Innovation demands more than tax breaks and education schemes

A surge in innovation is possible but it demands more than tax breaks and education schemes
Wheel of fortune: Sir James Dyson, pictured driving his favourite car, the Mini, overcame a lack of government support

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When Sir James Dyson took the bag out of the vacuum cleaner in 1983, he was dismissed as an oddball with dangerous ideas. Manufacturers and distributors saw his designs as a threat and shut him out of the British market. Development agencies turned down his request for a grant to build a factory in Wales. The former theatre designer turned engineer teetered on the edge of bankruptcy.

Today, Dyson’s company employs more than 2,000 people in Malmesbury, Wiltshire, half of them engineers. Much of its production now takes place in Asia but Dyson plans to invest £250m in its base, creating 3,000 science and engineering jobs by 2020.

The Dyson story tells us something troubling about government policy towards creativity and business in Europe, which appears at best inactive, at worst obstructive. For every Dyson that swept to market dominance, how many other creative entrepreneurs have stumbled for lack of support?

Now that only high-end manufacturing remains viable in Europe – and even that may change – governments need to find ways to stoke creative thinking and identify promising creative enterprises at the conceptual stage. Policy makers increasingly talk about Europe’s “creative edge” but are governments aware of what is needed to secure the continent’s future as the home of world-beating innovation and design?

“Awareness is definitely increasing,” says Sir George Cox, former chairman of the Design Council and author of the influential Review on Creativity in Business commissioned by the UK’s Labour government in 2005. “But there is still so much that must be done,” he adds.

The report declared boldly that “greater creativity is a key to greater productivity” and called on government to champion creativity, not just in artistic fields, but in every sector of the economy.

“I didn’t think my report was going to transform the world,” says Cox, a former aeronautical engineer and entrepreneur, now a board member of NYSE Euronext, the transatlantic exchanges operator. “But you hope that you can move the thinking and understanding forward a bit.”

The report called for three broad actions by government to boost creativity in business: offer incentives for research and development; broaden education to equip students with creative skills; and raise awareness of the value of creativity through centres that showcase creative enterprise.

But Cox admits that a change of government and the recession meant that the implementation of his recommendations has been uneven. “Hard times force you to rethink how you do things – these days we can’t compete on price, so we have to earn our living from creativity.”

For European governments, that means broadening the scope for tax credits in R&D, enabling companies to explore areas with some degree of risk. Almost all EU governments have adopted R&D tax credit schemes and research suggests that these can stimulate $3 of investment for every $1 in subsidy.

But experience across Europe has been mixed. Germany is responsible for much of the increase in R&D spending in recent years and the country is home to Volkswagen – the world leader in research investment – but the German government offers tailored grants rather than R&D tax credits. France and Spain top the chart for R&D subsidy rates but have very different levels of investment.

The OECD warns that R&D tax credit schemes favour established multinational firms at the expense of young, domestic start-ups that pioneer innovative research. Most start-ups do not have enough taxable income to benefit from tax credits but they are often the most creative enterprises and are responsible for almost 50 per cent of new employment since 2001.

Hungarian software company Prezi is a prime example of a young European start-up that has grown into a serious global player, offering a product that is both creative and functional. The cloud-based tool allows users to zoom in and out of presentations online or offline and now boasts more than 40m users, a figure that is growing by 55,000 a day.

Peter Arvai is the co-founder and chief executive of Prezi and from a sun-filled room in Silicon Valley he describes to me over Skype how he and two friends – an artist and a computer scientist – turned a creative idea into an innovative tool with mass appeal.

“It seemed ridiculous at the time when we sat down in a café in Budapest in 2008 to plan this – we wanted to take on Google, Microsoft and Apple. But I’m glad we did.”

Arvai’s experience illustrates the struggle of young, creative companies trying to attract government and investor support. “We worked for almost a year on the first version of Prezi. This was in 2008 – this was a time of recession so people weren’t investing in start-ups in general, but in particular not in companies in Hungary.”

Did the enterprising team receive support or interest from the Hungarian government? “No, we did not,” Arvai says.

The online company won investor interest with an early prototype, however, and now employs nearly 100 engineers at its headquarters in Budapest and more than 30 staff at its operations in Silicon Valley.

Arvai is frustrated by the failure of governments in Europe to create the conditions for start-ups to emerge.

“The lack of a sense of urgency in Europe is probably its biggest problem. The only way we can address this issue is through a mindset change, not through tax codes or changing company registration rules.”

Arvai cites the Estonian start-up Skype: “All of a sudden, Estonians start believing that they could be competitive through pure creativity. As long as they could come up with a product that the world needed and was improving people’s lives, then they could compete in that global economy.”

Arvai points to a recent survey by the Economist magazine that now ranks Estonia as Europe’s most entrepreneurial country.

Around the same time as the Prezi team was sketching ideas in a Budapest café, a number of universities in Dublin were rethinking their approach to educating students. The result was University College Dublin’s Innovation Academy, which trains high-flying researchers in creative skills and then connects them with start-ups.

The academy was part-financed by grants from the European Commission and the Irish government, and its staff praise it as a model of education policy that promotes creativity with commercial applications.

“I’m not sure if governments are best placed to drive innovation and creativity,” says Dan Hayden, an innovation specialist at the academy. “But institutes like ours can be a real driving force and government support for that is crucial.”

Even George Cox admits that the challenge of arming European businesses with creative and innovative thinking demands more than tax breaks and education schemes.

He is convinced that the potential for a creative surge is present in Europe if governments could adopt the solutions in promoting research, seeking out and championing young enterprises and reshaping education. But the risks of inaction are great, and Arvai is forceful on the point: “This is by far the most important thing facing European society in the next five to 10 years. And we have a lot of catching up to do.”

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