TSC TECHNOLOGY STRATEGY: ECONOMIC ASSESSMENT OF … · 1) Are forecast to be large AND where the UK possesses a strong capability; or 2) Where the predicted growth rate of the market

TSC TECHNOLOGY STRATEGY:

ECONOMIC ASSESSMENT OF THE

FRAMEWORK FOR

‒ MARKET PRIORITISATION

MARCH 2016

www.ts.catapult.org.uk TSC PUBLIC 2

Transport Systems Catapult

Transport Systems Catapult (TSC) is the UK’s technology and innovation centre for Intelligent

Mobility – the future of transport systems. It exists is to drive UK global leadership in intelligent

mobility, promoting sustained economic growth and wellbeing, through integrated, efficient and

sustainable transport systems. Its vision is to create an environment that will make the UK a leader in

transport systems innovation.

Oxford Economics

Oxford Economics was founded in 1981 as a commercial venture with Oxford University’s business

college to provide economic forecasting and modelling to UK companies and financial institutions

expanding abroad. Since then, we have become one of the world’s foremost independent global

advisory firms, providing reports, forecasts and analytical tools on 200 countries, 100 industrial

sectors and over 3,000 cities. Our best-of-class global economic and industry models and analytical

tools give us an unparalleled ability to forecast external market trends and assess their economic,

social and business impact.

Headquartered in Oxford, England, with regional centres in London, New York, and Singapore, Oxford

Economics has offices across the globe in Belfast, Chicago, Dubai, Miami, Milan, Paris, Philadelphia, San

Francisco, and Washington DC. We employ over 230 full-time people, including more than 150

professional economists, industry experts and business editors—one of the largest teams of

macroeconomists and thought leadership specialists. Our global team is highly skilled in a full range of

research techniques and thought leadership capabilities, from econometric modelling, scenario framing,

and economic impact analysis to market surveys, case studies, expert panels, and web analytics.

Underpinning our in-house expertise is a contributor network of over 500 economists, analysts and

journalists around the world.

Oxford Economics is a key adviser to corporate, financial and government decision-makers and

thought leaders. Our worldwide client base now comprises over 1000 international organisations,

including leading multinational companies and financial institutions; key government bodies and

trade associations; and top universities, consultancies, and think tanks.

March 2016

All data shown in tables and charts is Oxford Economics’ own data, except where otherwise stated and

cited in footnotes, and is copyright © Oxford Economics Ltd. The modelling and results presented

here are based on information provided by third parties, upon which Oxford Economics has relied in

producing its report and forecasts in good faith. Any subsequent revision or update of those data will

affect the assessments and projections shown

To discuss the report further please contact the TSC Technology team on

[email protected]

http://www.ts.catapult.org.uk/


Contents

Executive Summary ......................................................................................................... 4

1 Introduction .............................................................................................................. 5

2 Testing the Framework ............................................................................................. 7

2.1 Review of the available literature and evidence................................................................................ 7

2.2 Relevant concepts from economic theory ......................................................................................... 9

2.3 Review of similar programmes ........................................................................................................ 12

3 Our Assessment .......................................................................................................16

3.1 Overall assessment ........................................................................................................................... 16

3.2 Supplementary questions ................................................................................................................ 16

4 Appendix 1 ............................................................................................................... 18

5 Appendix 2 ...............................................................................................................19

6 Appendix 3 .............................................................................................................. 20

7 Bibliography ............................................................................................................. 21



Executive Summary The Transport Systems Catapult (TSC) was created in 2013, as one of ten Catapults that have been

established to date, each with a specific remit to drive innovation and job creation in sectors with

transformative potential for the UK economy. Its focus is on supporting Intelligent Mobility (IM) —

essentially how the latest emerging technologies can be used to transport people and goods in ways that

are smarter, quicker and easier.

To best ensure delivery against this ambition TSC commissioned Oxford Economics to provide an

external critique of its proposed framework for how to assess which types of technology (or ‘market

segments’) to support in the years ahead. The essence of the framework is to prioritise market segments

that are forecast to be large AND where the UK possesses a strong capability; or where the predicted

growth rate is exceptionally high AND there are currently no established market leaders.1

We have reviewed both grey and academic literature and the approaches of similar innovation

programmes both in the UK and internationally to identify the kinds of criteria that a robust decision

framework might want to explore. On the balance of available evidence, we think TSC’s focus on the

four criteria of projected market size, growth potential, national capabilities and missing

market leadership is the right approach. It is in line with the approaches taken by other Catapults;

guidance from The Department for Business Innovation and Skills (BIS); and similar programmes

internationally.

We would advocate, however, a fifth criterion which—recognising why the Catapult was established—

requires TSC to clearly articulate the rationale for intervention and the market failure that is to be

addressed. TSC has considered market failures in its thinking to date, but we think this criterion would

help it make the case to stakeholders for why it has chosen to commit resource to a particular market

segment; and determine what sort of market intervention is most appropriate.

In addition, we propose five supplementary questions that TSC should consider when market segments

have been prioritised. These questions have emerged from our review of the literature and our

experiences and expertise providing economic analysis across a range of sectors.

