The UK Innovation Report 2022

1: Structure and Performance of the UK Economy

Key policy questions addressed:

• How has the structure of the UK economy changed in the last few years?
• Are these changes affecting economic performance?
• How does this compare with other countries?

Key findings:

• In the last two decades the share in the UK economy of high-productivity sectors such as manufacturing and mining has reduced, while the participation of sectors such as construction and services has grown. Between 1998 and 2019, the manufacturing sector had one of the highest productivity growth rates in the UK economy, but it was also the sector whose share in the economy decreased the most (from 16.1% to 9.7%) during this period.
• Finance was the main driver of productivity growth prior to 2008 but its contribution became negative in the post-crisis period. Before the financial crisis, finance was the main driver of productivity growth in the UK, but Bank of England analysis suggests that this was likely driven by “unsustainable increased debt and higher risk tolerance”. The contribution of finance to national productivity growth became negative post-crisis.
• The loss of manufacturing has imposed a penalty on UK productivity growth of half a percentage point, on average, each year for the last two decades.  In contrast, manufacturing was responsible for around 30% of aggregate productivity growth in China and almost half in Taiwan during the 1998–2017 period. It also contributed to around 30% of aggregate productivity growth in Korea between 2005 and 2017 and 15% in Singapore between 2010 and 2017.

---

 

2: Investment in Innovation

Key policy questions addressed:

• Is the UK spending enough on R&D?
• How do the public and private sectors contribute to national expenditure on innovation?
• How does the UK compare with other countries?

Key findings:

• The UK spends less on R&D than the OECD average; a significant increase in public funding for R&D has been announced but delayed. At 1.74%, the UK’s gross domestic expenditure on R&D remains well below the 2019 OECD average of 2.5%. The UK government has committed to investing £22 billion in R&D by 2026/27 (pushing back the original target date of 2024).
• Compared to other countries, the business sector in the UK contributes less to R&D funding; universities perform significantly more of the country’s R&D and the government significantly less. In the UK the business sector funds around 55% of R&D – a lower proportion than in countries such as Germany, Korea and Japan. The UK’s higher education sector stands out from comparator countries, performing 23.1% of the country’s R&D in 2019. The government sector in the UK performs only 6.6% of R&D, well below comparator countries.
• Very few firms headquartered in the UK are global leaders in R&D investment and patent applications. In 2020 only two companies headquartered in the UK were among the top 100 R&D investing firms and no firms headquartered in the UK were among the top 100 patent applicants at the United States Patent and Trademark Office (USPTO).

---

 

3a: Industrial Performance – Focus on the Pharmaceutical Manufacturing Sector

Key policy questions addressed:

• Are UK sectors becoming more or less competitive internationally?
• How are UK sectors performing in terms of productivity, value added and employment?
• What are the drivers behind the observed performance trends?

Key UK pharmaceutical manufacturing trends in the last decade:

• The value added and productivity of the UK pharmaceutical manufacturing sector have declined significantly in the last decade. Of the top 13 countries by pharmaceutical value added in 2018, the UK was the only one to have experienced a significant productivity decline, at a rate of -7.9% per year between 2008 and 2018.
• The UK trade balance in pharmaceuticals has deteriorated significantly since 2014. The UK has recorded deficits in pharmaceutical product trade in all years between 2014 and 2020, except in 2015, with the trade balance going from a $9.6 billion surplus in 2010 to a deficit of over $1 billion in 2020.
• Pharma business R&D expenditure in the UK has remained stagnant in the last decade and remains significantly lower than comparator countries. The sector spent only 6% more in 2018 than it did in 2008, compared to increases of around 30% in the US and Germany and over 100% in Korea.

Drivers identified in literature review and sector expert consultations:

• Company restructuring and site closures, including those by major sector employers;
• Increased offshoring of pharmaceutical manufacturing, including a large share of APIs;
• The UK’s inability to capture the “second wave” of international manufacturing investments;
• Greater incentives (e.g. tax) offered by other countries to attract manufacturing;
• New entrants focusing on early-stage drug discovery and non-manufacturing activities;
• An inability to commercialise and scale up the manufacture of technologies developed in the UK;
• Caps on drug spending having an impact on the perception of the UK by investors;
• Increased use of generics pushing prices downwards and driving imports upwards;
• The 2016 EU membership referendum adding uncertainty to investment decisions;
• The large share of domestic business R&D expenditure decisions taken abroad;
• Competitor countries having greater incentives to attract R&D investment;
• Difficulties accessing scale-up funding locally, leading to firm decisions to migrate; and
• UK companies reducing in-house R&D investment in favour of acquiring small firms.

