News – Blog
27 September 2021
While the pandemic has hit the UK public finances hard, the Government remains committed to growing public investment in R&D significantly over the coming years.
It is hoped this will deliver an upsurge in private R&D spending and productivity growth and faster progress in addressing some of the defining challenges of our era. Alongside increased funding, the Government’s Innovation Strategy puts timed, measurable Innovation Missions at the heart of its approach to achieving these aspirations.
Challenge Works argues in this new report that the success of these Innovation Missions will require a fresh approach to how Government invests in innovation, complementing traditional R&D grants with methods that are able to bring together public sector strategic direction with private sector ingenuity.
The report makes the case that innovative methods such as challenge prizes have an essential role to play in a balanced portfolio of government innovation investments, and can help address longstanding weaknesses in the UK’s innovation ecosystem.
Alongside the report Challenge Works sets out seven specific proposals for Mission-aligned challenge prizes to drive innovation in key UK high value sectors.
The COVID-19 pandemic has highlighted starkly both our vulnerability to shocks and our deep dependence on the power of science and innovation.
The pandemic elicited an unprecedented response from the UK’s science and innovation ecosystem, bringing progress in vaccine development and distribution that surpassed almost all popular expectations at the start of the crisis. As the UK Government’s Innovation Strategy published in July 2021 puts it: “[D]uring this COVID-19 pandemic, our innovation ecosystem has come to the rescue.”(1)
But far from these successes being a cause for complacency, the Innovation Strategy sets out a bold new vision for the UK’s science and innovation ecosystem, building on its world-class strengths but reforming the way we do things where this is needed. Resources are part of the story: UK investment in R&D, public and private, remains stubbornly low by international standards(2) and the Strategy reaffirms pre-pandemic plans for an historic increase in public funding for R&D. But the primary objective of the Strategy is to ‘boost private sector investment across the whole of the UK’. And it sees Government taking a more strategic role in innovation policy, actively directing innovation towards our most important societal challenges, as critical to achieving that goal.(3)
What does this more strategic role for Government mean in practice?
Central to the Innovation Strategy are plans for a new programme of specific, measurable and timed Innovation Missions, focussed on some of the Government’s highest policy priorities, potentially including climate change, biodiversity, pandemic preparedness and the impact of an ageing society. These Missions will be inclusive by design, mobilising all sectors of the economy including the public sector, industry, civil society and universities.
This represents a new direction for UK innovation policy, which has historically shied away from providing direction through ‘measurable and timed’ objectives – in part no doubt because of the long shadow cast by industrial policy failures of the past. So for example the 2017 Industrial Strategy, which this Innovation Strategy succeeds, defined strategic themes in the form of four Grand Challenges, to provide strategic alignment for specific missions, individual challenges and over 1,600 projects.(4) But while a step beyond historical focus on horizontal, sector-agnostic policy such as R&D tax credits, the Industrial Strategy stopped short of a commitment to specific, measurable goals.
We welcome the Innovation Strategy’s move to introduce specific, measurable and timed Innovation Missions, because:
Specific, measurable, time-bound Innovation Missions will demand new ways of working to take advantage of the opportunities this new approach to innovation policy offers. In particular the new principle of organising policy around measurable outcomes, rather than basing it on broad themes or established processes, creates opportunities for greater methodological diversity, flexibility and experimentation and more open engagement with all parts of the UK innovation ecosystem.
So we welcome the Innovation Strategy’s commitment to employing ‘a diverse range of funding and policy instruments’7 to support Innovation Mission objectives and to make the most of the wider economic benefits they offer. Among these diverse instruments, we believe there is a particularly strong case for challenge prizes to be one of the fundamental building blocks used in Mission planning and deployment.
While much discussed in recent years, mission oriented innovation policy has historically suffered from a lack of UK success stories. The COVID-19 pandemic has however created another success story in the form of the UK Vaccine Taskforce, and the plan set out in the Innovation Strategy is described as being based on learnings from the pandemic.(5)
The Taskforce:
Its success has led many to ask: why can’t innovation policy achieve similarly rapid, demonstrable successes against other urgent priorities, for example in the fight against climate change or dementia?
Of course, the conditions within which the Taskforce was created and operated were extraordinary. It was a crisis situation unprecedented in living memory, creating a ‘whatever it takes’ mindset in Government. There was a strong consensus that securing access to vaccines should be an overwhelming priority, there were strong grounds for confidence that COVID vaccines could be developed (based on past successes), and the benefits promised by vaccines vastly outweighed the costs of developing them. There was also an unusually high intensity of public interest in progress, including through the media and the political process.
