Ever since Britain stopped being the workshop of the world, it’s been worried about the decline in its manufacturing sector. Instead of making things, we’re performing services with things other people have made. Despite the obvious prosperity that’s come from having a world-leading service-based economy, it strikes some as having a less firm foundation.
These days, the concern has widened from how many tractors our factories churn out to levels of innovation and quality, whether that be in electronics or pharma or indeed software - and clearly that depends on R&D. It could furrow some brows therefore to learn that Britain's domestic R&D spend by business declined by 52% to $3bn (£1.5bn) between 2007 and 2015, according to the Global Innovation 1000 Report by Strategy&, part of the PwC network.
British firms are, it seems, spending their research money abroad rather than at home, with R&D exports (i.e. conducted abroad for British companies) rising from 67% to 80% of total corporate spend. To make matters worse, the overall amount spent on R&D by British firms fell by 23% over the period to $14bn, bucking the otherwise upwards global trend.
‘If the UK is… to thrive as a growing knowledge economy, the long-term decline in UK R&D investment identified in this survey must be reversed,’ warned PwC’s UK head of consulting Ashley Unwin.
Before we start running for the nearest lab with our chequebooks out in a patriotic fervour, a word of caution. The study looked at the world’s biggest 1000 companies, reasoning that these are responsible for 40% of the world’s R&D spending and so are broadly representative.
That’s fine, except that, as companies from China and other developing nations grow they push British firms out of the list. As a disproportionate number of the top British firms are also in sectors that aren’t exactly known for R&D either (that means you, insurance), there is a question mark over how far these figures represent British R&D as a whole.
Even if you accept the figures as reflecting broad trends, is it really so bad? After all, firms are shifting from domestic to foreign R&D spending for good commercial reasons, such as being close to markets, suppliers and manufacturing sites.
Let’s not forget costs either, or indeed the fact that the best researchers for your particular job might just happen to be somewhere else. Mark Couttie from PwC's Strategy& says that ‘companies that deployed 60% or more of corporate R&D spending abroad in 2015 earned a premium of 30% on operating margin and return on assets, and 20% on operating income over their less outward looking competitors.’ In short, globalisation happens for a reason.
The decline in overall spending by British firms (at home or abroad) is somewhat more concerning, but it could to an extent reflect lower costs in countries like China or India producing better value for money, or higher levels of optimism (and therefore investment) in 2007 before the recession struck.
The key stat is that the total value of research conducted within the UK – by British and foreign firms – fell only 4% to $22bn. With its educated, international workforce and strong universities, Britain is still a powerhouse of research and development. While countries like India and China have overtaken it in sheer scale, the UK still effectively runs a healthy R&D surplus, selling more (72% more, in fact) to other countries than it buys from them.
Until that changes or British businesses start losing ground because of low R&D, it’s premature to point to a crisis or to say that British firms are underspending on R&D in their sectors. Leaders may want the economy to pivot towards innovation-heavy sectors like software and electronic engineering in order to solve the productivity puzzle, but without government investment that looks unlikely to happen on its own.