ENSURING THE FULL INNOVATION POTENTIAL OF THE WELSH ECONOMY

One of the headline promises by Prime Minister Boris Johnson in the build-up to the last general election was a pledge to double government research and development (R&D) spending to £18 billion within five years as part of a new wave of economic growth. This builds on the target by previous government’s Industrial Strategy to raise investment on R&D to 2.4 per cent of GDP by 2027. 

Whilst universities will be important in reaching this target, the majority of R&D in the UK is carried out by the private sector. Given this, it is critical that businesses are given the right support and incentives to invest into R&D over time.

The good news is that the latest statistics show that R&D expenditure on research and development performed by UK businesses was £25 billion in 2018, an increase of nearly six per cent on 2017.

In terms of sectors, pharmaceuticals remain the industry that spends the most on R&D accounting for £4.5 billion of expenditure in 2017 (or 18% of total expenditure performed in UK businesses). This was followed by motor vehicles and parts, computer programming and information services, and aerospace. Interestingly, the largest decrease in R&D expenditure by an industry was from arts, entertainment and recreatio, which fell by £65 million (or 18%) since 2017. This is disappointing, given the growing importance of the creative industries to the UK economy.

The data also shows that employment in R&D is now at its highest level in the UK, with 250,000 FTEs (full-time equivalents), which represents an increase of nearly 100,000 since 2009. Just under half of these posts are scientists and engineers although the growth in jobs over the last decade has been in lower level positions such as technicians and other support staff.

Given that R&D is expensive, it is not surprising that only 4.3 per cent of UK expenditure is undertaken within SMEs (i.e. independent firms employing less than 250 people). However, it would seem that initiatives such as R&D tax credits – which have been designed to reward UK companies for investing in innovation - may seem to be working as the amount spent by SMEs on R&D has increased by 167 per cent since 2007 as compared to 57 per cent for large firms.

What is of particular interest, given the new Government’s decision to leave the European Union at the end of this month is the source of funding for R&D. Whilst just over three quarters of R&D spending came from the businesses themselves, it is worth noting that £75 million came directly from European Commission grants. Whilst this is a relatively small amount of funding, this is likely to disappear over the next few years and will need to be replaced.

In addition, overseas funding of R&D continues to decline in the UK, with a fall of £824 million since 2014 and it is clear that if this continues, then this funding will also need to be found either from UK businesses themselves or from public funds.

With the new UK Government promising to focus on economic growth away from the more prosperous regions, it is worth examining the location where businesses currently undertake R&D. 

According to the latest data, the concentration of expenditure continues to be in the so-called ‘golden triangle’ of the South East of England, London the East of England, which currently accounts for 53 per cent of all R&D expenditure in the UK. More worryingly, the concentration of R&D undertaken in these three regions has increased considerably since 2007, with a growth in expenditure of 90 per cent as compared to 68 per cent for the rest of the UK. 

Unfortunately, Wales accounted for £430 million of UK R&D expenditure in 2018 which equates to only 1.7 per cent of the total. In addition, Welsh businesses had only increased their spending by 40 per cent since 2007 as compared to 60 per cent for the UK with only firms in the North east of England demonstrating slower growth. However, the number of Welsh employees in R&D has doubled over the last decade with Wales now accounting for 2.5 per cent of the total workforce.

Therefore, whilst it is good news that private sector investment in R&D is increasing in the UK, there remain some challenges to ensure that it benefits the whole economy. Certainly, there needs to be greater incentives to get more SMEs to invest in innovation, especially within the less prosperous areas of the UK. 

This is particularly the case in Wales where  there has been a historical underperformance when it comes to accessing national funds from bodies such Innovate UK and Welsh SMEs claimed only 3 per cent of the amount of tax credits paid out in the UK. 

One can only hope that both the Welsh and UK Governments address this deficit over the next few years so that the nation’s businesses can achieve their full innovation potential.