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R&D spending, European trailblazers and Brexit implications

The new official bulletin on R&D spending statistics makes for fascinating reading from a business point of view. Produced annually by the Office for National Statistics (ONS), figures in the Gross domestic expenditure on Research and Development, UK: 2016 are the latest available.

It pulls together estimates of research and development performed and funded by business enterprise, higher education, government, research councils, and private non-profit organisations – as well as contrasting UK R&D performance with that of the rest of Europe.

Headline aspects:

  • R&D kept expanding, by £1.4bn to £33.1bn in 2016 – an increase of 4.3%. That’s above the annual average increase since 1990 of 4.1%
  • Business R&D grew by £1.2bn to £22.2bn, an increase of 6% and the biggest growth sector
  • R&D spend in the UK in 2016 represented an unchanged 1.67% of gross domestic product (GDP) from 2015 0- below the EU estimate of 2.03%
  • The UK remains ranked 11th of all EU countries as a percentage of GDP spent of R&D
  • Overseas funding of UK R&D fell again and was 7% lower than 2014’s record high of £5.6bn

But what are we to make of all this? Statistics can generally be bent in any way to suit a particular standpoint. To use an apposite example, ‘the majority of people in the UK want to quit the EU’ against ‘nearly half of people in the UK don’t want to quit the EU.

Thus, it’s just the way you tell ’em, but at least we can rely on the ONS to provide accurate raw material from which we must disseminate, digest and cogitate. What we can say without fear of contradiction is that UK R&D spending is at a record high and most of the growth came from the business sector which accounts for two thirds of all R&D.

The business sector’s £22.2bn R&D spend represents 67% of total UK expenditure, an increase of 6% from 2015’s £21bn.

And within the sector the highest performing product groups on R&D expenditure were: pharmaceuticals (£4.1 billion); motor vehicles and parts (£3.4 billion); aerospace (£1.9 billion); computer programming and information service activities (£1.8 billion); miscellaneous business activities (£1.3 billion); research and development services (£1.0 billion).

So, all the stats are safely gathered in and everything appears rosy, but there are one or two issues.

The UK’s gross domestic expenditure on R&D (GERD) of 1.67% ranks us 11th of all EU-28 countries, putting us behind Sweden, Austria, Germany, Denmark, Finland, Belgium, France, the Netherlands and even Slovenia and the Czech Republic.

We have some way to go to achieve the slightly worsening EU-28 GERD average of 2.03% and the Europe 2020 target of 3% seems as distant as ever. It should, however, be noted that only Sweden (3.25%) and Austria (3.09%) have already attained this.

The Chancellor, Philip Hammond, stated last November that he intended increasing UK R&D spending to 2.4% by 2027 with promises to release extra billions of pounds – which would raise us to sixth place in a table that we will not be part of at some future point. Given that UK R&D spend has remained fairly constant for decades at considerably less than 2% and that political fluctuations and ever-changing Treasury priorities are fairly large and constant spanners in the works, we’ll cheer Hammond if he achieves his objective, but not hold our breath.

And that leads us to Brexit. Although the current state of political flux has turned forecasting into a dangerous sport, there are some pointers.

It is without question that R&D within the UK’s businesses is by and large (as, of course, are many aspects of business) complexly entwined and thoroughly reliant a great deal on companies with particularly close connections the European Union.

Worryingly, three industries which do the greatest amount of research – cars, pharmaceuticals, and aerospace – are deemed to be the most exposed to the ramifications of Brexit. Given that they spent just under half of the total spent by businesses on R&D in 2016 – £9.4bn out of a total of £22.2bn – it is not difficult to foresee that Brexit is likely to have serious implications.

For instance, what will happen to the UK’s motor industry which currently spends an annual £3.4bn on R&D?

Mostly foreign-owned, the big players have been making conspicuous noises about the need for continued movement of components and expertise across Europe without troublesome hurdles such as import tariffs or red tape.

It may or may not be significant that our largest player, the Indian-owned Jaguar Land Rover has commissioned a Canadian firm to build a new electric car in Austria. Or that JLR is building a £1bn factory in Slovenia. The West Midlands heartland of automotive production, desperate for better infrastructure, can be excused for feeling nervous.

In the world of pharmaceuticals, a great deal of research is carried out by a few big companies which appreciate the EU R&D budget. And aerospace firms are said to fear for future long-term investment in Britain.

We should, however, point out that R&D tax relief is an incentive to encourage innovation and to show that the UK is an attractive place in which to do business. No government in its right mind would act to endanger this, surely. It should be remembered that Brexit will not directly affect UK R&D funding which comes solely from our government. Indeed, it may well free us from the limiting shackles of EU regulations and restrictions.

Difficulty may arise if large companies discover other countries are more fruitful locations in which to conduct research and invest. But for many of our SMEs to operate overseas is out of the question and it is really a case of suck it and see.


Office for National Statistics:
Gross domestic expenditure on research and development, UK: 2016
The Guardian:
R&D can’t fly against the winds of austerity and Brexit
Opinions by Ayming:
Brexit and R&D Tax – What’s the impact for UK businesses
Open A European Company:
Why Brexit could be a blessing in disguise for British R&D

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