R&D expenditure and rebalancing

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In the last few weeks, although there has been some good news about growth, there has also been a discussion about whether this growth is really the kind of balanced growth we want to see if the UK economy is going to be competitive over the longer term. For example, we've talked about the investment challenge facing the UK economy.

Last year we published The Route to Growth where we argued that in order to see a more balanced growth we needed to see four things:

  • More businesses bringing new products and services to market
  • More globally focused companies choosing to expand in the UK
  • A lower cost of doing business
  • A more productive and flexible workforce

Looking at the first of these, we laid out two key indicators:

  • Business Expenditure on R&D (BERD) should return to pre-recession peak
  • Number of companies claiming SME R&D tax credit should increase 60% by 2014/15

Encouragingly, the first of these indicators has already been achieved, and progress has been made against the second. More data will be released this coming Thursday on the number of SMEs taking up the R&D tax credit.

So what's happened up until now? In June the NAO published a report on R&D expenditure which looks at some of these trends in a bit more depth. Here are some key points:

Between 1995 and 2011 total annual spending on R&D increased by 37% in real terms. It rose from just under £20bn to just over £27bn. Most of this was a result of an increase in R&D undertaken by business, which grew by 4.4bn (34%) over the period.

In 2011 64% of R&D in the UK was undertaken by business, largely funded by the businesses themselves, which contributed 69% of the sector's overall funding. The UK government and European Framework Programmes provide important sources of funding for R&D. The funding the UK government provides for UK business increased by £438mn between 2007 and 2011.

Although Business Expenditure on R&D is a key component of total expenditure on R&D, much of this is concentrated amongst large companies. This highlights the need we have stated to support smaller companies using the R&D tax credit.

Despite increases in R&D expenditure in recent years, this chart is a reminder that there is still progress to be made:

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