Soft Machines

In the first part of this series attempting to sum up the issues facing UK science and innovation policy, I tried to set the context by laying out the wider challenges the UK government faces, asking what problems we need our science and innovation system to contribute to solving.
In the second part of the series, I posed some of the big questions about how the UK’s science and innovation system works, considering how R&D intensive the UK economy should be, the balance between basic and applied research, and the geographical distribution of R&D.

In this third part, I move on to a more detailed discussion of the institutional landscape of R&D in the UK. In the next part, I’ll move on to the funding system.

3.1 Who does R&D, and who pays for it?

It’s an obvious, but nonetheless important, point to note that there isn’t an exact match between who funds research and where it’s carried out. Business can pay for research in its own laboratories, but it can also sponsor research in universities. Likewise, some research done research done by private business is paid for by the government. R&D statistics differentiate between sector of performance and financing sectors. The overall funding flows for the UK are summarised in this excellent flow diagram, from the ONS.

Flows of research and development funding in the UK in 2019. From Gross domestic expenditure on research and development, UK: 2019, ONS.

I begin by reviewing the mix of different research institutions in the UK. In the next part, I’ll consider who pays for that research, and how that decisions about funding are made.

3.2 Where is R&D done in the UK? The institutional landscape

R&D can be carried out in a number of different kinds of institution with different missions – universities, government funded research institutes, charitable research institutes, and private sector laboratories run as part of profit-making enterprises. My next figure shows how the mix of R&D performing institutions in the UK compares with other countries.

International comparison of the breakdown of R&D spending by sector of performance. From The Missing Four Billion.

The UK stands out in two ways – one is its overall low R&D intensity, as discussed in the last section. Big increases in both public & private R&D are needed to meet the UK’s current R&D intensity target of 2.4%. But in addition to this overall low level of R&D, the UK is an international outlier in the degree to which non-business R&D is concentrated in universities, with a much lower proportion in non-university government laboratories.

The UK, Germany & USA all do similar amounts of R&D in universities, relative to the overall size of their economies. But Germany and the USA do much more R&D in government owned R&D institutes, which tend to focus more on applied and mission focused R&D. As discussed in the last section, this reflects a positive policy choice by UK governments to withdraw from this kind of research.

3.2. University research

The dominant role of universities in the UK’s public research system has positive and negative features, arising from the way university finance operates and the competitive pressures they operate under. As far as the government is concerned, they deliver research very cost-effectively, because they subsidise their research activities from other sources of income. Because the environment they operate in is very competitive, both nationally and internationally, they respond in a very focused way to the incentives and pressures that competition puts them under. Up to now, those incentives have largely favoured the production of academic science that is highly ranked by measures such as citations and recognition by international academic peers. Thus they do well in international league tables. But this doesn’t come without cost.

It’s important to understand that, in the UK, universities are independent corporate entities (usually regulated by charity law), not direct arms of the state. This is in contrast with, for example, universities in Germany, and state universities in the USA. They can own their own assets, and their employees are not civil servants. So (to the occasionally obvious annoyance of ministers), the government can’t directly tell them what to do. The government does, however, have great influence on them through the very substantial funding that they provide, and the regulatory framework they can impose.

There are more than 100 universities in the UK, but not all of them are strongly focused on research, and indeed research is very concentrated in a relatively small number of institutions. Just four institutions – Oxford, Cambridge, and the two large London universities, UCL and Imperial – account for nearly a third of all research contract funding. Adding to these a further 5 large civic universities takes the fraction to a half, while 80% of the funding goes to 27 institutions.

Where does the funding for a research intensive university come from? On the research side, there is a so-called “dual support” system, through which the university receives a block grant, which can be used at the university’s discretion, but which is linked to the amount and quality of research it does, as measured through the “Research Excellence Framework” (of which, more later). Then there are research grants and contracts, competitively awarded to pay for discrete research projects, from research councils, and to a lesser extent charities and businesses.

On the teaching side, there are some remaining block grants for subjects that are particularly expensive to teach (e.g. medicine), but the bulk of funding comes through student fees. For home students, these are paid for through the student loan scheme, where the upfront cost is paid by the government and (partially) recouped through income-contingent payments from graduates. The maximum tuition fee is set by the government at £9250. Fees for overseas students aren’t capped in this way, and are in effect set by the international market for higher education and the pricing power of individual institutions, which is naturally related to their reputations. To give one example, Imperial College currently is able to charge more than £30,000 per year for an undergraduate engineering degree. This is at the high end of the scale, but most UK research intensive universities will charge overseas students substantially more than double the home fee.

Finally, income from endowments, derived from philanthropic donations over the years, and income from licensing intellectual property, do make contributions to the finances of some institutions. In contrast to the situation in the USA, where many universities have multi-billion-dollar endowments, only in Oxford and Cambridge in the UK does this kind of other income make a material difference.

To summarise the financial situations of UK universities, teaching home students more or less breaks even (though there are variations by subject, and the position is worsening due to the freezing of the fee). Research loses money; overall the combination of the block grant and research grants covers perhaps 70-80% of the true costs. Teaching overseas students makes a substantial surplus, which is recycled into making up the losses on research. A justification for this situation is that it is the institution’s research that contributes to its international reputation, which in turn is what attracts international students and gives the institution its pricing power.

The order of magnitude of this cross-subsidy from international students is comparable to the total research block grant to universities. Thus we don’t have a “dual funding” system for research, it’s a triple funding system, where the government’s contribution to core costs of research is matched by the surplus from the fees of international students

The university research environment is shaped by the highly competitive world that they occupy, much of it by the design of successive UK governments. There is competition for home students, since the Coalition government removed central government controls on the total number of home students each institution can accept. The competition for international students is itself international; the Chinese students who comprise the majority of these customers can choose their country of destination, with the main competition coming from the USA and Australia.

