Headline data from the biennial UK Innovation Survey 2017 were released this week, setting out key insights into innovation practices of SMEs and large enterprises in the UK between 2014 and 2016, and changes that have happened since the last survey.
The survey describes innovation as any of the following that took place within the survey period:
- The introduction of a new or significantly improved product (good or service) or process;
- Engagement in innovation projects not yet complete, scaled back, or abandoned;
- New and significantly improved forms of organisation, business structures or practices, and marketing concepts or strategies;
- Investment activities in areas such as internal research and development, training, acquisition of external knowledge or machinery and equipment linked to innovation activities.
A business that had engaged in any of the activities described in points 1 to 3 is defined as being ‘innovation active’, whilst any that had engaged in any of the activities in points 1 to 4 is defined as a ‘broader innovator’.
Manufacturing has been the most innovation active industry
Innovation activity has dropped in the majority of sectors, making a difference from 2015. Manufacture of electrical and optical equipment once again topped the list for most innovation active sector, continuing the trend from 2015, 2013 and 2011, closely followed by the manufacture of transport equipment.
The manufacture of electrical and optical equipment is also one of only two industries that had a rise in innovation activity, rising from 71% to 74%, along with a rise in real estate, renting and business activities, whilst all other sectors recorded decreases.
Fortunes of manufacturing haven’t been clear cut, as although electrical and optical equipment manufacturing has seen the most innovation, the manufacture of fuels, chemicals, plastic, metals and minerals has had the biggest fall in innovation activity, falling from 64% in 2015 to 56% in 2017.
Why manufacturing innovation matters
Our research report published last year, Process innovation: Bringing manufacturers to the frontier, shows that innovation is key to manufacturers’ success at home and in overseas markets. Around half of the manufacturers that we surveyed innovated in order to enter new export markets, with 40% innovating to seek new domestic markets.
Innovation also matters to manufacturers who cite that their main reason for innovating is to satisfy existing customers and to enhance margins on existing products and services. This reflects the importance of innovation in helping manufacturers to improve their processes and strengthen their position in existing markets.
What needs to happen next?
How do we get innovation activity to rise again in all manufacturing sectors? Availability of finance and direct innovation costs are listed as the biggest constraints on innovation activity in the survey. However, given that electrical equipment was the fourth lowest spender on innovation in 2016, it is evident that although cited as important by manufacturers, finance is not necessarily the only factor in levels of innovation activity.
We’ve consistently said that government decisions in support of industrial strategy should be lined up with the priorities of manufacturers, particularly with regards to process innovation, which tops the strategy list. Greater productivity efficiency and the need to complement automation investments are a priority.
EEF research from last year, however, showed that not all manufacturers are undertaking the innovations associated with the highest productivity gains despite seeing process innovation as increasingly important. Last autumn’s budget made some moves to help companies overcome the cash, certainty and capability hurdles they face, but we’ve identified where focus could turn now.
The Industrial Strategy Challenge fund seems to be addressing some of the sectors that have not seen as much innovation activity as others, such as the Transforming Food Production challenge, which would impact the food manufacturing sector. It will be interesting to see how this involves and supports other sectors.
The government’s pledge as part of the industrial strategy to increase overall funding of R&D funding to reach 2.4% of GDP by 2027, from its current level of 1.7% is a welcome step towards increasing innovation activity. For more of what EEF thinks of the industrial strategy, see here.