, considerably less than the 1.25% of the U.S. Department of Defense allocation to small firms under the SBIR Programme. 4. CONCLUSIONS It is only in recent years that reference could bc made to any meaningful so too did policy interest British “innovation policy”. As such a policy developed, in small firms. A major concern of the present government has been creating an environment conducive to the creation and growth of small firms. The capital market for small firms has increased in size, and improved in quality: there is, however, still a shortage of seedcorn capital. Direct policies, mainly under the
Small firm policy in the U.K.
245
auspices of the DTI, have recently been rationalised, and have increasingly changed in nature from project-based assistance, to more collaborative and non-project assistance (awareness campaigns, information and advisory services). Specific technologies for support are more commonly being identified. The MOD, too, has increased its direct support for small firms, although this is still at a level well below the U.S.A.‘s DOD support. While increasing assistance is being offered to small firms (financial, fiscal, legal), the Government’s policy lacks true coherence for two major reasons 1. The ambiguity in its main economic philosophy (reducing public expenditure) and reliance on market forces, and an awareness of the need financially to assist the innovation process 2. Ambivalence in its policy towards small firms derived from its concern to use small firms as “social”, i.e. employment generation, policy tools rather than industrial policy. This is revealed when during the last Budget small firms became the responsibility of the Department of Employment A marked feature of the U.K. economy is the considerable difference in levels of prosperity between the depressed North and the economically-buoyant South, especially the South-East. In terms of the regional distribution of R&D capacity, the South is similarly favoured: 37% of total “high-tech” employment is in the South-East region; the bulk of MOD R&D and procurement contracts go to firms located in the South; and most public-sector research laboratories are located in the South, as are the bulk of the central laboratories of large R&D-performing private-sector companies. To a significant extent, public innovation policies arc failing to redress this regional imbalance in innovatory potential. For example, 52% of firms awarded grants under the MAP scheme were located in the South-East; 59% of applicants for the SPS scheme were in London and the South-East; and 53% of firms financed by BES managed funds in 1983/84 were located in the South-East and Home Counties. In other words, schemes having a “new technology” flavour are taken up largely in the prosperous R&D-rich southern part of the U.K. In contrast, schemes designed to diffuse exisring technology and best-practice techniques to SMFs are taken up more or less evenly throughout the U.K. These distributions, of course, reflect regional differences in industrial structure rather than any supply-side deficiency. The point is that regional policy in the U.K. does not have a strong overt technology development content; it is not viewed by the current administration as being a main instrument of industrial and economic development strategy nationally, but rather as an instrument of social policy. As such it seems unlikely to contribute significantly to a reduction in regional disparities in R&D potential. More specifically, given that small-firm innovation is often a “local” phenomenon, regional policy in the U.K. seems unlikely to contribute to any marked degree to the innovatory activities of SMFs in the development regions. In terms of DTI policy measures, and following the successful example of the regionalization of MAS to SUIC, close consideration is being given to the increased regionalization of other DTI schemes.
Small firm policy in the U.K.
246
To conclude, although the situation has improved markedly since the 1960s and 197Os, the U.K. still has no coherent innovation policy. Such a policy requires a degree of interventionalism contradictory to the present government’s political and economic philosophy. It must also strongly integrate with regional industrial policy. The poor showing by the Government in the North at the recent General Election has provided extra stimulus towards forming policies aimed at regional rejuvenation. For these to succeed, however, the emphasis on small firms as being primarily a tool of social policy has to alter, and their importance in the process
of technological
innovation
realised
and actively
supported.
NOTES ‘Throughout the paper, a small firm is defined as having less than 200 employees, a medium-sized firm as having less than 500 employees. *The Bolton Committee of Enquiry on Small Firms reported in 1971. ‘The Teaching Company Scheme, a joint initiative of the Department of Trade and Industry and the Science and Engineering Research Council, began in 1978 and was designed to encourage high calibre graduates to work in industry while maintaining educational links with universities. It has been successful in linking small firms and universities in joint technological developments. ‘An example of this trend is the Alvey Programme on advanced Information Technology which has involved the deliberate selection and support of a number of key “enabling” technologies in the IT area. ‘The Government’s paradoxical position is clearly revealed in a recent paper by a Junior Minister at the DTI when he writes “. . . the Government is firmly committed to the macro-economic policy of reducing total public expenditure and controlling the public sector borrowing requirement. . . [and] to the free and fair operation of the market economy” while at the same time arguing “in reality market operations do not always put adequate stress on the factors which encourage innovation”. J. Butcher, UK Government policy on innovation, Int. J. Technol. Management, 1 (1986) I-11.
REFERENCES R. Rothwell and W. Zegveld, Industrial Innovation and Public Policy. Frances Pinter, London, 1981. R. Rothwell, Venture finance, small firms and public policy in the U.K., Res. Pal., January 1986. Financial Times, 29 April 1987. R. Rothwell, Public innovation policies: some international trends and comparisons. Thirteenth Imperial College/SPRU/TCC Science, Technology and Public Policy Lecture, Imperial College, London, 20 February 1986. Knowlman et al. Evaluation of the Business Expansion Scheme. Small Business Research Trust, London, 1985. J. Currie, Science parks in Britain: their role for the late 1980s. CSP Economic Publications, 1985.