In research, the competition is played out in the proxy medium of the various international university rankings. These statistically dubious aggregations of fundamentally incommensurable metrics are irresistible to trade journalists and university publicity departments, unignorable by managers and governing bodies, and undoubtedly influential in the perceptions of university quality by prospective students. Quantitative measures such as research income and citation data are combined with indicators such as number of papers published in so-called “top journals” and prizes awarded to faculty members, and the outcomes of reputation surveys. The choice of metrics and measures is itself an implicit definition of what in research is valued and what is not, and this in turn will influence the strategy and operations of those universities who seek to compete on these measures.

In the UK, the government-run assessment of research quality – the Research Excellence Framework – is more carefully constructed, with extensive peer review of the research outputs at the level of individual publications from each university. It is also much more expensive. From the government’s point of view, it provides some kind of assurance of the value for money of its investment in research, and because it is directly linked to the funding universities receive, it can be used as a lever to change the behaviour of institutions in directions the government wishes. For example, in the last two iterations of the scheme, the ”impact” of research – on business, through the formation of spin-outs, on policy, on health outcomes, etc – is measured and incentivised.

What has all this competition done? Much has been written about the positive and negative aspects of features of the landscape such as the Research Excellence Framework, and I haven’t space to summarise those arguments here. Suffice to say that it seems entirely plausible to me that any kind of metric-based assessment system will drive up performance in those aspects that are measured, while leading to relative neglect of those aspects that are not directly measured, even if in the long term this neglect will probably have a detrimental overall effect.

In UK universities I think you could point to a run-down of technical support for research, and a poor career structure for staff scientists, as examples of these kinds of negative consequences.

3.3. Basic research institutes

In many other countries, basic research is carried out not just in universities, but in specialised research institutes. For example, Germany has the government-funded Max Planck Institutes, while in the USA, the Janelia Research Campus, funded by the Howard Hughes Medical Institute’s $27 billion endowment, has many admirers. These have been much less important in the UK system, with the Medical Research Council’s Laboratory of Molecular Biology providing a rare example of a purely discovery research focused institution. But as we will see, there has been a recent move towards such institutes in the UK.

Central facilities, like the Rutherford Laboratory and the Diamond Light Source in Oxfordshire, represent slightly different type of non-University laboratory. These provide expensive large-scale scientific facilities that are used by university scientists on a shared-accesss basis to pursue their own research programmes. The largest facilities are too expensive even for a single nation, and the UK has shares in overseas facilities of this kind too – the neutron source ILL, and the synchrotron radiation facility ESRF, both in Grenoble, France, and perhaps most famously, the high energy physics laboratory CERN, in Geneva, Switzerland.

These laboratories do of course have staff scientists – and, although their purpose is primarily basic science, they concentrate substantial amounts of technological capability. This means that they do provide substantial economic spillovers in their locations. For example, the Harwell technology campus has developed around the Rutherford Appleton Laboratory and the Diamond Light Source, serving as the nucleus of a powerful tech cluster in rural Oxfordshire. Thus location choices for these facilities can have big implications for regional economic growth; in the case of the Diamond Light Source, the alternative location was at the Daresbury Laboratory, near Runcorn in the Northwest.

The last decade has seen the foundation of new, dedicated upstream R&D laboratories. The largest of these is the Francis Crick Institute in London, now the largest biomedical research establishment in Europe. Other new laboratories include the Rosalind Franklin Institute, on the Harwell Campus in Oxfordshire, the Alan Turing Institute in London, and the Henry Royce Institute at Manchester.

Is basic research better carried out in focused institutes, or in research universities? It’s important to distinguish factors that are specific to the funding environment from anything more fundamental. It’s certainly true that a researcher wholly focused on doing science in an institute, with the highest quality equipment and technical support, will achieve more than a university researcher with substantial teaching and administration duties and a poorer research infrastructure.

The difficulty for the UK, though, arises from the way it finances basic research. Universities can do basic research at a lower cost to the state because of the cross-subsidy from teaching overseas students. This cross-subsidy isn’t available to research institutes, so if they are financed on the same basis as universities they will not be financially sustainable.

The alternative would be to finance all research on the basis of what it actually costs; without unrealistic budget increases this would lead to a substantial reduction in the volume of research carried out in the UK. On the other hand, it would allow universities, if they chose, to reproduce many of the positive features of research institutes, such as better technical support and more stable career structures for staff scientists.

3.4. Public sector research establishments

The first state-run scientific establishment in England (predating the foundation of the United Kingdom) was the Royal Greenwich Observatory. At the time, astronomy was a science of strategic importance to the state. The projection of England’s naval power across the Atlantic, and then across the world, to underpin trade and colonialism, relied on accurate astronomical measurements for navigation. But state run scientific establishments whose purpose was applied science in support of the state’s strategic priorities took off on a larger scale in the late 19th and early 20th centuries, with the foundation of institutions such as the Meteorological Office, the Laboratory of the Government Chemist and the National Physical Laboratory. Such establishments flourished particularly in the cold war “Warfare State”.

While this sector of the research landscape is amongst the oldest, it has perhaps seen the most change and disruption in recent decades. With the move towards a smaller state, many of these institutions have been reorganised, some taken over by universities, some converted into “arms-length bodies”, some transferred into private sector management, some privatised outright. The result has been a public research sector that is smaller, more atomised, and less well connected to the strategic priorities of the state. As written in a government report commissioned by the Government Chief Scientific Advisor in 2019 (Realising our potential through science): “The wide range of Public Laboratories that are owned by government present a significant resource for government in the leadership of outstanding ‘directed’ R&D, but several decades of their devolution from central government have created obstacles to a more strategic deployment of this resource”.

