Table of contents
Introduction
Innovation is the development and implementation of new ideas; the state of innovation in the UK refers particularly to innovation within technological or scientific products, processes, and services. Innovation fills and creates new niches in the economy and allows us to compete on the global stage and tackle some of the great problems facing society. To support this the UK government incentivises private R&D through public investment.
Gross spending on research and development (R&D) in the UK has been on an upward trend since measuring began in 19841, but as a proportion of GDP it has stayed between 1.5% and 1.7% since 2000. In the 2021 budget the government announced a target to increase this to 2.4% by 20272 and to achieve this target it was announced government spending on R&D in 2021-2022 will be £14.9 billion, the highest level in four decades. This was announced in the wake of figures showing in 2019 the increase in R&D expenditure was the smallest since 20123, reflecting the impact of Brexit and subsequent uncertainty.
The landscape of the economy and priorities have changed dramatically with the ongoing Covid-19 pandemic, and the Government not only wishes to incentivise innovation to an unprecedented level but also use it to target specific societal issues and missions. A few of our perceived reasons for this are: to establish the UK as an independent leader on the global stage following Brexit, fuel long term economic growth, and to futureproof ourselves by keeping up with technological trends such as increasing digitisation. The government has set out these issues and missions as ‘The Grand Challenges’ which are: Artificial Intelligence and Data, Ageing Society, Clean Growth, Future of Mobility4. In order to achieve these ambitious targets, the government will have to do more than just throw money at the situation. A holistic and collaborative approach is needed to efficiently incentivise and direct innovation. This will include funding, education, ease of regulation and sector specific initiatives. In this report we will look at how the landscape has changed, the risks and opportunities this presents and how the government can facilitate, encourage, and create innovation.
Landscape
The current innovation landscape is marked by uncertainty following Brexit and the Covid-19 pandemic; the in-person economy halted, GDP started shrinking and potential for unemployment rose. Many businesses were focusing on maintaining their core business rather than investing in innovation. UK GDP is estimated to have grown for a fourth consecutive month in May 2021 (by 0.8%) but remains 3.1% below its pre-pandemic level5. This shrinkage has been seen across most sectors, with the service sector seeing the biggest decline and pharmaceuticals bucking the trend5.
The Covid-19 crisis has entirely altered the economic landscape – shifting the economy towards digital solutions, at- home shopping, and re-evaluated priorities. In these times of quickly changing pressures, those companies that can rapidly evolve to match these emerging niches will thrive and see their innovation rewarded. However, the majority of companies do not have had the capacity to do this on these timescales. In a recent survey of 300 executives from a variety of sectors, three-quarters agreed that the Covid-19 crisis will create significant opportunity for growth, though fewer than 30% feel confident in that they will be able to address all the changes. All sectors, other than pharma and medical products, have significantly reduced their focus on innovation during the Covid-19 crisis6. Though, as pointed out in Ayming’s International Innovation Barometer “even in these trying times, companies must not forget to keep investing in those long-term projects. After all, those more ambitious projects are the ones that will bring untapped markets or market segments.”7 Once the world has stabilised it is expected for innovation-related initiatives to return, though current targets are for the post-crisis innovation landscape to be bigger and better than before.
Covid-19 has accelerated some pre-existing trends and created others; the most obvious being increasing digitisation, ranging from work and entertainment to healthcare. The projection for trends in digitisation has shown a seven-year acceleration in the wake of the Covid-19 pandemic8, with products such as ‘Zoom’ seeing headline-grabbing growth of 370%9 in 2020. Healthcare and clinical trials are increasingly using digital platforms to administer health advice or collect clinical trial data, both of which were a niche offering pre-pandemic. Most GPs now use phone or video call screenings and clinical trials are using remote data entry with participants around the country. An example of this is the mobile app and website ‘Push Doctor’ which offers free GP consultations, which has seen a 152% increase in users since September 201910,11.
