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https://knowledgeasset.blog.gov.uk/2020/11/30/the-knowledge-economy-innovation-in-the-uk-public-sector/

The knowledge economy & innovation in the UK public sector

Posted by: , Posted on: - Categories: HM Treasury

In HM Treasury, officials spend a lot of time looking at charts, figures and other data to assess the best policy options.

One data trend that has caught our attention in recent years is the growing value of intangible assets (such as IP, R&D, know-how) compared to physical assets such as property. Two charts below show this. The first comparing the world’s largest companies in 2005 compared to 2020, and the second comparing the amount of value attributed to Tangible assets versus Intangible assets.

These graphs have a number of interesting implications for policy makers. A significant point is that the largest companies 15 years ago had lots of physical assets – factories, oil reserves and buildings. By contrast, the value of the leading companies in the world today is not in their physical assets but in their IP, R&D, know-how and data – intangible or ‘knowledge assets’. It is also noteworthy that even during a decade of slow GDP growth and systemic shocks such as the COVID pandemic, that the combined value of the ten largest companies has grown by five times since 2005 and is now more than $10 trillion.

A team in the Treasury – the Knowledge Assets Team – has considered this trend and how the dynamics driving the prosperity of these large companies is relevant to the UK public sector. In the public sector, our traditional accounting approach to measuring our intangible assets values these assets at £35bn, which is a relatively small amount compared to other asset classes. But using broader definitions of the value of intangible assets in the public sector is much greater – ranging between £100bn and £150bn according to internal analysis in the Treasury and external experts. This is likely to be a conservative valuation because it is based on cost rather than potential value.

These numbers sound very high, but what do they actually represent?

One of the most important investments the public sector makes is into R&D, and the Government has set becoming a science superpower as a key objective for the UK.  The UK public sector operates many laboratories, research organisations, many of whom are world leading at what they do. The National Physical Laboratory (NPL) is a good example of that. Its focus is on accurate metrology which is an underpinning requirement for an advanced economy. But in conducting this mission it develops an array of complex technologies ranging from Alan Turing’s development of the ACE computer in the late 1940s to quantum computing techniques to advanced ultrasound breakthroughs being applied to target diabetes and cancer today. Likewise, advanced research organisations in the US such as DARPA and Bell Labs have prospered by taking with blue sky academic breakthroughs and translating them into real inventions.

Spillovers, synergies & scaling up: a framework

Academics studying intangible assets have identified a number of features that differentiate them from traditional asset classes – excellently set out in a book by Jonathan Haskell and Stian Westlake “Capitalism without Capital”. Understanding these is crucial to getting the most out of intangible assets – and building the ground-breaking innovations that they enable.

These can be categorised under the headings of the four S’s:

  • Spillovers
  • Synergies
  • Sunk costs
  • Scaling up

Spillovers

Many R&D breakthroughs have their most valuable uses outside of their original purpose. As an example, scientists at the MOD’s research lab utilised the technology of a nuclear biologic suit and repurposed the technology by making mobile phones waterproof. Being able to transport innovations from one field to another is a crucial feature of many innovations.

Synergies

Another crucial success measure is when one intangible asset is combined with another – to help create greater benefit. For example, a dataset might have very little value at first, but once combined with analytical know-how or infrastructure such as a cloud supercomputing can have great impact. This fusion process helps to give birth to new innovations which can have significant benefits.  Google’s success emerged from combining the page-ranking technique developed by Larry Page and Sergei Brin with a new way of auctioning advertising. In the UK public sector, CT scanning was developed through a surprising combination of EMI, the music company, with the NHS.

Sunk costs

Investments into intangible assets are ‘sunk costs’ – unlike an investment into a property which has a ready resale value. The value is often closely tied to the team and the organisation where the investment has been made. At the same time, getting strong value out of the investment often requires forging strong partnerships with other organisations.

Scaling-up

Furthermore, intangible assets lend themselves to scale because they are ‘non-rivalrous’: for example, a dataset can be used multiple times in different locations, as well as being used simultaneously, unlike a physical asset such as an item of machinery. Mastering scale in managing intangible assets marks a crucial difference between having a good idea and having ground-breaking impact - whether in early computing or in quantum technologies being developed today. This requires prototyping, investment and business acumen. A good example of scaling up in the UK public sector is Fusion energy, which could be a source of almost unlimited safe elecricity. The UK Atomic Energy Authority has developed significant know-how over many years through its large scale experiments, as well as diverse spin off technologies such as Tokomak Energy or a advanced robotics team, called AI Luffy, which offer a different pathway to achieving scale.

Watch innovation in action…

The world’s leading companies and markets have become extremely proficient at managing spillovers, synergies and scaling up. But Silicon Valley is not the only place where leading innovation takes place. The UK’s public sector has many vibrant labs and policy units, which work on ground-breaking innovations. Between July - October 2020, the National Physical Laboratory hosted a series of presentations by leading innovators across the UK public sector that showcased a selection of these inventions. The presentations ranged from Genomics, to AI technologies, Fusion energy, to environmental science.

 

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