An obvious difficulty is how to create a similar sense of urgency and focus for other innovation priorities, including addressing no less devastating but less immediately salient challenges such as climate change. Credible Innovation Missions can create conditions similar to those that drove the success of the Vaccine Taskforce. Specific, measurable, time-bound Innovation Missions will demand new ways of working to take advantage of the opportunities this new approach offers. This will be strengthened by the governance role played by the new National Science and Technology Council, chaired by the Prime Minister, in defining and steering the Missions. Further, while the budgetary freedom enjoyed by the Taskforce was exceptional, its model of operational flexibility combined with strong accountability and expert leadership could serve as a model for the Innovation Missions.
The default instrument used for publicly-funded R&D is the grant. Though data are not available for the breakdown of public R&D by funding instrument, it is clear that grants predominate in the approximately £15 billion that Government will spend on R&D this year. (8) Is this dependence on a single kind of funding instrument the best way to maximise innovation outcomes from public investment in R&D?
Grants are the right instrument to use to fund basic research undertaken without a view to marketable applications. Government subsidizes R&D on the basis of market failure: the social returns from R&D exceed the private returns, because the knowledge created through R&D ‘spills over’ to market rivals.(9) This certainly characterises much fundamental or basic research, and it is also usually impractical and undesirable to specify in advance what the outputs of such research should be. Grants are a necessary instrument for financing such research.
But the case for grants as the Government’s default instrument of choice weakens as the potential for private returns to R&D grows, and as it becomes more practical and desirable to specify the outputs sought from R&D:
The new Innovation Missions are intended to be much closer to marketable applications than basic research,11 and will by design specify measurable outcomes. In such situations, other methods including challenge prizes12 offer different, and in some circumstances preferable, instruments for sharing risk and reward between the public sector and private innovators and for achieving targeted outcomes.
In The Great Innovation Challenge,(13) published in 2020, we made the case for challenge prizes to play a much more significant role in the way Government supports R&D in the UK, as part of a balanced portfolio of approaches that is likely to be more effective than overwhelming reliance on a single mechanism. The introduction of specific, measurable, time-bound Innovation Missions make the case for a significant role for challenge prizes even more compelling.
While no two challenge prizes are exactly the same, their common characteristic is an orientation towards outcomes rather than inputs. The rewards offered to innovators by challenge prizes are (at least in part) conditional on the successful achievement of outcomes. In this they contrast markedly with R&D grants, which provide rewards (often following a competitive process) conditional on the promise of effort. The key differences between challenge prizes and grants can be summarised, in very broad terms, as follows:
In the prototypical challenge prize, many innovators compete and collaborate with one another to achieve the goal set by the funder; in grant programmes, innovators propose projects to the funder who then selects one (or more) for funding. Grants are well suited to expanding the knowledge frontier, while challenge prizes are well suited to applying knowledge to solve problems.
Based on these characteristics, The Great Innovation Challenge sets out some common sense criteria for identifying situations particularly suited to the challenge prize model:
In practice, government innovation investments(14) are often made not in isolation but as part of a portfolio of investments aiming at the same high level goal. So the question for any individual innovation investment is not only: “What is the best instrument for this investment, e.g. grant or challenge prize?” but also: “How does this investment – including the choice of instrument – affect outcome risk in the overall portfolio?” And because challenge prizes and grants have different and complementary risk profiles, balancing them out in a portfolio can reduce overall risk.
Investing in innovation entails taking on and managing risk and uncertainty. The successful outcome of individual innovation investments made by Government can, and should, be uncertain, but the uncertainty of individual projects can in part be mitigated through a portfolio approach. This was exemplified by the Vaccine Taskforce which, as the Innovation Strategy describes, “took a portfolio approach with the knowledge that value for money could not be assessed at the individual spending decision level.”(15)
While typically portfolio risk management is framed in terms of the mix of projects invested in, the portfolio mindset should also extend to the range of funding instruments used because the instruments themselves can complement each others’ risk profiles. For the highest risk, most uncertain innovation investments of the kind made by Government, a portfolio approach should mean not only investing in different projects – but also using a diversity of funding instruments that complement one another.
