House of Commons - Risk and Reward: sustaining a higher value-added economy

Risk and Reward: sustaining a higher value-added economy - Business and Enterprise Committee Contents

3 R&D and innovation

Research and development

43. Measures of R&D are one of the traditional ways of assessing the comparative strength of different countries, and their ability to compete in producing higher value-added goods and services. As we noted, a higher value-added economy is about far more than research and development; nonetheless, R&D is a key part in ensuring that the United Kingdom has the knowledge and the expertise it needs, given that the country cannot compete in price alone. Here the picture is mixed.

44. The 2008 R&D scoreboard states that the 850 largest corporate spenders on R&D in the United Kingdom (the UK850) invested £21.6 billion in 2007, 7% more than these companies spent the previous year. Even allowing for inflation, investment in R&D in the United Kingdom increased significantly. The distribution of R&D by sector can be seen in Figure 1, below:

Figure 1: Distribution of UK850 R&D expenditure (2007).

Figure 1: Distribution of UK850 R&D expebnditure (2007).

Source: DIUS[38]

45. The 1,400 companies in the world most active in R&D in 2007 (the G1400) invested £274 billion, an increase of 9.5% over the previous year. This R&D was highly concentrated in firms based in five countries; 79% of the investment was undertaken by companies from the USA, Japan, Germany, France and the United Kingdom and 1,035 (74%) of the companies come from these countries.[39] While R&D expenditure amongst the G1400 was relatively concentrated in the leading countries' firms, the sectors in which those firms operate varied significantly between the leading countries. Both the USA and France and, to a lesser extent, Japan had relatively diversified portfolios of R&D whereas Germany was more concentrated, especially in automobiles and parts. R&D in South Korea and Switzerland remained highly specialised in electronic and electrical equipment and pharmaceuticals and biotechnology respectively. The 88 UK firms in the G1400 were also quite specialised, with pharmaceuticals and biotechnology dominating, but the UK88 had the largest amount of R&D outside the major sectors (52%) of all the leading countries covered by the analysis. Table 1 shows the top 25 UK companies by R&D expenditure.

Table 1: Top 25 UK companies by R&D expenditure (2007).

—  Rank
—  2008
—  Company —  Sector —  R&D
—  (£m)
—  Growth in R&D over
—  last year (%)
—  Rank
—  2007

—  1 —  GlaxoSmithKline —  Pharmaceuticals & biotechnology —  3,246 —  -6.1 —  1

—  2 —  AstraZeneca —  Pharmaceuticals & biotechnology —  2,533 —  29.8 —  2

—  3 —  BT —  Fixed line telecommunications —  1,252 —  11.9 —  4

—  4 —  Unilever —  Food producers —  638 —  -4.2 —  5

—  5 —  Royal Dutch Shell —  Oil & gas producers —  603 —  35.7 —  7

—  6 —  Royal Bank of Scotland —  Banks —  481 —  25.9 —  10

—  7 —  Rolls-Royce —  Aerospace & defence —  454 —  10.4 —  9

—  8 —  Airbus*# —  Aerospace & defence —  397 —  -10.8 —  8

—  9 —  Ford Motor*# —  Automobiles & parts —  368 —  9.9 —  6

—  10 —  HSBC —  Banks —  295 —  -0.3 —  12

—  11 —  BP —  Oil & gas producers —  284 —  43.3 —  15

—  12 —  Shire —  Pharmaceuticals & biotechnology —  261 —  71.7 —  18

—  13 —  Pfizer*# —  Pharmaceuticals & biotechnology —  258 —  -30.2 —  11

—  14 —  Vodafone —  Mobile telecommunications —  234 —  5.4 —  14

—  15 —  Land Rover (now Ford LRH)*# —  Automobiles & parts —  204 —  -19.8 —  13

—  16 —  Reuters (now Thomson Reuters) —  Media —  190 —  8.0 —  17

—  17 —  Jaguar Cars*# —  Automobiles & parts —  185 —  -4.3 —  n/a

—  18 —  BAE Systems —  Aerospace & defence —  176 —  8.6 —  3

—  19 —  Roche Products* —  Pharmaceuticals & biotechnology —  163 —  14.9 —  n/a