Inevitably, defense has been one of the main motivations behind the public sector research establishments, so institutions like the Atomic Weapons Research Establishment are the quintessential Warfare State research laboratories. AWRE was merged into the Atom Weapons Establishment, which in 1989 was taken into private management. This partial privatisation was reversed in 2021.

I think many people would be surprised that such a core part of the deep state as nuclear weapons was contracted out to the private sector in this way, and it is probably fair to say that this isn’t the place to look for the biggest spillovers into the private sector. Other defence establishments have, however had a bigger influence on the wider economy. The Royal Signals and Radar Establishment, at Malvern, was important in the development of liquid crystal displays and semiconductor optoelectronics. RSRE was privatised, with other defence laboratories, in 2001 as the company Qinetiq. Qinetiq is now a publicly listed defence-focused contract R&D company.

In the post-war period, civil nuclear energy was another major driver of state funded strategic research. The UK Atomic Energy Authority, in the 1960’s, was a huge enterprise running the both the civil nuclear energy enterprise and the weapons programme. The weapons programme was split from the civil nuclear energy programme in 1973; with the privatisation of energy in the 1980’s and the completion of the last new nuclear power stations in the early 1990’s, UKAEA was split up; responsibility for the decommissioning of its old sites was given to the Nuclear Decommissioning Agency, much of the R&D expertise was privatised as AEA Ltd, a contract R&D organisation which went into administration in 2012. What was left was the nuclear fusion programme, which now forms the core activity of the remaining UKAEA, based in the Culham Laboratories in Oxfordshire.

In another area of government – the criminal justice system – the evolution of research and development in support of forensic science makes an interesting case study. The Home Office’s Central Research and Support Establishment at Aldermaston historically provided forensic services to police services and other government departments, as well as developing new technologies (for example, developing and implementing the DNA profiling techniques invented by Leicester University’s Sir Alec Jeffreys). This was converted first into an executive agency – the Forensic Science Service – in 1991, then into a government owned company. As a government owned company, the Forensic Science Service provided forensic services for a fee, in competition with commercial operators.

In this environment, it was unable to cover its costs, and in 2012 the government decided to wind it up totally. Forensic science support for the criminal justice system is now provided by private providers in a highly competitive market. Research and development – both to validate and develop existing methods, and to develop entirely new techniques – has suffered (see this Lords Select Committee report). The private providers operate on margins that are too thin to sustain any long-ranged research, while forensic science research in universities has received little public funding, possibly because it isn’t perceived as being at the cutting edge of academic science, as measured by citations and publication in the most prestigious journals.

Similar stories of atrophy, if not complete liquidation, could be told about government supported research in other areas, such as public health, agriculture and food. The common feature is research in areas that, while societally important, lack both academic glamour and lucrative business opportunities.

3.5. Business R&D

As was stressed in the last instalment, the majority of research and development happens in the private sector. To what extent can we think of business R&D as part of a national innovation landscape? As we saw, most business R&D is done by large, multinational companies – and as such is part of a multinational system. The international nature of the UK’s business R&D is underlined by the fact that around half of it is done by overseas owned companies.

The dominant R&D companies in the world are ICT companies from the USA, Korea and China, automobile companies from Germany and Japan, and pharmaceutical and biotech companies from USA, Switzerland, and Germany. Only two UK companies make it into the top 100 of world R&D companies – the pharmaceutical companies GSK and AstraZeneca.

Does this relative lack of UK owned companies in the top world tier of R&D performing companies matter? The fact that the UK is an attractive destination for overseas companies to open R&D facilities in is often cited as evidence of the strength of the UK’s innovation system. The worry is that these investments are footloose; the UK is competing for these investments with other countries, which might offer other advantages such as lower labour costs, or access to larger markets. On the other hand, when corporate strategies change and “rationalisations” are demanded, proximity to the head office often seems to be a factor favouring the survival of R&D facilities.

Of course, the R&D performed by overseas owned companies in the UK is important; it anchors in the UK wider high value economic activities, such as design and manufacturing, and it has wider spillovers in those innovation economies. In the West Midlands, for example, the auto company Jaguar Land Rover, a subsidiary of the Indian company Tata Motors, has a major R&D centre in Coventry.

At the opposite end of the spectrum to large multinational companies with the scale needed to sustain large, internal R&D efforts in support of their own business activities are firms that specialise in supplying R&D as a service to other companies, quite often as part of a wider package of knowledge intensive business services including design and consultancy. This sector accounted for about 6% of business R&D in 2020; David Connell and colleagues have persuasively argued that R&D service companies play a central role in successful innovation economies such as that around Cambridge.

3.6. The Catapult Centres

The most recent entry to the public R&D landscape are the “Catapult Centres” – translational R&D centres launched by the Coalition Government in response to the 2010 Hauser Review. This called for the establishment of centres to focus on applied R&D in emerging technology areas, on the explicit model of Germany’s Fraunhofer Institutes.

The idea was that these centres would combine publicly funded R&D and innovation programmes with contract research. This would include the development and scaling up of manufacturing processes, and the production of technology and application demonstrators. The intentions was that they would bridge a gap in a linear technology development process, conceptualised in terms of the notion of “technology readiness levels” introduced in the aerospace industry.

There are now nine Catapult Centres (though one, the High Value Manufacturing Catapult, incorporates seven geographically dispersed centres which each operate with a considerable degree of independence. There does seem to be a consensus that the Catapult Network has helped fill a gap in the UK’s RD&I landscape (though the scale of the network is still relatively small).

