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.

An index of issues in UK science and innovation policy – part 1: the strategic context

We’re in the mid-term of a government that’s placed a lot of emphasis on science and innovation for the future of the country. There’s been a lot of rhetorical ambition and some snappy slogans (“science superpower”, “innovation nation”). There’s also been a lot of change in the way the nation’s science system is wired up, and much of that change is yet to work through. In this series of four posts, I’m going to try to give an overview of where this process of change has got to and what is yet to evolve. I’ll be covering a lot of ground, so the posts will form more of an index of issues than a comprehensive discussion; each item I’ll mention will undoubtedly deserve a longer piece of its own.

Since any strategy should begin with a clear view of what one is trying to achieve, the first part of the series, below, will think about the wider challenges the UK government faces, asking what problems we need our science and innovation system to contribute to solving.

The second part will discuss some big questions about how the UK’s science and innovation system works.

  • How research intensive should the UK economy be?
  • Do we have the right balance between basic research and more applied development?
  • Is the overall productivity of the research enterprise – in the UK and globally – growing, or falling?
  • What’s the relationship of geography to innovation?
  • How can national and regional economies be best equipped to take advantage of advances in science and technology made elsewhere?

The third instalment will get into the details of the UK’s R&D system as it is currently evolving, discussing what is changing, and what is yet to be resolved.

  • In government support of R&D, what’s the right balance between direct commissioning and tax incentives?
  • How well are the government’s agencies for supporting R&D (e.g. UK Research and Innovation, InnovateUK, the new agency ARIA, EU funding (or whatever replaces it), government departments) working, and how should they develop?
  • Is the UK’s landscape of institutions where R&D is carried out optimal?
  • Is the connection between policies for skills development and policies for innovation working well enough?
  • How can a national government influence business R&D largely carried out by multinational companies?
  • What should we make of the government’s focus on “missions” and “technologies” to organise innovation policy?
  • How should the government use science and innovation policy to reduce the UK’s regional productivity disparities?
  • Can the new National Science & Technology Council effectively develop national strategy for science and innovation, and convert that into implementable policy across the whole of government?

Finally, I’ll sum up by asking what it might mean for the UK to be a “science superpower”. Given the UK’s current position in the world as a medium size economy, accounting for about 2-3% of the worlds added value from knowledge & technology intensive industries, what is a realistic aspiration for the UK’s science and innovation system?

With that introduction, on to part 1 of this series of blogposts.

1. What problem(s) are we trying to solve?

1.1. Getting the UK economy growing again

The UK’s most serious economic problem now is its lack of productivity growth. As I’ve discussed many times here, after many decades in which productivity grew at a steady rate, a little more than 2% a year, this growth was arrested after the global financial crisis in 2008; since then productivity has been more or less stagnant. This translates directly into a stagnation in average wages, as the first plot shows – this is the painful backdrop to the current “cost of living crisis”.

Productivity and average wages since 2000. From Build Back Better: our plan for growth, HMT, March 2021

This stagnation almost certainly has more than one cause. There may be some general factors affecting all developed economies. Progress in some areas of technology may be slowing; the exponential growth in computer power that came from the combination of Moore’s law and Dennard scaling came to an end in the mid-2000s, for example. But, while productivity growth in all developed countries has slowed, the stagnation has been more pronounced in the UK than any other advanced economy except Italy.

Structural effects specific to the UK include the rapid fall-off of North Sea oil and gas production since the early 2000s, and the unwinding of the bubble in financial services that burst in the global financial crisis. The combination of North Sea oil and the financial services boom may have led to a touch of “Dutch disease”, squeezing other sectors such as manufacturing. There have been difficulties in specific sectors that the UK has been specialised in – notably pharmaceuticals.

There’s an effect of some policy choices over the last decade; macroeconomists focus on the role of demand in driving productivity growth, so the effects of the fiscal consolidation of the early 2010s may themselves have contributed. Other economists highlight the beneficial role of international trade in driving productivity growth, so the choice to impose additional frictions on international trade will give an additional headwind over coming years.

But the fundamental driver of productivity growth is innovation, which finds ways of reducing the inputs needed to produced existing goods and services, and develops entirely new, highly valued goods and services. Not all innovation arises from formal research and development, but it is striking that the UK’s decline in productivity growth follows a period in which the overall R&D intensity of the UK economy declined substantially, and that the UK’s weak performance in productivity growth compared to international comparator countries is correlated with comparatively low R&D intensity.

In terms of productivity, the UK is a highly divided country. The Greater Southeast – London, the Southeast, parts of East Anglia – has an economy with a comparable level of productivity to other high performing Northern European economies, but most of the rest of the country more closely resembles Southern Italy, Spain or Portugal. Moreover, the UK’s large second tier cities – Birmingham, Manchester, Glasgow etc – instead of being drivers of the national economy, actually have levels of productivity below the national average.

Without a recovery of productivity growth, wages will continue to stagnate, living standards will fall, and it will be impossible for governments to provide public services of a quality that people have come to expect. It will not be possible for one corner of the nation to carry the economy of the whole country, so it should be a priority to raise the productivity of those parts that are currently lagging behind their potential – particularly the UK’s large, second tier cities. This is the pre-eminent economic driver that the development of science and innovation policy needs to focus on.

