2023 UK Innovation Report
2023 Executive Summary
1: Structure and Performance of the UK Economy
Key policy questions addressed:
- How does productivity vary across UK regions and countries?
How has the economic structure of the UK regions changed in the last few years?
Are these changes affecting economic performance?
Key findings:
- Disparities between UK regions and countries are large and widening: in 1999 labour productivity in Wales represented 65% of that observed in London; however, in 2019 Wales’ productivity was only 58% of that of London.
- Regional analysis confirms that in the last two decades, the expansion of service sectors at the expense of higher productivity sectors, such as manufacturing, has slowed overall productivity growth and contributed to widening productivity gaps across the UK.
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:
- A new methodology introduced by the Office for National Statistics (ONS) has pushed the estimated UK expenditure on R&D as percentage of GDP for 2019 from 1.7% to 2.7%.
- While this means that the 2.4% target has been achieved, the UK remains well behind countries such as Germany, the United States and South Korea, which invested between 3.2% and 4.6% of GDP on R&D.
- At 0.12% the UK government’s expenditure on R&D in 2019 was still half the OECD average of 0.24%.
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 aerospace manufacturing trends in the last decade:
- The UK’s aerospace manufacturing sector was the third largest in the OECD in 2019, behind only the United States and France.
- The UK’s aerospace manufacturing sector specialises in engines and other aircraft components such as wings; its trade surplus (US$14.7 billion) was the third largest in the world in 2021.
- 14,000 jobs were lost in the sector in 2020–21 due a collapse in demand driven by the Covid-19 pandemic, which let to company restructuring and accelerated supply chain consolidation.
- UK aerospace competitiveness is underpinned by advanced R&D and innovation capabilities, with UK business expenditure on aerospace R&D ranking third among OECD countries and growing steadily in the last decade.
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 food and beverages manufacturing trends in the last decade:
- The UK’s food and beverages manufacturing sector was the sixth largest in the OECD in 2019, behind the United States, Japan, Mexico, France and Germany.
- Demand in the food and beverages sector has proven to be highly resilient to recessions and disruptive events, including the financial crisis, the COVID-19 pandemic and Brexit, as reflected by the sector’s growth in value added over the last decade and its stable productivity levels during this period.
- Most food and beverages manufacturers are focused on meeting domestic UK demand and have limited incentives to export. The UK produces around 60% of its domestic food consumption by economic value though imports are an essential part of the industry due to geography, weather and land availability. The UK’s food and beverage sector has one of the largest trade deficits in the world, though it remains a leading exporter in high value niches such as whiskey.
- UK business expenditure on food and beverages R&D has increased steadily during the last decade, reaching levels comparable to other leading OECD nations.
- Product innovation is a key focus of the UK food and beverages sector. However, economic and demand uncertainty may be hindering investment in innovation. Industry consultations suggest that opportunities exist to increase the adoption of digital and automation solutions, particularly among SMEs.
- Unfilled vacancies have been a long-standing issue in the sector, with vacancies per 100 employees increasing to 9.1 in Q3 2022, from 6.3 in Q2 2022, which is more than double the UK average of 4.1.
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:
- Although science, technology, engineering, and mathematics (STEM) graduates in the UK accounted for 41% of total graduates – above countries such as France and Canada, and similar to the United States – the share of graduates in the STEM sub-discipline of engineering, manufacturing and construction represented only 9% of graduates, well below comparator countries such as Germany (26%) and Korea (21%).
- The UK had a relatively low share of researchers working in the business sector in 2020 (42%), below Korea (82%), Japan (75%), the United States (72%), France (63%) and Germany (60%).
- Although women account for 39% of total researchers, placing the UK in the top 10 of OECD countries, female graduates are under-represented in some STEM disciplines in the UK, particularly in engineering, manufacturing and construction.
5: Environmental Innovation
Key policy questions addressed:
- How does the UK compare in environmental and 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 environmental sustainability?
Key findings:
- Gross value added in the UK environmental goods and services sector (EGSS), as defined by the ONS, was estimated to be £45.2 billion in 2019 (up 5.4% from 2018). The sector’s employment is estimated at 394,900 full-time equivalent employees in 2019 (down 4.7% from 2018).
- The OECD estimates that at 6%, the UK had the sixth highest government budget allocation for R&D in environment and energy innovation among OECD countries in 2020. This is higher than that of the United States (3%), but lower than Japan (8%), Germany (8%), Korea (8%), and France (9%).
- The UK ranks seventh among OECD countries in patent applications for the group of technologies defined by the OECD as “environment-related technologies”.
