By: Jorge Velez, Principle Economist at NCUB & Marcos Rodriguez, Policy Analyst at NCUB

The ONS has released the latest results of the UK innovation survey (UKIS), which is the main instrument for understanding the innovation landscape. Data, drawn from a representative sample of 31,928 firms for the period 2018-2020, provides an interesting baseline to measure changes and impacts of the pandemic in the first year of the pandemic.

Business innovation

The headline picture from the ONS release is that in 2018-2020 innovation activity increased from a record low between 2016-2018, but remained lower than in 2014-16. The percentage of businesses engaging in innovation increased by 7 percentage points from 38% in 2016-2018 to 45% in 2018-2020, as illustrated in Figure 1. This raise was reflected in both SMEs and large businesses, and was also true across all UK countries and English regions. The most significant percentage point increase was in Wales, where innovation active business increased from 34% in 2016-2018 to 44% in 2018-2020.

Figure 1

How did innovation activity increase?

We know that businesses drive their innovation decisions based on internal and external factors. Among the internal factors, the UKIS 2021 wave shows that businesses leveraged their innovations mostly from digital technologies, software, and hardware investments. Compared to the previous survey, computer software investment increased from 14% to 24% of businesses, and computer hardware investment increased from 8% to 23%. We hope that this translates into reductions in the gap in SME digital transition as they remain less digitalised than medium-sized and large firms (OECD, 2021; CEP, 2020).

We also see increases in the proportion of businesses investing in different innovation activities, including a modest 2% increase in in-house R&D, reaching 16% of businesses. We also see a moderate increase in the percentage of firms externally contracting R&D (5.3% from 4.5% in 2016-18) and acquiring external knowledge (4.3% from 2.7%). Among other innovation activities, we observe that more firms undertook training for innovative activities, market research, and advertising. In general, these figures suggest that the base of innovation active businesses in the economy increased as more businesses managed to engage in a variety of innovation activities.

Connected to these levels of investment, we also see investment in new skills. Specifically, for the period 2018-20, there was an increase in the number of businesses that hired employees in-house with multimedia or web design skills (17% from 16% in 2016-18), software development or database management (15% from 14% in 2016-18), and graphic arts, layout or advertising (16% from 15% in 2016-18). These changes could be partly attributed to firms pivoting strategy in response to the Covid-19 pandemic, which likely had significant transformative effects on the demand for certain skills, such as IT and digital skills.

The Covid-19 pandemic was one of the most common factors driving innovation in the 2021 UKIS wave

Surprisingly, among the external elements, the Covid-19 pandemic was the second-highest reason for innovation, with almost 2 in 5 innovative businesses rating this factor as crucial. This result parallels previous evidence of the increasing levels of innovation since the pandemic’s start (see some evidence for the UK here). The pandemic was also the highest-rated barrier to innovation.

University-business cooperation for innovation

University-Business collaboration arrangements for innovation remained stable despite the crisis; however, this is partly explained by a greater proportion of large firms cooperating with universities and SMEs doing so.

Figure 2 summarises the results of cooperation agreements by firm size, sectors, and UK regions. In the 2021 survey, the level of cooperation returned to the levels seen before 2017. The levels of cooperation agreements are broadly similar for broad innovation firms across all surveyed firms. Unsurprisingly, the data shows that companies in knowledge-intensive sectors are most likely to have cooperation agreements with universities. However, data also lays bare the extent of the crisis and economic disruption and the impacts on SMEs.

Overall, data shows that the pool of innovative SMEs has seen reductions in their formal engagement with universities. This is in line with findings revealed in NCUB’s 2021 State of the Relationship report, which identified that a 39% fall in interactions between universities and SMEs was largely responsible for the total decline in university-business interactions between 2018/19 and 2019/20. This fall in SME-university interactions was likely influenced by both the pandemic, as evidence suggests it affected SMEs significantly more; and the UK’s withdrawal from the EU, which places significant pressure on SMEs’ day-to-day operations (CEP, 2021), and therefore their ability to sustain and generate interactions with universities.

Figure 2

As our most recent evidence on the company-university interaction points out (see report here), interaction activity does tend to increase with company size. Overcoming the complex barriers to SME engagement will require target efforts by universities as well as policymakers, and is only likely to grow in importance in the present context.

There is variation in the trends of formal cooperation between businesses and universities across the UK. Companies in Scotland, Northern Ireland, Yorkshire and The Humber, and London managed to increase their cooperation levels with universities significantly. In the East Midlands and West Midlands, they reduced (See figure 3).

Figure 3

Overall, UKIS offers important insights into the varying impacts of the pandemic on business innovation and their collaboration with universities. In the years to come, more data will help paint a more complete picture of UK innovation post-pandemic. We particularly look forward to building a better understanding of business-university interaction in 2020/21 through our annual Collaboration Progress Monitor, which will be published in December.