Barriers and drivers of R&D
In order to stimulate R&D, the drivers of innovation must be encouraged, and barriers reduced. To effectively do this, it is essential to determine what the main drivers and barriers are and how they differ between sectors and size of company. In an Ayming client survey the major drivers identified were: long-term trends and future market demand (85% of respondents), as well as keeping pace with competitors (45% of respondents). Broadly speaking, the highest rated barrier has been identified as cost factors12. Further, the UKIS (Innovation Survey) reflecting on the 2019 year, with its markedly slower increase, showed that EU exit uncertainty, lack of government support in their area, and lack of skilled personnel were the key barriers to investing in innovation13.
The stages of innovation, as outlined in figure 1, can each represent a barrier and an opportunity to encourage increased R&D. Each stage of innovation from conceiving the idea to commercialisation has a set of requirements to be successfully achieved. This could include the company having access to the right talent in the sector, and those employees having time and space to develop new ideas, rather than just continuing with standard output. If these requirements are not met, then it will hinder or prevent the continuation of the innovation project. A holistic approach that addresses more than ‘funding’ is required to effectively incentivise innovation and differs with company and the form of innovation sought.
Innovation exists on a spectrum with one end being iterative and small-scale improvements to existing processes and products – stemming from consistently interrogating the current product/process or insights during normal working practices. At the other end of the spectrum are ‘blue-sky thinking’ style innovations, the sort of high-risk and high- reward innovations that often form the basis of start-ups. Companies are less likely to invest in high-risk projects while in a precarious position, though start-ups that are nimble and see a new niche appear in the evolving landscape may seize the opportunity. As time goes on and technologies grow more complex, it requires increasingly large investments to develop radical new technologies, and focus has for many companies suitably shifted to incremental gains14.
The government must work collaboratively with firms to determine the most effective way to stimulate innovation – for example, large firms may be incentivised to invest in a high-risk project if the regulatory environment becomes more friendly for the sector in which they operate. Alternatively, a start-up may struggle to successfully commercialise their product in the international market in which they do not have the expertise, in which case education on accessing these markets may stimulate innovation.
Government stimulation of innovation falls into three categories, with a sprinkle of poetic license: facilitate, encourage, and create. All of which involve an integrated approach but will target different types of firm and innovations.
Facilitate
Facilitating R&D means giving a helping hand to self-starting R&D. This is likely to be done by firms that undertake small innovation projects to constantly improve their products or processes, as well as in routinely R&D intensive industries.
Government R&D tax credits are a way of rewarding self-starting R&D, which can then be invested in more staff to contribute to innovation, or equipment necessary for the pursuit of R&D. Security in a company’s finances is also conducive of risk taking and investment in R&D, thus creating a positive cycle of R&D.
The government consultation (March 2021 to June 2021) on R&D tax credit scheme is a good start to the collaboration between government and innovating firms to make sure that the money put into incentivising R&D works effectively for everyone involved15. Ayming believes, both from our significant experience in the area and discussion with clients16, that the R&D tax scheme is already good at providing funds to innovating firms and is sufficiently accessible, though there is capacity for modernising and tweaking, as acknowledged by the government. One way in which this is being done is changing criteria to include the significant data and cloud hosting costs that come with the trend of increasing digitisation and technology.
The different tax credit schemes of RDEC and SME, such as the higher rate of return for SME than RDEC, is a good example of the differentiation according to needs of different firms, with smaller firms being more sensitive to financial incentives. There is industry support for an incorporation of the SME scheme into the RDEC scheme so that SMEs can access an above the line tax credit which will strengthen their accounts position. It is, however, important that the existing differences between the schemes continue, such as the higher rate for SMEs. The inclusion of subcontractor costs for SMEs should also be maintained as this is an important way to incentivise collaboration between firms with different skill sets, which is an essential aspect of innovation.
