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 3Breakdown 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
50
Ev 219 [NESTA] Back
51
Q 136 Back
52
NESTA (June 2007) Hidden Innovation: how innovation happens
in six 'low innovation' sectors, p6 Back
53
Q 430 Back
54
Q151 Back
|