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There is a general acceptance amongst economists that investment in research and development (R&D) plays a critical role in the economic development of countries and regions. As such, it is seen as an important driver of innovation and growth by policymakers and given the current frailty of the UK economy, it is not surprising that the CBI recently launched a campaign aimed at increasing the level of R&D spending in the UK.
Apart from contributing to greater productivity and competitiveness, this would ensure that innovation will be at the heart of the nation’s industrial strategy following the decision to leave the European Union.
And there is considerable work that needs to be done to make this happen especially as the latest statistics on R&D expenditure shows that whilst there is more investment going into this important area, this is considerably behind many other competitor nations within Europe.
The good news is that £31.6 billion was spent on R&D in the UK in 2015, an increase of four per cent on the previous year. Unfortunately, this accounted for only 1.7 per cent of GDP as compared to an average of 2.0 per cent for the 28 countries that makes up the European Union. Three countries – Sweden, Austria and Denmark – had surpassed the 3 per cent target set by Europe for 2020.
Whilst many would expect universities to be the main source of research within the UK, it is actually the business community that is responsible for two thirds of all R&D expenditure in 2015 (£21 billion), especially in pharmaceuticals, motor vehicles, computer programming and aerospace.
In contrast, the higher education sector accounts for only a quarter of all research and development spending in the UK (£8 billion) although interestingly, this proportion has stayed roughly the same for the last decade.
There are also considerable differences across the different regions of the UK in terms of R&D expenditure, especially across business and academia.
Whilst Wales has five per cent of the UK’s population, it only accounts for two per cent of R&D expenditure. In contrast, the so-called “golden triangle” of the East of England, London and the South East of England had over half of the UK’s total research and development expenditure.
Therefore, if Wales did manage to spend the same proportion on R&D as would be expected of its population, an additional £900 million would be available every year within our business and higher education communities to create the building blocks that could lead to greater innovation and commercialisation.
This shows the challenge facing Wales, especially if we compare our performance to the rest of the UK. In fact, with 43 per cent of our R&D expenditure coming from universities as compared to 25 per cent for the UK as a whole, there is still an over-dependency on academia for research within the Welsh economy.
This contrasts with areas such as the Midlands, East of England and Northern Ireland where over three quarters of R&D expenditure comes from business.
Given this, one of the key issues is how we can incentivise our indigenous businesses in Wales to focus more of their expenditure on research and, from this initial investment, greater innovation?
Perhaps the simplest solution that could give us a quick win is to ensure that Welsh businesses take full advantage of the UK’s Government R&D tax credits i.e. a tax relief designed to encourage greater R&D spending by offering 225 per cent relief on qualifying R&D expenditure for SMEs and 175 per cent for large firms.
Yet despite these generous allowances, a recent evaluation showed that Welsh businesses had only claimed 1.5 per cent of the total amount given out to UK firms to support research via R&D tax credits.
This is considerably less than would be expected from the business community and it whilst it may be the case that we do not have the type of firm that can qualify for this incentive, others may either be unaware that there are incentives to support investment in R&D or are simply not taking full advantage of what is available.
Whatever the explanation, this lack of take-up needs to be addressed urgently especially, as the CBI has noted, greater investment into R&D is vital for the economic future of the UK.
With Wales underperforming in terms of R&D expenditure, especially within the private sector, I would call on both the UK and Welsh Governments to ensure that Welsh firms take full advantage of all opportunities to invest in more research going forward.
That will not only potentially support greater innovation within the economy but, more importantly, lead to greater competitiveness within our business community at a time when we need it the most.