The third of our ambitions we want the government to set out in a stronger, clearer growth strategy on Budget Day is to see more companies in the UK bringing new products and services to market.
Why is this important?
There is no such thing as a sustainable competitive advantage. Firms that invest in innovation grow faster and are more productive. This is essential to stay ahead of the competition, especially given the inability of the UK to compete with fast-growing developing countries on relative labour costs.
We have strengths supporting the development of new products and services already. The UK has a good ‘knowledge infrastructure’ (e.g. world-leading universities) and the government has protected its investment in our science base.
However, we are weak in other parts of the innovation chain, in particular commercialising new products and services – taking a design from prototype or proof-of-concept to a commercially produced and sold reality.
How can we measure performance against this ambition?
In common with our other ambitions, we think the government needs to establish a credible set of measures by which progress can be demonstrated. For this ambition we think the measures should be by 2015 that:
• Real business enterprise sector investment in R&D returned to the UK’s pre-recession peak;
• 60% increase in the take-up of the SME R&D tax credit
We’ve chosen these measures quite deliberately – let me explain:
Real business enterprise sector investment in R&D to return to the UK’s pre-recession peak
To see companies bringing new products and services to market in the UK we need to see more basic research capitalised here. This will be driven primarily by businesses. Real business enterprise sector investment in R&D (BERD) is also an internationally comparable metric of business R&D.
National Statistics show that the 2007 figure for BERD in the UK was just under £12 billion. This fell to £11 billion by 2010 (both 2007 and 2010 figures in 2010 prices).
To return to 2007 levels would require 1.5% year on year growth in real business investment in R&D (roughly 8% growth in total). This is below the UK average growth rate from 2002-2007 – but BERD has fallen in every year from 2007-2010.
So we think returning BERD to the pre-recession 2007 peak is a stretching but realistic target.
60% increase in the take-up of the SME R&D tax credit
While the BERD target captures the overall level of business spending on R&D it doesn’t tell us about the number of firms, particularly SMEs, which face the greatest barriers to investing in R&D.
A boost in the number of smaller firms investing in R&D would be indicative of more of our SMEs moving into more productive growth cycle.
A 60% increase in the take up of the SME R&D tax credit would be measured from 2014/15 relative to 2009/10.
HMRC statistics show that average growth in claims since 2003/04 has been c7%; but from 2007/08-2009/10 (the latest year available) the annual average growth has been 12%.
60% growth over the five year period would require growth in 2010/11 of 7% but then growth accelerating to 11%pa 2011/12-14/15. Given that the government has increased the generosity of the scheme, we think this is realistic.
However the billions of pounds worth of estimated unclaimed R&D tax credits suggests the government has some work to do to get the word - and benefit - out there about the scheme.