I believe there is still a lack of clarity about what their mission should be. Originally, this was defined as doing applied R&D in emerging new technology areas. There is a danger here, that they will end up competing with commercial contract R&D providers. There are some bad precedents here: one of the abiding sins of UK technology policy is to expect public R&D centres rapidly to become financially “self-sustaining”; the effect of this is in effect just to create another SME, rather than having a wider impact on the national and regional innovation system.

On the other hand, a number of the Catapult Centres have taken on a wider remit, developing human capital through vocational training, in manufacturing advisory services, and in various networking and sector development activities, even though this is not part of their core mission as originally defined.

Eoin O’Sullivan and I have argued that we should have institutions that take such a wider role in developing innovation capabilities through technology diffusion, skills development, and the building of absorptive capacity are important for developing the weaker innovation systems that characterise those parts of the UK that economically underperform. The Catapult Centres could take on this role, given a formal widening of their remit – and additional resources.

3.7. Taking a look at the whole institutional landscape for R&D

It should be clear that the UK’s institutional landscape for R&D is complex, and has undergone big structural changes over the last few decades. I don’t think the effect of these changes was thought through at the time they were initiated, and it isn’t obvious that the system we are left with is optimal given the expectations people have of science and innovation to deal with the problems I outlined in the first part of this series.

The government is currently conducting a review of this landscape, led by the Nobel Laureate Professor Sir Paul Nurse, Chief Executive and Director of the Francis Crick Institute. This should report in the very near future.

I hope the Nurse Review recognises that there are several different problems that need to be addressed here. These include:

• How best to do basic, discovery science
• How to get public sector research establishments working well to address cross-government priorities
• How to fill in the “missing middle” of applied research
• How to develop regional innovation systems to increase productivity in economically lagging regions
• How to support and grow private sector R&D

It’s a good moment for change, with many conventional wisdoms dissolving. Given the consensus that the UK’s R&D intensity needs to be substantially increased, it will be necessary both to expand and modify existing institutions and, perhaps, to create new ones. But we’ll need to think clearly about the balance of different kinds of institutions we have now, and how that needs to change to meet today’s challenges.

In the first part of this series attempting to sum up the issues facing UK science and innovation policy, I attempted to set the context by laying out the wider challenges the UK government faces, asking what problems we need our science and innovation system to contribute to solving. In this second part, I move on to some big questions about how the UK’s science and innovation system works.

2. Some overarching issues

2.1. How research intensive should the UK economy be?

Total R&D intensity of selected countries, and OECD average (General expenditure on R&D as fraction of GDP). OECD Main Science and Technology Indicators.

The research intensity of the UK’s economy currently is low, both by the standards of other comparable countries, and by comparison to its position at the beginning of the 1980’s as one of the world’s most R&D intensive economies. In 2019, the UK’s R&D intensity – as measured by the fraction of total GDP spent on R&D, both public and private – stood at a little less than 1.8%; this compared with an OECD average of nearly 2.5%. The government has a stated policy of increasing R&D intensity to 2.4% of GDP by 2027, while the Labour opposition campaigned for a more ambitious goal, of 3% by 2030. So there is consensus on the need to increase R&D intensity. But why the focus on a single number, and how should one choose such a target?

The reason 2.4% was chosen was because it corresponded to the OECD average (which itself, as the plot makes clear is itself slowly increasing, presenting a moving target). Measuring R&D as a fraction of GDP is simply a measure of the proportion of total economic effort devoted to the systematic development and application of new knowledge; economists currently think of it as being a subset of investment in intangible assets, itself part of the wider picture of investment in the capital stock.

The wider picture here is that the UK has a history of low investment of all kinds – over the 20 year period to 2017, the UK had the lowest level of private sector investment for any G7 nation, and the second lowest government investment.

So one way of interpreting the UK’s low R&D intensity is as part of a wider reluctance, both from the private sector and HM Treasury, to forgo consumption now in the hope of rewards in the future. In other words, there’s a kind of national failure to pass the marshmallow test. Of course, this isn’t a question of some national moral failing, if true it’s likely to reflect institutional factors.

R&D is carried out (and paid for) both by private sector firms and by the government and its agents – in economies like ours, there’s a rule of thumb that the private sector carries out about twice the value of R&D than the government. So we need to look for such institutional factors both in the private sector, for example in the demands placed on companies from the financial markets, as well as in the accounting conventions and wider assumptions used in government. I suspect that there are issues here, but the necessary institutional changes will be difficult and take time to have an effect

Another argument is that the low R&D intensity of the UK is an inevitable consequence of the sectoral make-up of its economy, reflecting the transition from R&D-heavy manufacturing to the less research-intensive world of services. In such an economy, intangible assets are central. Although R&D itself produces such intangible assets, in the form of patents and know-how, there are other forms of intangibles. Defining intellectual property products (IPP) slightly more broadly than patents and R&D, to include, for example, entertainment products such as film, TV or radio, one finds that among G7 nations, UK invests more in IPP than Italy and Canada, less than USA, Japan and France, and (interestingly) about the same as Germany.

We should be careful, though, not to think of “services” as a single sector. The parts referred to as “knowledge intensive business services” – including design, technical consultancy and professional services – are a significant area of comparative advantage for the UK, and they do undertake a significant amount of R&D. Other kinds of service industry – such as social care – measure relatively low in terms of apparent economic value, but are of vital social importance. More attention should be given to innovation in areas like these. Ultimately, though, what matters isn’t whether a sector can be classified as manufacturing or services, but whether it can deliver productivity growth.

Although there is a case to be made that, even given the UK economy’s existing sectoral structure, R&D spending is too low, it probably is true that targeting an increase of R&D intensity to 2.4% (or higher) does represent an implicit commitment to reshape the economy’s sectoral structure.

