Innovation, regional economic growth, and the UK’s productivity problem

Innovation, regional economic growth, and the UK’s productivity problem

By Professor Richard A.L. Jones, Dept of Physics and Astronomy, The University Of Sheffield

 

AMRC SoR 2019Amongst the UK’s most pressing economic problems are the very weak productivity growth we’ve seen since the global financial crisis, and the profound disparities in economic performance between different regions.

Our productivity problem has a number of causes, but one key factor is a relative failure to innovate. There has been a general collapse in total factor productivity growth – the economy is less able to create higher value products and services from the same inputs than in previous decades. This is a problem of declining innovation in its broadest sense – and the disparities in productivity between the different regions of the UK mean that this innovation problem has a strong regional dimension.

Our productivity problem has a number of causes, but one key factor is a relative failure to innovate.

It’s not as though the opportunities for innovation aren’t there: there are exciting developments in machine learning, the “internet of things” and “Industry 4.0”, in biotechnology, synthetic biology and nanotechnology, in new technologies for generating and storing energy. But the productivity data shows that UK companies are not taking enough advantage of these opportunities.

The UK economy is not able to harness innovation at a sufficient scale to generate the economic growth we need.

The UK has a research and development intensity – especially in the private sector and for translational research – that is low compared to competitors. There is now widespread recognition of this, reflected in the adoption by the government of a target to raise R&D intensity from its current value of around 1.7%, to 2.4% by 2027. We will not be able to reach this target without rebuilding the innovation systems of those parts of the country outside the prosperous South East of England.

There is much to be proud of in the UK’s science base. As measured by the Nobel prizes won by UK-based scientists and the impact of their publications, our academic science base is internationally leading. But despite these successes, the UK’s wider research and development base suffers from three faults:

  1. Too small for the size of our economy, as measured by R&D intensity
  2. Particulary weak in translational research and industrial R&D
  3. Too geographically concentrated in the already prosperous parts of the country

There are very wide disparities in public investment between the regions of the UK, with significant underinvestment in the poorer regions, and a mismatch between where the public and private sectors invest.

Currently, just three sub-regions of the UK – Oxford and its environs, Cambridge and its sub-region, and inner West London – account for 31 per cent of all R&D spending in the UK. Public sector R&D is even more concentrated – 41 per cent takes place in these three regions. The strong science base of these regions has been a major contribution to their economic success, which now needs to be spread out to the rest of the country.

We can make a rough, fourfold division of the regions of the uk based on the relative strength of their public and private sector R&D:

  • West Midlands, North West, South West, East Midlands: have relatively low public spending on R&D, but disproportionately high private sector R&D investment. Government investment should support & grow existing private sector innovation capacity and productivity.
  • Northern Ireland, North East, Yorkshire & Humber, Wales: have a combination of low public spending on R&D and low private sector R&D investment. As the economically weakest regions of the UK, there is a compelling case to increase public investment, but this must be carefully targeted to those areas that are most likely to grow business R&D capacity and lead to increases in productivity.
  • South East, The East of England: have high public spending on R&D, matched by high private R&D investment. This is what successful knowledge economies look like.
  • Scotland, London: have high public spending on R&D, but with relatively low private R&D investment. Here the emphasis needs to be on driving up business R&D.

The University of Sheffield’s Advanced Manufacturing Research Centre (AMRC) gives us one model for how a new translational research facility can drive innovation and productivity growth in an economically lagging region. The subject of a case-study in the 2018 State of the Relationship report, the AMRC is now part of the High Value Catapult Network, though its establishment predated the introduction of the Catapult centres. The AMRC began with a strong aerospace sector focus, and was built around strong core partnerships with large companies - Boeing and Rolls-Royce. One measure of its success has been the way it has attracted new, high value, manufacturing facilities (from Boeing and McLaren) into an economically lagging, deindustrialised region.

This kind of inward investment from international companies at the technology frontier has both direct and indirect benefits.

This kind of inward investment from international companies at the technology frontier has both direct and indirect benefits. The direct effect is to introduce new, higher productivity, economic activity to the region. The indirect benefits are to raise the productivity of the indigenous business base. This happens through engagement of local firms in the supply chains of the incoming businesses, and by raising the level of skills in the region – including the quality of management.

In addition to its role as a research centre, AMRC has become more directly involved in skills at all levels, including developing high-quality intermediate level skills through apprentice programmes.

In short, the AMRC has served as a nucleus to recreate what US researchers Pisano & Shih call the ‘industrial commons’ – the set of collective resources and knowledge that a successful regional cluster in all types of manufacturing industry must draw on. It has created new networks to promote innovation, to diffuse new technologies, and to raise skills levels, both directly and indirectly. It has helped create more demand for higher levels of skills, suggesting a route by which lagging regions can break out of the low-skills/low-productivity equilibrium many find themselves in.

Science and innovation policy needs to develop a much stronger regional dimension, to correct the current imbalances in R&D spending, to create the new innovation capacity that will be needed if the 2.4% R&D intensity target is to be met, and to drive productivity growth in currently economically lagging regions. A big part of this policy should be the creation and strengthening of research centres in the regions with the conscious goal of rebuilding those places’ ‘industrial commons’.

 


This article first appeared in the 2019 State of the Relationship report published 19 June 2019.

READ THE FULL REPORT HERE

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