The UK Innovation Landscape: The Impact of Covid-19 on R&D

Economy & sustainability

The UK Innovation Landscape: The Impact of Covid-19 on R&D

Commentary
Posted on: 21st September 2020
Bill Wildi
Policy Researcher

The UK has a challenge on its hands to bounce back economically from Covid-19. On top of a decade of stagnant productivity growth and growing concerns about regional economic disparities, a return to pre-pandemic policies is not enough to boost prosperity.

The government's weak support for the recovery risks leaving R&D intensive manufacturers in the Midlands and the North cash-strapped in the face of the pandemic- and Brexit-related uncertainty. Meanwhile, the bulk of Covd-19 health-related R&D funding has primarily gone to recipients in London and the South East. While this is sensible policy for responding to the crisis, it highlights how region-blind R&D funding can add to regional R&D disparities.

If the government is committed to using additional R&D spending to address regional disparities, it needs to rethink how it invests in R&D capabilities and supports the viability of innovative businesses in relatively deprived regions.

Covid-19 R&D Funding Has Gone to the Usual Suspects

In response to the pandemic, the government has allocated over £100m of funding to university-based Covid-19 projects (compared to £2.8bn total funding in 2018/19), with some potential successes including a vaccine being developed by the University of Oxford.

Figure 1 shows that the largest beneficiaries of Covid-19 funding have been Inner West London along with Berkshire, Buckinghamshire and Oxfordshire. Together, these regions received almost 40% of Covid funding, substantially higher than the 28% of total public 2018-19 UKRI awards that these two regions received. And because UKRI allocates much of its funding based on its measures of university research quality, allocating more funding to Inner London and Oxford is likely to increase their ‘research excellence’ scores, enabling them to take a larger share of future awards.

East Anglia, despite being a golden triangle region, has only received 2.78% of Covid-19 funding, well below the 7.21% of 2018-19 awards they won. The University of Bristol and the University of Leicester both won substantial individual awards of several million pounds, which has made them significant beneficiaries of Covid-19 awards (each receiving around 10% of the total award value).

 

 

Figure 1 – Percentage share of total UKRI award value by region

Universities like Oxford, Imperial, and UCL are obvious focal points for UKRI and NHS Covid-19 prizes, because they have enormous strengths in biomedical and epidemiological research. Universities like Warwick and Sheffield, by contrast, tend to be stronger in manufacturing and engineering, and thus do not reap much from this new pool of funding.

Strength-focused funding is sensible policy for dealing with urgent social problems like Covid-19. But these findings echo the implications of our recent analysis of differing regional R&D strengths. Apart from the Strength in Places Fund, most R&D funding is region blind. But radically different regional R&D capabilities mean that technology-specific, region-blind R&D funding too often ends up reinforcing regional disparities. Given the government wants to use R&D funding as part of its levelling up agenda, it will need to consider the impact of such funding in increasing regional R&D disparities.

Manufacturing business R&D at risk in Covid recession

The economic fallout of Covid-19 has also had consequences for private-sector R&D. Figure 2 shows the percentage change in GVA across a range of sectors between February and June 2020 (the timeframe ONS use to demonstrate the economic impact of Covid-19) along with the business expenditure on R&D (BERD) for each sector in 2017. (Sectors are ordered by the similarity scores calculated for our previous blogpost on regional R&D.)

Figure 2 – Change in sector GVA between February and June 2020, and 2017 sector BERD (£m)

Chart showing 2017 BERD and GVA growth since February

Many of the hardest-hit sectors, like accommodation and food services, are not big R&D spenders. But some are. Transport equipment manufacturing (including motor vehicles and aerospace) represents the second largest sector in R&D expenditure after science, but activity here fell the third most, shrinking by 38%. This is especially concerning for regions like Derbyshire, Nottinghamshire and the West Midlands, the ‘Manufacturers’ from our previous post whose business R&D is heavily driven by these sectors, and whose residents were already among the poorest in the country.

This could take a long time to bounce back from. Experience in past recessions suggests that R&D spending tends to fall in recessions and rise in the recovery. In the UK during the financial crisis, R&D spending fell by 3.7% in 2009, before rising by 1.6% in 2010 and 7.1% in 2011. Overall, the percentage of innovative firms dropped by a third in the financial crisis and has yet to recover, while the proportion of firms reporting product or service innovation fell by 26.6% in the crisis and took six years to recover. Recovery in R&D spending can take a long time to recover and the last crisis did significant long-term damage to the number of firms engaged in innovation.

However, there may be an important wrinkle in this story: larger and cash-rich companies were more likely to maintain levels of R&D relative to smaller and cash-poor businesses, giving them a competitive advantage that lasted through the recovery. This suggests that policies that protect cash flow are important for preserving businesses’ ability to maintain R&D investment.

The Covid-19 recession, however, is deeper than the financial crisis, with a wider ranging impact on cash reserves: 61% of manufacturers recently reported they had less than six months cash reserves or were uncertain about their cash position. Overall, businesses estimate that they will cut R&D spending by around 16.7% on average, compared to the fall of 3.4% in 2009.

Conclusion

The limited spread of Covid-19 related R&D funding shows that technology-specific, region-blind R&D funding can end up exacerbating regional R&D disparities. As set out in our piece on levelling-up innovation, this is because different regions have different R&D specialisms, and it means that simply putting more money through existing, or even new, region-blind funding mechanisms is unlikely to address regional R&D disparities. Rather, if the government wants to use additional R&D funding as part of its levelling up agenda, it will need to rethink how best to target additional funding at regions that need it, for example by investing in innovation ecosystems in deprived areas, using the Strength in Places Fund or working with local authorities.

For the manufacturers from our previous post (ie, regions reliant on R&D intensive aerospace and automotive companies) the short-term priority must be sustaining cashflow as a means of ensuring business viability. While there are a variety of mechanisms to achieve this (for example, more generous R&D tax credits or full expensing on capital investment), sustaining capability within firms is essential: a rebound in R&D can happen, but only if the businesses are around to boost investment, or haven’t cut their capability to the bone.

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