Businesses' R&D spending on the up

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As we head up to the Spending Review next week, we know one of the Chancellor’s key priorities will be boosting the UK’s productivity. There are many factors that drive productivity, but a key one is innovation. And today we have some data on businesses’ R&D expenditure from ONS that gives us a hint at the UK’s performance on innovation.

 

 

Let’s start with the good news:

  • R&D is on the up: Businesses are growing the amount they spend on innovation, with real terms expenditure on R&D rising 5% between 2013 and 2014. Since the post-recession trough, business R&D expenditure is up by 16.3%.
  • Manufacturing punches above its weight on R&D spend, accounting for 67% of total business expenditure. Within manufacturing, the transport and electrical equipment sectors saw the biggest growth in spend this year. Manufacturers’ focus on R&D is no surprise. Innovation is a constant focus for manufacturers, and our Innovation Monitor survey earlier this year found that 94% of manufacturers engaged in some form of innovation in the last three years.

But there are reasons for concern too:

  • Relative to GDP, R&D spend hasn’t budged: Business R&D spend as a percentage of GDP remains at 1.1%, the level it has been at – more or less – for over a decade. While R&D is growing in absolute terms, it’s going to need to grow faster to break this trend.
  • Other countries are not standing still: today’s data does not change the fact that the UK still lags well behind competitor nations for R&D spend.

Where do we go next?

Recent improvements in R&D expenditure are great news, and a testament to UK businesses’ continued focus on growing and expanding their businesses at a time of economic uncertainty. Recent improvements in support for innovation have also played an important role in de-risking innovation and encouraging companies to invest.

However, the UK still underperforms relative to international peers on R&D, which is a concern for our long-term competitiveness. The government recognises the value of R&D and innovation for growing productivity, and has set out an ambition to make the UK the best place in Europe to innovate. This is a positive ambition, but as it stands UK manufacturers think that while innovation support has improved, they also think it “could do better”. Manufacturers especially see support to commercialise their ideas, and help them collaborate with others or access external expertise, as priorities for improvement.

Government support and expenditure on R&D has a key role in enabling manufacturers and other businesses to overcome some of the challenges they face when innovating. Evidence has consistently shown that government expenditure can crowd in private spending in the area. For example, evidence from BIS suggests receiving a grant is likely to double a firm’s total spending on innovation.

Next week at the Spending Review, the Chancellor will have some tough decisions to make as he seeks to balance the books, but supporting innovation must be a priority for the UK as we try to boost our productivity. As the economic outlook remains uncertain – particularly for the manufacturing sector – the Chancellor must get behind innovative businesses’ and maintain the breadth of innovation support provided by Innovate UK at next week’s Spending Review.

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