The UK’s relationship with the world – and why we care

James Tooze looks at overseas investment trends in the UK

My recent blog posts have been exploring the different aspects of making the UK a more research-intensive nation, in pursuit of the Government’s target to increase R&D investment to 2.4% of GDP by 2027. This piece looks at the UK’s ability to attract R&D funding from beyond its shores. It is no secret that in order to reach the target, the UK will need to ensure it retains the ability to competitively bid for foreign research funding, as well as being an attractive proposition for upwardly-mobile research-intensive businesses.

UK strength in attracting foreign investment

The UK has traditionally been a magnet for foreign investment, reaping the benefits of its research strengths in attracting funding and businesses alike. In 2016, the European Commission showed that the UK received €6.3bn in foreign investment for R&D, second only to the US globally. Significantly, this level of foreign investment was much higher as a proportion of GDP than other world-leading scientific nations.

In 2017, overseas funding for UK R&D, which includes funding from European Framework Programmes, accounted for almost 15% of total R&D investment. It is clear from this figure that securing continued overseas support for UK research will be crucial in getting anywhere near the Government’s R&D investment goal by 2027. Investments from overseas have helped to support research in all of settings in the UK. The quantum of such investments is demonstrated by an interesting (if slightly confusing) diagram, produced by the ONS showing the flows of overseas R&D investment to UK organisations in 2017.

In absence of any clarity over the UK’s future relationship with Europe, a cloud of uncertainty is hanging over business investment in R&D. It is likely that any change in the UK’s research environment will create disruption but could also present an opportunity to assess the way in which the UK wants to pursue becoming a more research-intensive nation. I want to try and explore some recent trends in overseas investment in UK R&D, to open the conversation about what the UK wants its future research landscape to look like.

Foreign-owned business investment rises…

Private business enterprise provides the lion share of R&D investment in the UK. Business funded 54% of UK R&D in 2017, a proportion that has been steadily rising over the last decade. A driving force behind this increase is investment from businesses that are headquartered overseas but have a presence in the UK. Examples of these companies include CaSE members, such as AstraZeneca, MSD and Roche, who fund their own R&D carried out in the UK. Since 1993, real-terms investment from foreign-owned businesses has increased threefold. In fact, since 2011, foreign-owned businesses have invested more money in UK R&D than UK-owned businesses.

This is likely to have been caused by a combination of factors, such as companies locating new R&D facilities in the UK when they had not previously, scaling-up of the existing UK operations of overseas-owned businesses or acquisitions of UK companies by overseas business. Understanding why overseas-owned businesses continue to invest in the UK will be essential to maximise growth in R&D intensity in the UK.

… but overseas sources of funding are declining

Despite the UK having significant strength in attracting foreign investment for R&D, there has been a steadily decline in overseas funding, in real-terms, over the last four years.

Unlike foreign-owned business investment, the investments shown in this graph are won by UK-based organisations from foreign partners, such as through contract research grants. These statistics also include the amount of funding that the UK has captured from Horizon 2020 (and the previous FP7 programme), the UK’s involvement in these programmes has been falling since 2016. The fall in overseas funding seen above is not solely down to decreases in EU Funding Programmes. Often hidden behind headline figures, these trends are not picked up and are easy to ignore on first glance. The headline numbers show that the UK invests more and more in R&D than the previous year, yet the balance of funding is changing.

Why does the balance of funding matter?

In our conversations with businesses big and small, they say the strength and breadth of the UK research base is the central factor to why they want to invest in the UK. This strength and breadth is supported by a diverse set of funding streams, able to support each stage of research in all of its settings. Concentration of sources of research funding can disproportionately stifle growth in areas of the research base.

An example that can illustrate this is overseas funding from EU Framework Programmes. In 2016, the UK successfully received €1.35bn in research funding from Horizon 2020 programmes. Against the headline number of £33.2bn that was invested in UK R&D in total, Horizon 2020 funding accounted for 3.1% (roughly) of total R&D investment. European Research Council (ERC) grants from within Horizon 2020 provide some unique sources of funding for UK research, and STFC estimates that between 30 – 43% of funding for UK space science comes from ERC grants. Clearly, for this sector of the research base, the loss of ERC funding would be devastating, something that would perhaps not be obvious for the casual viewer.

I think this is why understanding how different types of funding support different areas of the research landscape is so important in plotting a future course for the UK. The status quo is changing, which is not necessarily a bad thing in itself. The real damage occurs when decisions about research funding, or how much the UK cares about access to different types of research funding, are lost behind headline numbers or big targets. We will continue to talk about the importance of the different sources of R&D funding, overseas or otherwise, ahead of a proposed Spending Review this Autumn.