1.2. Managing the energy transition to net zero

All western economies and lifestyles depend on the availability of cheap, abundant energy – and this has been supplied by fossil fuels, which still account for around 80% of our energy supplies. But our dependence on fossil fuels has driven accelerating and potentially disruptive climate change. There’s widespread agreement about the need for our energy system to make a transition to one that stabilises the output of greenhouse gases, and in the UK a commitment to producing net zero greenhouse gases by 2050 is rightly enshrined in legislation. But it isn’t clear to me that policy makers and politicians fully understand the scale of this challenge.

The UK has made some good progress in decarbonising its energy economy, but naturally the UK has done the easy bits first. We’ve exported much of our heavy industry, shifted electricity generation from coal to gas, and we now get roughly half of our electricity generation from a combination of burning biomass, offshore wind and the continuing operation of legacy nuclear power stations.

What remains will be much more difficult. The majority of our energy use still comes from directly burning oil and gas, for transport and domestic and industrial heat. We need to reduce demand by much more focus on energy efficiency, especially in heating. This will need a major drive to retrofit existing commercial and residential buildings, and a large scale programme building out new, zero-carbon social housing, with the remaining heating needs being met by electric heat pumps

The transition to electric vehicles needs to accelerate; heavy goods vehicles and shipping may need to transition to hydrogen or ammonia, while in my view long-haul aviation will only be viable powered by synthetic, zero carbon hydrocarbons (e-fuels). These new fuels themselves need to be synthesised in a zero carbon way – hydrogen by electrolysis using renewable energy and/or high temperature process heat from high temperature nuclear reactors, synthetic hydrocarbons from green hydrogen and carbon dioxide captured directly from the atmosphere.

In addition to being totally decarbonising our electricity supply, we’ll need to substantially expand it to accommodate this transition from directly burnt oil and gas to electricity. The heavy lifting in the UK will likely be done by offshore wind, including floating offshore wind. In addition to intermittent renewables, we’ll need both more storage capacity, and sources of zero carbon firm power. For the latter, the choice is between continuing to burn gas, but with carbon capture and storage, and a bigger programme of nuclear new build. For why I think the latter route is both preferable and more likely, see my earlier post: Carbon Capture and Storage: technically possible, but politically and economically a bad idea. We should support fusion R&D (where the UK has a genuine comparative advantage) in case it works, though it isn’t likely, in my view, to make a substantial contribution to the 2050 net zero target.

This is a daunting list, combining some established technologies, some that exist but aren’t yet cheap or deployable at scale enough, some that exist only in principle. The scale of the transition is wrenching, and like all big changes, it will produce winners and losers, both at a national level and geopolitically. We need innovation to drive down the cost of the new, cleaner technologies to the point at which economic forces drive the transition more than political ones.

1.3. Keeping the nation secure in a more dangerous world

We now have a full-scale European war involving a nuclear-armed adversary, reminding us forcefully that one of the primary duties of a state is to keep its people secure. The 2021 Integrated Review of Security, Defence, Development and Foreign Policy reasserted the importance of science and technology as a source of strategic advantage and as a central part of national security. Although the war in Ukraine has called into question some of the assumptions of the Integrated Review, with a painful reminder that the security of our European neighbourhood can’t be taken for granted, this emphasis on security as a key motivation for the state’s involvement in science and technology will surely only strengthen.

The Ukraine war has also reminded us that the geopolitics of energy never went away, and that the resilience of the material base of the economy and our lives can’t be taken for granted. Since the end of the Cold War and the subsequent deepening of globalisation, we have become complacent about the degree of our dependence, as a small country, on imports for energy, food, materials and finished goods. Of course, our prosperity depends greatly on our international trade, so a North Korea-style Juche-UK policy would be ridiculous – but the pandemic reminded us of our dependence on other countries for some essential items like PPE and pharmaceutical precursors, as well as teaching us how sensitive our complex global supply chains have become, with the effects of disruptions in obscure corners rippling out worldwide.

UK government research and development spending by socio-economic objective, for selected sectors. Data: Eurostat (GBARD)

After the end of the Cold War, one of the ways in which we cashed in the “peace dividend” was by reducing the amount of R&D devoted to defense, as my last post discussed in more detail. We’re in a different world now, so, as I wrote there, priorities for the government’s R&D spending will inevitably and rightly be different, with more emphasis on food and energy security, rebuilding sovereign capabilities in some areas of manufacturing; as well as a return to higher spending directly on defence R&D, including new threats to cybersecurity.

1.4. Keeping an ageing population healthy

The pandemic has been a traumatic experience for the nation, with more than 175,000 deaths to date. As the UK went into the pandemic, there was some optimism that its strong position in life sciences would place it in a better position to weather the pandemic than other countries. As it turned out, its record was mixed. On the one hand, there was a successful rapid vaccination programme; on the other, the pandemic was unforgiving in the way it revealed and exacerbated widespread health inequalities.

Life expectancies at birth for males and females in 2020 for England. These are not predictions of how long a baby born in 2020 will live; instead they represent an estimate of the average number of years a baby born in 2020 would live if they experienced the age-specific mortality rates for 2020 throughout their life. Data from Public Health England.

A more complete reckoning of the strengths and weaknesses of the UK’s pandemic response awaits a full inquiry. The plot shows the impact of the pandemic on life expectancies. What is interesting, though concerning, is that even before the pandemic the rate of increase in life expectancies that we’d seen in 1980’s, 90’s and 2000’s had already, after 2010, begun to stall.

