The UK Innovation Report 2021

What makes this report different?

While numerous sources of data on the topic of innovation exist, the UK Innovation Report aims to make a contribution by bringing together, in a single place, innovation and value added indicators in a concise and accessible format.

The report seeks to demonstrate the value of combining different types of indicator and data sets to facilitate policy discussions on innovation and industrial performance – and the interplay between them. 

Instead of structuring the report according to input and output indicators, as is typically done in reviews of innovation activity, the focus has been on bringing together indicators that provide rich quantitative representations that are relevant to the vitality of the UK’s innovation activity and its industrial performance in an international context. While the report does not make specific policy recommendations, it does highlight areas where additional evidence and policy action may be required.

Motivation

• Review the UK’s innovation and industrial performance and compare it with that of other selected countries.
• Facilitate discussions on the relation between sectoral competitiveness and innovation.
• Stimulate the debate on the evidence base required to inform industrial strategy and innovation policy.

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.

The UK faces significant challenges as it seeks to return to sustained and inclusive growth following the deepest economic recession since the Second World War. There is a pressing need to support a swift economic and social recovery from the impacts of COVID-19. Moreover, fundamental challenges present before the pandemic are likely to dictate the shape of the UK economy for years to come: increasing international competition; erosion of market share in key industries; hollowing out of supply chains; the need to reduce carbon emissions; and regional imbalances.

Innovation is critical to tackling these challenges. While the UK’s expenditure on innovation has historically been lower than some of its closest competitor countries, the 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 £22 billion per year by 2024–25.

The UK is internationally recognised for its leadership in research and the excellence of its scientific institutions. However, securing economic and social benefits from research requires further efforts to deploy new technologies and solutions towards commercial success and practical application. Innovation needs to be leveraged to continue to improve productivity, shift into higher value activities, rejuvenate existing industries and build the foundations for the new industries of tomorrow. 

In common with other advanced economies, there has been a marked shift in the structure of the UK economy away from manufacturing towards services. Contrary to common perceptions, however, these new service activities are not always high value adding or innovative. It is therefore critical to analyse innovation trends in the context of broader economic developments. 

To help advance the debate in this area, this report provides a review of the UK’s industrial and innovation performance in a global context, drawing upon the latest available international indicators. A distinctive feature of this report is that it brings together, in a single place, innovation and value added indicators typically found in disparate sources and presented independently. Rather than producing a voluminous report, the intention is to present a concise selection of the most important indicators, in a format that is easily accessible to a wider audience.

Key policy questions addressed

Theme 1: Structure of the UK Economy 

• How has the structure of the UK economy changed in the last few years?
• Are these changes affecting economic performance?
• How does this compare with other countries?

Theme 2: Investment in Innovation

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

Theme 3: Industrial Performance

• Are the UK’s key industries becoming more or less competitive internationally?
• How are UK industries performing in terms of productivity, value added and employment?
• Are key industries in the UK investing enough in R&D compared to their international competitors?

Theme 4: Science and Engineering Workforce

• Is the UK producing enough scientists and engineers?
• Is the UK government investing enough in technical and vocational education?
• How does this compare with other countries?

Policy questions addressed in Theme 1 

1. How has the structure of the UK economy changed in the last few years?
2. Are these changes affecting economic performance?
3. How does this compare with other countries?

What the data tells us

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 (Chart 1.1). 

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) (Charts 1.2 and 1.3). There has also been a shift in employment between sectors, with the share of jobs in lower value added services experiencing the largest increase (Chart 1.4).

Medium to high-tech manufacturing has significantly outperformed other parts of the economy in terms of productivity and wage growth(Chart 1.5). While this sector represents only 4.8% of gross value added and 2.9% of employment, it accounts for 34% of the UK’s exports and almost two-thirds of business R&D expenditure (Chart 1.6). Medium to high-tech manufacturing represents a significantly higher share in countries such as Germany (14.1%) and Korea (21.1%), compared to the UK (4.8%) (Charts 1.7 and 1.8).

While the UK records a surplus in its trade in services, this is more than outweighed by a deficit in the trade in goods. In 2018 the trade deficit was around 1.8% of GDP. In other countries, such as Germany and Korea, manufactured goods have historically underpinned a positive trade balance (Chart 1.9).

