Bridging the innovation gap: the UK’s R&D strengths and shortfalls

By Dr Michele Palladino

The UK’s new Modern Industrial Strategy, unveiled in June 2025, puts long-term research and development (R&D) funding at the heart of national growth. By pairing sustained public investment with incentives for private innovation, it aims to strengthen the country’s position in science, technology, and commercialisation.

But how does the UK compare on the global stage? Using insights from the UK Innovation Report 2025, this blog examines the country’s research and development efforts, highlighting areas of genuine international leadership and revealing critical gaps that could hinder future competitiveness and growth.

UK R&D spending: above the OECD average but behind global leaders

The UK spends slightly more on R&D as a share of GDP than the OECD average, but remains behind the world’s leading innovation economies. Gross domestic UK expenditure on R&D amounted to £70.7 billion in 2022, representing 2.77% of the UK’s GDP, just above the OECD average of 2.73% (Figure 1).

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 2022, the UK ranked fifth in the OECD for total R&D expenditure at US$103 billion, with the US leading at US$810 billion. Japan, Germany, and Korea followed with US$189 billion, US$158 billion, and US$129 billion, respectively. Outside the OECD, China’s R&D investment surged 220% from US$225 billion in 2010 to US$718 billion in 2021, aiming to become the world’s top R&D spender.

Closing the gap in the global innovation race demands bold business investment, backed by government policies that can unlock private-sector R&D at scale.

Corporate R&D: strong global presence, but shrinking

In 2022, UK businesses accounted for 70.6% of total R&D performed domestically, with the business sector also remaining the principal driver of R&D across both the OECD and China.

The EU Industrial R&D Investment Scoreboard shows that 63 companies with headquarters in the UK were among the top 2,000 R&D-investing companies in the world in 2023 (Figure 2). 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).

While the UK remains a global leader per number of top R&D-investing companies, its presence has nearly halved over the past decade: 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.

Considering the methodological pitfalls of the EU Industrial R&D Investment Scoreboard, primarily that it attributes R&D to the company’s headquarters country regardless of where it is actually carried out, further insights can be gained into the negative trends affecting UK companies.

In 2023, the UK had only two of the world’s top 100 R&D investors: AstraZeneca (14th) and GSK (33rd), both in pharma. UK top R&D-investing companies mainly focus on health (pharma, medical devices) and finance (banks, financial services). Notably, these two pharma firms dominate 88% of the UK health sector’s R&D, highlighting the country’s innovation strength but also its over-reliance on just two giants, exposing a significant vulnerability.

Compared to the global R&D landscape in 2023, UK companies are underrepresented in sectors like ICT and automotive. The top 10 R&D investors include tech giants such as Google (Alphabet), Meta, Apple, Microsoft, and Intel from the USA, Huawei from China, Samsung from Korea, along with Germany’s Volkswagen, and pharma leaders Roche and Johnson & Johnson. Globally, the highest-ranking UK ICT company is BT at 389th place, while Aston Martin leads UK automotive firms at 553rd.

Even in the aerospace sector, historically considered a strong competitive asset of the UK economy, the first company with headquarters in the UK featuring in the list is Rolls-Royce, ranking 227^th in the world, behind Airbus (60^th), Boeing (74^th), RTX (89^th), Lockheed Martin (173^rd), Thales (208^th), and Safran (208^th).

The UK’s absence from the top tiers of ICT, automotive, and even aerospace R&D highlights a critical gap: without broadening its innovation base, the UK risks watching the industries of the future being built elsewhere.

Public support to R&D: lower direct funding, higher tax incentives

The UK government provides less direct funding for R&D relative to GDP than the OECD average but leads in total government financial support for business R&D by relying heavily on tax relief rather than direct funding.

In 2021, the UK government’s 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, when focusing solely on the proportion of government R&D funding allocated to the business sector, the data reveals a different story about how the UK compares to other OECD members.

Government financial support for business R&D may involve a range of policy tools, such as direct funding (including R&D grants and public procurement of R&D services) and indirect assistance through tax relief.

Adding up direct funding and indirect support through tax relief, in 2021, the UK provided the largest government financial support to business R&D as a share of GDP among the OECD countries: 0.48% of GDP, against the OECD average of 0.21%. In other words, 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), against around one-third in the form of direct funding (0.15% of GDP) (Figure 3)

In absolute values, 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.

This trend reflects a broader shift seen across OECD countries, where there has been a significant change in the business R&D support policy mix over the past two decades. Most countries have moved away from direct funding instruments and have moved towards a greater reliance on R&D tax incentives. 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.

OECD findings reveal that R&D tax incentives and direct government funding are complementary, each boosting R&D investment by 1.4 times. Tax incentives have a stronger impact on SMEs, which start with lower R&D activity. However, evidence from the US and EU shows these incentives play a limited role in attracting R&D, especially for large, R&D-intensive firms.

Further evidence is required to evaluate the effectiveness of UK government tax relief for R&D. Notably, R&D tax credits provide less direction than direct support via grants or public procurement, which can be specifically targeted at strategic priorities like certain technologies, sectors, or businesses essential for national security.

Looking ahead: strengths to build on, challenges to confront

As the UK moves into the next phase of its Modern Industrial Strategy, it has notable strengths in R&D investment and business support, but also faces clear challenges. Although R&D expenditure as a share of GDP exceeds the OECD average, the country still lags behind global leaders.

At the same time, the decline in UK-based global R&D investors and their underrepresentation in fast-growing sectors highlight the need for diversification and support to scale up. While the UK Government has committed to increasing overall R&D spending through the Industrial Strategy, careful thought must be given to how investments are allocated and which stages of innovation they target. The success of the Modern Industrial Strategy will depend on maintaining this focus.

This article draws from Section 2 of the UK Innovation Report 2025.

For data and more analysis on the UK’s competitive advantage in industrial innovation, see the full UK Innovation Report 2025 produced by Cambridge Industrial Innovation Policy.