Why the UK should spend more on R&D

The UK is short-changing investments in science and technology, which is holding back more investment from companies.

That is according to the UK’s The Royal Academy of Engineering (RAE), which has published a new report on the state of innovation in the country.

Public R&D spend as a percentage of gross domestic product (GDP) currently stands at 0.49, which is low when compared to what other advanced countries are spending. In South Korea the figure is 0.95; Finland 0.86 and Germany 0.85.

“We have undoubtedly great statistics for citations, performance in university league tables, and turning knowledge developed by scientists into new products and services,” said Hayaatun Sillem, RAE’s director of programmes and fellowship. “But so many competitor nations are powering ahead,” she said.

The RAE is just one component of the UK’s influential science lobby that is wading in to defend the budget, as a major government spending review looms. The science budget has been defrayed by inflation but it has dodged any absolute cuts since the financial crisis broke in 2008.

However, the recently elected government is committed to public spending cuts of £20 billion by 2020, and the £4.6 billion per annum science budget is in the firing line.

Right now, the comparatively small percentage of GDP devoted to R&D does not seem to be hurting the economy. Last year the UK economy grew by 2.8 per cent, more than any other economy in the G7 group of countries.

But the return on today’s investments are typically felt down the road, in something like a decade said Sillem. “Excellence is the result of many, many years of investment,” she said. She is optimistic that more R&D spending will lead to new technologies, which in turn will encourage companies to start investing in new equipment.

Even given long lead times, the multiplier effect of public investments has been compelling, Sillem claims. Each £1 of public investment in research and development attracts private investment of up to £1.60.

Innovate UK, the technology commercialisation agency, which supports near market research and runs a number of Catapult centres to provide support for translation in areas including cell therapy, precision medicine, smart cities and high-end manufacturing, has shown an average of £6 economic value-added for every £1 it invests. 

There are now nine Catapults up and running in the UK, with total public and private investment exceeding £1.4 billion over their first five years of operation. The latest, a £38 million Catapult for medical technologies opened its doors at AstraZeneca’s former research facility in Cheshire this week.

But said Sillem, “The worst thing you could do is spread funding thinly across new Catapults.”

She is also critical of the many different schemes the government runs to help businesses. Too many cooks make it all “fiendishly complex”, she said. “We’ve urged the government to simplify it all.”

Meanwhile, public procurement is not used to provide opportunities for small businesses in the UK as it is in the US.

The US Small Business Innovation Research Initiative sets aside around $2.5 billion for companies with fewer than 500 employees each year. The UK equivalent, the Small Business Research Initiative, which is also run by Innovate UK, is “substantially less effective”, Sillem said.

However, the RAE’s report credits two programmes, The Enterprise Investment Scheme and Seed Enterprise Investment Scheme, for helping to make the UK, “one of the most favourable environments for angel investing.”

Vulnerabilities

The UK is especially good at attracting high levels of R&D investment from foreign companies, and 20 per cent of the UK’s R&D investment came from overseas in 2012, compared to 4 per cent for Germany and the US and 1 per cent for China

But it is all fairly concentrated, with the report noting almost 60 per cent of corporate investment in R&D happens in just five sectors, of pharmaceuticals, aerospace, machinery, automotive and, computer services. A full 28 per cent of all business investment comes from 10 corporate groups and this concentration is a cause for some concern, said Sillem.

The high levels of foreign direct investment probably mask underinvestment by UK businesses. “If our major companies decide to move elsewhere for whatever reason, it would be a big issue,” Sillen said. “We’re very sensitive to flows of capital and talent.”