Money alone won’t fix the UK’s innovation problems
Advance market commitments are a way for the government to give innovators confidence in future demand
There is a big innovation problem that the government has not yet been able to solve.
Some ideas that are produced by universities and businesses have an obvious route to market. Their investment in R&D will be paid back through consumers who are willing to buy their products. This classic theory of the market says that the best ideas will win out and if the market has the right information they will find a funder. There are many examples, from new consumer goods to process efficiencies to the discovery of new materials, where this idea to production to market pipeline works.
But a challenge arises when an innovation has substantial social or strategic value but lacks an immediate, credible market. In these cases, the UK's problem is often not a shortage of ideas, or even of research funding. It is a shortage of customers willing to commit early enough to allow those ideas to scale.
There are some ideas that are brilliant but rather than being an enabler of progress, the market acts as a blocker. These are the innovations which may have an enormous social upside – but the cost is huge and the chances of achieving short-term profitability are very low. This might be because the technology is expensive in the absence of scale; it might be that no identifiable market exists yet; or it might be that the cost of the initial R&D makes development of the new product prohibitively risky.
Push and pull
Take a vaccine, for example. A company that develops a vaccine will only produce it on a massive scale where the incentive exists for it to do so. It can be motivated by what economists call “push incentives”. These are things like tax breaks, R&D tax credits, grants, or other forms of public incentives. Collectively, they encourage firms to “push” their ideas out of the door by making the costs of R&D lower. Push incentives are often necessary – and can be highly effective. But by themselves they address only one half of the innovation challenge. Reducing the cost of innovation is not the same as creating confidence that there will be a market for a successful innovation.
The problem with push incentives is they do not create a market for a product. If the government could subsidise vaccine research to cost nothing, it would still not be viable for the vaccine to be manufactured unless someone were to buy it. The government could assume the costs of research, manufacture, and distribution, but at that point the government would be permanently subsidising the profits of private companies. Aside from any moral implications, this would not be good for a flourishing and dynamic market. The government would be picking winners who would be guaranteed a permanent subsidy. This would reduce the incentive for other firms to build innovative products, and it would reduce the incentive for competitors to enter the market.
The question therefore becomes how governments can create confidence in future demand without permanently subsidising specific firms or technologies. One solution to the heavy handedness of the state and the imperfections of the market was set out in a recent report for UCL by Mariana Mazzucato and colleagues. They explain that the UK government could coordinate its public finances bodies around missions to catalyse private sector investment. The theory goes that in giving the market confidence that there is a consistent backer of new ideas, it becomes easier to attract more private funding. Taking the lessons from their report, there is an opportunity for the government not only to be a purchaser of first resort, but to shape, coordinate, and participate in the market. Missions matter not only because they coordinate research and investment, but because they allow the government to coordinate demand. A mission backed by credible purchasing power can help create a market where none previously existed.
Make the market and move the market
The mechanism for doing this is an advance market commitment. An advance market commitment is where a government, or private funders, make a contractual commitment to buy something in the future that has not yet been produced. This is usually used where there is a collective problem, like climate change, without an immediate buyer for a new technology, like carbon removal technologies (a 2024 essay in Works in Progress sets this out in fascinating detail). The benefit of an advance market commitment is that it gives confidence to innovative firms that their product will be bought if it can solve a pre-determined problem. It does not require the government to select a single winning company in advance, but instead allows multiple firms to compete to meet a clearly defined outcome while giving them confidence that there will be a buyer if they succeed. These work particularly well where there are ideas with high start-up costs and long lead times.
The UK government has tinkered around the edges with this approach – but falls far behind the US in utilising these market-shaping mechanisms. The gap is not ambition but credibility. Firms can raise capital against a contract, but they struggle to raise capital against an expectation that government support may materialise at some point in the future.
For example, the UK Space Strategy says the government will “explore” acting as anchor customer for space firms with “clear requirements.” And NHS procurement reform has produced a £900m AI framework and a strategy (still being drafted) to reduce duplication across departments. Both describe a laudable ambition to use public purchasing power to build British industrial capability. But neither yet describes a mechanism that would let a company borrow against that ambition.