The COVID-19pandemic has disrupted global supply chains, production activities and demand across industries and countries. Unlike China and Korea, countries such as the UK, Germany and the US have not yet managed to return to pre-COVID production levels (Chart 1.10). 

• 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 US$58.5 (constant prices 2015 PPP), barely above its 2007 level (US$56.9).
• Between 1999 and the outbreak of the global financial crisis in 2007, the average annual growth rate of UK labour productivity was 2.2%; between 2010 and 2018 it was only 0.3%.
• On a GDP per hour worked basis, UK productivity in 2018 was:
  • Lower than that of the United States and Germany, by 21 and 32 percentage points, respectively.
  • Above that of Japan and Korea, by 22 and 32 percentage points, respectively.

• Sector-level analysis can help explain 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, notably “Other services”(e.g. retail, hospitality and administrative services), which have increased their share in the UK economy from 50.3% in 2007 to 52.1% in 2017. 
• Meanwhile, sectors with high value added, such as medium to high-tech manufacturing (which includes pharmaceuticals, aerospace and automotive) and other production (which includes oil and gas extraction), have seen their share in the UK economy reduced. 

• Chart 1.3 presents a breakdown of productivity figures (as measured by value added per hour) for the three economic activities with highest value added within each sector. 
• Extraction of crude petroleum and natural gas reports the highest value added per hour, although this figure has declined by over 60% in the last 10 years. Meanwhile, its contribution to the UK’s value added has been reduced from 1.5% to 0.6%. These figures reflect the decline of UK oil and gas production as well as drops in international prices. 
• Within knowledge services, financial and insurance activities show the highest value added per hour. However, their share in UK value added has dropped significantly (from 8% in 2007 to 7% in 2017).

• There has been a worrying shift in employment between sectors over the last decade. Low value services report the largest gain in employment share (1.1%). 
• Meanwhile, medium to high-tech manufacturing, the sector with the highest value added per hour worked, reports a significant contraction in its share of UK employment (from 3.4% to 2.9%). In absolute terms, employment in this sector stood at 786 thousand people in 2017, a 9.5% decline from 2007.
• Knowledge services, in contrast, have experienced an increase in both, labour productivity and share in UK employment. In absolute terms this sector employed 6.6 million people in 2017, a figure 10.1% higher than in 2007.

• The largest share of employment is concentrated in other services (growing from 58.1% in 2008 to 58.4% in 2018), but it has experienced a decrease in wages in real terms.
• Meanwhile, medium to high-tech manufacturing has significantly outperformed other parts of the economy in terms of productivity, with an average annual growth rate of 4.9% in the last decade. This sector reports both the highest wages and the largest increase in their real values over the last decade. 
• Low to medium-tech manufacturing also reports productivity improvements, albeit more modest. 

• Chart 1.6 shows the contribution of UK sectors to export and business R&D (BERD).
• “Other services” contributes to around half of the UK’s gross value added but less than one-fifth of exports and only around 2% of business R&D expenditure. 
• Meanwhile, knowledge-intensive services (such as finance, professional services and ICT) account for around 30% of both exports and business R&D.
• Medium to high-tech manufacturing accounts for 34% of exports and almost two-thirds of business R&D expenditure.

• The UK, France and the US present a broadly similar economic structure, with other services accounting for over 50% of national value added in 2017.
• Among the economies analysed, medium to high-tech manufacturing represents a significantly higher share in Germany (14.1%) and Korea (21.1%).
• Meanwhile, in the UK, France and the US, medium to high-tech manufacturing accounts for less than 5% of domestic value added.
• Among the countries analysed, only Germany and Korea have observed increases in the shares of medium to high-tech manufacturing over the last decade.

In contrast with value added, the distribution of employment across sectors is more even among the countries compared.

The largest shares of employment are observed in other services (e.g. wholesale and retail, real estate, public administration). This sector accounts for at least 60% of employment across countries, with the exception of Germany, where it accounted for 57.7% in 2017.

Meanwhile, with the exception of Germany, medium to high-tech manufacturing accounts for less than 10% of the total employment.

