Innovation pays off but resources stretched to the limit

UK manufacturers are reaping the rewards of high levels of innovation over recent years. However, internal resources are being stretched extremely thin as a result.

The benefits are coming off the back of dynamic activity to develop products and services for new customers and markets, according to a major study published today by EEF and NatWest.

The 2014 EEF/NatWest Innovation Monitor shows strong demand is now putting pressure on manufacturers’ internal resources, from management time to working capital.

As a result, manufacturers have focused on a smaller number of innovative activities aimed at satisfying existing customers. Manufacturers continue to prioritise innovation, indeed most plan moderate increases in expenditure, but as with all areas of business activity, resources are spread more thinly.

This has led to an increase in the proportion of manufacturers who are concerned that their level of expenditure on innovation is not enough to keep pace with competitors, from 19% in 2013, to 26% in this year’s survey. This has worrying implications for the UK economy’s long-term competitiveness.

Over the course of this government there have been many positive additions to innovation support, but as the economy starts to expand and grow, it cannot be taken for granted that the UK’s innovation performance will accelerate.

Commenting, Lee Hopley, chief economist at EEF said: “Innovation is a critical part of manufacturers’ growth strategies and most have the ambition to do more. However, while they are now reaping the rewards of previous activity, and stronger demand is boosting growth prospects, the resultant increase in activity is forcing manufacturers to re-focus their innovation activity and leading them to fear for their competitive position.

“If the UK is to continue to compete internationally, both the level and effectiveness of innovation must be increased. Many of the recent changes to policy have been supportive and these should be maintained, together with a longer-term, more strategic approach from government over successive Parliaments.”

According to the report, 95% of companies said they had engaged in some form of innovation in the last three years. In addition, nearly all companies plan to continue innovating in the next three years, although their expenditure plans were generally moderate.

However, the number of companies reporting innovation in three activities or more has halved compared to last year from 75% to 38%, highlighting the fact companies are engaged in a narrower range of innovations, with a focus on satisfying existing customers in more traditional markets.

The report also shows that the UK needs to increase its expenditure and performance when it comes to innovation, especially applied research, if we are going to catch up, and overtake, key international competitors. UK Business Expenditure on R&D (BERD) is only 1.1% of GDP, while the OECD average is 1.6% and Germany is at 2%. Furthermore, over the last decade the UK’s relative position has declined as BERD intensity in many competitor economies has improved. The proportion of UK SMEs bringing new products to the market also falls way below the EU average.

Mark Eastwood, head of manufacturing at NatWest, said: “Last year’s report showed a very different picture, with manufacturers committing to several innovation projects and making it an investment priority. The change we are seeing this year may be that due to increased demand, manufacturers are refining the innovation projects they are working on and focusing on those that are going to achieve the biggest return.

“However, to remain competitive in a domestic and global market manufacturers need to make sure they are not falling behind their peers in the level and effectiveness of the innovation they undertake.”

According to the report, the main barriers to innovation are persistent – namely speed to market and overcoming technical barriers. Manufacturers are taking action themselves to overcome these barriers such as ensuring a high level of collaboration with customers, while Government support is also plays a key role in increasing the level of innovation; schemes such as the R&D tax credit and Knowledge Transfer Partnerships are particularly valuable.

Government has taken a number of steps to boost innovation support such as strengthening the R&D tax credit, and increasing the budget for the Technology Strategy Board (TSB).

However, EEF believes that if the UK is to continue to compete internationally then both the level and effectiveness of innovation must be increased. In response, EEF has made the following recommendations:

1.       Funding for the Technology Strategy Board must be sustained in real terms, at the very least at 2015/16 levels.

2.       Funding for the High Value Manufacturing Catapult should be increased and the structure adjusted to encourage SME engagement.

3.       The R&D tax credit should be maintained and the definition of R&D within the credit should remain broad and stable.

4.       Longer-term, Government should develop a framework for regular assessment of the breadth of science and innovation support to ensure all schemes remain well-directed and adequately funded.