---

 

3b: Industrial Performance – Focus on the Automotive Manufacturing Sector

Key policy questions addressed:

• Are UK sectors becoming more or less competitive internationally?
• How are UK sectors performing in terms of productivity, value added and employment?
• What are the drivers behind the observed performance trends?

Key UK automotive manufacturing trends in the last decade:

• The value added and productivity of the UK automotive sector grew steadily between 2008 and 2018. The UK belongs to a group of nations where productivity was high and rising over the 2008–18 period, together with Germany, Korea and the US.
• Despite being the ninth largest exporter of vehicles in 2020, the UK maintains a significant deficit in automotive product trade. Since 2010 the UK has recorded a persistent trade deficit in automotive products, standing at $21.8 billion in 2020. Industry reports suggest that 50% local content is a plausible target for the UK car industry.
• UK business expenditure on automotive R&D grew rapidly between 2009 and 2016 but has declined in recent years. UK business enterprise expenditure on R&D (BERD) for automotive grew by 11.7% (CAGR) between 2009 and 2018 (but with a slowdown in 2017 and 2018).

Drivers identified in literature review and sector expert consultations:

• Increased specialisation of the UK’s automotive sector in premium product segments;
• Future sector growth dependent on the UK’s ability to produce electric and hydrogen vehicles and components;
• High levels of automation influencing the growth in employment in recent years;
• Skills’ shortages, particularly in higher technical education reported by industry;
• Decisions by foreign original equipment manufacturers (OEM) favouring other locations;
• Increased competitive pressures from both established and upcoming nations;
• Increased uncertainty around trade and investment as a result of the 2016 EU membership referendum; and
• R&D investment decisions mostly driven by foreign OEMs.

---

 

4: Science and Engineering Workforce

Key policy questions addressed:

• Is the UK producing enough scientists and engineers?
• Is the UK government investing enough in technical and vocational education?
• How does this compare with other countries?

Key findings:

• Tertiary education attainment in the UK is well above the OECD average – and a comparatively larger share of graduates is found in science, technology, engineering and mathematics (STEM) disciplines. In 2019 graduates in STEM disciplines accounted for 43.4% of the total number of graduates in the UK, above comparator countries such as France (36.8%), Canada (37.8%) and the United States (37.6%)
• Women are under-represented in STEM disciplines. Only 27% of the STEM workforce in the UK is female, compared with 52% in the total workforce. For UK engineers a gender pay gap exists but it is smaller than the pay gap for all UK workers.
• Higher technical education enrolment is comparatively low in the UK. Enrolment rates in post-secondary education courses, below the standard three-year Bachelor’s degree, are comparatively low in the UK when compared with countries such as the US, Korea and France. The government’s White Paper, Skills for Jobs, recognises a “significant shortage of vital technician-level STEM skills”.

---

 

5: Net Zero Innovation

Key policy questions addressed:

• How does the UK compare in low-carbon and renewable-energy technology research and development (R&D) investment?
• How is R&D expenditure translating into patenting performance?
• Is the UK capturing the economic potential of the transition towards net zero?

Key findings:

• The UK is one of the global leaders in both public R&D budget and patenting of net-zero-related technologies. The International Energy Agency (IEA) estimates that in 2020 the UK’s public R&D budget in low-carbon and renewable-energy technologies was $1.2 billion (USD $2020), lower than France, Japan and the US but ahead of Germany and Canada. The UK ranks eighth in the registration of climate-change mitigation technology (CCMT) patents, behind Japan, the US, Germany, Korea, China, France and Taiwan.
• Most of the low-carbon and renewable-energy sectors in the UK have been declining over the last five years. The ONS defines the low-carbon and renewable-energy economy (LCREE) as 17 low-carbon sectors, including wind, renewables, PV, CCS, nuclear and energy-efficient products. A total of 10 out of 17 LCREE sectors showed a decline in turnover between 2014 and 2019. Overall, there were 27,000 fewer LCREE business and 33,800 fewer jobs in LCREE sectors in 2019 than in 2014.
• There are some national disparities, with Scotland performing strongly. At £1 million turnover, 4.1 jobs and 2.2 businesses per 1,000 inhabitants, Scotland performed above the UK annual average for all categories between 2014 and 2019. Wales also performs above the national averages for LCREE businesses and jobs, at 2.46 businesses and 3.35 jobs per 1,000 inhabitants.