Science and innovation are key to long-term economic growth. Both are likely to be underprovided by the market (as the social return is greater than the private return) and therefore both require support from the public sector.
There is a degree of consensus around this view, but even if we accept public sector support is required, there are a number of questions that need answering:
- How much science and innovation should we be doing? Does the UK do enough? How much support from the public sector is necessary?
- Does the UK have enough support?
- Where would additional support be best directed?
A report published by BIS earlier this week takes a wide-ranging look at science and innovation in the UK economy. In this blog I'll take a look at some of its insights on how the UK measures up.
How much science and innovation should we be doing? Does the UK do enough?
The report looks at a number of metrics for performance of science and innovation. One key metric is the level of R&D expenditure as a percentage of GDP. (This metric does have its limitations, but nonetheless provides for international comparison).The finding here is stark:
On R&D expenditure levels in the UK: “this overall level is unlikely to allow the UK to maintain or develop its leadership in science and innovation” … “higher levels of investment would likely provide very substantial returns in terms of benefits to the economy”.
Looking at these figures in closer detail, there is some cause for cheer: when it comes to metrics for non-R&D intangible investments the UK does better, with the private sector the key driver of expenditure. But this is no reason for complacency:
The report finds that “the UK as a whole appears to do well on private sector innovation expenditure but not so well as to fully offset its pattern of low expenditure on R&D.”
How much support from the public sector is necessary? Does the UK have enough support?
Given the report's findings that the levels of expenditure on R&D are unlikely to be enough to maintain or develop our leadership in science and innovation, the next question is how to boost it. Public support must be part of the answer, given that the report finds that UK public sector support for innovation is low, while the private sector performs strongly in international comparisons.
This table gives an indication of support available for innovation in competitor nations (though the degree of comparability is admittedly limited, this does provide an indication of where the UK stands):
However, it's important to note that successful science and innovation is not just about levels of expenditure. Despite our relatively low levels of expenditure on innovation, there is evidence that where the UK does spend on science and innovation, it does so effectively. So the question this raises is whether increases in public sector expenditure would result in decreasing returns to scale. The report is pretty emphatic in its view that this would not be the case.
Not only does it find that there is little evidence of deadweight loss from innovation expenditure in countries that spend far more than the UK, but it also finds a marked correlation between levels of public and private sector investment in R&D. This could be evidence of a “crowding in” effect from public expenditure on R&D, as the report notes:
The existence of strong positive feedbacks [between public and private sector R&D investment] points to the possibility of increasing returns to scale.
The report concludes that:
A long-term step-change in the UK's science and public sector innovation investment is needed if the UK wants to remain a global leader.
Where would additional support be best directed?
Even if we agree that expenditure on science and innovation should be increased, it is much harder to say precisely how that money should be directed. It is not the case that there are gaping holes in the system; the report notes that on the whole the UK's science and innovation structures are fit for purpose, with structures in place to support science and innovation from its early stages through to the market place.
We would agree with this view, but would question whether every stage of the process is supported equally – for example we know from previous BIS reports that the Smart scheme for SMEs is at once highly successful and oversubscribed. This may be a symptom of limited support for mid-stage innovation, an area we have previously noted as a cause for concern.
The report also notes the need for stability in the innovation ecosystem, a point on which we wholeheartedly agree. Our own research shows that where support has been stable there are higher levels of awareness and uptake amongst businesses.
Another key point made in the report is that a greater degree of conscious portfolio management is needed.
This is important. As well as supporting innovation through from basic research to commercialisation, support must recognise that innovation happens in a number of ways and from different sources, be it incremental innovation in a large company or a new discovery in a university (or the proverbial garden shed!).
The report suggests that taking a portfolio approach to investing in science and innovation is likely to be the best way to maximise returns. Exactly what this portfolio would look like is a subject for future debate, and something we'll return to later.