• The UK, France and the US recorded trade deficits in almost all years between 2000 and 2018. 
• In these three countries trade surpluses generated in services are more than outweighed by deficits in the trade in goods, both manufactured and non-manufactured. 
• The UK’s trade deficit for the total economy was the highest in 2011, at ~US$159B, but it has since improved to ~US$46B, in 2018, with increased surpluses in the services trade and decreased deficits in goods trade. For France and the US, their trade deficits widened to ~US$67B and ~US$658B, respectively, by 2018. 
• In contrast, Germany and Korea – which have significantly higher shares of medium/high-tech manufacturing – have consistently recorded trade surpluses in most years since 2000. Their large surpluses in manufactured goods trade more than offset the deficits in services and non-manufactured goods trade. 

• Mobility restrictions due to the COVID-19 pandemic have disrupted global supply chains, production activities and demand across industries. 
• Unlike China and Korea, countries such as the UK, Germany and the US have not yet managed to go back to pre-COVID production levels. 
• In the UK some of the manufacturing industries most affected are: automotive (-52% average annual drop March–September 2020); apparel (-37%); and machinery and equipment (-28%).

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).

• 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

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

• 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.

• 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.

• 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

• 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. 

• 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.

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

• 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.

• 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. 

• 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. 

• In terms of patent technology families, as defined by the World Intellectual Property Organization (WIPO), the United Kingdom presents a technology specialisation towards medical technology and pharmaceuticals. 
• Between 2007 and 2016 medical technology patents represented 11.6% of the total UK triadic patents, followed by 10.4% of pharmaceuticals and 6% of organic fine chemistry. 

• 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. 

• 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-27^c 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).

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

• 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. 

• 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 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. 

• 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

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

Policy questions addressed in Theme 3 

1. Are UK key industries becoming more or less competitive internationally?
2. How are UK industries performing in terms of productivity, value added and employment?
3. Are key industries in the UK investing enough in R&D compared to their international competitors?

What the data tells us

• Pharmaceuticals, automotive, aerospace and machinery and equipment are key industries of the UK, accounting for 30.5% of the total manufacturing value added in 2018. Their productivity levels lagged behind those of leading countries. 
• Aerospace and machinery and equipment became more productive on the basis that value added grew faster than employment (Chart 3.9, Chart 3.13). Automotivebecame more productive as value added grew while employment shrank (Chart 3.5). In contrast, productivity growth collapsed in pharmaceuticals as value added contracted at a quicker rate than that of employment (Chart 3.1). 
• Trade analysis also suggests that the UK has become less competitive internationally in specific products. It joins the bottom quartile of countries ranked by trade balance in automotive and machinery and equipment products (Chart 3.7, Chart 3.15), with widening deficits since 2009. From being the fifth largest net exporter of pharmaceutical products in 2009, the UK slipped rapidly into the third quartile of countries by 2018 (Chart 3.3). Aerospace products is a bright spot in which the UK has strengthened its position to become the fourth largest net exporter in 2018 (Chart 3.11). 
• Business R&D spending in the UK key industries is less than that of their international competitors (unadjusted for economy and industry size). Business R&D spending has accelerated in automotive (highest growth rate among comparator countries) (Chart 3.8), aerospace and machinery and equipment (Chart 3.12, Chart 3.16). However, it has been on the decline for pharmaceuticals (Chart 3.4). Low R&D spending contributes to overall low investment spending in the UK and hampers the capital deepening needed for labour productivity growth. 

This figure demonstrates the relationship between value added, employment and labour productivity. The horizontal axis measures the change in employment, and the vertical axis measures the change in value added, during the period of analysis.

The graph allows for more detailed country and sector comparison (than by considering overall productivity growth rates only) by explicitly showing the drivers of productivity growth or decline. 

Positive productivity growth (blue)

Productivity growth is positive if the rate of growth of value added is higher than the rate of growth of employment. Productivity is also positive when value added decreases, but employment decreases faster (i.e. the decrease in employment is proportionally greate rthan the decrease in value added).

Negative productivity growth (red)

Productivity growth is negative if the rate of growth of value added is lower than the rate of growth of employment. Productivity is also positive when value added decreases, but employment decreases slower (i.e. the decrease in employment is proportionally lower than the decrease in value added).

Zero productivity growth line

If the rate of change in value added and employment are the same (either positive or negative), productivity growth is zero.