1. Is there absorptive capacity?

2. Do capabilities exist to exploit the innovation downstream?

3. What are the characteristics of the market?

4. What is TSC’s approach to long incubation periods?

5. Should TSC adopt a partner-focused dimension to its assessment?

We are not proposing these questions form primary criteria, nor that they must all be satisfied when

deciding projects to support. Rather, consideration of them on a case-by-case basis, combined with TSC

judgement, may help to identify the most appropriate projects to support in each chosen market

segment.

1 (Transport Systems Catapult 2015)



1 Introduction The Catapult programme was launched in 2011 with the explicit aim of raising the level of innovation

in the UK and following a recommendation by Dr Hermann Hauser for the establishment of a network

of innovation and technology centres.2 Each Catapult aims to promote innovation and improve the UK’s

ability to commercialise its strong research base, in order to drive job creation and economic growth.

To date, ten Catapults have been set up across the country.3 A further review of the programme by Dr

Hauser in 2014 recommended a target of 30 be created by 2030 at a rate of one to two per year.4

The Transport Systems Catapult (TSC) was launched in 2013 with the aim of driving and promoting

Intelligent Mobility (IM) in the UK. The Catapult works by facilitating collaboration between a diverse

range of organisations, from academia to firms in the transport and technology sectors, providing a

platform for pressing transport challenges to be tackled. The intention is that funding for TSC, and other

Catapults, should be generated on a ‘one-third’ model. Under this, funding should be generated from

three broadly equal sources: business funded R&D contracts; projects jointly funded by the public and

private sectors (both of these are competitively won); and core infrastructure funding from government.

Simply speaking, IM uses the latest technology to move people and things faster and smarter. It does so

by connecting traditional players in the transport sector with producers of new products and services in

areas such as mobile devices, open data, integrated systems and the Internet of Things. Driverless cars

are an example of IM.

According to research commissioned by TSC in 2014, the global IM market will be worth more than

£900 billion annually by 2025, and will account for approximately one percent of global GDP. This

represents impressive growth from the estimated annual value of £140 billion in 2014.

TSC is currently developing a technology strategy, which includes a framework for assessing which types

of technology (or ‘market segments’) the Catapult should focus on supporting in the years ahead. In its

current incarnation the framework establishes four main criteria (paired into two overarching

requirements) for how to prioritise market segments, namely as those that either:

1) Are forecast to be large AND where the UK possesses a strong capability; or

2) Where the predicted growth rate of the market segment is exceptionally high AND

there are currently no established market leaders.5

Oxford Economics was commissioned by TSC to critique this framework. The motivation for this work

was a need for TSC to have some assurance that their framework is sufficiently robust, and that it stands

up to scrutiny from external stakeholders, some of which are public bodies.

In order to critique the framework, our methodological approach drew on three sources:

A review of the available literature and evidence;

2 (Hauser, The Current and Future Role of Technology & Innovation Centres in the UK 2010) 3 Cell & Gene Therapy, Digital, Energy Systems, Future Cities, High Value Manufacturing, Medicines

Technologies, Offshore Renewable Energy, Precision Medicine, Satellite Applications, Transport Systems 4 (Hauser, Review of the Catapult network 2014) 5 (Transport Systems Catapult 2015)



A consideration of additional key factors from the literature, our knowledge of

economic theory, and our expertise applying that knowledge across a range of sectors;

and

A review of similar innovation programmes in both the UK and internationally.6

Throughout we considered whether there are other primary criteria that ought to be incorporated in the

approach, in addition to or instead of the four that TSC proposes, as described above.

This report sets out our findings and our assessment of the changes that TSC might wish to consider to

its framework in light of these.

6 In undertaking this critique we have focused on the areas which we feel require the most scrutiny. As such, this

should not be regarded as an exhaustive exercise, but rather one that covers the elements that we think are most

important.



2 Testing the Framework

2.1 Review of the available literature and evidence

In exploring the kinds of factors that TSC might want to consider in its framework our starting point

was to explore the rationale for public intervention in innovation generally, and in this sector in

particular. An examination of what the academic and public sector (grey) literature says about this

guided our thinking. The most important literature in this regard is set out below, before the

implications for TSC are highlighted.

We have mainly focused on research papers published by UK government departments, including the

Department for Business Innovation and Skills (BIS) and Her Majesty’s Treasury (HMT), as well as

academic papers.

2.1.1 The case for intervention to boost innovation

There is a substantial body of literature covering the rationale for public intervention in research and

innovation. The literature identifies a number of ‘failures’ in the markets for goods and services, and in

the system of people, firms and institutions that are key to the innovation process. The presence of these

‘market’ and ‘system’ failures mean that innovation will tend to be under-provided if left solely to the

market.

Market failures capture the fact that for a variety of reasons, a freely-functioning market will produce a

level of innovation that is socially sub-optimal. There could be several underlying reasons for this:

would-be investors may not be able to reap the full social reward of their investment themselves; private

actors may simply find the uncertainty of such ventures too risky to bear; monopoly power in some

markets may impede innovation; or willing innovators may find financing their work difficult due to the

challenges of convincing lenders.

System failures can take a variety of forms, but seek to capture the ways in which the capabilities and

context of the organisations that might drive innovation could be holding them back. This could be due

to: limited internal capability to innovate; the failure to coordinate efficiently with other actors, thereby

risking duplicate efforts; and government-related barriers to innovation caused by regulatory design or

inadequate funding of primary research.