The paradox here is that this slow-down in the rate of improvement of life expectancy follows soon after the substantial increase in R&D devoted to health. As always, there are probably many factors at play here. But there is a conceptual muddle, in my view, about the way the UK thinks about its “Life Sciences Strategy”. The problem is that this strategy has two, largely separate, goals, which are sometimes in tension.

One objective of a life sciences strategy is to do the research needed to improve the way healthcare is delivered to the UK’s population, and to address the broader determinants of the health of the public. The other is to support the UK’s pharmaceutical and biotechnology industries. These are important areas of comparative advantage for the UK economy, strong exporting sectors. But in recent years, as I’ve already mentioned, productivity growth in the pharmaceutical sector has markedly slowed down, and given the UK’s specialisation in pharma, this underperformance has made a material contribution to the UK’s overall productivity problem, as demonstrated by this recent research.

So while it is an entirely appropriate piece of industrial strategy to support the pharmaceutical and biotechnology sectors, it’s important also to think about the wider innovation needs of the health and social care system. Nor should we expect the pandemic we have just been through to be the last, so we should pay some attention to making sure we’re better prepared for the next one.

As other priorities for R&D – like national security and net zero – become more pressing, it is going to be more important than ever to be clear about how we set our strategic priorities.

To come next: part 2 – Some overarching questions about the UK’s research & innovation system.

Science and innovation policy in a new age of insecurity

It’s conventional to date the end of the Cold War to the break-up of the USSR, in 1991. Around that time, people started talking about a “Peace Dividend” – the economic benefits that would come as economies like the UK stood down from the partial war footing that they’d been operating under for the previous half-century. In the early 1980’s, the UK was spending more than 5% of its GDP on defence; in the late 80’s there was an easing of international tension, so by 1990 the fraction had already dropped to 4%. The end of the Cold War saw a literal cashing in of the peace dividend, with a fall in defence spending to around 2.5% in the 2000’s. The Coalition’s austerity policies bore down further on defence, with its share of GDP reaching a low point of 1.9% in 2017 [1].

But I’d argue that there was more to the post-cold-war peace dividend than the simple “guns or butter” argument, by which direct spending on the military could be redirected towards social programmes or to lower taxation. In the apparent absence of external threats, there is less pressure on governments to worry about the security of key inputs to the life of the nation. Rather than worrying about the security of food or energy supplies, there was a conviction that these things could be left to a globalising world market. Industries once thought of as “strategic” – such as semiconductors – could be left to fend for themselves, and if that led to their dismemberment and sale to foreign companies (as happened to GEC/ Marconi), then that could be rationalised as simply the benign outcome of the market efficiently allocating resources. Finally, in the apparent absence of external threats, for a government with an ideological prior for reducing the size of the state, a general run-down of state capacity seemed, if not an actual goal, to be an acceptable policy side-effect.

Things look different now. The invasion of Ukraine has brought Russia and NATO close to direct confrontation, and the resulting call for economic sanctions against Russia has shone a spotlight on the degree to which Europe has come to depend on Russia for supplies of oil and gas. This all takes place against the background of what’s starting to look like a chronic world polycrisis. As the effects of climate change become more obvious, we will see patterns of agriculture disrupted, stress on water supplies, people and communities driven from their homes. We’ll have to be more realistic about confronting the scale and speed of the necessary transition of our energy economy to net zero greenhouse gas emissions, and the economic and political disruptions that will lead to. And the pandemic that’s dominated our lives for the last couple of years isn’t likely to be the last.

The assumptions that became conventional wisdom in the benign years of the 1990s are now obsolete. I’m not convinced that politicians and opinion formers fully understand this yet. We not starting from a great place; the UK’s economy is already well into a second decade of very poor productivity growth, as I’ve been pointing out here for some time. This has led to a long period in which wages have stagnated; this is about to combine with a burst of inflation to produce an unprecedented drop in people’s real living standards. We are going to see increases in defence spending; there is more talk of resilience. But the talk of many senior politicians seems to speak more of a hope of a return to those benign years, more of a clinging on to old nostrums than a real willingness to rethink political and economic principles for these new times.

I don’t have any confidence that I know what those new political and economic principles should be. Here I’m just going to make some observations relevant to the narrower world of science and innovation policy. How might this new environment affect the priorities the state chooses for the science and innovation it supports?

UK government research and development spending by socio-economic objective, for selected sectors. Data: Eurostat (GBARD)

My plot shows the way the division of UK government R&D between different socio-economic goals has evolved since 2004 [2]. The big story over the last twenty years has been the run down of defence R&D, and the increase in R&D related to health – another under-appreciated dimension of the peace dividend. In the heyday of the UK’s postwar “Warfare State” (as the historian David Edgerton has called it [3]), defence accounted for more than half of government R&D spending. As late as 2004, defence still accounted for 30% of the government’s expenditure, but by 2019 this fraction had fallen to 11%.

As for those other sectors that the warfare state would have regarded as of strategic importance – energy, agriculture and industrial production – by the mid-2000s, their shares of R&D had been run down to a few percent, or, in the case of energy, a fraction of a percent. Since then there has been some recovery – in the mid-2000’s, the government’s chief scientific advisor, Sir David King, very much aware of the issue of climate change, was instrumental in restoring some growth in energy R&D from the very low base it had reached. Meanwhile industrial strategy has made a slow and halting comeback, with increased government funding to agencies such as InnovateUK and collaborative initiatives in support of the aerospace and automotive sectors.

