Is the UK economy more R&D intensive than we’ve thought?

1. On the discrepancy between ONS and HMRC estimates of business R&D.

In the UK, there are two ways in which the total amount of business R&D (BERD) is measured. The Office for National Statistics conducts an annual survey of business, in which a sample of firms is asked to report how much R&D has been carried out. Meanwhile firms can report what R&D they have carried out to the taxman – HMRC – in order to claim R&D tax credits, which according to circumstances can be a reduction of their liability for corporation tax, or an actual cash payment. In recent years, the two measures of business R&D have increasingly diverged, with substantially more R&D expenditure being claimed for tax credits than is reported in the BERD survey.

The divergence between HM Revenue and Customs (HMRC) and Business enterprise research and development (BERD) estimates of research and development (R&D) expenditure. Source: ONS.

The ONS has been looking into this divergence, and has recently published a note which concludes that the primary reason for the discrepancy is an undersampling of the small business population. On this basis, it has adjusted its previous estimate for business R&D substantially upwards – in 2020, the revision is from £26.9 bn to £43 bn. In future years, ONS will introduce improved, more robust, methodologies that will include a wider range of SMEs in the sample they survey.

In principle, there could be two possible causes for the growing divergence between the total business R&D recorded by the ONS BERD survey and the amounts underlying claims to HMRC for R&D tax credits:

a. The incentives of R&D tax credits have caused businesses to stretch the definition of R&D so they can get money for activities that are part of normal business (e.g. market research, working out how to use new equipment). This is exacerbated by the growth of an industry of consultants offering their services to firms to help them claim this money (in return for a %).

b. The ONS survey of firms (the BERD survey) has systematically undersampled a population of small and medium enterprises (SMEs), which turn out to have more R&D activity than previously believed.

In favour of (a) – the discrepancy between the two measures hasn’t been entirely static, as you’d expect if it was simply a question of missing a population of firms who had always been doing R&D at a constant rate, but who have only just been discovered. The gap has risen from £7.3 bn in 2014, to £16.6 bn in 2018. So for this explanation to hold, we need to believe not only that there is an existing population of SMEs carrying out R&D that has previously been undetected, but that this population has been substantially growing. Is R&D growth in the SME sector at a rate of £2.3 bn a year plausible? I’m not sure.

Moreover, the incentives for stretching the definition of R&D to claim free money are obvious. HMRC accept that some claims are outright fraudulent, estimating that 4.9% of the cost of the scheme is attributable to error and fraud. But there’s a big grey area between outright fraud and creative interpretation of the “Frascati” definitions of R&D.

ONS argues in favour of (b), backing this up with a detailed comparison of the microdata from the ONS survey and HMRCs returns. To add some anecdotal support, work in Greater Manchester in collaboration with a data science consultancy does seem to have identified a population of innovative SMEs in GM which has previously remained invisible, in the sense that they are firms who don’t engage with universities or with Innovate UK.

In truth, the real answer is probably some mixture of the two. We’ll learn more once the new methodology has produced a complete data set identifying the sectors and geographical locations of R&D performing firms.

2. Policy implications

Figures for total R&D spending (including both business and public sector R&D) as a proportion of GDP provide a useful measure of the overall research intensity of the UK economy and form the basis for international comparisons. The previous figure for R&D intensity – about 1.7% – put the UK between the Czech Republic and Italy. The new estimates suggest a revised figure of 2.4%, which would put the UK roughly on a par with Belgium, slightly above France, but behind the USA and Germany, and still a long way behind leaders like Korea and Israel. Of course, when making these international comparisons, a natural question is how accurate are the R&D statistics in these other countries. This is a good question that could be investigated by OECD, who collate international R&D statistics.

The international comparison has driven a target for R&D intensity that the government committed to – that it would achieve an R&D intensity equal to the OECD average. At the time when the target was formulated this average was indeed equal to 2.4%. However, the OECD average is a moving target since other countries are increasing their own R&D – it’s now above 2.5%. One can also ask whether a target to achieve international mediocrity is stretching enough.

There are more fundamental issues with the idea of having an R&D intensity target at all. One quirk of expressing the target as a % of GDP is that one can achieve it by driving down the denominator; certainly GDP growth in the UK has been disappointing for the last 12 years, as the Prime Minister has reminded us. One could argue that a numerical target for R&D is arbitrary and one should concentrate more on the instrumental outcomes one wants to achieve from the research – higher growth, more rapid and cost effective progress towards net zero, better population health outcomes etc. As I wrote myself recently in my survey of the UK R&D landscape:

“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 it was significantly higher.”

Perhaps the most problematic implication of a BERD upgrade is the enduring puzzle that productivity growth remains very slow. This extra, previously unrecorded R&D, doesn’t seem to have translated into productivity growth as we would expect.

This raises the broader question of why we think the government should support business R&D at all, whether through R&D tax credits or through other means. The classical argument is that private sector R&D leads to wider benefits from the economy that aren’t captured by the firms that make the investments, so in the absence of government firms will invest less in R&D that would be socially optimal. This leads to the question of whether all kinds of R&D, in all kinds of company (e.g. large and small) lead to equal degrees of wider spillover effects (and the same question can be asked of intangible investments more generally). If the kinds of R&D that are now being revealed with the new methodology do have smaller spillovers than other types, one might ask what kind of interventions could improve those.

3. Political implications

As others have observed, the chief danger of the revision is that in times of fiscal retrenchment, the government could declare “mission accomplished” and delay or cancel increases in public R&D. This danger seems very real given the direction of the current government. The opposition, on the other hand, has called for an R&D target of 3% of GDP, so there is plenty of room there.

There is an argument that the revision suggests that public R&D is even more effective than we thought in generating private sector R&D – the leverage effect is stronger than we thought. For this argument to be convincing, we’d need to understand the degree to which the companies doing this R&D are connected to the wider innovation system. But it doesn’t then support the wider argument for R&D as a driver of productivity growth – we have the R&D intensity we aspired to, so why aren’t we seeing the benefits in the productivity figures?

There are possible arguments that our focus in business R&D has been too much on the big incumbents – the GSKs and Rolls Royces – whose R&D is very visible. On the other hand, this connects to the long-running question of why we don’t have more of those big incumbents? At this point, we should recall that there are only two UK companies in the world top-100 of R&D performers – AstraZeneca and GSK. So why aren’t some of these previously unseen R&D intensive companies scaling up to become the new big players?

There is much yet to understand here.

An index of issues in UK science and innovation policy – part 7: Horizon Europe (and what might replace it) and ARIA

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 the third part, I discussed the institutional landscape of R&D in the UK, looking at where R&D gets done in the UK.

In the fourth part, looking at the funding system, I considered who pays for R&D, and how decisions are made about what R&D to do.

In the fifth part, I looked in more detail at UK Research and Innovation, the government’s main agency for funding academic science.

In the sixth part, I looked at the other routes that the UK government funds R&D, particularly through government departments.

In this, the final section of my survey of the routes by which the UK government funds R&D, I turn to two areas with the most uncertainty. The first of these is the future of the UK’s participation in the EU Horizon programme. I’ll discuss the distinctive roles of EU funding, and what might replace it in the increasingly likely scenario that the UK is not able to associate. The second is the new agency the Advanced Research and Invention Agency, set up by Act of Parliament in early 2022, and currently just establishing itself; here I’ll suggest some early thoughts about the role this might play in the overall system.

7.1. Horizon Europe – past participation and future prospects of association

In the past, the UK government has funded R&D indirectly through the EU Horizon programme, which provided research grants to UK researchers in HE and to UK businesses, often as part of larger collaborative programmes with researchers and businesses from elsewhere in Europe. EU research funding to UK universities and businesses has been on a very material scale; of course ultimately this money came from the UK’s contributions to the overall budget. In the UK’s national accounts, this was accounted for by a notional cost that reached a high point of £1.46 billion in 2019.

Because EU research money was allocated competitively, there wasn’t a direct relationship between the money the UK put into the budget and the research money the UK received. In fact, because of the UK’s relative research strength, the UK got back significantly more money than it put in. According to an analysis of the 2007-2013 cycle, the UK’s indicative contribution to the budget was €5.4 bn, but it received €8.8 bn of funding for research, development and innovation.

After the UK decided to leave the EU, a consensus developed that the UK should seek to stay associated with the EU’s R&D programmes, an option already taken up by other non-member states such as Switzerland, Norway and Israel. The Trade and Cooperation Agreement between the EU and the UK contained a draft protocol establishing the UK’s association with Horizon Europe (with the exception of the European Innovation Council). “The Parties affirm that the draft protocols set out below have been agreed in principle and will be submitted to the Specialised Committee on Participation in Union Programmes for discussion and adoption. The United Kingdom and European Union reserve their right to reconsider participation in the programmes, activities and services listed in Protocols [I and II] before they are adopted since the legal instruments governing the Union programmes and activities may be subject to change. The draft protocols may also need to be amended to ensure their compliance with these instruments as adopted.”

If the UK does associate, it will need to contribute financially to the Horizon Europe programme. In contrast to the situation when the UK was a member state, when it received more back from EU R&D programmes than it notionally contributed, as an associated country it would need to cover not only the full cost of R&D activities funded in the UK through Horizon UK, but also a substantial additional overhead. The money for this was set aside in the 2021 Comprehensive Spending Review; it amounted to £1.3 bn in 21/22, rising to £2.1bn 24/25.

As I write, the draft protocol has not yet been finalised by the EU side, and given the wider political situation, it seems increasingly unlikely that it will be finalised any time soon. The UK government made a commitment at the time of the 2021 CSR that, in the event of the UK not associating, the money set aside would be retained in the science budget, redeployed in a set of programmes that reproduced the benefits of EU association – the so-called “Plan B”.

On July 20th, the government released more details of “Plan B”, restating the commitment to use the Horizon money for alternative science programmes. “In the event we are unable to associate, we will use the funding allocated to Horizon Europe at the 2021 Spending Review to build on our existing R&D programmes with flagship new domestic and international research and innovation investments to support top talent, drive end-to-end innovation and foster international collaboration with EU and global partners.”

7.2. The Three Pillars of Horizon Europe

The EU’s R&D programmes are agreed for seven year cycles; the current cycle – Horizon Europe – assigns €95.5 billion for the period from 2021-27. The overall goals of the programme are specified in terms of the strategic goals of the European Union – tackling climate change, meeting the UN’s Sustainable Development Goals, and boosting the EU’s competitiveness and economic growth.

To support these broad goals, Horizon Europe supports three “Pillars”. The first of these is “Excellent Science”. This includes the European Research Council, together with schemes supporting early career researchers and collaborative research and training for PhD students. The European Research Council supports investigator led basic science and humanities research; this has a very high reputation in the scientific community, for reasons I’ll discuss below. However, it is important to remember that it is a relatively small part of the overall Horizon programme – it’s been allocated €16 bn in the current cycle.

The second pillar is for “Global Challenges and European Industrial Competitiveness”, which supports research collaborations built around sectors, challenges and missions. These typically involve both academic and industrial researchers in multinational collaborations.

