A dive into innovation and R&D

 ANALYSIS (DAVID C STEVENSON)

PHARMACEUTICALS HAVE DIVED AS A PERCENTAGE OF UK EXPORTS

Britain’s ailing superpowers

The government wants to innovate its way to growth. It has a way to go. David C. Stevenson reports

Innovation matters. It is the powerhouse of economic growth. But in recent decades economists tended to put it behind productivity in terms of importance. Multiple studies have shown that innovation is a vital driver of growth, but does a narrower focus on research and development (R&D) really make a difference? 

A study in 2015 by the OECD club of developed nations found R&D spending had a “positive and statistically significant impact” on productivity and growth. Another study by UK’s NIESR think tank noted that “both R&D investment and innovation significantly boost productivity growth”. Its research suggested a £1 increase in R&D investment would yield a return of up to £0.20.

In short, if you care about economic growth, you should care about productivity growth, which in turn means you should also care about innovation and R&D. But how to define innovation and how do we measure R&D? 

This is not as straightforward as you might think. Back in 2021, the government’s statisticians raised some eyebrows when they redefined their measure of R&D spending to include a better estimate of what private businesses spend on research. Previously, the Office for National Statistics had said that businesses spent £26.9bn on R&D in 2020. 

As of November 2021, that figure jumped to £43bn – a rise of 60%. This meant that R&D spending as a percentage of GDP jumped from 1.71% to 2.4%, according to the World Bank’s rankings. Given that the government has a near-term ambition of getting to a target of 2.7%, one could see why bureaucrats were delighted with the revision. Even after that recalculation, the 2.4% number is still lower than that of the US (3.45%) and Germany (3.14%), if higher than that for France (2.35%) and equal to China’s.

But statistical fiddling is, of course, not the same thing as an actual boost in R&D spending, as economists such as Josh Martin have pointed out.  We should, therefore, as Martin observed in a blog at the time, “now revise the target… The poor productivity performance of the UK remains, and measuring R&D differently doesn’t change that. So we still need to aim for higher R&D spending (and investment in general).”

DEVELOPING A SCIENCE SUPERPOWER 

That upwards revision in R&D spending preceded another big change – the government announced that it had set a new £39.8bn R&D budget for 2022-2025, to “help deliver the government’s Innovation Strategy and drive forward” its ambitions to become a “science superpower”. The slight fly in the ointment is that government support of research and development still ranks 27th in the world at 0.4% of GDP, compared with an average of 0.6% among the 38 big world economies in the OECD. 

In truth the government, although crucially important, isn’t the dominant player in R&D – that accolade belongs to private business, which funds and manages the majority of R&D spending. (It’s also worth noting that the UK is unusual in that higher education is the key provider of a lion’s share of R&D. Our massive higher-education sector has undoubtedly been a boon for innovation spending.) 

However, we shouldn’t get bogged down on how much money is spent on R&D programmes. Broader measures of innovation are favoured by many experts. These include a whole bunch of intangible expenditures such as software and databases, mineral exploration, entertainment, and literary and artistic production. It’s possible to add up all these numbers in the national accounts – called intellectual property products, or IPPs – and see how we compare. According to Josh Martin, the UK is below the OECD average and below the EU average for intellectual property products, but above average in a broader set of intangible assets as a share of GDP, which includes branding, organisational capital and training.

“THE DATA CONFIRMS THAT UK GOVERNMENT SPENDING ON R&D IS WELL BELOW THE AVERAGE”

Other social scientists have tried a more detailed look at the number of published scientific papers as a gauge of innovation. Danish researcher Emil Kirkegaard has estimated how innovative we are compared with other nations by looking at a detailed data set of scientific papers published by researchers in each country. 

As you might expect, China comes out on top, followed by the US and India. The UK is at number four. So far, so good. But once we adjust for population and exclude various microstates, Switzerland comes out on top followed by some Nordic nations, Luxemburg and Australia. The UK comes a long way down the list. 

Kirkegaard also looked at trends in this data over time and, yet again, it seems like the Nordics stand out for their consistent improvement over time. Yet another data set looks at a publication’s quality using a measure called the Nature Index, which measures institutional research performance by how many papers are published in quality journals. On this measure Switzerland comes out on top followed by Iceland, Denmark, Sweden, and Singapore. Again, the UK is a long way down the list. 

The US government is also a useful source of comparative data – one of its key agencies tracks how the US is doing compared with the rest of the world. On the positive side, its data sets show that the UK and France have the largest shares of R&D expenditure devoted to applied research (each above 40%). 