Small firm policy in the U.K. 7
R. Rothwell and M. Beesley, UK research and technology development regional impacts, Report to the STRIDE Committee of the EC, SPRU, 8 J. Northcott et al., Promoting Innovation: Microprocessor Applications 1985. 9 J. Northcott, Robots in British Industry. PSI, 1986. 10 Alvey Annual Report, 1986, IEEE. 11 M. Sharp, The new biotechnology: European Governments in search Sussex European Paper No 15, European Research Group, SPRU. Sussex. 1985.
217 policy: some 1987. Projects. PSI,
of a strategy. University of
231 in the United Kingdom
Small firm policy in the U.K.* Mark Dodgson Research Fellow,
Science PO/icy Research Unit, University of Sussex, Falmer, Brighton BNl9RF
(Gt. Britain)
Roy Rothwell Leader, Management of Technology Group, Science Policy Research Unit, University of Sussex, Falmer. Brighton BNl9RF (Gt. Britain)
ABSTRACT Public policy emphasis in the U.K. has moved to favour small firms, and towarak creating a healthy and stimulating environment rather than trying to influence directly the rate and direction of industrial and technological change. Different types of policy initiatives lzave been tried with varying degrees of success: the DTI schemes were amalgamated into the “Support for Business ” programme, concerned with advice, innovation, investment and exports. Though specific technologies are being identified for support, and the MOD has increased its direct support for small firms, the authors argue that the I/. K. Government’s policies are piecemeal and lack true coherence as evidenced by the failure of innovation policies to redress the regional imbalances.
1. INTRODUCTION In this paper we will discuss the development of public policies in the U.K. designed to stimulate the generation and diffusion of technology in the small and medium-sized firm (SMF) sector’ and the creation of new technology-based firms (NTBFs). Figure 1 outlines the evolution of research and technology development (RTD) policies in the U.K. from the 1950s to the mid-1980s. During the 1950s and 196Os, the two main policy tracks were science policy (SP) and innovation policy (IP). Throughout this period, SP and IP were formulated and implemented largely independently of each other, and there was little coordination or active collaboration between the government departments Paper prepared for the Conference Augsburg. 17-19 September 1987. l
on Small and Medium-Sized
Firms in the EC,
232
Small firm policy in the U.K.
Evolution of AT0 policies in the U.K. 19509 and 1960s
Science policy Scientific education University research basic research in government labs.
Industrial policy Grants for R&D Equipment grants Industrial restructuring Support for collective Industrial research Technical education and training, etc. [Little coordination
Mid1970s
Increased emphasis 0”
science policy
Strategic innovation policy (Technology policy) Selection and support of generic technologies and high-technology product groups
: I= 3 I Z .=: ? e 3 5
or active collaboration1
Innovation policy Grants for “innovation” Involving collective research institutes in product development Innovation-stimulating public procurement, etc. [Increased inter-departmental coordination]
1980s
0 Firm size emphasis Emphasis on large Firms and industrial agglomeration creating national flagship companies, e.g. in computers
z
-4
Increasing emphasis on small firms
3.
.c t Emphasis on NTBFs and inter-firm collaboration
$2 :5 Z’ 5:
International (EC) collaboration [Inter-departmental initiatives]
Fig. 1. Derived from R. Rothwell and W. Zegveld, Medium-Sized Firm, Frances Pintcr, London, 1982; Rcindustrializntion and Technology, Longman, Harlow. 5(4), (Spccial Issue on Technology Policy), (1987).
Innovation and the Small and R. Rothwell and W. Zcgveld, 1985. Taken from Tcchnovation,
involved. Science policy focused largely on “big science”, i.e. astronomy, particle physics, atomic energy. At the same time, policy emphasis was generally on large companies: industrial mergers were encouraged and national “flagship” companies created in, for example, electronic computers. During this period, very little venture capita! was available to fund NTBF start-up and growth. From the mid-1970s onwards, public policy in the U.K. began to shift to favour small firms. This followed the work of the Bolton Committee,’ which illustrated both deficiencies in and the potential of the small firm sector in the U.K. During the latter part of the 1970s there were attempts to align better the aims of SP and IP, and a number of inter-departmental initiatives were undertaken to this end, e.g. the Teaching Company Scheme.3 The election of the Conservative administration in 1979, with support for the small business as a major element of their manifesto and political philosophy, increased the focus on small firms. Despite the increased policy emphasis on small firms the paucity of venture capital availability continued. From the beginning of the 1980s onwards, the public policy emphasis on small
Small firm policy in the U.K.
