Grease the links or the national asset will rust

University-business collaboration must be geared up before the UK falls farther behind, says Richard Lambert

As an outsider looking into the UK's university system, I have had a fair number of surprises over the past 12 months. Most of them have been positive.

I had not appreciated the dynamic role that many universities already play in the regional and national economy, nor was I aware of the steps that most have taken to improve the way they run themselves. I came across many vice-chancellors who seemed at least as impressive as the chief executives of similar-sized businesses, and I learnt that running a university is much more complicated than running a public company.

I also quickly became aware of the tensions that exist between the higher education institutions, the funding councils and the government. Academics feel unloved and undervalued. They are expected to build a long-term strategy for their department or their institution, but at the same time they are subjected to short-term shifts in public funding. In financial terms, they operate within tiny margins, and their room for manoeuvre is threatened by the way their funding is being increasingly ring-fenced.

The assumption must be that they are so hopeless at running their own affairs that they will fritter away public money unless its use is strictly curtailed. This is plainly unjust. The trouble is that it becomes a self-fulfilling prophecy:if you don't have enough autonomy to run your affairs properly, you can't be expected to take responsibility for them.

The time has come for change. A small but welcome sign came last month, when the government announced that its Knowledge Exchange scheme should be more flexible than it had originally indicated.

It seems obvious that universities that can show that they are efficiently run and performing well should be given more freedom of action than those that cannot. A simple form of risk-based regulation would do the trick.

Good governance, sound financial structures, high-quality teaching and research should earn the institution greater trust and autonomy. If we want our universities to be more dynamic, they must have more freedom.

Another surprise was the way public funding for research is allocated: I had no idea that the process was so rigorous. But I had a growing sense that although a peer-review process was clearly the best way of distributing money, the system had become too cumbersome and ripe for manipulation. It also seemed that the system discriminated against collaboration - with business or other third parties - and that it forced all institutions to measure themselves against the same benchmarks.

The hope is that these issues will be addressed by various reviews in the coming months. My report suggests that the system should be tweaked to encourage more collaboration, but that the bulk of public funding should still be distributed via peer review.

But in addition, some public money should be available to support research departments that can show that they have strong backing from business.

Business should pay for the full economic cost of contract research, at least. But there is a case for subsidising strategic research if business is prepared to back the work. You could do this in several ways - for example, through funding councils or the Department of Trade and Industry.

My vote goes for working from the ground up and channelling money through the development agencies.

The big challenge when it comes to business-university collaboration lies on the demand rather than the supply side. Most higher education institutions are trying much harder than in the past to engage with industry. But British companies are not research intensive by international standards, and the UK continues to do poorly in global comparisons of innovation and productivity.

A series of sometimes quite modest initiatives could make a difference.

Building networks between business people and academics; providing the right financial incentives to collaborate; simplifying the process of negotiation over intellectual property; improving the workings of technology transfer offices; making sure that business can recruit the skilled graduates it requires: all this will help business to take more advantage of the UK's strong university-based research.

And there is no other option. Gone are the days when the low cost of doing business in the UK was one of its key competitive advantages. Now it has to succeed further up the value chain - and its higher education system has become an even more vital national asset.

Richard Lambert is a member of the Monetary Policy Committee and a former editor of The Financial Times . His report on strengthening long-term links between business and universities was published last week.