An R&D target should be thought of not as an end in itself, but as a means to an end. We should start by asking what kind of economy do we need, if we are to meet the big strategic goals that I discussed in the first part of this series. Given a clearer view about that, we’ll have a better understanding the necessary fraction of national resources that we should devote to research and development. I don’t know if that would produce the exact figure of 2.4%, but I wouldn’t be surprised if an appropriate target would be significantly higher.

2.2. The UK – good at research, no good at innovation?

There’s a long tradition – amounting to cliché – of arguing that the UK is very good at basic research, but systematically fails to commercialise it. I’m sceptical of the rather mystical cultural explanations sometimes advanced for this; I think the reason is more obvious – it’s because the UK doesn’t put in the resources that are needed to turn science into money. This isn’t a result of some trait in the national character; it’s the outcome of deliberate policy choices to de-emphasise the more applied R&D needed to convert ideas into products, in favour of more basic science.

Innovation is about matching new technical opportunities with unmet demands, and for that reason it needs to be done (at least strongly steered) by those agents who are in a position to recognise those unmet demands. In our economy, with the notable and important exceptions of the health service and the armed forces, that puts the emphasis on the private sector. Yet, as economists know well, the fact that firms aren’t able to capture all the benefits of the innovations they make means that, in the absence of some form of government intervention, the private sector will systematically underinvest in research and development.

This provides the justification for governments to support basic science, where the outcomes are highly uncertain and the benefits often only materialise in the long term. But there’s much less consensus about how much governments should be involved in supporting more applied research and development. In the UK, there has been a major, but underappreciated, change in the government’s position on this point.

As the historian of science Jon Agar wrote in his definitive study of science policy under Thatcher, there was a sharp shift in science policy in the late 1980’s: “there was a crystallisation of policy: government funding for near-market research was abruptly curtailed (because private industry should step up), and, to balance this, the science base, especially ‘curiosity-driven research’ was heralded.”

One can see this in the statistics: from the 1980’s onwards, there has been a major reduction in the R&D carried out by government departments and their agencies. The research done here was typically applied research in support of the direct goals of those agencies. From 2000 onwards, there was a significant increase in the R&D government supported in universities through the research councils, while departmental research continued to fall.

The period 1980 to 2010 saw a systematic shift of UK government supported R&D from government applied research to “curiosity driven” research in HE. From R.A.L. Jones, ‘The UK’s Innovation Deficit & How to Repair it’, SPERI paper number 6, 2013.

This provided an empirical test of the view of some free market evangelists, who argued that state spending on research “crowds out” research by the private sector. In fact, over the same period, instead of seeing private industry “stepping up” to fill the gap, there was a substantial decrease in business R&D intensity over the same period, supporting the current consensus view that state spending on R&D in fact tends to “crowd in” additional private sector R&D spending. It’s important to recognise that, at the same time, privatisation moved some important sectors from the public to the private sectors; in most cases this coincided with a substantial reduction in R&D activities by the new owners.

Between 1980 to 2010, the decline in total government support for R&D was mirrored by a decline in private sector R&D. From R.A.L. Jones, ‘The UK’s Innovation Deficit & How to Repair it’, SPERI paper number 6, 2013.

Where does business R&D take place now, and how is it financed? The broad brush answer is that business R&D is concentrated in a few sectors of the economy, it’s carried out by big businesses, and it’s financed by their own internal cash resources.

In the UK, the dominant sectors are pharmaceuticals, automotive, aerospace, machinery and equipment, precision instruments and optical products, and chemicals. In addition to these manufacturing sectors, there is substantial R&D spending in services, in telecommunications, computer programming and software, and the provision of technical testing and R&D as services in themselves. Of course, these services are often driven by and provided for manufacturing sectors, emphasising the difficulty in a modern economy of making a clean separation between manufacturing and services.

Given the rhetorical emphasis in discussions of innovation on the role of venture capital financed start-ups and highly innovative small businesses, it’s important to understand the relative scale of the contributions of large and small companies. In 2020, total business R&D was reported as £27 billion; of this just £1.5 billion happened in SMEs. Total venture capital investment in 2020, as reported by the BVCA, was £1.7 billion. The Venture Capital sector is itself heavily subsidised by the state, both through direct investments and through tax reliefs.

What kind of R&D does business do? It’s natural to assume that it will be focused on short term improvements of existing products and processes, with any longer term work directed at the introduction of entirely new products, such as new drugs. But one can point to some quite fundamental discoveries made in industrial laboratories in the past.

The most well known example is Bell Laboratories in the USA, which produced the transistor, the UNIX operating system, laser trapping and cooling of atoms, and the discovery of the cosmic microwave background. Other breakthroughs in basic science – of the kind that attract Nobel Prizes – were also associated with other industrial laboratories in the USA, such as General Electric and IBM. Important industrial laboratories in the UK included those run by the chemicals company ICI and the electronics firm GEC.

Neither ICI nor GEC is in existence any more, while in the USA Bell Laboratories is now a much smaller and more business focused operation, owned by Nokia. There are still contributions to basic science from industry owned laboratories – for example Alphabet/Google’s subsidiary DeepMind has made a major contribution to biology through its AlphaFold programme for predicting protein structures. But the perception – backed up by some evidence – is that business R&D has become much more focused on short-term, product focused R&D rather than more basic research. This is understandable given changes to the business landscape over the last few decades.

Bell Labs in its heyday was sustained in effect by the monopoly rents of its parent organisation, the Bell Telephone Company, and when that monopoly was broken up there was naturally less room for expenditure that benefitted wider society without contributing much to the company’s bottom line. The demise of GEC and ICI as major combines at a scale that could justify and finance more speculative research reflects both some individual corporate misjudgements, but also a wider climate of primacy of maximising “shareholder value” in corporate governance.

