R&D business investment rises in the UK

James Tooze takes a look at today’s publication of business R&D expenditure in the UK.

What do the overall numbers say?

Statistical publications from the ONS always provide us with the opportunity to take a more up-to-date look at investment in R&D in the UK. I was particularly keen to see today’s figures, detailing R&D investment by businesses, to see if Brexit had any effects on investment trends that have emerged over the past few years. The short answer is it has not appeared to; likely because private companies take investment decisions over longer periods of time. There are, however, some interesting trends to tease out of the figures and will definitely provide fuel for thought for the coming months of crucial Brexit talks and an impending Spending Review next year.

The headline numbers will make for welcoming reading; business investment has increased by £1.1bn to £23.7bn. In real-terms, this increase is £600m from last year. This real-terms increase is a growth of 2.9% from 2016, which is higher than the 2.3% average yearly growth since 1993.

Pharmaceutical investment rises as aerospace investment falls

The pharmaceutical industry has long been the largest R&D investment sector in the UK and increased investment by £250m from last year. The sector accounts for 18.3% of total business investment in R&D, a proportion which remains unchanged from 2016.  The motor vehicle industries remain the second largest investor, a sector that has seen its investment in R&D more than double in real-terms since 2011. Until last year aerospace was the third largest investing sector but investment dropped by £400m since last year, dropping for the first time since the financial crash.

Overseas funding for R&D continues to decrease…

Despite real-terms growth in business R&D investment of £6.5bn between 2006 and 2017, funding from overseas sources have fallen by £700m over the same period.

In 2006, overseas funds made up 23% of total funding for business R&D expenditure in the UK. In 2017, this was just 14%. It is difficult to ascertain from the statistics why this is the case, but businesses already based in the UK have been providing a much higher proportion of business R&D funding. In 2017 businesses provided three quarters of the money spent on R&D, which has risen sharply from 61% in 2006.

…but overseas businesses play an increasingly important role in UK R&D

Make no mistake, international organisations play a crucial role in UK business R&D. In 1993, 73% of business expenditure on R&D was provided by UK-owned businesses. Increasingly, overseas-owned businesses located in the UK have expanded their share of the market, and in 2011 overseas-owned businesses accounted for more than half of business R&D funding in that year. The proportion of overseas-owned business contribution to UK business R&D peaked at 54% in 2013 and in 2017 overseas owned-businesses contributed 52% of business R&D expenditure, the highest proportion since 2013.

Since this statistical collation began in 1993, we have been able to track how this relationship has changed over the last 25 years. Over this period, business investment has increased by £10bn in real terms and overseas-owned businesses have been contributing increasingly large shares of this pot. It would be fair to assume that overseas-owned businesses have contributed to the increase in investment but further analysis of the figures show just how pivotal overseas-owned businesses locating in the UK and investing in R&D have been to the country.

In 2017 prices, UK owned businesses invested £10.1bn in R&D in 1993. In 2017, UK-owned businesses invested £11.3bn in R&D, an increase of £1.1bn. By contrast, R&D investment by foreign-owned businesses located in the UK has grown by £8.8bn over the same period, up from £3.6bn in 1993 to £12.4bn in 2017, eclipsing the investment of UK-owned businesses each year since 2010.

The ability of the UK to attract international businesses to locate here, and spend money on R&D, is a testament to the business environment, availability of talent and the strength of the UK research base. The attractiveness of the UK as a place to invest and grow business is subject to a lot of uncertainty in the current environment. This is something that the Government must consider very seriously, not least in helping to reach its target of increasing R&D intensity in the UK but also in the creation of jobs and developing international links. It also suggests that continued work to support the scaling and retention of new and growing UK-owned R&D intensive companies will be critical in seeing necessary growth in UK-owned business contribution to the landscape.

We are continuing to develop our principles leading to next years Spending Review, not only in stewarding public funding but what the UK Government can do to attract private business investment in R&D.

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