233
firms intensified and, in particular, considerably more emphasis was placed on NTBF formation. as shown in Table 1, the growth in NTBFs in the U.K. has been marked. During this period, venture capital in the U.K. has been available in increasing quantities which, as will be described below, owes a great deal to public policy interventions in the capital market. In general, the thrust of U.K. public policy has been indirect rather than direct. In other words, public policy is directed towards creating a healthy and stimulating environment for U.K. firms to operate in, rather than with attempting to influence the rate and direction of industrial and technological change. Increasingly, however, programmes are being devised to encourage technology transfer and collaboration between industry and research institutes, and specific technologies targeted by policy-makers. An analysis in 1980 [l] of two major public innovation policy documents illustrated the indirect approach of the current British administration. Analysis of the main policy tools, targets and target levels recommended in the two reports showed Emphasis on S&T education and financial and taxation Main tools measures Emphasis on technical knowledge and manpower, the R&D Main targets environment and financial resources Main target levels Emphasis on industrial performance, industrial innovation and small firms More recently, dc-nationalization and de-regulation have become increasingly important elcmcnts of U.K. policy towards stimulating the competitiveness and vitality of the small firm sector. These wider economic and political issues, along with other means by which the small-firm sector has been assisted, such as cuts in
TABLE 1. NTBF formation in NTBFs
the
U.K.,
1950-1~85
in the U.K.
1950-1975” Number
1970-1985~
in
cxistcncc
200 (Only
7,0(K) manufacturing
probably
considered;
an underestimate)
Total employment
15,tluo
120,ooo
Start-up
LOW
“Explosive”
rate
since the mid-1970s
Most are “very young”; Sectors of
Mainly
electrical
operation
and electronic
Electronics; and software; recentlv.
‘AD
Little,
New Technology-Based
computer
Firms in the UK and FRG,
post 1979
hardware
instruments;
more
biotechnoloev
Anglo-German
Foundation,
London,
1976. b Segal, Quince
and Wicksteed
and ISI,
New Technology
Based Firms, SOW,
Cambridge,
1986.
233
Small firm policy in the U.K.
personal taxation and “reducing the burden” of the small firm, will not be considered in this paper, which will concentrate instead on measures specifically targeted at small firm innovation. creation and growth: in particular, changes in the availability of investment finance and on the role of the Department of Trade and Industry (DTI) will be considered.
2. IMPROVING (a) Capital
THE ENVIRONMENT
FOR SMALL
FIRMS
markets
Venture capital One of the key features of the current U.K. Government’s industrial policy is the stimulation of the small-firm sector. In order to stimulate both the growth of existing small firms and the establishment of new small firms. several venture capital schemes have been introduced since 1980 [2]. These highlight the Government’s emphasis on an indirect approach towards stimulating industrial and business development. The first vcnturc capital schcmc is the Loan Guarantee Schcmc (LGS). Under the LGS. loans made by private banks to small tirms are guaranteed for 80% of the value of the loan. The aim of the schcmc is not only to increase the volume of invcstmcnts in small firms, but also to encourage more adventurous Icnding. thereby releasing innate cntrcprcncurial potential. Under the original conditions of the schcmc, loans of up to f75,000 could be made in return for an annual premium equivalent to 3% of the guaranteed portion of the loan. Bctwcen 1981 and 19X4 roughly 16,000 loans were made totaIling nearly 1520 m 131: just under one half of these loans went to manufacturing firms. Stud& of the LGS loans at this time estimated that their failure rate was around 30%. Whereas it was intended that the scheme was to be self-financing, by 1984 the Government had to pay out around f34m to the banks. Criticisms levelled at the scheme include: poor initial appraisal by the banks and inadequate monitoring of performance, and declining “additionality,” i.e. the scheme is being used increasingly as an alternative, rather than an additional, form of finance. The current rules of LGS applications have been tightened and altered so that 70% of the loan is guaranteed, and the borrowing premium is reduced to 2.5%. Some of the problems with the scheme have been removed: however, there remain considerable regional discrepancies in loan allocation, the more prosperous South-East of England receiving nearly 40% of total loans. The second scheme, the Business Expansion Scheme (BES, set up in 1982 as the Business Start-up Scheme), was introduced in the 1983 Budget and is designed to inject development capital into unquoted businesses across all sectors of industry. It allows individual investors to claim tax relief on equity investments of up to f40.000 and pay no capital gains tax on these investments provided that funds arc committed for a minimum of five years in unquoted companies. While
Small firm policy in the U.K.
235
the BES encourages investments by individuals, a significant percentage (estimated at nearly 50%) of funds committed have been through professionally managed funds established specifically for this purpose. There are now some 40 such funds in the U.K. with available investment capital of about f.50 million. By the end of the 1983-1984 financial year, some f80m had been invested through the BES in some 400 companies, over half of which were start-ups. Data on the U.K. venture capital industry are given in Table 2. The figures do not include LGS funds. Until recently about 70% of BES funds have gone to areas outside of manufacturing. In 1983- 1984 farming schemes predominated, and in 1984-1985 property development schemes received most funds. Both of these types of scheme were excluded from BES in 1986, and manufacturing industry may, therefore, begin to receive an increasing proportion of BES funds. There has been some lack of additionality with the scheme and there remains an equity or seed capital gap for small ventures requiring f50.000 or less, despite the lower than average loans awarded under BES. Despite its various problems, the BES has played an important part in the recent development of the “new-wave” venture capital industry. In the first place, it has underwritten the entry costs to the venture capital sector of indepcndcnt vcnturc capital funds and individuals, effcctivcly
reducing
their
financial
risk.
