The report, published yesterday argues unless the Government grasps this area, there is a danger spending cuts and public service reforms will stifle innovation along with its economic benefits, and a chance to reverse declining public sector productivity will have been lost.
Making the most of public services: a systems approach to public innovation finds that the Government spends around £50 billion a year on 'intangible' - or knowledge based - assets, the key drivers of innovation. However, it does so with little understanding of how to support innovation in order to provide the greatest value for money.
With the public sector spending £243 billion a year on procurement, public sector performance has major direct implications for the wider economy.
The report argues that the private sector should be used as a model rather than a substitute for public sector innovation. It warns that a narrow focus on cuts and the 'outsourcing' of innovation to the private sector risks neglecting the potential of the public sector itself. Instead, the Coalition should use the lessons of the private sector to reach a better understanding of how public spending can support innovation and boost value for money through investment, networks and nurturing innovation 'ecosystems'.
Lead author Charles Levy said: "Public sector innovation has the potential to radically improve value for money at a time of growing demand. In spite of this, there has been very little research into how public services invest in and support innovation. Putting services out to tender avoids the issue, and with rapid, swingeing cuts now being made across the board, there is a real danger that innovation will be cut along with spending. This would be counterproductive for both public services and the wider UK economy.
"If the Coalition is not to throw the baby out with the bathwater, it must look to the private sector as an example rather than a substitute for public sector innovation."
Drawing on case studies from the UK's international education and healthcare sectors, Making the most of public services puts forward a model for achieving a better understanding of public sector innovation. In its analysis of the international education sector, it looks at how this area can be viewed as a knowledge-based, public sector 'export', which generates billions of pounds for the UK economy. It examines how the government is managing this sector and looks particularly at how new visa policies and budget cuts are likely to impact negatively upon income.
In its examination of the healthcare sector, the report looks at the how the NHS connects to the private sector. It argues that while there is great potential to drive innovation through public procurement, the NHS currently performs poorly in terms of how it supports innovation through its supply chain. As yet this debate has had a very low profile within the current reform agenda.
The report argues that the public sector must be viewed as a key part of the knowledge economy. It concludes that only with this understanding can the government ensure public funds are being invested in a way that drives innovation and boosts performance across the public and private economy.