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The analysis reveals the agglomeration of R&D activity in UK, particularly in the South East corner of the UK:

• Between 2009 and 2019, 72% of additional jobs created in the ten most R&D-intensive industries were located within the sub-regions covering London, Oxford and Cambridge, despite these regions only containing around 20% of the population.
• Regionally, this means there are twice as many R&D-intensive jobs located in London, the South East and the East of England combined (46%) as in the North of England (20%) and three times as many as the Midlands (15.6%).
• Looking at total R&D expenditure, only six sub-regions, out of 41, spend more then the OECD R&D average of 2.4% of GDP, comparing to 16 sub-regions in Germany, out of a possible 38. At the other end of the spectrum, the UK’s least R&D intensive region spends less, as a share of GDP, than the least R&D intensive sub-regions of Germany, Italy, Spain, Bulgaria, the Czech Republic, Croatia, the Netherlands, Hungary and Poland.

The report argues this is partly because many of the ingredients of innovation are heavily directed towards these places. For example:

• In 2018, London and the South East received 49% of the Government and UKRI’s total R&D spending. 
• Since 2009, organisations in London, the South East and East of England have received 60% of total grant funding dispensed by the Small Business Research Initiative (SBRI), which brings together government challenges and ideas from business to create innovative solutions. 
• Between 2015 and 2018, start-ups in London received four times more per head of population than businesses elsewhere through the Government’s two main innovation investment reliefs, Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). Combined, London and the South East made up more than 60% of SEIS and EIS investments during this three year period, compared to 10% for the North of England. 
• Between 2015 and 2020, venture capital investments rose fourfold in London compared to a third in Manchester. London’s share of venture capital increased from 69% of total UK investment in 2015 to 77% in 2020.

Business R&D as a percentage of GDP by NUTS2 area, 2018

The report argues that there are a number of steps the Government could take now to start building highly-productive clusters of innovation in poorer regions, driving both regional growth and supporting the national recovery from the pandemic.

Key recommendations to boost innovation across the UK include:

1. Devote the uplift in public R&D investment through the 2.4% of GDP target to projects outside the “Golden Triangle”. This would amount to an annual £9 billion boost to R&D funding for lagging regions by 2027, and, according to the Government’s own modelling, could raise UK productivity by 3-4% by 2027 and 8-12% by 2040 relative to the current distribution. 
2. Expand capital allowances for plant and machinery to among the most generous in the G20. This would help manufacturing, which are disproportionately located outside the South East, to innovate. One recent study found that despite having the lowest headline rate, the UK ranks only 10th in the G20 on the effective marginal rate due to limited allowances. 
3. Establish a further round of mission-orientated technology institutes to kickstart innovation in industries where the UK has an early advantage. This might include industries such as climate change adaptation, machine learning, food security, and translational genetics, and build on the success of the catapult network which has underpinned the search for a coronavirus vaccine. 
4. Use R&D tax credits to incentivise follow-on investment from firms. A number of other countries, including South Korea, Japan, and Italy, have successfully raised private R&D spend by directly rewarding firms that increase their innovation spending year-on-year. The UK should do the same. 
5. Create expanded University Enterprise Zones to bring together researchers and commercial organisations to translate research innovation into commercial products and services. This would build on the existing network of UEZs, and give them additional incentives in the form of additional tax credits or higher capital allowances.

Will Holloway, Deputy Director of Onward, said:

“You only need to look at the UK’s vaccine success to understand the enormous economic value created by R&D intensive clusters like Oxford and Cambridge. But the truth is that these clusters are increasingly concentrated in one small corner of the country.

“The lopsided nature of UK innovation has the potential to derail the Government’s ambitions for levelling up. The Chancellor will never be able to close the gap between productive and unproductive parts of the UK if R&D funding, institutions and industries are only in the Greater South East.

“The Government should use every tool at its disposal to level up innovation, including boosting public R&D for lagging regions and investing in a network of research institutes in other parts of the UK.”

