The degree of success Research and Development (R&D) funding has had in fostering innovation, economic growth, competitive advantages, and labour productivity has historically varied depending on the specific business sector which funding is directed towards. Nonetheless, longstanding academic rhetoric and field outcomes suggests that advocating R&D does have a positive influence on socio-economic performance. For example, a recent academic paper published in the Journal of Economics by Khan (2015), concludes that R&D 'plays a significant role in the economic growth of a country'. Wider empirical literature also supports this view, with for example, Frantzen (2000) concluding that wealthier countries spending on R&D (such as the UK) had a greater influence on innovation, inventions and total factor productivity, compared to those less wealthy economies. Moreover, globally respected institution ‘World Economic Forum’ views R&D as the ‘bedrock of innovation’ where spending ‘indicates a thriving and entrepreneurial industrial spirit’. Therefore, if a country’s objective is to observe strong, consistent levels of socio-economic progress, it should be expected that R&D spending would be reflected in a Government’s annual budgetary plans.
According to the latest data release by the Office for National Statistics (ONS), the three sectors receiving the greatest R&D funding were pharmaceuticals, computer programming & information service activities, and motor vehicles & parts. Consequently, it comes as no surprise that sectors such as pharmaceuticals have constantly generated widening trade surplus contributions and have contributed 'more to the UK economy than would be possible if other industrial sectors used the same resources'.
However, when dissecting the statistics further, numerous questions must be raised over the Government's Budget planning. For instance, ONS data suggests that although ‘UK gross domestic expenditure on R&D’ has been increasing year on year since 1990, its ‘gross domestic expenditure on R&D as a percentage of GDP’ has shown gradual decline in the same period.
The ONS suggests that the UK Government has increased its reliance on alternative R&D sources, for example, through overseas and private/public business investment since 1990. In 2014, the ‘EU Horizon 2020’ programme – aimed to direct funds to UK academic institutions and laboratories – is one branch of funding which would classify as a significant proportion of overseas R&D investment. This is supported by the ONS, who suggest overseas funding has increased from £1.4bn in 1990 to £5.4bn in 2014 – at an average annual growth rate of 5.8%. Conversely, spending by the UK Government and its numerous Research Councils amounted to £6.3bn in total, but, “R&D expenditure in the UK performed by the Government and research councils sector decreased by 5% in current prices, from £2.3 billion in 2013 to £2.2 billion in 2014”.
Whilst it cannot be argued that the UK Government's R&D spending has been falling - because it hasn't - it can be argued that R&D spending has been given a low priority in the Government Budget. This is highlighted further when comparing R&D spending across the rest of the EU. For instance, the UK has continuously fallen short of the European Union's 2020 target of spending '3% of GDP' on GERD R&D. Interestingly, those Government’s which have demonstrated more commitment to the EU's spending target i.e. Sweden, Finland, France, Germany, South Korea and Japan - have broadly performed better than the UK in areas such as innovation and labour productivity.
It is not clear why the Government has not more actively supported research funding within the UK. Whilst some opponents may argue that the Government reduced corporation tax as an indirect incentive for Businesses to increase their research focus, indirect measures often lead to gaps in investment, with certain sectors taking more initiative, whilst others lag behind. Instead, the Government should take a more pro-active approach, by either working more closely with the UK business enterprise sector (of which R&D funding still lags behind the those aforementioned countries and the EU28 average) and/or directing R&D funding to those sectors which have been overlooked or left behind.