UK: The Ball’s in our Court - The UK Technology Sector at a Critical Juncture (part 1 of 2)

During the last decade, the technology sector, both in the UK and globally, has experienced unprecedented volatility. Technology fomented a boom, the tail-end of which was an unprecedented crash that affected companies and consumers around the world. In many countries, the bruises are still showing. But now that the dust has settled, it is highly apparent that technology is more omnipotent and omnipresent than ever.

Not surprisingly, technology remains a major policy issue for governments. Technology continues to differentiate, by driving down cost and generating value, in the world’s largest economies and companies. Technology continues to create billionaires and crowds of millionaires. Proficiency in the use of, as well as ownership of technology are creating a new social divide. Technology, it is clear, is far from a mature market.

The criticality of technology for the UK has prompted Deloitte to undertake a comprehensive review of the current state of its technology sector. The messages from this review are relevant for: governments, regulators, universities, schools, financial institutions as well as technology companies themselves. Using a combination of qualitative research, comprising over fifty leading figures from the UK technology ecosystem, and extensive quantitative research, Deloitte has authored a thorough, sensitive and objective assessment of the current state of the UK technology sector. Our analysis comprises: a review of the sector’s performance over the past five years; the impact that education, government and financial institutions have on the sector; the outlook; and finally our conclusions and recommendations.

This report is based on both primary and secondary research. The former comprises over fifty interviews with senior representatives from the UK technology sector’s ecosystem: education, finance, government, customers, analysts, multinational technology companies with a UK presence, and of course, UK headquartered technology companies. Deloitte conducted the interviews in-person or by telephone between August 2004 and May 2005. A full list of respondents is in the acknowledgements section at the end of this report. Deloitte partners from the UK and overseas were also consulted for their views of the UK’s technology sector.

Our definition of the technology sector covers four discrete but interdependent groups of organisations, as illustrated below:

Pure research sits behind the entire UK technology sector, and provides the science that is the raw material of innovation and technology development. This category includes all of the UK’s universities. Applied research includes all commercially funded research and development.

This is a very large category, not only including commercial companies specialised in contract research and development, but also a list of university research institutes that are funded in whole or in part through commercial activities paid for by private enterprise clients.

The Technology Suppliers category includes all those commercial companies that design, develop and sell technology products, components and (to a lesser extent) processes. This category includes many British companies, such as ARM, Cambridge Silicon Radio, Intec Telecom Systems, Psion, Sage, and others, as well as a number of foreign multinationals such as IBM, Intel, Hewlett Packard and Motorola. Technology Service Providers is a broad category that includes those companies that use third party technology, in combination with their own, in an integrated fashion, to create end-user solutions that are based on a technology platform. Mobile operators, for example, are therefore included in this category because although they buy more technology than they develop, they also integrate that technology themselves, develop their own systems and software to make that technology function at a commercial level, develop services and applications that run on that technology, and sell end products that are, in essence, pure technology products (mobile phones, data cards and other communications equipment).

We have deliberately included foreign multinationals in our definition – as they are an important and positive part of the UK technology sector as a whole. All technology companies with a presence in the UK – whether UK or foreign in origin – can create employment, pay taxes, develop intellectual property for products and services, enhance workers’ skill levels, and contribute to the deployment of technology across the private and public sectors. Furthermore, a key secondary impact of technology is its value creation among the businesses and consumers who use it effectively. Country of origin, therefore, is not deemed to be of importance in the short-term.

" The contribution of multinationals has been important, both in terms of inventions and in terms of the formation of some well-trained technology professionals who have then gone on to found their own companies."

Deloitte’s view is that the UK technology sector has fared positively, though inconsistently, over the last five years. The broad range of our respondents’ assessments of the sector’s performance mirrored the wide variation in performance of individual companies and other entities within the sector. There is certainly scope for improved performance over the next five years.

