The dire consequences of the COVID-19 pandemic on many firms across the UK continue with depressing implications for employment and future prosperity. The government has invested heavily in supporting businesses through the furlough scheme, loan schemes and rate relief. The strengths and limitations of these measures have been widely covered in the media, but less attention has been paid to a more targeted set of measures designed to support business innovation and help lay the foundations for future recovery.

Through Innovate UK the government has supported innovation in the short and long term. First, through Continuity Grants (£90m) and Continuity Loans (potentially £210m) help has been provided to help firms continue with existing innovation projects hit by the COVID-19 pandemic. Second, and very much for the short term, Innovate UK have invested around £55m to over 900 firms to support COVID-19 related innovations (mainly through ‘Fast Start’ grants).

Third, and very much with a view to the long term, another major slice of new funding – the Sustainable Innovation Fund – totalling £191m, is supporting over 1000 firms to develop new green innovations to drive future growth and recovery.

These interventions are welcome and may well be critical for the recipient firms and their innovation projects. The evidence both from previous economic crises and from 2020 suggests, however, that business innovation may well be another casualty of the COVID-19 pandemic. Previous ERC analysis of the impact of the Great Financial Crisis of 2008-10 suggests that it stopped innovation in between a quarter and a third of UK innovators. A back of the envelope calculation suggests that this meant that perhaps 70-80,000 companies stopped innovating at that point, and recovery was slow. Levels of pre-crisis innovation only returned after 4-6 years.

Evidence we gathered from UK firms in June 2020 via a survey of Innovate UK award holders suggested that even at that point (the end of Lockdown 1), many firms were cutting back on their R&D and innovation investments. In June 2020 around 1:4 innovators (perhaps 80-100,000 companies nationally) were planning to reduce investment by more than 50 per cent over the next three months. We surveyed firms again in October 2020, and our findings – which we are publishing for the first time today – suggested that this proportion improved somewhat to 1:8 firms.

Uncertainty was also a key factor in many firms’ view of the future in October 2020. At that point, around a third of firms had already developed plans for future local and national lock-downs and a further 40 per cent of firms were in the process of developing lockdown plans. Larger firms were more likely to have fully developed lockdown plans. Micro-businesses with 1-9 employees were less likely to be planning for lockdown.

More surprisingly, perhaps, in October 2020 a significant proportion of firms were envisaging a more positive outlook for innovation and R&D spending towards the end of 2021. Subsequent events – Tier 4 extensions and the January national lockdowns though – seem likely to have further dampened this emerging positive sentiment. In future surveys we will publish in the coming months we will aim to capture firms’ plans for innovation during 2021.

Stephen Roper, ERC Director 

Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the

Enterprise Research Centre, its Funders or Advisory Group.