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"Science and technology superpower": more than a slogan? Contents

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Chapter 3: The 2.4% target

Research intensity targets

87.The percentage of gross domestic product (GDP) spent on R&D is sometimes called “research intensity.” In the 2017 Industrial Strategy the Government stated an ambition to increase the UK’s research intensity to 2.4% of GDP by 2027 and a longer-term target of 3%.178 In the UK in 2019, total public and private expenditure on R&D was £38.5 billion, around 1.74% of GDP. Of this, public sector expenditure was £10.85 billion.179 Figure 3 shows that research intensity in the UK has been roughly constant at 1.6 to 1.7% of GDP for the last 25 years. The UK’s investment in R&D as a percentage of GDP is lower than the OECD average both in the public and private sectors, but significantly lower in the private sector (Figure 4.)180

Figure 3: International comparison of research intensity (OECD average and selected countries)

Source: OECD Key Indicators Organisation for Economic Co-operation and Development (OECD), ‘Gross domestic spending on R&D’ (2022): https://data.oecd.org/rd/gross-domestic-spending-on-r-d.htm#indicator-chart [accessed 8 July 2022]. Countries illustrated: Germany, China, Japan, South Korea, the OECD average, the UK, the USA and Israel.

88.In the Industrial Strategy, the Government set an intermediate target to increase public R&D expenditure from £9 billion in 2017 to £22 billion by 2024–25. In the 2021 Spending Review this target was deferred to 2026–27.181 Investment in R&D reached £14.9 billion in 2021–22.182 Modelling shows that over the first four years of since the 2.4% target was set, research intensity rose from 1.78% in 2017–18 to 1.94% in 2021–22.

89.To meet its research intensity target, the Government requires public investment in R&D to stimulate private sector investment. Analysis from the Campaign for Science and Engineering suggests that the proposed increase in public sector spending could stimulate an increase in private sector spending, which together would take the UK to 2.33% of GDP by 2027–28.183

Meeting and explaining the 2.4% target

90.The 2.4% target was generally welcomed by witnesses. Lord Willetts thought that meeting the target would be “a hell of a sight better than 1.7 or 1.8%, which is where we are now”. However, he noted that it was set to match the OECD average in 2017, which had increased to 2.68% by 2020, so the UK will still be behind comparable countries.184

91.Professor Main welcomed the ambition of the 2.4% target as “transformative” but cautioned that it would be difficult to achieve. This was because “the UK’s gross expenditure on R&D over 20 years has been almost completely flat”, despite numerous pledges to increase it185 and “only a small number of countries have achieved that kind of economic transformation.”186 Research by Adão Carvalho, Professor of Economics at the Universidade de Evora, Portugal, found that, across 112 R&D intensity targets set by 45 countries, 84% were missed, including the UK’s target in 2004 to increase research intensity to 2.5%.187

92.Professor Graeme Reid explained that how the 2.4% target was met could lead to “profoundly different versions” of the UK economy. “There is a version of 2.4% that is reached by keeping the shape of the research community intact and having every bit of it expand in equal proportion. There is another version of 2.4% where you keep the academic research base as it stands right now and concentrate all the expansion into higher levels of business investment … [or] you put all the emphasis on the Government’s policy priorities, be it net zero, public health or cybersecurity, and drive it that way.”188

93.Since the 2.4% target was announced there have been significant economic challenges, including the COVID-19 pandemic and high inflation. We heard that “departments cut their R&D budgets when they are under public spending pressure.”189 Lord Willetts said that a “boom/bust cycle in science funding [is] really dangerous.”190 Professor Main thought that communicating how meeting the target will benefit society could ensure it is supported. “It really must work for the public … this strategy is not just about trying to achieve those economic [metrics] … [but] about making a meaningful and material transformation in people’s prosperity and livelihoods.”191

94.We welcome the substantial planned uplift in Government spending on research and development towards the 2.4% of GDP target. It has the potential to be transformational for UK science and technology, even though it would still leave the UK behind other OECD countries. But increasing research intensity to such an extent is highly ambitious and previous attempts have failed. It will not be achievable with business as usual policies.

95.We are concerned that the economic context may threaten the Government’s commitment to research and development. A boom-and-bust cycle in research and development funding must be avoided. The Government should go beyond an abstract percentage of GDP target and explain what benefits it wants to achieve with the additional funding.

