Innovation policy: Driving equity or driving inequality?

The need to boost levels of innovation in the UK is at the heart of the recent Green Paper on Industrial Strategy, and few would argue with the general proposition that innovation is good for growth. New products, new services and new ways of doing business help firms to win new customers and sell more both in the UK and internationally.

However, innovation can also have strong labour market effects which may not be so desirable. Innovation in modern production processes can lead to a loss of semi-skilled or unskilled jobs. More complex products and services may also increase the demand for employees with strong ICT skills at the expense of the less skilled. As Bent Brynjlofsson and Andrew McAfee argue in the ‘Second Machine Age’, both mechanisms mean that accelerated innovation can lead to greater inequality in opportunity and earnings, a trend which may be exacerbated by public policies which promote innovation.

The way public support for innovation is allocated may also exacerbate inequalities in competitiveness between firms. Public support for innovation awarded through competitions or challenges tends to reward the best projects and the best companies. Our own recent research suggests that this leads to some leading-edge firms attracting a disproportionate share of public support for innovation. Success breeds success in this respect with the potential to increase the gap in competitiveness between the winners and losers in these Challenges. Recent OECD research has also made a similar point, emphasising the growing gap between high productivity, leading edge companies, and less innovative low productivity firms.

So, innovation may promote growth and productivity but it can also drive inequality both in job opportunities and competitiveness. But does it have to work like this?

Some recent research by Amos Zehavi and Dan Breznitz (February 2017, Research Policy) provides an alternative perspective describing what they call ‘Distribution sensitive innovation policies’ or DSIPs. The objective here is to target innovation policy measures to actively reduce inequalities and at the same time stimulate advances in growth and/or productivity. In their research they describe four very different DSIPs adopted in Israel and intended to counter either inequalities in competitiveness (between sectors or locations) or directly address inequality of opportunity:

  • Measure 1 was funding to support R&D in traditional, low-tech industries where productivity lags Israel’s rapidly growing high-tech sector.
  • Measure 2 also funded R&D but in the relatively under-developed Galilee and Negev regions of Israel.
  • Measure 3 was a pre-competitive procurement scheme aimed to stimulate innovations which would enable disabled individuals to live and work independently.
  • Measure 4 was a group of initiatives targeted at promoting inclusion among Arab-Israelis, a group which has experienced high levels of unemployment. It included subsidised recruitment by high-tech firms, training subsidies and incubator development in predominantly Arab areas.

This raises the question of how UK innovation policy can be re-configured to drive both national growth and achieve the distributed ‘growth for all’ highlighted in the Industrial Strategy Green Paper?

Is there scope, for example, to implement regionally or locally differentiated support mechanisms for R&D and innovation along the lines of Zehavi and Breznitz’s Measure 2? Levels of R&D grant or loan support could be varied between areas to promote R&D investment in lagging UK regions. Similarly, there is some evidence that public R&D support is more effective (has higher additionality) in low-tech sectors. Should these sectors be the focus of some Industrial Strategy Challenge Funding? Pre-competitive procurement policies such as SBRI could also be explicitly targeted at developing products or services to enhance the productivity and well-being of those who find it difficult to work (see Measure 3 above).

Innovation is also not just about new-to-the-market products or services. As the Green Paper makes clear (p. 15) ‘we have often been slower than competitors to take up and deploy existing technologies: for example, the UK makes less use of robotics and automation than most other countries in Western Europe’. Promoting broader deployment of technologies such as robotics would help to counter inequalities in competitiveness by raising productivity levels among less productive UK firms.

Innovation is a two-edged sword. It certainly has the potential to drive growth and productivity but also can also fuel inequality. If we are serious about ‘growth for all’, embracing DISPs may be one answer. At the very least, we need to think about the potential for unanticipated and unwelcome consequences which may follow from new innovation policies.


Stephen Roper is Director of the Enterprise Research Centre and Professor of Enterprise at Warwick Business School.

Please note that the views expressed in this blog belong to the individual blogger  and do not represent the official view of the Enterprise Research Centre, its Funders or Advisory Group.