The UK ranks as the fifth largest technology exporter in OECD countries and has the highest proportion of employment in the technology sector of any developed country . And whilst the stock markets’ valuation of UK technology companies has fallen by 75 percent from its all time high, this has reflected a return to normality, not a fundamental collapse in confidence. The number of technology IPOs has fallen in recent times, but there has been steady activity in trade sales. Multinational technology companies and communications operators have enjoyed steady to good growth – and indeed, foreign direct investment by overseas technology companies in the UK has shown consistent growth in recent years.

However, a growing cause for concern is the performance of UK-headquartered technology companies which, in some cases, have fared poorly during the past five years. A good number of large British technology companies have disappeared from public markets, either due to financial difficulties or acquisition; there have been headline-generating performance problems for a number of high profile technology companies; and a handful have fallen into receivership.

Any UK based technology company – including foreign multinationals – is positive for the UK’s economy in the short-term. However, in the longer-term it is in the country’s interest to have more nationally-domiciled, profitable technology companies as these have the potential to deliver intellectual property (IP) based revenues in addition to creating employment and generating tax receipts. This is particularly important given the on-going reduction in the UK’s manufacturing sector. To achieve this aim requires all parties involved in the sector – the government, academic institutions, commercial companies and finance firms – to work together to ensure that the UK does not allow its position to erode further.

The current standard of technology education in the UK is good, but has the potential to be excellent.

The UK’s schools need to make pupils familiar with technology as a means of research, problem solving, production, communication and more. The situation is improving: there are now five pupils to every computer in secondary schools. However, schools need to provide the underlying education required for a career in technology. In this regard the situation is concerning. The number of ‘A’ level students for science and engineering subjects, and the quality of teachers, are both falling.

Universities must provide the environment in which those wishing to pursue technology as a career can thrive – and in this respect they appear to be delivering. Further to this, universities need to provide technology to the general student body.

However their ability to do this is overshadowed by funding issues, with some UK universities struggling to pay their way. If this funding gap continues it will inevitably impact on the availability of technology for the general student body and constrain students’ ability to use technology in the workplace. Technology courses need to combine commercial ability with technological ability. Presently the UK appears to be adept at developing world-class subject matter experts who too often lack commercial aptitude. This inevitably constrains their revenue-generating potential. The result: school leavers and graduates often have little or no idea of how a company works, and how they could fit in. The cost: too many great technological ideas are squandered as their creators have little to no idea how to express their inventions in business terms to potential investors and customers.

With or without academic qualifications in a technology-related field, UK workers must train throughout their working lives in constantly evolving technology products and services. Those unable to work with current technology will be marginalised in the labour market. UK consumers will also increasingly have to interface with technology, for interaction, communication, finance and consumption. Over time, the social cost of not using a technology-based interface will grow, implying another angle to the now infamous digital divide.

The UK needs to provide technology training and education that allows the workforce to generate significant value-add; partly through understanding the technology itself, and partly through understanding how to deploy, manage and commercialise it. The UK should focus on creating individuals who have an unrivalled capacity to turn science into technology, and technology into specialised, commercially viable, products, services and solutions.

The government shapes the UK’s technology sector in three major ways: via its strategic view of technology, via its macroeconomic policies and, more directly, through its microeconomic policies.

The current government is generally recognised, according to both our primary and secondary research, to believe strongly in the value of technology to the UK. This is in terms of the existence of the sector, the availability of a qualified workforce and the productivity uplift resulting from effective technology deployment. However in some respects, our respondents inferred that the government’s enthusiasm for technology may be slightly ahead of its understanding of it.

With regard to macroeconomic environment, the UK government is currently performing commendably well: the UK’s macroeconomic environment provides a platform for the sector to grow over the medium term. The country enjoys a fiscal and social environment that broadly both supports UK-based companies and workers, and also is generally attractive to multinational companies and foreign talent.

As for microeconomics, the government has had more of a mixed record. Microeconomic policies affect the UK technology sector both directly and indirectly. Direct influence derives from taxation policies affecting the technology sector (world leading, but more still could be done); the funding of basic research (improving), regional development authorities (variable); and development of clusters (good, but too little). Indirect influence derives from policies on education (see section on macroeconomics), and public sector technology procurement and deployment.