• The UK ranked fifteenth in the world in the production of pharmaceuticals in 2016–17 by value added in current PPP US$ terms.
• The US has sustained global leadership in the industry in the last decade, followed by India, Germany, Switzerland and France.
• With the exception of Switzerland, labour productivity growth has been weak among the top performers in the global industry.
• The productivity of the UK pharmaceuticals industry declined by almost 10% on a CAGR basis. At ~$137 in 2016–17, it was lower than the productivity levels of all comparators except India. 

• The pharmaceutical industry contributed to 7.5% of manufacturing gross value added in the UK in 2018.¹
• Unlike top-performing countries, the UK has recorded negative growth rates in value added, employment and productivity.
• Korea and Singapore are fast-growing nations with niche specialisation areas. 
• The pharmaceutical industry has played a central role in responding to the COVID-19 outbreak.²

¹ Office for National Statistics.

² Life Sciences COVID-19 Response Group (2020). Life Sciences Recovery Roadmap; Kapoor et al (2020). Flexible Manufacturing: The Future State of Drug Product Development and Commercialization in the Pharmaceutical Industry. J. Pharm. Innov.

• The UK has suffered from a rapid loss in trade competitiveness in pharmaceutical products from the perspective of trade balance. 
• The UK was the fifth largest net exporter of pharmaceutical products in 2009, with a surplus of ~$10B, placing it among the top quartile of countries according to trade balance. 
• Since 2014 the UK has recorded deficits in pharmaceutical products trade in all years except 2015. Its trade deficit widened to ~$126M in 2018, placing it among the third quartile of countries according to trade balance. 
• The wider deficits were a combination of a dip in exports between 2009 and 2018 (CAGR: -0.2%) and an increase in imports (CAGR: 4.3%). 
• Top performers alongside the UK in 2009 – with the exception of Israel, which was overtaken by Singapore – retained their spots among the top 10 by 2018, notwithstanding the change in their ranking. 

• In 2018 the pharmaceutical industry accounted for almost 17.8% of overall business R&D expenditure in the UK.¹
• However, the same decline experienced by the sector in terms of GVA and productivity also affected R&D expenditure. 
• The sector spent 3% less in 2018 than it did in 2008.¹
• Research and development is fundamental to pharmaceutical companies that rely on the discovery of new drugs to achieve growth.
• It takes on average between 12 and 15 years and £1B for a new medicine to go through the necessary procedures before it can be prescribed by doctors.
• Patents play a key role in the pharmaceutical industry: the expiration of patents, while good for consumers, can result in weaker industry performance when firms experience sharp declines in revenue. This phenomenon is known as the “patent cliff”. 

¹ Office for National Statistics.

• In 2018 the UK ranked seventh in the world automotive industry in value added terms.
• China has become the global leader in the automotive industry in terms of value added, surpassing the US, Japan and Germany. However, employment levels have reduced (at an annual rate of 1.4%).
• From 2005 to 2018 UK automotive productivity has grown at higher rates than among other world leaders (8% annually).
• The productivity of the UK automotive industry grew by 8.3% – outpacing the sixth largest countries in automotive production – on a CAGR basis. With value added per employee of $171 in 2018, the UK was the third most productive – after the US and Korea – and more productive than Japan and Germany.

• The automotive industry contributed to 8.8% of the manufacturing gross value added in the UK in 2018.¹
• The UK automotive industry has recorded a strong performance in recent decades, with value added growing at around 7% annually from 2005 to 2018.
• The automotive sector has been one of the most affected by the COVID-19 pandemic. Policy packages have been established around the world, including France, Germany, Korea and the UK to support the industry while promoting the production of energy-efficient vehicles.²

¹ Office for National Statistics. 
² Policy Links (2020). How manufacturing can emerge stronger.

• The UK’s terms of trade in automotive products have improved. The ratio of exports to imports increased from $0.61 in exports for every $1 in imports in 2009 to $0.73 in exports for every $1 in imports in 2018.
• The UK’s international ranking by net exports has also improved. However, it consistently belongs to the bottom quartile of countries ranked by net exports in automotive products.
• Its deficit in automotive products trade widened by 1.7% per year (CAGR), from ~$18B in 2009 to ~20B in 2018.
• Germany, Japan, Mexico, Korea, the Czech Republic, Thailand, Slovakia, Turkey and Spain were among the top 10 countries in both 2009 and 2018, notwithstanding the change in their respective ranking.
• Poland fell out of the top 10 in 2018, and its spot was taken by India.