Private sector investment in research and development

96.Sir Patrick Vallance told us that “countries that have managed to increase their R&D spend” to the extent required to meet the 2.4% target “achieved it with a very big increase in private sector investment … the leverage ratio of private sector to public sector has always been increased … something like three to one.”192 The UK is not as successful at leveraging private sector investment as other countries. The Chancellor of the Exchequer in his Spring Statement 2022 noted “right now, we know that the amount businesses spend on R&D as a percentage of GDP is less than half the OECD average. And that is despite us spending more on tax reliefs than almost every other country. Something is not working.”193

97.The ratio of private to public investment in R&D in the UK is around 2.06:1, compared with an OECD average of 2.41:1 (see Figure 4). The planned increase in public R&D funding should stimulate sufficient private sector investment to come close to the 2.4% target if the ratio of public to private spending is maintained.194 But uncertain economic conditions make it unclear whether it is realistic to expect private sector investment, which has been relatively flat for many years (see Figure 5), to increase to the extent needed.

Figure 4: International R&D spending in the private and public sectors

Source: Royal Academy of Engineering. The numbers for the UK are from the Office for National Statistics in 2019; other countries provide the most recent year available. There are other comparative charts that differ slightly and include other OECD countries—including in the 2017 Industrial Strategy. A graph with more nations included is on page 24 of the Commons library briefing. House of Commons Library, Research and Development funding policy, Library Note, CBP 7237, May 2022

Figure 5: Private sector expenditure on R&D as a percentage of GDP in the UK

Source: ONS data for private sector expenditure on R&D as a percentage of GDP. Office for National Statistics, ‘Business enterprise research and development, UK: 2020’ (19 November 2021): https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/researchanddevelopmentexpenditure/bulletins/businessenterpriseresearchanddevelopment/2020 [accessed 20 June 2022] Expenditure on R&D performed by UK businesses as a percentage of GDP is recorded under ONS data code 2.

Government levers to increase research and development spending

98.Andrew McCosh told us that increasing private investment in R&D would not be achieved by “a single panacea” but a combination of approaches.195

Tax credits

99.In the year ending March 2020, UK companies claimed around £7.4 billion in R&D tax credit relief.196 As noted by the Chancellor, tax credits in the UK do not leverage private finance as effectively as in other countries. The Chancellor’s Spring Statement in 2022 therefore committed to “reform R&D tax credits so that they’re effective and better value for money.” The Chancellor said “we’ll expand the generosity of the reliefs to include data, cloud computing, and pure maths. And we’ll consider, in the autumn, whether to make the R&D expenditure credit more generous.”197 George Freeman said he had “signalled to the Treasury that if we really are to unlock the £100 billion over the next six years to get us to 2.4%, one key lever is R&D tax credits. We need to think about how best to deploy them.”198 Kwasi Kwarteng described an “ongoing review on R&D tax credits” in the Treasury.199

Pension funds

100.We heard that pension funds could be better used to support research and development. George Freeman said that regulations introduced after the 2008 financial crash had “inadvertently” hindered the ability of pension funds to invest in smaller, innovative companies. He was “working with the Chancellor on changing the rules on institutional pension funds so they can invest” in “UK equities and high-growth” companies.200 Suranga Chandratillake, General Partner, Balderton Capital agreed that “pension fund asset allocation in the UK versus similar-sized economies” was risk averse, with “more in bonds, less in equities, and, in particular, less in private equity”. Suranga Chandratillake explained that “some of that is regulatory. It is to do with transparency, fee regulations and so on, and some of it is cultural.”201

101.The Government is exploring changes to pension fund rules. Options include:

• removing performance-based fees from the charge cap;202
• recreating the “French Tibi scheme … a matched investment scheme with government and the private sector in life sciences”;203 and
• reforming the EU Solvency II legislation (which is transposed into domestic law), on which the Government announced a consultation in April 2022.204

102.The Government is consulting on whether these changes would have the desired effect. The consultation acknowledges that the effects of deregulation are difficult to predict and that it is an uncertain way of directing investment.205