The UK boasts one of the most vibrant financial markets in the world, and its financial sector is also one of the largest customers of technology. Yet its relationship with the UK’s technology sector has been marred by the dotcom crash, which our respondents felt has led to the creation of a degree of mistrust between the sectors. However, there was also a consensus that better dialogue between the two sectors would be beneficial. The financial sector could improve its understanding of technology. Conversely, and more importantly, technology companies certainly need to improve their ability to express themselves in commercial terms. In other words, technology companies must be able to explain, using language comprehensible to the financial sector, how a technology will be able to provide a return to its investors. This will require far stronger awareness of the financing options available and longer-established relationships with the financial sector than appear to exist today. This in turn should hopefully lead to a more frequent pattern of companies progressing through ever larger financing, from angel funding through to a full listing.

That said, within a European context, the UK’s financial sector is a leading supporter of technology. Eight of the ten most significant technology IPOs executed in Europe since January 2004 have been on London exchanges, although technology IPO activity and value in the UK pales into insignificance when compared with that in the US and China. The UK’s financial sector comprises a wide range of funding options for the technology sector, each of which works with a varying degree of success:

• Small business banking was criticised for both lacking understanding of business fundamentals in general and technology companies in particular. But it may also be the case that technology companies are failing to communicate effectively with small business banking.

• The UK has an active angel and seed funding network, although this is far smaller relative to its US equivalent and is poor at marketing itself.

• The UK’s technology sector is the most actively invested in by the European Venture Capital (VC) community. However VC firms’ support of the UK’s technology sector could be greater still if they had deeper technology expertise and could develop exit strategies tailored to the typically extended lifecycle for early stage technology companies.

• The private equity market was considered by most respondents to be strong, but under-exploited by the UK’s technology sector.

• AIM, the small company listings market, was regarded positively, not least because it admirably survived the dotcom crash. AIM could perform better still, by raising its profile, for example by launching a specific index for the best-performing technology companies, attracting analyst coverage and guiding the progression to full market listing.

• In recent years, technology has flailed rather than flourished on the UK’s main exchanges. With the exception of a few companies (O2, BT, Capita, Sage and Vodafone), technology is more marked by its absences.

In Deloitte’s opinion the global technology industry will continue to be in constant evolution over the next five years. In some respects, the UK’s technology sector is extremely well-positioned to exploit several of the upcoming opportunities.

With a competitive stance on stem cell research, a strong and growing body of expertise in biotechnology, micro-electronics, semiconductor design, software development and many other areas, the UK has the potential to capture significant share in some high potential global markets.

The overall outlook for the UK technology sector is neutral to positive – and the difference between the two will be most clearly manifest in the extent to which technology companies in the UK are capable of adding exceptional management skills to complement their technology development skills.

The UK’s technology sector is well-positioned overall, although its performance varies by sub-segment. Education, finance and government are all generally supportive of the UK’s technology sector, even if, in each case, performance could be improved. Demand for technology over the next five years, from consumers and businesses, should be healthy. While international competition will intensify, the UK remains in a relatively strong position, in terms of primary research, economic environment and specialisations. The question for the UK is how it can exploit its relatively strong position and improve its performance. Deloitte’s view is that the UK’s technology sector can thrive – but that this is dependant upon all stakeholders in the industry playing an important role. The approach should be to assume responsibility, rather than – as some respondents noted – to blame others.

Our recommendations are:

• Communicate, co-operate, collaborate: all stakeholders in the UK’s technology sector would benefit from enhanced dialogue and joint working.

• Establish the next generation of technology workers: a shared responsibility between the educational system, government, business and individuals.

• Integrate commerce into technology education to improve the UK technology sector’s ability to exploit its innovations.

• Embrace entrepreneurship as well as invention in the technology sector.

• Specialise to survive – choose battles you can win.

• Leverage other countries’ strengths for example by using offshoring to take advantage of India’s lower wage costs.

