A Literature Review on Skills and
Innovation. How Does Successful
Innovation Impact on the Demand for
Skills and How Do Skills Drive
Innovation?
A CRIC Report for
The Department of Trade and Industry
Bruce Tether, Andrea Mina,
Davide Consoli and Dimitri Gagliardi September 2005
ESRC Centre for Research on Innovation and Competition

Soft Skills and ‘Emotional Labour’ 38
Complementary Explanations of Skill Bias 39
Innovation, Skills and Wage Inequality 41
Conclusions 43

Chapter 4 The Instituted Supply of Skills and Implications for Innovation 45
Introduction 45
Human Capital and Its Implications for Innovation 49
Education Systems and Skill Formation – Implications for Innovation 52
Skill Formation for Work – Internal vs. Occupational Labour Markets 55
Intermediate Vocational Skill in Britain and Germany – the NIESR Studies 59
The Proliferation of Qualifications and Skill Mismatching 61
Is the UK Trapped in a ‘Low Skills Equilibrium’? 63
Skills, Innovation, Value Added and Product Strategies 64
Services, Soft Skills and ‘Emotional Labour’ 68
A Note on Consumption Skills 69
Conclusions and Moving to a High Skills Route to Development 70

Chapter 5 Innovation Cycles and Strategies, and the Role of Skills 73
Introduction 73
Changing Understandings of Innovation – from Linear to Systemic Models 74
Innovation over the ‘Stages’ of the Industrial Life Cycle 78
Technology Trajectories and Pavitt’s Taxonomy 82
Services and Organisational Innovation 86
Radical Creativity versus Incremental Accumulation 87
Innovation and Dynamic Capabilities 91
Distributed Innovation and Imbalances in the UK’s ‘System of Innovation’ 94
Conclusions 95

2

Service Innovators 87
Figure 5.8 A Penrosian Model of Resources and the Growth of Knowledge in the Firm 92 Tables Page
Table 2.1 Employment in the UK by Industry, Spring 1984 and Spring 2004 16
Table 2.2 Employment in the UK by Occupation, 1971 to Spring 2004 17
Table 2.3 Employment, Unemployment and Inactivity in the UK, 1993 and 2003 19
Table 2.4 Pupils in England Reaching or Exceeding Expected ‘Key Stage ‘3’ Standards in
English Maths and Science 21
Table 2.5 Patenting in the United States, 1996 – 2000 – International Comparisons 24
Table 4.1 Factors Hampering Innovation in Europe between 1998 and 2000 46
Table 4.2 ‘Crucial’ Impediments to Growth amongst UK SMEs 46
Table 4.3 Impediments to Innovation – European Innobarometer Survey of 2001 47
Table 4.4 Educational and Skills Inadequacies for Innovation – European Innobarometer, 2001 47
Table 4.5 The Employment of Graduates and the Conduct of Research and Development 64
Table 4.6 The Employment of Graduates and Engaging in Innovation Activities 65
Table 5.1 Characteristics of Innovation, Technology and Skills over the Industry Life Cycle 81
Table 5.2 Major Technological Trajectories, their Sources of Technology, Innovation Strategies
And Key Skills 83
Table 6.1 Characteristics of Innovation and Skills over the Industry Life Cycle 97

3
A Literature Review on Skills and Innovation A CRIC Report for the DTI Case Study Boxes Page
Case Study 1 Japanese Production Practices in the Car Industry – Implications for Skills 31
Case Study 2 Innovation and Co-operation in UK Transport Services 37
Case Study 3 Poaching of Key Staff and Innovation in the West Midlands 50