The third pillar is new to the current cycle – “Innovative Europe” is focused on developing more high tech start-up companies, with a new “European Innovation Council”, a “European Institute of Innovation and Technology”, and support for regional innovation ecosystems. In the event of association, the UK will opt out of the “EIC accelerator” – that part of pillar 3 which provides investment funding to companies.

Underpinning the whole programme is an aspiration to create a “European Research Area”, with free and easy movement of people and research groups across the continent, lubricated by exchange schemes for scientists (particularly at early career stages) and cross-border transferability of grants. In the past the UK has benefitted from this, with a scientific and institutional infrastructure that has made the country an attractive destination for scientists from other European countries.

7.3. Why scientists love the European Research Council

Amongst elite scientists in the UK, the main driving force for an enthusiasm for the UK to associate with Horizon Europe is to be able to continue to participate in the European Research Council. This, in part, simply reflects how successful the UK has been in winning competitive funding through this route. For example, in the competition for the most established researchers – the Advanced Grants, which provide €2.5 million over 5 years for a single investigator and their team – UK based researchers won 22% of all grants between 2008 and 2020, compared to 16% and 12% to the two next most successful nations, Germany and France respectively (source).

But beyond the self-interest of UK scientists, why is the European Research Council so highly thought of? It has a clarity of purpose, with a single-minded focus on investigator driven basic research, with no predetermined priorities, but with an emphasis on supporting high risk/high gain proposals. It is correctly perceived as highly competitive, attracting proposals from the most outstanding researchers across Europe – currently its grantees have won nine Nobel prizes. Its decisions are made by a peer review process which is widely considered to be fair, rigorous and well executed.

Peer review isn’t easy to do well. In section 2 of this series, in discussing a possible world-wide slow-down in scientific productivity, I mentioned the suggestion that peer review can lead to conservatism and can suppress radical new ideas. In section 5, I suggested that there was a lack of confidence in the scientific community in the credibility of the peer review systems that the UK Research Councils run. In the light of these concerns, it’s worth asking what the European Research Council gets right about peer review (while recognising that even the ERC’s process is probably not perfect, for example in tricky areas like handling highly interdisciplinary proposals).

In my opinion, there’s nothing magic about the ERC’s approach to peer review. The process involves committees of experts (and, to declare a personal interest, I recently served on the expert panel for Advanced Grants in my own field of Condensed Matter Physics). Those panels invite written comments on proposals from worldwide specialists they choose for their appropriateness to judge individual proposals. In a final meeting, the panels consider the referees’ reports, with interviews with the proposers to give them the chance to respond to criticisms, and come to a collective judgement about which proposals to give highest priority for funding.

What makes this work? The starting point must be high quality panels, with a good range of expertise, the ability to take a broad view, and an effective chair. At its best, the ERC has developed a virtuous circle, in which the high quality of the proposals means that outstanding scientists are prepared to put the time in to serve on panels, while in turn it is the credibility of the process that attracts applications from the best scientists from across a whole continent. It is the researchers on the panels who select the remote referees, using their knowledge of the field to select the most appropriate ones, and then applying their own critical scientific judgement to resolve any discrepancies and differences of opinion between referees. Sufficient time is set aside for in-depth decisions – a single proposal round will involve two panel meetings, each of which can take up to a week.

Meanwhile administrative support is provided by high quality subject specialists working full-time for ERC as programme managers. In the UK, the research councils were forced to make serious cuts on their office staff in the early 2010s, because it was mistakenly believed that these subject specialists represented an administrative overhead, rather than being a precondition for the most effective allocation of R&D funding. This mistake should not be repeated (and, indeed, should be corrected).

7.4. “Plan B” for non-association

The “Plan B” document published this July (Supporting UK R&D and collaborative research beyond European programmes) usefully sets out some principles for how the money set aside for association with Horizon Europe will be used in the event that association doesn’t materialise. But details of implementation remain sketchy, and delivery may prove challenging to the existing agencies and bodies that will be charged with executing these schemes.

These agencies are mostly in UKRI, with a particularly important role for Innovate UK, with the National Academies potentially playing a role in the “talent” schemes. These are largely fellowships at various career stages, that will be in part fill some of the role of the European Research Council, though without the benefits of the institutional strength that ERC has developed, as outlined in the last section.

The emphasis of measures taken so far has been on stabilising the system, in particular keeping in the UK outstanding scientists who have been awarded ERC grants, but who can’t take them up without moving to an EU member state. The commitment has been made to guarantee the funding of any Horizon UK grant awarded to UK based researchers for the lifetime of the grant. It is going to be important to ensure that this happens without bureaucratic hurdles, in perception or reality, as HE institutions in the EU will be making energetic efforts to recruit these researchers.

The last point emphasises the importance of making sure the UK remains an attractive destination for overseas scientists, and promoting researcher mobility to make sure that the UK is centrally integrated in international networks of expertise. The plan here remains vague, but states the intention to fund “bottom-up collaborations with researchers in partner countries around the globe; multilateral and bilateral collaborations; and Third Country Participation in Horizon Europe”.

Measures for supporting business R&D will be funnelled through Innovate UK; it seems these will largely build on existing schemes. The aim is to support both domestic and international collaborations. The international dimension will be particularly important in supporting high technology SMEs to participate in trans-national supply chains and innovation systems, many of which, of course, involve EU member states.

The local and regional dimension of support for innovation systems is also important. EU funding – including structural funding as well as direct R&D funding – has been important in developing clusters in economically lagging parts of the UK, such as Northern England, Wales and Northern Ireland. The Shared Prosperity Fund is likely to offer only a partial substitute for EU structural funds, so it is encouraging to see a commitment to drive “the development of emerging clusters throughout the UK”, and the statement that the “Plan B” portfolio “will support our mission of levelling up the UK and build on our commitment to increase domestic R&D investment outside of the Greater Southeast by at least a third over the spending review period and at least 40% by 2030.

Moving forward with the association of the UK with Horizon Europe would seem to require a breakthrough in wider EU/UK relations that currently doesn’t seem very likely. In the absence of such a breakthrough, the priority needs to be for the new administration to confirm the funding of plan B, and move very quickly to turn what are currently rather high level plans into deliverable programmes.

7.5 The Advanced Research and Invention Agency (ARIA)

The most recent addition to the UK’s R&D funding landscape is the new funding agency, the Advanced Research and Invention Agency. This was established by an Act of Parliament, finalised in early 2022. It was a personal priority of the Prime Minister’s former chief advisor, Dominic Cummings, who emphasised the need to have a funding agency with the freedom to take big risks, modelled loosely on the US agency ARPA. ARPA was set up in the late 1950’s to ensure technological supremacy for the US armed forces, and research it supported has underpinned world-changing technological innovations such as the internet, the satellite location system that GPS evolved from, and stealth aircraft.

The Act of Parliament establishing ARIA does indeed give a huge amount of latitude in defining its goals and modes of operation; much is left to the discretion of the CEO and the board. The major lever the government retains is the level of funding allocated; the initial commitment is to spend £800m by 24/25. This is a relatively small amount seen in the context of the £20 billion total R&D budget planned for 24/25. Nonetheless, given that we’re already halfway through 22/23, that leaves only two years to get some entirely new programmes off the ground.

The Act does give the Secretary of State powers of Intervention on grounds of national security, and it is easy to imagine that these could be used quite widely. Nonetheless, there is some irony in the way the independence from government that was taken away from the Research Councils has been given to this new agency.

Given that the appointments of the Chief Executive and Chair have only relatively recently been announced, there is not yet clarity about what the new agency will do. I outlined my own views about how such an agency should operate in a piece from January 2020, UK ARPA: an experiment in science policy.

As I wrote then, “If we want to support visionary research, whose applications may be 10-20 years away, we should be prepared to be innovative – even experimental – in the way we fund research. And just as we need to be prepared for research not to work out as planned, we should be prepared to take some risks in the way we support it, especially if the result is less bureaucracy. There are some lessons to take from the long (and, it needs to be stressed, not always successful) history of ARPA/DARPA. To start with its operating philosophy, an agency inspired by ARPA should be built around the vision of the programme managers. But the operating philosophy needs to be underpinned by as enduring mission and clarity about who the primary beneficiaries of the research should be. And finally, there needs to be a deep understanding of how the agency fits into a wider innovation landscape.”

My starting point would be to recognise that pluralism & diversity in funding agencies is a good in itself, and we need to innovate in the way we support innovation. ARPA at its best represented an approach to funding where the focus was on the programme manager – or better, programme leader as the creative force. These leaders should be tasked with assembling and orchestrating teams of talented people to achieve ambitious programmes with concrete goals.

The archetype of the visionary leader is perhaps J.C.R. Licklider, who accepted a position with ARPA in 1962, because if offered an opportunity to realise his vision of computer networking. The research he funded at ARPA laid many of the foundations of modern computing, including the principles of networking that led to the internet, and the principles of human/computer interaction that were further developed a the XEROX PARC laboratory to give us the graphical interfaces that we all take for granted together.

ARPA benefited from a complete clarity of mission – its role was to ensure that the US armed forces enjoyed technological supremacy over any potential rival. That makes clear who its beneficiaries should be – the US Armed Forces.

What should ARIA’s mission be, and who are its beneficiaries? This remains to be decided, but from my perspective it is important to make clear that its primary beneficiaries should neither be the academic community, nor industry. Both communities will be crucial in delivering the mission, but it should not be primarily for their benefit. Instead, I believe that ARIA should focus on one, or a subset of one, of the important strategic goals that the UK state currently faces, as I outlined in the first part of this series.

For me, the most obvious candidate is the challenge of driving down the cost of achieving net zero greenhouse gas emissions to a point where the global transition can be driven by economics, rather than politics.

Up next…

In the next and final part of this series, I will attempt to sum up, with some key priorities for the UK R&D system.

Edited 20 Sept to make clear that the proposed opt-out from Pillar 3 of Horizon Europe only covers the European Innovation Council Fund. My thanks to Martin Smith for pointing this out.

An index of issues in UK science and innovation policy – part 5: UK Research and Innovation

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 the third part, I discussed the institutional landscape of R&D in the UK, looking at where R&D gets done in the UK.

In the fourth part, looking at the funding system, I considered who pays for R&D, and how decisions are made about what R&D to do.

Here, I go on to look in more detail at the agencies that allocate R&D money on behalf of the government, examining the range of different purposes those agencies must meet and the constraints they operate under.

This funding system has seen some really substantial changes over the last few years, with the introduction of a new agency, UK Research and Innovation (UKRI), in 2018, and will see yet more in coming years, for example through the new agency the Advanced Research and Innovation Agency (ARIA). The future of the UK’s association with the European Union research funding programme, Horizon Europe, also remains in question. This makes it all the more timely to try and think about the funding system as a whole.

In this section, (after a brief detour to talk about R&D tax credits) I will start with the agencies that make up UK Research and Innovation. The next section will go on to consider the new agency ARIA, European funding and what might replace it, and R&D funding by other government departments.

