The Business World: Challenge is to turn all that clusters into gold

THE GOVERNMENT'S White Paper on Competitiveness, published late last year, hit the spot for a lot of its readers. Almost literally so, with its emphasis on the importance of industrial clusters. These economic hotspots have been around as long as there have been economies, and were analysed a century ago by Alfred Marshall. However, they have recently re-emerged as a focus for industrial policy - partly because developments in modern economic theory made them interesting to glamourous academics like MIT's Paul Krugman, and partly because new industries seem to develop in clusters.

Silicon Valley is one prominent example. But other high-technology industries, such as biotechnology, cluster as well. And in a follow-up to the White Paper the Department of Trade and Industry has been looking at how best the UK's biotech industry can be encouraged.

According to figures from Ernst & Young and Arthur Anderson, the number of biotech firms in the UK has climbed from 125 with about 10,000 employees in 1994, to 260 with more than 15,000 employees now. This increase has been matched by a gentle upward trend in the amount of venture capital investment in biotech, which has doubled from around pounds 30m to pounds 60m between 1987 and 1997. Britain is far ahead of Europe, too. Germany has more than 200 biotech companies, but the next closest rival, France, trails far behind with less than 150.

This lead is far from assured, however. As part of a policy to modernise the country's industrial base, the German government is making tremendous efforts to grow its own industry, through generous financial incentives to start-up companies.

The question is what the British government ought to be doing in its turn. Lord Sainsbury, the science minister at the DTI, is emphatic that the role of government is to create an enabling environment. "You cannot create clusters," he says. "But government can remove barriers to their growth. We should not attempt to direct them."

The American experience offers a sort of natural experiment in what enables successful science clusters to develop, and it turns out that the role of state governments has been extremely varied. In Silicon Valley, the local authorities had played next to no role, but in other hotspots like North Carolina, local government had been very active in offering tax breaks and creating science parks.

Lord Sainsbury concludes: "The key part is the quality of the university or medical centre ... Clusters grow up around a university that is at the cutting edge of science." Or to put it another way, the new industries run on brainpower and will form where there are large reserves of their key raw material, world-class thinkers. This is a characteristic of all sorts of weightless, modern industry, not just the science-based ones. Web page designers or software programmers also tend to cluster together, because they feed on the flow of complex and creative ideas, and generate ideas and exchange information far better face to face. But it is true in bucketloads about scientific knowledge.

The DTI has identified half a dozen or so biotech clusters already in existence in the UK. The best-known and most self-aware is in Cambridge. There are others at Oxford, York, Manchester, in Scotland around Edinburgh and Dundee, and in Surrey. The government policy identified as the most important by Lord Sainsbury is the University Challenge Fund, a pounds 55m pot of money very clearly targeted at the gap in funding between a scientist in a lab having an idea and turning it into a commercial product. In addition, there is extra funding for the UK science base, with new areas like genomics a priority.

Another key area in which government can help includes the clarification of intellectual property rights - does the idea, and profits flowing from it, belong to the funding body or the university, and how is it to be parceled out within a university research team? In the US there is no ambiguity: the university owns the intellectual property and decides how to distribute it. There is a role for local authorities too, in things like making property available for new companies and smoothing the planning process.

Yet while Britain's lead in biotechnology within Europe is encouraging there is one big worry. If success in science-based industries is based essentially on intellectual attainments, the weakness of the education system is a bad omen for the future. The new funding cannot make up for a generation of decline.

For the past 20 years most of Britain's top scientists - indeed, academics from many disciplines - have left the country for US and other universities. Apart from a few high-profile returnees, there is little sign of that tide turning. And although the UK still has some fantastic scientists, there must be a real doubt about whether there are enough. Are the underlying intellectual clusters going to attain critical mass?

There are few subjects in which the UK has world-class departments, few universities if any that can compete with the top US ones. And the problem goes all the way through the education system. Students opt in their droves for soft subjects rather than hard sciences. It is fashionable to be both innumerate and unthinkingly opposed to serious scientific argument - witness the witless furore surrounding genetically modified foods. Real geek, alas, is not chic.

There is no doubt the Government is on to a real opportunity for the British economy in its clusters approach. Unfortunately there is still a mountain to climb.