What state R&D in the UK?

A DTI report shows that UK engineering productivity is lagging behind other countries. Investment in R&D is crucial to compete globally – and companies must act now.

For a number of years there have been concerns over the levels of R&D spending in the UK. Investment in this area is one of the key drivers of innovation and iscritical to closing the productivity gap with competitor nations, boosting the economy and delivering rising living standards for everyone.

This week the DTI’s Innovation Unit released the Value Added Scoreboard, detailing the wealth created by companies. It measures the value of sales less the cost of bought-in materials, components and services, based on information extracted from audited company annual reports.

The Value Added Scoreboard is the first company productivity comparison that shows output as a measurement of wealth rather than input factors such as R&D and capital expenditure.

It reveals that sectors such as the pharmaceutical and petrochemical industries have a level of productivity that is higher than the European sector average.

‘In order to do this they must both make good strategic choices concerning their technologies, invest in efficient manufacturing choices and develop new products for the future to ensure their offerings look exciting and not tired,’ says Dr Mike Tubbs, a senior industrialist at the DTI and author of the report on the scoreboard.

The UK’s pharmaceutical sector generates an average of £104,000 of added value per employee compared to a European average of £95,000 while the petrochemical sector excels with £246,000 opposed to Europe’s £192,000. However, the automotive and electronics industries are not performing as well. The electronics industry’s average value added score per employee is just £31,000 compared to a European average of £40,000. The automotive industry scores little better, with a UK average of £39,000 against Europe’s £46,000.

When this year’s R&D and Capex scoreboards are produced, a comparison of all three sets of figures will reveal the percentage of a firm’s wealth production reinvested in both R&D and capital spending.

‘It is important for a company to generate sufficient value added to cover not only salaries, interest, dividends and taxes, but also to be able to invest in growing and developing the business,’ says Tubbs. ‘This means investing in research and development. A company maximises its sustainable value added by careful choice of strategic direction, operational excellence in its chosen area and investment in the future.’

The scoreboard covers the 500 largest UK and 300 largest European companies by value added. To qualify companies must generate over £100m value added to be included in the UK 500 and over £950m for the European 300.

Tubbs says that companies that successfully expand and develop their business are characterised by investment of a significant proportion of current value added in the future through R&D spending, and by high productivity, expressed as value added divided by the costs of employees and depreciation.

‘A company that has under-invested in the future faces a short-term problem as it seeks to improve its long-term position,’ says Tubbs. ‘This is because the increased investment needed will initially reduce productivity before the investment pays off.’According to the DTI’s calculations, the UK’s engineering sector is lagging behind its European rivals. While the sector accounts for 3.1 per cent of the total value added for the top 300 European companies, it comprises just 2.5 per cent of the total value added for the top 500 UK companies. Of the top 10 European engineering firms, only one, Tomkins, is British – though five of the top 15 European wealth-generating companies are British and have a heavy engineering and technology bias, including GlaxoSmithKline, Shell, and BT.

The pattern that emerges suggests that while other sectors are doing well, UK engineering has reached a critical juncture. Unless firms take the decision to invest a substantial amount in R&D, within five to 10 years, the state of the productivity gap will be grave.

The point is reinforced by new figures from the US Office of Legislative and Public Affairs, which says that dramatic increases in R&D investment during the past decade have significantly contributed to the US’s current global economic standing. The 2002 Science and Engineering Indicators report, compiled by the National Science Board, claims that the US finances 44 per cent of worldwide investment in R&D, equal to Japan, the UK, Canada, France, Germany and Italy combined.

The study also showed that three-quarters of this investment came from industry rather than Federal budgets, with defence-related spending falling to a 50-year low of just 14 per cent of the total.

But despite industry’s efforts to maintain America’s position as global leader, the authors of the Science and Engineering Indicators report say that a good proportion of this strength is built on the intake of foreign nationals into the country’s well-funded universities and research institutes. They worry that other countriesseeking to emulate US success might undermine this. The report’s overview says: ‘If other countries and regions build up their indigenous science and technology capabilities, they may diminish the relative attractiveness of the US as a destination country.’

