The UK Innovation Report 2021

Investment in Innovation

Policy questions addressed in Theme 2

1. Are the UK government and the private sector spending enough on R&D?
2. How does this compare with the level of investment in other countries?
3. How big is the gap to achieving the 2.4% R&D expenditure target?

What the data tells us

• The UK government has committed to boosting investment in R&D to 2.4% of GDP by 2027. Achieving this goal would require a step change in recent trends.
• The UK gross domestic expenditure on R&D (GERD) as a percentage of GDP has remained almost constant between 2000 and 2018, increasing only from 1.6% to 1.7% during this period (Charts 2.1 to 2.3).
• The business sector contributes less to the funding of R&D in the UK (less than 55% of total expenditure) than in other countries, such as Germany (66%), Korea (76.6%) and Japan (79.1%) (Chart 2.5).
• Manufacturing remains the largest contributor to R&D expenditure across industrialised economies. In 2018 the pharmaceutical, automotive and aerospace industries accounted for around 40% of total business R&D expenditure in the UK. This suggests that manufacturing industries have a key role to play in achieving the UK’s 2.4% target (Chart 2.6).
• Business enterprise R&D expenditure (BERD) in the UK as a percentage of value added remains lower than comparator countries such as France, the US, Japan, Germany, Korea and Sweden, indicating that UK businesses are not reinvesting in R&D as much as firms in those countries (Chart 2.7, Chart 2.8).
• Between 2007 and 2019 the UK received venture capital investments of a total of US $20.4B, above other European nations. The UK venture capital market has been largely concentrated in London (Chart 2.11) and in sectors such as ICT, biotech and health care (Chart 2.12).

UK R&D expenditure by sector of performance

Source: ONS (2020). Research and Development in UK Businesses, 2018 Datasets; OECD (2020). Main Science and Technology Indicators. Notes: Industries include: agriculture and fishing; extractive industries; electricity, gas and water; construction.

• In 2018 the UK gross domestic expenditure on R&D (GERD) as a percentage of GDP was 1.73%.
• In terms of R&D expenditure by sector of performance (i.e. use of funding), the business enterprise sector performs the highest share of R&D, at 63%.
• Manufacturing is the main driver of R&D expenditure, accounting for 42% of total GERD, with pharmaceuticals, automotive and aerospace performing 26.8% of total GERD.
• Among businesses, services perform 21.4% of total GERD, mainly driven by ICT services, technical testing and analysis, software development, R&D services and telecommunications.
• The UK’s higher education sector stands out from comparator countries, with a 23.6% share, above countries such as Germany, France, Korea, Japan, China, India and the United States.^a
• Conversely, the government sector in the UK performs only 6.6% of R&D, below comparator countries, given the more prominent role played by UK’s higher education sector

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^aOECD (2020). Main Science and Technology Indicators database

UK R&D intensity

Source: OECD (2020). Main Science and Technology Indicators.

• The UK’s gross domestic expenditure on R&D (GERD) as a share of GDP remained almost constant between 2000 and 2018, only increasing from 1.62% to 1.73%.
• The UK government has committed to boosting investment in R&D to 2.4% of GDP by 2027 and to increasing public funding for R&D to £22B per year by 2024.

UK R&D expenditure (1)

• The UK’s GERD remains below the 2018 OECD average of 2.4%.
• In this regard, the UK ranks below key comparator countries such as Israel, Korea, Sweden, Japan, Germany, the United States and France.

UK R&D expenditure (2)

Source: UNESCO-UIS (2020). UNESCO Institute for Statistics (UIS) database. Notes: 2007 data for Switzerland refers to 2008.

• Given their economic size, the US and China stand out from other nations, with total expenditure considerably higher than any other comparable countries.
• In 2018 the UK ranked eighth in the world for total expenditure on R&D, which stood at US$40B (in constant prices).
• The UK is, however, lagging behind countries such as France, Germany, Korea and Japan.
• In 2018 the UK’s total expenditure on R&D was equivalent to:
  • 82% of France’s
  • 46% of Korea’s
  • 40% of Germany’s
  • 28% of Japan’s

R&D expenditure by source of funding

Source: OECD (2020). Main Science and Technology Indicators database. Notes: US$B PPP –constant prices 2005, data for France refers to 2017.

• The business sector contributes less than 55% to the funding of R&D in the UK.
• This contribution is below that of competitors such as Germany (66%), Korea (76.6%) and Japan (79.1%).
• The UK government (including national and regional governments, as well as their agencies) funds roughly 26% of total R&D expenditure, which is higher than countries such as Japan, Korea and China.
• The UK has a relatively high share of R&D funded through the “rest of the world” category (13.7% in 2018). This includes, among other sources, research funding granted to UK-based universities from non-UK organisations.

Business R&D expenditure in the UK

Source: ONS (2020). Business enterprise research and development.

• Manufacturing industries remain the largest contributors to R&D expenditure across the world^b despite the sector’s relative decline as a share of the economy in most industrialised countries in the last couple of decades.
• In 2018 pharmaceuticals, automotive and the aerospace industries accounted for around 40% of total business R&D expenditure in the UK.
• Among services, computer programming and information services, software development, business services and research and development services accounted for around 26% of total business R&D expenditure in 2018.

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^b OECD (2020). Business enterprise R&D expenditure by industry database.

R&D intensity in the business sector

Source: OECD (2020). Main Science and Technology Indicators. Notes: Valued added in industry is calculated as the total gross value added (GVA), excluding “real-estate activities” and “community, social and personal service”.

