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Why the government’s Innovation Strategy must not become a missed opportunity

The UK has a problem with R&D spending, but the new government plan to address this leaves too many important decisions unresolved

Although the total amount of money invested in research and development (R&D) in the UK has increased from £17.6bn in 2000 to £37.1bn in 2018, the UK has a well-known problem with innovation. Namely, the proportion of UK GDP spent on R&D has barely risen at all, from 1.6% in 2000 to 1.7% in 2018.

This is a problem because we know that increasing spending on innovation is vital for economic growth, with a strong link between product and service innovation and revenue growth. Investment in innovation also drives productivity growth – between 2000 and 2008, Nesta estimated that 51% of labour productivity growth came from investment in innovation, with 19% of this coming from investment in intangibles such as training, marketing, software and design.

As we recover from the impacts of the Covid-19 pandemic, increased investment in innovation will be vital for our recovery. Yet at the same time, growth in innovation spending has slowed, while the cost of innovation has risen. For example, companies now need, on average, 18 times more researchers to achieve the doubling of computer chip density than in the early 1970s.

These are problems and issues that the government’s recently published Innovation Strategy recognises. In the strategy, the government articulates the benefits that innovation can bring to the UK economy and society.

The strategy sets its ambition to reverse the sluggish increase in innovation spending, aiming to make the UK a global innovation hub by 2035. Pointing to key metrics such as the Global innovation index, the World Bank’s Ease of doing business survey and OECD monitors of innovation activity, the government clearly sets out how stakeholders are to judge its success.

For TechUK’s members, the problem is well defined and the focus on key metrics is welcome. However, while there are some good announcements in the strategy – such as new visa routes for high-potential individuals, a new route for scaleup workers and a revitalisation of the innovator route – the strategy leaves a number of major decisions unresolved, particularly around how the government will use “innovation missions” and a focus on strategic technologies to improve the UK’s innovation performance.

The Innovation Strategy has the potential to be a catalyst for bold thinking and clear action in the UK’s approach to innovation and R&D. However, fundamentally this means building a system that allows businesses to see clear returns on investment in innovation. Doing so will require a focus on innovation missions and strategic technologies, as well creating room for innovation that will see new products brought to market.

When focusing on innovation missions and strategic technologies, the government will need to work closely with the sector to ensure there is a clear understanding of the nascent industries in the UK which, with support, could be accelerated from centres of excellence to global champions. This will require a careful balance, avoiding picking winners by committee, instead gathering evidence to strategically back and support winners already on the up and with the capacity to grow.

Building markets for innovation means rethinking more broadly what innovation means in the modern economy. Productivity growth is driven by investment in intangibles, yet this kind of investment is poorly served by the current R&D system. R&D tax credits cannot currently be claimed against key enablers of innovation, such as cloud computing, data and data analytics. This issue needs to be urgently looked at, yet no details were given in the Innovation Strategy.

At the moment, the strategy leaves too many important decisions to later resolution when action is needed now, and agility and speed are of the essence if we are to achieve the aim of making the UK a global innovation hub by 2035.

The UK’s Vaccine Taskforce, Ventilator Challenge and broader response to the pandemic has put the social and economic benefits of innovation at the forefront of the public consciousness in a never-before-seen way. To build on the solid foundations of the strategy and capture this renewed spirit of innovation, the government needs to engage closely with the UK’s most innovative businesses, listen to their proposals and act fast to deliver.

The good news is that the government is pressing at an open door, with TechUK members and other sectors across the economy eager to work with them to ensure the innovation strategy is a success. If we work together, government and industry, we can achieve the goal of making the UK the Innovation Nation.

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