• In 2018 the automotive industry accounted for almost 15% of overall business R&D expenditure in the UK, second only to the pharmaceutical industry.¹
• UK automotive R&D grew by 15.4% (CAGR) between 2009 and 2015.
• The automotive industry has been one of the most productive UK manufacturing industries over the last 20 years; its productivity growth of 61% since the 2008 financial crisis has been the strongest of any industry.
• Over 6% of automotive firms – both original equipment manufacturers (OEMs) and those in the supply chains – are foreign-owned, over double the average for the UK manufacturing sector as a whole.
• The biggest foreign investors in the UK automotive industry are the US (31% of foreign-owned companies), followed by Japan (15%) and Germany (14%).

• The US has sustained its leadership in the aerospace industry over the last decade. It is followed by France, Germany, the UK, Canada and Italy.
• Of the top six performing countries, France, Italy and Korea experienced the largest increases in value added and employment, between 2005 and 2017.
• In terms of value added per employee, Germany and Italy have observed the highest growth rates.
• The productivity of the UK aerospace industry grew by 1.7% –lagging behind most countries, except Canada and Korea – on a CAGR basis. With value added per employee of ~$120 in 2017, the UK was the least productive compared to all other countries.

¹ Office for National Statistics

• The aerospace industry contributed to 5.9% of the manufacturing gross value added in the UK in 2018.¹
• The UK ranks in fourth position in the world in the manufacturing of air and spacecraft and related machinery, in value added terms.
• However, the UK’s share of global value added halved between 2006 and 2016 (from 14% to 7%).
• As well as automotive, the aerospace industry has been highly impacted by the COVID-19 pandemic. Strategies to support national industries have been announced in countries including France and Germany, with a particular emphasis on improving the sustainability of the sector.²

¹ Office for National Statistics (other transport equipment).
² Policy Links (2020). How manufacturing can emerge stronger.

• The UK has become increasingly competitive in aerospace products trade from the perspective of trade balance. Its position improved from being the twenty-third largest net exporter in 2009 to the fourth largest in 2018, with the surplus widening by 100.9% per year from ~$15M to ~$8B.
• The UK achieved growth rates of 111% in exports of aerospace products and 122% in imports, respectively, the highest among comparator countries.
• France, Germany, Brazil, Italy, Canada, Spain and Israel were among the top 10 countries by net exports in aerospace products for both 2009 and 2018, despite the change in their respective ranking.
• The US was the largest net exporter, with a surplus of ~$108B in 2018, in sharp contrast to its ranking at 196th with a deficit of ~10B in 2009. This was achieved on the back of strong growth in exports (2009–18 CAGR 37%)1, with modest growth in imports (6%).

¹ This was particularly strong in the exports of commercial aerospace products to China, which accounted for 12% of total industry exports in 2017 (SpaceNews, 11 July 2018).

• In 2018 the aerospace industry accounted for 6.8% of overall business R&D in the UK.
• It is the fourth largest contributor to business R&D after pharmaceuticals, automotive and computer programming and information service activities.
• UK aerospace R&D grew by 3.9% (CAGR) between 2009 and 2016, outpacing growth rates in Italy and France.
• Business spending on R&D underpins most of the technological advances in the UK aerospace industry.

• The UK ranks eighth in the world in the production of machinery and equipment in value added terms.
• China has become a world leader in the production of machinery and equipment, showing the largest increase in value added from 2005 to 2018.
• Germany showed the largest growth in employment in the same period.
• China, the UK and Italy have observed the largest increases in value added per employee.
• The productivity of the UK machinery and equipment industry grew by 4.3% – the second highest after China – on a CAGR basis. With value added per employee of ~$104 in 2018, the UK was less productive than the US, Korea, Japan, Germany and Italy.

Note: Manufacture of machinery and equipment includes: manufacture of machinery, pumps, compressors, lifting and handling equipment, machine tools and domestic appliances, among others.