• Exploit other countries’ weaknesses, if this can provide competitive advantage.

• Be positive towards technology.

• Believe in the UK technology sector: ask "how much can we grow?", and "where can we dominate?"

Introduction: a review of the UK technology sector’s performance (2000 – 2005) 

Deloitte’s view is that the UK technology sector has fared positively but inconsistently over the last five years. The broad range of our respondents’ assessments of the sector’s performance mirrored the wide variation in performance of individual companies and other entities within the sector. There is certainly scope for improved performance over the next five years.

On the positive side, the UK is the fifth largest technology ¹ exporter of all OECD countries. The UK has the highest proportion of employment in the technology sector of any developed country. Technology’s share of all business value added is again fifth of all OECD countries. The UK is a leading contender as a European headquarters for multinational technology companies. In several respects, the UK consumer has consolidated its position as an early adopter of new technologies, from electronic games to mobile phones.

Multinational technology companies and communications operators have enjoyed steady to good growth. The former has benefited particularly from government spending on technology, which has risen sharply since 2000.

The latter, and in particular the UK’s mobile operators, have experienced steady revenue growth from UK customers. Some emerging technology companies and exploiters of new technologies have managed breakneck levels of growth, with last year’s winner of Deloitte’s European Fast 500 program, lastminute.com, attaining over 90,000 percent growth over a five-year period.

" UK technology companies are now in general more competitive. They are more robust, on a better financial footing, spending more sensibly. However ambition has not disappeared. There are still companies that have unrealistically optimistic expectations, but these are in the minority."

The net impact of the bubble and crash on the technology sector has been to accelerate the evolutionary process of market entry and exit: consequently, in general, quality has risen to the surface. 1 Technology refers to the OECD’s measure of Information and Communication Technology (ITC).

The bubble caused massive market-entry; in general the crash allowed only the leanest, most focused companies to survive. Whilst the stock markets’ valuation of technology companies has fallen, this has reflected a return to normality, not a fundamental collapse in confidence. The London Stock Exchange Techmark index fell from an all-time high of 5,743 in March 2000 and has since stabilised between 1,100 and 1,250. It is the latter range that is more positive for the UK’s technology sector as it is a realistic indicator of value. It is also worth noting that in this period Vodafone has established itself as the largest company on the UK’s stock exchange.

The UK has seen relatively few technology IPOs since the bursting of the dotcom bubble. While the UK’s record on IPOs has been positive within a European context, it is poor when compared to the US, China and India – some of the UK’s leading competitors (see Figure 1). But this is not necessarily considered as an outright negative: IPOs are just one route for raising money and can also reflect the immaturity of a market. China’s frenetic technology IPO activity is to some extent a reflection on the country’s nascent capital markets and its extensive privatisation process, which is belated relative to the UK.

However, a growing cause for concern is the performance of UKheadquartered technology companies which, in cases, have fared poorly over the past five years. Simultaneous to a host of foreignheadquartered technology companies’ strong growth, UK headquartered companies, have disappeared from the UK’s public markets. Similarly, while there are many UK-based multinationals generating a billion pounds or more in revenue each year, only a small handful of UK-headquartered companies have managed this level of turnover (such as O2, BT, Capita, Sage and Vodafone). Indeed, there are only two UK-based information technology companies among Europe’s top 10 (see Figure 2).

The pattern over the past few years has often been for UK-based technology companies to be acquired by foreign investors once they have reached a critical size. While any UK based technology company is positive for the UK’s economy in the short-term, in the longer-term it is the country’s interest to have more nationallydomiciled, profitable technology companies. UK headquartered technology companies have the potential to deliver intellectual property (IP) based revenues in addition to creating employment and generating tax receipts. The greater the number of UK headquartered technology companies, the greater the interest and coverage by the UK’s financial sector.

The current standard of technology education in the UK is good, but has the potential to be excellent. Deloitte’s view is that technology education should be considered from two perspectives: as an integral part of the individual’s career and as a core skill; the latter within business and personal contexts. General aptitude in technology is a shared responsibility between the educational system, the government, business and – most importantly – the individual.

