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Theme 2

Investment in Innovation

Policy questions and key messages

  1. Is the UK spending enough on research and development?
  2. How do the public and private sectors contribute to national expenditure on innovation?
  3. How does the UK compare with other leading countries?

The UK’s investment in innovation remains just above the OECD average, but still behind leading countries such as Korea, the USA, Japan and Germany: 

  • The UK gross domestic expenditure on R&D amounted to £70.7 billion in 2022, a 6.7% increase from 2021.
  • This expenditure represents 2.77% of the UK’s GDP, just above the OECD average of 2.73%.
  • In terms of GDP, the UK’s R&D expenditure is 25% higher than France’s and over 60% higher than Canada’s, but 16% lower than Switzerland’s and almost half that of Korea’s.

In 2021, while the UK government’s direct funding for R&D as a share of GDP was below the OECD average, the UK led in total government financial support for business R&D, relying heavily on R&D tax relief over direct funding:

  • In 2021 the UK government’s direct funding to gross expenditure on R&D performed by all sectors in the economy amounted to 0.56% of GDP, below the OECD average (0.62%), making the UK 18th in the OECD
  • However, a fraction of the UK government’s direct funding to R&D goes to the business sector, equivalent to 0.15% of GDP, above the OECD average (0.09%) and countries such as France and the USA.
  • Adding R&D tax relief, in 2021 the UK provided the highest government financial support for business R&D in the OECD, measured as a share of GDP, with over two-thirds of this support delivered through tax incentives.

In 2023 the UK remained a global leader per number of top R&D-investing companies, but its presence has nearly halved over the past decade, and its R&D investment in sectors such as ICT and automotive lags behind leading countries:

  • In 2023, among the top 2,000 R&D-investing companies in the world, the UK ranked fifth per number of companies and seventh per total R&D investment.
  • However, between 2013 and 2023, the number of UK companies among the top 2,000 R&D-investing companies in the world almost halved, going from 118 to 63.
  • UK-headquartered R&D-investing companies specialise in health and the financial sector, accounting for almost 70% of the country’s R&D investment in 2023, but their R&D investment is comparatively low in sectors such as ICT and automotive.

R&D intensity: international comparison

  • The gross domestic expenditure on research and development (GERD) as a share of the gross domestic product (GDP) is commonly used to compare countries’ “R&D intensity” and investment in innovation.
  • In 2022 the UK R&D intensity was 2.77%, above the OECD average (2.73%).
  • To put the R&D expenditure into a global perspective, the UK performs well compared to some peers but lags behind global leaders, being:
    • higher than France and Canada – the UK’s R&D expenditure as a share of GDP is 27% higher than France’s and over 60% higher than Canada’s
    • lower than Switzerland and Korea – the UK still trails leading economies, with R&D spending of GDP 16% lower than Switzerland’s and almost half that of Korea’s.
  • In absolute terms, in 2021 the UK ranked fifth in the OECD for total expenditure on R&D (US$84 billion), where the USA remained the global leader (US$726 billion), followed by Japan (US$172 billion), Germany (US$129 billion) and Korea (US$110 billion).[1]
  • China ramped up its R&D investment: its R&D intensity went from 1.71% in 2010 to 2.56% in 2022; and its total expenditure on R&D went from US$213 billion to US$687 billion in the same period.[1]

[1] Note: US dollars, PPP converted, constant prices. Source: OECD (2024). Main Science and Technology Indicators (MSTI database).

 

Overview of UK expenditure on R&D

  • This chart presents an overview of UK expenditure on R&D (GERD) in 2022, breaking down funding sources and performance across different sectors. The key categories include business enterprise R&D (BERD), higher education R&D (HERD), government-funded R&D (GOVERD) and private non-profit R&D (PNPERD).
  • In 2022, according to the ONS, the UK gross domestic expenditure on R&D was £70.7 billion, increasing by 6.7% from 2021.
  • Regarding the sources of R&D funding (i.e. who funds the R&D), the UK business sector accounted for 62% of the total R&D funding, and the government and UKRI contributed 14.6%.
  • In the UK and other G7 countries, the main source of R&D funding is the business sector, although in countries like the USA and Japan, the funding contribution to domestic expenditure on R&D from businesses can reach 68% and 78%, respectively.[1]
  • In terms of sector performance (i.e. who performs R&D), the UK business sector performs 70.6% of the total R&D, and the business sector remains the main performer of R&D in each G7
  • The UK higher education sector performs a relatively high share of R&D (23%) compared to countries such as the USA (9.9%) and Japan (11.5%).[1]

[1] Source: OECD (2024). Main Science and Technology Indicators (MSTI database).