Role of regulation

103.The Government has an ambition for “global regulatory leadership” across sectors including artificial intelligence, space and life sciences.206 George Freeman said the UK could “develop competitive advantage” if it could “move more quickly and be more agile” than other countries.207 BEIS said that the UK should “seize the opportunity of post-Brexit regulatory … freedoms.”208 George Freeman mentioned the work of the Taskforce on Innovation, Growth and Regulatory Reform. A Taskforce report in June 2021 identified areas of post-Brexit regulatory reform that could encourage innovation, some of which are now being acted upon.209

104.We heard of a tension between regulatory divergence, where the hope is to achieve competitive advantage, and regulatory convergence, which eases international trade. Helen Kennett explained that “if the UK wants to be a regulatory superpower, it needs to understand how it works with the other international players … there is no point in having a regulation that works perfectly in the UK but which we cannot use globally.”210 George Freeman explained that his “instincts are strongly for convergence” in sectors with an “established major industrial base”, such as “the automotive sector, the aerospace sector, the life sciences sector.” But he thought that the UK should identify areas where divergence could provide an advantage.211 He wanted the UK to be a “global digital testbed for the technologies of tomorrow”, that would attract companies to generate data and conduct research on new technologies.212

105.Since the UK’s departure from the EU, much rhetoric has focused on cutting regulation to support innovation.213 But we heard from Mike Biddle, Programme Director, Industrial Strategy Challenge Fund, Innovate UK, that “regulation, if done well, can drive innovation”. He described the efforts of the Regulators’ Pioneer Fund to look at how regulation can be developed proactively in emerging areas of technology to encourage innovation.214 Helen Kennett described regulation as a “great innovation driver if it sets the direction of travel, the demand signal”.215 Industry witnesses did not identify many areas where they thought the UK’s regulatory regime needed overhauling.216

106.To identify regulations to improve, techUK, a technology membership organisation with over 850 members, suggested that “the Government should establish a series of taskforces aimed at … streamlining regulatory processes … [for] emerging technologies, … such as quantum technologies [and] artificial intelligence … Modelled on the work of the Regulatory Horizons Council, these taskforces should be a partnership between industry and Government that seek to identify … [regulatory barriers and] expand existing innovation schemes … such as regulatory sandboxes … [and] test beds.”217 Sir Adrian Smith as head of the Turing Institute gave a sector-specific example: “we have a fantastic opportunity in the UK to lead on things such as AI governance, regulation and standards”.218

107.The Government wants to become a “regulatory superpower”. Regulations can make countries more attractive to investors, but companies operating in international markets are concerned about regulatory divergence. The Government should work with industry and the research base to identify the areas, such as artificial intelligence, in which the UK can take a global lead in regulation.

108.Deregulation for its own sake will not automatically spur innovation, and regulations can incentivise innovators by providing a clear direction of travel. It is not at all clear what role the Government envisages for regulatory reform in a science and technology strategy. Sector-based taskforces should be established, providing a single point of contact with industry, to identify opportunities for regulatory reform, explaining how they will encourage innovation.

Public procurement

109.Beyond stimulating private sector investment, the Government wants to use public money, through public procurement, to incentivise R&D. BEIS described “enormous potential to make better use” of public procurement to support R&D and to improve public services.219 The Council on Science and Technology similarly recommended that the Government should integrate “research, innovation and growth investment by joining up all government research efforts, using government procurement as a catalyst.”220

110.There are few details on how public procurement rules will change. BEIS wants to ensure procurement is “proactive and long-term, signalling to industry our direction of travel … UK Government departments and public sector delivery bodies will, where appropriate, produce a clear overall policy problem statement that describes the priority outcomes that they want to [achieve].” BEIS is “continuing to work with colleagues in the Cabinet Office, IPA [Infrastructure and Projects Authority] and other Government departments … to drive innovation through procurement.”221 It is not clear how many policy problem statements have been published.