• The machinery and equipment industry contributes to 8.3% of the manufacturing gross value added in the UK.¹
• The value added and employment of the UK machinery and equipment industry has grown at rates similar to those observed in top performing countries.
• The strong linkages between this industry and the automotive and aerospace industries have meant that production has also contracted amid the COVID-19 outbreak.² Sustainability is also a strong trend in the machinery and equipment industry.³

¹ Office for National Statistics.
² The Manufacturing Technologies Association, MTA (2020). Forecast for Manufacturing Technology.
³ MTA (2020). Decarbonisation: Future Growth for Manufacturing.
Note: Manufacture of machinery and equipment includes: manufacture of machinery, pumps, compressors, lifting and handling equipment, machine tools and domestic appliances, among others.

• The UK has not been competitive (and increasingly so) in machinery and equipment products trade. It is consistently in the bottom quartile of countries according to trade balance, with the deficit widening by 14.1% per year from ~$15B in 2009 to ~49B in 2018.
• The terms of trade have also deteriorated, from $0.82 in exports for every $1 in imports in 2009 to $0.67 in exports for every $1 in imports in 2018.
• China, Korea, Germany, Taiwan, Japan, Italy, Singapore and Malaysia were among the top 10 countries according to net exports of machine and equipment products for both 2009 and 2018.
• They were joined by the Czech Republic and Vietnam in 2018, while the Netherlands and Hungary fell out of the top 10.

• In 2018 the machinery industry accounted for 4.1% of overall business R&D in the UK.
• UK machinery R&D grew by 2.3% (CAGR) between 2009 and 2017, trailing all countries except France.
• The machinery industry tends to be bigger than the manufacturing average, in terms of both turnover and employment.
• With size comes opportunities for scale, greater diversification and (at least the perception of) stability – all of which have supported the machinery industry through its cyclical fluctuations.
• 43% of the demand for products made by the machinery industry came from overseas consumers and their investments – making the industry one of the most export-intensive in UK manufacturing.
• In 2014, 7.4% of mechanical equipment firms in the UK were foreign-owned – higher than the UK total manufacturing average, at just 3%.
• Foreign-owned firms were 37% more productive than domestic firms, and they helped to contribute to the industry’s considerable R&D expenditure.

Policy questions addressed in Theme 4

1. Is the UK producing enough scientists and engineers?
2. Is the UK government investing enough in technical and vocational education?
3. How does this compare with other countries?

What the data tells us

• The UK presents a level of tertiary education attainment well above the OECD average, but it is still below countries such as Canada and Korea (Chart 4.1).
• Undergraduate enrolment in STEM disciplines has increased steadily in the UK in recent years (Chart 4.2). In 2018 graduates in STEM disciplines accounted for 44.2% of total graduates in the UK, above comparator countries such as France (37%), theUnited States (36.8%) and Canada (35%) (Chart 4.3).
• The number of R&D personnel (i.e. researchers, technicians and other supporting staff) in the UK remains below that of comparator countries such as Korea, France and Germany (Chart 4.4). 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 (Chart 4.5).
• Women are underrepresented within the “researchers” segment of R&D personnel, although the share of women researchers in the UK is above the world average, and it is well above comparator countries such as Japan, Korea, Germany and France (Chart 4.6).
• 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 (Chart 4.7).
• The UK has few science and engineering technicians, compared to countries of a comparable size, such as France and Italy (Chart 4.8). Science and engineering technicians are employed in every sector of the economy, dealing with, for example, operating technical equipment, power plants, aircrafts and ships, among other tasks (Chart 4.9).

• The UK presents a level of tertiary education attainment (47%) that is well above the OECD average (38%) and countries such as Italy (20%), Germany (30%) and France (38%).
• Although showing a similar value to the United States (48%), the UK is still below the level of the tertiary educational attainments of Canada (59%) and Korea (48%).

