Japan's five biggest construction firms each spend more on research and development than the whole UK industry. Roger Eglin looks at why we are so far behind in the innovation race.
As part of his new policy at the Department of Trade and Industry, Peter Lilley, the Secretary of State, wants to make encouraging innovation one of the department's main objectives. In a recent speech he argued that "success in the '90s will depend increasingly on the willingness of firms to invest in effective R and D".
Few would disagree with this proposition. The problem is that few would also disagree that Britain is falling behind its main industrial competitors in the innovation race. While the pharmaceuticals manufacturers have built a globally successful industry on the back of a big research programme, the wider picture is bleak.
R and D spending is slipping as a share of gross domestic product. We are turning out fewer scientifically qualified people than rival economies like Germany and Japan. The number of British patents being registered with the European Patent Office is declining. Ultimately all of this will rebound on the country's trade performance. The explanations advanced for this decline are manifold.
The City's short-termism is said to deter companies from spending on R and D (although how this argument squares with the City's general approval of big R and D spenders like Rolls-Royce, Glaxo or ICI is not made clear). Another weakness is that too much is invested in the narrow area of military R and D. Some argue that academic "elitism" dismisses the value of "commercial" science. Labour politicians say that the state should give more help; even Lilley, although more cautious, sees a need for encouragement.
The evidence that we have not been spending enough, and are beginning to spend even less, is powerful. "R and D Short-termism?", a Sciteb/Confederation of British Industry report, shows that industry-funded research is in decline. It is now running at 1.3% of gross domestic product, well behind the 2.3% being spent by Germany and Japan.
Sciteb interviewed a number of senior industrialists, and what they had to say was almost without exception depressing. One pointed out that Japan's five biggest construction companies all spent about 1% of their turnover on R and D. "Indeed, any one of them spends more than the entire UK construction industry," he added. Another interviewee said that the arguments seeking to justify R and D costs seldom arose in Japan. "You need a culture that calls for specific proposals for R and D expenditure. They are not coming forward because no one expects them to be accepted." More money would help. But it is a mistake to believe that it will solve the problem by itself.
In a recent lecture at London Business School, Kyoto University's Professor Hajime Yamashina explained how much Japan's industrial strength rested on the way in which the innovation process permeated the whole company. It was a two-stage process, he said, which involved developing both the products and competitive manufacturing capability. Ideas for development were often picked by screening teams which covered the whole company looking for suggestions from every department - research, manufacturing and marketing.
There was little emphasis on looking for a quick return. Companies talked of looking for a "portfolio of new products" or "advancing into new fields through R and D", said Yamashina, but rarely of "setting a target period for investment return". Once or twice a year companies would evaluate research to decide whether to continue support.
Products, he pointed out, were becoming more complex, changed more frequently and were increasingly tailored to the requirements of individual customers. A company's manufacturing must be able to cope with rapid product change and diversity. Product development was pointless if manufacturing engineers could not get the results to market quickly and competitively. It involved close integration of product and development engineers, said Yamashina, and heavy investment in manufacturing process innovation.
He gave some practical examples of how quickly the Japanese exploit innovation. Between 1982 and 1987 Japan's eight car makers achieved on average a 4.6 model change cycle, against 8.1 years for the three mass producers in the United States and 12.2 years in Europe. In the same period Japan had 72 new car projects, the US 21 and Europe 38. This is a formidable example of a competitive industrial economy in full cry and a reminder that innovation is about the organisation of the whole company and not just about giving more people in white coats more money.
(Roger Eglin is managing editor of the Business section of The Sunday Times.)