It was a response to a question about venture capital funding made by the chair of ARIA, Matt Clifford, that got me thinking about how value is created in universities. At the House of Lords Science and Technology Committee he said:
ARIA has been designed very explicitly as a value creation mechanism, rather than a value-capture one. That is the right call. What do we know about the benefits of innovation and publicly funded R&D? Innovators capture only about two per cent of the value created. The vast majority of value created by R&D is captured by consumers. What really matters for economic growth is not equity value but adoption.
Clifford’s argument is that the ultimate value of ARIA is not that the government will own a stake in an invention that goes on to generate billions of pounds of value and return money to the Treasury. For him, the real prize will be if the technologies that emerge out of ARIA are widely adopted by society and grow the economy. He went on to say:
If it turns out that an ARIA programme ends up changing the way global pharma interfaces with the brain, yes, it would be great if there was £1 trillion company that captured that value in the UK, but the primary benefit to the UK would be its people having lifechanging access to new drugs. That has to be the thesis of all publicly funded R&D.
It is a strong statement to say the thesis of all publicly funded R&D should follow this model but it’s an interesting question to consider what a university agenda which was entirely about value creation, without less interest in capturing that value, would look like. It’s a fundamentally different view that a rising tide will lift all boats rather than institutional investment should reap institutional rewards.
That’s your value
Let’s begin by considering how value is created and captured in universities. And to do this we have to acknowledge that as (mostly) charities universities are bound to carry out their work for the public benefit – but they generally do this through their own institutional success. Universities aren’t state schools, they charge fees, they make investments, and they operate within a market. However, this market produces different kinds of value. And for absolute clarity in this article value is about economic value, which is not always the same as the social returns and benefits of higher education, and of course isn’t the sole purpose universities exist.
The first kind of value we can consider is internal value production. The university recruits students in order to extract money from them in exchange for a university education. It’s a little more complicated than that, a little, but the creation of new knowledge is really the only commodity that the university has to sell. It’s not so much a product as it is a promise that if a student chooses to spend their money (in the case of international students) or sign up to forty years of debt (in the case of a home student) their lives will be better than if they had chosen not to do so. The university then turns this into employing people, investing in things, paying off debt, and so on.
The recruitment of students produces an economic value both in the future – they will ideally be better paid than if they had not gone to university – and in the places they occupy through increasing the population of a place where they will spend their money. Of course the places that the students have left might see a corresponding destruction in value as students move out of their homes. The recruitment of students also leads to incentives which create value in the creation of infrastructure like student housing, teaching spaces, and so on.
And then there is the kind of value that Clifford talks about. Universities take public research funding, and increasingly international student fees, to invest into ideas that could spin out into companies or one day become intellectual property. Universities seek to recoup their investment through owning a share in the company.
Value(s)
So, on that basis there are four kinds of value created: economic value for society and students, place-based benefit, infrastructure, and production value in technology and IP. Universities attempt to capture a significant portion of this value because recycling income makes their other missions possible.
If instead universities tried to simply produce more value rather than capture it the world would look different. Here are three policy ideas.
We know from the independent review of university spin-outs carried out by Professor Irene Tracey and Doctor Andrew Williamson in 2023 that UK universities are taking wildly different amounts of equity depending on the kinds of companies that being spun-out and the approach of universities to equity. As The Times has been covering just this past week, many universities have now endorsed the recommendations of the report and reduced the amount of equity they expect to take from software related ventures.
One of the main arguments in the spin-out review was that negotiating terms was unnecessarily difficult between universities, business, and researchers. The university revenue from spin-outs, IP, and trademarks is not small, standing at around £287.7m in 2022–23, but over two thirds of that revenue is created by only five universities. An agenda of value creation would need incentives to keep universities engaged in the process of IP creation but the goal would solely be about larger more profitable spin-outs.
This would likely mean the radical simplification of term-sheets and a flattening of equity to be closer to five per cent for institutions. Universities would also need to consider internal incentives for spin-outs in terms of promotion of colleagues who undertake this work, access to the right spaces, the expansion of their in-house expertise, and so on. The hope would be that this would return more income in the long-run but that would not be the primary goal.
On student value the goal would be about getting more students to go to university generally rather than attend a specific institution. Clearly, going to different kinds of universities to study different subjects produces different kinds of value but there are big swathes of the population that do not benefit from a university education.
The Office for Students would move its attainment raising agenda into a more central part of the Access and Participation Plan and institutional bursaries, which have a mixed record of success, would be recalibrated to lean toward more school partnerships. This would include measures like more intensive outreach, tutoring, study skills, leadership support, investment in pathways and partnerships, and other local interventions. The goal would be to increase regional capacity for the benefit of university education, not just to encourage more direct recruitment.
Places
If this covers economic and production benefits there is then the question of a value driven infrastructure that reaps place benefits. Imagining a value led agenda is harder here as the hypothetical university would have to be concerned with where their infrastructure was additive to the collective productivity of their place, not just their immediate needs. It would need to be the infrastructure that fits tidily between academic need, business need, and fulfilling a regional growth imperative. The Materials Innovation Factory in Liverpool is a good example of this kind of interaction between place and productivity.
The challenge is that funding is tight and capital incentives do not follow economic need. For example, capital funding by OfS does follow the specific needs of industry and employers – but it does not follow that this will always incentivise the leveraging of other funds. It also does not follow that this could be used more widely to revitalise existing assets in a place to add vibrancy to the high street, or help a wider regeneration agenda, or other productivity benefits. It also does not entirely help support the kinds of spaces which are merely functional but support the everyday economy that is so important for growth. Space for coordinating approaches to social care, or shared teaching spaces with other providers, and so on. This is slightly at odds to the UKRI Research Capability Investment Fund which covers all disciplines and various kinds of collaborations.
The bigger shift, for funders, institutions and regulators, would be to consider the ultimate location of an asset is less important than its utility toward value creation. It would open up a range of difficult questions on the use and circulation of public funds but the trade-off would be targeting funding where it had the great agglomerate benefits for science, places, and the wider research sector.
Why
Some of these ideas are more practical than others but the wider point is that it is a different economic frame to consider universities as being more closely in the business of value creation than value capture. Labour’s industrial strategy does not imagine universities as an enormous growth sector in and of themselves but as an enabler to economic growth more broadly.
Education secretary Bridget Phillipson has made the case that any future fee rises are contingent on demonstrating value for money and the sustainability of universities. A more explicit agenda of value creation could be one part in making that case.
This is a different approach to demonstrating how universities create value through their current activities such as student spending, rent, and employment, but an approach which consistently considers how to grow the economic impact of university activity. There are clear trade-offs in creating and capturing value, how public funding should be used, and whether long-term ideas can survive the short-term financial pressures universities face.
In the long term, the political noises emerging from the government’s nascent agenda suggests that funding, support, and political coverage for measures that are unpopular with the public like raising tuition fees, become more possible the closer universities can align their work to the government’s core mission of growth and productivity.