productivity drivers: skills and innovation. It does this through pulling together theoretical and
empirical literature from across various academic disciplines, including labour economics,
management studies and innovation studies.
A skill can be defined as an ability or proficiency at a task that is normally acquired through
education, training and/or experience. It can at times be synonymous with the related concepts
of competence, expertise, knowledge and human capital. There are many different kinds of skills.
In this report, distinctions will be made between different levels of skill, and different types of
skill. The types considered include pure science, engineering, problem-solving, language skills,
team working and communication skills.
Innovation is defined as the successful exploitation of new ideas. That is the development and
commercial exploitation of a new idea for a product or process that contributes to wealth
creation and profitability. The large-scale benefits of innovation come from the eventual wider
diffusion of these new products and processes across the economy. Innovation has many forms.
It can be technological in nature (relating to new machinery or other forms of equipment),
organisational (relating to changing management practices or general structures) or even new
individual ways of working unrelated to colleagues or new equipment.
How innovation drives the demand for skills
This report finds that the impact of innovation on demand for skills is very dependent on the
type of innovation and the context. Most of the literature examined focuses on technological
innovation. In the case of process innovation,
1
the literature predicts that innovation reduces
jobs, because it tends to be of the kind where capital (new machinery/equipment) replaces
labour, particularly unskilled labour. However, this is not always the case, as a process innovation
could be of the kind where more labour is used relative to capital, or where the job losses are
offset by the creation of jobs elsewhere in the company or the economy (such as in the upstream
production of new machinery). The empirical literature suggests, however, that process
innovation, in general, implies job losses. The theoretical and empirical literature suggests that
product innovation, on the other hand, is positive to employment levels as it will often result in
an increase in demand for those products.

There is no one mix of skills that is conducive to good innovation performance in all
circumstances. Instead, the required skills vary across the type of innovation concerned, the
industry and the strategic model the firm pursues.
In the older models of (technological) innovation, such as the ‘science push’ model of Vannevar
Bush, the skills to ‘produce’ innovation are the degree and higher-level science and engineering
skills of a small head or elite in the organisational hierarchy. More recent models of innovation,
such as the ‘systemic integration’ model, allow for more democratic, distributed sources of
innovation, involving the skills of the whole workforce. In particular, this model says all workers
should have basic ‘platform’ skills that allow them to be adaptable to changing circumstances and
more open to new ideas to be innovative. This contrasts with the past, when many workers
developed only job-specific, narrow skillsets. This model emphasises the importance of
interaction and cooperation between all the actors in the innovation process, including the
innovating firms’ suppliers, commercial partners and customers. These interactions require
communicating and negotiating skills.
The report identifies management and leadership skills as being of particular importance for all
types of innovation. Without leadership, or ‘strategic intent’, firms do not innovate in any
fundamental ways, and have to rely on small incremental improvements to their ways of working
from learning-by-doing. In a competitive environment, managers have to choose between
different innovation and growth strategies, even if they are just to keep ‘treading water’. Putting
the chosen strategy into practice requires management and leadership skills at all levels of the
organisation. There is little empirical evidence about how management skills (which may be

6
A Literature Review on Skills and Innovation A CRIC Report for the DTI
imperfectly measured in a variety of ways) relate to innovation, but theoretically they are thought
to be very important.
Intermediate level technical skills are also thought to be very important for innovation, especially
in manufacturing. This is significant because the UK has a smaller proportion of people with
these skills than countries like Germany and Japan. Further, there is a concern that the quality of
these skills is relatively low in the UK because of an over-reliance on narrow job related skills

valuable to the firm that reaps the return on the investment, especially if a new market is being
opened up.
The dynamic relationship between skills and innovation
The questions about how innovation drives demand for skills and which skills are required for
innovation are to some extent two sides of the same coin. It is difficult to disentangle the skills
that drive innovation from those which are demanded as a result of change brought about by
innovation. In the long term, the relationship between skills and innovation must be circular. The
skills of the workforce and management will help determine the innovation that takes place,
which will then help determine the changed demand for skills in the firm, which will influence
the innovation that takes place and so on.

2
There is evidence that fear of poaching is more of a problem than actual poaching.

7
A Literature Review on Skills and Innovation A CRIC Report for the DTI
The product life cycle theory provides some answers to how innovation changes the demand for
skills through the stages of a new product innovation, or it could also be viewed as how the skills
for successful innovation change over the cycle.
3
In the early, fluid stages of the industry where
the product is ill-defined, the key skills are those of entrepreneurs, and sometimes those of
scientific or technical specialists, which together with marketing skills realise or create the market
for the product. As time goes on, the product tends to become more standardised, until a
dominant design emerges. In this transitional stage, there is a shift from product to process
innovation. Functional, scientific management skills and specialist workforce skills are
increasingly required. Once the dominant design is established, the industry enters the specific
stage, where innovation is more incremental and cumulative. The skills required are managerial
‘command and control skills’ and low level or unspecific workforce skills. Higher-level workforce
skills may be increasingly required if the firm attempts to move into the higher quality end of the

entrepreneurial skills for spotting market trends, and a workforce with the ability to implement
and use new technologies.
In a later paper, Pavitt added a fifth category of information-intensive firms, largely in the service
sector. Their main source of new technology is in-house software or systems development,