Though the R&D schemes are accessible there is room for improvement in transparency and guidance from HMRC in the process – a tracker of the claim progress would particularly help SMEs that may rely on the benefit being paid. Experienced claim reviewers would help ensure that legitimate claims are approved, and illegitimate claims are not.
Programmes by Innovation bodies are another way to facilitate R&D, such as the Global Expert Mission by Innovate UK and UKRI. This programme works to introduce and educate innovators to new global markets and establish successful collaborative relationships, overcoming the barriers to global commercialisation17, thus facilitating the final step of the innovation process.
Initiatives to financially reward R&D activities breed a sense of financial security and provide cash that can be reinvested in future R&D work, as well as non-financial incentives. This includes educating firms on commercialising the output of their research and development.
Encourage
Encouraging innovation involves stimulating the pursuit of a project that otherwise would not be developed. This motivates firms to invest in finding solutions to problems or stems from collaborative places that breed innovation. It differs from the facilitation of R&D as the initial research and development projects would have been pursued of their own accord. Incentivising methods reward and lead to further investment in innovation. The ways to ‘encourage’ R&D include grants, easing of regulation, and collaboration between innovators.
Grants are a way of alleviating the risk that comes from innovation – which by definition does not always lead to a breakthrough and that may not be translatable into financial gain. Grants capture the positive externalities of innovation that are not felt by the firm itself, but instead by society at large. They can be used by the government to encourage as well as facilitate R&D and are an essential way of steering the innovation landscape in the direction most helpful to its development goals and keeping the UK at the forefront of major global initiatives.
Grants can be offered in certain sectors, namely those of the ‘Grand Challenges’, with criteria to qualify, encouraging developments in target areas. This is especially important as the major technological developments needed to begin addressing missions such as Clean Growth and Artificial Intelligence are likely to be ‘moon-shot’ style high-risk, high- reward innovations. These projects are often are not undertaken in the free market as the up-front investment is too high and the risk is deemed unacceptable. The new ARIA (Advanced Research and Invention Agency) announced by the UK government is looking to tackle this exact problem by specifically funding and providing support to firms looking to investigate these high-risk, high-reward technologies.
Aside from grants, other ways to encourage R&D include reducing or supporting firms with regulations. Regulations in place to ensure polluting practices are kept to a minimum or that people are kept safe are necessary for obvious reasons, and in these situations the government can help small companies navigate these through advisory services. In sectors where it is safe to reduce regulatory barriers, this is a potential method to stimulate R&D, as companies may decide to invest in research projects that previously would have had to jump through too many regulatory hoops to be commercially viable.
A pillar of the innovation strategy suggested by the government is ‘Places’, which involves creating collaborative spaces for firms that innovate, so they can share skills and knowledge, cross pollinate each other’s plans, and access such benefits as economy of scale and share large pieces of innovation equipment18. This could be government-developed innovation parks provided at lowered rates of rent, or financial incentives to move businesses into pre-existing spaces.
Another source of innovation in which the UK falls behind other nations, are collaborations between academics and corporations19. The success of such projects is demonstrated in the recent AstraZeneca and University of Oxford collaboration to develop, produce, and distribute the Covid-19 vaccine. Academics often have the knowledge base and pure research capacity to develop innovative technologies, but may lack the funding, skills, and time to commercialise their products. Collaborations between academics and businesses are the perfect way to turn research into usable innovations, and in some nations, such as the US, it is an established culture. In the UK there is still a lot of stigma in traditional academia about pursuing financial gain and working with industry. It is incredibly difficult to change such deeply entrenched cultures. A remedy would be for the government to consult with people within both spheres and those involved in previous successful collaboratives projects to understand how best to encourage collaboration.
Proximity and collaboration between innovators also presents great opportunities for innovative ideas to emerge, which the government can make use of with the ‘Places’ plan. Building or subsidising innovation parks, however, could be a great expense and is not a guarantee of increased innovation, therefore it is imperative that industry players are consulted and suggestions incorporated into plans. Consultation is also the key to beginning to untangle the lack of collaboration between industry and academia.
