Innovation holds key in UK fight for levelling up
‘The way we fund research means already productive regions receive the lion’s share of public funding for R&D.’
Will Tanner
THE UK economy has many fundamental strengths but on one count, at least, it is fragile – its capacity for innovation.
This is a strange thing to write when UK innovations in vaccine development and gene sequencing offer some of the best hopes of beating coronavirus and reopening the world economy.
But it is true. The UK is increasingly out-spent and out-patented in research and development by our competitors. The country that led the first industrial revolution is at risk of falling behind in the next.
In 2018, UK businesses and taxpayers collectively spent 1.7 per cent of national output on R&D compared to more than three per cent in Germany and Japan and nearly five per cent in Israel. Patenting rates have fallen in the UK since the turn of the century but have risen impressively elsewhere, especially far eastern countries like Japan, South Korea and China.
Our failure to invest in innovation is one of the best explanations for why UK productivity has been in the doldrums for a decade; correcting it is one of the surest ways we can guarantee a strong and sustainable recovery.
This also goes to the heart of the Government’s ambition to “level up”, which will be front of mind for the Chancellor as he prepares for his Budget next Wednesday.
We not only invest too little in innovation, but what we do spend is regionally uneven. As Onward research today sets out, there are six sub-regions in the UK that spend more than the OECD average on R&D, and all of them fall within the “golden triangle” of London, Oxford and Cambridge. Germany has 17 regions that spend above this level, distributed broadly from Stuttgart in the West to Dresden in the East.
And Whitehall policy is making this worse. The way we fund research means already productive regions receive the lion’s share of public funding for R&D, in turn widening the regional productivity gap.
Half of the core research budget and three fifths of support from the Treasury’s two main start-up investment reliefs is spent in London and the South East. The recovery grants handed out by Innovate UK since the beginning of the pandemic have followed a similar pattern.
Some economists might argue that this is smart. Places like Cambridge and Oxford are globally competitive innovation ecosystems, on a par with Tel Aviv or Silicon Valley. Shouldn’t we leverage our strengths? Yes, to an extent. But these places are already successful, so the private sector has considerable incentives to invest, and diminishing returns may mean the marginal pound goes further elsewhere.
It has also generated a worryingly lopsided economy, memorably described by Professor Richard Jones as being “like Portugal with Singapore glued on to the bottom right hand corner”. In the last decade, nearly three in four jobs created in R&D intensive industries were based in London, Oxford and Cambridge, with 14 times more created in Inner London than in the North of England. It is no wonder some places feel left behind.
As long as this concentration continues, the Government will struggle to close the gap between richer and poorer places.
The good news is that the Government is already taking some important steps. In 2017, the Government committed to increasing national R&D spending to 2.4 per cent by 2027. ARIA, the high-risk science agency announced last week, may well unlock countless regional innovations.
But the Chancellor should go further and now make
Technological breakthroughs and commercial invention is the engine of growth.
innovation central to levelling up. By 2027, the public sector will be spending about £9bn more than it does now on R&D. We should spend every last penny in less productive regions. At the same time, the Government should build the institutions around which high-growth clusters form, and do so in different parts of the UK. Institutions like the Advanced Manufacturing Research Centre (AMRC) at the University of Sheffield have proved how good institutions can catalyse innovation in the places that need it the most.
To the average voter, R&D may seem remote, technocratic and obtuse. Innovation is not top of the list of voters’ concerns in the Red Wall.
But technological breakthroughs and commercial invention is the engine of growth. As we emerge from the pandemic, it offers not just a route to recovery but a method to level up.
The Chancellor should seize the opportunity to innovate and thrive.