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PROSPER MAGAZINE: DIGITAL EDITION

FEATURE

THE MISSING £4 BILLION:

MAKING R&D WORK FOR THE WHOLE UK

As the UK emerges from the unprecedented economic crisis the Covid-19 pandemic has caused, the strength of the UK’s research base should be one of the foundations for recovery. But just as the economic crisis will emphasise existing weaknesses in the economy, research carried out by innovation foundation NESTA, will not be able to make its full contribution to the recovery unless its own imbalances and shortcomings are addressed.

 

For many people and places across the UK, the economy never really recovered from the 2008 recession. Now the Covid-19 pandemic threatens to bring new disruption to an already fragile British economy, and to exacerbate entrenched problems that contribute to regional economic inequality, the report from NESTA, has highlighted that the UK’s R&D spending, both public and private, is highly regionally imbalanced.

 

The report for NESTA by Richard Jones, who wrote the 2019 paper that shaped the thinking of Chief Advisor to the Prime Minister, Dominic Cummings, shows enduring disparities between different parts of the UK in economic performance, in household incomes and in health outcomes.

 

It examines one of these longstanding problems for the UK.

The UK’s expenditure on Research and Development (R&D) - an important driver of economic growth - has historically been low compared to our competitor countries. The Government has committed to significantly increasing the amount that the UK spends on R&D by 2025. This investment is needed now more than ever as we rebuild the economy across the UK.

 

“R&D leads to innovation, and innovation creates productive industries and well-paid jobs”, said Corin Crane, Black Country Chamber CEO, “Additional investment in innovation is essential but decisions on how and where this is spent will need to be made differently to really ‘level up’ the UK. We are at a rare moment where change is possible.”

 

The report’s analysis is striking, and it presents some compelling arguments. The authors have calculated that large parts of the UK, including North England, the English Midlands, and South West of England, together with Wales and Northern Ireland, have been missing out, to the tune of £4 billion a year.

 

It is particularly helpful regarding the case for additional Government R&D investment in the West Midlands. Particularly noting that the regional multiplier effects of R&D-intensive enterprises and clusters are significantly greater than almost all other economic activity.

 

The report identifies data and analysis supporting the view that there are:

  • Significant imbalances - London and the two subregions containing Oxford and Cambridge account for 46 per cent of all public and charitable spending on R&D, but just 31 per cent of business R&D and 21 per cent of the population

  • The West Midlands sits above average for the UK in terms of private sector investment in R&D and well-below the average for government / public spending

 

In the bluntest terms, the report also highlights where it is believed the UK has gone wrong over the last 25 years.

 

Since 1995, R&D spending in Paris, London and Berlin have grown significantly. In Paris and London, this growth has been mostly driven by the public sector with private sector growth joining in. The private sector has contributed more, and more quickly, in Berlin.

But in England’s West Midlands, private sector R&D per head has matched the growth of Berlin and grown by more than in Paris and London put together. And yet public sector R&D has remained static.

 

We will never know how much more growth in private sector R&D and private sector productivity we would have seen in the West Midlands had the UK public sector invested as heavily in the region as the German public sector invested in Berlin.

 

We cannot know whether Tesla would have decided to build its European Gigafactory in Birmingham instead of Berlin. But we can compare the economic performance of Birmingham with Berlin (Berlin’s GDP/resident has grown by 48 per cent since 2000 compared to 32 per cent for the West Midlands), and we should be able to see that perhaps this was a missed opportunity.

 

The report presents 5 scenarios, in most of these the West Midlands would receive more additional funding than any other region:

 

Everyone is Equal

UK government commits to investing in R&D equally in every nation and region of the UK. The West Midlands would need an additional £0.91billion of Govt. and HE investment, more than any other region, but equal to the North West.

 

Excellence Above All

The UK government commits to investing in R&D in proportion to research excellence as defined by the REF 2014. £0.43billion extra to the West Midlands, less than some other regions.

 

Follow the Business Money

Matching business R&D spending regionally would mean an additional £1.06billion of Govt. and HE investment in our region. More than any other region.

 

Levelling Up

UK government commits to investing in R&D in inverse proportion to the GVA per resident of each region or nation of the UK (with parallels to Germany). Again, an additional £1.06billion of Govt. and HE investment to the West Midlands. More than any other region.

 

March of the Makers

UK government commits to investing in R&D in proportion to the GVA produced by manufacturing in each region or nation. West Midlands would gain an additional £1.38billion, second only to the N. West (£1.51b).