Create
The creation of R&D refers to publicly funded R&D, long-term investments in future R&D and the intermingling of these and privately funded innovation. Government can directly carry out R&D, as seen in the military, universities, and research councils, as well as provide funds to private companies. The impact of this direct government R&D and support to private companies are inextricably linked. The result is a positive multiplier effect with analysis suggesting that each
£1 of public R&D investment eventually stimulates between £1.96 and £2.34 of private R&D20. This will need to be realised if the promised government spending will enable the target of 2.4% of GDP R&D expenditure. This is because most innovation spending comes from the private sector, in roughly a 2:1 ratio20. To achieve this target the government money will need to be deployed to maximise private sector investment, equivalent to approximately £18 billion a year21.
A key aspect of creating R&D is having access to people with the skills, ambition, and resources to pursue innovation; these factors are rolled into the term ‘Availability of Talent’. The 300 executives interviewed by Ayming in the 2021 International Innovation Barometer showed that for 56% ‘Availability of Talent’ is a major factor when considering where to carry out their innovation22. Access to talent involves home-grown education, attracting people from other countries, and maximising human capital through diversity.
Education encompasses everything from schooling and university, to specialised innovation-oriented courses. To build the innovation landscape to be bigger and better than before, we need to improve quality, access, and uptake of a broad range of educational opportunities. For example, apprenticeships offer young people the opportunity to gain practical skills, join the workforce earlier and not take on lots of student debt. This is a valuable education mechanism to build the skills needed for a huge scope of innovation, and so is part of a scheme to offer cash incentives to companies taking on apprentices. Given the rising costs of traditional higher education, the government should continue encouraging these schemes, particularly through in-school education about these options. For education beyond schooling, short courses that may enhance expertise in an area, inspire new ideas, or give the skills to turn innovations into a commercial success are often prohibitively expensive. It would be a possibility worth exploring to identify skills inherent to innovation and courses that target them, then set up funding schemes to which people can apply or subsidise the fees unilaterally.
Access to talent also involves attracting the right people from outside the UK, either to migrate to the UK or to collaborate with UK companies. Although the full impact of Brexit on this is yet to be seen, there will evidently be restriction of movement to some extent which may put off some potential innovators from migrating to the UK or make travel to collaborate for research more tedious. The government should establish measures for research travel and immigration applications to expedite the process. The bureaucracy of the process would likely be worthwhile if the UK becomes a true hub of innovation and is attracting companies at the forefront of their industries. However this will be hindered if companies relocate to the EU or Northern Ireland to access the single market. This is a much broader challenge that must be faced, and with any luck the talent will follow if measures to keep and attract innovating firms succeed.
A huge pool of talent is currently overlooked through the lack of diversity in the innovation landscape. There is a significant under-representation of women and black and minority ethnic people. There is also a disproportionate focus on the south east of England, to the exclusion of poorer areas in the north of England and the devolved nations. This is a huge and complicated issue spanning workplace culture, wealth and power inequality, education access, and further interplaying factors. The causes and solutions to this inequality and under-representation require their own dedicated analysis. It can certainly be said that improving diversity within the innovation landscape would unlock significantly more talent, as well as provide valuable perspectives to increase and improve innovation in the UK.
To achieve the ambitious R&D spending target of 2.4% of GDP, the government will have to invest in a holistic approach encompassing funding schemes, education initiatives, support, and regulatory changes. Moreover, they must ensure the strategies employed address real needs by the people and firms doing the innovating, are accessible and uptake is sufficient. This means making sure that the right people hear about schemes on offer and feel capable of accessing them, rather than deciding the effort of the application is not worth the reward.
Necessity may be the mother of invention, but a largescale culture of innovation stems from a place of security where the risk of investment in R&D is deemed acceptable. Both our journey to economic recovery and the Government’s unprecedented emphasis on innovation mean it should be an exciting, if bumpy, time for innovation.