BIS conducted a thorough review of the literature and condensed these market/system failures into

eight different categories which are set out in the tables below.7

7 (Department for Business, Innovation and Skills 2014)



Fig. 1. Market failures associated with innovation

Market

failures

Description

Character of

science and

technology

Research and innovation is an inherently risky activity that is also subject to great uncertainty.

Confronted with such uncertainty risk averse firms will underinvest in research and innovation.

Externalities Innovation generates benefits for individual firms that invest in the research, but it also benefits

other economic agents like other firms, consumers and society at large. These external impacts

mean that the full benefits of innovation tend not to be factored into individual firms’ investment

decisions, resulting in underinvestment if left solely to the market.

Market

power

A central idea of modern economics is that imperfectly competitive markets fail to allocate

resources efficiently. Monopolies have the power to act as a barrier to entry, for example by using

the scale of their operations to undercut potential entrants. This may stifle innovation by

deterring innovative potential entrants from entering the market due to fear of financial losses.

Information

asymmetry

Specialised technical and/or market knowledge mean not all actors have the knowledge to make

informed decisions. This is particularly an issue for financing innovation. At the point of

investment, providers of finance often lack the capacity to verify the likely returns from

innovating activity, and therefore a sub-optimal level of finance and subsequent innovation may

occur. This issue is particularly acute for early-stage development of a product.

Fig. 2. System failures associated with innovation

System

Failures

Description

Capability

failures

Economic theory assumes that firms function efficiently and will exploit opportunities when

they arise. However, firms may have internal deficiencies, such as a lack of technical

understanding or absorptive capacity that prevent this. Firms may therefore be considered to

lack the capability to capture innovation opportunities, but information and training could help

to rectify this.

Network

failures

Fragmented networks and poor cooperation between agents can lead to coordination failures,

captured by a duplication of resources and effort. Networks may also become ‘locked in’ to

existing technological regimes, in the sense that a critical mass of users may have been

established that act as a barrier to innovation. New, more efficient technologies may emerge

but may fail to enter the market because successful implementation requires a sufficient

number of agents to switch simultaneously.

Institutional

failures

Institutional failures can arise from inadequate regulations and technical standards that are not

conducive to innovation. Also, weaknesses in “soft institutions” such as culture, which can

affect trust between businesses, may act as a barrier to innovation, especially where

collaboration is involved.

Infrastructure

failures

Infrastructure failures are taken to be a kind of government failure, in which a government

policy response has been inadequate. This may take the form of an under-investment in basic

research or insufficient educational investments which are both critical to innovation.



2.1.2 The case for intervention in the IM sector in particular

BIS went a step further by identifying the key barriers to innovation across a number of sectors of the

economy, and relating these back to the market and system failures which are most relevant.

In the context of IM, the most relevant sector it considered was Intelligent Transport Systems (ITS).8

The barriers and market failures identified as being most relevant were:

The scale and integration—efficiently integrating data into ITS products requires

large, standardised datasets that cut across geographies and modes of transport. A

mixture of network and infrastructural failures prevent the market from managing this

process effectively.

Information asymmetry—potential customers of ITS products do not fully perceive

what ITS can do and what the benefits to them might be. This creates an extra element

of uncertainty that discourages investment in innovative activities by risk averse firms.

WHAT DOES THIS MEAN FOR TSC’S IM FRAMEWORK?

The literature refers to market and system failures as the core rationale for public intervention in

innovation, with further research identifying specific failures in ITS. When deciding which sectors to

support and how, an appreciation of the specific market failure(s) that TSC is trying to address will

help to determine what form of support is most appropriate and who the priority recipients of that

support should be.

2.2 Relevant concepts from economic theory

The literature review together with our expertise of applying economic theory and concepts to a range

of issues in multiple sectors, suggests to us that there are four additional factors that TSC should take

into account. Considering these factors will help TSC decide which projects to support within prioritised

market segments.

2.2.1 Absorptive capacity

The concept of absorptive capacity was first defined as “… the ability to recognise the value of new

knowledge, to assimilate it, and to apply it to commercial ends.”9 Essentially, the concept tries to

capture the extent to which firms are receptive to externally generated knowledge and ideas which they

can then exploit. The role that absorptive capacity plays in successful innovation is well documented. It

can be thought of in two dimensions. The commercial success of innovation in a given sector is partly

dependent upon the ability of other firms in that sector to build upon and extend the new knowledge.

However, arguably at least as important is the idea that firms in other sectors can also benefit if they

are able to recognise the value of new technologies, methodologies or information generated in a

different industry, and apply it for commercial purposes. Those purposes may only be indirectly related

8 Defined as comprising “various forms of digital systems, services and infrastructures that enhance the safety,

ease and efficiency of use of the transport system”. Though similar, IM centres on the needs of the end-user

(passenger and freight-haulier) rather than the transport network, with a greater focus on combining data across

a range of technologies to ensure efficient transportation. 9 (Cohen and Levinthal 1990)



to the initial goal of the work. Firms operating in entirely different sectors exploiting advances made in

cybersecurity in the IM sector are an example of these broader ‘spillover’ impacts.