Now, the security of the nation, using that word in its broadest sense, no longer seems something we can take for granted. This will inevitably and rightly affect priorities for the government’s R&D spending. More emphasis on food and energy security, with a focus on driving down the cost of the transition to net zero; rebuilding sovereign capabilities in some areas of manufacturing; as well as a return to higher spending directly on defence R&D (including new threats to cybersecurity); these shifts seem inevitable and probably need to happen on a faster time-scale than many will be comfortable with. We won’t return to the world of the Warfare State, nor should we, but I don’t think the institutions we currently have are the right ones for a science and innovation policy driven by security and national resilience.

[1] Defense as fraction of GDP: SIPRI
[2] Gbard data from Eurostat.
[3] David Edgerton, Warfare State: Britain 1920 – 1970 (CUP). Historic defence R&D figures quoted on p259.

Levelling Up Research and Development

The government published its long-awaited “Levelling Up” White Paper on February 2nd. This is a much expanded version of a piece I wrote for Research Fortnight, “Levelling Up R&D is about spreading power as well as money”, in which I look at the implications of the White Paper for research and development.

What do the government mean by “levelling up”?

It’s fair to say that the Levelling Up White Paper, published after a long delay last week, struggled to compete with other political events for the front pages, and what comment there was about it focused, somewhat unfairly, on its great length, its thumbnail history of 9 millennia of urbanism, and its invitation to compare our Northern and Midland cities with renaissance Florence. But for those interested in the UK’s research and development landscape, it would be wrong to underestimate its significance.

For those who have been wondering what “levelling up” actually means, the White Paper does offer some concrete answers. Correctly, in my view, it puts the UK’s regional disparities in productivity centre stage. It offers some detailed analysis of the UK’s regional problem; for all that “industrial strategy” is not a “brand” currently in fashion with the government, the mark of the prematurely terminated Industrial Strategy Council, as transmitted through the person of Andy Haldane, now head of the government’s “Levelling Up Task Force”, is clear. In addition to much discussion of the data, there is an analytical framework based on a consideration of different types of capital, their unequal distribution across the country, and – crucially – a discussion of the vicious circles that can lead places into a self-reinforcing decline.

The role of research and development in levelling up

Research and development, together with skills, contribute to a place’s “intangible capital”, and, echoing an argument myself, Tom Forth and others have been making for some time, the connection is made between the unbalanced distribution of government R&D expenditure across the country and regional disparities in economic performance. Under the overarching goal of boosting “productivity, pay, jobs and living standards by growing the private sector, especially in those places where they are lagging”, one of the 12 “Levelling Up Missions” promises that public investment in R&D outside the Greater South East will grow by 40% by 2030, and by one third in the current spending review period (i.e. by FY24/25). The aspiration is that this increase in public sector R&D should “crowd in” roughly double the amount of private sector R&D.

Although it’s been pointed out that in many areas the Levelling Up White Paper isn’t supported by new money, this is not actually true for R&D. The October 2021 Comprehensive Spending Review did commit the government to a substantial rise in government R&D spending – about £5 billion, taking spending from a bit less than £15 billion to £20 billion. The commitment to a spending uplift of a third outside the Greater SE doesn’t, therefore, represent a real rebalancing of the current situation, and it actually represents a dilution of the commitment of the October Spending Review, which promised 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”.

Given that the CSR commitment is reiterated in the White Paper, perhaps we should regard these targets as represents a floor to to the ambition, and they do at least mean that the current imbalances won’t get any worse. To be fair to those managing science funding agencies, it should also be recognised that, given that they have already taken on substantial multi-year commitments, changing the overall distribution of funding isn’t something that can happen very quickly.

Where is this new money going? It’s important to remember that, although academics tend to focus on the research councils, much public R&D is carried out by government departments. When we look at where the uplift in funding is concentrated, we find that the core UKRI budget, comprising the research councils and block grants to universities and research councils, does have an increase of £1.1 bn between 21/22 and 24/25, a 23% increase in cash terms. In percentage terms, though, the really big winners are departments like the Ministry of Defence, The Department of Health and Social Care, and the agency Innovate UK, which between them see an increase of 64%, representing a £2.7bn cash uplift.

If the promised one third increase in R&D spending outside the Greater Southeast is to be funded from the uplift committed in the spending review, much of the heavy lifting will need to be done by these more mission focused and applied funding streams. However, it is fair to say that the details of how this commitment will be met are not yet fully fleshed out in the White Paper.

How UKRI can support levelling up (and why it should)

UKRI gets 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”, and an instruction to increase consideration of local growth criteria and impact in R&D fund design. It will be interesting to see how the organisation responds to this new mandate. Some may feel that UKRI shouldn’t take explicit measures to rebalance the distribution of R&D across the country, as this might compromise its primary commitment to funding excellence in science. I would certainly agree that UKRI needs to avoid funding poor quality research, but I’d make two points about the question of excellence.

The first is to point out that, for many in the research community, the most prominent funder of purely excellence based research for the UK at the moment isn’t part of UKRI at all, but is the European Research Council, with its mission to “support investigator-driven frontier research across all fields, on the basis of scientific excellence”. The ERC delivers this mission through the rigorous peer-review, by acknowledged international experts, of proposals whose quality is driven up by healthy competition from a whole continent’s worth of leading scientists. Much of UKRI funding, in contrast, is influenced by strategic priorities set by the research councils themselves. Of course, the UK’s ongoing participation in the ERC, like other parts of the EU Horizon programme, is now under serious question, but that’s another story. Perhaps the most important lesson we can take from the success of ERC in supporting excellence, though, is that it is entirely people-focused. Places aren’t excellent, people are.