3
Not all industries will follow this pattern, as has been shown empirically.

8
A Literature Review on Skills and Innovation A CRIC Report for the DTI
although some may come from outside. Here the style of innovation requires technical skills to
develop software and communication or cooperation skills to acquire technology from outside.
The empirical evidence suggests that service-sector firms are more organisationally innovative
than manufacturing firms. These organisationally-orientated service-sector firms are more likely
to emphasise the importance of supply chain interaction and external intellectual property but
less likely to emphasise in-house R&D and research based cooperation with other organisations
such as universities as their key sources of technology.
Much of the literature emphasises the systemic nature of the relationships between innovation,
skills and productivity. Florida proposes the concept of the ‘creative class’ of people – scientists,
engineers, designers and creative arts workers. He finds their concentration level in local
populations is positively related to economic performance and tolerance. Meanwhile, in the
innovation studies literature, Kodama suggests that with technological fusion and increasing
cooperation, innovations are increasingly crossing industry and technological boundaries, which
will tend to make the new innovations more widely applicable. This in turn is changing the
demand for skills by requiring that workers have broader, less specialised skills, involving multiple
disciplines.
Policy implications
With the growth of trade in goods and services, and the growing internationalisation of scientific
and technological activities, it is increasingly important that innovation in the UK involves a large
proportion of firms and their employees. No longer can companies or the country as a whole

There perhaps should also be more consideration of the trade-off between short-run
productivity, or static efficiency, and capacity to innovate, or dynamic efficiency. In many
companies and organisations a battery of targets or financial measures encourage short-run
efficiency but fail to recognise the importance of ‘organisational slack’ and local experimentation
to achieve innovation and greater dynamic efficiency. 3M allows its engineers to spend 15% of
their time on any project that happens to interest them. This approach, while clearly not
applicable to all, has been shown to boost innovation, as well as increasing employee
commitment and motivation.

10
A Literature Review on Skills and Innovation A CRIC Report for the DTI
1 Introduction
1.1 The DTI’s definition of innovation is the successful exploitation of new ideas. That is
the development and commercial exploitation of a new idea for a product or process that
contributes to wealth creation and profitability. The large-scale benefits of innovation
come from the eventual wider diffusion of these new products and processes across the
economy. Innovation takes many forms. It can be technological in nature (relating to
new machinery or other form of equipment), organisational (relating to changing
management practices or general structures) or even outside of these two main categories.
A skill can be defined as an ability or proficiency at a task that is normally acquired or
developed through education, training and/or experience. It is, of course, related to the
concepts of competence (which tends to imply these days that there is a demand for the
skill), expertise and knowledge. There are many different kinds of skills.
1.2 The aim of this study is to review the literature in order to start answering the questions:
- Is there a mix of skills at either the firm level or within society that would increase the
amount of innovation that is undertaken?
- How does the successful introduction of new ideas change the pattern of demand for
skills in companies and the economy?
- How do these two questions relate to each other and what is the nature of the two-
way relationship between skills and innovation?

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A Literature Review on Skills and Innovation A CRIC Report for the DTI
1.5 In Chapter 6 we conclude the study, reviewing what we have learnt to answer the
questions as outlined above.

12
A Literature Review on Skills and Innovation A CRIC Report for the DTI
2 Context: The UK Economy’s Skills & Innovation Performance
Introduction
2.1 Overall, relative to its historical performance, the UK economy has enjoyed a decade of
relatively strong and stable growth in GDP, with stable and low inflation, and falling
unemployment.
5
With inflation and unemployment under control, the chief concern has
been to establish the framework conditions to stimulate the development of the economy
towards higher value added activities and ‘the knowledge economy’.
2.2 To achieve its ambitions, the Government recognises the UK will have to improve its
productivity and innovation performance: “We live in a fiercely competitive global
economy. If we are to enhance our productivity and raise our standards of living we need
to improve radically our innovation performance. And we will need to innovate
continuously in the future so that we can hold our own against fast moving new
economies” (DTI’s Innovation Report, 2003, p. 16). It is argued that UK companies will
have to compete more on quality, with high value added and more innovative products
and processes. This, in turn, “will require inspirational leadership, stronger management
and leadership skills, a highly skilled workforce, a flexible labour market that promotes
diversity and fair treatment, and high performance workplaces” (op cit, p. 11). Moreover,
the Government seeks: “A highly educated workforce with a culture of lifelong learning
[which] is more likely to adapt to economic change” (ibid).
2.3 The purpose of this chapter is to set the context for the studies examined in the report in
the light of the government’s objectives and the key structural characteristics of the UK