5.1 Tax incentives for R&D

I begin my discussion, not with UKRI, but with HM Treasury, which is now one of the UK government’s largest direct funders of R&D, through the R&D tax credit schemes, which had a cost to government of £7.4 billion in FY 2019/2020. This cost has increased dramatically in recent years – in 2010/11, it was just £1.1 billion, rising to £3 billion by 2014/15. This is as a result both of increases in the scheme’s generosity, and of increases in take-up by business.

The way R&D tax credits work is that firms report their spending on R&D to the government, which partially offsets the cost of the R&D by reducing the amount of corporation tax the firm has to pay. Corporation tax is paid on the profits made by a company; this is potentially a difficulty for start-ups in the stage where they are investing money in R&D before significant revenues arrive. In these circumstances, where companies are not yet making a profit and aren’t liable for corporation tax, the government partially recompenses them for their R&D expenses with a cash payment.

The logic behind R&D tax credits is simple. Economists argue that firms don’t capture all the benefits to society that doing R&D brings, so left to itself the private sector will invest less in R&D than is optimal for the economy more widely. R&D tax credits correct this market failure, with the state in effect paying for the spillovers that benefit the economy more widely. But, the argument goes, the market knows what people want better than the government, so it’s necessary to funnel money directly to businesses seeking to exploit innovation to meet market opportunities that they have detected.

Supporting business R&D this way means that there’s no need for the government to make any decisions about what kind of R&D to support; there’s no danger of being accused of trying to “pick winners”. This means that the scheme is very cheap to administer, and there is no need for the government agencies to have any specialist expertise or to develop a strategy.

What are the downsides? One is that the scheme almost certainly has a significant deadweight cost – in effect, giving companies money for R&D they would have done anyway. There’s a huge incentive for companies – and the industry of consultants that has grown up to help them claim this government money – to stretch the definition of R&D to include the kind of business as usual that isn’t likely to generate much in the way of spillovers for the economy more widely. And, of course, there is a very real risk of outright fraud.

One strong signal that all is not right with the scheme is a growing mismatch between the total amount of business R&D that forms the basis for these claims, and the independent ONS estimate of Business R&D that comes from survey data. In 2014/15, R&D tax credits were claimed based on £24.4 billions worth of R&D, a bit more than ONS’s estimate of £20 billion for business R&D. But by 2019/20, the comparison dramatically diverges: the ONS estimate for business R&D was £25 billion, but businesses told the taxman that they’d done R&D worth nearly double that, £47.5 billion.

There are differences in definition between the two measures of R&D. For example, it is possible to claim tax credits for R&D that is carried out abroad. This doesn’t make a lot of sense from the economic point of view. It is suggested that the ONS survey undercounts R&D in the financial services and insurance sector; this, however, accounted for only £3 billion (7%) of R&D expenditure for tax credits in the year ending March 2019. But neither of these factors seem sufficient to explain the gulf between the two measures.

The R&D tax credit scheme is currently under review by HM Treasury. Crucial background for this review is a recent paper by David Connell, Is the UK’s flagship industrial policy a costly failure? (PDF). (Connell’s answer to his own question? “Yes”).

But even if this kind of scheme was perfectly run, there is a more fundamental question. This approach to funding R&D in business leaves the choice of what research to do entirely to the businesses, with no attempt at all to align the spending with the priorities of the state. This makes it attractive for governments that don’t have any priorities or strategic goals.

5.2 UKRI: the Research Councils

The 2017 Higher Education and Research Act created UK Research and Innovation (UKRI) as an umbrella organisation into which were folded the existing seven research councils, The innovation agency Innovate UK, and Research England, which looks after the higher education research system in England (though not in the devolved nations). I’ll discuss the goals of this reorganisation, and the degree to which it has succeeded, below. But first I want to discuss the research councils themselves.

As discussed in the last section, the Research Councils arose as expert panels to advise government on how to fund research outside government departments. For most of the twentieth century, they constituted a relatively small part of the government’s overall R&D effort. However, in recent years their relative importance in the system has grown – my plot shows the fraction of government R&D expenditure managed by the research councils from 1986 onwards. This shows a marked increase from 1986 to 1994, reflecting the run-down of government applied research in the late Thatcher period, and a further increase in the early 2000’s, reflecting the New Labour government’s simultaneous increase in research council budgets and decrease in departmental R&D budgets.

Fraction of total government R&D spending in the control of research councils. Data: ONS Research and Development expenditure by the UK government (2009 – 2019), BIS Science Engineering and Technology Indicators (before 2009).

As the research councils have become more dominant in the UK’s research system, their visibility – and the expectations placed on them – has increased. This has led to a progressive widening in the range of organisational goals they have.

For most academic researchers, the core goal of the research councils is to keep research in the academic disciplines moving forward. The very organisation and naming of research councils reflects this; the seven research councils are arranged on a disciplinary basis, BBSRC, covering biology & biotechnology, MRC, focusing on medical research; EPSRC covering chemistry, maths, engineering, and physics, (apart from astronomy & high energy physics, which are covered by STFC); NERC ,environmental science; ESRC, social science; and AHRC the arts and humanities.

The core mechanism for achieving this goal is called “responsive mode” – essentially, inviting proposals from researchers and seeing what comes in, allocating funding to the best proposals as judged by peer review. The difficulty of running an effective peer review process shouldn’t be underestimated – quite a lot of domain knowledge is needed to be find the right referees for a given proposal, and in putting together expert panels to rank a batch of proposals in a single sub-discipline on the basis of the referees’ reports.

Much of the most innovative research is not to be found in single disciplines, though, but where the insights of different disciplines are brought together. But interdisciplinary research is more difficult to judge and support; there’s always the potential for proposals to potential for proposals to fall between the cracks. The cracks can be between the single discipline based panels within research councils; for interdisciplinary proposals, it’s all too common to find referees who will dismiss the part of the proposal they understand, while failing to see the added value that bringing together ideas and methods from different disciplines.

This is perhaps even more difficult for proposals that fall between the remits of different research councils, where the budgetary incentives are against such research. Take a proposal to apply machine learning to a problem in medical science; it’s all too tempting for the Medical Research Council to say, this is all very interesting, but it’s the business of the Engineering and Physical Research Council to support machine learning proposals (and it should come from their budget), while the EPSRC says the same thing in reverse.

In the past, interdisciplinary proposals were handled through cross-council programmes overseen by the coordinating body RCUK. Most of these cross-council programmes were motivated by societal issues rather than academic priorities; they can be thought of as “mission-driven” research.

Following the formation of UKRI, the Strategic Priorities Fund was introduced to fund such proposals in thematic areas – my example would have fallen within the remit of “AI and Data Science for Science, Engineering, Health and Government”. Over the current budget period, according to the recent UKRI allocations document (PDF), the Strategic Priorities Fund is being wound down; there is not yet clarity in the recent UKRI strategy how cross-council research will be funded in the future.

Research Councils don’t just respond to the demands of the UK’s research community; they also actively shape the overall landscape. This is inevitable given their importance in the overall system; by what the Research Councils choose to fund, they influence the priorities both of institutions and individual researchers. If a university perceives that a particular discipline is no longer in favour with the research councils, they will be less likely to recruit academics in that area, while the choices of research direction of individual researchers will be influenced by what they think they can get funded.

The influence Research Councils have on the research landscape is inevitable. The issue is how purposefully the Councils use it, and how much their choices are informed by any kind of larger national strategy.

Beyond their role funding individual researchers and groups in universities, the Research Councils are also responsible for maintaining hard and soft infrastructures. Hard research infrastructures include research facilities that are too large for an individual research group to manage – for example high performance computing, large scale neutron and x-ray sources, telescopes and research ships; soft infrastructures, including large scale data sets and long-running observational programmes, are arguably less well cared for.

In addition, there are a number of national laboratories, often with very long histories, that have ended up under the care of individual research councils – for example the British Antarctic Survey and the British Geological Survey fall into NERC’s stewardship, while the BBSRC’s Pirbright Institute has been a leader in studying animal diseases for a century.

The issue here is that these institutes often have national strategic purposes distinct from the focus on the high-status discovery science that many in the academic community think should be the core function of the research councils. This puts the survival of these institutes in periods of tight budgets under pressure, and over the years a number of such institutes have shrunk, merged, or been transferred into the university sector, where they end up under inevitable pressure to conform to the norms of academic research. On the other hand, entirely non-scientific pressures to keep certain facilities funded can lead to political influences overriding scientific factors in decision making.

Research councils also play an important role at the upper end of the skills system, by supporting PhD programmes in universities. A high proportion of UK-domiciled PhD students are supported financially by the research councils, and recent years have seen this aspect of their work being put on a more formal footing, by the creation of “Centres of Doctoral Training”, often in collaboration with businesses, where the research training that has traditionally formed the core of a PhD programme is combined with training in more transferrable and business-focused skills.

The role of research councils in driving economic growth has become much more politically prominent in the last couple of decades as their relative importance in the overall research system has grown. The case for sustaining science spending during the early 2010’s period of austerity was based on its claimed importance for economic growth, and the increases in public spending that began in the May government were explicitly tied to the need to restore productivity growth to the UK economy.

The economic role of research councils operates both at a strategic level, shaping the research landscape to meet the needs of R&D intensive businesses, and at the operational level, encouraging research partnerships between academia and business in research projects and PhD training programmes, and promoting spin-out companies that use intellectual property created by the academic research they support.

This growth in prominence of the “impact agenda”, as it has come to be known, has been unpopular with many academics, who interpret it as a shift away from basic, discovery science in favour of more applied research. But it’s more accurate to see it in the wider context of the way much larger government applied research programmes were run-down in the 80’s, 90’s and 00’s, and the perceived vacuum that left.

To sum up, Research Councils have the following core goals:
1. Advancing disciplinary-based research through competitively awarded research grants
2. Promoting interdisciplinary and mission-driven research
3. Shaping the UK’s overall R&D landscape
4. Maintaining an infrastructure of research facilities and institutes
5. Driving economic growth by supporting research in collaboration with UK businesss and promoting spin-outs exploiting IP developed through research they support
6. Maintaining a pipeline of highly skilled people by supporting PhD programmes

In balancing these goals, they need to satisfy four quite different constituencies.

  • They need the research community, as the source of insights about the directions in which science and technology are heading, to provide the expertise that the peer review system depends on, and, most importantly, as the people who actually carry out the research they fund.
  • But they have to respond to the government, as the organisation that writes the cheques, making the case for supporting research, in competition with the many more pressing political priorities that governments may have.
  • If they are to be convincing in their arguments that the research they support contributes to economic growth, they have to work in partnership with the businesses that can turn research progress into new and improved products and services.
  • And they must reflect the wider values of society.

It is a challenge to create a structure which maps onto this many goals, and which needs to respond to such a wide variety of stakeholders.

5.3 UKRI: Innovate UK

Besides the research councils, UKRI now incorporates the innovation agency Innovate UK. This was formed as a free standing agency in the late 2000’s, as the Technology Strategy Board, taking a number of funding instruments for R&D in business from the Department of Trade and Industry. Now it operates a combination of sector based networking organisations (the Knowledge Transfer Networks), small scale collaborative grants for industry and academia (Knowledge Transfer Partnerships), and larger scale grants for business R&D (including the SME focused, responsive SMART grants). It also is responsible for core funding of the Catapult network of translational R&D institutions.