The second point is to note that UKRI’s current aspiration is to be a steward of the whole research system. This stewardship certainly should include supporting excellent researchers wherever they are to be found, but it should also involve creating the environments that support those researchers. Research councils have in the past, quite correctly, taken on some responsibility for building those environments, so it is a natural extension of those activities to widen the range of places which do provide those environments. They can do this by building capacity, and by developing partnerships.

UKRI has a responsibility for maintaining the capacity of the UK system to do good research. This starts with helping to provide the infrastructure for that research, whether that is by providing funding for strategic equipment in universities, (in England) the block grant support to universities through quality related funding (QR) from Research England, through to creating and supporting entire research institutes. Research councils have rightly intervened to maintain the UK viability of some fields of research deemed strategically important. And there is a continuous, entirely justified, commitment to support the talent pipeline for research, and supporting good training environments for PhD students has become an increasingly important part of the research council’s business. It is a natural extension to UKRI’s stewardship of the UK’s future research capacity to give more weight to the geographical dimension of building that capacity.

Partnership remains another very important dimension of UKRI’s work, both internal and external. The whole point of creating UKRI as a single organisation was to promote more partnership working between the component parts of the organisation, the research councils, Research England, and Innovate UK. Research councils like EPSRC are rightly proud of the large proportion of their grants that involve some partnership with industry, and high profile recent initiatives include EPSRC’s Prosperity Partnerships, large scale research programmes with matched funding from industry, to deliver a research agenda co-created by academic and industrial researchers.

It’s welcome that the most recent prosperity partnership call offers an invitation to articulate the degree to which these partnerships support place-based outcomes, such as attracting inward investment to specific regions or otherwise supporting regional economic growth. It would be a natural extension to include regional bodies more explicitly as partners for research council supported research, and as co-creators of research strategy, in the way that R&D intensive companies currently engage with UKRI.

Innovate UK has different drivers from the research councils; as an explicitly “business led” agency one might expect there to be some correlation between the regional distribution of business R&D and Innovate UK’s investments. The relationship is shown in my figure –regions to the left of the line receive more Innovate UK money than you would expect from a simple correlation with business R&D, regions on the right receive less.

A comparison of Innovate UK expenditure with business R&D for 2018. Innovate UK data from UKRI, regional business R&D data from ONS BERD statistics.

This distribution doesn’t immediately suggest a straightforward explanation. One might wonder whether it reflects industrial sectors that are particularly well organised to receive support from Innovate UK – perhaps the importance of automotive for the West Midlands and aerospace for the South West and East Midlands is reflected in the above average Innovate UK support for those regions.

Another factor in determining these spending patterns is the location of the Catapult Centres. These receive core funding directly from Innovate UK, as well as participating in joint projects with industry that receive partial funding from Innovate UK, so the regional distribution of Innovate UK funding probably to some extent reflects the location of Catapult Centres.

It’s possible that the high London figure to some extent reflects spending being registered at Head Offices rather than in the R&D centres where the work is actually carried out. I don’t have an obvious explanation for the relatively low level of spending in the South East and East.

The expectation of a correlation between existing business R&D spend and Innovate UK investments rests on the idea that Innovate UK should be led by the business R&D landscape as it is, rather than trying to shape it. But if the goal of “levelling up” is to increase productivity in underperforming regions, then perhaps the goals of innovation policy should include the use of applied R&D, together with other interventions to promote innovation diffusion and workforce development, explicitly to develop innovation and manufacturing capacity, as Eoin O’Sullivan and I have argued in our recent submission to the Nurse review. As we outline in our paper, this could be done by Innovate UK through the Catapult Network, but this would require some explicit modifications in their mission and in the selection criteria for new Catapults.

One programme run by UKRI in recent years is designed to build regional capacity in this way, through partnership with research organisations and industry in particular places. This is the “Strength in Places Fund”, administered as a partnership between Innovate UK and Research England. I believe this scheme has been a success in the collaborations it has generated, although the bureaucracy surrounding it has been frustrating. It’s very disappointing that the White Paper lacked any commitment to continue this scheme, currently the only explicitly place-based funding instrument run by UKRI. Hopefully this will be remedied in the ongoing detailed discussions of the CSR settlement; if not it will inevitably interpreted as a signal of the UKRI’s lack of commitment to addressing regional R&D imbalances.

R&D for levelling up health inequalities

Turning to non-UKRI funding streams, one that does receive a very substantial uplift is the National Institute of Health Research, the research arm of the Department of Health and Social Care. The White Paper, entirely correctly, draws attention to the shocking disparities in health outcomes across the country, which amount to about a decade of life expectancy between the most and least prosperous parts of the country, and sets as another of the 12 “Levelling Up missions” the goal of narrowing this gap. I believe these health inequalities are not just morally unacceptable in a prosperous country, they are themselves direct contributors to productivity gaps. Further details of how this aspect of levelling up will have to wait until another White Paper, promised for later in the year.

Narrowing these gaps should be a key focus of the National Institute of Health Research – yet of all the research funding agencies, this is the one whose funding is most concentrated, not just in the Greater Southeast, but specifically in London. There is in the White Paper a commitment that NIHR will “bring clinical and applied research to under-served areas and communities in England with major health needs to reduce health disparities”, but the targets are currently vague. This refocusing NIHR on the urgent problem of health inequality needs to go further and faster.