Measuring absorptive capacity in practice however, in either dimension, is more challenging. The

general approach taken in the literature is to identify two categories of proxy indicators:10

Input indicators such as R&D continuity, which attempt to measure whether firms

have the resources, skills, or capabilities needed to assimilate new innovation. R&D

measures are typically used because they provide proxies for an organisation’s prior

knowledge base, which is thought to be a precursor for being able to recognise external

opportunities.

Output indicators, such as industry publications and patents, which demonstrate an

ability to exploit external knowledge and apply it to commercial ends. However, since

the propensity to produce publications varies by sector, so too does the applicability of

these measures across different sectors.11

A relatively small number of studies have tried to measure absorptive capacity in the UK. A report by

the Government Office for Science constructed an industry-level absorptive capacity index and

compared scores across sectors.12 The study found that manufacturing and knowledge-intensive service

sectors appear to have the highest levels of absorptive capacity.13 Within the manufacturing sector, it

also found that companies based in Wales and Scotland demonstrated higher levels of absorptive

capacity, and there was evidence of ‘clustering’ especially in the North East and East of England.14

A further report by the Government Economics Service reviewed the evidence around absorptive

capacity across all sectors, and also found evidence of regional disparities. In addition, the report found

evidence suggesting that smaller firms are less equipped to successfully develop absorptive capacity.15

Given that the assimilation of new ideas can occur both within and between industries, it is an open

question as to the importance of geographically local absorptive capacity, in addition to high levels of

sectoral absorptive capacity, when it comes to allocating support.


The challenges of measuring absorptive capacity mean it would be difficult to include it as an explicit

criterion in TSC’s framework. However, studies which have tried to measure it in the UK have found

evidence of industrial and regional disparities, as well as constraints on smaller firms which could

potentially have an impact on TSC supported projects.

Further research would be needed to understand the extent of these issues and how TSC activity

might be affected. As a starting point, the research would need to collect data on the input and output

indicators of absorptive capacity, such as R&D continuity and the employee characteristics

associated with the exploitation of knowledge, such as the percentage of graduates employed. For a

fuller picture, these data would need to be supplemented by business surveys to capture the multiple

10 (Duchek 2013) 11 See Appendix 1 for a list of indicators that have been used to measure absorptive capacity in the literature 12 (Government Office for Science 2013) 13 See Appendix 2 14 It was suspected that the low rank of London and also the West Midlands reflects the relatively lower

manufacturing bases in those areas 15 (GES, Government Economics Services Group on Growth Innovation Project 2014)



aspects of absorptive capacity, such as the extent to which firms seek external information and the

capabilities and development of staff.

Since absorption of new innovation can take place obliquely, in very different industries to those that

initially fostered the advance, TSC may want to focus on measuring the absorptive capacity of firms

within the IM sector only. However, it will need to take a view on the extent to which local absorptive

capacity is also important, as this could influence the scope of measurement and the types of projects

TSC chooses to support.

2.2.2 Constraints of downstream firms

National capabilities are a key part of TSC’s current framework. While innovating firms in the IM sector

may possess these capabilities however, the scaling of that innovation or production of physical

products using it will also depend on the capacity and capabilities of downstream firms.

Take the example of a TSC supported project which leads to the development of a new product in the

UK but which requires overseas outsourcing for a large part of the production process. Perhaps this may

be because domestic suppliers are unable to scale to produce the final product cost-effectively. Although

the project might have been successful in terms of bringing a product to market, the job creation impacts

on the UK economy may be negligible. This suggests potential tensions between the economic

contribution from a venture and its job creation potential, which TSC will need to be aware of in its

decision making.

2.2.3 Market characteristics

The ultimate aim of the Catapult programme is to increase innovation, create jobs, and generate

economic growth in the UK. This suggests that projecting future market size, and codifying this

explicitly as a criterion for selecting which markets to support is prudent. TSC does this by focusing on

markets that are projected to be large or where the growth rate is predicted to be exceptional.

However, an appreciation of the emerging structure of a market is also worthy of consideration in order

to maximise the impact of TSC’s interventions. For example, the presence of market leaders in adjacent

industries that could easily move into a given sub-sector may affect the ability of UK firms to be

successful in some markets, even when they have the capabilities, are in large or fast-growing markets

and are supported by TSC.

2.2.4 Incubation periods

TSC’s framework recognises market size, growth, capabilities, and a lack of market leadership as the

key parameters for choosing which markets to support. However, the time it takes to move from an

initial concept to a fully-fledged commercial offer is also an important consideration. In sectors that are

recognised to have no market leaders for example, investors may be unwilling to commit the financial

resources needed to develop new products because long incubation periods can increase the risk that

competitors will bring products to market first.

TSC can play a role when markets fail in this way, by supporting projects and taking on some of this

uncertainty risk. However, it may also decide that there are other market failures that it is better suited

to addressing, or that there is a greater imperative to support projects which are more likely to show

tangible results quickly to stakeholders.

In any case, TSC will need to make a strategic decision about its approach to projects where long time

lags can affect the ability of markets to fully develop.




Economic theory suggests that there are a number of additional considerations, besides absorptive

capacity, that TSC may want to take into account when deciding which projects to support.

TSC may need to identify the degree of downstream potential to exploit a new technology within the

UK, and assess the sector’s capability to do so through active engagement with innovating firms.

