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How R&D can rebalance the economy

The UK spends just 1.7 per cent of GDP on research and development, leading to a dearth of innovation.

By Sebastian Shehadi

Blood clots, vaccine nationalism and a bitter stand-off with the EU. After much work, these were probably not the headlines the Oxford-AstraZeneca team had hoped for. Still, its vaccine remains a national trophy, and something the government has been able to cling to. The UK’s management of the pandemic may have been poor, but the Covid jab handed Boris Johnson a high-profile coup.

And in fact, according to analysis by Universities Allied for Essential Medicines UK, as much as 97 per cent of funding for the decades of research that contributed to the vaccine was public. But this belies an overall lack of research and development (R&D) funding in the UK. Britain has a dearth of innovation, something to which the country’s low total expenditure on R&D – just 1.7 per cent of GDP – contributes. This is well below Germany (3.1 per cent), the US (2.8) and France (2.2).

There is a structural problem. If the UK distributed R&D funds to the whole country as it does to the wider south-east of England, it would spend £4bn more, according to a report last year from Nesta, an innovation foundation. This imbalance results in a missed opportunity to use public spending to “level up” areas with weaker economies, the report states.

The issue is decades old. Great Britain’s highest-productivity sectors tend to be ones that involve innovation, such as tech and advanced manufacturing. “But this country has for 40 years not really supported those industries. [It has] no consistent industrial policy,” Juergen Maier, former CEO of Siemens UK, told an event at the University of Manchester in 2020. “Instead, we’ve relied on the services industry, many parts of which have lower-paid jobs and productivity.”

Read more: How Brexit will affect the levelling up agenda

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Support for innovation has clustered around the university cities of London, Oxford and Cambridge, otherwise known as the “Golden Triangle”. But even distribution of funds is not the answer, either. “Economic policy based on perceived fairness won’t actually improve people’s lives,” says Paul Swinney, director of policy and research at the Centre for Cities, a think tank. “We need to spend more in places where it will have an impact. [Most] locations in the UK don’t have the right skilled workers, companies and ecosystem to absorb R&D funding.”

Economics of scale are vital. The more funding one puts in one place, the higher the returns tend to be, hence the historic focus on the Golden Triangle, says Riccardo Crescenzi, a professor of economic geography at the London School of Economics.

It seems, however, that the UK’s next largest cities, after London, have missed out. They are far less competitive in economic terms than their European and US counterparts, research from the Centre for Cities has found. According to conservative estimates this costs the UK economy close to £50bn every year.

“The UK has never properly thought about using R&D money as a tool for promoting economic development,” says Thomas Forth, head of data at Open Data Institute (ODI) Leeds, a non-profit firm. “Whereas in Germany, it’s been an explicit goal in stimulating growth.”

The Nesta report highlighted the extent to which the UK’s regions (outside the south-east and east of England) lag behind their competitors in western Europe in terms of public funding. According to Forth, these discrepancies may have deterred major private investment, such as Tesla’s Gigafactory for electric cars and batteries that created around 10,000 jobs near Berlin.

“The West Midlands was in the running for that. Berlin’s region has no long history of car building. But over the last 30 years it received loads of government funds, while public money to the Midlands was largely stagnant.” Part of the problem is a lack of understanding of the drivers of innovation. “It’s tricky. Should we prioritise the innovation of something being invented or new technologies being absorbed? Should it focus more on universities or businesses?” asks Swinney.

Read more: How do you grow a healthier city?

Currently, the UK’s public R&D funding – issued by the UK Research and Innovation body – puts “academic excellence” as a priority. “Their definition is focused on historic excellence, centred in the Golden Triangle, and less so on emerging or potential excellence in academia and business,” says Jen Rae, head of UK innovation policy at Nesta. “This is to the detriment of up-and-coming talent in Manchester, Leeds, Birmingham (and the like), where there are highly innovative businesses that aren’t being backed up with the level of public investment they deserve.”

Manchester’s graphene industry is one well-known example. Critics argue that the government took too long to support the universities and businesses developing the lightweight, stronger-than-steel material, in large part due to their location. “The vast majority of the boards and institutions assigning money are based in the south-east and meet in central London. This makes them more disconnected from the networks, talent and science in the rest of the country,” says Forth. “On top of this, regional governments in the UK don’t have control over funds, so they lack the power to gamble on future growth or throw money at, for example, the West Midlands’ electric car industry,” he adds.

The argument for devolution is clear: funding decisions need to be local. In a boon for this, the government has said it plans to shift 22,000 civil servants out of London by 2030. Another boost for the regions is the £800m recently confirmed for a new research body funding ambitious proposals in emerging fields, a pet project of Boris Johnson’s former advisor Dominic Cummings. In last year’s budget the government said it would more than double spending on R&D by 2024, a good step towards the UK reaching its target of boosting the proportion of R&D spending from 1.7 to 2.4 per cent by 2027.

However, this year’s budget has been less encouraging, giving little detail on new R&D spend. The jury is out, but ensuring the right resource for innovation will clearly be vital in rebalancing the UK’s unequal economy.

This article originally appeared in the Spotlight report on regional development. You can download the full edition here.

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