Completing the innovation jigsaw: A government boost to R&D funding

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The UK lags on R&D spend and funding for small, innovative companies – but the government is joining up the pieces to complete the picture.

The pieces of the UK’s innovation jigsaw – from our world-class universities, robust intellectual property framework and increasingly favourable ambience for angel investment – all appear to be on the table.

Yet there remain nagging indications that they have not yet been joined up to complete the picture of a landscape of enormous potential.

The UK is already a global tech power: our software, IT and telecoms generate more than 4% of gross value added (about £59bn) and our creative exports (£17.3bn) are the highest per head globally. We also dominate our neighbourhood: of the 47 European “unicorns” – private technology companies valued north of $1bn – more than a third are based in Britain, says investment bank GP Bullhound.

But large and impressive as these figures are, our command of the market is small by comparison with its potential size: the estimated added value of internet of things services globally, for example, is set to reach £1.4 trillion a year and data could create more than $300bn of value over the next decade.

Sums on this scale put into perspective why innovation is crucial to our future prosperity, not least by helping businesses unlock productivity: according to the Royal Academy of Engineering, innovative businesses grow faster, fail less, do better during downturns, and drag up the performance of their neighbours.

Yet when it comes to R&D, Britain’s investment landscape is uneven and we still invest less than many rival economies.

According to the 2015 Global Innovation Index (GII), while the UK ranks 2nd globally for its overall innovation performance, it is much weaker on a range of market indicators: 21st in terms of gross expenditure on R&D; 24th in gross domestic expenditure on R&D financed by business itself; 16th in terms of the ease of getting credit; and 12th in terms of venture capital deals as a proportion of GDP.

Countries like Japan, Korea, the US, Germany and France responded to the 2008 crisis by upping investment in R&D, while the UK’s budget fell. There is also a perception that they may be more effective at extracting economic value from our ideas than we are ourselves.

While the investment environment for innovation and entrepreneurship in the UK also has strengths – the Enterprise Investment and Seed Enterprise Investment Schemes (EIS and SEIS), for example, have been extremely popular – lack of access to financing for SMEs remains a major concern.

For too many businesses inclined to innovate, funding is still a key issue. According to the UK Innovation Survey 2015, the most important barriers to innovation reported by businesses remain the availability of finance and its high cost.

UK Business Barometer surveys of SMEs from 2015 suggest unambiguously that external sources of finance – business angels, venture capital funds etc. – are still almost negligible as a source of funding. The vast majority of SMEs are relying on savings, overdrafts or credit cards. Bank lending criteria for SMEs are restrictive and innovation in financial services – particularly AltFin – has a long way to go.

According to the UK Innovation Survey, 40% of innovative businesses report having co-operation arrangements with other parties on innovation-related activities, mostly with industry although 23% co-operated with universities or higher education institutions.

Moreover, government is becoming far more proactive in innovation policy.

Why governments choose to support innovation is a no brainer – it has been estimated that an extra £1 of public R&D funding gives rise to an increase in private funding of up to £1.60.

Government support is also essential for skills development – a key issue rarely out of the news and restated most recently in June by MPs on the Commons science and technology committee, who said our digital skills crisis costs the UK economy some £63bn a year.

The British government has certainly not been sitting on its hands. At the heart of its strategy is Innovate UK (formerly the Technology Strategy Board) which since 2007 has invested £1.5bn in innovation, with a further £1.5bn from business and partners.

Innovate UK’s Catapult centres are already delivering concrete returns: its High-Value Manufacturing (HVM) Catapult, for example, generates net benefits of £15 from every £1 of core public funding. Its partnership in missions with UK Trade & Investment (UKTI) has proved a highly effective way to help early-stage businesses accelerate growth overseas.