used in the production of these outputs) by the inputs used, such as the number of
employees, the number of hours worked, or a measure which combines both the labour
and capital used in the production process.
2.6 Measures of productivity allow comparisons between countries and firms in terms of
their performance, but the current performance of a country or company is determined
to a significant extent by decisions made some years ago. Similarly, decisions made today
will impact on productivity in the future. For example, current investments in R&D and
training are being made in the expectation that the firm will gain a greater return in the
long run than it would save in the short run by not engaging in these activities.
However, even this is complex, as many if not most firms do not have a precise
understanding of the rates of return to their R&D and training activities. Suffice to say
that particularly in the past UK firms were often criticised for being short-termist – that is
seeing to maximise their short run performance and failing to invest significantly for the
longer term through activities such as R&D and training.
2.7 At the aggregate level the UK has long suffered a productivity deficit relative to its major
competitor nations. In terms of labour productivity, the UK lags significantly behind the
US. As van Reenan (2004, p.4) puts it: “Joe Doe, our average American worker, could
take Thursday and Friday off and produce as much as poor John Bull toiling away
throughout the working week”. Although the higher productivity of US workers means
they could work fewer hours to achieve the same standard of living as UK workers, in
fact they tend to work longer hours and therefore tend to have significantly higher
incomes. Growth accounting suggests that US productivity is higher because US workers
have more and better equipment (although they have similar skills), and because of
greater past investments in R&D. But some of the US’s advantage remains unexplained.
As Van Reenan (2004) asks: “Why do US workers create so much more output for their
fixed and human capital inputs? What is it that they do more effectively that makes such
a significant difference on the macroeconomic level?” Increasing the amount of physical
capital per hour worked in the UK to American levels would only make up about half the
gap in labour productivity between the UK and US. Nor would having the same skill
distribution as the US close the gap. Around half the gap between the UK and US labour

means it should be well placed to take advantage of these.
2.9 The UK’s productivity performance relative to its major European competitors, and
France and Germany in particular, is more contentious. Simply put, the average French
and German worker is more productive than the average British worker, but fewer
French and Germans work, and those who do work fewer hours. Assuming that, in all of
these countries, the more productive people in the potential labour market tend to work,
whilst the least productive tend to be economically inactive, it is less clear that the
difference in productivity between Britain, France and Germany would still remain if the
same proportion of the labour force in each of these countries worked, and especially if
the average Briton, French and German worker all worked for the same number of hours
and had the same amount and quality of equipment available to them.
2.10 Arguably, the UK has lower productivity because it has simpler and less complicated
labour market regulations than France, Germany and most other European countries.
This has the direct effect of encouraging more people to work and encouraging
employers to offer more jobs, not least because it is also relatively easy to reduce
employment by cutting jobs. This means more marginal workers are more likely to be
employed in the UK, reducing unemployment and inactivity. But the higher labour costs
and stricter labour market regulations in Continental Europe also encourage companies
to substitute capital goods for labour, meaning that the average European worker has
better equipment (i.e. more and/or newer equipment) with which to work, which further
raises output per person employed, resulting in higher productivity amongst those in
work. One study estimates that this deficit in physical capital accounts for about 80% of
the labour productivity gap between the UK and France and Germany (van Reenan,
2004). The other 20% is very largely attributed to the lower skill levels of British workers
(which itself partly reflects the UK’s higher employment rates).
2.11 The UK therefore enjoys higher employment rates than France and Germany, to some
extent at the cost of lower average productivity amongst those employed. However, this
trade-off between the employment rate and productivity amongst those employed does
not explain how some smaller European countries (such as Switzerland, Denmark and
the Netherlands) are able to achieve higher productivity whilst maintaining high

