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Invest to Grow: Why research and development works - the link between investment and growth

MCS Corporate

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.

Investment in the research and development (R&D) activities and the development of intellectual property (IP) has been identified by the Government as being a key driver to growth and economic success.  The British government, as in many other countries, has a suite of tax incentives and funding opportunities to support businesses investing in research and development activities.  The question is why, when economic pressures on government services are high, would offering tax breaks to companies be a good idea?  It is all about boosting the economy in a sustainable way.

Research shows that investing in R&D activity can boost a companies output and in turn a country’s growth.  In 2015, with a challenging financial backdrop, R&D spending was the highest (as a percentage of GDP) in Israel (4.266%) and the Korean Republic (4.228%), with Japan, Sweden and Austria spending between 3.284 and 3.072%1

This spend on R&D directly correlates with growth rates in GDP, with consistently high growth in Israel, Korea and Sweden, strong growth compared to its historic averages in Japan and impressive growth in Austria in 2017 of 3.03%, an increase of 1.943% on its GDP growth rate in 2015.  Other indicators show high levels of researchers per capita are key drivers, with four of the ‘top five global R&D spenders’, having markedly high numbers of researchers per capita. 

In 2015, the UK R&D spend per capita was only 1.703%, with spend on R&D similar to that of Korea and France, but half of that of Germany.  In terms of actual spend on R&D the UK spent £744.42 per person, versus an average of £1,268.49 per person in the ‘top five’.  So should this be a cause for concern? 

Philip Hammond joined a succession of Chancellors to support innovation, by stating in August 2018, “It is by backing innovative British companies to grow and create jobs that we will continue this progress and build an economy fit for the future.”2 This is because in an increasingly global market, it is only through investing in our products and services, improving productivity and developing our areas of expertise, we will be able to stay competitive. 

R&D is crucial to growth, by developing smart working, promoting industrial competitiveness, job creation and developing solutions to wider societal and environmental challenges, such as global warming and progress in healthcare.  In light of Brexit, R&D has become an even more important activity for the UK.  Our European allies aim to increase spend on R&D to 3% of GDP by 2020 as part of the Europe 2020 goal3, the UK needs to increase relative activities to drive innovation forward and stay competitive, if not push ahead. 

An increase in R&D activity and IP creation is crucial to economic growth, but this is already an economic force.  The Intellectual Patent Office highlighted that patent intensive industries generated 13.3% of UK GDP and 8.3% of employment between 2011-2013, with total investment into protected intangible assets in 2014 of £7.5 billion4

Spend on R&D in the UK is increasing and targeted government tax and funding incentives have supported this growth and continue to do so.  HMRC highlighted that every £1 spent on R&D tax credits stimulates between £1.53 and £2.35 in R&D expenditure,5 in the UK in 2015.  Ultimately, developing and progressing businesses and services enables sustainable growth, so this trend needs to continue.

About MCS Corporate

Rebecca Warwick is a consultant at MCS Corporate Strategies Ltd, a specialist in Research and Development Cost Recovery.  MCS has been working in the region for over 30 years, providing specialist support and advise for companies accessing Government incentives. 

For more information see www.mcs-corporate.com, or contact Rebecca on 01926 512475 for an informal chat or connect on Linked in.

1 https://data.worldbank.org/indicator/

2 https://www.gov.uk/government/news/billion-pound-backing-for-british-innovation

3 European Commission, Taking stock of the Europe 2020 strategy for smart, sustainable and inclusive growth, COM(2014) 130 final, Brussels, 2014 (p. 12).

4 ttps://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/581280/Fast-Facts-2017-booklet.pdf

5 https://www.gov.uk/government/publications/evaluation-of-research-and-development-tax-credit

Rebecca Warwick
Consultant
MCS Corporate