Earlier this week, the Office for National Statistics (ONS) released statistics on Business R&D expenditure in the UK (BERD).

This release provides a significant data revision on the way the ONS estimates corporate research and development (R&D) spending in the UK, raising the BERD sample to make a better representation of small businesses performing R&D. The ONS release is still under revision and a more complete picture of the implications of the revised methodology will only be available in 2023. However, the data provides several timely insights into R&D investment for the period 2018-2021, which is the first period available using the updated methodology.

Business research and development in 2021 grew despite the economic uncertainty 

The revised data shows that investment in R&D by UK businesses (in real prices) totalled £46.9 billion in 2021 (a 6.7% increase from 2020). The ONS data also shows that R&D investment growth in 2021 recovered across UK firms after the level of investment had dropped by 1.2% (in real terms) in 2020, the first year of the pandemic. The level of business R&D investment also grew at a faster pace than pre-crisis levels in 2021 and is very close to the OECD short-term forecast of 7% for the world’s top R&D investors.   

Even though the ONS publication did not contain the same type of detailed breakdowns compared to previous data releases, the updated survey data still helps us understand the levels of corporate R&D investment across product groups, regions and business size.  

Regarding product groups, the data shows that computer programming and information service activities, followed by miscellaneous business activities and chemicals and pharmaceuticals, were the top performers in 2021, representing two-thirds of the total R&D investment (see figure below). We do not observe any significant change in the product groups regarding their R&D spending between 2018 and 2021. Many product groups also saw an increase between 2020 and 2021. The largest increments were observed in R&D services (up by 21%), chemicals and pharmaceuticals (16%), and electrical machinery (15%). It is worth noting that the new ONS methodology has put more weight on services than manufacturing, suggesting that the old methodology underestimated a lot of R&D activity in knowledge-intensive services and the creative sector.  This opens new avenues for policy to support innovation in these sectors, which account for most of the UK’s jobs and GDP.  

Business R&D in all English regions and UK nations grew between 2020 and 2021. Northern Ireland, the north of England (North East, North West, Yorkshire and the Humber) and Wales, saw the most significant real growth rates above 8% between 2020 and 2021.  

Regarding business size, the release also shows that large businesses (250 employees and over) and small and medium enterprises (0 to 249 employees) saw a 9.3% and 4.3% growth in the level of R&D between 2020 and 2021, respectively. 

Overall, the level of R&D investment observed in the last year demonstrates that the business enterprise sector still managed to grow despite the adverse economic conditions and the pro-cyclical nature of R&D.   

UK investment in R&D 

The ONS also released new data on Gross Domestic Expenditure on R&D (GERD), covering the period between 2018 and 2020. Methodologically, the total R&D expenditure is now about £21.1 billion higher than previously estimated59.7 billion in 2019 whereas the previous estimate for 2019 was £38.5 billion). 

The data shows that R&D in the UK was severely disrupted by lockdowns and uncertainties during the first year of the pandemic. Overall, GERD dropped (in real terms) by 2.7% between 2019 and 2020. This decline was predominantly driven by a 1.9% decline in business R&D and a 6.9% fall in universities’ R&D investment, the two largest contributors to total R&D.  

By combining the new ONS methodology on R&D estimates with estimates of R&D by the Government, universities and non-profits, and the latest GDP data, it suggests the UK has met the government target to spend 2.4% of GDP on R&D, which was announced in 2017 (see figure below). Data also suggests that UK businesses invest a higher percentage of GDP in R&D than most of our competitors. Levels of business investment, according to the new methodology, are now very close to the levels reported by the US and Germany (about 2%).   

Even if the figures suggest that we have reached the 2.4% target, this is still below the current OECD average and so it is critically important to keep up national efforts to drive up R&D investment. Furthermore, the UK still suffers from relatively low productivity levels, which have significantly decreased since the 2008 financial crisis and slowed UK economic growth down. 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. Further enhancing all important facets of the UK innovation ecosystem will certainly allow the UK to maximise knowledge spillovers, thereby increasing productivity, competitiveness and economic growth. The fiscal plan announced by the Chancellor last week, as well as the Prime Minister’s comments to the CBI conference this week, demonstrate the Government’s firm commitment to spur innovation-led growth. However, long-term efforts are also needed to align incentives between actors in the innovation ecosystem. 

A short note on universities’ R&D 

The ONS release also includes revisions to higher education R&D. These changes result from adopting a new methodology: the Transparent Approach to Costing (TRAC). This approach records full economic costs of all activities including self-funded R&D of HE, which previous estimates did not consider. The new methodology lifted universities’ R&D by £4.8bn from a previous estimate of £9.1bn in 2019 to a revised figure of £13.9 billion in 2019.  

According to the ONS data, R&D performed by universities fell (in real prices) in 2020 by 6.9% (from £14.8bn in 2019 to £13.8bn in 2020). The data also shows that the share of universities’ investment in R&D from overseas sources was 5% in 2020. The share of R&D funded by businesses recorded 8.8% in 2020. This new data implies that business contribution to universities’ R&D seems to be higher than previously estimated and at the same time the overseas element has reduced as an overall proportion.  We will follow ONS updates on this data closely.