Welsh business needs to raise its game on innovation

As many economists will tell you, innovation is key to improving the competitiveness of nations and regions around the world, especially in recovering from the economic downturn caused by the current Covid-19 pandemic.

Given this, it is good news that the UK Government has set a target in its 2017 Industrial Strategy of raising public and private investment in research and development (R&D) from 1.7% of GDP to 2.4% by 2027.  This increased spending on scientific and technological development will then hopefully be commercialised by businesses with positive impacts on the UK economy.

Whether that happens will be largely dependent on the number of businesses that are engaged in innovation across the UK. Unfortunately, the latest data shows this is in decline and according to the latest UK Innovation Survey 2019 which was published this week and covers the period 2016-2018, only 38% of UK businesses were innovation active as compared to 49% for the period 2014-16.

By size of firm, half of all large businesses are innovation active as compared to only 37% of SMEs and both groups showed considerable decline in activity as compared to the previous period.

By region, Welsh businesses (34%) had a lower level of innovation activity than the UK average with South West England and the South East of England having the highest percentages of innovation active businesses (40%).

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In terms of activity by sector, production and construction businesses were more innovative than businesses in distribution and service industries, with manufacturers of electrical and optical equipment and transport equipment being the most innovative (63% and 59% of businesses respectively). Not surprisingly perhaps, accommodation and food services had the lowest percentage of innovation active businesses (23%).

According to the survey, the market still drives innovation with the two main reasons for UK businesses to undertake innovative activities being improvement of the quality of goods or services (43%) and replacing outdated products or services (37%). Given the increased emphasis by policymakers on green innovation, reducing environmental impact was of ‘high’ importance to only 20% of businesses.

In terms of where businesses spent their money on innovation, there seems to be a greater focus by businesses on developing innovation in-house rather than externally. For example, the percentage of innovation expenditure used for internal R&D in 2018 was 50% as compared to 44% in 2016.

In comparison, there had been four point decrease from 2016 to 2018 regarding the innovation expenditure used for external R&D. The largest decline in expenditure had been for the acquisition of machinery and equipment from 31% in 2016 to 21% in 2018 suggesting that the treatment of capital expenditure for innovation may be something which the UK government may wish to focus on.

The increased focused on internal innovation is also reflected in the results on innovation support and collaboration with only 49% of innovating businesses having co-operation arrangements as to 58% in the last survey with a decline in all types of partnerships. The most popular relationship was with suppliers (75%) followed by clients and customers in the private sector (64%).

Given the amount of emphasis on increasing links between academia and business, only 23% of innovating firms had any partnerships with the universities and only 3% used the sector as a source of information.

This suggests that far more needs to be done to encourage greater links between the higher education and industry if the increase in expenditure of billions of extra pounds on R&D by the UK Government is not to be wasted.

However, a key role that universities can play in supporting greater innovation is through workforce development especially as various studies have shown that science, technology, engineering, and maths (STEM) graduates make up a greater proportion of those employed by innovative businesses. This finding is reflected in this survey with the average percentage of employees with a degree or higher qualification being higher for innovators than for non-innovators.

In terms of the main barriers cited by innovating businesses, it was the cost of innovation that was the biggest issue including the availability of finance, high innovation costs and finance costs in general.

This may suggest that despite the relative success of initiatives such the R&D tax credit scheme and the funding provided by Innovate UK, there needs to be greater financial incentives to businesses to undertake innovation, especially given the recent decline of those doing so.

Therefore, the latest innovation survey shows that much needs to be done to ensure that we have a thriving innovation economy here in the UK. More importantly, it shows that increased spending on R&D alone will not ensure economic success without improving the capacity and capabilities of the private sector to turn that knowledge into new products, processes and services.

In particular, greater efforts need to be made to ensure that our universities are taken more seriously by innovating firms as sources of know-how and expertise in the future.