The UK Innovation Report 2021

Executive Summary

Structure of the UK Economy

• In recent years the UK’s labour productivity, as measured by GDP per hour worked, has grown somewhat slower than in other developed economies. In 2018 the UK’s labour productivity was barely above its 2007 level.
• Sector-level analysis reveals key structural factors behind the relatively slow rates of productivity growth in the UK. Over the last decade, there has been an increase in the relative contribution of sectors with low value added per hour worked (particularly low value services) and a reduction in the share of high value added sectors (particularly medium to high-tech manufacturing, oil extraction and finance).
• Medium to high-tech manufacturing has significantly outperformed other parts of the economy in terms of productivity and wage growth.

Investment in Innovation

• Achieving the UK government’s goal of boosting investment in R&D to 2.4% of GDP by 2027 would require a step change in recent trends. R&D investment as a percentage of GDP has remained almost constant over the last two decades, increasing only from 1.6% in 2000 to 1.7% in 2018.
• The business sector contributes less to the funding of R&D in the UK (less than 55% of total expenditure) than in countries such as Germany (66%), Korea (76.6%) and Japan (79.1%). As is the case across developed economies, manufacturing remains the largest contributor to R&D expenditure in the UK, suggesting an important role in achieving the UK’s 2.4% target.
• Between 2007 and 2019 the UK received venture capital investments to a total of US$20.4B, above other European nations. These investments have been largely concentrated in London and in sectors such as ICT, biotech and health care.

Industrial Performance

• Over the last decade, the UK aerospace industry became more productive on the basis that value added grew faster than employment. Automotive became more productive as value added grew while employment shrank. Productivity growth collapsed in pharmaceuticals as value added contracted at a quicker rate than that of employment.
• From being the fifth largest net exporter of pharmaceutical products in 2009, the UK slipped into the third quartile of countries by 2018. Aerospace products is a bright spot, with the sector becoming the fourth largest net exporter in 2018.
• Business R&D spending in the UK has accelerated in automotive, aerospace and machinery, but it has been on the decline for pharmaceuticals.

Science and Engineering Workforce

• Undergraduate enrolment in STEM disciplines has increased steadily in the UK in recent years. In 2018 graduates in STEM accounted for 44.2% of the total number of graduates in the UK, above France (37%), the United States (36.8%) and Canada (35%).
• In the UK most of the researchers are employed in the government and higher education sector, as opposed to some comparator countries, where researchers are mainly employed in business enterprises. Women are underrepresented within the research profession, although the share of women researchers in the UK is well above comparator countries.
• The UK education system is marked by a “missing middle” of higher technical education (i.e. enrolment in post-secondary education courses, below the standard three-year Bachelor’s degree) that is usually designed to provide students with technical skills to enter the job market.

Implications for Policy

• Important patterns related to the vitality of the UK’s industrial and innovation activity can be lost in aggregation.
• Sector-level analyses are necessary, not only to uncover underlying trends affecting national performance but also to identify areas of comparative advantage, constraints to technology adoption and required policy responses. Industrial and technological know-how is needed to identify and interpret key sector trends that are not immediately observable from economy-wide figures.
• This report raises important questions about the interdependence between innovation activity and sector competitiveness. A more comprehensive evidence base for industrial strategy (and related policy areas), however, should also include analyses of other important variables influencing industrial performance, including, for example, capital investment, finance and firm survival rates.