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Banks must find the means to support innovation and reap the rewards

Dr Steven McCabe "writes I was involved in a debate which took place as part of Birmingham Made Me Expo on what is an appropriate economic strategy for the Midlands".

I was involved in a debate which took place as part of Birmingham Made Me Expo on what is an appropriate economic strategy for the Midlands.

This debate produced some really crucial questions.

Probably the most crucial is, what should such a strategy consist of?’

Another is, how do we facilitate a culture that will ensure growth and jobs in this region?’

Unsurprisingly, much of the debate involved the issue of whether there are structural problems that militate against this region.

Those involved also debated the role of both central and local government level, as well as the other interested agencies, in facilitating a recovery which is sustainable.

The thing that was absolutely agreed by all was that encouraging innovation in all sectors was crucial.

All panellists reinforced the message that in order to compete effectively it is vital for companies to provide goods and services that are perceived by customers as being superior to those offered by competitors and include the latest technology and ideas.

Interestingly, an earlier speaker on concluding his talk about the origins of manufacturing in Birmingham was asked by a member of a school party why the manufacturing industry lost out to other countries.

There’s no easy answer to this question but, for a multitude of reasons, despite this sector being the effective bedrock that created opportunities over the last 200 years, in terms of jobs it has declined rapidly since the late 1970s.

It would be foolish to believe that these jobs lost will ever be replaced, though many argue that more should be done in dedicating effort and funding to ensure that we support the manufacturing and engineering sector.

In answer to the question, we do know that the one aspect of manufacturing and engineering where we still have a competitive advantage is in the expertise and creative ability of those who design products.

The problem is that they are not always made here.

Comparison was made with the likes of Germany where the creative and innovative expertise is harnessed to make the high-value and innovative products which are also made by indigenous workers.

There was common agreement that if we had maintained a culture of placing creativity and innovation in our manufacturing we might potentially have had a sector which has survived as well as Germany’s.

I’ve said before that we should do everything we can to emulate what occurs in Germany where there is a network of small and medium-sized companies dedicated to making high-quality and innovative products; the Mittelstand.

These companies were vital to Germany’s ability to withstand the chaos caused by the global financial crisis so much better than other European economies including ours.

A fascinating debate ensued as to whether we could produce a culture to support a Midland’s version.

And this is where the problems begin.

The renowned quality guru Dr Deming used to say, in response to any solution intended to produce improvement, “by what means?”

Take finance for instance. In Germany the Mittelstand is supported by banks which see the benefit in funding innovation and creativity which will not only create jobs but will contribute to future prosperity and growth. For example, when Germany’s second largest bank, Commerzbank, announced its results in February it was able to report that it made operating profits of 1.6 billion euros for the division dedicated to funding companies in the Mittelstand.

This was far more profit than the rest of Commerzbank’s divisions combined.

Investing in innovation, therefore, should be seen as a ‘no-brainer’. Not in this country it seems.

According to two recently published reports small businesses wanting to invest in innovation find it increasingly difficult to secure funding through bank loans.

The effects of the credit crisis has made banks more reluctant to invest in companies developing schemes which they consider to be risky which, of course is frequently a corollary of attempting to be innovative.

According to Credit and the Crisis: Access to Finance for Innovative Small Firms Since the Recession, which has been jointly published by the Big Innovation Centre, whose director Professor Birgitte Andersen was a speaker at Birmingham Made Me, and the Work Foundation it is becoming increasingly difficult for small enterprises with innovative ideas to attract the funding that will enable them to get beyond the inception stage.

This report shows that the rejection rate for funding has increased from 11.5 per cent in 2007 to a rate now of 22 per cent.

What this tells us is that if companies are being effectively stymied at this stage in their evolutionary development they are less likely to flourish and become the dynamic concerns which will ensure jobs and future economic prosperity.

* Dr Steven McCabe is director of research degrees for Birmingham City Business School

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