—  20 —  Nokia*# —  Technology hardware & equipment —  137 —  23.4 —  22

—  21 —  Tesco —  Food &drug retailers —  128 —  -0.8 —  21

—  22 —  Smiths —  General industrials —  126 —  -41.9 —  16

—  23 —  BAT —  Tobacco —  119 —  22.7 —  n/a

—  24 —  Telefonica O2 Europe
—  (now Telefonica Europe)*#
—  Mobile telecommunications —  119 —  -6.0 —  n/a

—  25 —  Barclays —  Banks —  118 —  24.2 —  n/a

* - foreign owned firm

# - accounts not prepared using IFRS

Source: DIUS

46. The Society of British Aerospace Companies (SBAC) argued in evidence that:

The benefits to the economy from increased investment in research and development are large. In 2006 Oxford Economic Forecasting (OEF) estimated that a one time investment of £100 million in aerospace R&D would raise UK GDP by £70 million per annum. This work estimated that these economy wide-social returns or spillovers were higher for aerospace than other manufacturing sectors.[40]

47. The CBI evidence gave us more information about the UK R&D spend and how that compares to other developed countries: "According to the OECD's Main Science and Technology Indicators (Vol 2007/1), 1.78% of the United Kingdom's GDP was spent on R&D in 2005 (a fraction below the average for the previous four years, despite increases in both government and business spending): 42% of this comes from industry and 33% from government. For the 27 EU countries as whole the figures are 1.74%, 62% and 30% and the United Kingdom is rated 'about average' in most analyses of our performance."[41]

Table 2: R&D as a percentage of GDP

—  Country —  R&D as % of GDP —  % financed by industry —  % financed by government

—  EU-27 —  1.74 —  62 —  30

—  UK —  1.78 —  42 —  33

—  France —  2.13 —  53 —  38

—  Germany —  2.46 —  67 —  26

—  USA —  2.62 —  65 —  30

—  Japan —  3.33 —  76 —  17

—  Finland —  3.48 —  67 —  31

Source: CBI

48. However, as can be seen from Table 2, UK R&D as a percentage of GDP is significantly lower than it is in competitor countries, such as France, Germany and the USA. It is nowhere near the target set by the Lisbon Agenda agreement between EU Member States to invest 3% of GDP on R&D.[42]

49. Moreover, while the overall picture may appear in line with other countries, as Table 2 shows, British R&D is less likely to have industry financing than R&D in competitor countries. (UK R&D figures are increased by the large amount of research funded by medical charities.) In evidence we heard from the EEF that "despite the strength of manufacturing innovation related spending, overall R&D spending by business in the United Kingdom lags behind that of Japan, the US, Germany and France. These differences are due in part to the fact that R&D intensive industries account for a smaller share of GDP in the United Kingdom than they do in other countries".[43] As the Lambert Review said in 2003:

Compared with other countries, British business is not research intensive, and its record of investment in R&D in recent years has been unimpressive. UK business research is concentrated in a narrow range of industrial sectors, and in a small number of large companies. All this helps to explain the productivity gap between the UK and other comparable economies.[44]

50. It is important to note that many high-tech industrial firms do invest significantly in R&D. Some of the differences in research intensity are caused by the structure of United Kingdom's economy in which the service sector is relatively large, compared to some other countries, and by the sectoral mix which contains many industries which historically have not reported high levels of R&D (see Table 3). Nonetheless, the Sainsbury Review noted some studies suggest "at least in parts of manufacturing, there is some evidence of an intensity effect, i.e. the proportion of gross value added spent on R&D in specific industries might be lower than in other countries".[45]

51. The United Kingdom does well in attracting foreign companies to locate research and development here. This is impressive, given that there is evidence that all things being equal, companies will naturally locate research and development close to their head office. The CBI told us that in 2005 a survey by Arthur D. Little found that "foreign firms in the UK appear to be relatively more R&D intensive than foreign firms based in other G-7 countries".[46] We also note that "in terms of the international exploitation of technology, the UK has a positive technology Balance of Payment and its surplus expressed as a percentage of its GDP is the largest of all the OECD countries".[47]

Table 3—Breakdown of selected world economies by kind of economic activity, 2006

%of total economic output

—  Services —  Manufacturing —  Mining and Utilities —  Construction —  Agriculture, hunting, forestry & fishing