Secondly.
it has biased
invcstmcnts
towards early stage-an d probably thcrcforc higher risk-financing. And thirdly, and perhaps most importantly. it has hclpcd to crcatc in Britain a growing body of experienced capital managers AS of Dcccmhcr 1985. the failure rate for BES vcnturcs funded in lW3-I9X-l was about 14%. An analysis of BES invcstmcnts in 1983-1984 [5] showed
that of those firms 88% were located in England, 2% were l(>catcd in Wales, I I o/o were in Scotland and 0.5% wcrc in Northern Irclnnd. Of the 26 Managed Funds then in existcncc, 22 were in England and four were in Scotland. These
rccciving
finance
distributions illustrate the very strong regional bias in availability of venture capital, which has important implications for would-bc entrepreneurs based in locations other than the South-East.
TABLE
2. U.K.
venture capital (VC) industry and the Business Expan-
sion Scheme (BES) [4]
Total U.K. VC investment BES investments
No. of firms backed under BES Average “specialist” VC investment No. of BES related funds
Total no. of “specialist” n BES average f 16Ok.
VC funds
1981
1983/M
1984185
fll4m -
f215m f40m 207
f2Mm f50m 220
-
f265k”
f3Y9k
-
30 -
40 100
236
Small firm policy in the U.K.
A parallel, and perhaps even more crucial, Government-encouraged initiative was the establishment in 1980 of the Unlisted Securities Market (USM). USM-quoted companies require a three-year trading record rather than the five-year record for a full listing. They can also issue a smaller percentage of equity (10% rather than 25%), and they do not need full accountants’ reports. The USM effectively provided an accessible exit mechanism for venture capital investors, thereby giving a considerable stimulus to the growth of new venture capital funds. By 1987, the USM had about 500 companies quoted with an aggregate market capitalization of f5OOm [3]. and this despite the fact that BES-backed ventures had yet to be allowed access. This development is all the more remarkable when it is considered that in the five previous years there were only sixty new quotations on the U.K. stock market. To a significant degree because of the two comp/e~nerzfary initiatives, establishing the USM and introducing the BES, Britain currently has a larger and better-developed venture capital industry than any other European nation, as illustrated in Table 3. In 1987 a new market, the Third Market, was opened by the Stock Exchange specifically to cater for smaller, younger business than the USM. Companies have to be sponsored by individual members of the Stock Exchange. There is no restriction on the percentage of equity to be issued, and BES-backed vcnturcs are allowed to join. It is too early to determine how successful this market will bc in stimulating small firms, but as it is gcarcd towards riskier start-up vcnturcs, and
TABLE
3. Estimated [3]
(lWWH6)
size of national
venture
No. of VC lirms U.K. France Netherlands West Germany Denmark Ireland
Total
capital
VC pool ($m)
110 45 40 25 1-t
4,5ou 750 650 500 170
10
100
Sweden
31
325
Austria
11
51)
Norway
35
185
Canada
44
Japan
70
United
States
EC total VC
1 ,oW 850
550
20.000
in 1985, f4.75b;
growth
U.K.
rate in 1985. about
times the total European very considerable tise and efficient
industries
total.
accumulated inter-fund
about 38%.
40% The
1Iowcver, evaluation
informal
of the total. U.S.A.
U.S.
European
has about
three
VC is hands-on,
and management
communications
with expcr-
networks.
Small firm policy in the U.K.
237
to providing smaller amounts of capital (which venture capital funds are often unprepared to fund), this market could valuably contribute to the limited sources of seedcorn capital available in Britain (estimated at 1.4% of total venture capital in 1985). (b) Property English Estates
English Estates, originally a subsidiary of the DTI and now a separate government corporation, has responsibility for industrial and commercial property in rural and assisted areas. Recognizing the specialised property requirements of the growing high technology sector and the benefits of partnerships with universities and other centres of specialized technology, since 1981 it has financially assisted the setting-up of a number of science parks [6]. In 1987, English Estates has a budget of f47m, of which f12.6m is from a government grant. There are now nearly 200 science parks/technology parks/innovation centres in Britain, many of which have benefited from English Estates’ assistance. Enterprise
Zones
There arc 26 Enterprise Zones in Britain. These are areas designated to attract new enterprise through a ten-year exemption on local authority rates and the freedom to relax or accelerate some planning and administrative controls. (c) Legislation Small firms have exemption from some of the requirements legislation, in particular those related to maternity rights.
of employment
(d) Local initiatives There are around 300 local Enterprise Agencies in Britain. These are centres where small businesses can obtain business advice and consultancy, financial brokering, and training courses. These agencies are receiving increasing amounts of government support. 3. DIRECT SMF POLICY INITIATIVES The government department responsible for most of the schemes designed to support small firms is the DTI. In March 1985, and following a moratorium on all expenditure for a number of months, the DTI rationalized all its schemes under the rubric “Support for Business”. Before describing this reorganization-which, in effect, pulled the considerable number of diverse existing schemes together-
Small firm policy in the U.K.