The key principle underlying Innovate UK is that it is “business-led”. This puts clear water between it and the research councils, with their focus on funding research in universities. But it does lead to some tensions and dangers of its own. A close connection to businesses in R&D intensive sectors can lead to the danger of capture by incumbents, and raises the question of who speaks for emerging companies and sectors.

It would be natural to think of Innovate UK as a vehicle for implementing an industrial strategy (and its original name – the Technology Strategy Board – reflects this). A good case can be made that its sustained support for the automotive sector has played a significant role in that sector’s relative recovery.

But being perceived as an instrument of industrial strategy carries political risks. Innovate UK received a significant setback as an organisation in the first period of the 2015 Conservative majority government, when a Secretary of State opposed in principle to the idea of industrial strategy – Sajiv Javid – imposed significant cuts, and introduced a policy of replacing grants by loans.

A more fundamental question remains: who or what is a business-led innovation agency like Innovate UK for? One doesn’t go far in discussions like this without hearing the phrase “UK plc”, and the assertion that the role of Innovate UK is to make sure “UK plc” benefits from new technology.

But there is no UK plc. Fifty years ago, one might have talked about a national capitalism consisting of major industrial concerns based in the UK, quoted on the London stock market and largely owned by UK residents or their fund managers and pension funds. But we left that world behind in the 80’s and 90’s, when the UK embraced globalisation with an enthusiasm unmatched anywhere else.

Today, around half of our business R&D is done by overseas owned firms; this is a very high proportion in comparison to other similar sized developed economies. Very few UK owned firms are to be found amongst world R&D leaders – according to the EU R&D Scoreboard, only two UK firms are in the world top 100, the pharma companies GSK and AstraZeneca.

Large UK technology intensive companies, like GEC and ICI, were broken up and sold in the early 2000s. Exit and entry of companies isn’t a bad thing in a dynamic economy, but the UK hasn’t done well in sustaining and growing new companies. In ICT, the chip design house ARM was sold to the Japanese fund Softbank in 2016, while AI start-up DeepMind was bought by Google in 2014. In life sciences, the Cambridge spin-out Solexa, which developed the currently dominant technology for sequencing DNA, was bought by US company Illumina in 2007. A next generation sequencing technology has been developed by Oxford Nanopore, which remains a rare example of a non-software technology start-up determined to scale-up as a UK owned, UK based company, but its R&D investment remains about a factor of ten less than Illlumina’s.

The trajectory of two privately held companies is instructive. The electrical goods company Dyson was founded in 1991, and while it maintains significant manufacturing and R&D presence in the UK, it moved its headquarters to Singapore in 2019, together with a significant fraction of its R&D and engineering effort. The chemical company INEOS emerged from a buyout of the commodity chemical operations of ICI and BP; it moved its HQ from the UK to Switzerland in 2010 for tax reasons. It did move its tax domicile back to the UK in 2016, but it is today a global company whose manufacturing and R&D are mostly now in overseas locations.

So, with the UK’s industry base so dominated by multinationals with little or no natural allegiance to the UK, what is the role of a business-led innovation agency? Given the very high dependence of the UK’s innovation system on R&D carried out by overseas owned firms, Innovate UK’s role in attracting inward R&D intensive investment and keeping it anchored in the UK remains important. A focus on supporting new companies in scaling up is also crucial, but the possibility of these companies relocating to the USA or mainland Europe is a constant risk – and such a move may be entirely logical from a business point of view, by giving access to bigger markets and deeper ecosystems.

On the other hand, a new focus on resilience and security of supply, driven by the experience of the pandemic and much more threatening geopolitics, presents a whole set of new challenges for an innovation agency. While an attempt to retreat into some kind of “Juche UK” vision of self-sufficiency is obviously doomed, there may be a need to purposefully build industrial capacity in a few key areas where that capacity has been lost – as we have already seen with vaccine manufacture. In this environment, Innovate UK may need move a little away from being business led, and be more proactive in leading business.

5.4 Place based research and innovation funding

In section 2.4 of this series, I discussed the geography of innovation, highlighting the very regionally unbalanced distribution of R&D spending in the UK, and the relation this has to the UK’s profound regional disparities in economic performance. This has been recognised by the government, with a commitment to an increase in R&D intensity outside the Greater Southeast being identified as “Mission 2” in the Levelling Up White Paper (PDF). To support this, UKRI has been given a new organisational objective, to “Deliver economic, social, and cultural benefits from research and innovation to all of our citizens, including by developing research and innovation strengths across the UK in support of levelling up”.

This is a more significant change than it might appear, because in the past the key elements of UKRI have been committed to a “place blind” approach to funding. For the research councils, the primary consideration has always been “excellence”, while Innovate UK and its predecessor the Technology Strategy Board has up to now, always focused on the innovation landscape at a national level. These agencies now have an instruction to “increase consideration of local growth criteria and impact in R&D fund design.”

The one part of UKRI that does have a track record of thinking about local and regional innovation systems is Research England. Research England was formed in 2017 from the part of the Higher Education Funding Council of England that dealt with funding research in universities. As its name suggests, its writ runs only in England. Its function is devolved in Scotland, Wales and Northern Ireland, exercised there respectively by the Scottish Funding Council, the Higher Education Funding Council Wales, and the Northern Ireland Executive’s Department of the Economy.

Research England is responsible for the formula driven funding discussed in section 3.2 of this series; it runs the “Research Excellence Framework”, and then administers the formula by which the results of this exercise are converted into block grants to universities. In addition, it awards strategic funding for research infrastructure.

Research England has been responsible for delivering a specifically place-based funding mechanism, the “Strength in Places Fund”. The aim of this is to support existing or emerging innovation clusters across the UK (including in the devolved nations). After two funding rounds, to a total value of £316m, UKRI has decided not to continue this scheme beyond the 12 currently supported projects.

This means the only currently open explicitly place based intervention is the “Innovation Accelerator” pilot programme announced in the Levelling Up White Paper. In this £100 m is split between three city regions, Greater Manchester, Glasgow and West Midlands, “intended to boost economic growth by investing in R&D strengths, attracting new private investment, boosting innovation diffusion, and maximising the economic impact of R&D institutions.”

In practise, Innovate UK’s Catapult Centres have played a significant role in developing regional innovation clusters. But this has happened largely in an unplanned way; developing regional innovation capacity has not been an explicit part of their mission. Eoin O’Sullivan and I argued in this paper that it should be.

Finally, it’s worth mentioning the important role the European Union’s structural funds have played in supporting innovation activities in economically lagging parts of the UK, especially Wales, Northern Ireland, Cornwall, and parts of northern England. These funds will be partially replaced by the Shared Prosperity Fund, though it’s still not clear how that will work in practise, and how much emphasis on innovation it will have.

5.5 UKRI four years on

UKRI formally came into being on April 1st 2018, a product of the 2017 Higher Education and Research Act; its formation was prompted by the 2015 Nurse Review. To what extent have the goals of the Nurse Review been realised?

The central recommendation that Nurse made was to merge the seven existing research councils into a single organisation. The Research Councils were government organisations, but with a degree of institutional autonomy conferred by their status as “Royal Charter” bodies. The research councils were formally independent of each other, but in practise they would present a common front to central government for spending reviews, and an umbrella organisation – “Research Councils UK” – acted as a coordinating body, developing joint interdisciplinary programmes.

The effect of the Higher Education and Research Act was to merge all seven research councils into a single body, with one accounting officer. Two other, rather different, organisations were also folded into the overall structure – Research England, with its systemic oversight and funding of research in English universities, and Innovate UK. As I discussed in section 4.4, the act imposes much more direct control from central government on UKRI than had been the case for the research councils.

What was the Nurse review trying to achieve? In part, it was to create a closer strategic connection between the research landscape and central government, with a single organisation being better able to engage with and influence departments across the whole of government. Other motivations were operational – “reducing the complexity and increasing the agility of operations”. There was a hope that a single organisation would reduce bureaucracy and strengthen governance.

But a key motivation was to break down the walls between different parts of the scientific endeavour – “Establishing mechanisms to deal with cross-cutting issues such as the support of multi-disciplinary and inter-disciplinary research, grand challenges and the redistribution of resource between Research Councils in response to new developments, advances and priorities in the research endeavour”.

How effective has UKRI been at achieving these goals? The government has just published an independent review of UKRI by Sir David Grant.

I don’t intend to summarise the findings of this report in detail here; it’s well worth reading in full. In short, there are findings both of operational shortcomings, and a lack of strategic coherence. One very worrying finding is a combination of high staff turnover with poor results from staff surveys; any knowledge-based organisation relies on the commitment of highly qualified and experienced staff.

The lack of strategic coherence is associated with a muddled organisational architecture. The Grant reports concern “about the extent to which the board makes strategic decisions around the direction of UKRI which then translate into meaningful activity within the organisation. For example, there is little evidence that UKRI has made strategic decisions to prioritise particular goals and the bulk of spending has not shifted between different councils, activities within councils or activities across UKRI.”

The role of the “councils” of the constituent Research Councils is now not clear. Before UKRI was established, these were, in effect, the governing bodies of the individual Research Councils; in UKRI they are in effect advisory bodies to each council, but their role within the wider organisation isn’t well defined: to quote the Grant review, “across UKRI, there are over a hundred council members sorted by domain expertise but with no clear way to engage with UKRI strategic decision-making and governance and with uncertainty over if they need to”.

How have these difficulties affected the way UKRI has operated? I would identify five key issues.

The first is that I don’t think that the promise of UKRI to improve support for interdisciplinary research has been realised. The Industrial Strategy Challenge Fund (ISCF), which did bring together research councils and Innovate UK in support of some interdisciplinary areas, had some successes, but is now being wound down. To quote the Grant Review again: “the potential for interdisciplinary research has not been fully realised. The most successful example is the ISCF which put new money into the system to support inter-disciplinarity. In practice, with most councils’ budgets committed into future years and systems that limit cross-council working, UKRI is unable to maximise the full potential for interdisciplinary research or transform the collective UK approach to this outside of specific programmes such as the ISCF.” Meanwhile, it was never clear how the eight themes and thirty four (generally small scale) programmes supported by the Strategic Priorities Fund were arrived at, and this fund is now being wound down with no clarity on its successor.

The second is that there doesn’t seem to have been much integration between Innovate UK and research councils. As the Grant Review says, “the advantages of having Innovate UK within UKRI have not been fully realised. With the exception of specific programmes such as ISCF we note that there have been examples and pockets of joint working between councils and Innovate UK, however this was often driven by passionate individuals and not by a strategic plan.” Innovate UK’s new plan for action barely mentions the research councils, making few connections between its own technology priorities and the upstream science priorities of the research councils. Meanwhile the research councils have their own priorities for engagement with industry, both in the university research they support and in their own institutes and research campuses, but there is a risk that this is seen as being in tension with a lead role in innovation for Innovate UK.