companies, and it is nearly always possible to find ways of increasing productivity in
existing tasks to maximise short-run efficiency. But in the longer run, such measures
may not be sufficient, as countries and companies that are highly developed in one
context may find it difficult to adapt to change. Core competences become core rigidities
(Leonard Barton, 1992). ‘Structural change’ is associated with more fundamental
changes in types of work, types of output (e.g. moving from goods to services, and mass
production to customisation) and ways of working (e.g. from integrated companies to
more distributed forms of production involving greater outsourcing).
2.14 The UK has undergone tremendous economic change in the last quarter of a century.
This has seen the decline of some industries and the growth of others, as shown in table
2.1. Scase (1999, p. 23) observes that “more people now work in Indian restaurants than
in shipbuilding, steel manufacturing and in coal mining combined. There are three times
as many public relations consultants as coal miners.”
Table 2.1
Employment
*
in the UK by Industry, Spring 1984 and Spring 2004
9

All Male Female
1984 2004 1984 2004 1984 2004
All in Employment (000s) 23,974 28,311 14,039 15,296 9,935 13,015
Agriculture & Fishing (%) 2.6 1.3 3.5 1.9 1.3 0.6
Utilities (%) 2.9 1.0 4.3 1.4 1.0 0.5
Manufacturing (%) 24.9 13.5 30.3 18.8 17.3 7.4
Construction (%) 7.7 7.8 12.0 13.0 1.6 1.7
Distribution, Hotels &
Restaurants
(%) 20.3 19.9 15.8 18.1 26.5 22.1
Transport and

Employment
*
in the UK by Occupation, 1971 to Spring 2004
1971 1981 1991 1998 All Men Women
2004 2004 2004
All in Employment (000s) - - - - 28,801 15,179 12,901
Managers & Senior Officials (%) 11 10 13 13 14.7 18.3 10.5
Professional Occupations (%) 7 8 9 11 12.6 13.5 11.5
Associate Professionals and
Technical Occupations
(%) 9 9 11 12 13.8 13.3 14.4
Administrative & Secretarial (%) 14 16 16 15 12.5 4.7 21.6
Skilled Trades (%) 19 17 15 14 11.3 19.4 1.9
Personal Service Occupations (%) 34567.8 2.3 14.1
Sales and Customer Services (%) 56678.2 4.7 12.1
Process Plant and Machine
Operatives
(%) 14 12 10 9 7.6 11.9 2.4
Elementary Occupations (%) 17 18 15 14 11.8 11.9 11.6
Data for 1971-1998 from Green, 2005. Data for 2004 from the Labour Force Survey
* includes Self-Employment

2.17 This combination of changes in occupational and industrial structure has been associated
with the growth of services and the dis-integration of production (i.e. the growth of
outsourcing and the decline of the vertically integrated firm). The decline of large scale
operations, and the growth of small firms and self-employment has been associated with
a growth in small business management and administrative work, relative to production
workers. The growth of services and small firms attracts widely differing views with
regard to job quality and skills. Some commentators are very negative. Scase, for
example, observes that, “inherent in the growth of a service and information economy is

in the UK has not changed markedly from about 20%
for twenty-five years, and what is remarkable is the convergence in the inactivity rates of
men and women. “Since 1975, the percentage of non-student men of working age who
are inactive has risen more than five times [from 2.6% to 13.2% in 1998], around a 10
percentage point increase. By contrast, this is almost offset by a nearly 10 percentage
point decline in the inactivity rate of women [from 36.5% in 1975 to 26.9% in 1998]”

(Nickell and Quintini, 2002, p. 211). The growth in economic inactivity has been
particularly striking amongst unskilled men: “Most extraordinary is the fact that the
inactivity rate amongst men of working age without qualifications was 30% in 2000,
compared with less than 4% some 20 years before. This despite the fact that in 2000, the
UK labour market was booming” (Nickell and Quintini, 2002, p. 212). Gregg and
Wadsworth (2003) show that two in five men of working age (excluding students)
without qualifications are now economically inactive or unemployed, with the majority
being economically inactive; see table 2.3 below. This lack of work, and growing
exclusion from work, has been most marked in some northern cities, such as Newcastle-
Gateshead, Liverpool and Glasgow.
1210
Nickell and Quintini (2002, p. 203) observe that “Since the disasters of the early 1980s, UK unemployment has
moved in parallel with the best performers in Europe (Denmark, Ireland, the Netherlands).” What is especially
remarkable is that unemployment has been able to fall without any significant inflationary pressure. Nickell and
Quintini discuss the reasons for this.
11
The inactivity rate refers to the total number of individuals of working age who are not students and who are
neither working nor unemployed, as a proportion of the non-student working population of working age.
12
“By 2002, only 25% of less skilled men [i.e. the bottom 30% by qualifications] living in social housing were in