Innovation policy to support levelling up needs to be co-created with cities, regions and nations

But making a material change in the distribution of R&D funding using existing mechanisms will always be a hard and slow process. Tom Forth and I, in our 2020 NESTA paper “The Missing Four Billion”, argued that to make a real difference, it will be necessary to devolve significant funding to nations, cities and regions. To make an impact on productivity, R&D interventions need to work with the grain of the existing regional economic base, and even the best central government departments and agencies, in Whitehall or Swindon, can’t be expected to have the local knowledge and develop the partnerships that would make this work. Ultimately, developing an effective regional innovation strategy is a matter of finding out who is doing the innovating, and helping them do more of it.

On the other hand, the necessary organizational and analytical capacity to make good decisions about innovation don’t always exist or aren’t fully developed in our cities and regions. Our answer to this dilemma was the idea of an “Innovation Deal”, where central government work with cities and regions to develop this capacity, in return for substantial devolution of innovation funding.

The White Paper does take a tentative step in this direction. Three “Innovation Accelerators” have been announced, with £100m of funding over three years going to three pilot areas, Greater Manchester, the West Midlands, and Glasgow City-Region. The idea is that national and local government, together with industry and R&D institutions in those cities, will work together to develop projects to improve the strength of the existing R&D base and maximise its economic impact, to attract new investment from international companies at the technological frontier, and to improve the diffusion of technology into the existing business base.

In Greater Manchester, we’ve been preparing for such a programme. The organisation “Innovation Greater Manchester”, which brings together the private sector, universities and the Mayoral Combined Authority, has been developing a pipeline of rigorously tested investment opportunities aimed at driving productivity across the whole of GM. This needs to support not just the city centre economy, where digital and creative industries are currently thriving, but the economies of GM’s outlying boroughs like Rochdale, Bury and Oldham, which are amongst the most deprived communities of the Northwest. Here, initiatives like the Advanced Machinery and Productivity Institute (supported by the Strength in Places Fund) will help existing innovative manufacturing businesses to develop and grow. Innovation GM will work with central government to develop its “Innovation Accelerator” as an exemplar of locally informed innovation policy.

R&D is an important element of the productivity-enhancing investments that should be at the centre of the levelling-up agenda, and it’s right that the Levelling Up White Paper sets as one of its missions the need to increase the R&D intensity – both public and private – of those parts of the country currently not fulfilling their economic potential. Work does remain to translate some of the high level commitments on R&D spending into changes in the way government departments and agencies spend their R&D budgets.

In addition to this, I believe that co-creation – and ultimately devolution – of innovation programmes with city-regions will be important, to incorporate local knowledge about the existing economy, and ultimately to assign local responsibility for the outcomes. Innovation Accelerators are a good first step to develop the institutional landscape for this to work, and I hope that this initiative can soon be rolled out to include other areas of the UK.

Will the government’s interest in regional economic disparities be sustained for the long-term?

Finally, one of the most telling sections of the Levelling Up White Paper is a history of 100 years of local growth policy, with the comment “spatial policy in the UK has, by contrast, been characterised by endemic policy churn…. By some counts, there were almost 40 different schemes or bodies introduced to boost local or regional growth between 1975 and 2015, roughly one every 12 months.” Surely no-one can argue with the White Paper’s call for policies to be applied consistently at sufficient scale over the medium to long term. Addressing the UK’s fundamental problems of disparities in regional economic performance must surely take a project that will take decades, and it’s realistic that the White Paper defines milestones for 2030.

But what will be the longevity of this White Paper itself? Of course, 2030 is beyond the life of this government – but given the prevailing political instability, some may doubt that the “Levelling Up” agenda will even last the year. It’s odd that a central manifesto commitment of a government elected with an 80 seat majority should be in doubt, but it’s not clear that enthusiasm for the agenda is universally shared across the ruling party. Many influential people and institutions doubt that the reduction of the UK’s regional economic disparities is possible or even desirable. In fact, many people and institutions benefit from the current state of affairs, and there’s a surprisingly large constituency for economic stagnation.

So I wouldn’t be surprised if some people in government and its agencies will be tempted to drag their feet, in the hope that if they wait long enough the entire “levelling up” craze will go away. Naturally, I think this would be wrong in principle – the role of regional economic disparities in the UK’s current economic difficulties, and the resulting societal instability, has become more and more obvious and widely acknowledged. I suspect that such foot-dragging would be politically unwise too.

What’s missing in the UK’s R&D landscape – institutions to build innovation capacity

The UK government has commissioned a new review of the institutional landscape in which research, development and innovation (RD&I) is carried out, led by Sir Paul Nurse. In response to an invitation for views, Eoin O’Sullivan, from Cambridge University’s Institute for Manufacturing, and I submitted this brief paper:
The role of intermediate RD&I institutes in building regional and sectoral innovation capabilities (PDF).

Our paper argues that what’s underdeveloped in the UK’s research landscape are research and development institutes whose mission goes beyond just doing applied research, to encompass a wider range of activities to build the innovation and manufacturing capabilities of regional economies that are currently underperforming. There are many international examples of this kind of institution, which carry out workforce development and innovation diffusion functions as well as applied research, and there are lessons from these other countries that the UK could usefully learn.

