2023 UK Innovation Report launched

In the UK, we face an extremely difficult economic situation. Since 1990, we, along with the other G7 countries, have been experiencing a slowing rate of economic growth. At the same time, the economic profession has not able to agree on an explanation as to why this is the case. Low demand is the most popular explanation, some think that poor human capital is to blame, while others think the problem is one of productivity mismeasurement.

This inability to explain why we have a slow rate of growth is clearly a major problem for policymaking. It’s difficult to know how to fix a problem if one doesn’t know what the cause of that problem is. I should say, however, that in my experience of government, the lack of an explanation of why a problem exists does not seem to worry most politicians – but it does explain why so much policymaking is of poor quality and achieves very little.

Before we start producing policies to increase our rate of economic growth in the UK, we need to know why it’s been so slow in the recent past; which is easy to see when you look at what happened in the global economy in 1990.

Around that time three key economies in the world began to be transformed into dynamic markets. Deng Xiaoping started introducing market reforms of privatisation of state ownership in China and Manmohan Singh started liberalising the Indian economy. At the same time the Russian Federation collapsed which meant that countries like Poland began to grow very fast, particularly as German industry started putting factories into the country.

This meant that all G7 countries during that period started to experience a vast increase in competition from countries which had much lower wages. When a country with over a billion people, like China, turns into a market economy it has a big impact.

And you can see the results of this increased competition. For example, the UK manufacturing sector, which has a relatively high value added per capita, has shrunk. While low value added services, such as food services, have increased their share of the economy.

So, we have a slow rate of growth because, quite simply, we have a slower rate of innovation, and we’re no longer producing enough high value added innovative, world-beating products and services, which we can sell for premium prices in world markets.

There is a simple reason for this. And it really has to be the starting point for asking what we need to do to get a higher rate of growth. Take a look around your house at home, there will be a number of products, from laptops to paper clips, that will be made in countries like China.

And that gives you a feel for what is happening in the world economy. There just aren’t enough British products. If you go back to the period where the UK was the leading industrial country, and growing very fast, it was off the back of brilliant products which we were selling around the world, whether it was steel from Sheffield, ships from Newcastle or Glasgow or textiles from Manchester.

The answer to this problem of course lies in the hands of industry. Only they can produce the innovative world-beating products we need to compete in world markets. But the government, working with industry, can play a productive role; offering support in areas such as R&D, skills and finance for medium and high tech manufacturing companies, green and other advanced industries who have plans to increase that value added per capita.

But if government is going to do that effectively, it needs to know a lot more about our overall record in innovation; what is happening in the different sectors of the economy; how our overall level of science funding compares with other countries; and how well it’s targeted to help different sectors of the economy increase their rate of innovation and become more competitive.

That’s why this innovation report is so important. It contains an enormous amount of important information about the UK’s innovation approach, which is essential for the government to know in order to develop the policies necessary to speed up the innovation rate of UK industry sectors.

Regional analysis confirms that in the last two decades, the expansion of service sectors at the expense of higher productivity sectors, such as manufacturing, has slowed overall productivity growth and contributed to widening productivity gaps across the UK.

A new methodology introduced by the Office for National Statistics (ONS) has pushed the estimated UK expenditure on R&D as a percentage of GDP from 1.7% to 2.7%. While this means the 2.4% target has been achieved, the UK remains well behind countries such as Germany, the United States and South Korea.

The UK’s aerospace manufacturing sector was the third largest in the OECD in 2019, behind only the US and France.

The UK’s aerospace manufacturing sector specialises in engines and other aircraft components such as wings; its trade surplus (US$14.7 billion) was the third largest in the world in 2021.

Fourteen thousand jobs were lost in the sector in 2020–21 due to a collapse in demand driven by the Covid-19 pandemic, leading to company restructuring and accelerating supply chain consolidation.

UK aerospace competitiveness is underpinned by advanced R&D and innovation capabilities, with UK business expenditure on aerospace R&D ranking third among OECD countries, with overall growth in the last decade.

The UK’s food and beverage manufacturing sector was the sixth largest in the OECD in 2019, behind the US, Japan, Mexico, France and Germany.

Demand in the food and beverage has proven to be highly resilient to recessions and disruptive events, including the financial crisis, the COVID-19 pandemic and Brexit, as reflected by the sector’s growth in value-added over the last decade and its stable productivity levels during this period.

Most manufacturers are focused on meeting domestic UK demand and have limited incentives to export. The UK produces around 60% of its domestic food consumption by economic value though imports are an essential part of the industry due to geography, weather and land availability. The UK’s food and beverage sector has one of the most significant trade deficits in the world, though it remains a leading exporter in high-value niches such as whiskey.

UK business expenditure on food and beverages R&D has increased steadily during the last decade, reaching levels comparable to other leading OECD nations.

Product innovation is a key focus of the UK food and beverages industry. However, economic uncertainty and industry buying practices may hinder investment in innovation. Industry consultations suggest opportunities to increase the adoption of digital and automation solutions for food production, particularly among SMEs.

Unfilled vacancies have been a long-standing issue in the sector, with vacancies per 100 employees increasing to 9.1 in Q3 2022 from 6.3 in Q2 2022, more than double the UK average of 4.1.

Although science, technology, engineering, and mathematics (STEM) graduates in the UK accounted for 41% of total graduates – above countries such as France and Canada, and similar to the United States – the share of graduates in the STEM sub-discipline of engineering, manufacturing and construction represented only 9% of graduates, well below comparator countries such as Germany (26%) and Korea (21%).

The OECD estimates that at 6%, the UK had the sixth highest government budget allocation for R&D in environment and energy innovation among OECD countries in 2020. This is higher than that of the United States (3%) but lower than Japan (8%), Germany (8%), Korea (8%), and France (9%).

The UK ranks seventh among OECD countries in patent applications for the group of technologies defined by the OECD as “environment-related technologies”.