James Tooze delves into today's ONS publication

I’m always eager to see statistics outlining the UK’s expenditure on research and development and publications from the ONS give the most complete picture of R&D investment in the UK. Today’s publication details the UK’s gross expenditure on R&D in 2017. In 2017, the first allocations of additional R&D investment pledged by the Chancellor in the 2016 Autumn Statement were set to be distributed. This means that these figures provide us with the first opportunity to review the Government’s commitment. We will be able to use these statistics to adjust our modelling on what will be required of the UK to meet the Government’s target to increase R&D expenditure in the UK to 2.4% of GDP by 2027.

Proportion of GDP spent on R&D increases

The UK collectively invested £1.6bn more in R&D from 2016 to 2017, reaching £34.8bn across all sectors of the economy. When assessing this figure in real terms (adjusted for inflation), the increase was £1bn. This represents a continuation of a trend over the last few years. Significantly, the proportion of GDP spend on R&D was 1.69% in 2017, the highest level since 1991.

Despite this increase, the UK is still lagging behind the EU average of 2.07%, while four European nations invest over 3% of their respective GDP on R&D. The UK will have to increase the proportion of GDP spent on R&D by 0.7% by 2027 to meet the Government’s target, an ambitious ask but something that has been achieved by a dozen countries, including South Korea, Denmark and Australia in the modern era.

Public investment increases while overseas investment decreases

Public investment in R&D increased from 2016 to 2017, by roughly £400m to £9.05bn. In public announcements since 2016, the Government stated that an additional £425m would be made available for R&D in 2017/18 so it is no surprise that public investment increased by this quantum. Investments in R&D from the public purse in 2017 represented the first real-terms increase since 2013, a crucial first step in the increase in public investment need to meet the Government’s target.

Business investment in R&D continues to grow and remains the driving force behind rises in UK R&D investment. Since 2006, real-terms business enterprise investment has increased by 48%, now accounting for 54% of gross UK R&D spend, amounting to £18.7bn. Private-non-profit organisations also play a key role in R&D investment in the UK, contributing just under £1.8bn in 2017.

A cause for concern is the amount of investment for UK-based R&D coming from overseas. Traditionally, the UK has been very effective in attracting foreign direct investment (FDI) to its research and innovation sector. UK business enterprise captured £3.3bn of overseas investment in 2017, while UK HE received £1.5bn. However, since 2014, overseas investment in UK R&D has been steadily declining in real-terms, and overseas investment is at its lowest since 2006. Overseas investment has fallen significantly as a proportion of total UK R&D investment since 2011.

This is worrying because to reach the Government’s R&D target, the UK will need to grow R&D expenditure from all sources, including its traditional strength of attracting FDI and other overseas funds. The Government must do all it can to reduce and remove the uncertainty surrounding Brexit and the UK’s future relationship with Europe, and the European Framework programmes in particular, in order to prevent overseas investment falling further. It must also look at ways it can encourage greater overseas investment in R&D, including setting out a long-term plan for public investment to provide a sound basis for private investment, as we have previously called for. We have been engaging in consultations with our membership and beyond to understand investment decisions for private enterprise, how the UK could be more attractive to investors and lessons that can be learned from international competitors. This work is fuelling our wider considerations ahead of a Spending Review in the Autumn.

 

We have taken these statistics from the ONS website, namely the Gross domestic expenditure on research and development, UK: 2017 statistical release. The ONS also produce an informative brief on the statistics.

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