Generating coherent and effective R&D and innovation policies

Executive Summary

This report is part of the British Academy's Economic Strategy Programme.

Given the important role innovation plays in productivity growth, policies to support R&D, technology and innovation are vital components of any economic strategy. However, despite improved government funding for R&D, UK productivity growth (along with the rest of the world) has been poor. In addition, the UK continues to have one of the most geographically uneven economies in the G7.

This low productivity growth has reduced the financial resources the government has to invest at a time when new security, geopolitical and sustainability challenges are creating additional demands on limited resources.

Given this context, what can the UK government do to better utilise and leverage the potential of R&D and innovation for improving economic outcomes in the long-term?

The UK has many high-quality assets. Improving how they are utilised can create positive outcomes at relatively little cost. Over the last decade, successive UK governments have sought to boost academic R&D spending, and to commercialise high-tech products and processes developed in universities. These policies have contributed significantly to an increase in UK business expenditure on R&D of £3 billion since 2021, to £49.9 billion in 2022.

Total “civil”3 net expenditure on R&D and knowledge transfer activities increased by 32.6%, from £10.4bn in 2011 to £13.7bn in 2022.4 While this increase is welcome, it still means the UK is lagging in R&D intensity among OECD countries.5 This is a challenge, but not one without opportunities. The Working Group discussed six such opportunities to improve the economic outcomes from R&D and innovation:

Strengthen the evidence base on how we measure research and innovation inputs and outputs

In the UK, we lack an understanding as to why investment in R&D has not led to significantly improved economic outcomes. This is indicative of a lack of good data on R&D and innovation in key research disciplines, sectors, industries and regions. This gap has made it more difficult to generate shared agreement about what the problems are and what policies should be implemented to address them. This will require a more nuanced understanding of the complex interactions between the stages and nature of research, innovation and industry.

Increase policy stability and build more effective R&D and innovation policy

While UK science policy has been consistent over decades, UK industrial policy has constantly changed, creating uncertainty for industry and international investors.7 There is a need to build long-term funding commitments and political stability into both science and industrial policy to create a more productive and integrated policy system.

Recognise that most of the science and technology that benefits UK firms is likely to be developed overseas.

The UK only produces about 7% of global scientific output. Policy focused solely on investing in the creation of new technologies here in the UK risks under-emphasising the adoption, adaptation and diffusion of those technologies.

Invest in talent, not just technology.

Productivity benefits are typically associated with adoption rather than creation. However, adoption and diffusion cannot happen without a well-trained, world-class research base ready to do the translation required. We need to invest in both.

Ensure a realistic understanding of the system and clarify the overall goals of innovation policy.

A range of evidence suggests that policy in other nations is increasingly interventionist and typically addresses all parts of the innovation system, from traditional R&D to downstream adoption. This covers managerial practices, diffusion, skills and access to international talent, infrastructure and planning, as well as connections to global technology supply chains and export markets.

Develop a range of structures and mechanisms appropriate for the UK to support innovation.

Arms-length funding bodies and innovation agencies direct funds, but central, regional and devolved innovation bodies also deliver that funding on the ground. To achieve positive outcomes, different structures need embedded expertise, alongside clarity of their purpose in their landscape. However, there will be inevitable trade-offs that need to be clearly articulated and understood.

Simply boosting the supply of translational research may be ineffective if it is not being appropriately used. Innovation, no matter its form, should not be taken for granted as “good”: innovation has a direction as well as a rate of change that must be noted and actively managed.8 Similarly, research and innovation are iterative processes, requiring experimentation, uncertainty, risk and, often, failure.

Building from these starting points, this paper identifies the following policy choices:

1. Bolster data and evidence-bases across innovation systems: Effective innovation policy needs to be underpinned by a solid research and evidence base, that reflects the breadth of activity associated with innovation, for use by both civil servants and researchers.
2. Understand and build on existing strengths: R&D and innovation policy needs to be pragmatic and based on a clear understanding of the UK’s relative strengths and weaknesses. This will require policymakers to build a better understanding of existing skills, industrial capabilities and innovation capacities in different regions of the UK.
3. Look beyond frontier technologies: Innovation policy should support the entire innovation process and ecosystem, not only the parts that generate improvements at the technological frontier.
4. Create longer-term innovation policy: Embed more stability and reduce policy uncertainty to encourage private sector investment. Ensure that the design and utilisation of institutions align with overall policy need and goals.
5. Align new policy to the existing policy mix: The interconnection between innovation policy and other areas of public policy requires policymakers to take a coordinated approach to the wider policy mix to generate growth.