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Boosting R&D

Tom Forth,

The UK government says it’s going to raise spending on research and development (R&D) from 1.7% of GDP today, to 2.4% of GDP by 2027. With UK GDP at about £2000bn per year, the increase in total R&D spending will need to be about £14bn per year.

That’s a lot of money to start spending, and quite a short amount of time to start spending it.

How should we go about doing it? What should we be hoping to get for the money?

The R&D ratio

My biggest (small) contribution to studying R&D has been the charts that you’ll see throughout this piece. About five years ago, I took Eurostat’s data on R&D spending, split it into government-related and business-related, and put it on a scatter plot.

I also built a tool that tracks spending over time. It’s no longer for general sale, but we can talk about getting you a version offline if you have a budget.

Below is what spending on R&D looked like in 2013 for the pre-expansion EU countries.

Across Europe business spends 2€ on R&D for each 1€ government spends.

There’s some variation, but the pattern is clear —for every € that government spends on R&D, business spends about 2€. There’s a worrying trend in the low spending countries (Greece, Portugal, Spain, Italy) where business only seems to spend the same as government, but that’s not a problem for the UK.

In order to meet the government’s target, the UK needs to shift from its current position on the graph to where France is.

During the move there’s room for over-achievement, like Belgium, where business contributes more to total R&D. And there’s room for under-achievement too, like The Netherlands, where government is forced to contribute even more to total R&D.

The UK government will hope for Belgium, but the most likely outcome is France. That means that it will have to raise about a third of the £14bn, near enough £5bn per year, of extra money through taxes or borrowing.

£5bn a year of extra spending is a lot of money for a government committed to austerity. So what is the government hoping to get out of it? And why has it made this really ambitious commitment?

R&D and place

My guess it that the UK government has two main reasons for wanting to increase R&D spending.

First, there’s pretty good evidence that higher R&D investment increases long-term growth rates. Spending more on R&D today gives you back even more money to spend in the future. It’s a good long-term investment, a big chunk of the returns of which end up in the private sector. That makes it very attractive to a party that enjoys talking about good long-term investments and boosting the private sector. Simple.

Second, as I’ve long argued, state R&D investment seems to be one of the few ways of boosting underperforming regions that works in the long-term. In Germany, R&D spending has been one way in which The West has supported The East since reunification. The East’s economy has strengthened and the transfers needed to maintain public service levels there have declined. In Sweden, the government invests heavily in the North for similar reasons. By contrast, the UK government invests most heavily in London and Scotland — regions that already do quite well economically. Here’s a graph that shows that, for the UK.

The UK government overspends on R&D in London and Scotland and underspends in The West Midlands and North-West.

This misallocation of R&D spending is one of the reasons why the UK has done so badly at boosting economic growth in its poorest regions. London and Scotland enjoy about four times the government investment in R&D as The West Midlands, despite business in The West Midlands spending about twice as much on R&D.

Zooming in one level further risks turning our graph into a mess. But the mess is important.

At the top left are regions where business invests significantly in R&D and government is almost completely absent. Cheshire (Pharmaceuticals), Hertfordshire (Biotech), and Herefordshire, Worcestershire and Warwickshire (Automotive supply chain) are examples. At the bottom right are places where government invests significantly despite low business investment. London stands out, but East Scotland is notable too.

It is this pattern, among other factors, that explains why AstraZeneca recently left Cheshire and moved to East Anglia. Access to the talent and infrastructure resulting from twelve times the government R&D investment is very tempting.

Looking at smaller geographies, we see that government spending andbusiness spending on R&D in the UK are misaligned.

It is only in East Anglia (Cambridge) and Oxfordshire where both business and government invest heavily in R&D in the UK. These are prime candidates for receiving a huge chunk of the extra £5bn/year of R&D funding that the government needs to spend.

But there’s a big problem — Oxford and Cambridge do not want to grow. They build a fraction of the houses of cities like Manchester, Birmingham, Liverpool, and Leeds. They cannot accommodate the growth that extra R&D funding would bring.

