There is less than a month to go to the government’s first Budget. The Conservative manifesto has promised historically large increases in investment to help the UK get to a target of spending 2.4% of GDP on R&D. In this context, one of the most important questions we have to ask is: how can the UK spend that money well?
It’s a generational challenge
First, a reminder of where we are. The UK’s R&D intensity – the amount we spend on R&D as a percentage of GDP – hasn’t budged for a long time. It’s bumped about around 1.7% of GDP since the late 80s. In fact, it’s entirely possible that someone could have been born, gone to school, gone to university, worked for over a decade, got married and even spent the last two years as Director of Innovation and Digital at the CBI … and never have seen R&D intensity increase in their lifetime.
Reaching 2.4% will be hard.
Raising R&D intensity is something we’ve failed at before. Back in 2004 the UK released its science and innovation framework, which included an ambition to increase R&D from 1.9% to 2.5% of GDP between 2004 and 2014. We didn’t do it.
There were three big reasons we failed:
- The great financial crisis hit investment (although we were already off track in 2008)
- Government failed to increase public expenditure to the extent needed
- A lack of long term policy focus
But, international evidence tells us the challenge can be met
Although the UK hasn’t yet turned around its R&D performance, other countries have. In the last twenty years, 14 other countries have achieved equivalent – or even greater – increases. Almost all of those increases saw business investment do some of the heavy lifting, critically, though public investment played a role in leveraging that additional private sector spending.
Improving the UK policy environment for business R&D is therefore key. That means maximising the leverage public investment achieves and ensuring there are strong incentives for multinationals to invest in the UK.
The international experience reveals “Five Fs” to improve the policy environment
- FOCUS: A long-term strategic approach to R&D investment reflecting national characteristics is the first, and most important tool for success. In almost all countries who have achieved big steps up in R&D investment, the longevity of approach is key. If you’re looking to make long-term change, you need a long-term approach. The OECD has a great paper on the rationale for an innovation strategy.
- FUNDING: high levels of well-tailored public funding and incentives that help create a diverse “ecosystem” can deliver a strong innovation economy. There is a high degree of correlation between the level of public funding for innovation and private funding. Chapter 4 of this international benchmarking report from Terra Allas back when BEIS was BIS makes the case.
- FLAUNT IT: don’t underestimate this one! Well-marketed support designed to meet industry needs and attract international investors is key. Angela Merkel was key to selling Germany’s Industrie 4.0 strategy(there’s even a photo of Putin holding it) or think about Estonia’s “E-estonia” branding. It’s catchy and it gets investors’ attention.
- FAIL FAST: this is an area where government can learn from business. Successful innovation policy should embed a willingness to pilot, learn from failures and international good practice.
- FOUNDATIONS: innovation needs the right foundations. These include scientific and digital infrastructures, skilled people, and a large market for innovation driven through business adoption and government procurement. The US’s strong R&D performance is linked to its large market (many international investors tell me it’s why they’re in the US first), and a strategic use of government procurement, especially through DARPA. Meanwhile the EU’s Innovation scorecard highlight Sweden’s overall innovation friendly environment – including good broadband connectivity – as a key reason for its success as an innovation leader.
The UK has made much progress in each of these areas in the last few years, but there is more to do! The next steps must build on the unique UK context.
- The UK has incredible research and innovation but both have been subject to under investment. Innovation funding is particularly underweight and has faced high levels of chop and change.
- Compared with other countries, the UK industrial mix has a lower-level of R&D-intensive sectors like manufacturing. This is compounded by only average levels of innovation adoption.
- Research and innovation is highly concentrated: in a few large companies; in a few sectors and in a few regions. The UK is also highly reliant on international investment
The UK needs a long-term framework to increase Research, Development and Innovation
This table sets out the key actions that the CBI is calling for, addressing each of the Five Fs.
For more information and detail on the CBI’s policy thinking please read:
- Don’t Wait Innovate: which highlights some incredible R&D happening around the UK and proposes “Catapult Quarters” as a model for building on this.
- ARPA postion paper: the business community’s views on what a model for UK ARPA could look like.
- From Ostrich to Magpie: which looks at the UK’s record on innovation adoption
CBI members can also read the latest on the CBI’s Innovation and Digital policy work and get involved at MyCBI.