• Although innovation encompasses several disciplines, graduates in STEM disciplines (Science, Technology, Engineering and Mathematics) are of particular importance to innovation activities.
• Tackling the shortage of STEM skills is one of the objectives of the UK Government Industrial Strategy.
• Between 2009/10 and 2017/18 the total number of students enrolled in STEM undergraduate courses in the UK increased by 17.6%, more than the increase in non-STEM subject areas (9%).
• In 2017/18 students who had enrolled in STEM undergraduate courses accounted for 46.7% of total students, representing an increase from 44.9% in the 2009/10 academic year.
• In 2019 STEM graduates represented only 18% of the total UK workforce,with a prevalence of engineering and technology disciplines.^a

Source:^a British Science Association (2020). The State of the Sector: Diversity and Representation in STEM Industries in the UK.

• In 2018, 418,704 students obtained a Bachelor degree from UK’s Higher Education Institutions.
• Graduates in STEM disciplines accounted for 44.2% of total graduates in the UK in 2018. This value is above comparator countries such as France (37%), the United States (36.8%), and Canada (35%).
• The share of graduates in Engineering, Manufacturing and Construction remains relatively low in the UK, at 8.4%, especially when compared to countries such as Germany (23.4%), and Korea (20.7%).

• The OECD classifies R&D personnel as researchers, technicians andother supporting staff.
• In the UK the number of R&D personnel per 1,000 employment (14.3) remains below that of Korea (18.8), Switzerland (16.3), France (16.1) and Germany (15.8).
• While having a number of researchers per 1,000 employed (9.4) that is above the OECD average (8.6) and the United States (9.2), the UK still has comparatively fewer researchers employed than countries such as Korea (15.3), France (10.9), Japan (9.9) and Germany (9.7).

• The OECD Frascati Manual defines researchers as “professionals engaged in the conception or creation of new knowledge. They conduct research and improve or develop concepts, theories, models, techniques instrumentation, software or operational methods.”
• In the UK most of the researchers (60%) are employed in the government and higher education sector. This may be related to the low attractiveness of the business sector for UK-based researchers and/or the lack of R&D job opportunities in business enterprises.
• Conversely, more than 70% of researchers in countries such as Korea, Japan and the United States are employed in business enterprises.

• As indicated by UNESCO,^a only around 30% of the world’s researchers are women, despite the fact that in recent decades the number of women enrolling in tertiary education has increased.
• There are, however, differences among regions. The regional averages for the share of female researchers are as follows:
  • 48.2% for Central Asia
  • 45.1% for Latin America and the Caribbean
  • 41.5% for the Arab States
  • 39.3% for Central and Eastern Europe
  • 32.7% for North America and Western Europe
  • 31.8% for Sub-Saharan Africa
  • 29.3% for the world
  • 23.9% for East Asia and the Pacific
  • 18.5% for South and West Asia
• In the UK the share of women researchers is above the world average, as well as the North America and Western Europe average, and it is well above comparator countries such as Japan, Korea, Germany and France.

Source: ^aUNESCO (2019). Institute for Statistics (UIS) Fact Sheet no 55.

• Recent analyses argue that the UK education system is marked by a “missing middle” of higher technical education (HTE): enrolment in post-secondary education; and short-cycle tertiary education.^a
• For example, in 2018 students who were enrolled in short-cycle tertiary education in the UK made up 12% of the total tertiary education, compared to 36% for the USA and 22% for Canada and Korea.
• HTE corresponds to Level 4 and Level 5 of the UNESCO International Standard Classification of Education (2011): post-secondary, non-tertiary education (Level 4) is post-secondary education, not sufficiently complex to be tertiary education, which prepares students to enter the job market (or pursue tertiary education); short-cycle tertiary education (Level 5) courses are often practically based, preparing students to enter the labour market.^*
• The lack of HTE skills may have implications for the competitiveness of the economy, as the job market requires a variety of skills that are not always provided by standard three-year Bachelor degrees.
• The evidence suggests that the lack of HTE enrolment in the UK is due to the bias of public funding towards higher tertiary education (i.e. Bachelor degree and above).^b

Note:^* In the Frameworks for Higher Education Qualifications of UK Degree-Awarding Bodies, HTE corresponds to Level 4 and Level 5, both corresponding to UNESCO ISCED Level 5.
Source:^a Field S. (2018). The Missing Middle: Higher Technical Education in England. Gatsby Charitable Foundation; bMason G. (2019). Higher Education, Initial Vocational Education, and Training and Continuing Education and Training: Where Should the Balance Lie? LLAKES Research Paper 66.