The third is a patchy degree of connection between skills policy and innovation policy, which reflects some wider difficulties in policy in England (the situation is different in the devolved nations, though here a lack of high level connectivity between UKRI and devolved nations causes other problems). The splitting of HEFCE into Research England, within UKRI, and a free-standing Office for Students, conceptualised as a regulator of higher education as a consumer service, means that no-one owns responsibility for the HE system in England as a deliverer of the skills needed for the innovation agenda. Historically Innovate UK has not regarded skills development as being part of its brief; there is some change here, with more involvement of the Catapult Network with regional skills systems, but this is hampered by the disconnect between BEIS and its agencies and a chronically neglected FE sector. Only in the provision of PhD training is there evidence of UKRI being able to take a more holistic view than its predecessors.

Fourthly, there still seems to be some lack of conviction within UKRI on addressing regional imbalances in R&D. If nothing else, the signalling doesn’t look good; as we’ve seen, UKRI’s only dedicated instrument for place-based R&D up to now, the Strength in Places scheme, is being wound down, with around £70m a year allocated for continuing funding of existing programmes. The three new “Innovation Accelerators” are allocated £50m a year, but only for two years, with no commitment to continuation beyond 24/25 or to expansion beyond the three cities funded in the pilot scheme. These figures look like very small commitments in the context of an £8 billion/year budget. If the emphasis now is going to be on adapting existing programmes to deliver UKRI’s new organisational goal, of “developing research and innovation strengths across the UK in support of levelling up”, there needs to be some clarity about how this is going to work in practise.

Fifthly, and a little more tentatively, I do sense a decreasing level of confidence in the wider scientific community in the ability of the research councils to run a credible peer review system, that does manage to support excellence in the core disciplines. One symptom of this is, perhaps, the great anxiety in the scientific community about the UK being cut off from the European Research Council, and the lack of confidence in the community that UKRI could run a credible replacement. I’ll discuss the ERC more in the next section; it does offer some important lessons about what it takes to run a credible and effective peer review system, which is more difficult than it might first appear.

Finally, what are the broader implications of the way in which the Higher Education and Research Act removed the autonomy of research councils, giving government more direct control over them? The goal was to make the system more responsive to the strategic goals of the government, and in turn give the science community a stronger voice in influencing those strategic goals. But the risk was that it would hobble the research councils’ freedom to operate and experiment, by imposing more Whitehall bureaucracy.

We’ve certainly seen quite a lot of the latter. According to the Grant Review, “UKRI reports receiving a high volume of ad-hoc requests from government”, and “UKRI has identified a non- exhaustive list of 40 different reports they must produce for government either annually, quarterly or monthly”.

The impression is of a whole set of extra hoops UKRI is made to jump through, absorbing management attention and creating friction and delays. Again, from the Grant Review: “the business case for the second wave of COVID-19 funding went through UKRI approvals in a week, BEIS in two weeks and HMT in six weeks consecutively, which is less than ideal in an emergency response situation”, and “UKRI’s SHARP programme must go through internal controls in addition to external assurance from four separate organisations (GIAA, IPA, BEIS Portfolio Office Gateway Reviews, CDDO) and approvals from BEIS commercial board, BEIS investment board, and ministers from BEIS, Cabinet Office and HMT”.

Yet there doesn’t seem to be much evidence of a strong strategic connection to government priorities that is influencing the operation of UKRI. Once again, the Grant Review comments that “there is little evidence that budget allocation advice from UKRI is made on a clear analysis of its goals and what the right allocation is to achieve those goals.

What has happened by the removal of autonomy, though, is that UKRI is more exposed than the research councils were to rapid political shifts, due to the inability of recent governments to sustain consistent policy over the long term.

For example, in November 2020 the government announced that it was suspending the target of spending 0.7% of GDP on foreign aid. This led to large and abrupt cuts to UKRI’s Global Challenges Research Fund, which supported collaborative R&D with developing countries in support of international development. This in turn led to many grants being cut-off in midstream, and substantial damage to the UK’s international reputation as a reliable research partner.

One way in which there had been a connection between UKRI programmes and wider government strategy was through the Industrial Strategy Challenge Fund, which responded to priorities set in the 2017 Industrial Strategy White Paper and did bring together research councils and Innovate UK in support of some interdisciplinary areas. But this industrial strategy was in effect replaced in March 2021 by a Treasury driven “Plan for Growth”, with a subsequent Innovation Strategy defining priority “technology families”. The Industrial Strategy Challenge Fund is now being wound down, with little clarity on what might replace it.

Perhaps we will now enter a period of political stability, where long term priorities, informed by the science and innovation opportunities identified by UKRI, are set by government, and these in turn set long term directions for the UK’s public research enterprise. Maybe the long-term missions and 2030 goals defined by the Levelling Up White Paper will form a basis for some of these directions. Perhaps the new National Science and Technology Council (about which, more later) will give a clearer way of connecting UKRI strategy with wider government priorities. We shall see.

In the next section of this series, I will move on to consider the other ways in which the UK government supports science, covering other spending departments, the new agency ARIA, and EU R&D programmes – and whatever might replace them, in the increasingly likely event that the UK does not associate with Horizon Europe.

An index of issues in UK science and innovation policy – part 4: science priorities – who decides?

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 the third part, I discussed the institutional landscape of R&D in the UK, looking at where R&D gets done in the UK.

In this part, looking at the funding system, I consider who pays for R&D, and how decisions are made about what R&D to do.

4.1. The broad flows of research funding in the UK

The flow diagram I reproduced in my last post summarises the overall way in which R&D is paid for in the UK. In 2019, total spending on R&D was £38.5 billion. The largest single contribution to this was from business, which spent £20.7 billion, mostly on R&D carried out in the business sector.

The government spent £10.4 billion, including £1.8 billion to support R&D in industry, £6 billion on university R&D, and £2.3 billion in its own laboratories.

Overseas sources of funding accounted for £5.5 billion. £1.5 billion of this overseas money went into universities; of this, I estimate around half of this came from the EU (and is thus properly thought of as originally coming from the UK government), with the rest from overseas companies, charities and other governments.

Finally, £1.8 billion was spent by the non-profit sector, dominated by the Wellcome Trust and medical research charities such as CRUK.

It’s worth adding two glosses to these official figures. Firstly, businesses receive a substantial subsidy for their R&D spending through the mechanism of R&D tax credits. These were worth £7.4 billion in FY 19/20. Although there isn’t an exact alignment between the R&D tax credit statistics and the Business R&D statistics, we can estimate, putting together the cost of tax credits and direct government funding of industry research, that roughly 35% of business spending on R&D is ultimately paid for by the state.

Secondly, as we discussed in the last section, research carried out in universities isn’t fully funded by the government, but in effect is cross-subsidised by other activities, especially teaching overseas students. It’s difficult to precisely quantify this additional contribution to university-based research, but it’s likely to be of order an additional £1 billion across the whole HE sector.

4.2. Who should decide what science is done?

Science funding is about making choices and deciding priorities. Who, in principle, should be making these decisions?

(a) Scientists. One view is that it is only that scientists who are in a position to judge the quality of the work of other scientists, and to make informed choices about what science should be done. This view underlies the prevalence of “peer review” as a mechanism for judging the validity and quality of scientific publications, and the practical procedures by which science project proposals are judged and ranked by science funding agencies. Typically, a project proposal will be sent to referees from the science community, who will make a critique of the proposal, and a panel will rank a set of proposals by reference to these referees’ reports.

From a practical point of view, the argument is that it is only expert, practising scientists who are in a position to assess the novelty of a proposal in the context of the existing body of scientific knowledge, and who can make a judgement of a proposal’s technical feasibility. The potential counterarguments are that reliance on the judgement of other scientists promotes conservative, consensus-driven research rather than projects with truly transformative potential, and disadvantages cross-disciplinary research, because of the difficulty of finding potential referees whose expertise ranges across more than one area.

This view was given an ideological framework by Michael Polanyi, who compared the international scientific enterprise at its best as a “market-place of ideas” in which the best and most profound ideas would naturally prevail. In this view any attempt by non-scientists to steer this “independent republic of science” is likely to be counterproductive and destructive. This point of view is popular with elite scientists.

(b) The Government. On the other hand, if the reason the government funds science is because it believes this supports its strategic objectives, then one can argue that the government should direct science in ways that support those objectives. In fact, over the last century and a half, this is exactly what has happened for most government supported science. The most pressing strategic goal behind which the government has directed science has always been military power; behind that at various times support for agriculture, for colonial activities, and for civil industry has also been prominent.

(c) The people. In a democratic society, the government’s support for science should reflect widely held societal priorities. There’s an argument that representative democracy doesn’t provide a very effective way of translating those societal priorities into decisions on science funding, simply because so many other issues – health, crime, the economy etc – are likely to be much more salient in influencing citizens’ votes. This makes the case for giving more direct forms of deliberative democracy – citizens’ assemblies and such like – a role in setting science priorities.

Often this has been framed in a defensive way, to head off potential public opposition to controversial new technologies. But there is case for thinking of the direct involvement of citizens in setting priorities in a more positive way, challenging expert group-think and bringing new perspectives to set a direction that commands widespread public support.

(d) The market. According to many economists, if you want to find out what people want, you should look at what they do, not what they say. In this view, the true test of whether people want some innovation is whether they buy it. Following Hayek, one can regard the market as the most efficient way of aggregating information about societal wants and needs. In this view, the government should simply step out of the way, and let private firms explore the space of possible innovations, with the market deciding which are successful and which not.

The difficulty with this view is that many radical innovations need large investments to get to the point at which they can be brought to market, with no certainty not just as to whether demand for them materialises, but as to whether they will work in the first place.

There’s a more general point here; what works for applied research, with a clear and relatively short route to commercialisation, is likely to be less useful for more basic research, where any applications are highly uncertain, unpredictable and often don’t manifest themselves for many years after an initial discovery.

4.3 What kind of science policy choices are we talking about?

In thinking about who makes decisions about what kind of science gets done, and who influences those priorities, we should distinguish between some different levels of decision-making.

We’ve seen major strategic shifts – for example the shift from applied research to “curiosity driven” research in the late Thatcher government. In effect this involved shifts of many £billions, and was driven from the centre of government, under the influence of a single powerful advisor (George Guise, in that case). The post-cold war shift of emphasis from defence to health and life sciences was on a similar scale, though this is probably more difficult to pin on a single individual or agency.

On a slightly smaller scale, we have long-term strategic programmes, with funding at the level of £100m’s. Examples of this could include the fusion programme, recent initiatives on batteries and quantum technology, and the new funding agency ARIA. Here the initiative usually does come from some part of central government, with Government Chief Scientific Advisors and other influential policy actors (for example, in the recent case of ARIA, Dominic Cummings) often being a driving force.

Programmes at the level of £10m’s have generally been initiated by research councils, though they may form part of the research councils’ pitch to government in the budget negotiations around spending reviews. Priorities at this level may emerge from the scientific community through the various advisory bodies that research councils draw on; there may also be an element of research councils anticipating what they think the government of the day is interested in, whether that is driven by formal government strategy documents or more informal interactions with key actors.

Within these programmes, it is the individual projects that are awarded to researchers that are awarded through peer review.