111.Sir Patrick Vallance pointed to Israel, which “focuses on four areas: cybersecurity, desalination … agriculture, and defence … it uses Government procurement as a way to pull those through.” He noted that the UK’s Vaccine Taskforce was set up to bring together “R&D, procurement, and manufacturing” to support the rapid development of technologies from concept to deployment. He described the value of identifying other areas where such an approach could be applied.222 He thought that “procurement … to signal clear long-term intent … does not happen … absent something like the NSTC … to pull it together”.223

112.When George Freeman was asked for details on how public procurement would change, he referred to the importance of “culture change” and “regulatory change”, arguing that “we are no longer subject to the same state aid rules [as in the EU]. We are much freer to be more strategic in our own interests.”224 Alex Jones of BEIS said that “it is striking that we have been trying to reform procurement for a long time … the Cabinet Office post-EU exit [is] looking at ongoing reform of procurement, simplifying process, increasing flexibility, helping public bodies procure more innovative solutions, and looking at regulation.”225

113.The Government announced a Procurement Bill in the 2022 Queen’s Speech.226 It is intended to support innovation by “allowing buyers to tailor procurement to their exact needs” and eliminating “complicated and bureaucratic rules” associated with procurement under the EU. It would allow buyers to reserve competitions for contracts below a certain threshold for UK suppliers and small and medium-sized enterprises, while maintaining value for money as the “highest priority in procurement.”227 Government departments will be required to “take account of national strategic priorities” in considering procurement decisions.228

114.Government procurement, and subsequent approval of funds, is guided by value for money principles: “the over-riding procurement policy requirement is that all public procurement must be based on value for money, defined as ‘the best mix of quality and effectiveness for the least outlay over the period of use of the goods or services bought’”.229 This could exclude supporting, or continuing to support, high risk, but innovative, UK R&D as the benefits are uncertain or may accrue only in the long term.

115.Risk aversion may have increased following the COVID-19 pandemic, when public procurement, and wider spending, came under scrutiny amid concerns about waste. Inquiries were conducted by the National Audit Office and the Public Accounts Committee.230 In this context, and amid economic difficulties, we heard that encouraging a riskier but more innovative culture of procurement may be difficult.231 Kwasi Kwarteng recognised the tension in trying to use procurement to support objectives alongside value for money: “you can have more risk appetite, but there are dangers with that.” He referred to “some anomalies” that had arisen after previous efforts to “procure through small companies.”232 Andrew McCosh spoke of “shift[ing] the culture” in departments to ensure procurement was “geared to a spread bet of risk in earlier, more innovative technologies.”233

116.The Government wants to use public procurement to encourage the development and deployment of new technologies, but has not identified the technologies that will be supported. Value for money rules governing expenditure of public money are vital, but they do not always work for investments in developing companies and technologies: risk is inherent in the process and benefits may accrue only in the long-term. The role that public procurement will play in a science and technology strategy needs to be clarified. The Government should set out which technologies, or areas of technology, it will support through public procurement. A proportion of public procurement spending should be set aside to support defined areas of technological priority, with the value for money rules being interpreted appropriately. The flexible interpretation of value for money rules should apply to future funding decisions, not just the initial procurement decision.

117.The Government has identified risk aversion as a cultural factor that limits investment in research and development in the UK. This may be true, but we have not heard any concrete proposals on how to change it. The Government must explain how it will address any cultural risk aversion in the UK. It needs to set out its own approach to risk when it comes to public money. It should adopt a portfolio approach to risky investments, supported by appropriate expert input, and it must acknowledge that some failed ventures are an inevitable part of the process.

118.The Government has identified potential levers to increase research and development spending, such as tax credits, reforming pension fund rules and public procurement. But many of these areas for reform are perennial suggestions and we heard concerningly few specifics about why this attempt will be different. The Government should work with stakeholders to identify how tax credits, pension fund rules and public procurement will need to change, how these changes would support innovation and how this would lead to different outcomes from past attempts to stimulate business research and development investment. These changes must be communicated clearly to potential investors.

119.Reforms to tax credits, intellectual property regulations and public procurement could be driven by government taskforces in each area, providing a single point of feedback for stakeholders to propose reforms. These should be headed by individuals given accountability for the delivery of each element of reform across government.

