This week, the ONS published the latest figures on Business R&D expenditure in the UK (BERD).  In 2022, overall spending reached £49.9 billion, representing a 0.4% real terms decline from 2021.

We have long argued that growing private R&D investment is critical to realising the UK’s Science Superpower ambitions, but that a suite of policy interventions are needed to encourage, attract and build private R&D expenditure. Since, many actions have been taken but early indicators are that they may not have gone far enough to truly shift the dial on investment levels.

Here’s a deeper dive into what the data reveals:

1. A tale of two trends

  • Short-term slowdown: Compared to 2021, R&D spending by businesses saw a 0.4% real terms drop in 2022, deviating from the previous upward trajectory (see figure below). This level of investment falls short of OECD short-term forecast of 13.6% for the leading global R&D investors.  This might raise concerns about the immediate future of R&D investment.
  • Long-term growth: Looking at the bigger picture, there’s been a positive trend with a 29.7% increase in business R&D investment from 2014 to 2022 in real terms. This indicates that supportive policies and increased R&D funding have been critical to boost business R&D investment, despite the recent slowdown.

2. Global comparison

  • UK in the middle: Many countries have similar ambitions to grow their R&D activities. Our analysis suggests that the UK sits midway among the examined countries in terms of business R&D growth rate since 2014. While the UK at 30% surpasses some major economies like France (8%) and Italy (18%), it lags behind the United States US (60%). The overall OECD average growth rate (55%) is also higher than that of the UK, as countries around the world have stepped up their efforts to encourage research investment.

  • Room for improvement: The UK’s business investment in R&D at 2.2% of GDP is comparable to Austria and Germany, reflecting similar investment intensity. However, trailing Korea and the United States at 3.9% and 2.7%, respectively. This suggests potential for improvement. While maintaining solid R&D intensity, aligning with leading economies is feasible. Furthermore, outpacing countries like Canada, Switzerland, Spain, France, and Italy positions the UK favourably in global business R&D intensity, with scope for further enhancement.

3. Who’s investing and where?

  • Manufacturing and service sectors take the lead: Both sectors contribute roughly the same amount to R&D spending, with pharmaceuticals being the biggest spender in manufacturing.
  • Small businesses play a significant role: Nearly a third of the total R&D expenditure comes from businesses with fewer than 100 employees. This highlights the growing involvement of smaller players in the innovation ecosystem.

  • Uneven distribution across regions: The data reveals a concentration of R&D spending in the South East of England, London, and the East of England, while the North East of England lags behind. This raises questions about regional disparities.
  • Foreign direct investment (FDI) in Research and Development (R&D) nearly matches public R&D investment, with over 40% of the UK’s R&D funding originating from foreign-based businesses. This influx of FDI amounts to over £21 billion in 2022. Notably, key sectors driving this investment include motor vehicles, pharmaceuticals, software development, miscellaneous business activities, and R&D services. These top-performing sectors collectively constitute two-thirds of the overall R&D investment by overseas investors in 2022, as illustrated in the figure below.

The takeaway

While the recent slowdown in R&D growth is a cause for concern, it should be seen within the context of the positive long-term trend and the active participation of diverse players in the UK’s innovation landscape.

Looking ahead, it’s crucial to:

  • Encourage continued investment: Policies and initiatives are needed to encourage, attract and build business R&D investment. We need to consider how sustained increases to public and private R&D spending can better drive productivity gains and economic growth in the future, alongside clear, strategic investment in other essential factors of the UK innovation ecosystem, such as skills, knowledge transfer and infrastructure. Long-term efforts are also needed to align incentives between actors in the innovation ecosystem.
  • Promote balanced distribution: Efforts are required to ensure a more even spread of R&D activity across different regions of the UK. This involves adopting a strategic approach to attract FDI not only in well-established hubs like London and the South East of England but also in regions and nations that may currently lag behind as previous evidence
  • Gather further insights: We need more granular data to understand the dynamics of business R&D over time and identify areas for improvement. We hope that the ONS will provide additional data in the coming months to facilitate a more comprehensive analysis.

By enhancing all facets of the UK innovation ecosystem, the nation can maximise knowledge spillovers, ultimately boosting productivity, competitiveness, and economic growth.