4.4 The “Haldane principle” and the political independence of science funding agencies

How closely should politicians be able to direct research priorities for government funded science? The conflict between the long-term nature of science and the short-term imperatives of electoral politics has long been recognised, and makes the case for inserting some distance between science funding agencies and central government. It’s not just in science that this conflict between the long term interests of the state and short term electoral politics is recognised; the decision to give the Bank of England the power to set interest rates independently of the Treasury presents an analogy. In the UK the symbol of this distance in science policy is a semi-mythical arrangement known as the “Haldane principle”.

The Haldane principle is interpreted in different, often self-serving, ways by different constituencies. Some scientists interpret it as meaning that the government should have no involvement in any aspect of science policy, apart from signing the cheques. For government ministers, on the other hand, it legitimates their right to make big funding announcements while leaving operational details to others. The historian David Edgerton has stressed (see e.g. The Haldane Principle and other invented traditions in science policy) its relatively recent rise to prominence in science policy discourse, and the fact that most government funded science has never been within its orbit.

The origins of the “Haldane principle” are purported to lie in an important and influential report from Lord Richard Haldane published in 1918 . This defined many of the principles by which the modern civil service is run, including principles for both the way state-funded science should be administered and the way scientific evidence should be used in government.

The principle that the government should be involved in science had been established in the late 19th Century, through reports such as that of the Royal Commission on Scientific Instruction in 1870, and the establishment of institutions such as the National Physical Laboratory and the Laboratory of the Government Chemist. The First World War brought new urgency to government driven science, both to meet the technological demands of the new industrial warfare, and to accommodate the medical demands of dealing with its terrible human cost.

This was the context of the Haldane review, which brought attention to the slightly ad-hoc way in which different government departments had ended up supporting scientific research in support of their various goals. The report focused on two new bodies that had arisen to deal with these pressures; the Medical Research Committee and the Department of Scientific and Industrial Research. In each case a pattern had been established – a minister taking responsibility, but with decision making devolved to a committee of experts, taking advice from a wider advisory council. This did set the pattern for something like a modern research council, and indeed the Medical Research Committee morphed into the Medical Research Council, which survived until its incorporation into UKRI in 2018. Other research councils – first the Agricultural Research Council, followed. But the focus of the Haldane recommendations was on the best way to bring expert advice to bear onto the problems of government, rather than any principle of scientific autonomy.

As David Edgerton has stressed, in the postwar period, the research councils were relatively small parts of an overall R&D system dominated by the requirements of the “Warfare State”. One major innovation was the introduction of the Science Research Council in 1965, which first evolved into the Science and Engineering Research Council, and then was broken up following William Waldegrave’s 1993 White Paper. This co-incided with the big shift in UK policy I’ve referred to before, where the state substantially withdrew from applied research. The 1993 White Paper did invoke a “Haldane principle”, but reasserted a right for the government to make strategic choices: “Day-to-day decisions on the scientific merits of different strategies, programmes and projects should be taken by the Research Councils, without Government involvement. There is, however, a preceding level of broad priority-setting between general classes of activity where a range of criteria must be brought to bear.”

The government asserted much more direct control over the research system in the 2017 Higher Education and Research Act, which incorporated all seven research councils into a single organisation, UK Research and Innovation (UKRI). The act does give a nod to a “Haldane principle”, which it defines in a rather diluted form: “The ‘Haldane principle’ is the principle that decisions on individual research proposals are best taken following an evaluation of the quality and likely impact of the proposals (such as a peer review process).”

However, the act makes explicit where it thinks power should lie. Section 102 of the Act states, “The Secretary of State may give UKRI directions about the allocation or expenditure by UKRI of grants received…”, and, in case the situation isn’t already clear enough, “UKRI must comply with any directions given under this section.”

My own view is that the government does have a right – indeed, a duty – to steer the overall science enterprise in support of the strategic goals of the state. I discussed some of those big issues in the first section of this series – the need to return to productivity growth, to manage the energy transition to net zero, to keep the nation secure in a hostile world, to support the health and well-being of its citizens. The government has given itself the power to do this.

The danger, though, is that nobody does the strategy, but that instead governments succumb to the temptation of micromanaging the implementation for short-term political advantage.

To come in the next instalment: on the bodies that fund science in the UK – UKRI, the research councils, Horizon Europe (and whatever may replace it). How well do they work, what challenges do they face?

An index of issues in UK science and innovation policy – part 3: the institutional landscape

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.

An index of issues in UK science and innovation policy – part 2: some overarching questions

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.

Levelling up and R&D – the case for innovation deals

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.

When the promise of economic growth is not fulfilled

It’s been widely reported that the government is considering lowering the earnings threshold at which people need to start paying back their student loans. Let’s leave aside, for a moment, the question of whether it’s good economic sense for some graduates, at relatively early stages of their careers, to be facing very high effective marginal tax rates, or indeed bigger questions of the fairness of the current split in tax burden between young and old. The fundamental reason this change is having to be considered reflects the fact that, contrary to the expectations of economists and the experience of the rest of the post-war period, average wages in the UK have been stagnant for a decade. Worsening terms for student loans represent just one example of the way we’re starting to see the unfulfilled promise of continued economic growth having depressing and unwelcome real-world effects.

The key number in understanding the UK’s byzantine student finance system is the so-called RAB charge. When a student goes to university, the Government fronts up a fee to the university – currently £9250 a year (except in Wales) – and in some circumstances advances a loan for living expenses. In return, the student agrees to repay the loan in monthly instalments that depend on their income, with any unpaid portion of the loan being written off after 30 years. So, the fraction of the money the government doesn’t get back depends on the average level of wages, projected 30 years into the future. The less wages rise, the higher the fraction of the loan the government doesn’t recover. This fraction is known as the RAB charge, and is counted as a cost in the government’s accounts.

When the current student loan scheme was introduced by the Coalition government in 2012, the RAB charge was expected to be about 30%. As the years went on, this number increased: for 2014, it was estimated at 45%, and by 2020, the RAB charge stood at 53% – the government expected less than half of the student loans advanced that year to be repaid. The total advanced by the government under the student loan scheme that year was £19.1 billion, so under the original assumptions of the scheme, the cost to the government would have been £5.7 billion. Instead, under the current assumptions, the cost is now more than £10 billion, largely due to the failure of the average wage growth anticipated in 2012 to materialise.

Much of the discussion around the cost of the student finance system now revolves around the calculated return to individual degrees, by subject and institution. The creation of a large data-set linking subject studied to income achieved makes it possible to identify those degrees that provide the highest and lowest financial returns. This is fascinating and useful data, but there’s a danger of misinterpreting it, to suggest that the problem of the high cost to the government of the current HE funding system is the result of bad choices by individuals, and of universities offering “poor value” degrees. Instead, the fundamental issue is a collective one, of the economy’s failure over the last decade to deliver the progressively rising wages we had come to expect in the post-war period.

It’s clear from the data that if an able individual wants to maximise their earning power, they should do a degree in economics rather than, say, music. But from that, it doesn’t follow that the nation would be more prosperous if every student studied economics. There is an issue about how to find the optimum distribution of subjects studied that matches the changing needs of an economy, but the first order determinant of the overall cost of the HE funding system is the average wage that the economy can sustain. The problem we have isn’t low value degrees, it’s a low value economy.

The reason wages have been stagnant is straightforward – the regular, year-on-year, increases in productivity we had become accustomed to in the post-war period stopped around the time of the global financial crisis, and have not yet returned. Labour productivity measures the value added, on average, by an hour of work, so given a relatively constant split between the reward to capital and labour, we would expect labour productivity and average wages to track each other quite closely. My first plot – taken from the Treasury’s March 2020 Plan for Growth – shows that this relationship has indeed held quite closely in the UK over the last twenty years.

The relationship between labour productivity (output per hour) and total labour compensation. From HM Treasury’s Build Back Better: our plan for growth, March 2021.

As the Treasury said in the March 2021 Plan for Growth, “In the long run, productivity gains are the fundamental source of improvements in prosperity. Productivity is closely linked to incomes and living standards and supports employment. Improvements in productivity free up money to invest in jobs and support our ability to spend on public services.” The corollary of this is that, without productivity growth, we see stagnant living standards, and tighter fiscal conditions, leading to poorer public services. The story of the swelling RAB charge for the student finance system is just one example of the malignant effect of productivity stagnation on public finances.

It’s conventional wisdom to look back to the 1970’s as the nadir of UK economic performance. But measured by productivity growth, the last decade has been much worse. From 1971 to 2006, labour productivity grew at a remarkably steady rate of about 2.3% a year – and this provided the material for sustained growth in living standards. But since 2010, trend growth has remained stubbornly low – at less than 0.4% a year.

Labour productivity since 1970, with the latest prediction from the Office of Budget Responsibility. Sources: ONS, OBR Economic and Fiscal Outlook October 2021.

What are the chances of this dismal trend being broken? The forecasts of the Office of Budgetary Responsibility are based on the expectation of a modest upturn in productivity. The OBR has been predicting a recovery in productivity growth every year since 2010, and this recovery has so far failed to materialise. I’ve written a lot about productivity before (see e.g. The UK’s top six productivity underperformers,
Should economists have seen the productivity crisis coming? and Innovation, research and the UK’s productivity crisis), and I’ll surely return to the subject. In the meantime, I don’t understand why the OBR think it will be different this time, particularly given the additional headwinds the economy now faces.

Many – if not most – of the big economic transactions made, both by individuals and by governments, amount to shifting saving and consumption backwards and forwards in time. Whether it’s individuals getting a mortgage on a house, or saving for a pension, or governments borrowing money now on the basis of the expectation of future tax income, we are making assumptions about how our future income, at a personal or national level, will grow. Governments don’t repay the national debt – they hope the economy will grow fast enough to keep the interest payments manageable. If our assumptions about income growth turn out to be over-optimistic the ramifications are likely to be unpleasant. The slow unravelling of the 2012 student finance settlement is just one example.

UK science after the spending review

On October 27th, the UK government set out its spending plans for the next three years, in a Comprehensive Spending Review. Here I look at what this implies for the research and development budget.

The overall increase in the government’s R&D budget is real and substantial, though the £22 billion spending target has been postponed two years

The headline result is that real, substantial increases in government R&D spending have been announced. The background to this is a promise made in the March 2020 budget that by 2024/25, government R&D spending would rise to £22 billion a year. Of course, after the pandemic, the UK’s fiscal situation is now much worse, so it isn’t surprising that the date for reaching this figure has been set back a couple of years.

I wrote earlier about the suspicions in some policy circles that the government might attempt to game the figures to claim that the target had been reached – On the £22 billion target for UK government R&D
I’m glad the government hasn’t done this, and instead has set out a path which does deliver real, and substantial increases in R&D spending.

This is made clear in my first figure, which shows the trajectory of R&D spending since 2008. The Comprehensive spending review delivers an increase next year very much in line with increases in previous years, but the increase from 2022/23 to 2023/4 is very substantial – and in fact would put R&D spending on the trajectory that would be needed to achieve the £22 billion target by the original date of 24/25. I understand that the slower increases after that date are connected with some technicalities about the path of the UK’s contributions to the EU Horizon R&D programme, but more on that below.