Considering market characteristics by, for example, reviewing the size structure of firms in adjacent

markets may also help to determine the extent of the risk for innovating UK firms.

Finally, TSC will also need to make a strategic decision about its approach to projects where it expects

there will be significant incubation periods between idea generation and commercialisation.

2.3 Review of similar programmes

Finally, as well as examining the theoretical literature and formulating a view of important economic

concepts to consider, we examined the experience of similar programmes, both within the UK and

internationally. In particular, we explored the general approaches and specific criteria used by similar

programmes and examined whether these suggested ways of improving TSC’s framework.

For programmes in the UK, we reviewed the approaches taken by a sample of other Catapults, and the

approach adopted by BIS when selecting future Catapults. We also looked in detail at two similar

programmes internationally, to see whether TSC’s approach was broadly consistent with established

and best practice.

2.3.1 Approaches taken by other UK Catapults and BIS

TSC is one of ten UK Catapults, so there are a number of options for comparison. We reviewed the

approaches of two Catapults as well as BIS’ stated approach for selecting new Catapults.

The Digital Catapult

The Digital Catapult became operational in 2013 and aims to help UK businesses unlock new value from

sharing proprietary data in faster, better and more trusted ways.16 To focus its resources, the Digital

Catapult has identified four ‘challenge’ areas within which it supports one flagship strategic project (in

brackets):17

Addressing the challenges around personal data privacy and trust (The Personal Data

Project)

Accelerating the integration of diverse data sets (The Open Source Data in Cities

Project)

Building next generation connectivity labs and city demonstrators for innovators to

develop in (The City White Space Demonstrator Project)

Accelerating digital creative content innovation in the reuse of content and catalogues

(The Copyright Hub Project)

Underlying the Digital Catapult’s approach for identifying challenge areas is a requirement to support

areas that have the potential to be high growth markets and which will build on existing UK

16 (About: Digital Catapult 2016) 17 (Digital Catapult 2015)



strengths.18 This is a very similar approach to that taken in TSC’s framework. Specifically, it shares

TSC’s focus on high growth markets and on UK capabilities.

The Satellite Applications Catapult

Launched in 2013, the Satellite Applications Catapult (SAC) seeks to create economic impact in the UK

through the exploitation of satellite applications and technologies.19 SAC has devised a framework of

broad priority areas, or ‘Programmes’, within which it executes its strategy.20 There are two types of

Programmes — ‘Focus’ Programmes and ‘Explore’ Programmes.

Focus Programmes define market sectors of strategic interest, in terms of their scope for adopting

satellite solutions. The two sectors so far identified are the Maritime and Transport sectors—the former

because of the often limited alternatives to satellites technologies, and the latter because of its growing

need for seamless connectivity.

Within the Explore Programme there are two areas of activity. ‘Explore Markets’ aim to identify new

Focus Programmes (the Agri-tech, Future Cities and Energy sectors are all currently being considered).

‘Explore Technologies’ look at emerging technologies and how they can be applied in Focus

Programmes, for example in areas like machine-to-machine communications.

From TSC’s perspective, SAC’s approach to identifying priority sectors in their Focus Programmes offers

the most insight. SAC uses two criteria:

There must be a significant opportunity, for which the Satellite Applications Catapult

should comprise an important element of the solution; and

There must be a reason for Catapult intervention, which normal market forces cannot

resolve.

Again, this approach closely aligns to TSC’s approach of focusing on potential market size and

capabilities. However, SAC’s explicit focus on the identification of explicit market failures as reasons for

intervention is an area that TSC should consider.

BIS

BIS states that it intends to use three distinct criteria for selecting future Catapults:21

That there is the potential for a large global market;

The UK possesses research excellence; and

UK businesses possess sufficient absorptive capacity.

TSC’s approach reflects the first two BIS criteria, with its focus on growth and UK capabilities. A greater

focus on absorptive capacity would in principle be a sensible dimension to add to TSC’s framework, as

discussed above. However, in practice, as set out in Section 2.2.1 there are challenges associated with

using absorptive capacity as a specific criterion for prioritising segments.

18 (RAND Europe 2015) 19 (Who we are: Satellite Applications Catapult 2016) 20 (Satellite Applications Catapult 2015) 21 (Department of Business Innovation and Skills 2014)




The approaches used by other Catapults and BIS have strong similarities with TSC’s approach,

specifically in their focus on UK capabilities, market size and growth as key criteria in their decisions.

However, TSC should consider whether explicitly identifying market or system failure, in the same

way that the Satellite Applications Catapult does, would be a beneficial addition. This fits neatly with

the market and system failures criterion outlined in Section 2.1.

2.3.2 International comparisons

As well as UK examples, there are a number of international programmes that also try to build on and

commercialise national research bases. These offer potential insights for the way TSC chooses sectors

to support.

The Cooperative Research Centres Programme (Australia)

Established in 1990, The Cooperative Research Centres Programme (CRC) is a merit-based grant

system that funds industry-led collaborations between researchers, industry and the community.

Funding is currently prioritised according to six government-selected “growth sectors”, which

correspond to sectors in which Australia already possesses a ‘comparative advantage’, such as Food &

Agribusiness.