The side-effect of this, though, is more of a division of labour, with basic research more exclusively the province of universities and research institutes, and industry focusing entirely on shorter-term applied work. I think something has been lost by this separation.

2.3. Is the productivity of the science enterprise slowing down?

If the UK has focused government support on curiosity-driven research, does that mean that its basic research enterprise is in a correspondingly strong state? There are certainly some things to be proud of in the UK’s research base – by measures such as share of highly cited research papers, the UK system seems to deliver internationally competitive results well out of proportion to the money the government puts in. The UK in many ways has worked to optimise its system to deliver “excellence” as defined by the academic community, and the outcome reflects what the country has chosen to optimisea

But that doesn’t mean that everything is fine in the basic research enterprise, in the UK or more widely. There are a number of linked worries, some specific to the UK, some with a wider international relevance. The wider background is a sense that international science is suffering from falling productivity, with diminishing returns in terms of fundamentally new results, from ever increasing investments.

This argument was made in an influential piece by Patrick Collison and Michael Nielsen – Science is getting less bang for its buck, arguing that despite exponential increases in the number of people involved, the amount of money spent, the number of articles published, the rate of production of significant new ideas static or indeed falling. This argument is difficult to quantify – how can one define “significant”? There are linked arguments about whether the rate of innovation more widely defined is slowing (e.g. an influential paper by Bloom, Jones, van Reenan and Webb – Are ideas getting hard to find?) though of course this also calls into question the effectiveness with which basic science is turned into products as well as calling into question the productivity of the basic science enterprise itself. But despite the difficulty of quantifying this, it is worth taking seriously.

There are two quite different views about what might be wrong with basic science, that are at first sight in contradiction, though in my own opinion there are elements of truth in both. One is that a slow-down could reflect too much control over science. Rather than just giving talented scientists resources and freedom to pursue their own priorities, in this view our system has become bogged down with too much bureaucracy and poor incentives. Systems such as peer review have led, in this view, to conservatism and a stultifying consensus which acts to suppress genuinely radical new ideas and approaches.

The other view is that, rather than being over-controlled, academic science has had too much freedom. By drifting apart from the kind of applied science that is subject to the discipline of having to deliver devices and systems that actually work in the world, the argument is that science is in danger of becoming an entirely self-referential system, prone to swings of fashion and producing too much work which is at best poor quality, and at worst irreproducible or just wrong. In this view, most forcibly argued by Dan Sarewitz in his piece Saving Science, it is technology which keeps science honest, and an increasing separation between science and technology is unhealthy for both sides.

These issues are international in their scope – how do they apply to the specific circumstances of the UK’s science system? I’ll discuss the details of the UK’s funding system in the next section of this series of pieces, but there are some consequences of the UK’s structural shift away of government support from departmentally driven applied science to university focused basic science that are worth dwelling on.

I suspect that if you were suggest to most senior academic scientists in the UK that government support has shifted from applied research to more basic science, they would react with disbelief. I believe the more widespread perception is that the shift has been in the other direction – from the perspective of university-based scientists, the pressure has been to demonstrate more practical relevance – more “impact”, in the favoured term of art in UK science policy – of their research.

Broadly speaking, the UK went from a situation in the 1960’s and 1970’s where there was a very large cadre of government supported scientists and technologists doing explicitly applied research, and a relatively smaller group of university-based scientists with more freedom to follow their own research priorities. By the end of the 2000’s, the cadre of explicitly applied scientists was very much smaller, and the university research base was substantially bigger and better resourced. But the continuing rhetorical commitment to science and technology as the driver of economic growth and international competitiveness led to an obvious pressure on the now dominant university-based science to demonstrate its contribution to those goals.

This pressure has had some positive outcomes. It’s good that universities have become more professional about technology transfer and creating spin-outs, that the very positive aspects of collaborations between scientists in industry and academia are more widely recognised, and that the civic universities are rediscovering their mission to support their regional industries and economies.

But the downside is when academic scientists, who are not close enough to the market to understand its real needs, opportunities and constraints, feel compelled to generate unconvincing quasi-commercial motivations for their work. At its worse, the result can be to steer research in directions that are neither fundamentally interesting nor practically relevant.

2.4. The geography of science and innovation

It’s never been easier to access the latest scientific ideas from anywhere with an internet connection, yet the world is not flat. Economic opportunity is highly unequally distributed, with technological innovation concentrated, not just in a few highly developed nations, but in very specific cities and regions within those nations. Information may travel at the speed of light, but know-how moves with people, and the result is that there is a very distinct geography of science and innovation.

The discussions we have about innovation reflect the data we collect, and because we collect data at the level of nation states we think of the nation as the right unit to analyse science and innovation at. But it isn’t obvious that this must be the case.

Instead, we should talk about an “innovation system” – the collection of people and institutions who collaborate, informally or formally, to create ideas, assimilate them from elsewhere, and turn them into value.

These systems can be transnational. Multinational companies represent such a transnational innovation systems, with manufacturing and R&D sites across the world linked by formal management systems and the mobility of people. Beyond the formal limits of a single multinational, there is a penumbra of companies supplying goods and services, and of business customers, all of whom help drive innovation. Think, for example, of the leading semiconductor company TSMC. This sits at the centre of a global network of highly innovative companies. Some are providing inputs to the production process, including the suppliers of highly sophisticated equipment, like the Netherlands’s ASML, and the suppliers of materials of enormous purity. Meanwhile customers such as Apple, working with their designers in ARM, pressure TSMC to innovate to meet their very demanding requirements.

