The UK Government views research and innovation as a major driver of recovery, future growth and prosperity. Business investment in research and innovation are a critical part of this.
The Department for Business Energy and Industrial Strategy (BEIS) recently-published an R&D Roadmap setting out how it intends to transform the UK into an “innovative economy” spending 2.4% of GDP on R&D by 2027 and 3% in the longer term. To achieve the 2.4% target, the private sector would need to invest an estimated £44 billion in R&D each year, £18 billion more than it does today. NCUB submitted its response to the R&D Roadmap highlighting the need for more involvement and engagement with businesses to meet this vision.
In the UK, over half (54% of £18.7 billion) of total UK-performed R&D activity is funded by business. This means that there are significant expectations as well as a heavy reliance on a small number of companies that currently invest in R&D. The challenge is that we know little about how the Covid-19 pandemic has affected business innovation-focused activities, research and partnerships with universities. Policy makers need to be able to anticipate and put in place effective programmes of support to stimulate R&D investment.
To gather evidence, NCUB, along with the new Universities Commercialisation and Innovation Unit at the University of Cambridge, launched a survey to understand the impact of Covid19 and the resulting economic downturn is affecting universities’ abilities to contribute to innovation. To view the survey as a PDF click here. This was part of a wider project that will feed into the NCUB R&D taskforce to advise on the future of UK R&D.
NCUB recently interviewed some of our business members in a variety of sectors to understand the impact of Covid19 on R&D activity. Our interviews revealed several trends across UK R&D intensive businesses which we may see play out over the short to medium term.
1) Businesses affected by revenue loss will need to make decisions about spending priorities, including R&D spending
The impact of Covid19 on businesses of course varies across industries and it’s likely that even the effects of Covid will be felt in stages: immediate impacts resulting from the health crisis and lockdown, then a likely recession and, in the longer term, an increased likelihood of austerity measures.
Our discussions revealed that September may be the start of the second ‘crisis’: the recession and when businesses begin the hard decision-making around R&D restructures. Indeed, data published today shows that the UK economy suffered its biggest slump on record between April and June, pushing the country officially into its first recession in 11 years.
Even within businesses, sales and revenue situated or associated with sectors badly hit by the Covid recession, such as civil aerospace, were harder hit than other areas which were based in relatively stable, even growing sectors. Longer term impacts, however are expected to hit other parts of industries that are located further along in the supply chain.
As might be expected, with less liquidity, significantly less revenue and sales, and potentially more debt, companies around the world are being forced to make immediate decisions to stop spending, resulting in furloughed staff, redundancies (in some cases) and short term loan repayment extensions. These decisions have reduced spending in the short term and have helped to stabilise the immediate impact on R&D budgets. However, it has also meant that businesses are not initiating new university partnerships.
Whilst cuts to R&D budgets are understandable when facing uncertainty and cost pressures, research from the McKinsey Institute suggests that companies who innovate are more resilient in a crisis, more likely to expand into new markets during disruptions, more likely to be able to hold on to staff and grow in difficult trading conditions.
Instead however, our interview findings show that in a majority of cases businesses experiencing major cash flow problems are reconsidering how much they invest in innovation and where their priorities lie. Often, this is related to what budget line R&D comes out of. If the company makes a profit, dividends are paid to investors and reinvested back into the business, often into new technology and R&D. If the company does not make a profit, investment in R&D will likely suffer.
2) Number of partnerships could decline
Almost all of the businesses we spoke to said they invest in R&D because it is essential to their long term business objectives. In line with the findings from the McKinsey Institute, these are not just existential questions for R&D intensive businesses. Partnerships with universities represent opportunities for growth and efficiencies.
In some cases, companies were already on a journey to reinvent or rejuvenate the roles that technology, efficiency and innovation play in where their business is moving. Therefore their partnerships with universities are strategic and will continue. The expertise needed can only be found outside of the organisation. Businesses said they depend on university partnerships to help them think differently. Therefore, although they are facing cost pressures, they are not yet in a position to walk away from these strategic relationships.
Longer term however, the businesses we spoke to are focused on working with universities with whom they have worked before, and with whom their partnerships are strategic and ‘easy’. This trend was highlighted within the NCUB 2009 business motivations survey, which reported that businesses tend to gravitate to universities with whom they have a prior history and ‘mutual trust’.
One business said that although they currently work with more than 30 universities, strategic decisions in the future will mean that they will need to be more selective about their partnerships and it is unlikely they will pick up any more. Businesses said they will be looking to build up critical mass with one to two partners, looking particularly at where they can leverage additional funding by working in partnership with research councils and others.
This move towards strategic partnerships is not uniform. One large business suggested that even where their strategic priorities remain in R&D, they will likely shift away from strategic partnerships to more responsive, ad-hoc partnerships. This can only be successful if there is a vibrant competitive research community from which to build these partnerships. They said they are not worried about their own investment but more about the wider university R&D ecosystem remaining competitive. The NCUB response to the R&D Roadmap puts forward the case that interventions to stabilise university R&D budgets for example, can have multiple impacts in other areas, helping to ensure the whole system remains healthy.
3) Human capital could be lost
Short term options to delay projects or frontloaded funding have been helpful to allow companies to offer extensions to researchers but companies said they are worried about the longer term. If budgets are squeezed, projects are unlikely to be renewed and postdoctorate sponsorships discontinued, resulting in talented researchers being drawn to countries and funding programs where support and longer term stability is available. At this stage, there is still uncertainty around whether businesses will recruit/sponsor new PhD students in the Autumn; in many cases already, there have been delays.
Businesses warned that their biggest concern is protecting their long term investments in people. Taking an innovative idea from initial thinking to product launch can take up to 10 years; therefore, maintaining the right people with the right experience, expertise and knowledge, will be essential to continuing their future R&D and innovation capacity. The UK has long relied on its excellent research capability, but if that talent is lost, businesses explained that it will mean starting from scratch once again and could result in following where the talent moves.
The long road to recovery
None of the businesses we spoke to had made any immediate decisions to cut back their R&D budget. In the medium term however, things could change quite quickly as existing projects and funding contracts come to an end. Many R&D intensive businesses invest in R&D because it makes strategic sense and remains a part of their company objectives. All acknowledged that they had made significant investments in the UK and want to protect these investments.
As the economy slumps, investment in R&D will in all likelihood contract at a time when the UK Government is trying to find ways for it to increase considerably. How the UK retains and continues to attract world-class, competitive research talent and infrastructure at this time of uncertainty will be key to retaining R&D investment.