Comprehensive Spending Review commitments for total government spending on R&D, in current money, compared with historical actual spending. Sources: ONS, October 2021 HMT Red Book.

Of course, these figures are uncorrected for inflation – and given that we’re currently seeing a rate of price increases higher than we’ve seen for some time, this is likely to make a big difference. I’ve attempted to show the effect of that in the next plot, which shows both the historical and projected R&D spending expressed in constant 2019 £s. I’ve made the correction using the Consumer Price Index, and used the OBR’s latest central prediction of future CPI inflation (of course, this may turn out to be optimistic) to deflate planned future R&D spending.

This plot shows that R&D spending stagnated in the early 2010’s, with a gently increasing trend beginning in 2015. In real terms R&D spending only recovered beyond the previous 2009 peak in 2018. The increase from 2022/23 to 2023/4, even after the inflation correction, is significantly greater than anything we’ve seen in the last decade.

If we look ahead to 2026/7, by when the £22 bn nominal total is planned to be reached, we can expect the real value of this sum to have been significantly eroded by inflation. On this, rather uncertain, projection, we project a 47% real increase on the 2009 previous peak.

Comprehensive Spending Review commitments for total government spending on R&D, correct for inflation by CPI, compared with historical actual spending. Sources: ONS, October 2021 HMT Red Book, OBR Economic and Fiscal Outlook October 2021 (future CPI predictions).

All areas of R&D spending see real increases, but there’s slight shift in balance to applied and department research

Even though most attention falls on the R&D money the government spends in universities through research councils and research block grants, this actually forms a minority of the government’s total R&D spending. Other departments – notably the Department of Health and Social Care and the Ministry of Defence – have significant R&D budgets focused on more applied research connected to their core goals. The Department of Business, Energy and Industrial Strategy holds the overall budget for the UK’s main funding agency, UK Research and Innovation, but this also includes the innovation agency Innovate UK, which has a more business focus, and various pots of money directed at mission-orientated research, most notably the Industrial Strategy Challenge Fund.

This is illustrated in my next plot, showing planned R&D spending in real terms. This shows a gentle but significant rise in what the government now calls the UKRI core research budget – mainstream research supported by the research councils and national academies, and the block grant distributed to universities by Research England and corresponding agencies in the devolved nations. The innovation agency Innovate UK is part of UKRI, but has been helpfully broken out in the figures; although this is a relatively small part of the overall picture, as we’ll see this will see substantial increases.

What isn’t clear to me, at the moment, is how the R&D spending currently ascribed to the rest of BEIS will be allocated. I believe this includes funds currently distributed by UKRI, but not included in the “core research” line, which would include the Industrial Strategy Challenge Fund and the Strength in Places fund. It also includes various public/private collaborations like the Aerospace Technology Initiative. We await details of how these funds will be allocated; as the plot makes clear, this is a very substantial fraction of the total.

The other uncertainty surrounds the cost of associating to the EU’s research programmes, particularly Horizon 2020. The UK’s withdrawal agreement with the EU agreed to associate with the EU’s R&D programmes, as widely supported by the UK’s scientific community, the UK government, and our partners in Europe. But the final agreement with the EU has not yet been signed by the Commission, who are linking its finalisation with all the other outstanding issues in dispute between the UK and the EU, notably around the Northern Ireland protocol.

I understand that the commitment has been made that, if association with Horizon is stymied by these entirely unrelated problems, the full amount budgeted for the Horizon association fee will be made available to support R&D in other ways. It’s no secret that some in government would prefer this outcome, and the significant scale of the funds involved may tempt some in the scientific community to support such alternative arrangements, though it may be worth reflecting on the likely solidity of that commitment, as well as stressing the non-monetary value of the international collaborations that Horizon opens up.

Breakdown of Comprehensive Spending Review commitments for government spending on R&D by department/category, corrected for inflation. Source: October 2021 HMT Red Book, OBR Economic and Fiscal Outlook October 2021 (future CPI predictions).

The relative scale of the increases becomes more clear in my next plot, where I’ve plotted the real terms increase relative to the 2021/22 starting point. This emphasises that in relative terms, the big winners from the budget uplift are the other departments – dominated by the Ministry of Defense – and the innovation agency Innovate UK. The Department of Health and Social Care – which holds the budget of the National Institute for Health Research – also does well.

The increase in the UKRI core research line is real, but significantly smaller. This does indicate a shift in emphasis to applied research and development, including R&D in support of other government priorities. However, one shouldn’t overstate this – there’s a lot of inertia in the system and the UKRI core research budget is still a very large proportion of the total. As a fraction of total government R&D, UKRI core research is planned to fall slightly from 32% of the total to a bit less than 30%.

Increases in spending on R&D by department/category, corrected for inflation, relative to 2021/22 value (index=100). Source: October 2021 HMT Red Book, OBR Economic and Fiscal Outlook October 2021 (future CPI predictions).

R&D spending, place, and the “levelling up” agenda

Government R&D spending in the UK is currently highly concentrated in those parts of the country that are already most prosperous – the Greater South East, comprising London, the Southeast and East of England. In our NESTA paper “The Missing Four Billion, making R&D work for the whole UK”, Tom Forth and I documented this imbalance. For example, 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.

A large part of the focus of the government’s “levelling up” agenda should be on the problem of transforming the economies of those parts of the country where productivity lags. Government spending on R&D should contribute to this, by supporting private sector innovation and skills. Currently, though, the UK’s R&D imbalances work in the opposite direction.

The Comprehensive Spending Review makes a welcome recognition of this issue, stating in paragraph 3.7:

“SR21 invests a record £20 billion by 2024-25 in Research and Development (R&D). 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, and will set out the plan for doing this in the forthcoming Levelling Up White Paper. The investment will build on the support provided throughout the UK via current programmes such as the Strength in Places Fund and the Catapult network.”

This is an important commitment. It is the substantial real increase in R&D spending that gives us the opportunity, for the first time for many decades, to have the prospect of raising the R&D intensity of the UK’s economically lagging cities and regions without compromising the existing scientific excellence found in places like Oxford and Cambridge.

How much money should be involved? The £20 billion R&D spend planned for 2024/25 represents a £5 billion increase from the current year; the business-as-usual split would suggest a bit more than half of that increase would go to the Greater South East. So, to ensure that an “increased share” goes outside the greater South East, we should be aiming for an uplift of order £3.5 – £4 billion. As the title of our paper suggests, that is a sum on a scale that could make a material difference.

How should the money be spent in a way that delivers the outcomes we want – more productive regional economies, leading to more prosperous and flourishing communities? Paragraph 3.7 mentions two existing programmes – “Strength in Places” and the Catapult Centres. I think these are good programmes that can be built on, but they are not likely to be sufficient in scale by themselves, so more will be needed. Here are some concrete suggestions:

  • Double the size of the Strength in Places fund, and streamline the administrative processes surrounding it.
  • Expand the existing Catapult Network, creating new centres to support innovation in a wider range of industries and sectors across the country, stimulating more demand from industry across the whole country to participate in an expanded range of Innovate UK programmes.
  • Earmark the entire uplift in the budget of the National Institute of Health Research to be spent outside the Greater South East, with a single focus on reducing the shocking health inequalities between and within regions of the UK.
  • Ensure that the majority of R&D in support of the Net Zero goal takes place outside the Greater Southeast, supporting the development of productive new industries, for example in hydrogen for decarbonising heavy industry, new nuclear power, carbon capture and storage including direct air capture, development of zero-carbon fuels (e.g. e-fuels) for aviation and shipping, and large scale retrofitting of housing and adaption of new build to zero-carbon standards.
  • Use the uplift in R&D in support of defense and the security services – particularly in artificial intelligence and cybersecurity – to nucleate new digital clusters outside the Greater Southeast.
  • We await further details of the government’s proposals in the forthcoming Levelling Up White Paper. In my view, to achieve the government’s goals, we need to reconsider how decisions are made about R&D spending. Good decisions about the kinds of R&D support that work with the grain of existing local and regional economies need local knowledge of the kind that it is unreasonable to expect policy makers based centrally in Whitehall to have.

    Instead, I hope that the Levelling Up White Paper will create structures through which policy makers in central government and its agencies can work with more local and regional organisations in “Innovation Deals”, to co-create and research priorities that are both appropriate for specific places but also contribute in a joined-up way to national priorities. The local partners in these Innovation Deals should be credible, representative organisations bringing together the private sector, local government (e.g. Mayoral Combined Authorities in our big cities), and public sector R&D organisations, including universities.

    What should government R&D be for?

    By focusing too much on whether the government is going to hit or miss its target of £22 billion R&D spending, we forget that the purpose of R&D spending isn’t just to hit a numerical target, but to support some wider goals, to help solve some of the deeper problems that the country faces. I’d list those goals, not necessarily in order of importance, as follows.

  • Restoring productivity growth to the economy as a whole. Since the global financial crisis, productivity growth has dramatically slowed down, leading in turn to stagnant wages and living standards, and to a difficult fiscal situation that produces pressure on public services.
  • Raising the productivity of the UK’s economically lagging cities and regions. In particular, the UK’s second tier cities underperform relative to their counterparts in Europe, and their economies are not strong enough to drive the economically failing de-industrialised towns in their peripheries.
  • The innovation needed to make the wrenching economic transition to a net-zero energy economy by 2050 economically affordable and politically viable.
  • The health-related research that’s needed to underpin a health and social care system that is affordable, humane and sustainable for an ageing population, learning the lessons from a pandemic which is not likely to be the last one.
  • The research needed for our defence and security services to maintain a technological edge, to keep the nation secure in an increasingly hostile world.
  • I think the settlement of the science budget in the Comprehensive Spending Review takes us in the right direction. It’s a good settlement for the science community, but they aren’t its ultimate beneficiaries, and to achieve these goals we will need to do some things differently. In the words of Anthony Finkelstein, “We – ‘the science community’ – have done a deal. The sustained increase in R&D funding we have secured over several budgets is firmly based on a reciprocal promise: that we will deliver for UK prosperity.”

    Edited 8 November, to correct graphs 1 & 2, which originally had 2027 rather than 2026 for the new target date for £22 bn

    On the £22 billion target for UK government R&D

    As the pandemic moves to a new phase, it’s natural to assume that the Prime Minister would want to make progress on the other agendas that he might hope would define his tenure. Prominent in these has been his emphasis on the need to restore the UK’s place as a “Science Superpower” – for example, in his 15 July speech he said: “We are turning this country into a science superpower, doubling public investment in R and D to £22 billion and we want to use that lead to trigger more private sector investment and to level up across the country”, a theme he’d set out in detail in a 21 June article in the Daily Telegraph. The theme of boosting science and innovation is also crucial to the government’s other key priorities, “levelling up” by reducing the gross geographical disparities in economic performance and health outcomes across the UK, delivering on the 2050 “Net Zero” target, and securing a strategic advantage in defence and security through science and technology in an increasingly uncertain world.