Economically Inactive 41% 50% 39% 41% 21% 18%
* Working age population excluding students.
#
The 30% of the population which, for their age cohort, have the lowest qualifications.
Data source: Gregg and Wadsworth, 2003, Table 6.1 (Labour Force Survey Data)
2.20 The growth in inactivity amongst men almost certainly reflects structural changes in the
economy which are associated with an overall shift in demand towards higher skills, and a
shift away from physical labour to more cognitive work and ‘emotional labour’ (see
Chapter 4). The fundamental problem is that there is a large body of individuals of
working age who, because of lack of skills, do not command a high enough wage in the
labour market to provide a decent standard of living for themselves and their dependents.
This problem is particularly severe in Britain because the pool of very low-skill workers is
much larger than in western Europe as a whole (Nickell and Quintini, 2002, p. 215).
Moreover, not only is it larger; it is also geographically more concentrated especially in
the old industrial areas where the ‘new jobs’ created to replace those lost in heavy
industry tend to be low skill and low wage, but also increasingly ‘feminine’ (Danson,
2005). This has encouraged the expansion of women’s participation in the labour market,
whilst unskilled men have found it difficult to find or take up new forms of work.
13

2.21 By contrast, those with skills and especially degrees have prospered: “in 1980, men with
degrees earned around 63% more than those without qualifications [other things being
equal]. By the mid-1990s this had risen to 93% - this despite the fact that the percentage
of employees with degrees had almost doubled over the same period” (Nickell and
Quintini, 2002, p. 212).
Skills and Educational Attainment
2.22 At a broad level a skill is a human ability coupled with an actual or potential demand for
that ability. Narrower definitions consider that a skill is a special ability, often acquired
through specialist training.
14

and the Third International Mathematical and Science Study (TIMSS) the UK has
performed relatively poorly, compared to the Far East and much of Europe. This said, in
the last round of OECD studies the UK appears to show much improved standards, and
appears to outperform other countries which are widely thought to have superior
education systems (see Prais, 2003 & 2004, vs. Adams, 2004).
2.25 At least as proxied by qualifications, the skills in the UK labour force have been
transformed in the last 30 years. In 1974 over half of all men and two thirds of women
(aged 16-69) had no qualifications at all. Now these figures are 15% and 19%
respectively. Meanwhile, in 1974 only 4% of the male workforce and 1% of the female
workforce had degrees, whist 16% and 13% respectively now do (Glennerster, 2002). In
2002/03 53% of pupils in the UK gained five or more GCSEs (or equivalent) at grades
A* to C, compared with 46% in 1995/96. Girls outperformed boys, with less than half
of boys achieving this standard. Meanwhile, the proportion of pupils gaining two or
more GCE A levels (or equivalent) has increased dramatically from 19% in 1992/93 to
39% in 2002/03. Again girls outperform boys, with 43% of girls achieving this compared
with a third of boys (Social Trends, 2005).
15

2.26 There have therefore been significant improvements, but is the glass half full or half
empty? The consensus seems to be that in the future most jobs will require higher skills.
One estimate reported in the media is that in ten years two-thirds of jobs will require A-
levels or higher education qualifications.
16
It is very difficult to assess the accuracy of
these claims. Partially it will depend on the extent to which more routine forms of work
resist or succumb to displacement through off-shoring and automation, and partially it
will depend on whether new applications are found for the relatively low skilled within
the workforce. For example, the domestic cleaning sector may expand enormously in the
next decade, as it becomes more socially acceptable both to be and have a cleaner, and as
the relatively affluent decide to ‘buy time’ (for more paid work and leisure) by

any abilities, no matter how basic, are increasingly subject to qualifications.
18

