The ONS has released today data on business expenditure on R&D for 2015. Here are five interesting facts you need to know.
1. Manufacturing is driving UK innovation
Expenditure on R&D performed by UK businesses continued to increase in 2015, amounting to £20.9bn in current terms. Manufacturers performed remarkably well, outpacing the trend reported for the economy as a whole. In 2015, business expenditure on R&D within manufacturing grew by 6.7%, reaching an all-time high of £14.5bn in current prices.
2. Automotive is the new champion of business R&D
Within manufacturing, R&D expenditure in motor vehicles recorded the highest growth, expanding by a significant 14.3% in 2015 in current terms. In the meantime, the sector has been capturing a larger share of business R&D, climbing to 13% of total BERD performed in the manufacturing sector in 2015 up from 7% five years earlier.
Meanwhile, growth in R&D expenditure within pharmaceuticals – the UK's most innovative sector – turned positive for the first time since 2011. R&D expenditure increased by 8.4% to £4.2bn in 2015, yet they still stand below their level 4 years ago.
3. The largest manufacturing sectors are not innovating enough
Not all is good news, however. When comparing sub-sectors share of manufacturing value added and R&D expenditure, it appears that the innovation effort is uneven across sectors. Especially, the food and drink industry – the largest manufacturing sector – accounts for only 3% of total BERD performed across manufacturing.
4. How does R&D expenditures break down?
The composition of R&D expenditure is somewhat different across sectors. Salaries of R&D personnel are the major part of BERD in sectors such as machinery and equipment and electronics. On the other hand, capital expenditure, which can range from machinery and equipment, software and other intellectual property products, are more preeminent in sectors such as electrical equipment and metals.
What about “other” current expenditure? According to the Frascati manual (OECD), those comprise non-capital purchases of materials, supplies, equipment and services to support R&D. And in fact, they account for the largest share of R&D expenditure in the top two innovative sectors.
5. The UK must stay an attractive location for R&D activities
Foreign investment is a vital source for business expenditures on R&D in the UK. Foreign owned businesses performed 51% of total expenditures on R&D in the UK as a whole in 2015. This share goes up to 56% for the manufacturing sector alone, and is far higher for the most innovative sectors. It is therefore critical to improve the UK’s attractiveness as a location for R&D activities.
What does all this sum up to?
Supporting business growth is of primary importance. As our recent report Manufacturing Ambitions highlighted, manufacturers are aiming for growth and innovation is their first arm to do so. Therefore, increasing the support for innovation activities is vital.
In the Autumn Statement next week, the Government should increase its support for innovation activities. EEF recommendations include:
Delaying the switch from innovation grants to new financial instruments;
Enlarging the scope of R&D tax credit scheme to allow for more process innovation within SMEs;
Increasing the rate of the Large Company R&D tax credit.
These measures should enhance R&D efforts and adoption of innovation within UK businesses (such as those related to the 4th industrial revolution) and ensure the UK stays attractive as a destination for R&D activities.