The Government’s plan for creating a more prosperous nation by raising productivity uses a double track of encouraging long term investment and promoting a dynamic economy.

The plan pledges multiple connected policies for the UK to produce more and better, but the emphasis should have been on the better, since multi-factor productivity is currently the only drag on growth for the UK economy.

Multi-factor productivity sounds obscure because it is a black box of things we cannot measure, it is economic growth that stems from the way in which we combine people and their skills with the quality of the equipment and buildings they use. According to the latest ONS Economic Review (Figure 12) if we just considered investments in people, and skills, and equipment, and buildings, that is, excluding “other things”, we would have higher output than we actually do. Those other things that are effectively putting a drag on labour productivity are the multi-factor component of productivity (Figure 13).

While we do not know fully what is inside that black box, every year we take steps to expose some of its components. Innovation investments as captured in R&D expenditures used to be the most important of these hidden components, but as we got better at measuring R&D expenditure, and at showing that this has a positive and sizeable effect on growth, we also realised that there was still a large part of multi-factor productivity left unaccounted for.

It is now well-known that R&D is but a part of the national base of “intangible assets”, which is the new more inclusive name for the black box. For businesses, intangible assets have been shown to include generous investments in training, software and branding, and smaller investments in design and business process improvement. Importantly, 60% of all intangible asset investment is purchased from outside providers, demonstrating that collaboration is a fundamental component of multi-factor productivity.

The ONS/NESTA survey of intangible assets does not ask business to report the source of purchase, but HEFCE’s Higher Education -Business and Community Interactions (HE-BCI) report, released today, helps shine a light over this fundamental contribution of universities to economic growth.

•    Overall, as demonstrated in the NCUB collaboration monitor, the HE-BCI shows income from business for shared activities with universities of £900 million in 2013/14, whereas business reported that £313 million of their R&D expenses were invested in higher education institutions. This indicates that two thirds of intangible assets purchased by business from universities are financed by non R&D budgets.
•    The HE-BCI also offers evidence of what these intangible assets are. The above figures exclude income from the sales of IP, which is an important intangible asset for business, and would have added £73 million to the above. Other intangible assets purchased by business from universities include contract research and consultancy services (circa £700 million), and use of facilities and equipment and professional training.
•    Further to income, the HE-BCI also counts entrepreneurial assets released by universities and community and cultural activities, all of which generate and/or draw additional benefits for the business and wider community.

While it is not possible to match how much of each investment as reported by business ends up in what activity as reported by universities, the combined messages from official sources of evidence demonstrate a compelling case for investing in university-business collaboration so as to boost multi-factor productivity, and ultimately improving welfare and growth.
Dr Rosa M Fernandez – Research Director