Rob Largan MP, MP for High Peak and Levelling Up Taskforce Committee Member, said:

“If we are serious about levelling up regional productivity, we need to attract innovative companies to invest and create jobs. That is what we have done in the past, when we brought Nissan to Sunderland, and what the world’s most innovative countries, from Taiwan to Israel, do today. This report sets out a roadmap to level up innovation in every corner of the UK.”

Selaine Saxby MP, MP for North Devon and Levelling Up Taskforce Committee Member, said:

“In the last year, the UK’s vaccine success has demonstrated the awesome power of scientific innovation to save lives and sustain jobs. But as this report shows, that innovation is becoming worryingly concentrated in three cities in the South East. We need to unleash R&D in every corner of the UK, from market towns and rural communities in the South West to post-industrial towns in the North“

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Read the report here

The report finds that, despite London’s deep and mature financial markets, the UK suffers competitive weaknesses linked to investment in businesses and infrastructure, including:

• A wide infrastructure financing gap of £8 billion a year, equivalent to 0.4% of GDP and weak infrastructure stock equivalent to just 47% of GDP. This compares to 52% for Italy, 54% for France and 56% for the Netherlands. 
• A large SME financing gap, equivalent to £22 billion in foregone funding for growth and jobs. Between 2015 and the end of 2018 gross flows of bank lending to SMEs fell as a share of total lending to private sector non-financial services firms from 28% to 21%. Meanwhile, bank lending to large businesses rose from 70% to 80%. 
• These problems are much worse in Britain’s lagging regions: since 2007, infrastructure spending per capita, for example, has been over triple the rate in London as in the East Midlands and Yorkshire and the Humber. According to Bank of England data, 25% of all SME loans are lent in London versus just 2.8% in the North East and 3.5% in Wales. 
• These issues have been exacerbated by the sale of the Green Investment Bank (GIB) and the departure from the European Investment Bank (EIB). The GIB catalysed £15 billion of green infrastructure spending by 2015. In the same year the EIB invested £5.6 billion in UK projects, equivalent to approximately a third of infrastructure spending under the remit of the National Infrastructure Commission. 

The creation of a British Development Bank would address these market failures and provide financing at scale to level up the UK. The majority of British Development Bank’s funding would come from loans to the private sector. This would be similar to KfW, which receives 99% of new funding from capital markets. The British Development Bank, in consultation with the Treasury, would issue the bonds and deploy a combination of loans, guarantees and equity to finance infrastructure and SMEs.

The new institution would be modelled on the successful German bank, KfW, which was established in the aftermath of the Second World War. Since 1991, almost one out of every ten euros invested in East Germany has come from KfW, helping to reduce the gap in disposable incomes between East and West Germany by over 50%. In the first half of 2020, KfW has tripled the level of domestic promotion to £63 billion to support the coronavirus response. 

The report argues that the equity shares in the BDB should be given to each of the devolved administrations of the United Kingdom, and Mayors, Local Enterprise Partnerships and Combined Authorities should have the power to scrutinise decision-making. The institution would have the power to raise regional development bonds, ring-fenced for development in specific regions. 

An additional benefit of establishing a national development bank would be to create a long term financing institution capable of taking decisions away from the political cycle. At present, infrastructure decisions are subject to political wrangling that can frustrate investment and create undue delay. An independent bank, overseen but not controlled by the Treasury, would create certainty and stability of funding, especially for controversial projects. 

Gareth Davies, MP for Grantham and Stamford and co-author of the report, said:

“Even before the pandemic, the UK economy faced a number of long term challenges around the financing of growth-enhancing projects and dynamic businesses, especially in parts of the country which have lagged behind for a long time.” 

“The UK is unusual among developed countries in not having a national development bank to catalyse private sector activity where the market will not invest alone. If we are serious about levelling up, we need a British Development Bank.”

For media inquiries please email will.tanner@ukonward.com

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