• Business enterprise R&D expenditure (BERD) in the UK as a percentage of value added in industry remains lower than comparator countries such as France, the US, Japan, Germany, Koreaand Sweden.
• This indicates that UK businesses are not reinvesting in R&D as much as firms in those countries.

UK –R&D intensity in the manufacturing sector

Source: ONS (2020) Research and Development in UK Businesses, 2018 – Datasets

• This chart reports manufacturing sectors with the highest R&D intensity, as measured by the sector expenditure on R&D as a percentage of sales.
• In 2018 pharmaceuticals, automotive, aerospace, and machinery and equipment accounted for 67% of total R&D expenditure in manufacturing.
• Differences exist among sectors. Pharmaceuticals and electronics and communication equipment have the highest R&D intensity (˜35%). However, for pharmaceuticals, the total expenditure on R&D decreased by 0.6% between 2010 and 2018. In the same period, R&D expenditure in electronics and communication equipment increased by 6.9%.
• Automotive and aerospace show a similar R&D intensity, at 6.6% and 6.4%, respectively. However, these sectors experienced a different performance in terms of R&D expenditure growth between 2010 and 2018, with automotive increasing by 14% against 2.2% in aerospace.

Share in the world's triadic patent families

Source: OECD (2020). Triadic patent families (indicator).

• A triadic patent family is defined as a set of patents registered at the European Patent Office (EPO), the Japan Patent Office (JPO) and the United States Patent and Trademark Office (USPTO) to protect the same invention.
• In 2018 the UK was the seventh economy in terms of the share in the world’s triadic patent families, with a share of 3%.
• Japan and the United States presented shares in the world’s triadic patens well above comparator countries, at 32.6% and 22.3% respectively, in 2018.
• China has dramatically increased its shares, from 1% in 2005 to 4% in 2018.

UK – triadic patents by technology domain

Source: OECD (2020). Science, Technology and Patents database.

VC investments by company development stage

Source: Invest Europe (2020). Activity Report 2007-2019 – European Private Equity. Notes: Original values in euros, converted at the annual average nominal exchange rate. 

• Venture capital represents a key instrument in investing in innovative start-ups and businesses that show high potential future growth.
• In Europe, countries such as the UK, Germany and France are the most attractive markets for venture capital investment.
• Between 2007 and 2019 the UK received venture capital investments to a total of US$20.4B, followed by Germany (US$15.7B) and France (US$13.9B).
• In 2019 the largest share of venture capital investments in the UK was directed towards start-ups, in line with comparator countries.

Top European venture capital regions

Source: Invest Europe (2020). Activity Report 2007–2019 –European Private Equity. Notes: Original values in euros, converted at the annual average nominal exchange rate.

• The European venture capital market is geographically highly concentrated.
• Between 2007 and 2019, 10 regions accounted for more than 50% of the total venture capital investment received in the EU-27c plus the UK, with the UK having 3 of the most dynamic regions in Europe for VC investments (i.e. London, the East of England and the South East).
  

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  c Excluding the following countries, where data is not available: Croatia, Cyprus, Malta, Slovakia and Slovenia.

Venture capital investments in the UK (1)

Source: Invest Europe (2020) Activity Report 2007-2019 –European Private Equity. Notes: Original values in euros, converted at the annual average nominal exchange rate; the figure does not include VC investment in British territories outside the UK, as well as unclassified investment. These investments amounted to 1.61% of total VC investment in the UK between 2007 and 2019.

• The UK venture capital market is extremely concentrated in the “golden triangle” of London, Cambridge and Oxford, which received 76% of the total venture capital investments between 2007 and 2019.
• In the same period, more than 50% of total VC investments were directed to London.

Venture capital investments in the UK (2)

Source: Invest Europe (2020). Activity Report 2007–2019 –European Private Equity. Notes: Original values in euros, converted at the annual average nominal exchange rate.

• The UK venture capital market is relatively concentrated in two key sectors.
• Between 2007 and 2019 ICT (i.e. business-related software, computer and data services, Internet technologies, hardware, telecommunication services) and biotech and health care (i.e. biotech products and services, medical equipment and devices, pharmaceutical and drug delivery) received US$14B of VC capital investments, which funded 2,812 companies. This is equivalent to70% of total venture capital investments and 65% of companies funded.

Unicorns

Source: CBINSIGHTS (2021). Full List of Unicorns.

• Unicorns are start-ups with a valuation over US $1B.
• At the end of 2020 there are 507 unicorns around the world, of which 26 are decacorns (valued at over US$10B) and 1 is a hectocorn (value at over US$100B).
• The United States has 242 unicorns (47.7% of total world unicorns), followed by China, with 122 unicorns (24.1% of total), and India, with 26 unicorns (5.1% of total).
• The UK is the fourth country in the world in terms of high-value start-ups, with 24 unicorns and 1 decacorn.
• Fintech, Internet software and services, e-commerce and direct-to-consumer, and artificial intelligence account for almost 50% of sector activities of unicorns in the world.

Unicorns in the UK

Source: CBINSIGHTS (2021). Full List of Unicorns.

• The United Kingdom presents a vibrant start-up ecosystem.
• Being the fourth country in the world, the United Kingdom has 25 unicorns (including 1 decacorn) by the end of 2020.
• the sectors with more unicorns are: fintech (9 companies), artificial intelligence (4 companies), e-commerce, and logistics and delivery(2 unicorns each).
• As per the venture capital investments in recent years, most of the unicorns (16) are headquartered in London.
• The UK’s start-up ecosystem is also home of additional five “exited” unicorns (i.e. sold to larger corporates, or admitted to a public stock exchange). Two of them were eventually acquired by Chinese and US investors.^a

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^a Beauhurst(2019). UK Unicorn companies –a free report on £1b businesses.