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UK business R&D is stagnating as competitors surge

Image: John M Lund, via Getty Images

Companies need clearer, more stable policy towards both private and public sectors, says Rosalind Gill

More businesses are recognising they must invest in R&D and innovation to remain competitive in a world where technology changes in fast, impactful and often unpredictable ways. The United States, Japan and South Korea are leading on business R&D spending. Each starts from a strong position and is driving sustained growth through large-scale initiatives such as the US Inflation Reduction Act.

In contrast, the UK is one of the few countries in which business R&D spending is falling. Data published by the Office of National Statistics in February showed total business investment in R&D falling by 0.4 per cent in real terms between 2021 and 2022. This looks worse still when compared with a global rise of 5 per cent in the same period, reported in OECD data released at the end of March. 

This means the UK is missing out on attracting and building the companies that would bring growth and resilience to our economy. Businesses are by far the largest investors in UK research, spending close to £50 billion annually. The decline is both important and surprising. For one, it reverses a long trajectory of growth. Between 2014 and 2022, UK business R&D expenditure grew by almost 30 per cent. We have been particularly successful at attracting globally mobile investment into R&D, with foreign-owned businesses spending £21 billion in this time on R&D in the UK. 

The UK holds many attractions to investors in R&D, including talent availability, good government support, a large and receptive market, and world-leading universities keen to collaborate with business. Nonetheless, in an increasingly competitive global market, policymakers are considering how to boost investment further. The options include sector strategies, changes to R&D tax credits, innovation zones and targeted funding programmes. 

Despite these efforts, the data suggest at best stagnation and at worst decline. Many factors are known to affect business R&D decisions, but their relative importance and optimal design are not well understood. This makes evidence-led policy design challenging.

We do know that direct public funding for research plays a critical catalytic and leveraging role. And UK research funding has, for many years, lagged behind that of competitor nations.

The government has followed through with its commitment to grow public research spending, which now stands at just under £13bn a year. However, this may not yet have made up for historic underinvestment, and the UK still spends less public money on research than other nations. 

Another significant and growing challenge is the funding gap faced by universities and other public research performers. Without action by policymakers, this will only get more acute.

Nonetheless, public R&D funding is not the only influence on business investment. Businesses tell us that prioritisation is critical to successful policy. 

Playing to strengths

The UK cannot be world-leading in everything. A clear signal of where our strengths lie, combined with a supportive policy framework, would help boost private investment. 

Instead of providing clarity, however, a rapidly changing cast of ministers has repeatedly rewritten industrial strategies and growth plans, eroding the certainty and long-termism that encourage business investment. There are also huge geographical disparities, with business R&D spending concentrated in the southeast of England.

A focus on attracting foreign direct investment remains vital. The government-commissioned Harrington Review of this issue published last November makes a series of recommendations that should improve the UK’s approach, but coordinating delivery will be challenging and take time. 

Along with attracting globally mobile corporate investment, the UK must also nurture its research-intensive, innovative small businesses. Companies with fewer than 100 employees account for nearly a third of UK business R&D spending. Initiatives to unlock investment for promising companies to launch, grow and scale are critical.

The latest data on business R&D investment should be a warning to the UK against complacency. Raising public underinvestment in research was a necessary but insufficient step towards a more research-intensive and innovative economy. The UK is world-leading at research; its greatest challenge and opportunity is to translate this strength into greater business-driven research, development and innovation. 

Setting out a new vision for R&D in the UK requires a commitment from business as much as it does from universities and government. Policymakers must view businesses as partners in the R&D ecosystem. 

Rosalind Gill is head of policy and engagement at the National Centre for Universities and Business

This article also appeared in Research Fortnight