New Index puts Economic Value on Innovation

NESTA Innovation Index

NESTA Innovation IndexTwo thirds of private sector productivity growth between 2000 and 2007 was driven by innovation, claims a new report by NESTA, the National Endowment for Science, Technology and the Arts.

The findings are revealed in NESTA’s Innovation Index – the most ambitious attempt yet to measure the contribution of innovation to the UK’s economic growth. The Index, which will be published on an annual basis, reveals a direct link between the amount of innovation that companies invested and productivity output. UK businesses invested £133bn in innovation in 2007 (the most recent year covered by the Index), representing 14% of private sector output.

The effect of all this innovation is increased productivity. Two-thirds of UK private sector productivity – 1.8 percentage points of productivity growth per year – between 2000 and 2007 was a result of innovation.

This compares favourably with the best data available for countries like France and Germany, and similar to the US levels. It may account for why the UK has enjoyed higher productivity growth in recent years than France or Germany: 2.0% compared to 1.3% and 1.1% respectively.

Jonathan Kestenbaum, Chief Executive of NESTA says:

‘For people who care about the prospects for our economy, this Index will be as important as the Consumer Price Index. The Innovation Index measures arguably the most important driver of growth.’

The Innovation Index, chaired by Lord David Currie has been designed together with leading innovation experts, practitioners, policymakers and economists. It measures innovation ‘in the round’, making it broader than the current measure of R&D (which represents only 11% of investment in innovation in 2007) and includes factors such as product design, training in new skills, organisational innovation, developing new customer offerings and brands, and copyright. NESTA has referred to this as ‘hidden innovation’ which is as important to productivity as R&D.

Lord Currie comments:

‘This report measures the direct contribution of innovation to productivity and economic growth, through a much wider set of channels than hitherto captured. This is critical in refocusing innovation policy on what really matters for enhancing the UK’s prosperity.’

The Index also reveals that:

  • Innovation is linked to business growth across a range of sectors. Innovative software firms enjoyed a much faster growth rate than non-innovative ones (13% average revenue growth per year compared to just over zero per cent). But this relationship holds true even in sectors not traditionally associated with innovation such as legal services, where innovative firms enjoyed average revenue growth of over 10%, while non-innovative firms revenues shrank on average.
  • The UK is a relatively good place to innovate, but has some shortcomings. The UK is a mid-table performer when it comes to the wider conditions for innovation compared to other leading economies (the US, France, Germany, Japan, South Korea, and Finland). But it performed poorly on three important indicators: access to finance, demand for innovation (in particular the use of government procurement to encourage innovation), and skills for innovation.

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