Here’s the first section of our paper:

The place of intermediate institutions in the UK’s RD&I landscape

National innovation systems have a complex landscape of different types of research institutes with different missions and goals. These include both research universities and institutes devoted to fundamental science, and public sector research establishments (PSREs), which support government strategic goals. A majority of research, development and innovation takes place in the private sector, in firms’ own laboratories, and in for-profit contract research organisations. It is this private sector innovation that most directly drives productivity growth. Public and private sector R&D can be connected in intermediate RD&I institutes, which carry out more applied research, often as a public/private partnerships, as well as taking a wider role in building regional and sectoral private sector capability, through the promotion of innovation diffusion and skills development.

In the absence of government intervention, the private sector will systematically invest less in R&D than would be optimal for the whole economy, due to the inability of firms to capture all of the benefits. This market failure provides the justification for government investment in R&D. In many successful innovation economies, intermediate RD&I institutes play a vital role. Examples include the Fraunhofer Institutes in Germany, the Industrial Research and Technology Institute in Taiwan, and VTT in Finland.

In the UK, basic research is carried out in a strong university base, supplemented by some stand-alone institutes, such as the Laboratory of Molecular Biology at Cambridge and the Crick Institute in London. The PSRE sector has diminished in size over the past few decades, because of privatisations and absorption of some institutes into universities, but it retains some strong institutions such as the National Physical Laboratory and the Meteorological Office.

The perceived weakness of the UK’s landscape in intermediate research and innovation institutions led to the development of the Catapult Network in the 2010’s, modelled in some respects on Germany’s Fraunhofer network, though not as yet commensurate with it in scale.

Discussion of the purpose of Intermediate RD&I institutions in the UK, such as the Catapult Network, has focused on their role carrying out applied research in collaboration with industry. The purpose of this note (which summarises the argument of a longer working paper current under preparation for the Productivity Institute) is to draw attention to the wider range of functions that such institutions carry out in other nations, and in particular their role in supporting economic development in regions with lower productivity.

The rest of the paper can be found here: The role of intermediate RD&I institutes in building regional and sectoral innovation capabilities (PDF).

Video of my lecture on “levelling up” R&D

On the 9 February I did a lecture at the think-tank Policy Exchange, on the subject “Can we level up research and innovation?”.

The talk had three parts:

  • On the relationship between Research and Development, productivity and regional growth: why it’s important to level up R&D;
  • On levelling up R&D in the White Paper: what government has committed to – and what remains to be done;
  • On levelling up R&D in practice in a city region: Innovation Greater Manchester and the Innovation Accelerator pilot.
  • The lecture can be watched on YouTube here, and the slides can be downloaded here: (PDF) Levelling up R&D.

    Lessons from the gas price spike

    On April 1st this year, the average UK household will see its annual energy bills rise from £1,277 to around £2,000 a year, according to the Resolution Foundation. After 10 years of stagnant wages – this itself a result of the ongoing productivity growth slowdown, there’s a clamour for some kind of short term fix for a potential political crisis, made worse by a forthcoming tax rise. Even more ominously, an unfolding geopolitical crisis over a conflict between Russia and Ukraine may interact with this energy crisis in a potentially far-reaching way, as we shall see.

    UK gas and electricity spot prices (monthly rolling average of “day-ahead” prices). Data: OFGEM

    My first plot shows the scale of the crisis. This shows the wholesale, spot prices of gas and electricity since 2010. I don’t want to dwell here on the dysfunctional features of the UK’s retail energy market that have led to the failure of a number of suppliers, or to look at the short-term issues that have exacerbated a current supply squeeze. Instead, it’s worth looking at the longer term implications for the UK’s energy security of this episode of market disruption, and to try to understand how we have been led to this state by global changes in energy markets and UK policy decisions over decades.

    Natural gas matters existentially for the UK’s economy, because 40% of the UK’s demand for energy is met by gas, and without sufficient supplies of energy, a modern economy and society cannot function. The price of electricity is strongly coupled to the price of gas, because 34% of our electricity (in 2020) was generated in gas-fired power stations, compared to 15% from nuclear and 23% wind. But generating electricity only accounts for 29% of our total demand for gas. The biggest fraction – 37% – is used for heating our houses, with another 12% is directly burnt in industry, to make fertiliser, cement and in many other processes.

    To understand why the wholesale price of gas matters so much, we need to understand a couple of ways in which the UK’s energy landscape has changed in the last twenty years. The first – the UK’s own balance between production and consumption – is shown in the next plot. Since 2004, the UK has gone from being self-sufficient in gas to being a substantial importer. Production of North Sea gas – like North Sea oil – peaked in the early 2000s, and has since rapidly dropped off, as the gas fields most easily and cheaply exploited have been exhausted.

    Gas production and consumption in the UK. Data: Digest of UK Energy Statistics 2021, table 4.1.

    The second consideration is the nature of the international gas market. A few decades ago, natural gas was a commodity that was used close to where it was produced – it could not be traded globally. But since then an infrastructure has been developed to transport natural gas over long distances; a network of intercontinental pipelines have been built, so gas produced, for example, in Arctic Siberia can be transported to markets in Western Europe. And the technology for shipping liquified natural gas in bulk has been developed, allowing gas from the huge fields in Qatar and Australia, and from the USA’s shale gas industry, to be taken to terminals across the world. This means that a worldwide gas market has been developed, tending to equalise prices across the world. A liquified natural gas tanker can leave Qatar, the USA or Australia and choose to take its cargo to wherever the price it can fetch is highest.

