Public sector contracting could be a better way to drive UK industrial innovation than venture capital and grants, according to a report by MPs.
In the report on UK post-pandemic economic growth the Business, Energy and Industrial Strategy (BEIS) Committee said the government had an “opportunity to reshape how public procurement can be used to drive innovation by British businesses”.
David Connell, senior research associate at Cambridge Judge Business School, told the committee he had “reservations about the implications of venture capital funding” and “argued that contracting could be a more effective way to drive innovation in commercial businesses than the collaborative grant model” used to distribute government funds.
This was because SMEs had limited resources to participate in collaborative bids for funding and then only received a percentage of the total, leaving them to find the rest.
“The result is that many of the companies that we would like to support cannot be supported through that process,” said Connell. “It has to be through 100% funded contracts.”
The report said Connell reasoned that “commercial innovation and the successful development of new products is achieved by contracting processes rather than collaborative processes” and “businesses which use contracts to innovate products are much more likely to be focused on the customer’s needs and their ultimate willingness to buy the product in volume”.
“The best way is to encourage companies at the top of the chain to fund, as customers, potential suppliers and catapults through contracts,” said Connell.
The report said the government’s new Advanced Research and Invention Agency could “provide a mechanism to contract for innovation by driving public-private collaboration”.
“In our enquiry it was clear that witnesses felt that industrial policy could better harness the power of public procurement to encourage innovation,” said MPs, adding the public sector as a whole spent around £268bn each year on procurement, equivalent to around 14% of GDP.
The report said: “There now exists an opportunity for the government to reconfigure its relationship with business on the principle of public/private co-production.
“Rather than acting as an occasional and remote investor the government could become a driver of innovation by utilising its purchasing power, reforming public procurement rules and establishing a credible post-Brexit state aid policy.”
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