If, in the UK, efforts were made to set up specialist centres, with research targeted at promising sectors for industrial applications – automotive and electronics would be obvious candidates – the country’s engineering future might seem more assured. But those who have worked in both the UK and abroad say there is some way to go before the UK’s universities and research establishments can match the service offered by those overseas, particularly in ensuring their research is relevant to industrial needs.

‘Research in universities must have a route of exploitation as it helps focus research on real problems,’ says Phil Ruffles, chairman of the Royal Academy of Engineering’s working group on engineering research. ‘Academics are more switched on when working on real problems.’

He says that although the relationship between academia and the engineering sector has improved greatly over the past few years, the country still lags behind others such as Germany, where it is common for individuals to move between industry and research.

‘Some professors spend six months in business and six months in research in the same year,’ says Ruffles. ‘You don’t get that in the UK, and this may in part be because it can be hard to balance teaching and research during university employment.’

The RAEng has also called for a closer relationship between government funding for university research and the outcome of the Research Assessment Exercise carried out every five years by the university funding councils.

Bob McGuiness, managing director at the National Physical Laboratory, who previously worked as a manager of ICI companies in the UK, US and Germany, says he believes there is a great willingness within research organisations to tie in closely with industry. However, the mechanisms for doing this are still not in place.

‘We need more people, particularly at senior level, moving between the two sectors to bring them together,’ he says. ‘As science minister Lord Sainsbury has been very clear in his message that getting research and development into industry is high on his agenda. A lot of money has been poured in, and if you believe the statistics the UK’s return on investment is good.’

Based on his own experience of working in California Mike Carr, director of enterprise venturing at BTexact Technologies, says that the UK must encourage ties between research institutes and practical applications.

‘In the US a great number of start-ups come from university research,’ he says. ‘This means innovations come to market much more quickly. We are getting better at closing the gap between university and industrial research, but we are still about 30 years behind the US.’

He adds: ‘A surprising number of start-ups are headed by UK people as they find they can get funding more easily abroad. There is a lot more confidence among industry to invest in research at an earlier level.’

Though he argues that the UK makes good use of the money it has, he concludes: ‘In Japan research investment is part of business strategy, though this can be inefficient. If the UK were to do the same amount of research that Japan does, with the encouragement that exists in the US, our future output would be magnificent.’

This year the UK government finally paid heed to calls from industry to improve the financial incentives for research investment with the launch of a 25 per cent R&D tax credit for larger companies. In 1998 Sir Robert May, the government chief scientific adviser, compiled an analysis of the R&D spending of the G7 nations plus Australia, Denmark, the Netherlands, Sweden and Switzerland between 1981 and 1995, based on OECD data. He said: ‘It is interesting that countries that introduced tax credits over the past decade – Australia, Canada and the US – have all seen strong growth in industry-financed R&D investment.’

Observers have welcomed the credit. ‘We are pleased that the rate of the additional relief has been set at a level that is actually likely to influence decisions by UK companies on whether to increase R&D expenditure,’ says David O’Keeffe, head of KPMG’s R&D Tax Relief Group. ‘These proposals should be effective in encouraging more R&D spend in the UK.’

With government encouragement and the current economic stability enjoyed within the UK, the engineering sector has fewer barriers to R&D investment than ever before. But as the US report recognises, engineering in countries such as the UK is facing a make-or-break scenario. Unless a closer relationship between industry and study is developed and funds channelled into developing technologies for future profit, in five to 10 years’ time the gap between the nation’s innovations and the competition will widen into a chasm.

An opportunity exists for UK engineering to stop the haemorrhaging of talent abroad by concentrating on building investment in centres of excellence at home. If both business and government target funding and work hard to raise their game, the engineering sector may not miss this unique opportunity for future growth.

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