Another interesting feature is that a sizeable proportion of our middling spend on R&D comes from funding from the rest of the world – that is, from foreign entities not based in the UK. The UK stands out in this category, with about 14% of R&D funding coming from foreign sources. On the downside, the data confirms that UK government spending is well below average, and the verdict from the American mandarins is that the UK’s performance is middling. 

A GLIMPSE OF THE BIG PICTURE

As you can see, then, which measures you choose makes a difference. But what is the overall picture? The Global Innovation Index, run by the World Intellectual Property Organisation, is an example of an attempt to reveal the big picture using a composite of measures. This shows that the UK is in a strong position. Switzerland tops the list (again), followed by the US and Sweden, but the UK comes in at number four. 

The European Commission also produces a scoreboard for innovation, and its conclusion is that the UK “is a strong innovator with performance at 114.8% of the EU average”, with an above-average performance among other countries it ranks as “strong innovators”. But it also warns the UK’s performance is increasing more slowly than the EU’s annual 8.5 percentage points and that the “country’s performance lead over the EU is becoming smaller”. 

The analysis says that the UK’s strengths lie in its foreign doctorate students, public-private co-publications, and our innovative small and medium-sized businesses, while our weaknesses are in the lack of innovation in business processes and design applications, low R&D spending by public sector, and poor showing in medium- to high-tech goods exports. 

Another area where the UK is unquestionably in the lead is on start-ups and entrepreneurship, especially if venture-capital (VC) funding is the measure. There’s not a lot of doubt that the UK remains one of the favourite locations for VC funding, although the French and other European nations are catching up quickly.

MUST TRY HARDER IN SOME AREAS

So, to sum up all the vastly contrasting data points,  I think a fair assessment is that the UK has a strong reputation, some huge strengths in key areas (higher education, applied research), but has been falling behind on numerous fronts and is currently probably a middling science-superpower, at best. Even if this is true, there are big challenges ahead. We may punch above our weight in some respects, but it’s increasingly obvious that in others we are lagging. Even our successes are unevenly distributed. A few years back, a House of Commons library research note looked at regional spending and found that more than 50% of all R&D cash is spent in the south, below a line drawn from Leicester. Regions such as the North-East lag a long way behind.

We also have a problem scaling up our successes. It’s great having lots of vibrant start-ups, but much research shows that you need large-scale corporates to really push through the kind of innovation that ends up as mass-market products. Having lots of global-scale corporate R&D champions matters. The consulting firm PwC runs the Global Innovation 1000 study, which looks at the biggest corporates spending sizeable amounts on innovation and R&D. In its top 25, there’s only one UK company (GSK), compared with four German businesses, two Swiss and one French. I think you can guess which countries dominate the list. 

“IT’S GREAT HAVING LOTS OF VIBRANT START-UPS, BUT YOU NEED LARGE-SCALE CORPORATES TO REALLY PUSH INNOVATION”

We face another scale-up challenge in manufacturing. It’s wrong to say that only R&D as applied to industry and manufacturing matters – as we’ve seen, there is plenty of absolutely vital innovation happening outside of our much diminished manufacturing sector. But plenty of studies, including one for the OECD back in 2017, tend to take the view that “a large manufacturing sector has a role to play for innovation-led growth in developed economies” – although even that report cautioned that this role seems “sensitive to the specific industrial structure of a country”. Our strength in life sciences could be a winner here. 

Other sectors are more worried. Sharon Todd, CEO of the Society of Chemical Industry, has been very critical of our national record, telling The Times that, since the turn of the century, Britain has crashed from fifth to 30th in industrial competitiveness among leading industrial nations. Pharmaceuticals products have dived as a percentage of exports from 11% to 3%. 

According to Todd, “the UK is no longer a competitive or compelling place for industry to be located. We have a core asset base in science. We need to make the case and make it very strongly, because things are going to get worse, and dramatically worse. Big investments come around in ten-year cycles for big plants and big facilities. We are close to hitting some pinch-points. Chief executives are being approached to invest elsewhere. It is not appreciated that we are in danger of dropping off a cliff.”

If this wasn’t bad enough, one of our key strengths – our higher education system and its success in churning out lots of science, technology, engineering and maths (STEM) graduates – is in danger of backfiring. Another report, this time by academics working for the Nuffield Foundation, found that the majority of science graduates “choose not to – or are unable to – work in highly skilled (STEM) occupations at any time in their careers”. 

So, as the authors, professor Emma Smith and Patrick White, wryly observe, “simply increasing the number of students studying STEM subjects at university – something that has proven very difficult – will be an ineffective way of addressing any labour shortages that may exist”. Britain’s report card is mixed.