Individual project applications are assessed against a number of selection criteria, some of which are

relevant to TSC’s approach. These include criteria around: 22

The expected industry outcome, including an identified problem to be solved, tangible

outcomes from the research activity and the commercial potential of expected

outputs;

Governance and management, including demonstrated expertise in managing the

process of commercialisation;

Education and training, with a requirement that projects show how they will

contribute to capacity and capability building in related industry and research sectors;

and

The expected national benefits, including how projects will improve Australia’s

competitiveness in the global economy and whether there are any anticipated

spillover effects.

The focus on growth sectors and comparative advantage is similar to TSC’s use of growth and UK

capabilities in its approach to prioritising segments. TSC’s criteria around growth potential and national

capabilities are further echoed in CRC’s approach to prioritising projects that are expected to yield

tangible outcomes which have commercial potential; and projects that will contribute to Australia’s

competitiveness in the global economy.

As an important part of the Australian Government’s National Innovation and Science Agenda, the CRC

programme has also been evaluated, most recently in 2012.23 This evaluation estimated for every AUS

$1 spent on the programme there was AUS $3 of benefit to Australia. This result also assumed that the

beneficiaries of the programme would have spent 50% of their R&D expenditure anyway, in the absence

of the programme.

22 (Australian Government; Department of Industry, Innovation and Science 2015) 23 (The Allen Consulting Group 2012)



Fraunhofer-Gesellschaft (Germany)

Created in 1949, Fraunhofer-Gesellschaft (also known as Fraunhofer) is Europe’s largest application-

oriented research organisation. There are 67 semi-autonomous institutes spread across Germany,

which are grouped into seven working alliances, devoted to research in the areas of Information and

Communication Technology; Life Sciences; Light and Surfaces; Microelectronics; Production; Defence

and Security; and Materials and Components.

Like the Catapults, institutes working in related fields coordinate work, but they also pool essential

resources and help to present a unified image in the R&D marketplace.24

Also like Catapults, Fraunhofer receive funding both from the public sector (approximately 30%) and

through contract research earnings (roughly 70%). Crucially for TSC, the criteria used to assess the

value of Fraunhofer institutes to the innovation system include:

Scientific competence, proved by the recognition of the scientific community;

A well-balanced financial mix of different independent sources;

Market success and entrepreneurial competence, proved by contracts with industry

and government; and

Professional networking with other Fraunhofer Institutes and externals.25

The focus on scientific competence and market success is somewhat different to TSC’s use of national

capabilities and market size in its approach to identifying market segments. Rather than looking

outward at the market opportunities, Fraunhofer demands evidence that institutes demonstrate a clear

ability for bridge the ‘valley of death’—all the way from primary scientific research to commercial

exploitation.


TSC’s capabilities-based approach reflects a similar focus on comparative advantage to the

Cooperative Research Centres programme in Australia. However, the focus on scientific competence

in Germany’s Fraunhofer programme suggests a further possible dimension that could be added to

TSC’s assessment criteria.

CRC’s funding support approach, which has been shown to have a positive net benefit, and

Fraunhofer’s more hands-on R&D approach, which has stood the test of time, both offer insights into

the other factors that each organisation thinks is important. These factors, which include governance

and management, education and training, and professional networking, are all important

determinants of absorptive capacity, as discussed in Section 2.2.1 and in Appendix 1.

Finally, CRC’s criterion around identifying the problem to be solved is similar to a requirement to

articulate the market or system failure justification for intervention, as suggested at the end of Section

2.1.2.

Appendix 3 gives further examples of international programmes that also aim to bridge the gap between

research and industry.

24 (Fraunhofer-Gesellschaft 2016) 25 (The Work Foundation 2010)



3 Our Assessment

3.1 Overall assessment

In summary, TSC has developed a framework to prioritise types of technology to support. The

framework establishes four main criteria (paired into two overarching requirements) for how to

prioritise market segments, namely as those that either:

Are forecast to be large AND where the UK possesses a strong capability; or

Where the predicted growth rate of the market segment is exceptionally high AND

there are currently no established market leaders

From our review of the evidence we think that this focus on market size, growth potential,

national capabilities and missing market leadership is the right approach, in the context of

bringing innovative IM products to market and stimulating high-skilled job growth in the UK.

TSC’s approach is also broadly in line with approaches taken by other Catapults that we have reviewed,

the approach stated by BIS in its assessment of future Catapults, and the approaches of similar

programmes internationally.

However, in our view there is one further essential criterion that TSC should explicitly incorporate in

its framework, which sets out the market or system failure that justifies TSC’s intervention. While

we are aware that TSC has considered market failures in their thinking to date, incorporating this

criterion would help to clearly articulate to stakeholders why it has chosen to commit resource to a

particular market segment (rather than let the market develop organically); and determine what sort of

market intervention is most appropriate.

3.2 Supplementary questions

In addition, we believe there are five supplementary questions that TSC should consider. We do not

suggest these questions form primary criteria, or that they must all be all satisfied. Rather, consideration

of them on a case-by-case basis, combined with TSC judgement about which are more important, may

help to identify the most appropriate projects to support in each chosen market segment.

Question 1: Is there absorptive capacity?

Though absorptive capacity is an important feature in successful innovation, challenges with measuring

it in practice make it difficult to incorporate explicitly as a criterion. However, TSC should consider

whether further research would help give a clearer picture of absorptive capacity in IM market

segments, and the extent to which it is an enabler of or a blocker to successful exploitation of innovation

in the sector within the UK.

