Universities that engage the most with businesses will see "significant" increases in state funding for knowledge transfer after proposals by Lord Sainsbury, the former Science Minister, were approved last week.
Under the blueprint for UK science and innovation, universities' so-called third-stream funding, supported by the Higher Education Innovation Fund, will be reformed to favour those with the strongest links with industry.
The current round of HEIF funding, worth £238 million and ending in 2008, allocates 75 per cent using a formula and the rest through competition. The new system will end the competitive element and distribute funds entirely on the basis of a formula to favour "business-facing" universities.
"The changes will mean that by and large the research universities will get the same, or slightly more, money. But the money that would have gone on competition will now go mainly to business-facing universities," Lord Sainsbury said, adding they should expect "a significant increase".
Less weight will be given to the size of the university and more to income received from small and medium-sized enterprises.
"We are really getting very good knowledge transfer from the research universities ... It is in the business-facing universities where the opportunity is now," Lord Sainsbury said.
He added that universities without a reputation for world-class research had in the past been called "less research intensive" or "teaching intensive", but the term "business-facing" was more apt. "We should be giving them a clear mission," he said.
The recommendations are contained in a wide-ranging review by Lord Sainsbury of the Government's science and innovation policies, commissioned by Gordon Brown when he was Chancellor last year. Released last week, Lord Sainsbury's review said Britain's innovation performance is better than commonly assumed but more needs to be done to produce the best conditions to stimulate innovation in industry and compete with emerging economies such as China and India.
In accepting a number of Lord Sainsbury's recommendations, the Prime Minister said that £1 billion would be channelled through the Technology Strategy Board over the next three years to support technology and innovation in business; government procurement would be used more effectively to drive innovation; and there would be a major campaign to enhance the teaching of science, engineering, technology and mathematics in schools. In addition, the number of "knowledge transfer partnerships", placing recently qualified graduates in industry for one to three years, would be doubled from the current level of about 1,000.
"Our technology and knowledge-intensive services provide the basis to build on," Mr Brown told science and innovation leaders assembled at 10 Downing Street to discuss the report. "We are doing better than many countries, but this is going to be the challenge in times to come."
Rick Trainor, president of Universities UK, welcomed the moves. He said institutions would be looking for extra money for HEIF in this week's Comprehensive Spending Review. "We look forward to seeing more detail on the proposed allocation method for HEIF. It must be remembered that all institutions are business-facing and have intensive interaction, albeit of varying nature, with business at all levels," Professor Trainor said.