The UK’s schools have two principal responsibilities with regards to technology. Firstly, schools need to make all pupils familiar with technology as a means of research, problem solving, production, communication and more. This will be essential to creating the next generation of workers, for whom confidence with technology has become a prerequisite, rather than a bonus. Secondly schools need to provide the underlying education required for a career in technology – particularly mathematics and science – and make it attractive to students of both sexes.

The UK’s schools are lacking in both areas. In terms of creating a technology-pervasive environment, the situation was weak, but is now improving. While it was not until 1998 that every classroom had a computer; ratios have since improved such that there are now five pupils to every computer in secondary schools. (However this still compares poorly with Singapore, for example, which targeted a ratio of one computer per two pupils for 2002).

Currently only a fifth of technology workers and students are female, and this represents a substantial cause for concern. To increase interest in technology among girls – a national network of computer clubs for 10-14 year old girls is being rolled out. But more will need to be done to ensure that a vast amount of talent is not lost.

As for mathematics and science education, the situation is even more concerning. The number of ‘A’ level students for both subjects is falling: for physics, numbers fell by a sixth between the mid 1990s and 2003; for maths, the number of fell by twenty percent between 2002 and 2003. The quality of teachers, measured by qualifications, is also dropping. Almost 80 percent of those teaching physics are without a degree in the subject; almost 30 percent do not have even have a relevant A level .

To encourage greater uptake of mathematics and physics, easier curricula have been introduced, but this is reducing the worth of qualifications and their international competitiveness. The Ministry of Defence now provides a remedial maths course for those with a C level GCSE pass or below. Coventry University equates today’s B graded ‘A’ level as the equivalent of a fail in 1991. This situation has to be addressed urgently.

As with schools, universities have two key objectives concerning technology: enabling a competence and ability in exploiting technology among all students while providing the environment in which those wishing to pursue technology as a career can thrive.

Universities appear to have delivered against the latter objective. Our primary research portrayed an industry generally content with the quantity and quality of its employee base, thus far. However, there are concerns as to the quantity of suitably qualified students available in the short to medium term.

The longer-term outlook is overshadowed by funding issues. Fundamentally, UK universities do not pay their way: some leading universities are even resorting to selling property to cover costs. Charges to foreign students are up to £20,000, over seven times the maximum fee applicable to UK students. If the funding gap continues, this will inevitably impact on the availability of technology for the general student body.

As for the universities’ ability to support students wishing to specialise in technology, the picture is generally positive. The UK houses five of the world’s top 50 research universities, including two of the top 10. Despite the lower salaries available in the UK for postdoctoral students and junior lecturers relative to the US, there has been only minimal brain drain over the past five years. The UK attracts the cream of European post-doctoral students with its blend of resources, lifestyle and location. As a result, there are 80,000 more science students in 2005 than in 1997.

The outlook for technology specialists is also improving. The government is upping funding both for postgraduates, whose stipend is rising to £13,000 in the coming academic year, and post-doctorates, whose starting salaries are rising by £4,000. By 2010, the government has committed to covering all research costs, both direct (which it has covered historically) and associated (from administrative staff to travel).

Commercial awareness needs to complement pure technological prowess. Presently the UK appears to be adept at developing worldclass subject matter experts. However these individuals can lack commercial capability, constraining their revenue-generating potential. The result: school leavers and graduates often have little or no idea of how a company works, and how they could fit in. The cost: too many great technological ideas are squandered as their creators have little to no idea how to express their inventions in business terms to potential investors and customers. Hence the UK education system both needs to introduce more tuition in commerce and also develop a more business-oriented outlook.

The former should be addressed in multiple ways, from familiarising primary school students with basic commercial skills, such as presenting to groups to understanding how shops operate; to explaining, through history, the role of economic perspective. Technology specialists, at school or university, should also be compelled to undertake courses in commerce.

