The implications of revised R&D levels for policy and advocacy

Daniel Rathbone and Camilla d’Angelo discuss the latest ONS R&D statistics, and what they might mean for policy and advocacy.

The new gross domestic expenditure on R&D (GERD) release shows that the UK has been doing much more R&D than previously thought. These statistical revisions are large and are likely to have a significant and continued impact on R&D policy and advocacy as we move forward.

The UK has likely already met the 2.4% research intensity target

We have previously commented that the new gross domestic expenditure on R&D (GERD) results mean the UK has higher levels of research intensity than previously thought, and has likely already met the UK Government’s 2.4% target. Our initial back of the envelope calculation shows that the UK invested 2.7% of GDP in R&D in 2018, 2.7% in 2019 and 2.9% in 2020. Because the revisions don’t go back further, we are not able to calculate when the UK reached the Government’s target.

These initial estimates however should be interpreted with caution – the ONS themselves have not yet provided research intensity figures, as calculations of GDP will need to include the revised R&D statistics. The ONS have indicated that the earliest opportunity to add the revised R&D estimates into national accounts will likely be towards the end of 2023. The Department of Business, Energy and Industrial Strategy have also done preliminary calculations giving similar numbers.

International comparisons

R&D investment as a percentage of GDP provides a useful measure of the overall research intensity of the UK economy and form the basis for international comparisons. The original target of 2.4% was set in 2017 and reflected the then OECD average for R&D intensity. However, the OECD average is itself a moving target, since other countries are increasing their R&D. The OECD average is now at nearly 2.7%.

The revised estimates of research intensity may have pushed the UK up in the world R&D rankings. However, it still puts us behind leading R&D nations like the USA, Japan and Switzerland (who each spend over 3%) and a long way behind leaders like South Korea and Israel (over 4%). At CaSE we have long argued to build on the current foundations and take the UK’s ambitions higher, looking towards investing 3% or more of GDP into R&D – a level that would secure the UK’s place on the world stage.

The principles that underpinned the target still remain

The 2.4% target may have been met but the principles that underpinned the original target still remain. A more research intensive UK has the potential to improve the lives and livelihoods of everyone in the UK. Research and innovation are essential to solving challenges facing Government and society, including climate change, energy security and caring for an ageing society. They also contribute to wellbeing through the creation of high-skilled jobs and better public services, as well as increasing life expectancy, reducing pollution and improving physical and mental health, amongst others.

We must continue to build on the current foundations and take the UK’s ambitions higher. It is great that the Government has moved to bolster its stance on research and innovation, placing it front and centre of its ambitions for growth. Stability of intent, supported by sustained investment, is vital to help research and innovation thrive in a way that improves people’s lives and livelihoods.

What does this mean for business investment and the link with productivity?

R&D is widely seen to be a driver of productivity growth through technological development and creating innovations. A long-standing argument has been that low levels of innovation (and hence productivity) in the UK economy are the result of relatively low levels of investment in R&D compared to other countries. The BERD revision suggests that public R&D is even more effective than we thought in generating private sector R&D, i.e. the leverage effect is stronger than we thought. But what is puzzling then is that despite having reached the R&D intensity target, this doesn’t seem to have changed the level of productivity growth.

One explanation could be one of the composition of R&D spending – that different types of R&D (and intangible investments) in different types of organisations (e.g. large and small) lead to different degrees of wider spillover effects. It could be that the types of R&D that have been revealed with the revised methodology (which are mostly driven by smaller businesses) have smaller spillovers than other types or perhaps smaller firms are less able to capture the spillovers from R&D. This would have interesting implications for the types of policy levers that would be needed to improve spillovers. A number of organisations are considering carrying out work on some of these issues and it is something we are also considering looking into further.

Policy levers to support the innovation ecosystem

If innovation and productivity in the UK are not being held back by the quantity of R&D, this suggests the issue could be one of translation, i.e. the efficiency of R&D expenditure and of those working in R&D in the UK. One implication of this would be that a more efficient innovation ecosystem could help to boost innovation levels in the UK and in turn the productivity of the UK economy.

In addition to R&D investment, other important aspects of the UK’s innovation ecosystem include infrastructure, market, regulation for innovation and procurement, developing skills and focusing on regional strengths. Two key pillars of the Government’s 2021 Innovation Strategy were people and places. The 2022 Autumn Statement also provided welcome commitments to support innovation, including support for high potential knowledge clusters across the UK and an emphasis on the value of skills and education to drive innovation and long-term economic growth.

CaSE welcomes the focus on supporting clusters across the UK as part of levelling-up – a key plank of the recommendations in our report ’The Power of Place’. CaSE also believes that skills provision is an essential dimension of the UK Government’s ambitions for science and innovation. Wider skills provision will be needed to meet the requirements of an expanding R&D sector, and ensure that everyone can participate in and benefit from a more innovative UK. CaSE is currently undertaking a piece of work examining challenges across the education and skills landscape.