 

Recommendations from the report include:

  • There should be a substantial regional devolution of innovation funding

  • We should create new science and technology institutions outside London, the South East and the East of England, including translational research centres, City Centre Innovation Districts and Advanced Manufacturing Innovation Districts

  • UKRI should take a lead in driving regional R&D rebalancing, including:

  • Block grant funding for research and knowledge exchange

  • Universities should be regionally weighted to reflect current regional public underfunding of R&D

  • The Strength in Places Fund should be developed and expanded

 

The sums needed to rebalance R&D spending across the nation are substantial.

A crude calculation shows that to level up per capita public spending on R&D across the nations and regions of the UK to the levels currently achieved in London, the South East and East England, additional spending of more than £4 billion would be needed: £1.6 billion would need to go to the North of England, £1.4 billion to the Midlands, £420 million to Wales, £580 million to South West England and £250 million to Northern Ireland. Spending in Scotland would be largely unchanged.


Prosper spoke to Rob Gunn, Tax Partner at national audit, tax, advisory and risk firm Crowe, for his views on the report findings, he said, “I recognise the merits of many of the findings in the paper, but have concerns about the idea of the Government, i.e. the public sector, picking winners and losers for R&D investment.

 

“The West Midlands already has a strong manufacturing sector, albeit it is under pressure at present, and the region is above the national average for private sector investment in R&D.

 

“I welcome the potential for more spend in the region but wonder whether it can be better directed into the private sector, particularly without the need for any further commissions or institutions. Who needs a further layer of bureaucracy?

 

“Promoting R&D needs to start from the top down and we need to see a much more coherent long-term plan for the Midlands Engine and the West Midlands Combined Authority. We don’t want to see another scenario such as investment in diesel engines one year and then the focus switching to electric power two or three years later.”

 

He added that it should come as no surprise that London and two subregions containing Oxford and Cambridge accounted for 46% of all public and charitable spending on R&D.

 

“These are where the brains have gravitated to, given their history. To change the balance, we should be driving up R&D innovation in the regions, and I feel that is best done through the private sector.

 

“We should look more closely at what is already available and encourage more take up of initiatives such as Knowledge Transfer Partnerships, and similar.

 

“The proposal for Advanced Manufacturing Innovation Districts has some merit given the quality businesses in our region but then we should look more closely at the timeline for funding R&D.

 

“There are odd criteria in some parts of the Innovate UK Smart Grants programme for example, where you will be ticking all the boxes and suddenly come to a condition that requires the SME or body applying for the grant to be allied to a Tier 1 supplier. Why?

 

“That’s just one example, but it is this kind of issue that is putting people off from applying.”

 

Rob is calling the way grants are paid out and how relief is applied, to be pulled forward, to give companies, the cash they need to innovate when they really require it.

 

“For example”, he said, “If you are looking to fund a project in stages, you may find you can get an R&D grant initially, but this can mean that you no longer qualify for SME R&D tax credits for that project, which could be worth more than the grant. A mechanism to repay the grant but keep the SME credit would help more than the current rules.

 

“In the current climate where cash is vital, more up-front grant funding rather than delayed R&D tax credits would be beneficial. Tax credits only help when the tax is due and, in some cases, this could be over a year after expenditure is incurred. Why not bring this all forward? The Exchequer has deeper pockets than private businesses.”

 

Turning to public sector R&D investment, Rob said it was right that Government departments should be constantly challenged in this area.

 

“We want to see more funding reaching the coalface directly, not via another tier of bureaucracy. Yes, there must be accountability, but expedience should be prioritised over excessive compliance.”

 

Dr Jagvir Purewal, a senior associate at Forresters, the leading firm of patent and trademark attorneys in central Birmingham said additional funding for R&D would lead to businesses that were not only competitive but future-ready.

 

He told Prosper “Time and again we see businesses in the Midlands facing a dilemma over where to invest the limited capital that they have.

 

“Additional funding would help businesses take the plunge and invest more in R&D, which involves uncertainty and risk but can play an important role in giving them an edge over their competitors. It also means that businesses can then maximise their existing capital so that they do not have to sacrifice one activity over another when choosing whether to invest in R&D.

 

“Our Birmingham office has seen an upturn in business in recent years. An increase in local businesses and entrepreneurs securing their intellectual property rights supports the idea that the private sector is investing in innovation in the Midlands.

 

“However, extra funding for R&D would not only lead to long-term business sustainability but also help in the development of green technologies that are becoming regulatory norms. By investing in R&D, Midlands businesses will be future-ready and able to gain a competitive advantage in a global market.”

 

Corin Crane concluded, “The Black Country and West Midlands region has a long history of businesses whose innovation has driven the global economy and in such worrying times we need them more than ever to solve problems and innovate. To find new effective vaccines, to develop ground-breaking PPE, to switch from diesel production to electric, to rely less on traditional fuels and find new streamlined processes to make our businesses more productive. This recession and pandemic will be beaten by innovation – we need to make sure they get all the support they need.”

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