2.28 International evidence shows that in virtually all OECD countries participation in tertiary
education is increasing – i.e., young adults are more likely that the rest of the workforce
to have participated in tertiary education (see Figure 2.1). The OECD data also shows
that the UK’s performance in terms of participation in tertiary education is moderate,
with the proportion of young adults in the UK who have participated in tertiary
education being higher than some countries (notably Germany, Switzerland, the
Netherlands and Italy), but lower than in others (including Canada, Japan, Korea, the US,
Sweden and France). 17
‘Basic skills’ are defined by the Basic Skills Agency as “the ability to read, write and speak in English and to use
mathematics at a level necessary to function and progress at work and in society in general”.
18
See the National Qualifications Framework (available at http://www.qca.org.uk/493.html)

21
A Literature Review on Skills and Innovation A CRIC Report for the DTI
Figure 2.1
Tertiary Education - Attainment levels by 2002 (OECD Data)
0%
10%
20%
30%
40%
50%
60%

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Public Expenditures Private Expenditures

2.29 Certainly if the UK wants to be at the forefront of the knowledge economy it will have to
continue to address some of its deep-seated problems and invest heavily in education.
The Labour Party Manifesto of 2005 declares that ‘Education is our number one priority’
and claims that state funding for education has risen from 4.7% of GDP in 1997 to 5.5%
in 2005. This level of spending is still not exceptionally high by international standards as
Figure 2.2 shows. Of course, it is not just a matter of spending, but also how the money
is used (Leach, 2002). 22

depicted in figure 2.3 below. (see Golborne, 2005 for a detailed analysis of R&D activities
by UK firms). Having said that, there is some reason to believe there may be greater
under-recording of R&D in the UK than elsewhere, not least because before the
introduction of tax credits there was little incentive for private firms to record their R&D
activities, and many appear unsure as to whether or not they undertake R&D (Howells et
al., 2001).

19
DTI (2003b) points out that the growth sectors within manufacturing have tended to be those that invest more
in R&D and have higher qualified workforces, as measured by the proportion of employees with degrees.
20
As a whole the European Union has set itself the target of increasing R&D to 3% of GDP with two thirds of this
expenditure coming from private sector enterprises (i.e. business expenditure on R&D reaching 2%)

23
A Literature Review on Skills and Innovation A CRIC Report for the DTI
Figure 2.3
Gross Expenditure on R&D as a proportion of GDP, 2001 (OECD Data)
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France 57 77 98 113
Taiwan 0 1 11 77
South Korea 0 0 3 62

2.35 The European Community Innovation Survey (CIS) – The CIS-3 found for the
period 1998 – 2000 that the UK had a lower than average proportion of enterprises
engaged in (technologically) innovative activities (i.e. 36% c.f. the EU average of around
40%). Only in Spain and Greece did lower proportions of enterprises report engaging in
(technologically) innovative activities. A low UK propensity to engage in innovative
activities was found for all firm sizes, including large firms. In the UK, only 57% of large
enterprises (those with 250+ employees) reported having engaged in innovation activities

21
Utility patents cover the useful features of an invention. These patents cover a broad category of sciences. Utility
patents have been issued for everything from anchors for buildings, zebra stripes as a method of camouflage,
computer software, to methods of doing business.

24
A Literature Review on Skills and Innovation A CRIC Report for the DTI
between 1998 and 2000, compared with an EU average of 80% . A lower propensity to
innovate was also found for both industry (manufacturing and construction) and services
in the UK compared with the EU average.
22

2.36 According to the CIS-3 (Lucking, 2004), 21% of UK firms had introduced product
innovations compared to an EU average of 31%. This deficit, relative to the EU average,
is again found to be consistent across both enterprise size and by sector of activity.
Meanwhile, amongst those enterprises that were innovation active, only 27% introduced a
“new to the market” product innovation, a proportion which is amongst the lowest in the
Europe (EU average = 36%).

productivity). We will see that whilst much is known, there are also significant gaps in
understanding.

22
Averages here exclude the UK and Ireland.
23
However, amongst those firms that did introduce product innovations, UK firms tended to claim the highest
share of turnover was due to new products – at an average of 41% of total turnover. This perhaps suggests a
polarisation of innovation performance amongst UK firms, with some being highly innovative whist others have
little or no commitment to product innovation.

25