🤝 Philip Salter, Founder
Despite the performative antagonism of shows like The Apprentice and Dragons’ Den, anyone familiar with business knows that collaboration is critical for success. You only need to look at the concerns arising from Anthropic’s broken relationship with the United States Department of Defense to see the primacy of partnerships. And what’s true for one of the world’s fastest-growing companies is also true for Britain’s smallest — even more so.
In a new paper, researchers analysed over 17,500 UK firms from 2006 to 2018 across three government datasets, measuring innovation as the share of revenue from new-to-market products. They tracked whether firms collaborated with seven types of partners across four geographic levels and isolated how SMEs — 92% of the sample — benefited differently from partnerships compared with large firms.
The headline finding is that SMEs get the highest returns from collaboration with customers and suppliers compared with universities, consultants and government. On average, knowledge collaboration for innovation in SMEs is positively moderated by the regional proximity of collaboration partners — in other words, the closer the partner is, the greater the positive effects of knowledge collaboration. This matters most for university collaboration and exploration-oriented innovation; for customers and suppliers, however, the positive effects hold across geographic distances, including international.
University collaboration does positively affect SME innovation, but only when the university is nearby — regionally or nationally. The effect disappears or turns negative at international distances. Even then, the research suggests that the type of knowledge universities offer is harder for small firms to absorb and commercialise compared with the more applied, market-ready knowledge that flows from customers and suppliers.
Critically, government collaboration has essentially no measurable impact on SME innovation. This isn’t procurement but rather cooperation with government bodies or public research institutes specifically on innovation activities — joint R&D work or knowledge-sharing partnerships aimed at developing new products or processes.
The paper finds that homophilous partnerships — working with knowledge-similar, geographically close, supply-chain partners — produce the strongest measurable innovation outcomes for SMEs, at least when success is measured by new-to-market product revenue. The paper suggests that this can create echo chambers and might mean missing out on more transformative opportunities, but the data shows this is, on average, the best strategy.
So what are the policy implications? When it comes to SMEs, this paper suggests that government support should prioritise helping them deepen relationships with customers and suppliers — the partnerships that most reliably drive innovation. University–industry linkages — as currently delivered — may be overweighted, while international programmes requiring cross-border academic partnerships risk imposing costs on SMEs that outweigh the benefits. And, to be blunt, the data shows that entrepreneurs should think twice before working directly with government.
🪙 Eamonn Ives, Research Director
Plans to replace portraits of historical figures with pictures of quintessential British wildlife on bank notes will understandably be the one currency news story that gets all the attention today. Fun as it will no doubt be to see cuddly creatures adorn our legal tender, another altogether more important money-related media item also bubbles beneath the surface.
Today marks the last call for submissions to the Financial Services Regulation Committee’s inquiry on how stablecoins should be regulated in Britain. For the uninitiated, stablecoins are a form of digital currency, the value of which is tightly pegged to real-world assets — like cash or government bonds. This allows them to serve as a ‘stable’ unit of value, in the sense that one sterling-denominated stablecoin can always be redeemed at £1, a dollar-denominated one at $1, and so forth.
As Hugo Okada and Osian Guthrie note in our latest research paper, A Sterling Opportunity, stablecoins offer a host of potential benefits. For consumers, there’s the promise of greater financial inclusion. For businesses, cross-border transactions could become radically less expensive.
Where stablecoins could, however, pose more of a threat is to governments. If they continue on their meteoric rise — up tenfold in the last five years, with the market cap currently standing at around $300 billion — there’s always a risk that sovereign states will see their ability to regulate the money supply eroded. But, for a nation like the United Kingdom, there could also be significant upsides too.
Consider how stablecoins rely on high-quality assets — such as government bonds — to maintain their value. Simple economics tells us that this will drive bond prices up, and yields down. Servicing the national debt would in turn become cheaper. Public sector net debt is incrementally nudging down from the highs of the Covid-19 pandemic, but it still stands at 92.9% of GDP. In 2025-26, the Office for Budget Responsibility expects the UK to pay £114 billion simply to service that debt. Even in the best of times, that’s an awful lot of money that could otherwise be used for more productive ends.
Stablecoins won’t solve Britain’s debt problem entirely. But they might just help at the margin — through allowing cheaper borrowing, and by stimulating entrepreneurial activity in a clear growth sector. To seize their full potential, however, Britain needs a regulatory regime that’s fit for purpose. We should take heart from the fact that legislators are examining stablecoins closely — let’s hope their diagnosis and subsequent prescriptions are wise ones.
📝 Mann Virdee, Senior Researcher
On Sunday, our Adviser Sam Dumitriu highlighted a growing paradox in Britain’s approach to safeguarding nature: well-intentioned legislation designed to protect nature often has the opposite effect. By prioritising bureaucratic processes over purpose and outcomes, current laws offer the worst of all worlds. They fail to protect the environment and also prevent us from building the energy and transport infrastructure essential to decarbonisation.
This is part of a broader problem — the prioritisation of process over purpose leads to distorted outcomes. When we treat administrative compliance as the goal, we lose sight of the intended outcomes.
Legislation can also fail to serve its intended purpose because politicians are required to vote on complex regulations with limited time, information, and ability to stress-test. That’s not helped when the UK’s political system prioritises looking busy and constituency casework over the job of being a legislator. It’s worse for the entrepreneurial ecosystem because so few parliamentarians understand what it takes to be an entrepreneur or the competing pressures they face.
Take the example of the National Security and Investment Act. Its well-intentioned purpose is to allow government to scrutinise and intervene in business acquisitions, mergers, and investments that it believes will pose risks to national security. But its broad scope means that some startups and low-risk deals such as internal restructuring are unintended targets.
This all reflects an environment where the fear of making a wrong decision outweighs the benefit of trying a new approach. This “paralysis by analysis” leaves Britain with the highest energy costs in Europe and a regulatory regime that makes the investment environment more difficult for Britain’s entrepreneurs.
Addressing these failures requires better oversight as well as better regulation. That could include sunset clauses, formal review processes, and structured scrutiny from experts and practitioners after legislation has been passed. And there are many arguments for the reform of the House of Lords — not least its status as the world’s second-largest legislative body and the questionable expertise of some members — but the scrutiny and debate provided by the upper chamber should not be dismissed lightly; it remains a necessary, albeit imperfect, check on poorly drafted law.