The Community Innovation Survey, produced every two years, would be an important source of data on

the indicators used to measure absorptive capacity. Potentially, TSC could also use the survey to track

absorptive capacity going forward.26 Other data on local economic structure and workforce from ONS

surveys could also be used in such a benchmarking exercise.

26 (BIS 2014)



Since absorptive capacity is of shared interest across the Catapult programme, TSC should also consider

whether there is additional value in working with other Catapults to develop a consistent approach to

its measurement.

Question 2: Do capabilities exist to exploit the innovation downstream?

Downstream capability and competitiveness will play a fundamental role in determining whether the

UK can benefit from specific innovations developed here. Consequently, a consideration of these

capabilities, in terms of downstream firms’ ability to support cost-competitive production, is important.

An exercise to identify and qualitative assess the capacity to scale innovations in the UK, working with

IM partner firms, would be a good starting point. This would highlight any potential risks, and allow

mitigation strategies to be developed.

Question 3: What are the characteristics of the market?

There may be emerging features of some IM market segments which could constrain the ability of UK

firms to be successful. A review of the size structure of firms in different IM markets, and in particular

the existence of large players in adjacent sectors, could be an indicator of risks in supporting a given

opportunity.

TSC’s acknowledgment of market leaders in its analysis and its investment in a virtual reality testing

laboratory, to allow partners to test new ideas without having to make large fixed capital investments,

demonstrates that it already taking these considerations into account.

Question 4: What is TSC’s approach to long incubation periods?

Long time lags between idea generation and commercialisation introduce a level of uncertainty risk that

private actors may be unwilling to bear. Arguably, TSC may decide that it has a specific role to correct

this type of market failure, though it may also decide that other priorities (other market failures or the

need to show results quickly) are more important. Alternatively, it may feel that a mix of long and short

term projects is the most appropriate route. In any case, TSC has a strategic decision to make about its

approach to projects which it expects will have these long incubation periods.

Question 5: Should TSC adopt a partner-focused dimension to its assessment?

The approach of the Fraunhofer programme highlights the fact that TSC’s criteria are outward-looking

in the sense that they focus on the potential in the marketplace when considering which interventions

to support. This could usefully be supplemented by an inward-looking focus on the nature and capability

of the project to be supported. Does the innovation partner demonstrate the full range of abilities to

bridge the innovation ‘valley of death’—all the way from showing the scientific and engineering

credibility to possessing the commercial acumen to bring the innovation to fruition? Whether this type

of criterion is appropriate for the framework is clearly a judgement for TSC.



4 Appendix 1 A Government Economic Service report which reviewed the evidence around absorptive capacity in the

UK set out common indicators used to measure it.27

Driver Impact on absorptive

capacity

Possible metrics

R&D Firms ability to exploit external

knowledge is often a by-product of

R&D, therefore R&D not only

increases knowledge but also

increases the ability to exploit

external knowledge

• R&D/sales

• % employees engaged in R&D

• R&D investment over time

• No of patents

Training/skills Human capital is key to absorptive

capacity. Firms need a diversity of

skills e.g. scientific/technical skills

to absorb external knowledge,

process/production/design skills

to create firm-specific innovation

• % employees with science/STEM degrees

• % employees engaged in R&D over time

• % in employment with NVQ level 4 or above

• Expenditure on training for innovation

Management

practices

Effective management practices

enable better transmission of

knowledge into and within the

organisation

• Use of practices such as job rotation, quality circles, KPIs, targets

• Employee participation in decision-making

• Use of performance related pay, talent management

Access to

external

networks

External networks (e.g.

universities, customers, suppliers,

international links) are key to

knowledge acquisition and

assimilation

• % of businesses with cooperation agreements

• Density of international firms

• Rate of FDI investment project successes

• Advanced Producer Services Network Connectivity

• International co-authorship of research papers

• International co-patenting

• Industry-financed public R&D

Knowledge

exploitation

skills

Firms with good knowledge

exploitation skills can appropriate

the benefits of technological

advances and transform/exploit

knowledge

• Number of innovation active enterprises

• Process/product innovation new to industry or market

• Scale of early stage private investment (e.g. VC)

• Export of knowledge services

27 (GES, Government Economics Services Group on Growth Innovation Project 2014)



5 Appendix 2

The following sectors are classified as Knowledge-Intensive sectors by

Government Office for Science (2013);

Water transport, air transport

Telecommunications

Financial intermediation

Computer and related activities

Research and development

Legal, accounting, book-keeping and auditing activities; tax

consultancy; market research and public opinion polling;

business and management consultancy holdings

Architectural and engineering activities and related technical

consultancy

Technical testing and analysis

Advertising

Labour recruitment and provision of personnel

Investigation and security activities

Public administration and defence; compulsory social security

Education

Health and social work

Recreational, cultural and sporting activities



6 Appendix 3 The following are examples of other international programmes that seek to commercialise research

bases.

