The Office for National Statistics recently published their annual update of R&D expenditure in the UK, or Gross Domestic Expenditure on Research and Development (GERD). This annual data provide the headlines on R&D activity in the economy, measuring the total amount invested, who’s invested it, who’s performed the R&D, and the proportion of total economic activity devoted to R&D, known as R&D intensity.
The headlines for the 2016 data, which the latest release covers, are a familiar update: increases in overall R&D expenditure look good, with a 4.3% rise, but when measured as a proportion of the UK’s Gross Domestic Product (GDP), things are flat at 1.67%.
What does this mean?
This compares to the EU average of 2.03%, and puts the UK 22nd on the list of OECD countries, behind the likes of the Czech Republic, Iceland and Slovenia. Why does this matter? R&D is the key driver of economic growth, and of productivity growth. As such, it is also the key driver of improvements in living standards, and R&D intensity is widely regarded as an important indicator of the economic health and future prosperity of a country.
The UK historically lags behind on this indicator, partly due to the economic structure of our country, which has a large services component – a sector which typically invest less in R&D. This structural gap is less concerning, but does not account for the full “R&D gap” between the UK and its peers.
Beneath the headlines
Overall R&D intensity in the UK has been fairly flat throughout the 21st Century, at or around 1.6-1.7%. Focusing on civil (non-defence related) R&D, in 2016 53% of all R&D performed in the UK was funded by businesses, 8% by higher education institutions or funding councils, and 17% by Government, including the Research Councils.
The good news is business R&D is growing. Looking at the data since 2005 – in figure 1 - the contribution towards total R&D expenditure from businesses (in purple) has risen, particularly since 2012, whilst the contribution from government and higher education sources (primarily in the blue, red, green sections below) has remained more or less flat.
Here at Innovate UK, we’re mostly interested in R&D performed by businesses. Taking a closer look at this, in figure 2, the story above is borne out again: over the last ten years, businesses have not only been increasing their total expenditure on R&D, they’re also funding a far greater proportion of their R&D themselves; up from 63% in 2010 to 73% in 2016. At the same time, the proportion funded by the UK government has fallen every year since 2013, from 9.9% to 7.8%.
Doing more for less
We know business investment in R&D grows in response to well targeted public R&D, such as that provided by Innovate UK. One of the challenges facing government since the financial crisis has been how to boost this effect – getting government investment to work harder – in times of fiscal constraint. The data in figures 1 and 2 suggests that this has been happening.
Whilst it’s difficult to make attributions from macro data of this type, the data in figures 1 and 2 show the importance of leveraging business investment alongside public investment. Whilst government funding has been fairly flat, and other sources of funding has decreased, businesses have stepped up, increasing their spending on internal R&D has increased by 30% since 2012.
An Industrial Strategy to take this further
The Government’s Industrial Strategy aims to bring about a step change in the UK’s innovation activity over the next ten years, with R&D intensity increasing to 2.4%. Innovate UK is at the heart of delivering this ambition, not least through the Industrial Strategy Challenge Fund. We are working across the funding partners of the challenge fund to ensure we’re monitoring progress along the way, as well as continuing to fund high-potential innovation and connect businesses to the partners, investors, collaborators, and ideas they need to innovate and grow.
2.4% - an achievable target?
2.4% is an ambitious target. To reach it, increased government expenditure needs to leverage even more business investment. The good news is, this has shown to be achievable in other countries. A recent analysis by the Enterprise Research Centre highlights that to achieve a target of similar scale in Austria, the government increased funding for business R&D. The resulting doubling of the government share of funding for R&D performed by businesses was associated with a 65% increase in R&D intensity, from 1.89% to 3.12%.
Innovate UK evaluations have shown time and again that our programme help businesses innovate and grow, boosting the UK economy. The GERD data suggests that at a national level, the impacts are also been seen through increased business investment. Now we look to see if overall intensity will follow as increased government investment takes effect.
The Industrial Strategy is the most ambitious attempt to drive this change in recent times, aiming support at industry - where innovation is most likely to happen, and where the bulk of increased investment needs to be seen.
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