This is a crucial gap because Britain's frontier industries like space, health technology and advanced manufacturing share a common challenge: high capital needs, long development timelines and thin private markets for anything not yet proven. The UK government keeps offering these firms grants and warm words about future contracts, when what they really need is a guarantee specific enough to take to a bank.
NASA solved this problem through Commercial Orbital Transportation Services. It funded development through milestone payments and committed in advance to purchase a defined volume of services once technical performance had been demonstrated. Investors could therefore finance against a specific future contract rather than a general expectation of government support. SpaceX built Falcon 9 and Dragon using that structure, which is now the default way America buys innovation it cannot yet purchase off the shelf.
Britain has never built the equivalent. What it has created instead is a set of instruments that do half the job. The Small Business Research Initiative (SBRI) funds pre-commercial research through phased development contracts. But the government's own evaluation of the programme, published in 2022, is candid about why it under-delivers: no department is given ring-fenced funding to follow through, nobody is held accountable for outcomes, and procurement, policy and innovation teams operate in separate silos. Those same findings appeared in reviews from 2015 and 2017. The problem has been documented three times but still not fixed. The lesson is not that Britain lacks innovation programmes, but that it repeatedly funds development without creating a route to scale.
The old ways won’t work
The Advanced Research and Invention Agency comes closer to the US DARPA model that inspired it, funding high-risk research through programme managers with real autonomy and a tolerance for failure built into its design. But ARIA funds discovery, not purchase. It has no equivalent of the second half of COTS: no paired commitment from a public body to buy the resulting capability once it exists. The same gap shows up in health. America’s answer, ARPA-H, pairs milestone-gated development contracts with an explicit commercialisation pathway from day one. Britain has nothing that plays the same role for the NHS, and the direction of travel is making that harder to build: from 2027, most of NHS England's commissioning power transfers out to more than 40 local Integrated Care Boards, scattering the buying power a COTS-style guarantee would need to concentrate.
A credible anchor-customer mechanism for the UK requires three things: a named mission owner, milestone payments linked to technical performance, and a legally credible purchase commitment triggered once performance thresholds are met. In Britain, that commitment must also survive spending reviews if it is to support private investment. It sounds like a radical idea in the context of what the UK does now, but it is an approach that is increasingly gaining traction across the globe.
Britain has the opportunity to deliver such a mechanism. For example, within the UK Space Strategy the National Active Debris Removal Mission already has a demonstrator budget and a defined technical objective. Converting it into a standing commitment such as a guaranteed number of removal missions purchased each year once a company clears an agreed technical readiness level would bring greater business confidence. It would require no fundamentally new policy instrument and could be built around capabilities the government has already identified as strategically important. It would also serve as the pilot for a mechanism the NHS badly needs, before health commissioning disperses further and the chance to build a single guaranteed buyer narrows.Taken together, these examples reveal a consistent pattern. Britain has developed a wide range of mechanisms to fund research and support innovation. What it has not yet developed at scale is a systematic mechanism that gives innovators confidence that successful technologies will be purchased and deployed once they meet agreed performance standards.
In the week following John Healey’s conference speech it is clear that the same old approaches will not deliver the changes he wants for the country. There are lots of ideas that can meet his ambitions for reindustrialisation, technology-led growth, or revitalising the economy. However, if he wants to “use the power of public procurement to direct more of British taxpayers’ money to British business, British jobs, and British innovation,” he should start by thinking about which sectors and which challenges, and where there are the biggest gaps between idea creation and market adoption.
The UK cannot keep trying to do the same thing with different amounts of funding. Without reform it risks allocating money to the ideas that would succeed on their own and depriving innovators of the commitments to bring their ideas to market.
Concentrating mission choice in a small number of empowered decision-makers does raise the cost of a wrong bet. But the answer to that is not to retreat back into diffuse, unaccountable funding of the kind SBRI’s own evaluations have criticised for a decade. It is to be clear about the risk that is being taken by naming the mission, the gate, and the price. For decades Britain’s innovation debate has focused primarily on the supply of ideas and the level of public funding available to support them. But the more important question is credibility. Companies can raise capital against a contract, but they cannot raise capital against an aspiration. The missing ingredient is not ambition, but a mechanism that turns ambition into a financial commitment.