238
some of these individual small firms examined.
Technology
schemes will be described,
and their significance for
transfer
A major thrust of the Department of Trade and Industry’s technology policy has been the stimulation of technology transfer to SMFs. A number of the DTI’s principal technology transferschemes and their pattern of take-up are described below [7]. (i) Manufacturing Advisory The MAS was introduced
Service
(MAS)
in 1977 to improve the efficiency of small and medium-sized engineering establishments, although subsequently it was extended to all sectors of manufacturing and later to most of the service sectors. It operated by providing subsidized consultancy on manufacturing and related problems. MAS was based on the observation that many SMFs were unaware of the benefits, in both production efficiency and product quality, which can be obtained by applying the best available technology and techniques to their manufacturing processes and organization. Until 1983 the service offered up to 15 person-days’ free consultancy with an option on a second 15 days’ at half cost. In December 1985 the half-cost facility was withdrawn and, since August 1984, firms have had to pay 25% of the cost of a 13 person-day consultancy following two free days’ for the preparation of the terms of reference for the project (firms’ contributions have now increased to 33%). Initially firms with between 100 and 1000 employees on site were eligible. The minimum establishment limit was lowered to 80 in 1978 and 60 in 1982. From April 1985 the service was limited to establishments employing between 1 and 500 on site. MAS was operated on behalf of the DTI by the Production Engineering Research Association (PERA) and, in 1982, Salford University Industrial Centre Ltd. (SUIC) took over the responsibility for operating the service in the North-West. An in-house evaluation of MAS indicated several benefits from the decentralization of the service - SUIC had detailed knowledge of the structure and needs of local industry. - SUIC had good links with chambers of commerce, enterprise agencies and industry sections of local authorities. - SUIC’s local linkages provided a high profile for MAS in the region leading to high levels of enquiries about assistance from local firms. Between 1987179 and 1984185, 7,128 firms had been assisted by the MAS scheme at an average cost of f4,500 per firm. An evaluation of MAS has indicated a benefit to cost ratio of about 7: 1. Seventy per cent of all grants were offered to small firms.
Small firm policy in the U.K.
239
(ii) Design Advisory Service Funded Consultancy Scheme (DASFCS) The DASFCS was introduced to assist manufacturers to improve the design of
new and existing products and to encourage them to use assistance for this purpose. It was operated on behalf of London-based Design Council. Its terms and conditions were which apply to the MAS scheme. Up to March 1985, DASFCS firms at an average cost of about f3,500 per firm.
specialist outside the DTI by the the same as those had assisted 2,796
(iii) Small Firms Technical Enquiry Service (SFTES) The aim of the SFTES was to provide small manufacturing
firms with a readily-available source of assistance in solving minor problems related to manufacturing techniques and organisation. In addition, it was designed to encourage small firms to use specialist outside advice. The scheme was limited to England, Scotland and Wales. Manufacturing units with between 1 and 200 were eligible for the SFIXS scheme. Initially, answers to up to four technical enquiries, involving a maximum of 40 hours’ work, or up to five days’ free consultancy on manufacturing techniques and organisation were available. After 1984, applicants were required to contribute 25% towards the cost of consultancy time after the first free day. By March 1985, 9010 firms had used SFTES. This scheme has been discontinued. (iv) The Microelectronics
Application
Project
(MAP)
[8]
MAP was launched by the DTI (then the Department of Industry) in July 1978. It had an initial budget of f55m. MAP was aimed at raising the national lcvcl of awareness within British industry of the potential of microelectronics, at increasing the supply of skilled people, and at increasing the rate of applications of microelectronics in firms’ products and processes. All manufacturing companies were eligible; there was no minimum level of expenditure but there was a maximum level of f500,OOO. The scheme was essentially in three parts Part A Awareness and training, including the setting up of a MAP Information Centre by the DTI Part B MAPCON, which provided support to meet the cost of authoriscd consultants to undertake feasibility studies of microelectronics applications (currently f2,500) Part C Financial assistance towards the cost of developing products or processes involving the application of microelectronics (currently a grant of up to 25% of the costs incurred) Between July 1978 and April 1984 a total of 1,359 firms had received offers of support, which represented about 1% of all manufacturing establishments in the U.K. During this period the average size of grant was f47,000, although one-third have been less than f20,OOO. More than f2OOm was spent under the MAP scheme.
240
SmaIl firm policy in the U.K.