UK business research and development

  • In 2023 the R&D performed by businesses in the UK amounted to £49.9 billion, increasing by 2.9% from 2022.
  • Manufacturing products accounted for 48% of total business R&D, followed by services (47%) and other production activities (5%).
  • In 2023 the top four products and services, which accounted for 56% of total UK business R&D, equivalent to £28.2 billion, were: pharmaceuticals (£8.7 billion), motor vehicles (£4.9 billion), software development (£7.6 billion) and miscellaneous business activities (£7 billion).

Government financial support for business R&D in the OECD

  • Government financial support for business R&D can be a mix of policy instruments, namely direct funding (including R&D grants and public procurement of R&D services) and indirect support through tax relief.
  • Among OECD countries, the UK provided the largest government financial support to business R&D as a share of GDP in 2021: 0.48% of GDP, against the OECD average of 0.21%.
  • The share of the UK government’s direct funding to business sector R&D is equivalent to 0.15% of GDP. This figure is also above the OECD average (0.09%) and countries such as France and the USA, both at 0.14% of GDP in 2021.
  • The last two decades have seen a change in the mix of policy instruments used to support business R&D. In 2021, R&D tax incentives accounted for approximately 58% of total government support for business R&D across OECD countries, compared to just 35% in 2006.[1]
  • In 2021 over two-thirds of UK government support to business R&D was in the form of R&D tax relief (0.33% of GDP). Only around one-third was in the form of direct funding (0.15% of GDP).

[1] Source: OECD (2024). OECD R&D tax incentives database.

Government financial support for business R&D in G7 countries

  • In 2021 the UK government’s total financial support to business R&D was equivalent to US$13.9 billion, second only to the USA (US$51 billion) across the G7 countries.
  • In the UK almost 70% of government financial support to business R&D in 2021 took the form of tax relief (£9.6 billion), while 30% was direct government funding, through R&D grants and public procurement of R&D services (US$4.2 billion).

UK Government R&D tax credits

  • For the 2022–23 tax year, UK businesses claimed a total of £7.5 billion in R&D tax relief support. This figure is more than twice the £2.6 billion of direct support to business R&D provided by the government and UKRI in 2022.[1]
  • In terms of R&D tax credit claims by firm size in the UK, in the 2022–23 tax year:[2]
    • 67% (US$5 billion) were claimed by small and medium enterprises
    • 33% (£2.5 billion) were claimed by large firms

[1] Source: ONS (2024). Gross domestic expenditure on R&D, UK: 2022.
[2] Source: HMRC (2024). Research and Development Tax Credits: main tables 2024.

Top R&D-investing companies in the world

  • In 2023, 63 companies with headquarters in the UK were among the top 2,000 R&D-investing companies in the world. This placed the UK:
    • fifth in the world per number of top R&D-investing companies headquartered in the country (3.2% of total companies in the world)
    • seventh in the world per total investment by top R&D-investing companies headquartered in the country (2.8% of total R&D investment).[1]
  • Between 2013 and 2023, however, the number of UK companies among the top 2,000 R&D-investing companies in the world almost halved, going from 118 to 63.
  • In 2023 only two UK-headquartered companies were among the top 100 R&D-investing companies in the world, namely AstraZeneca (14th) and GSK (33rd), both
  • Compared to the rest of the world, in 2023 UK R&D-investing companies:
    • were specialised in health (i.e. pharma, medical devices) and finance (i.e. banks and other financial services), accounting for almost 70% of the country’s R&D investment in 2023;
    • were under-represented in sectors such as ICT and automotive.

[1] Note:  The 2024 EU Industrial R&D Investment Scoreboard covers the world’s top 2,000 R&D-investing companies with headquarters across 40 countries and over 900,000 subsidiaries across the world. In 2023 those companies accounted for over 85% of global business-funded R&D. The unit of analysis of the Scoreboard is investment in R&D by company headquarters, regardless of where the R&D activity is conducted. Source: European Commission (2024). The 2024 EU Industrial R&D Investment Scoreboard.

Patent applications in key technology fields

  • In 2023 the UK Science and Technology Framework identified “five critical technologies”:
    • artificial intelligence (AI)
    • engineering biology
    • future telecommunications
    • semiconductors
    • quantum technologies.[1]
  • The UK was among the top ten countries in the world in all five critical technologies, as measured by the total number of patent applications filed between 2000 and 2023.
  • When considering the scale of patent application, however, leaders such as the USA, Japan, China and Korea are far ahead of the UK. For example, between 2000 and 2023:
    • in AI, the USA filed 331,382 patents, Japan 301,373, and the UK 11,279
    • in quantum technologies, the USA filed 157,311 patents, Japan 60,426, and the UK 7,225
    • in semiconductors, Japan filed 659,131 patents, Korea 317,664, and the UK 10,098.

[1] Source: DSIT (2023) The UK Science and Technology Framework.

Appendix 2.1. Sector classification

Appendix 2.2. Key technology fields