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Invest to Grow: Why aren't more businesses investing in innovation and R&D?

Greater Birmingham Chambers of Commerce

This blog post is part of the Greater Birmingham Chambers of Commerce’s Invest to Grow campaign. Invest to Grow aims to inspire and inform businesses around investment in R&D, innovation, technology and machinery and how it can help boost productivity through case studies, expert opinion pieces and briefing information. Click here to find out more and don’t forget to join the conversation on social media with #I2G18. Part 1 of Invest to Grow focuses on investment in innovation and research & development and is sponsored by the University of Birmingham.

Why invest in innovation and R&D?

Investing in innovation and research and development (R&D) is a good idea.

In a world where technologies advance rapidly, consumer loyalty is diminishing, customer behaviour is constantly shifting and the competition is global, innovation is crucial for business survival. Many iconic businesses of my childhood (think Blockbusters, Woolworths, Toys R’Us) fell into the trap of failing to innovate – with very public consequences. While they don’t make the headlines, countless small and midsized businesses have also suffered a similar fate.

But it is not just fear of being consigned to the business graveyard that motivates businesses to innovate – it is generally good for business. Firms that consistently invest in R&D, a key part of innovation, are 13% more productive than firms that don’t invest in R&D.

Embracing innovation can also be a great way to attract talented employees; as the latest Deloitte Millennials Survey highlights, young professionals attach significant value to organisations that innovate.

But if investing in innovation and R&D is such a great idea, why aren’t more businesses doing it?

Why don’t businesses invest in innovation and R&D?

According to the UK Government’s Innovation Survey, between 2014-16, 50% of UK Enterprises were actively innovating. What about the other 50%?

Well first up, plenty of businesses that are innovating may not realise they are doing it. Innovation isn’t just about labs and white coats or young creatives disrupting industries from coffee shops. Improving processes or machinery, adapting products for key customers or new markets, applying ideas or technologies seen elsewhere to your business are all forms of innovation. Investment in innovation also doesn’t necessarily mean a financial investment: staff time is a vital component.

This is particularly important when it comes to R&D, especially R&D that matches HMRC’s definition for R&D tax credits. There are plenty of employers, often SMEs, in the region who could be missing out on, well, cash through failing to claim R&D tax credits for applicable activity. Research from PwC released last year suggests that, while over 10% of UK R&D spending is incurred in the West Midlands, only around 8% of claims for R&D reliefs come from the region. The missing 2% may have cost West Midlands’ companies around £60 million in one year alone. 

We’ve only recently discovered that the Chamber could be able to make a claim for our work customising our Customer Relationship Management system.  We are now working with an R&D tax advisor on a commission only basis. If we’re successful, we’ll receive a nice reduction in corporation tax that we otherwise wouldn’t have and if not then there’s no cost to pay – well worth doing.

There are also some core reasons why businesses don’t invest in innovation. Earlier this year we surveyed GBCC members in partnership with the University of Birmingham’s City-Region Economic Development Institute. We found that the top barriers to investing in innovation were:

  • Cost pressures/high input costs (65% rated it of high to medium importance to their business)
  • Too much competition in your market (64% rated it of high to medium importance to their business)
  • Lack of skilled employees within your enterprise (59% rated it of high to medium importance to their business)
  • Lack of internal finance for innovation (49% rated it of high to medium importance to their business)

These highlight several interesting factors:

  • The one thing all businesses have in common: finite resources. When cost pressures are high and organisations prioritise investing internal finance and staff time on other (perhaps more immediately urgent) activities, innovation and R&D can fall by the wayside. However, as discussed above, over the long term a failure to invest in innovation does have consequences for competitiveness…
  • …Which makes it interesting that businesses cite market competition as a barrier to innovation. Challenging the mind-set that investing in innovation represents a cost rather than (if done properly) a strategy for enhancing competitiveness is crucial.
  • Access to employees with the right skills is a recurrent issue for local businesses – and not just in relation to innovation. The challenge for businesses is how they look beyond this as a barrier and see it as an opportunity to review the skills that they do need and explore opportunities to partner with other organisations on either staff training or whole innovation projects to fill those gaps.

Interestingly, the lowest rated barrier was lack of credit or private equity with 71% rating it as of low or no importance to their business.

What can we do about it?

With this in mind, the Greater Birmingham Chambers of Commerce have a number of recommendations:

For stakeholders:

  • Reduce input costs for businesses arising from taxation

There have been some positive interventions on supporting investment in innovation and R&D from the Government lately. For instance: the Government has announced that it will raise total R&D investment to 2.4 per cent of GDP by 2027 and has already increased the rate of R&D tax credits to 12 per cent. It has also unveiled a £725m investment in the Industrial Strategy Challenge Fund for programmes that “capture the value of innovation” as part of the approach outlined in the Industrial Strategy (click here for more details).

However, we have also seen a rise in costs for businesses arising from taxation. When we surveyed businesses across the West Midlands region earlier this year as part of the British Chambers of Commerce Business Taxation Survey, we found that 76% firms had experienced an increase in the overall burden of tax admin and compliance compared to five years ago. And with the recent introduction of the apprenticeship levy, pension auto-enrolment and rising business rates for a significant number of firms, it’s no wonder why.

Bearing in mind the “law of finite resources” if the Government could successfully overhaul the UK’s tax system to reduce its reliance on input taxes and streamline admin it would free up significant business resources for potential investment in innovation and R&D.

  • Clarify the long term vision for funding innovation post-Brexit

As noted above, there is a notable amount of UK Government backed innovation funding (led by Innovate UK). However, far more is currently accessible via EU funded programmes such as Horizon 2020. Businesses and universities need certainty on the extent that they will be able to access such funding post-Brexit and, if they can’t, how the UK Government intends to replace those funding streams and networks.

For businesses:

  • Embrace innovation and R&D

Investing in innovation and R&D is as much, if not more, about business culture and leadership as it is about financial investment. Seek to create an environment that recognises, rewards and enables innovation. Make sure it features highly in your business plan and receives the resources it needs (in a way that is proportionate to your business and its aspirations) to deliver tangible results.

  • Make the most of the support available

Every investment comes with a risk of failure. Luckily, there are lot of support organisations, tax incentives, grants and potential partners out there that can help businesses reduce the risks associated with investing in R&D and innovation. Make sure your organisation is making the most of them.

  • Get involved in Invest to Grow

It’s packed full of inspiration and information.

Make sure you:

  • Check out the case studies, expert opinion pieces and briefing information on the support available for businesses here.
  • Join the conversation on social media and share your views and experiences of investing in innovation and R&D using #I2G18
  • Take part in our latest Quarterly Business Report survey here (closes 17th September) - we’re asking some additional questions on your views on investment in innovation, R&D, tech and machinery.

Henrietta Brealey
Director of Policy & Strategic Relationships
Greater Birmingham Chambers of Commerce