(v) Software Products Scheme The Software Products Scheme,
subsequently renamed Support for Software Products (SPS), was introduced in 1972. Its aim was to encourage the development and subsequent marketing of software products which have a high innovation content. Up to 1977, the scheme was operated on the basis of 50% shared contracts. Subsequently applicants were given the option of 50% shared contracts or grants totalling variously a maximum of 25% and 33.3% of total project costs: the 50% option was latterly withdrawn. In total, some f35m was committed to the scheme. Two-thirds of applicants for SPS have been independent companies, mainly very small firms. (vi) Small Engineering
Firms’ Investment
Scheme
(SEFIS)
SEFIS was inaugurated in 1982 to assist small engineering firms with investment in advanced manufacturing technology, such as CNC machine tools. Initially f20m, and eventually E30m, was made available to finance capital grants of one-third of the costs of certain types of advanced capital equipment, mainly concerned with metal working. The original scheme was massively oversubscribed, and was succeeded in 1983 by SEFIS? with an allocation of flOOm to be used in both small and medium-sized firms. (vii) The Robotics
Support
Programme
(RSP)
The RSP was launched in 1982 alongside the programme supporting Flexible Manufacturing Systems (which was a almost entirely the preserve of larger firms). Three areas were supported by RSP: (a) feasibility studies for the USCof robots (up to 50% grants were available), (b) robot purchase (up to 33.3% grants), and (c) R&D costs of robot manufacturers (25% grants). In 198.5 the level of funding for purchasing robots was reduced to 20%, and the RSP was integrated into a wider Advanced Manufacturing Technology (ANT) Programme, which provided advice, information and training as well as financial support into a range of etc. In 1986 the AMT promanufacturing technologies, CNC, CAD/CAM, gramme was integrated into the wider Support for Business Programme which offers assistance for the development of new products and innovative processes, but not towards the purchase of equipment such as robots. A survey of robot use in British Manufacturing [9] found that less than a quarter of robots in British industry are in establishments employing less than 200. It found that whereas small firms were as aware as large firms of support for robotics, they were less likely to apply (fearing delays and bureaucratic procedures). The DTI, however, tended to award more feasibility grants to small rather than large applicants. The above schemes give some idea of the range of direct measures that were available to small firms. Other schemes include the Product and Process Development Scheme (PPDS), the Innovation-Linked Investment Scheme (ILIS), the Microelectronics Industry Support Programme (MISPl and MISP2), the Fibre Optics and Opto-Electronics Scheme (FOOES), The Flexible Manufac-
Small firm policy in the U.K.
211
turing Systems Scheme (INS), The Computer-Aided Design and Test Equipment Support Scheme (CADTES), and the Quality Assurance Support Scheme (QAS). The examples also highlight the considerable number of changes in the conditions of application and awards made over the years: basically, the situation was complex and changeable. In March 1985, the DTI schemes were rationalized into four areas under the “Support for Business” programme: advice, innovation, investment and exports. The areas of relevance to small firms will be described below. 1. Business and technical Advice for small firms
advisory
services
This service offers small firms counselling by experienced three sessions are free, subsequent ones cost f30. Products
and process
businessmen: the first
consultancy
SMFs can apply for support in the form of 75% of the costs of 1.5 man-days consultancy to the firm to enable them improve the quality and design of their products, their manufacturing organisation and techniques, and also to resolve technical problems. Grants
for new technology
feasibility
studies
Grants of 75% are available towards the costs of feasibility studies by consultants into the exploitation of biotechnology, microelectronics applications, AMT for batch manufacturing, and the USCof integrated circuits. The upper limit of support is f2,500. 2. Support for innovation The DTI offers selective financial support for R&D projects leading to new products and processes, and longer-term research projects. The participating firms have to prove technical and managerial competence and satisfy the “additionality” clause that the work would not go ahead, or would be delayed, without public support. Support is in the form of grants: - 25% for projects involving single firms - 50% for collaborative projects Project costs should range between flOO,OOO and f5m, although projects below flOO,OOO are considered for small firms. 3. Support Grants studies
for national and regional investment for new technology implementation
studies
and
demonstrator
Grants are available to meet half the cost of studies into the implementation of advanced manufacturing technology of to assess opportunities and commercial risks in biotechnology. Grants for new technology
investment
projects
Grants of up to 20% are available for selected capital investment projects involving the production or design of advanced microelectronic, fibre optic and opto-electronic components and related activities. Twenty per cent grants are also available for the acquisition of CAD systems for the design of integrated circuits.
Small firm policy in the U.K.
242
Grants
for quality
assurance
projects
Grants of up to 25% are available to assist SMFs with the costs of implementing consultants* recommendations to improve their quality assurance procedures to comply with the relevant British Standard. Regional
grants
Both U.K. government and EEC grants are available to small firms starting up or already in business in Assisted and Development Areas. 4. Support Marker
for exports advice
Market advice and grants of up to 50% towards export market research are available to all firms. More specialized advice on tariffs, regulations and technical requirements are also available. He/p with getting
into the market
Market reports, status reports on foreign companies, assistance in finding overseas representatives, grants for overseas travel and for exhibitors at overseas trade fairs (up to 60% of the cost) are all available.