Grants and challenge prizes entail different kinds of risk for Government as funder:
For both grants and challenge prizes there are ways of mitigating their respective risks.(17) But the risks of each method also naturally offset each other. For example:
The upshot is that combining challenge prizes and grants (and other instruments) in a portfolio can help diversify the risks faced by Government in funding R&D. For any individual innovation project one method may ex ante be preferable to another. But for portfolios of projects – such as the Innovation Missions – the choice is not between challenge prizes or grants, but how best to combine them in a portfolio.
Although the specific focus of the individual Innovation Missions has not yet been determined, the Innovation Strategy describes the key characteristics they will share.
They will:
There are strong prima facie reasons for challenge prizes to be central to the way these Missions are delivered.
Ambitious Missions of the kind announced in the Innovation Strategy are new to UK innovation policy and there is no ready-made blueprint for how to design and execute them effectively in the UK context.
Although the specific focus of the individual Missions has not yet been determined, it is reasonable to expect that they will be diverse in character, demanding a flexible and creative approach to their management individually and as an overall programme. We offer here preliminary reflections on how Missions might be conceptualised and organised, and based on these the role that challenge prizes could play in their execution.
A Mission may usefully be conceptualised as a coordinated portfolio of investments that evolves over time with a view to achieving a specified goal. Although the objective of the Mission overall will remain constant, what the Mission needs to accomplish at any moment in time en route towards that objective will change. For instance, at any moment in time it could be the case that:
Taking this perspective of a Mission as an evolving portfolio of investments, key challenges for those with responsibility for leading a Mission will be:
Because Missions aim to achieve specific measurable outcomes, they will need over time to converge on a preferred roadmap and solutions. What that journey towards convergence looks like, and in particular what it means for the planned evolution of the investment portfolio over the Mission’s lifetime, depends on the Mission’s starting point – Missions may start with the preferred roadmap more or less well defined. For example, the roadmap for a Mission addressing a complex societal challenge may at first be quite unclear – for instance, how best to address regional disparities in life expectancy across the UK. Such a Mission may start with a period of experimentation and evidence-gathering before converging on preferred solutions. The roadmap for a more narrowly technological Mission – for example, achieving the cost effective deployment of carbon capture, usage and storage in the UK – may be more well established based on expert technical consensus.
As a consequence, both the use of challenge prizes in the portfolio of investments, and the type of challenge prizes undertaken, may vary between Missions and over time.
In the early stages of a Mission, when a high degree of convergence on the preferred roadmap may not have been achieved, a portfolio of methods, with each playing to their known strengths, could be particularly effective as a method for discovery and exploration of the solution landscape and of the barriers that will need to be navigated on different roadmaps. Grants may focus, for example, on more speculative research by research institutions at the relevant knowledge frontier, while challenge prizes are used more to engage a wide range of innovators (regardless of sector) that may have value to bring to the Mission, and to learn which innovation opportunities private sector investment is currently prioritizing and how this may evolve. Challenge prizes at this stage might target quite broadly defined (rather than very focussed, measurable) objectives, may require relatively little investment from innovators to participate in order to encourage the widest possible participation, and may be relatively short in duration with a focus on early stage prototyping rather than achieving scaled adoption.
Over time, as the preferred roadmap for achieving the Mission and the nature of the expected barriers and opportunities along the way become clearer, the role that challenge prizes (and other methods) play would evolve.
As Missions converge on a preferred roadmap, it will often be the case that achieving the Mission objective requires significant input from the private sector – for example to find the best ways to scale up adoption or distribution. Because challenge prizes are a particularly powerful method for tapping into the ingenuity of private sector innovators, where this is the case we would expect to see challenge prizes play a growing role in the Mission portfolios over time.
Although an underlying feature of all challenge prizes is that they provide rewards conditional on outcomes, they are a flexible and adaptable method. A key difference is between challenge prizes that reward ‘firsts’, and those that reward ‘best’.
Prizes for ‘firsts’ reward the first in time to achieve a specified goal. Because of this they can be indeterminate in length, or may determine a cut off after which the prize will not be awarded. The original Longitude Prize in the 18th century for a practical and reliable method for determining longitude at sea, and the modern Longitude Prize run by Challenge Works, are examples of such prizes.
But in practice contemporary challenge prizes today are more often for ‘bests’ – they reward whoever provides the ‘best’ solution to a specified problem within a given timeframe. This model is attractive for funders and for participants because it determines in advance when the prize will end – but at the risk that, with more time, better solutions might have been developed. The outcome of a ‘best’ challenge prize depends crucially on the quality and diversity of the participating innovators, so such challenge prizes are open by design and creating profile is a key success factor. Because the Innovation Missions themselves will be time-bound, challenge prizes for ‘bests’ are likely to be a natural fit.