28 (Our activities: Vinnova 2016) 29 (Research Council of Norway 2013) 30 (Knowledge Economy Network 2012)

Programme Description

VINN Excellence

Centres, Sweden

Funding is provided by Vinnova (Sweden’s innovation agency) to 17

competence research centres which aim to bridge the gap between

academia and industry.28 The centres work across a diverse range of

projects, dealing with both basic and applied research, with the aim

of ensuring new knowledge and technological developments lead to

commercialisation of new products.

Centres for research-

based innovation (SFI),

Norway

The scheme seeks to encourage firms to innovate through a greater

focus on longer-term research, and facilitates cooperation between

innovative firms and research institutions. An SFI centre is

affiliated with a research institution or company that is responsible

for the centre's activities. The host institution and partners

comprise the centre. Centres are selected primarily on their

potential to generate innovation and value creation as well as their

scientific merit. The SFI scheme is primarily aimed at industries in

which Norwegian research is already cutting-edge.29

Engineering research

centres programme,

USA

Established by the National Science Foundation, these

interdisciplinary centres, located at universities, bring together

academia, industry and government to produce advances in

complex engineering systems. Additionally, the programme focuses

on ensuring that engineering graduates possess the skills for

innovation.

Cooperative R&D

agreements, USA

A cooperative R&D agreement is a written agreement between a

private company and a government agency to work together on a

project. It enables both parties to optimise their resources, share

expertise and accelerate the process of commercialisation.

Danish Innovation

Consortium programme,

Denmark

An innovation consortium consists of at least two companies who

collaborate with research institutes on a research and innovation

project. The knowledge and technology generated is not geared

towards the needs of one particular firm but instead should benefit

all parties involved and entire industries in the Danish business

community.30



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Australian Government; Department of Industry, Innovation and Science. 2015. “Cooperative Research

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Automotive Council, UK. 2011. “Intelligent Mobility: A national need?”

BIS. 2014. Community Innovation Survey. 10. https://www.gov.uk/government/collections/community-

innovation-survey.

Cohen, Wesley, and Daniel Levinthal. 1990. “Absorptive capacity: a new perspective on learning and

innovation.” Administrative Science Quarterly 128-152.

2016. Community Innovation Survey. 7 2. https://www.gov.uk/government/collections/community-

innovation-survey.

Department for Business, Innovation and Skills. 2014. “An economic analysis of spillovers from

programmes of technological innovation support.”

Department for Business, Innovation and Skills. 2014. “Estimating the effect of UK direct public support

for innovation.”

Department for Business, Innovation and Skills. 2014. “Insights from international benchmarking of the

UK science and innovation system.”

Department for Business, Innovation and Skills. 2014. “The case for public support of innovation at the

sector, technology and challenge area levels.”

Department of Business Innovation and Skills. 2014. “Our plan for growth: science and innovtion.”

Digital Catapult. 2015. “An overview for 2015.”

Duchek, Stephanie. 2013. “Capturing Absorptive Capacity: A Critical Review and Future Prospects.”

Schmalenbach Business Review 312-329.

Dyson, James. 2010. “Ingenious Britain; Making the UK the leading high tech exporter in Europe.”

2016. Fraunhofer-Gesellschaft. 7 2. http://www.fraunhofer.de/en.html.

Fraunhofer-Gesellschaft. 2016. 07 02. http://www.fraunhofer.de/en.html.

GES. 2014. “Government Economics Services Group on Growth Innovation Project.”

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/370187/bis-14-

1169-government-economic-service-group-on-growth-innovation.pdf.

Government Office for Science. 2013. “Knowledge spillovers and sources of knowledge in the

manufacturing sector: literature review and empirical evidence for the UK.”

Hauser, Herman. 2014. “Review of the Catapult network.”

Hauser, Herman. 2010. “The Current and Future Role of Technology & Innovation Centres in the UK.”

HM Treasury. 2011. “The Green Book: Appraisal and evaluation in central government.”

House of Commons: Science and Technology Committee. 2013. “Bridging the valley of death: improving

the commercialisation of research.”



Knowledge Economy Network. 2012. “The Danish Innovation System.”

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specific-target-groups/Individuals-and-Innovation-Milieus/VINN-Excellence-Center/.

Prendergrast, Jessica. 2015. A example of how a citation should look. London: Oxford Economics.

RAND Europe. 2015. “The Digital Catapult and productivity: A framework for productivity growth from

sharing closed data.”

Research Council of Norway. 2013. “Centres for Research-based Innovation (SFI); Description of the SFI

scheme.”

Rodrigue, Jean-Paul. 2010. “Transport and Innovation: Un/Leashing the potential.”

Satellite Applications Catapult. 2015. “Delivery Plan 2015-2020.”

Schmidt, Tobias. 2009. “Absorptive Capacity - One Size Fits All?”

The Allen Consulting Group. 2012. “The economic, social and environmental impacts of the Cooperative

Research Centres program.”

The Work Foundation. 2010. “Applying the Fraunhofer model to create an effective innovative ecosystem

in the UK.”

Transport Systems Catapult. 2015. “Transport Systems Catapult Technology Strategy.”

2016. Who we are: Satellite Applications Catapult. 23 02. https://sa.catapult.org.uk/who-we-are.



Transport Systems Catapult

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TSC TECHNOLOGY STRATEGY: ECONOMIC ASSESSMENT OF … · 1) Are forecast to be large AND where the UK possesses a strong capability; or 2) Where the predicted growth rate of the market