The British Technology
Group (BTG)
BTG is an important research and technology dcvclopmcnt policy implementation institution. It was formed in 1981 following a merger of the National Research and Development Corporation (NRDC) and the National Enterprise Board (NEB). Its main functions are the provision of “finance for innovation” (usually in the form of joint venture finance with invcstmcnts from f5,OOO to f5m) and technology transfer. BTG is currently financing more than 200 development projects with companies throughout the U.K. Under its five-year corporate plan, published in 1985, BTG will - Offer to take responsibility for patenting, or otherwise protecting, technology derived from universities and other public sector sources - Provide funding for developing that technology to the point where it can be taken up by industry - Transfer the technology to industry by seeking licensees - Offer project finance to help those licensees to launch the product on to the market - Offer project finance to companies that want to develop new products and and where a particular processes, based on their own new technology, technology requires the setting up of a new company, BTG will perform a catalytic role in promoting the creation of start-up companies - Attempt by various means to improve communications and linkages between academia/research laboratories and industry The plan provides for investment of about f15m a year in development projects.
Small firm policy in the U.K.
243
Collaboration The DTI is shifting its pattern of support away from funding particular projects towards non-project support (e.g. advisory services, the encouragement of best practice and increasing the supply of skilled technologists) and collaborative projects. This trend is illustrated in Fig. 2. In this respect, U.K. policy is following the EEC model of collaborative European technology programmes (ESPRIT, RACE, BRITE, etc.). Collaborative projects attract a higher level of grant, normally 50%, compared with no more than 25% for individual company projects. Technology
targeting
As mentioned above, the U.K.‘s Alvey project reveals the increasing interest of policy makers in targeting particular technologies for support. However, the numbers of small firms participating in Alvey-supported projects are few, and limited mainly to software production [lo]. Another technology to be targeted is biotechnology, although the government’s enthusiasm in offering support is muted; preferring instinctively to rely on market forces.’ The Spinks Report in 1980 pointed to the immense potential offered by biotechnology, and called for greater research, teaching and technology transfer efforts. Dcspitc the government’s “market forces” approach, additional funds have been made available to universities and industry. In 1982/83, total government funding for biotechnology amounted to f45m [Ill: by 1984/85 expenditure by research councils alone (SERC, AFRC, MRC, NERC) amounted to f5lm. Govcrnmcnt expcnditurc has increased considerably, as has the number
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Small firm policy in the U.K.
of mechanisms by which funds are allotted, in particular, through the use of “industrial clubs” e.g. the Protein Engineering Club. One of the outcomes of the Spinks Report was the establishment of a company, Celltech, under the auspices of the BTG. It was formed with 50% industrial funding, and on the basis of an agreement with the Medical Research Council giving Celltech priority over industrial exploitation of discoveries. Celltech currently employs 200, and is a world leader in biotechnology development.
SMART The Small Firms Merit Award for Research and Technology (SMART) is another attempt by the DTI to identify key technologies; in this case biotechnology, and advanced instrumentation. SMART is a small-scale scheme developed along the lines of, and stimulated by the success of, the U.S.A.‘s SBIR programme. Advertised as a competition, small firms working in the two specified technologies were invited to apply for awards. The awards were in two stages: the first stage offered an award of 75% of eligible costs for product development of up to f50,OOO; the second, open to winners of stage 1, offered awards of 50% of eligible costs. Twenty firms were offered awards, and the DTI has been very impressed by the quality of the applicants and the potential of their projects. The DTI also has a support scheme for advanced manufacturing in electronics (AMIE). One part of this, the Support for Electronics Manufacture (SEM), has been allocated f2m to provide grants of 25% of project costs (up to f25.000) to assist small clcctronics companics to invest in computer-aided automated production equipment for electronics asscmblics and clcctronic products.
Military
expenditure
Reflecting a concern that SMFs receive little of the benefit of Britain’s large military R&D expenditure (about 27% of total national R&D), a recent Ministry of Defence (MoD) initiative, the Small Firms Research Initiative, has allocated flm in 1987/88 specifically to increase the opportunities for small firms to carry out innovative work of relevance to the military. This represents 0.6% of total expenditure, considerably less than the 1.25% of the U.S. Department of Defense allocation to small firms under the SBIR Programme. 4. CONCLUSIONS It is only in recent years that reference could bc made to any meaningful so too did policy interest British “innovation policy”. As such a policy developed, in small firms. A major concern of the present government has been creating an environment conducive to the creation and growth of small firms. The capital market for small firms has increased in size, and improved in quality: there is, however, still a shortage of seedcorn capital. Direct policies, mainly under the
Small firm policy in the U.K.