As the Government defines which Innovation Missions it will prioritise and how these will be taken forward, we hope it will consider the important contribution that challenge prizes could make as part of a balanced portfolio of funding instruments.
Challenge prizes are a distinctive method and their execution demands a different approach from the grant programmes that currently predominate in public R&D funding. Based on our experience at Challenge Works delivering over 40 challenge prizes since 2012, ‘getting prizes right’ requires a particular focus on the following aspects of execution.
Challenge prizes should set objectives that are ambitious but also achievable, and should offer rewards that incentivise high quality engagement with the challenge. So defining the problem and setting the right target is key to a prize’s success. Before launching a prize we undertake detailed research consulting with problem-owners, innovators and beneficiaries to identify the opportunity space on which the prize should focus, the barriers to innovation, the landscape of potential innovators and their motivations. We do all this to be confident that the prize is focussing on the right problem and will bring forward solutions that can flourish beyond the lifetime of the prize.
Challenge prizes build from the premise that great innovation can come from unexpected places, and that the more that a diverse range of innovators engages enthusiastically with the prize the greater its impact. This demands an understanding of and empathy for innovators – who they are, what they are trying to achieve, what they need to prosper, and how to level the playing field – and designing the prize so that it works with the grain of innovator mindsets. This means keeping processes simple and unbureaucratic, moving at pace, and transparent, clear and timely communication. We use prizes to build networks and communities of innovators who support and challenge one
Challenge prizes are designed to raise awareness and to get noticed. We use the power of communications to shine a light on a problem, demonstrate why it matters and what opportunities it creates, and to highlight the solutions that prize participants are creating. The high-profile nature of prizes develops downstream customer demand, and can stimulate further private sector investment many times greater than the direct financial rewards provided by the prize.
The COVID-19 pandemic has demonstrated the appetite for high quality information about science and innovation where this is made relevant to people’s lives and daily concerns. We believe that to date we have barely scratched the surface of challenge prizes’ potential to stimulate public engagement with science and innovation. Challenge prizes could play a key role in engaging the public in the Innovation Strategy, the Innovation Missions and the wider UK science and innovation ecosystem.
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1. Department for Business, Energy & Industrial Strategy (BEIS), 2021, p.18.
2. In 2019 UK domestic spending on R&D was 1.8 per cent of GDP, and the average across the OECD was 2.5 per cent of GDP.
Source: https://data.oecd.org
3. The Prime Minister has stressed the need for Government to play a more strategic role in innovation policy: “It is also the moment to abandon any notion that government can be strategically indifferent, or treat research as a matter of abstract academic speculation.” Source: https://www.gov.uk/government/speeches/prime-ministers-article-in-the-daily-telegraph-21-june-2021
4. Data as of January 2021, from National Audit Office, 2021.
5. BEIS, 2021, p.19.
6. Source: https://www.gov.uk/government/publications/thevaccine-taskforce-objectives-and-membership-of-steeringgroup/vtf-objectives-and-membership-of-the-steering-group
7. BEIS, 2021, p.83.
8. Source: https://www.gov.uk/government/publications/beis-research-and-development-rd-budget-allocations-2021-to-2022/beis-research-and-development-rd-budgetallocations-2021-to-2022
9. See e.g. Bloom, Nicholas, Schankerman, Mark, & Van Reenen, John, 2013, ‘Identifying Technology Spillovers and Product Market Rivalry.’ Econometrica, 81(4).
10. Grants programmes can include match funding requirements for the private partner(s) to address this risk. But apart from the practical difficulties of monitoring compliance with a match funding requirement, there is no robust way of calibrating what an appropriate match funding requirement should be for any given project.
Department for Business, Energy & Industrial Strategy, ‘UK Innovation Strategy: Leading the future by creating it.’ July 2021.
Industrial Strategy Council, ‘Lessons for industrial policy from development of the Oxford/AstraZeneca COVID-19 vaccine’, February 2021.
National Audit Office, ‘UK Research and Innovation’s management of the Industrial Strategy Challenge Fund.’ February 2021.
Challenge Works, ‘The Great Innovation Challenge: How challenge prizes can kickstart the British economy.’ July 2020.
