Frank Holmes says that Wales needs to look to innovative small countries like Estonia if it wants to create a vibrant and IP rich economy
There is a dangerous assumption running through Welsh economic debate: that the fiscal gap is someone else’s problem. That Westminster will reform the Barnett Formula, or that public services will somehow be sustained by goodwill and political commitment alone. That prosperity, if we wait patiently enough, will eventually arrive.
It will not. According to the latest data from the ONS, Wales faces a structural deficit of £14– 16bn per year, the gap between the £22–24 billion its economy generates in tax and the £38bn to 40bn its public services require. No formula, no grant programme, no amount of restructuring of what already exists will close that gap. Only one thing will: building the high value, IP-led businesses that generate the tax revenues Welsh public services depend on.
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The question is not whether Wales has the intellectual capacity for this. It does. Cardiff University, Swansea University and the Compound Semiconductor Applications Catapult generate world-class intellectual property. Welsh researchers file patents, publish breakthroughs and produce graduates of genuine quality. The research is not the problem.
The problem is translation. R&D productivity has been declining for decades not because discoveries are running out, but because the institutional infrastructure that converts research into commercial value, like IP valuation, patient finance, commercialisation expertise and market access is chronically underdeveloped. Wales invents things. It does not, systematically, build businesses from them.
Jonathan Haskel and Stian Westlake, in Capitalism without Capital, show why this matters more now than at any point in economic history. Investment in intangible assets like patents, algorithms, software and brands has overtaken physical investment as the primary driver of prosperity in advanced economies.
The UK’s intangible investment overtook tangible investment around the year 2000. Wales has largely missed this shift, and the fiscal consequences are now visible in every NHS waiting list, every underperforming school, every community that has been promised renewal and received managed decline.
Intangible assets have a characteristic that physical ones do not: they can be used simultaneously and at scale without being depleted. A patent can generate royalty income from fifty licensees at once. A photonics architecture licensed globally creates wealth in Cardiff without requiring a factory in every market.
Frank Holmes.
But the same characteristics that make IP so valuable, its scalability, its dependence on clustering, the fact that its social returns exceed its private returns also explain why markets systematically under-invest in it. The spillovers that make IP valuable are precisely the reason private capital alone will not create the ecosystem Wales needs.
The scale of what is at stake is documented rather than asserted. A joint study by the European Patent Office and the European Union Intellectual Property Office covering 2021– 2023 found that IPR-intensive industries generated almost half of EU GDP, approximately €7.7 trillion per year, while accounting for over 30% of all EU jobs, paying wages nearly 41% higher than the rest of the economy and representing over 78% of all EU exports.
Over 88% of all private equity and venture capital invested in EU star-tups flowed into these industries alone. IP is not a niche policy concern. It is the primary structural determinant of whether an economy generates high wages or low ones.
Estonia proves the point. With a population of 1.3 million, less than half of Wales, it entered the 1990s with a Soviet-era agricultural economy and near-zero private sector. The government made a deliberate institutional decision to invest in digital infrastructure and technology education before the private sector had any reason to believe it was credible. GDP grew from $5.7bn in 2000 to $36.3 billion in 2021. It now produces more unicorns per capita than any other country in Europe including Skype, Wise and Bolt.
This is where the state enters. Not as a grant-giver, but as a co-investor.
Mariana Mazzucato’s The Entrepreneurial State makes a point that should be uncomfortable for anyone who assumes the market leads and government follows. The internet, GPS, mRNA vaccines, touchscreens – the technologies underpinning the modern economy were developed through patient, mission-oriented public investment at stages of risk that private capital would not absorb. The state has always been the most important risk-taker in innovation economies. What it has failed to do is structure that involvement to share in the rewards.
As Mazzucato says: The state does not just fix markets. It creates them. And when it takes on the risk of early-stage investment in transformative technologies, it should expect to share in the rewards.”
For Wales, this means a genuine reorientation. Not grants, which socialise cost and privatise benefit, but co-investment structured to generate returns. The Development Bank of Wales, taking minority equity stakes in Welsh IP businesses alongside private capital on fully commercial terms. A put option requiring companies that relocate outside Wales to buy bac that stake at a premium, creating a genuine commercial disincentive to leave.
Loan guarantees that make IP bankable in the Welsh market for the first time, by removing the risk that has historically prevented commercial lenders from lending against intangible assets. Subsidised independent IP valuations that break the chicken-and-egg problem facing every early-stage Welsh technology company: they cannot afford the £40,000 assessment that would unlock the £3m they need to grow.
Each of these instruments addresses a specific market failure. An IP insurance pooling facility, operated through the Development Bank of Wales, reduces the cost of insuring patent portfolios from prohibitive commercial rates to something accessible to smaller Welsh businesses, making IP-backed lending viable across the ecosystem rather than only for its largest members.
Enhanced Welsh R&D tax incentives, layered above the UK’s existing Patent Box and EIS regimes, make Welsh IP investment measurably more attractive than comparable investment elsewhere in the United Kingdom. A Welsh IP Quality Mark, issued by a Welsh Centre for IP Excellence and marketed at investor conferences in Tokyo, Singapore and San Francisco, signals credibility to international capital that would otherwise look past Wales entirely.
And strategic public procurement, from a Welsh public sector that spends £8bn a year, provides the first customer relationships that transform pre-revenue businesses into investable ones. Not subsidies. Commercial contracts for services the public sector actually needs.
Institutions matter as much as policies. Growth is not automatic. It is a fragile achievement that depends on the credibility of the frameworks within which private capital operates. Private investors will not commit to Welsh IP businesses at scale if policy changes with every administration. The Welsh Government’s role is not just to deploy capital but to provide the stable, legally-grounded institutional environment that makes private capital rational. That means embedding this framework in statute, not policy. Making it durable across political cycles, not dependent on the survival of any single administration.
The cost of running all of this programme is estimated at £8–14m per year including loan defaults, IP valuations and the insurance reserve. This is less than a medium-sized road improvement scheme, and approximately 0.025% of the Welsh Government’s total budget.
The potential return, even in a conservative scenario of scaling 5,000 Welsh businesses to £2m EBITDA over a decade, is approximately £4bn in additional annual tax across the UK economy. This would reduce Wales’s fiscal deficit in the national accounts and strengthen the case for a reformed fiscal settlement with Westminster.
This is not a marginal policy intervention. It is the only credible route to a Wales that funds its own ambitions.
The Welsh IP-led companies already exist, in photonics, in compound semiconductors, in life sciences and fintech. They are not waiting for grants. They are waiting for the valuation infrastructure, the patient capital, the insurance pooling, the procurement relationships and the commercialisation expertise that would make building and scaling in Wales the rational commercial choice. They are waiting, in other words, for the ecosystem that every successful small innovation economy, Ireland, Israel and Singapore has deliberately constructed around its most valuable assets.
Wales has spent too long managing its economic decline with dignity. The question now is whether it has the political will to do something more difficult: to build, deliberately and with appropriate public investment, the conditions for prosperity it has not yet had.
Prosperity is not something places inherit. It is something they choose.
- Frank Holmes partner with Gambit Corporate Finance and chair of the Cardiff Capital Region’s Economic Growth Partnership.