—  Canada —  66 —  18 —  8 —  5 —  2

—  France —  76 —  14 —  2 —  6 —  2

—  Germany —  69 —  24 —  2 —  4 —  1

—  Italy —  70 —  19 —  2 —  6 —  2

—  Japan —  70 —  20 —  3 —  6 —  2

—  UK —  75 —  14 —  4 —  6 —  1

—  USA —  77 —  13 —  4 —  5 —  1

—  Brazil —  54 —  23 —  7 —  7 —  9

—  China —  41 —  41 —  0 —  5 —  13

—  India —  53 —  16 —  5 —  7 —  20

—  Russia —  57 —  19 —  14 —  6 —  5

Source: UNCTAD, Handbook of Statistics 2008, online database

52. The United Kingdom's relatively modest rates of R&D relative to GDP are in part the result of the structure of the United Kingdom economy. Indeed, the proportion of R&D financed by government is not out of line with many comparable countries. If the United Kingdom is to grow as a higher value-added economy, the policy challenge will be to encourage innovation, and to encourage companies to take advantage of the United Kingdom's strengths as a source of innovation. This includes promoting the strength of United Kingdom research and development capabilities, but also looking at innovation more widely.

Wider innovation

53. One problem with assessing the United Kingdom's relative performance is that since R&D levels are easily measured, international comparisons tend to be based on such inputs. The CBI told us that "as far as we are aware, none of the various UK, EU and international surveys and scoreboards that attempt to measure innovation adequately capture the full innovation dynamic across all sectors".[48] For example, RBS has a group for innovation which reports to the Chairman's office of regional markets to meet customers' needs using innovative technology, business models, products and services. We visited the group in Edinburgh. It is impressive but little if any of its activities would score on traditional R&D measures.

54. Given that 76% of the UK economy is services and only 2.5% high-tech manufacturing,[49] NESTA contends indicators such as investment in R&D and patent awards do not effectively capture innovation that is taking place in, for example, the creative industries and the public sector and that understanding this "hidden innovation" is vital to the UK's future prosperity.[50] In this view, innovation does not necessarily mean the application of knowledge which is "new to the world" but can and does include the successful adaptation of existing knowledge to new things. Mr Halkett of NESTA gave us an example:

If you think about something like low-cost airlines, very little of the innovation that is represented there was actually new to the world. It is a combination of extensive investments in ICT, marketing, standardisation of maintenance, things like that, which have delivered enormous value and are definitely recognised as being innovative but certainly were not based on new to the world discoveries.[51]

55. If this is the case, innovation policy should be extended to include "the adoption and exploitation of technologies, organisational innovation and innovation in services (including public services)".[52] This view is widely shared. For example Mr Cridland, Deputy Director General of the CBI, told us that:

we have felt for a long while that the way government was measuring innovation was leading to a set of false assumptions and therefore sub-optimal policies. Their tendency was to focus on research rather than development. Their focus was on R&D rather than innovation. Their metrics were not capturing the activity that I would consider innovation in the broader economy.[53]

56. We accept that it may be extremely difficult to capture some of the innovative activities in our economy. Indeed, it is likely to be impossible to provide a full and accurate measure of something which involves a high level of intangibles. However, this does not mean that improvement is impossible. Quite small changes would capture some of this wider innovation. For example, measuring the number of items copyrighted as well as the number of patents granted would capture a wider range of information.[54] It should also be possible to capture some of the value added by intangibles such as branding.

It should be possible to produce wider measures of innovation than those currently in use, and we are delighted that the Government has asked NESTA to work on this. However, as well as knowing how the United Kingdom is doing internally, we need to be able to benchmark performance against other countries. We hope the Government will take a lead in encouraging the development of better international monitoring.

38 The 2008 R&D Scoreboard, DIUS. http://www.innovation.gov.uk/rd_scoreboard/?p=11 Back

39 Ibid. Back

40 Ev 260 [SBAC] Back

41 Ev 149 [CBI] Back

42 See Presidency Conclusions, Lisbon European Council, 23 and 24 March 2000, available at: http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ec/00100-r1.en0.htm Back

43 Ev 180 [EEF] Back

44 HM Treasury (2003), Lambert Review of Business-University Collaboration: final report, p1 Back

45 HM Treasury (2007), The Race to the Top, A Review of Government's Science and Innovation Policies conducted by Lord Sainsbury of Turville; HM Treasury (2006), para 2.21 Back

46 Ev 157 [CBI] Back

47 Ev 157 [CBI] Back

48 Ev 149 [CBI] Back

49 Q 133 Back