Policy Innovation Blog

Plan I at Budget 2013

Stian Westlake - 15.03.2013

How to use the Government’s purchasing power to boost Britain’s most innovative businesses

On Wednesday, the Chancellor should look beyond Plan A and Plan B and focus on Plan I - for innovation. Budget 2013 presents an opportunity for the Chancellor to boost the fortunes of innovative, ambitious small businesses without spending additional public money. He should follow Nesta's recommendation to massively increase the size of the Small Business Research Initiative (SBRI) programme, which channels government procurement through the innovative businesses that will be essential to economic recovery. Getting this right could provide a billion pounds of funding at a crucial stage in the life of small firms.

The problem

As the Chancellor prepares for the 2013 Budget, his most urgent concern must be how to get Britain's businesses investing in innovation again. We know that innovation drives the lion's share of productivity growth, and that both businesses' innovation investment and business productivity have fallen precipitously since 2008.

But this is not a problem the Chancellor can spend our way out of, especially given the government's commitment to reduce the deficit. He needs a solution that will boost innovative businesses without boosting public spending.

A tried and tested answer

Innovative businesses need finance to grow. They also need customers. The best customers also provide finance, in that they are willing to buy new products and back their development.

History gives countless examples of this at work. At the birth Silicon Valley, Disney took the risk of buying 8 new oscillators from a tech start-up called Hewlett Packard, which rose to become one of the world's largest and most influential computer companies. Software giant Autonomy cut its teeth developing fingerprint recognition software for police forces, which both paid the bills and helped it create its core IP. And ARM was a result of the BBC procuring the BBC Micro computer from its parent company Acorn.

Often, these influential first customers have been parts of government. This idea lies at the heart of a 40-year-old US government programme called SBIR (Small Business Innovation Research), which has provided billions of dollars of start-up and growth funding, and given rise to global business from Amgen to Qualcomm.

In 2002, the UK government started its own version of SBIR, called SBRI. SBRI had many years of teething troubles, but is now an effective if small programme, providing £103 million of funding since 2009, all from existing budgets.

Like SBIR in the US, it involves departments running competitions for entrepreneurs to come up with ways of meeting its trickiest problems. Recent examples have included new biosensors to stop hospital-borne infections and new, light power systems that can be integrated into soldiers' kit.

Now is the time to take this programme to industrial scale. Government should require departments to commit 1% of their procurement budget to this kind of programme, to ensure that innovative small businesses benefit from the government's purchasing power. The economy will benefit, since this will help the most dynamic, innovative business thrive. Departments will benefit too, by bringing the efforts of entrepreneurs to bear on problems that would otherwise go unsolved. And the taxpayer will not be out of pocket, as the sums involved will come from already committed spending.

The Chancellor should take this opportunity to take a simple, proven step to provide the innovation and growth the economy so desperately needs.

Further reading

For Nesta's Plan I:

Plan I Executive Summary

For more information about SBRI, see:

• Nesta: Buying Power (a review of SBRI from 2010, giving examples of some projects)
• David Connell: Secrets of the World's Biggest Seed Capital Fund (on the US SBIR)