08/11/2021

What’s Driving Britain’s Tech Growth

Three questions to Martin Carkett

Policy lead at Tony Blair Institute for Global Change

The UK tech sector is booming. British unicorns and start-ups have significantly grown, attracting venture capital funding. The UK is also catching up with tech hotspots in the US and China. After an in-depth exploration of the French innovation ecosystem, we asked Dr. Martin Carkett, of the Tony Blair Institute for Global Change, to walk us through the state of play for the UK’s tech sector. He explains the reasons behind such strong growth.

The tech industry is expanding more than two and half times faster than the rest of the British economy, with a reported 2.1 million jobs created in the digital economy in 2018. The UK digital sector is said to have added £149bn or £400m a day into the country’s economy in 2018, an increase of 7.9% from the year before. When and why did the UK chose to make tech its priority?

Britain, a nation of shopkeepers, has always had an entrepreneurial spirit at its heart and has consequently had a long love affair with tech. In its broadest terms, technology, science and innovation have been core priorities for Britain for centuries, but it's only in the last decade that Britain’s digital tech sector has really come to the fore.

As far back as the 1600s, English statesman and philosopher Sir Francis Bacon made the first pioneering steps in developing the scientific method, revolutionizing our approach to discovery and innovation. In the centuries that followed, Britain’s high wage economy, yearning to do things better and faster, and to access cheap energy and capital, precipitated the conditions that ensured that the industrial revolution first took seed in Britain. The country's subsequent investment in innovation and technology transformed its industries from hand production methods to mechanical manufacturing ones, greatly improving productivity and propelling Britain to prosperity.

In more modern times, the UK has continued to prioritize technology. From Harold Wilson’s focus on embracing the "white heat of technology" in the 1960s, to Tim Bernard Lee's development of the World Wide Web at the end of the last century, Britain has invested heavily in science and tech, and has maintained a role of global leadership in these fields.

The British tech sector has grown 10-fold in the last decade. Venture capital investment [...] has risen from £1.2bn in 2010 to £11.3bn in 2020.

But it is over the last two decades that the UK has built upon this legacy and extended this ethos to its digital tech sector to build its digital economy. Governments and business alike have recognized the digital tech sector’s increasing strategic importance for the UK economy. Fostering its development has consequently been a key feature of industrial strategies.

And it’s working. The British tech sector has grown 10-fold in the last decade. Venture capital (VC) investment into this sector has risen from £1.2bn in 2010 to £11.3bn in 2020. And it continues to grow at a fast pace with tech companies raising more money between January and June 2021, than they did during the whole of 2020, equivalent to $18bn.This is more than twice what Germany ($8.7bn) or France ($5.3bn) attracted.

London now ranks fourth behind the Bay Area, Beijing and New York in terms of the number of start-ups and unicorns created. Since 2010, the number of British unicorns has grown from 8 to 91, while the number of companies nearing unicorn status has also grown 10-fold.

And why has the British government chosen tech as a priority? Just as Britain invested in the industrial manufacturing technologies of the past, digital technologies of today offer simpler, more efficient and more effective means of producing value. In short, technology and innovation are the critical pathways to economic growth and prosperity, offering a better quality of life for UK citizens.

But in many ways, it is the tech industry that has chosen the UK, rather than the other way round. The UK’s trusted institutions and legal frameworks, its strong economic fundamentals, its access to global capital markets, and its open and creative culture have created an ecosystem ripe for tech development.

There can be no room for complacency however. Despite Britain’s tech sector’s vast investment and explosive growth, the UK is still reeling from the global financial crisis and the double blow of Brexit and Covid-19. Economically speaking, the UK has seen a decade of laggard growth, stagnant real wages and stalled productivity. The UK must double down on its efforts to accelerate technological advancements. It must also drive growth not just in its tech sector, but throughout the wider economy as well, in order to deliver a more prosperous society that meets the promises of the 21^st century.

British VC funding into deep tech companies reached €3.1bn in 2019, up from €0.9bn in 2015. Their nearest European competitors, France and Germany, attracted a combined figure of €2.7bn while having a GDP per capita quite similar to France’s and way smaller than Germany’s. How does the UK attract such a high amount of money within its ecosystem?

It’s no coincidence that the UK continues to attract high volumes of capital into its burgeoning tech sector. It’s a safe, innovative and, ultimately, lucrative place to invest in and build a tech business. The UK economy remains the fifth largest in the world, providing a sizable domestic market and close ties to European markets, even withstanding Brexit. Its institutions remain trusted, its legal and regulatory regimes transparent and sound, and its political and economic landscape (largely) stable.

Beyond these fundamentals, successive UK administrations have consistently sought to transform Britain into an attractive place for business and investment. Despite a recent tax increase, the overall tax burden of the UK remains lower than that of France or Germany. More importantly, it has one of the lowest corporation tax rates amongst major European economies. Concerted efforts to reduce the administrative burdens on business have had their intended effect - the UK ranks 2^nd in Europe (behind Denmark) and 8^th globally in the World Bank’s Ease of Doing Business Index.