    The combination of the UK’s dependency on gas imports means that the prices UK households and industry have to pay for energy reflect supply and demand on a global scale. My next plot shows how global demand has changed over the last couple of decades. The UK’s demand has held steady – the UK’s “dash for gas” represented an early energy transition from extensive use of coal to natural gas. This was a positive change that has reduced the UK’s emissions of greenhouse gases. Now other countries are following in the UK’s footsteps – again, a positive development for overall world greenhouse gas emissions, but putting huge upward pressure on gas supplies. This stresses that the UK is a minor player in world gas markets; its consumption accounts for about 2% of world demand.

    World gas consumption by continent, together with China and UK. Data: US Energy Information Administration

    Where is this gas coming from? The largest net exporter, as shown in my next plot, is Russia. There’s an ominous echo of the 1970’s and its linked energy, economic and political crises, as dominant energy suppliers realise that withholding energy exports can be a powerful weapon in geopolitical conflicts. As it happens, the UK’s gas imports come primarily from Norway, by pipeline, and Qatar, through LNG imports by ship. But this doesn’t mean that the UK won’t be affected if Russia chooses to exert pressure on Europe by throttling back gas exports. There’s a global market – if Russia cuts off supplies to Germany and Central Europe, Germany will seek to replace that by buying gas from Norway and on the world LNG market, and the prices the UK has to pay will rocket.

    Top gas net exporters (i.e. exports less imports).Data: US Energy Information Agency

    What should the UK do about this energy crisis?

    We can discount straight away the suggestion made by veteran Thatcherite and Eurosceptic MP, Sir John Redwood, that the UK should simply produce more gas of its own. The UK is a small-scale participant in a global market. Even doubling its gas production would make no impact on the global balance of supply and demand, so prices would be unaffected. It’s true that if the gas was produced by a government-owned organisation, the rent – the difference between the market price and cost of production – would be captured by the UK state rather than having to be handed over to the governments of major exporters like Qatar, Norway and Russia. But British Gas was privatised in 1986.

    The reason the UK ran down its production was that governments in the 1980’s made a conscious decision that energy should be left to the market, and the market said that it was cheaper to import gas than to produce it from the North Sea (and even more so than to develop a fracking industry in Sussex and the rural Pennines). One can’t help getting the impression that UK politicians like John Redwood are in revolt against the consequences of the national economic settlement that they themselves created.

    In fact, there is nothing fundamental the UK can do now apart from strengthen the social safety net for the poorest households, accepting the pressure to increase taxes this leads to. Less politically visible, but nonetheless important, is the pressure high gas costs will put on energy-using industries. The reality is that, as a net importer of energy, higher gas prices inevitably lead to a real loss of national income. Energy infrastructures take many years to build, so all we can do now is look back at the things the UK should have done a decade ago, and learn from those mistakes so that we are in a better position a decade on from now.

    What the UK should have done is to reduce the demand for gas through an aggressive pursuit of energy efficiency measures, and to increase the diversity of its energy sources by accelerating the development of other forms of (low-carbon) electricity generation. It failed on both fronts.

    In 2013, the Coalition government reduced spending on energy efficiency measures as part of a campaign to “cut the green crap”; the result was a precipitous drop in measures such as cavity wall insulation and loft insulation. In 2015, the zero-carbon homes standard was scrapped, with the result that new housing was built to lower standards of energy efficiency. Recall that 37% of the UK’s gas demand is for domestic heating, so the UK’s poor standards of home energy efficiency translate directly into increased demand – and, with the current high prices, higher bills for consumers. “Cutting the green crap” turned out to be a costly mistake.

    It is true that the UK has brought on-stream a significant amount of offshore wind capacity. However, too much of this capacity has been offset by the decline of the UK’s existing nuclear fleet, now approaching the end of its life. The UK government has committed to a programme of nuclear new build, but this programme has stalled. In 2013, I wrote that the nuclear new build programme was “too expensive, too late”, and everything that has happened since has born that diagnosis out.

    There’s a more general lesson to learn from the current gas price spike. For some decades, the fundamental underpinning of the UK’s energy policy is that the market should be left to find the cheapest way of delivering the energy the nation needs. In the last decade, the government has intervened extensively in that market to promote one policy objective or another. We’ve seen contracts for difference, capacity markets, renewable obligation certificates – the purity of a free market has long since been left behind. But there’s still an underlying assumption that someone will be running a spreadsheet to calculate a net present value for any new energy investment.

    Cost discipline does matter, but it’s important to recognise that these calculations, for investments that will be generating income for multiple decades, rest on projections of market conditions running many years in the future. But what this current episode should tell us is that the future course of energy markets is beset by what the economists call “Knightian uncertainty”. On the reliability of predictions of future energy prices, the lesson of the past, reinforced by what’s happening to gas prices now, is that no-one knows anything.

    Energy can’t be left to the market, because the future state of the market is unknowable – but the need for energy is an inescapable ingredient of a modern economy and society. For something that is so important, building resilience into the system may be more important than maximising some notional net present value whose calculation depends on guesses about the state of the world over decades. This is even more true when we factor in the externalities imposed by the effect of fossil fuels on climate change, whose cost and impact remains so uncertain. To be more positive, there are uncertainties on the upside – the reductions in cost that an aggressive programme of low carbon research, development and deployment-driven innovation could bring. Rather than relying entirely on market forces, we have to design a resilient zero carbon energy system and get on with building it out.