" An American will look you in the eye, be animated and passionate, and will deliver a direct and concise presentation. I may not always like the style or the language, but I get the message clearly and quickly. An Englishman will talk to his shoes, will use verbose language to try to show how clever he is, will rarely get to the point, and will never deliver a concise summary of what he’s offering."

The ability of the UK’s educational system to deliver effective commercial teaching will be affected by its own attitude towards business. Presently, according to our respondents, the mood in a large share of schools and universities ranges from indifferent to anti-business. This attitude hinders universities’ ability to generate funding through technology transfer to the private sector. Yet in the US, some universities generate over $1 billion a year from this source of income.

In contrast, in the UK, even the most prolific universities generate only a few million pounds per annum; technology curricula are often not unaligned with industry needs; the heads of leading UK universities rarely meet their peers in industry; and most remarkably, only 4.3 percent of all UK businesses undertake collaborative projects with a university .

Over the course of the 21st century, the minority of workers with no exposure to technology will shrink inexorably. Every year, new categories of workers, from utility meter readers to lift engineers, start working with technology to improve their productivity. Every year the degree to which technology is used in the workplace grows. Ultimately the UK workforce will increasingly be split between those supplying technology and those using it.

A similar trend applies to the consumer who will increasingly have to interface with technology, whether this is for interaction (e-mail, text messages, web-cams); for finance (e-banking, share dealing); or for consumption (from groceries to travel). Suppliers are driving technology-based interfaces because they are typically lower in cost than their human equivalent: to influence consumer behaviour, consumers are increasingly being charged for choosing the latter approach. So over time, the cost of not using the technology-based interface will grow, implying another angle to the now infamous digital divide.

Thus there is an imperative on the individual to train continuously in technology. While schools and universities can provide a strong foundation, and employers generally provide top-up courses, technology’s incessant progress means that training can never cease – and individuals from all walks of life must strive to stay ahead. This is an individual mission for those who wish to keep pace with society.

The government shapes the UK’s technology sector in three major ways: via its strategic view of technology, via its macroeconomic policies and, more directly, through its microeconomic policies. 

The current government is generally recognised, according to both our primary and secondary research, to believe strongly in the value of technology to the UK. This is in terms of the existence of the sector, the availability of a qualified workforce and the productivity uplift resulting from effective technology deployment. However some of our respondents viewed the government’s enthusiasm for technology as being slightly ahead of its understanding of it.

With regard to macroeconomic environment, the UK government is currently performing commendably well: the UK’s macroeconomic environment provides a platform for the sector to grow over the medium term. The country enjoys a fiscal and social environment that broadly both supports UK-based companies and workers and also is generally attractive to multinational companies and foreign talent (see Figure 3 below).

As for microeconomics, the government has had more of a mixed record. The government’s microeconomic policies affect the UK technology sector both directly and indirectly. Direct influences include specific taxation policies affecting the technology sector (world leading, but more still could be done); funding of basic research (improving), regional development authorities (poor); and the development of clusters (good, but too little). Indirect influences include policies on education, and public sector technology procurement and deployment.

The government was widely regarded by our respondents as believing in the importance of the technology sector to the UK, both in terms of its contribution to GDP as a standalone industry and also for its impact on private and public sector productivity and living standards. Support for technology was manifest throughout the current government, from the top down. Respondents noted that the government needed to maintain a delicate balance in terms of providing support – via everything from macro-economic policy to investing in basic research – while at the same time adopting a laissez faire approach were relevant.

" The current government recognises the importance of science and technology to the welfare of the economy."

The UK macro-economy and the UK technology sector In general, the UK government has created a relatively healthy economic environment. It is most healthy when compared with the UK’s closest neighbours: indeed against Eurozone countries, the UK’s record gleams (see Figure 4).

" The government should try and attract greater inward investment by multinational technology companies into the UK. This creates considerable opportunities for small, UK headquartered technology companies."

This is a situation that the UK should exploit, both in terms of strengthening the hand of UK-based technology companies and also attracting additional multinational technology companies. The UK is, after all, well-positioned to be the location of choice for companies seeking a European base. The UK’s attractiveness to overseas investors is reflected by its foreign direct inflows, including acquisitions which for all sectors trebled to $78.5 billion in 2004.

