The government has promised more R&D. Where will the money come from?

The government has promised more R&D. Where will the money come from?
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The UK government has ambitious plans to boost research and development. Most funding will come from business – but universities must be at the heart of the strategy.

After decades of lobbying, the government has promised to raise UK investment in research and development (R&D) to 2.4% of gross domestic product over the next ten years. Brexit is the big catalyst. The government is using R&D investment to combat stubbornly low productivity and persistent regional inequalities before new economic challenges appear.

Governments have set out vague ambitions before but this time it’s more than just talk. An extra £2.3bn per year has already been added to government R&D budgets. The funding system is being restructured, tax incentives are increasing, a review of private sector investment is nearing completion and research and innovation are being woven into both the UK’s negotiating position on Brexit and the new industrial strategy. Richard Jones addressed many aspects of the industrial strategy in an earlier Guardian post. Here, I focus on money.

In its new strategy, the government says: 

"We could see a dramatic change in the use of R&D by industry, with our businesses creating the next generation of technology to revolutionise productivity in all sectors … This will raise the standard of living and establish UK leadership in global markets." 

R&D investment in the UK currently stands at around 1.7% of GDP, just over £30bn per year. The government is promising a 50% increase by 2027.

About two-thirds of UK R&D investment comes from the private sector, with most of the rest coming from government. Charity and EU funding are important but small proportions of the total. That 2:1 ratio of private to public R&D investment is also found in the USA and Germany, our largest trading partners. Realistically, R&D investment will grow by 50% only if business investment rises by about £10bn per year and the government share rises well beyond the recent £2.3bn increase. The government will not sustain its higher level R&D investment unless business keeps pace.

Three options are worth exploring: encouraging established UK firms to invest more in R&D; scaling up emerging research-intensive businesses into larger organisations with larger R&D budgets; and attracting additional research-intensive firms to the UK from other countries.

At first sight, these increases seem fanciful. But three options are worth exploring: encouraging established UK firms to invest more in R&D; scaling up emerging research-intensive businesses into larger organisations with larger R&D budgets; and attracting additional research-intensive firms to the UK from other countries. Let’s look at these in turn.

First, the existing UK industrial base. The UK economy has large proportions of banking, retailing and other service industries compared to many other major economies. These service industries are highly innovative but do not rely on classical R&D. As a 2014 report from the Department for Business, Innovation and Skills put it:

"UK firms’ spending [on R&D] is not as far below international norms, once industrial structure has been accounted for. It does, however, imply that the UK has fewer firms in research-intensive sectors."

In other words, even with further tax incentives, many established firms won’t greatly increase their R&D investment, either because they don’t rely on R&D for their innovation or because they are already investing at about the right level. Maybe we could look for a 10-20% increase over a decade, but not 50%.

Second, emerging firms. Alongside the industrial strategy, the government published initial findings from a review of so-called “patient capital”. They point to the stock of long term investment capital already present in UK pension funds.

The Pensions Regulator will clarify guidance on how [pension fund] trustees can invest in assets with long-term investment horizons… This will give pension funds the confidence that they can invest in assets supporting innovative firms as part of a diverse portfolio. With over £2tn in UK pension funds, small changes in investment have the potential to transform the supply of capital to innovative firms.

If, over time, 5% of that £2tn pension pot was allocated to the long-term growth of knowledge-intensive firms and if these firms put 5% of that investment into UK research, then 0.25% of the pension pot – a further £5bn – would be added to UK business R&D. This would not repeat annually, but the government presents it as part of a wider suite of initiatives aimed at stimulating new private sector investment.

Finally, attracting foreign investment. Exceptionally strong research in UK universities acts as a magnet to corporate R&D investors both from the UK and other parts of the world. Around half of the business R&D in this country is done by firms headquartered overseas, a significantly higher proportion than other major economies.

Syngenta, headquartered in Switzerland, told the House of Lords Science and Technology Committee recently:

"We currently have over 500 active collaborative R&D projects, and more of these are with partners based in the UK than any other country in the world. This suggests that UK is a great place – maybe even the best place – in which to participate in collaborative research in agricultural technology."

US-based pharmaceuticals giant MSD recently announced a major UK investment in R&D. They told the same committee:

"The decision to place our recent investment here … was based on our ability to get access to the best scientific talent. We believe that, with the golden triangle that exists here, this is a really good place at the moment to do early discovery-stage science."

Data from accounting firm PwC suggests that, globally, the top 1,000 firms together invest over £500bn each year in R&D outside the UK. If we captured an extra 1% of that amount then £5bn would be added to UK business R&D annually.

On that basis, the £10bn a year uplift in business R&D is ambitious, but not crazy. It just might be achievable.

This vision of the future requires healthy university research. Universities are magnets for investors, sources of talented people, creators of start-up companies and, of course, places where some of the additional research is actually carried out.

There are important questions about whether this agenda can be delivered without the golden triangle of Oxford, Cambridge and London scooping even more of the additional investments from global corporations and financial institutions. Is the new agenda worth delivering without a more diverse regional spread of R&D?

With judicious governmental support, universities across the UK have the capacity to host major new research partnerships with business. But universities are at risk of being distracted by new performance measurements, new regulatory requirements and various trivial controversies at just the time when they are needed to underpin the most pressing economic agenda in more than a generation.

By National Centre for Universities and Business Strategic Adviser, Professor Graeme Reid. 

Article first published in the Guardian

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