Industry engagement

120.Reaching the 2.4% target depends on a strong response from industry. Lord Browne of Madingley, Co-Chair of the Prime Minister’s Council on Science and Technology, said that reaching 2.4% would require “much more fully developed” interaction between business and government.234 He praised the increases in public spending but said: “what is missing is any real connection with business and industry … there is something really missing in … the integration of people [across] government and business.”235

121.The lack of clarity in the definition of a science and technology strategy may hinder industry engagement. Lockheed Martin, an aerospace, defence, and technology corporation with a large UK subsidiary, said “it is unclear how the [NSTC] and the [OSTS] intend to engage with industry … Incentivising private research spending in the UK requires clarity of priorities … Compared to other countries … the UK’s science and technology priorities are not as clear.”236 Professor Main said the “critical thing to learn from how previous strategies have been addressed and what we could do differently this time is to involve those different communities and stakeholders from the beginning … so that people feel ownership and engagement.”237 The OSTS has said it will “work collaboratively with government departments, think tanks, academia [and] industry”, but it is unclear whether this will be during the development or implementation of a strategy.238

122.Andrew McCosh felt that it was important to co-design the Government’s science strategy with people with knowledge “in how markets work, particularly innovation and [venture capital] markets. As you say, if we will outsource the delivery of this strategy, and the outcomes we want are fundamentally going to be delivered by academia and the market, incentivised by government, we need to understand better what incentivises people and listen to those communities.”239 He welcomed the appointment of the Chief Scientific Adviser for National Security who had joined from Amadeus Capital Partners—”one of the country’s leading VC investors in technology”.240

123.Some witnesses suggested that engagement between government and industry was made more difficult “because we do not have the halfway houses … [of] corporate labs or national labs.”241 George Freeman said “the Catapults are our clutch plate for deep industrial R&D engagement.”242 However, the Catapults focus only on nine areas and they were described as operating on a “miniscule scale” by Professor Friend.243 This Committee considered Catapults in detail in the report Catapults: bridging the gap between research and industry.244 Kwasi Kwarteng said that there had been “huge engagement from BEIS” with companies on specific strategies such as the “energy White Paper and the net zero strategy”. However, he conceded that engagement with the NSTC might not have been as effective because it is “quite a new organisation.”245

124.To increase private sector research and development spending towards the 2.4% target, a step change in the level of engagement with industry is needed. Industry witnesses welcomed the idea of a strategic approach to science and technology, but were often unclear about the Government’s plans and policies. The Office for Science and Technology must engage intensively with industry to define and implement a science and technology strategy in order to meet the 2.4% of GDP target.

Services sector and the structure of the UK economy

125.It is unclear what role the Government sees for the service sector within the science and technology strategy. Service companies invest less in R&D than those in manufacturing (Table 2) but they account for around 80% of the UK’s GDP.246 Lord Browne of Madingley told us that while the UK is “number three in unicorn generation in the world … when you actually look at them … almost three-quarters—are in fintech and e-commerce.”247 It is not clear whether the Government wants to encourage service-based companies to conduct more R&D, to shift the economy by growing more research-intensive sectors or a combination of these approaches.

Table 2: UK Companies investing in R&D in 2019

World rank in R&D investment	Company	Industry	Global R&D investment (£, billion)	Revenue (£, billion)248	Percentage revenue spent on R&D
29	GlaxoSmithKline	Pharmaceuticals	4.47	33.8	13.2
32	Astrazeneca	Pharmaceuticals	4.23	19.0	22.3
84	HSBC	Banks	1.64	44.0	3.7
123	Rolls-Royce	Aerospace and Defence	1.15	15.4	7.5
135	Lloyds Banking	Banks	1.06	42.4	2.5
160	APTIV	Automobiles & Parts	0.91	11.3	8.1
169	Barclays	Banks	0.88	21.6	4.0
193	Royal Dutch Shell	Oil & Gas Producers	0.76	344.9	0.2
198	Unilever	Food Producers	0.74	45.6	1.6
253	BT	Telecommunications	0.56	23.4	2.4

Source: European Commission, House of Commons Library. House of Commons Library, Research and development spending, Library Note, SN04223, September 2021. $ figures converted to £ using average 2019 exchange rate of $1 = £0.7835. EUR converted to £ using average 2019 exchange rate of 1EUR = £0.877

Figure 6: Annual R&D spending by sector in the UK. (Figures in £ billions)

Source: Research and development spending from the House of Commons Library. House of Commons Library, Research and development spending, Library Note, SN04223, September 2021

