Hitting a moving target: evaluating the economic impact of R&D activity in the UK

Research & development (R&D) is one of the UK’s strongest comparative advantages. Despite accounting for around 3.5% of global GDP, UK universities occupy 10% of the spots on the top 100 world ranking of universities, including position one and three. EY’s latest UK attractiveness survey found that the UK’s market share of all European foreign direct investment R&D projects reached 18.6% in 2019. 

Research and innovation help drive a more dynamic and entrepreneurial economy, where knowledge is turned into commercial success and jobs. This is not just about economic impact though. Research and innovation also lie at the heart of social development. The last six months have perfectly demonstrated social innovation in action. We have seen companies develop new processes to manufacture ventilators, become COVID-19 secure, or enable their people to work from home at a scale never seen before. There has also been a concerted effort on the part of the business and research base to develop better and faster COVID-19 testing, and the UK is showing global leadership on vaccines research. As the economy recovers from the COVID-19 crisis, research and development will be at the heart of solving long-term challenges from delivering on net zero to supporting an ageing population.  

The case for R&D investment 

But the UK needs to do more. UK expenditure on R&D as a proportion of GDP has remained stubbornly below the OECD average of 2.4%. The CBI’s report ‘Don’t wait, innovate’ also highlighted the geographical concentration of UK R&D activity, with just three regions (the South East, East of England and London) accounting for over half of the UK’s R&D spend. 

As the government contemplates its spending priorities over the rest of this parliament as part of the Comprehensive Spending Review, R&D must be at the top of the list. But the risk is that concern over the mounting public debt pile (which topped 100% of GDP in August for the first time since 1960) means more immediate needs will win out.  

The payback for R&D investment can be long and uncertain. Yet, as the UK looks to a future outside of the EU, isn’t now the perfect time to double down on our intrinsic advantages and take the risks needed to deliver a successful and vibrant economy? 

Making the case for R&D investment has never been so important and the CBI will continue to work with business and government to demonstrate the overwhelming opportunity from R&D investment.  

We also know that many organisations are considering investing in the UK’s R&D ecosystem, from accelerators to innovation sites, but getting that access to adequate funding or achieving local buy-in can be tough. This is something our new CBI Economics service can help with. 

Three areas for R&D policy and investment projects to improve in 

Based on our wealth of experience in understanding the economics of R&D spending we have identified where R&D policy and investment projects need to get better at making the case: 

• R&D is an ecosystem – evaluating a policy, project or any R&D spend in isolation misses a crucial truth of a well-functioning R&D economy, it is an ecosystem that requires a balance of incentives, structures and R&D infrastructure. For example, clustering of R&D activity has proven to lead to greater levels of innovation while establishing one world class institution or facility crowds in investment and increases resource efficiency. Analysing and quantifying these spill-over effects is vital to capture the true value of R&D 
• Regional impact matters – evidence shows that spreading activity across the UK leads to better social and economic outcomes. Traditional models of government expenditure analysis can often lead to a skew in preferences for investments that are in densely populated and already economically successful areas. The current government’s levelling up agenda provides an opportunity to challenge this approach and there is a key role for the R&D community to prove the value of investment which delivers growth and prosperity in those regions that have long lagged behind the rest of the UK in their economic performance 
• An international approach is key – R&D intensive foreign direct investment (FDI) is a powerful mechanism for the development of clusters, and it can also raise the innovation expenditure of existing firms. Attracting investment from the world’s largest multinationals needs a strongly competitive domestic R&D environment built on an ecosystem of world class facilities and institutions, exceptional talent and a tax and regulatory environment that enables risk taking investment. Making this case to policy makers requires building the evidence base of the impact of FDI and benchmarking the UK’s R&D policies against the best in the world. Evidence for new investments should recognise that we are not in this race alone and keeping an eye to the competition can tip the balance towards action over inaction. 

Do you need help developing your economic evidence base? 

At CBI Economics we can help you to build the economic evidence base for your project, policy or idea. We can bring together a team of excellent economists with our understanding of the economics of R&D; leading innovation policy specialists, and a unique understanding of government and business decision making to help bring your project to fruition. 

For more details on how CBI Economics can help you, get in touch with the team today at economics@cbi.org.uk