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Target manufacturing for best return on R&D funding

Small, high-tech companies show the greatest payoff from participating in publicly funded research, says Stephen Roper.

Between now and 2020, public support for business R&D is set to increase sharply, thanks to government commitments to the research budget and in particular the £1-billion Industrial Strategy Challenge Fund.

How and where should this spending be allocated? Should the UK invest in basic R&D that may lead to commercial benefits in many years’ time? Or would it be better to invest in more applied R&D, which is closer to market and which may do more in the short-term to address the UK’s productivity challenges?

There is probably a good case to be made for more investment in many areas of science and innovation. Looking at the evidence of past spending decisions, however, can give clues as to where the returns from investment will be greatest.

Together with my colleagues Enrico Vanino and Bettina Becker, I have done just that, carrying out the first comprehensive assessment of the business benefits of funding from the research councils and Innovate UK. Our results, published this month, show that while the impact of participating in R&D projects is generally positive, some types of company benefit more than others.

We looked at the effect on business growth and productivity of all research council and Innovate UK support involving private companies between 2004 and 2016, amounting to a total of about 10,000 firms. We compared these companies’ performance with a closely matched control group drawn from the one million or so UK businesses with employees that didn’t participate in publicly funded research or innovation projects over this period.

Our results are encouraging. Firms that took part in publicly funded projects—supported primarily by the Engineering and Physical Sciences Research Council (EPSRC) and by Innovate UK—increased their turnover and employment about 6 per cent faster in the three years after the project, and up to 28 per cent faster in the six years after the project, than similar firms that did not receive support.

There were also productivity gains of about 6 per cent over six years. As well as these direct returns to businesses that participated in the projects, we would also expect positive spillovers to other firms through increased spending, imitation or competition.

This suggests that the Industrial Strategy Challenge Fund will yield significant benefits. Patience will be needed, however, as investments made in 2018-20 will not show their greatest effects on business performance until 2024-26—at least one general election away. The uncertainties of Brexit may also influence firms’ willingness to invest in risky R&D and innovation, even where public support is available.

We found that the effect on growth of participating in research projects was greater in manufacturing firms, particularly in high-tech industries, than in service industries. This might be because innovation is more expensive in manufacturing (see figure).

Smaller firms also showed a proportionately greater benefit, perhaps because public funding makes a greater difference to them than it does to larger firms with stronger financial resources. For those seeking to maximise the returns to future investments, the messages are clear: think smaller firms, think manufacturing.

Two other aspects of our results are also potentially important in thinking about the allocation of resources. First, we found that in terms of business outcomes, the effects of the funding for more basic research provided through the EPSRC and more applied innovation funding from Innovate UK are rather similar. Maintaining the current mix of funding may therefore be the best option.

Second, the industrial strategy emphasises the need for growth to be spread across the entire country. Our results suggest that by focusing on the right type of companies the government may be able to target resources to support less developed areas of the UK. 

For firms, our results show the potential benefits, in enhanced growth and productivity, that come from engaging with projects funded by Innovate UK or the EPSRC. For example, at the time of writing, the government’s online list of innovation funding sources shows 23 opportunities to apply for grants. These include support to help develop autonomous vehicles, battery technologies, low-carbon technologies and machine learning. The EPSRC website also lists a range of funding opportunities and provides useful resources such as model collaboration agreements.

For the government and taxpayers, our research provides evidence of the value of publicly funded science. R&D funding is not a miracle cure for low productivity, but it is part of the solution. The challenge for government is to ensure that the Industrial Strategy Challenge Fund supports UK innovation in the best way.

Stephen Roper (@steverop) is director of the Enterprise Research Centre and professor of enterprise at Warwick Business School. See also http://rsrch.co/2gYfWVJ

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This article also appeared in research Fortnight