On the other hand, innovation systems can also be subnational in scale, driven by concentrations of institutions and infrastructure, and above all their attractiveness to people with the relevant skills. There are a couple of related concepts here.

One is the old idea, going back to the 19th century economist Alfred Marshall, of “industrial districts” – places where concentrations of related industries cluster. These can have deep historical roots and their evolution is strongly path dependent; close to my home, Sheffield has been a centre of production for steel and steel products since the Middle Ages. In Manchester, an early specialisation in textiles created a demand for chemicals, including fine chemicals like dyestuffs, from which a pharmaceutical industry subsequently emerged.

The other is the more recent phenomenon of science and technology based clusters – in the USA, Boston for biotech, and Silicon Valley for semiconductors and information technology; in Taiwan, Hsinchu for semiconductors and electronics hardware, in the UK, Cambridge for both biotech and ICT.

The success of these examples have led many policy makers around the world to try and create new clusters from scratch, without, it has to be said, universal success. To make a successful cluster, many ingredients have to come together – relevant research institutions, access to finance, strongly expanding markets for the cluster’s products (sometimes, as in the case of the early days of Silicon Valley, driven by very large scale government procurement).

Above all, there needs to be a concentration of appropriately skilled people. This includes high quality scientists, but scientists by themselves are not enough. There need to be high quality managers and financiers, skilled technicians and other intermediate skilled occupations. A successful cluster will have high quality institutions for developing skills at all levels, from research universities to technical colleges. It must also have a vibrant labour market, attracting skilled people from elsewhere, and with people going from job to job taking their know-how with them.

What is the role of research institutions in developing clusters and regions of highly productive technology-led industrial specialisation? I believe that the evidence suggests that a strong and relevant research base is a necessary, but perhaps not sufficient condition, for the success of a cluster. It’s certainly true that both in Boston MA and Cambridge UK those clusters built on a very long history of substantial investment in research in very strong research universities. Meanwhile, the government funded Institute Technology Research Institute was pivotal in getting the Hsinchu, Taiwan cluster established (TSMC was itself a spin-out company from ITRI).

The Hsinchu example shows that the key capability that R&D capacity provides isn’t always the generation of new ideas, but the ability to assimilate and integrate ideas from elsewhere – to provide “absorptive capacity”. The availability of skilled people and the spread of know-how between them is crucial to develop this.

Is there a more general relationship between R&D spending and productivity at a regional level? In the first section of this series, I drew attention to the very pronounced regional productivity disparities in the UK . These differences in regional productivity are mirrored in very substantial differences in regional R&D intensity, as Tom Forth and I detailed in our report “The Missing £4 billion”.

R&D spending in the market and non-market sectors by NUTS 2 region (except London presented at NUTS1 level). From “The Missing £4 billion”.

This plot shows three outliers – London and the two subregions containing Oxford and Cambridge, which between them account for 46 per cent of all public and charitable spending on R&D, but just 31 per cent of business R&D and 21 per cent of the population.
Another nine subregions show respectable levels of total R&D. These include Bristol, Hampshire, Derby, Bedford, Surrey and the West Midlands, Worcestershire and Cheshire. With the exception of East Scotland, all these subregions are characterised by above-average ratios of private to public sector R&D spending. Two subregions stand out for significant private sector R&D and almost no public sector activity – Cheshire, with its historic concentration of chemical and pharmaceutical industries, and Warwickshire, Herefordshire and Worcestershire. Then there is a long tail with much lower public and private investment in R&D, including all of Wales, Northern Ireland, the North of England, Lincolnshire, South West England beyond Bristol, and Kent and Essex in the South East.

This regional imbalance in R&D spending mirrors the regional disparities in economic productivity. The most prosperous and productive parts of the country – broadly, Greater Southeast England, comprising London, the Southeast, and parts of the East of England – have the greatest concentrations of R&D investment, while less productive regions in the North and Midlands, and in Wales and Northern Ireland, have substantially less investment in R&D. Curiously, the imbalance is greater for public sector R&D than in the private sector.

If investments in research and development do contribute to productivity growth, and the beneficial effect of those investments is at least in part geographically bounded, then the spatial aspects of the UK government’s R&D policies have been acting as an anti-regional policy for some decades.

To come next: part 3 – The institutional evolution of the UK’s research & innovation system.

The UK has a profound problem of regional disparities in productivity performance, with second tier cities that underperform compared to expectations based on their size, and deindustrialised towns and urban areas that have failed to find productive new economic roles. Productivity growth arises from innovation, taking that term in its widest sense, and formal research and development (R&D) is one underpinning of innovation, so it’s worth asking whether there is a link between geographical disparities in R&D intensity and regional economic underperformance.

The distribution of research and development investment in the UK – especially in the public sector – is currently highly skewed to the prosperous Greater South-East. London, together with the two subregions containing Oxford and Cambridge, account for 46% of all public and charitable spending on R&D, with 21% of the UK’s population. We know that there are substantial spillovers from public and private R&D; econometric estimates suggests that a 10% rise in public R&D would raise private total factor productivity growth by 0.03 percentage points per annum, with an estimated return on public R&D of 20% per annum, so a correlation between regional R&D intensity and productivity might be expected. But does it matter where the R&D is done?

R&D matters not just for the knowledge it generates and the inventions it produces, but in the capacity of firms to absorb new technology. It’s certainly possible to innovate without formal R&D – through the development of new business models, or through the acquisition of new equipment. But in the UK R&D still takes the largest share of firms’ innovation expenditure.

One key justification for public support of R&D is that firms are unable to capture the whole benefit of the research they undertake – there are “spillover” benefits to other firms that are able to copy the innovations of the leaders. The geographical aspect of these spillovers is captured in the importance of clusters, recognised in economic writing since the time of Alfred Marshall. A successful regional cluster draws on a set of collective resources and knowledge, much of it tacit, that drives innovations in both products and processes.