In London, the UK boasts the largest financial center in Europe, second only to New York City in terms of its size and competitiveness. This gives access to some of the deepest, most liquid global capital markets providing finance and a large target market, as well as world class business, banking, legal and tech expertise. All are vital components for establishing a successful new tech start-up. London is by far Europe’s top city for tech investment. This in itself lends gravity, creating a feed-forward loop attracting yet further investment. But the UK’s tech dominance extends beyond London - 5 British cities are now featured in Europe's top 20 areas for tech investment.

The UK’s tech dominance extends beyond London - 5 British cities are now featured in Europe's top 20 areas for tech investment.

What really sets the UK apart is its penchant for science, innovation and technology. The UK boasts a world leading academic and research sector, with 5 of the world’s top 20 institutions, ranking only behind the US in terms of global citations. More broadly, the UK ranks 4^th in the World Intellectual Property Organisation’s Global Innovation Index, demonstrating the overall effectiveness of its innovation ecosystem. Meanwhile, British citizens are also technologically literate. The country is the fourth largest market for eCommerce with a revenue of $105bn in 2020, placing it ahead of Germany ($96bn), France ($59bn) and only just behind Japan ($114bn). The public is also increasingly using digital services to interact with government and public services, for example with the NHS app which now has over 10 million users. This too creates valuable public data sets.

Finally, culture capital is another reason for the UK’s success in attracting talent, business and finance into its tech ecosystem. The UK has remained consistently high in term soft power and its language, time zone and international connection hubs make it a prime location for tech investment.

Similarly to Germany, the UK excelled in translating pioneering intellectual property developed in universities’ labs into commercially viable products. How has the country managed to attain this level?

The UK has rightly gained a strong reputation in developing commercial value from its academic institutions. The amount of patents, volume of industry relevant research and number of commercial spin outs from UK institutions have all increased significantly in the past two decades.

Cambridge and Oxford, in particular, enjoy international renown in this space. Companies such as Oxford Nanopore Technologies - the rapid decentralized genomics platform which achieved a market capitalized of almost £5bn in its Initial Public Offering in London earlier this year - and ARM Holdings - the smartphone chip designer purchased by Softbank for £24bn in 2018 - pay testament to this.

Beyond the Golden Triangle, many other UK universities are beginning to get more effective at IP commercializing.

But beyond the Golden Triangle, many other UK universities are beginning to get more effective at IP commercializing. Cardiff, Dundee and Leeds have all greatly improved their entrepreneurial impact according to the latest domestic rankings, with Queen’s University Belfast impressively topping the list. Between 2003 and 2018, over 3000 IP-based spinouts were created by UK universities, whilst over 1% of all patents registered in the UK between 1999 and 2018 have been from Higher Education Institutions.

The UK has achieved this chiefly through three mechanisms. First and foremost, the UK has long placed great value in its universities and academic institutions. It ensured funding - both through general taxation and by enabling universities to raise private capital through tuition fees - has been in place to retain their world leading status. It has also sought to provide significant, long-term investment into basic research, which, taken together, has ensured a steady stream of bright ideas being generated in the first place.

Access to seed funding - investment capital to commercialize viable ideas - has been another critical factor. In the UK, public bodies such as UK Research and Innovation (UKRI) and Innovate UK and government initiatives such as the Connecting Capability Fund and Higher Education Innovation Fund have helped provide significant finance to prospective spin-outs. Meanwhile, the emergence of internal funds, such as Oxford Science Innovations and Cambridge Innovation Capital, have raised hundreds of millions in venture capital, whilst direct partnerships with investment funds and equity crowdfunding are increasingly being used as other effective routes to financing. Finally, successive administrations have also sought to foster the links between research institutions and industry to capitalize on commercially viable ideas. This has been a key component of Industrial Strategies in the past decade and initiatives, like the Knowledge Transfer Partnerships Scheme, 'Getting Smarter' strategy and the UK Government Office for Technology Transfer, which have sought to extract greater value from public IP and intangible assets and foster links between research and business.

There remains a vast untapped potential in UK research institutions that could be worth billions to the economy. The country needs to go much further to realize this potential. The UK can learn from Japan, Korea, Finland, Germany and France, all countries that excel in developing research and IP into commercial success. But it is from the US in particular, where we can learn the most. Massachusetts Institute of Technology (MIT) alone has produced 26,000 spin-outs that have a total annual turnover of $2trn - almost two thirds of the UK’s entire 2020 GDP - and which have created around 3 million jobs. The UK is reputed both for its innovative research and its entrepreneurial drive. The economic potential of combining these two factors more effectively is enormous and must be the focus of long-term economic plans for growth in the UK, as it aims to bounce back from Covid-related damage and firmly establish itself in a post-Brexit world.

Copyright: JUSTIN TALLIS / AFP