245
auspices of the DTI, have recently been rationalised, and have increasingly changed in nature from project-based assistance, to more collaborative and non-project assistance (awareness campaigns, information and advisory services). Specific technologies for support are more commonly being identified. The MOD, too, has increased its direct support for small firms, although this is still at a level well below the U.S.A.‘s DOD support. While increasing assistance is being offered to small firms (financial, fiscal, legal), the Government’s policy lacks true coherence for two major reasons 1. The ambiguity in its main economic philosophy (reducing public expenditure) and reliance on market forces, and an awareness of the need financially to assist the innovation process 2. Ambivalence in its policy towards small firms derived from its concern to use small firms as “social”, i.e. employment generation, policy tools rather than industrial policy. This is revealed when during the last Budget small firms became the responsibility of the Department of Employment A marked feature of the U.K. economy is the considerable difference in levels of prosperity between the depressed North and the economically-buoyant South, especially the South-East. In terms of the regional distribution of R&D capacity, the South is similarly favoured: 37% of total “high-tech” employment is in the South-East region; the bulk of MOD R&D and procurement contracts go to firms located in the South; and most public-sector research laboratories are located in the South, as are the bulk of the central laboratories of large R&D-performing private-sector companies. To a significant extent, public innovation policies arc failing to redress this regional imbalance in innovatory potential. For example, 52% of firms awarded grants under the MAP scheme were located in the South-East; 59% of applicants for the SPS scheme were in London and the South-East; and 53% of firms financed by BES managed funds in 1983/84 were located in the South-East and Home Counties. In other words, schemes having a “new technology” flavour are taken up largely in the prosperous R&D-rich southern part of the U.K. In contrast, schemes designed to diffuse exisring technology and best-practice techniques to SMFs are taken up more or less evenly throughout the U.K. These distributions, of course, reflect regional differences in industrial structure rather than any supply-side deficiency. The point is that regional policy in the U.K. does not have a strong overt technology development content; it is not viewed by the current administration as being a main instrument of industrial and economic development strategy nationally, but rather as an instrument of social policy. As such it seems unlikely to contribute significantly to a reduction in regional disparities in R&D potential. More specifically, given that small-firm innovation is often a “local” phenomenon, regional policy in the U.K. seems unlikely to contribute to any marked degree to the innovatory activities of SMFs in the development regions. In terms of DTI policy measures, and following the successful example of the regionalization of MAS to SUIC, close consideration is being given to the increased regionalization of other DTI schemes.
Small firm policy in the U.K.
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To conclude, although the situation has improved markedly since the 1960s and 197Os, the U.K. still has no coherent innovation policy. Such a policy requires a degree of interventionalism contradictory to the present government’s political and economic philosophy. It must also strongly integrate with regional industrial policy. The poor showing by the Government in the North at the recent General Election has provided extra stimulus towards forming policies aimed at regional rejuvenation. For these to succeed, however, the emphasis on small firms as being primarily a tool of social policy has to alter, and their importance in the process
of technological
innovation
realised
and actively
supported.
NOTES ‘Throughout the paper, a small firm is defined as having less than 200 employees, a medium-sized firm as having less than 500 employees. *The Bolton Committee of Enquiry on Small Firms reported in 1971. ‘The Teaching Company Scheme, a joint initiative of the Department of Trade and Industry and the Science and Engineering Research Council, began in 1978 and was designed to encourage high calibre graduates to work in industry while maintaining educational links with universities. It has been successful in linking small firms and universities in joint technological developments. ‘An example of this trend is the Alvey Programme on advanced Information Technology which has involved the deliberate selection and support of a number of key “enabling” technologies in the IT area. ‘The Government’s paradoxical position is clearly revealed in a recent paper by a Junior Minister at the DTI when he writes “. . . the Government is firmly committed to the macro-economic policy of reducing total public expenditure and controlling the public sector borrowing requirement. . . [and] to the free and fair operation of the market economy” while at the same time arguing “in reality market operations do not always put adequate stress on the factors which encourage innovation”. J. Butcher, UK Government policy on innovation, Int. J. Technol. Management, 1 (1986) I-11.
REFERENCES R. Rothwell and W. Zegveld, Industrial Innovation and Public Policy. Frances Pinter, London, 1981. R. Rothwell, Venture finance, small firms and public policy in the U.K., Res. Pal., January 1986. Financial Times, 29 April 1987. R. Rothwell, Public innovation policies: some international trends and comparisons. Thirteenth Imperial College/SPRU/TCC Science, Technology and Public Policy Lecture, Imperial College, London, 20 February 1986. Knowlman et al. Evaluation of the Business Expansion Scheme. Small Business Research Trust, London, 1985. J. Currie, Science parks in Britain: their role for the late 1980s. CSP Economic Publications, 1985.
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R. Rothwell and M. Beesley, UK research and technology development regional impacts, Report to the STRIDE Committee of the EC, SPRU, 8 J. Northcott et al., Promoting Innovation: Microprocessor Applications 1985. 9 J. Northcott, Robots in British Industry. PSI, 1986. 10 Alvey Annual Report, 1986, IEEE. 11 M. Sharp, The new biotechnology: European Governments in search Sussex European Paper No 15, European Research Group, SPRU. Sussex. 1985.
217 policy: some 1987. Projects. PSI,
of a strategy. University of