This set of collective resources has been called by US researchers Pisano & Shih the “industrial commons”. A successful industrial commons is rooted in large anchor companies & institutions, together with networks of supplying companies; it is characterized by both informal knowledge networks and formal institutions for R&D, training and skills. International examples include advanced manufacturing in Lombardy, Italy, ICT hardware in Hsinchu, Taiwan, and in the UK, biotechnology in Cambridge. A goal of regional economic policy should be to consciously attempt to rebuild the industrial commons in places where de-industrialisation has caused them to wither.

Public R&D in the UK is carried out in universities, and increasingly, in specialist research institutes such as the Crick Institute in London. In comparison to other developed nations, one type of institution that is relatively lacking in the UK are translational and applied research institutes such as the Fraunhofer Institutes in Germany, IMEC in Belgium and the Industrial Technology Research Institute in Taiwan. Such institutes may focus more on industry engagement, process innovation, the wider diffusion of existing innovations, and in skills development than is possible in institutions more focused on basic research, and they can play an important role in nucleating and developing an innovation ecosystem of the kind that can anchor an industrial commons.

Recent policy developments in the UK do give encouraging signs that some of these issues are being recognised. The UK’s Innovation Strategy, published in July 2021, stated that “we need to ensure more places in the UK host world-leading and globally connected innovation clusters, creating more jobs, growth and productivity in those areas”, while the October 2021 Comprehensive Spending Review announced a £5.2 billion increase in government R&D spending from FY 20/21 to 24/25, and made the important commitment that “the government will ensure that an increased share of the record increase in government spending on R&D over the SR21 period is invested outside the Greater South East”.

Further details for how this increase will be delivered are expected in the imminent “Levelling Up” White Paper. One possibility, signalled in the Budget, is that the Catapult Network might play an important role. These centres represent a recent UK initiative to create the kind of translational and applied research institutes discussed above; it would be valuable to develop these further in a way which more explicitly recognizes their potential for regional development.

The White Paper is being driven by the newly renamed Department of Levelling Up, Housing and Communities, but it will need support across the whole government, including not just the Department of Business, Energy and Industrial Strategy, but in other departments that have received substantial increases in their R&D budgets, especially Defence and Health and Social Care.

For increased R&D spending to have a material effect on the UK’s regional productivity imbalances, it will be important to avoid two pitfalls. The first is to recognise the importance of scale. Too often previous attempts to boost innovation in the regions – for example, by the English Regional Development Agencies in the 2000’s – have been worthwhile in themselves, but implemented at a scale too small to make a material difference to regional economies.

For example, the three Northern RDAs spent £157m on innovation in the three years of the 2004 spending review period – while government and HE R&D spending over the same period was £20.3 billion in total, of which £4 billion was in the North.

To make a material impact on regional inequality of R&D spending, the resources deployed need to be at least an order of magnitude bigger; a crude calculation shows that to level up per capita public spending on R&D across the UK to the levels currently achieved in the Greater Southeast, additional annual spending of more than £4 billion would be needed. If the government is serious about devoting a significant share of the £5.2 billion R&D uplift to “levelling up”, the possibility now exists to make a real change, without jeopardising the existing excellence of R&D clusters in the Greater SE.

The second is to ensure that spending priorities aren’t defined entirely “top-down”, from Whitehall or Swindon. To be effective in driving productivity growth, government spending on R&D must be deployed in a way that maximises its effect to “crowd in” private sector investment. This needs to be done in a way that works with the grain of local economies, building on the existing business base and complementing their existing assets and endowments. This will need local knowledge that it is unreasonable to expect national agencies to possess.

The current geographical imbalances in R&D spending across the UK are of long-standing, and they won’t change without a significant change in the way funding is allocated. One way of doing this would be simply to devolve government R&D funding to cities, regions and nations to make their own decisions in the light of their knowledge of local economies.

There are potential objections to this approach. Given the very patchy nature of devolution across the UK – and especially in England – places may lack institutions with the analytical capacity and the legitimacy to set priorities and make good funding decisions. There’s a further risk that a lack of coordination, between different regions and cities, and between cities and central government agencies, leads to duplication, unhelpful competition and lack of coherence with national policy and priorities.

The idea of an “innovation deal” provides a way forward that answers these potential objections. In an innovation deal, cities and regions would develop a strong institution to implement an evidence-based local innovation strategy. Such an agency should be based on a coalition of private sector actors, local government (e.g. Mayoral Combined Authorities) and regional R&D assets, and would give central government and its agencies confidence that there was a trusted local partner that would take responsibility for implementing an innovation strategy and developing the region’s innovation ecosystem.

These agencies would give a robust mechanism whereby central government and cities and regions could work together to co-create a set of priorities for those new investments, many of which would be focused on translational research and skills development, that would both be most effective for improving regional productivity, while at the same time supporting national innovation priorities, such as the 2050 Net Zero target and a drive to reduce inequalities in health outcomes across the nation.

In Greater Manchester, a private sector led partnership of business, the Mayoral Combined Authority, and universities has come together to create “Innovation GM”, with an invitation to central government to work with them to make R&D led levelling-up of regional productivity a reality. Other cities and regions are engaged in similar initiatives, so there is now a chance to inject a new, place-led, dimension into innovation policy.

The substantial uplift in R&D funding announced in the October 2021 budget, together with the commitment to spend more of this uplift outside the Greater Southeast, offers a once-in-a-generation chance to make a material difference to the UK’s persistent imbalances in R&D spending. Innovation deals with cities and regions offer mechanisms for maximising the impact of this spending uplift on regional productivity.