• Science and engineering technicians are physical and engineering science technicians, mining, manufacturing and construction supervisors, process control technicians, life-science technicians or ship and aircraft controllers and technicians, among other sectors.
• The UK has few science and engineering technicians compared to countries of a comparable size, such as France and Italy.
• Analyses conducted by the UK National Audit Office also suggest that “there is an acute shortage of technician-level STEM skills” in the United Kingdom.

Source:^a National Audit Office (2018). Delivering STEM (science, technology, engineering and mathematics) skills for the economy.

• In the UK science and engineering technicians are mainly employed in manufacturing (27%), construction (16.7%) and professional services (13%), where they are involved with operations, operating technical equipment, power plants, aircrafts and ships.
• The UK Government Industrial Strategy recognises that in the past technical education was given insufficient attention; its aim is to reform the system to improve the technical education outcome.
• In this respect, from September 2020 T Level qualifications were introduced in England as a 2-year post-16 course qualification that “bring[s] classroom learning and an extended industry placement together on a course designed with businesses and employers”.

Source:^a HM Government (2020). About T Levels.

Technical notes

1. The data used in the report has been gathered from dynamic databases, which are regularly updated throughout the year. In some cases, the most recent values may be provisional, while earlier data may have been revised as a result of initiatives to expand data completeness and coverage.
2. Data sources aggregate information from a large number of disparate primary sources, and, as such, missing values and discrepancies in the data are to be expected. Data sources might also use different industry classifications and sector groupings.
3. Key data sources include: Office for National Statistics (UK); UNIDO’s Industrial Statistics Database (INDSTAT); OECD Science, Technology and Industry Scoreboard; United Nations Commodity Trade Statistics Database (UN Comtrade); UIS Statistics (UNESCO); IP Statistics Data Center (WIPO); National Science Foundation Science and Engineering Indicators; and World Bank Education Statistics.
4. For most indicators, the latest available year is 2018. As such, the effects of the COVID-19 pandemic are not reflected in most of the charts in the report.
5. A flexible approach has been adopted to the selection of countries for international comparison, accounting for factors such as industrial specialisation and data availability. Country rankings can be influenced by the units chosen for comparison and the data source.

For comments or queries, please email: ifm-policy-links@eng.cam.ac.uk

The information contained in this report does not imply the expression of any opinion whatsoever on the part of the authors, or their affiliated institutions, concerning the legal status of any country or its authorities. Its content, as well as any data and maps displayed, are without prejudice to the status of, or sovereignty over, any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Any mention of firm names does not imply endorsement.

Cambridge Industrial Innovation Policy (CIIP) brings together the Centre for Science, Technology & Innovation Policy at the Institute for Manufacturing, the Policy Links Unit from IfM Engage and the Babbage Policy Forum. Our work is based around what we call industrial innovation policy, a policy domain that focuses on the interplay between technology, innovation and industrial competitiveness.

CIIP is based at the Institute for Manufacturing, a division of the University of Cambridge's Department of Engineering.

17 Charles Babbage Road, Cambridge, CB30FS, United Kingdom https://www.ciip.group.cam.ac.uk/.

Contributors

The contributors to this report are: Jennifer Castaneda-Navarrete, David Leal-Ayala, Carlos López-Gómez, Michele Palladino and Tong Yee Siong. Eoin O’Sullivan provided overall academic guidance to the project. Research support was provided by Manuel Ricardo Galindo.

Acknowledgements

The authors would like to thank those who provided comments, suggestions and reviewed earlier versions of this report: Tim Minshall, Frank Tietze and Tomas Ulrichsen at the Institute for Manufacturing; Diane Coyle at the Bennett Institute for Public Policy, University of Cambridge; Daniel Sandford Smith and Ginny Page at the Gatsby Charitable Foundation; Fhaheen Khan and Nina Gryf at Make UK; the Sector Analysis team at the Department for Business, Energy and Industrial Strategy (BEIS); and the Communications and Research team at Invest Europe.

For further details, please contact: ifm-policy-links@eng.cam.ac.uk

Please quote as: Policy Links (2021). UK Innovation Report. Benchmarking the UK’s Industrial and Innovation Performance in a Global Context. IfM Engage, Institute for Manufacturing, University of Cambridge.