    And yet, the public finances are in disarray following the huge increase in borrowing needed to get through the pandemic, the economy has suffered serious and lasting damage, and the talk is of a very tight spending settlement in the upcoming comprehensive spending review, given the need for further spending in the NHS and education systems to start to repair ongoing costs and the lasting aftermath of the pandemic. How robust will the Prime Minister’s commitment to science and innovation be in the face of many other pressing demands on public spending, and a Treasury seeking to bring the public finances back towards more normal levels of borrowing? The government is committed to two R&D numbers – a long term target, of increasing the total R&D intensity – public and private – of the UK economy to 2.4% by 2027. Another shorter term promise – of increasing government spending on research and development to £22 billion by 2024 – was introduced in the 2020 budget, and has recently been reasserted by the Prime Minister – though without a date attached.

    Some people might worry that the government could seek to resolve this tension by creative accounting, finding a way to argue that the letter of the commitments has been met, while failing to fulfil their spirit. It would be possible to bend the figures to do this, but this would be a bad idea that would put in jeopardy the government’s larger stated intentions. In particular, anything that involves a reclassification of existing expenditure rather than an overall increase, will do nothing to help the overall goal of making the UK’s economy more R&D intensive, and achieving the overall 2.4% R&D intensity target.

    To begin with, let’s look at the current situation. A breakdown of government spending in real terms shows that we have seen real increases, although it will not have felt that way to university-based scientists depending on research council and block grant funding. The increase the plot shows on the introduction of UKRI partly reflects an accounting artefact, by which spending in InnovateUK has been shifted out of the BEIS department budget into UKRI, but in addition to this there was a genuine uplift through programmes such as the “Industrial Strategy Challenge Fund”. These figures also include a notional sum for the UK’s contribution to the EU research programmes. In the future, assuming the question of the UK’s association with the Horizon programme is finally resolved satisfactorily, contributions to the EU research programmes will continue to be included in total R&D investment, as they should be, in my opinion. The uplift we’ve seen in the current year includes a contribution for EU programmes, as well as some substantial increases in R&D funding by government departments, especially the Ministry of Defence (overall departmental spending outside UKRI is dominated by the MoD and the Department of Health and Social Care).

    Total government spending on R&D from 2008 to 2019 as recorded by ONS, in real terms. 2021 is announced commitment. UKRI figure excludes Research England, but includes InnovateUK funding, previously recorded as department spending in BEIS (here included in “rest of government”). Research England is included in “HE research block grants”, which also includes university research funding from Devolved Administrations and, pre-2018, HEFCE. Data: Research and development expenditure by the UK government: 2019. ONS April 2021

    To summarise, it is true to say that government spending is higher now in real terms than it has been for more than a decade. But this still doesn’t look like a trajectory heading towards a doubling, and £22 billion looks a long way away.

    Of course, these are figures that are corrected for inflation; we will see a more flattering picture if we neglect this. And there might be some flexibility over the timescale for achieving the £22 billion target. My next plot shows the overall trajectory of government spending on R&D, in current money, without an inflation correction. The red line indicates the path required to achieve the £22 billion by the original date, 2024. This would require a substantial increase in the rate of the growth we have seen in recent years. But one might argue that the pandemic has forced a slippage of the timescale, which might be aligned with the 2027 target for achieving the overall 2.4% of GDP R&D intensity target. This does look achievable with current rate of nominal growth – and of course the pulse of inflation we’re likely to see now will make achieving £22 billion even easier (albeit at the cost of less real research output).

    Total government spending on R&D from 2008 to 2019 as recorded by ONS, in current money (non-inflation corrected) terms. 2021 is announced commitment. Data: Research and development expenditure by the UK government: 2019. ONS April 2021

    But there is another possibility for modifying the figures that may well have occurred to someone on Horse Guards Road. That would be to include the cost of R&D tax credits. These are subsidies offered by the government for research carried out in business, that according to circumstances can be taken as a reduction in corporation tax liability or a direct cash payment from government (the latter being particularly important for early stage start-ups that aren’t yet generating a profit). This, then, is another cost incurred by the government related to R&D, representing not direct R&D spending, but lost tax income and outgoings. It’s perhaps not widely enough appreciated how much more generous this scheme has become over the last decade, and there is a separate discussion to be had about how effective these schemes are, and the value for money of this very substantial cost to government.

    My next plot shows the effect of adding on the cost of R&D tax credits to direct government spending on R&D. The effect is really substantial – and would seem to put the £22 billion target within reach without the government having to spend any more money on R and D.

    Government spending on R&D from 2008 to 2019, as above, together with the cost of R&D tax credits (includes an HMRC estimate for total cost in 2019). The estimate for 2021 combines the committed figure for government R&D with the assumption that the cost of R&D tax credit remains the same in real terms as its 2019 value. All values corrected for inflation and expressed in 2019 £s. Uncorrected for the mismatch between fiscal years, by which R&D tax credit data is collected, and calendar years, for R&D spending.

    We can make the situation look even better by not accounting for inflation. This is illustrated in the next figure.

    Government spending on R&D from 2008 to 2019, as above, together with the cost of R&D tax credits (includes an HMRC estimate for total cost in 2019). The estimate for 2021 combines the committed figure for government R&D with the assumption that the cost of R&D tax credit remains the same in real terms as its 2019 value. All values in nominal current cash terms (uncorrected for inflation). Uncorrected for the mismatch between fiscal years, by which R&D tax credit data is collected, and calendar years for R&D spending.

    This not only gets us very close to £22 billion spending ahead of target, but also might allow one to argue that the Prime Minister’s claim of doubling government investment in R&D had been fulfilled, taking the timescale to be a decade of Conservative-led governments.

    What would be wrong with this? It would actually lock in a real terms erosion of spending on R&D, and would not help deliver the more enduring target, of raising the R&D intensity of the UK economy to 2.4% of GDP by 2027, most recently reasserted in the HM Treasury document “Build back better: Our Plan for Growth”. This target is for combined business and public sector funding – but redefining government R&D spending to include the government’s subsidy of R&D in business simply moves spending from one heading to another, without increasing its total. This would stretch to breaking to breaking point the larger claim, that the government is “turning this country into a science superpower”.

    Currently, while the UK’s science base has many strengths, it is too small for an economy of the size of the UK. If we measure the R&D intensity of the economy in terms of total investment – public and private – as a proportion of GDP, the UK is a long way behind the leaders, as my next plot shows. By R&D intensity, the UK is not a leader, or even an average performer, but in the third rank, between Italy and Czechia. The UK’s science base is a potential source of economic and strategic advantage, but it is currently too small.

    R&D intensity of selected nations by sector of performance, 2018. Data: Eurostat.

    This is widely recognised by policy makers, and is the logic behind the 2.4% R&D intensity target that was in the Conservative manifesto, and has since been frequently reasserted, for example in the Treasury’s “Plan for Growth”. In one sense, this is still not a very demanding target – assuming (unrealistically) that the R&D intensity of other countries remains the same, far from elevating the UK to be one of the leaders, it would leave it just behind Belgium.

    How much would the UK’s R&D spending need to increase to meet the 2.4% R&D intensity target? This, of course, depends on what happens to the denominator – GDP – in the meantime. Based on the OBR’s March estimates, we might expect GDP in 2027 to be around £2.4 trillion, up from £2.22 trillion in 2019, before the effects of the pandemic (both in 2019 £s). So to meet the target, total R&D spending – public and private – would need to be £58 billion.

    This compares to total R&D spending in 2019 of £38.5 billion, split almost exactly 1/3:2/3 between the public and private sectors (this figure includes expenditure associated with the R&D tax credits, but this appears here on the private sector side). So to achieve the 2.4% target, there needs to be a 50% real terms increase in both public and private sector R&D relative to 2019. If the same split between public and private is maintained, we’d need £19.4 billion public and £38.8 billion business R&D.

    There are two points to make about this. Firstly, we note that the estimate for the required public R&D is actually lower than the £22 billion government promise. This reflects the fact that the 2.4% target is less demanding than it used to be, since we now think we’ll be poorer in 2027 than we expected in 2019. However, remember that this is a figure in 2019 £s – so in real terms inflation will push up the nominal value. In fact, a very rough estimate based on the OBR’s inflation projections suggest that £22 billion nominal by 2027 as the government’s investment in R&D could be about right. On the other hand, OBR’s March 2021 forecast was quite pessimistic compared to other forecasters. If GDP turns out to recover more fully from the pandemic than the OBR thought, then R&D spending will need to be higher to meet the target – but this will be easier to fund given a larger economy.

    Secondly, note that this split between public and private sector is based on where the research is carried out, not who funds it. So the subsidy provided by the government in the form of R&D tax credits appears on the private sector side of the ledger. Unless the split between public and private dramatically changes over the next few years, then the £22 billion the government needs to put in can’t include the cost of R&D tax credits.

    Targets are important, but they are a means to an end. The Plan for Growth identifies “Innovation” as one of three pillars of growth. A return to economic growth, after a decade of stagnation of productivity growth and living standards, capped by a devastating pandemic, is crucial in itself. But innovation also directly underpins the government’s three main priorities.

    The first of these is the transition to net zero. This requires a wrenching change of the whole material base of our economy; it needs innovation to drive costs down – and to make sure that it is the UK’s economy and the UK’s communities that benefit from the new economic opportunities that this transition will bring.

    The second is “levelling up”, which, to be more than a slogan, should involve a sustained attempt to increase the productivity of the UK’s lagging cities and regions through increasing innovation and skills. This won’t be possible without correcting the imbalance in government R&D investment between the prosperous Greater Southeast and the lagging rest of the country. We shouldn’t put at risk the outstanding innovation economies we do have in places like Cambridge, so this needs to involve new money at a scale that will make a material difference.

    Finally, we need to rethink the UK’s position in the world. Part of this is about making sure the UK remains an attractive destination for inward investment by companies at the global technological frontier, and that the UK’s industries can produce internationally competitive products and services for export. But the world has also got more dangerous, and the modernisation of the UK’s armed forces and security agencies needs to be underpinned by R&D.

    The government will not be able to achieve these goals without a real increase in R&D spending. That does not mean, however, that we should just do more of the same. We need more emphasis on the “development” half of R&D, we need to coordinate the strategic research goals of the government better across different departments, we need to support the development of internationally competitive R&D clusters outside the southeast, all the while sustaining and growing our outstanding discovery science.

    So, could the government game its £22 billion R&D promise, by reclassifying the cost of the R&D tax credit as government investment in R&D and ignoring the effect of inflation? Yes, it could.

    Should it? No, it should not. To do so would put the 2.4% R&D intensity target out of reach. It would seriously undercut the government’s main priorities – net zero, “levelling up” – and keeping the UK secure in a dangerous world. And it would put paid to any pretensions the UK might have of recovering “science superpower” status.

    Instead, I believe there needs to be realism and honesty – both about the difficulty of the post-pandemic fiscal situation, and the need for genuine increases in government spending in R&D if its long term economic and climate goals are to be met. £22 billion is about the right figure to aim for, but if the extraordinary circumstances of the pandemic make it difficult to achieve this on the original timescale, the government should set out a new timescale, with a fully developed timetable outlining how this increase will be achieved in order to deliver the 2027 2.4% R&D intensity target. Early increases should focus on the areas of highest priority – with, perhaps, highest priority of all being given to net zero. Climate change will not wait.