This contrasts strongly with France whose inward investment almost halved to $24 billion. In Germany, foreign investors withdrew $39 billion, having invested $27 billion the previous year.

The UK’s share of foreign direct investment was also competitive with the world’s most talked about economy – China. In 2004, the UK attracted over $20 billion more than China, despite the latter having its best ever year. The UK’s attractiveness is also measured by the number of inward investment projects which last year rose by 31 percent to 1,066, with the largest number of projects coming from the technology sector.

The UK’s macroeconomic attractiveness depends heavily on two key policies: labour and taxation. The UK is widely perceived as a country with flexible labour laws and competitive (but not necessarily world-leading) corporate and personal tax policies.

" Although the US is still the place to be, the UK is the best place in Europe; skills are good and, relative to Europe, there is a good supply of good managers."

The overall UK tax burden for people-based industries such as the technology sector is competitive. The UK’s 30 percent corporate tax rate is internationally competitive, particularly when compared to North America and the rest of Europe. Twinned with reasonable tax rates on employment, the UK’s overall tax burden is generally attractive to multinationals looking for a European base and provides UK companies with a competitive advantage.

An associated cost of taxation is the compliance regime. Again, in this respect, the UK is internationally competitive. The UK’s tax collection system is less bureaucratic than most of its developed nation competitors, particularly relative to the US. The UK Revenue authorities are considered to be reasonably fair and efficient in dealings with taxpayers, although recently legislative attacks on what the government considers as harmful tax avoidance are creating some uncertainty among taxpayers and advisers. Overall though, Her Majesty’s Revenue and Customs is perceived as businesslike in its dealings with companies and generally supportive of enterprise.

While the UK’s personal taxation is considered by some British citizens we spoke to as excessive, foreign technology professionals domiciled in this country – particularly those from the rest of Europe – regarded UK tax levels as a key reason for locating here. Administration of tax for foreign nationals is also relatively easy. For an overseas employee becoming resident in the UK, filing and tax payment obligations for both employer and employee are equivalent to best practice in Europe.

However the UK should be wary of allowing its recent economic performance relative to the Eurozone to engender complacency: European countries and those further a field will compete hard for foreign direct investment. Ireland, arguably the UK’s most significant European competitor, offers a 12.5 percent corporate tax rate on trading income. Italy, France and Belgium all either have reduced, or plan to reduce, their headline rates.

The spirit of the UK’s macroeconomic policy is exemplified by its generally dismissive stance on national champions. Our respondents were in unanimous in their agreement with the UK government’s approach. National champions were particularly inappropriate in the highly dynamic and volatile environment of the global technology sector. In this environment, a subsidised, sluggish national champion cannot compete – and serves to drag the whole sector down. Furthermore, since technology is becoming increasingly based around niche products and solutions, a large national champion would struggle to deliver. And the consequences of a failing national champion are typically far greater than just the company itself: it is also the support structure, including other firms, based around the artificially sustained company that suffers.

In terms of microeconomics, the government has had a mixed record, ranging from being world-leading to being relatively weak. This section will discuss the government’s impact on the UK’s technology sector in terms of:

• taxation policy with a direct impact on the technology sector (attractive);

• funding of basic research (improving);

• regional development authorities (poor);

• development of clusters (good, but too little); and,

• public sector technology procurement and deployment.

The key taxation policy affecting the UK’s technology sector is that of Tax Credits for Research and Development (R&D). In this respect, Deloitte’s assessment is that the UK has one of the world’s most attractive regimes and reflects the government’s view of the link between R&D and economic growth. The UK’s scheme is generous, wide-ranging and easy to understand. In fiscal terms the policy on R&D should engender strong R&D spending; it should also encourage further foreign direct investment for those companies seeking to conduct research in Europe.