126.Witnesses diverged on whether meeting the 2.4% target would require a move away from services in the UK economy. Professor Reid thought that “a heavily service based economy is highly innovative by its very nature.”249 The British Academy cautioned against fixating on purely scientific or technological R&D: “the UK’s current research and economic strengths sit across the breadth of disciplinary research, including the humanities and social sciences; the economy is 80% services based with a fast growing and internationally competitive creative industries sector.”250

127.Other witnesses thought that shifting the economy towards more research-intensive industries would be required and welcome. Professor Friend said that, apart from in life sciences, R&D spending “has dropped below the levels of our international competitors.” He thought that the UK had “exited quite large sectors of the economy rather carelessly” and welcomed renewed support for them.251 Sir Patrick Vallance noted that “eight out of the 10 biggest companies in the world are very dependent on intangible assets—intellectual property and discovery—as part of their businesses. We do not have as much of that as we probably could have, given our science base.”252 Kwasi Kwarteng said the Government’s ambitions do “not mean … we are reordering the UK economy … we want to see an increase in the proportion of manufacturing, but clearly at 10% [of the economy] we are not going to change the economy overnight.”253

128.Outside the life sciences sector, the UK has a limited manufacturing base. A successful science and technology strategy will need to recognise the existing structure of the UK economy and have a plan to grow the UK’s manufacturing base, if that is the intention. The Government should explain what role the services sector will play in increased research and development spending and outline how the 2.4% target fits with the structure of the UK’s economy.

Scale-up funding

129.We heard that the UK “is a very good place to launch a start-up. It is a less good place to build that start-up into a large, enduring business … Where it really falls off is late-stage investing. If you look at funding rounds for companies that are raising £100 million or more, at that point the vast majority of the capital that British companies raise comes from abroad.” Suranga Chandratillake explained that this leads to founders “ultimately … moving their companies to other countries.”254

130.This is a long-standing problem, recognised by successive governments: the Scale-Up Report was commissioned in 2014,255 and its associated Scale Up Institute has published annual reports since 2016.256 Additional reports such as the 2017 Patient Capital Review257 and the 2020 Future of Growth Capital258 made recommendations on how to increase scale-up capital. Andrew McCosh noted that “at scale-up … around nine times more” investment flows into companies in the US than in the UK.259

131.We heard that part of the issue is that the “average late-stage investor in the UK” is “typically someone who has no background in technology, science or innovation.”260 This leads to a situation that Kwasi Kwarteng described where “one of the biggest inhibitors to scale-up here in the UK is the fact that investors—people who are in charge of deploying capital—simply do not understand or are not interested in the technology.”261 Andrew McCosh thought that the UK should assess whether it had “enough expertise with respect to deep technologies” in its institutional and private capital markets.262

132.Lord Browne of Madingley and Government witnesses thought that investors in the UK were risk averse, particularly compared with those in the US.263 Suranga Chandratillake thought the science and technology expertise among US investors meant they “understand technology and its value, and the direction that technology is taking us, and so are very excited to be able to invest.”264 Andrew McCosh said the UK needed to develop “belief at every level that great things can happen if people take risks and invest in deep technologies.”265

133.Policy options to increase scale-up are similar to those that could incentivise private investment generally. Andrew McCosh said that the Government would explore “the regulatory incentives that make the UK a more attractive place to invest”.266 He spoke of “encouraging … UK institutional capital to invest in different asset classes” and “attracting the best tech investors to the UK and growing our own tech investment talent”.267 In the Life Sciences Vision, published in 2021, the Government said that it would establish a Life Sciences Scale-up Taskforce.268 This was referred to by Kwasi Kwarteng and George Freeman in evidence and it has reported to the Secretary of State, but its recommendations have not been made public.269

134.Economic realities mean some start-up companies will move abroad to larger or more specialised economies. But when such companies have received taxpayer support, we heard concerns this represents a poor use of public money. Dr Ami Appelbaum, CEO of the Israel Innovation Authority, explained that grants and investment from the Israeli government “are conditional on the IP and the jobs that will be created staying in Israel. We are not funding companies that move their IP overseas. However, they have a way … to buy it out from the Government. Typically, they have to pay three to six times what we provided them.”270

135.The UK supports many start-ups, but companies often leave when they reach a certain size because of the capital or expertise available in countries like the United States. This is a long-standing problem which has proved difficult to address. It is welcome that the Government has identified mechanisms to increase scale-up funding, but specific policy changes in these areas have not been set out. The Government must develop clear incentives to encourage late-stage investors and support companies to scale-up. The recommendations of the Life Sciences Scale-up Taskforce should be published. The Government should explore mechanisms to recoup investments from companies that have received public money if they move abroad.