So where should we spend the money instead?

Let’s look again at France, at R&D spending by small region as in the graph above for the UK.

Government spending on R&D in France is much more closely aligned with business spending. There are four regions with high spending in both, compared to just two in the UK.

The pattern is very different. The only region where government seems to overspend on R&D is Languedoc-Roussillon, a poor region in need of a boost. No region with high business R&D is so thoroughly ignored by government as Cheshire or HWW.

But most importantly there are four large regions with high R&D spending by both business and government, compared to just two in the UK. And unlike Oxford and Cambridge which refuse to grow, Ile de France (Paris), Midi-Pyrenees (Toulouse), Rhone-Alpes (Lyon), and Provence-AC (Marseille, Aix, Nice, etc…) have grown rapidly, and continue to build the homes and assign land to businesses necessary to support rapid growth.

We shouldn't be surprised that today France's economy is growing at twice the rate of the UK.

My rules for the UK while we increase our R&D to French levels would be to,

  1. Try and create a few more places where both business and government invest heavily in R&D.
  2. Where business already spends a lot on R&D, government should spend more, especially if the area has low house and business land prices, and a proven record and stated ambition to continue growing.
  3. Where business doesn’t spend a lot on R&D, government should consider investing ahead of time in the hope that business would join in. Government must be mindful that the timescales for business investment following government investment are long (I can quantify these if you get in touch).
  4. Government should consider cutting investment in R&D in places where housing and business land prices are high and where business R&D expenditure is low.

These ambitions will need watering down heavily, policy cannot ignore politics. So I’d be wary of the following pitfalls.

Achieving change and being seen to be fair: what won’t work

We should cut government R&D funding in the two most over-funded regions of the UK, but this will not happen. London and Edinburgh enjoy such a privileged position in UK politics that they will win any battle over funding. This is a mis-assignment of funding that we will not realistically be able to fix, just look at the capitulation over Channel 4’s relocation to see how hard even tiny cuts in national investment are to push through in London.

We should freeze government R&D funding in the two successful regions of the UK that refuse to grow, but this will not happen. Oxford and Cambridge are extremely powerful within UK national politics and the current mechanism for assigning funding within the UK. They will secure political support and they will continue to be favoured in officially-neutral assignment of funding. The UK government will continue its low-value investment in transport infrastructure between Oxford and Cambridge to try and limit the waste of investing heavily in cities which refuse to grow. This is unavoidable politically.

It is the impossibility of reducing Oxford, Cambridge, or London’s funding that means the government has decided to increase R&D rather than re-allocate it.

Achieving change and being seen to be fair: what could work

We should invest heavily in the cities that are willing to grow and which are close to areas of high R&D investment by businesses. Principally this means Birmingham, Manchester, and Liverpool. Newcastle, Leeds, Sheffield, and Nottingham will have a role to play too.

This change is possible. Through the creation of metro mayors the government has laid the foundation for this to happen. It could give them large streams of funding to spend on R&D however they see fit. This would have the large advantage of side-stepping existing structures for assigning funding that have done a poor job of aligning with business investment.

There will be challenges. The creation of cities to rival London is strongly opposed within the English mindset.

What about Wolverhampton? People will scream. It’s part of Birmingham I’ll reply. What about Bolton? (Manchester). What about Sunderland? (Newcastle). Governments will announce that The Northern Powerhouse must be about the whole North, not just its big cities. There’ll be similar announcements in The Midlands and across the nation. They will hopefully be lies (pick a polite euphemism if you dislike that word); they mostly have been to date.

What's missing so far is a coherent and ambitious ask for R&D spending from the metro mayors of Liverpool, Manchester, and Birmingham. And crucially, a reasonable argument that if these plans are funded they will make the national government more popular. Nesta are currently researching how to engage the public better in innovation research, and I hope that this helps us understand how to make R&D an issue in local politics in more places. Then the Metro Mayors need to get to work.

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