The R&D tax credit has been gradually refined – hence making the UK more competitive – since it was first introduced in 2000. The UK’s tax credit is a "super-deduction" for investment in research and development. Companies are entitled to a deduction amounting to between 125 percent and 150 percent of spending on qualifying R&D. The credit can even be monetised for loss-making SMEs. The R&D credit is a permanent benefit, not a timing difference. There are no restrictions on year-on-year increases or complicated percentage calculations. R&D does not even need to take place in the UK and can also be sub-contracted. Deloitte’s view is that a similar incentive for non-corporate entrepreneurs would help encourage innovation at the micro-scale.

The countries that come closest to the UK’s R&D tax credit regimes include Canada, which provides up-front deductions for R&D costs, and Austria which offers super deductions of up to 135 percent. As for other schemes, France’s R&D credit system was recently declared unlawful by the European Court of Justice, as it only applied to R&D conducted in France.

One weakness with the R&D Tax Credit Scheme derives from the variable degree of awareness amongst our respondents. Arguably, the government needs to communicate its tax credit policy more effectively, both nationally and internationally.

The government has – and is right to have – assumed responsibility for basic research. The social return from research and development is at least twice as great as the private return – this is due to the resulting benefits to other companies. Our respondents felt that the government’s role in supporting basic research is critical – now and in the future – because private companies are often unable to underwrite the cost and indeed capture all of the benefits of scientific discoveries The government’s record to date has been mixed. On the positive side, the UK currently produces 8 percent of the world’s scientific publications generated by 1 percent of the world’s population. The UK government has increased its spend on basic research, by committing an extra billion pounds in finance for research and development by 2006.

However, on the negative side, the government needs to ensure that it invests in the basic research most apt for the UK: it cannot afford to invest across all emerging technology areas, and, according to our respondents, has not always shown a high level of understanding of trends – current and future – in the global technology world. It must invest in areas that the UK technology sector is able to exploit, and almost all respondents therefore called for more open and inclusive dialogue between the government, the research community and the technology sector at large.

This is particularly pressing as other countries are competing ever harder in the field of basic research. Ireland’s Science Foundation, for example, has an investment fund of £646 million, a major chunk of which is going into constructing five Centres for Science, Engineering and Technology (CSETs) focused on information technology and biotechnology.

As for Regional Development Agencies, their impact on the UK’s technology sector has been average to underwhelming. Respondents viewed that there was an excess of quasi-autonomous government agencies providing support to technology (and other) businesses. In some cases, ambition outweighed realism, with the result that too many RDAs had the objective of replicating the success of Silicon Valley. Inter-agency competition was also manifest in arguments over whose jurisdiction a company should fall into. Our respondents also questioned quality of staff, particularly those focused on business development and support. Staff were thought to be lacking both in basic commercial understanding as well as specific technology knowledge. As a result, they felt that the capacity of RDAs to offer business development support and advice was limited. For RDAs to be successful they – contrary to their name – need to work nationally, identifying realistic and complementary objectives for each region.

Indeed, one of Deloitte’s key recommendations for the industry is the need for greater dialogue between all players. The government has taken steps to encourage networking, but could do far more, for relatively little effort or investment. In some respects the government has unequalled clout. For example, only a ministerial invitation has carried sufficient weight to gather the heads of two key groups of players: technology companies and leading universities. Government must therefore continue to facilitate and drive partnership in key areas.

A further key role for the government relates to its position as a buyer of technology. In recent years, the government has suffered some high profile failures in technology deployment – but has also striven to raise its game. These concerns have also led to concern among the financial community that only the largest technology companies can deliver.

The government should at least follow – but more ideally set – best practice in the purchase, deployment and exploitation of technology. Effective use of technology by the government will raise awareness of the benefits of technology, potentially encouraging entrepreneurship, diversification, and ultimately, growth. Failed deployments, conversely, will engender scepticism.

The UK governments’ approach of purchasing from UK companies only when this is the best of the available options from the taxpayers’ perspective is the right one. Purchasing on the simple grounds of their nationality would be akin to a national champions policy, which as discussed earlier, is inappropriate.