The Government as an investor

136.The Government has a number of schemes to invest directly in R&D. These include programmes delivered by Innovate UK271 and the Future Fund: Breakthrough from the British Business Bank.272 Such schemes invest in technologies at different “readiness levels” (see Figure 7) and companies at different stages of development, with varying levels of risk.

137.We heard how government funding helps to attract private sector investment to a company. Mike Biddle described how a company that has received direct government funding will have passed “technical due diligence through the assessment process.”273 Investors know that the tests conducted before public money is provided to a company are rigorous, so it gives them the confidence to invest and reduces the need for them to conduct their own checks.

Investment at later technology readiness levels

138.Some witnesses suggested that the Government could play a valuable role as a late-stage investor. Scale-up funding is difficult to attract in the UK; direct funding from Government could alleviate this to a degree. Government funding predominantly focuses on small-to-medium grants to early-stage businesses; for example, its open competition “Smart Grants” range from £25,000 to £2 million.274 Suranga Chandratillake said “there is absolutely an opportunity for some form of government-funded, late-stage investment fund, [such as] a sovereign wealth fund … [it] could be tied particularly to things like the industrial strategy, focused on areas where, as a country, we have decided that we would like to … double down on … expertise.”275 Professor Monks explained how a goal in a defined area, such as net zero by 2050, enables BEIS to invest in later technology readiness levels: “in the net-zero innovation portfolio, much of that is higher [Technology Readiness Level] research—levels 6, 7 or 8. Much of it is procured from companies to do demonstration-style projects and the like around … technology for heat engines or CO2 direct air capture.”276

Figure 7: Technology Readiness Levels

Source: CloudWATCH2, ‘A brief refresher on Technology Readiness Levels (TRL)’: https://web.archive.org/web/20200126083540/https://www.cloudwatchhub.eu/exploitation/brief-refresher-technology-readiness-levels-trl [accessed 16 June 2022]

139.Although there is scope for greater use of direct government funding, we heard of problems. Nigel Toon, CEO and co-founder of Graphcore, a British semiconductor “unicorn” start-up company, said that receiving government funding was more bureaucratic than private funding: “with 15 PowerPoint slides we can raise $30 million of venture capital, whereas with 200 slides we might be able to get a few hundred thousand from a UK scheme.”277 Suranga Chandratillake described this experience as “very typical” with few companies pursuing “large volumes of capital” through government funding. However, he praised “programmes such as the Future Fund”, which allowed the Government to supplement existing private investors, as “much more lightweight … and … therefore used by more companies”.278 Mike Biddle said Innovate UK was responding to recommendations from the Public Accounts Committee, including on making recruitment and grant allocations faster.279

140.We heard that the range of schemes offered by the Government is overly complex. George Freeman said there are “too many” Innovate UK funds “to mention … That is partly a credit to Innovate UK’s creativity, but it is a problem unless we have quite a strong and consistent offer and people know what they are getting.” He wanted to make “that landscape a bit more coherent and clearer.”280

141.There will need to be a shift in attitudes to risk if Government funding is to be used more widely. Sir Patrick Vallance described the difficulties in balancing the risk portfolio of companies that the Government invests in: “you cannot use the government approach for innovation without expecting a number of them to fail. That requires an adjustment of approach in thinking about how then to account for the public money in that system. Innovation cannot happen without failure.”281 The Council for Science and Technology recommended that the “Government should adopt a more business-friendly, ‘investment portfolio’ approach to funding for development and implementation activities.”282

142.The Government discusses using public funding in a number of ways: to support companies in their early stages; to de-risk investments for the private sector; to provide later-stage capital for a smaller number of focus areas; and to encourage scale-up of industries in the UK. It is not clear how the Government sees its role as a technology investor. The Government should explain what it wants public innovation investment to achieve, which technologies and sectors it wants to support, and which mechanisms it will use to provide funding in each case.

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