How to skin a (R&D) cat.

Innovate UK recently launched a new loan scheme to support research and innovation in UK firms. This scheme – originally conceived in the austerity years – aims to provide an alternative way of supporting innovation alongside the UK’s innovation grants and tax credits. The new loans also suggest a subtle change in emphasis in UK innovation support.

Different countries have very different ways of supporting business R&D and innovation, however. And, these different approaches have very different implications. In the UK, the emphasis is on ‘supporting excellence’. Innovate UK run national competitions and the best research and innovation proposals are rewarded with grants. This concentrates support for innovation in leading-edge firms, and on new-to-the-market or radical innovations. More specifically this means that more than half of all Innovate UK funding goes to the most productive – and potentially most profitable firms – in the top two deciles of the productivity distribution. The level of funding available also means that only around 1:20 innovating firms in the UK actually receives any public support.

So the UK focuses support on supporting cutting edge technologies; but what about other countries? Austria – by no means a slouch in productivity terms – adopts a very different approach. Here, the principle mechanism for supporting business R&D and innovation is the so called ‘R&D premium’. This is a straight cash subsidy paid to all firms which can provide evidence of their R&D spending. Currently standing at 12 per cent this is due to rise to 14 per cent over the next two years. It means that nearly half of all innovating firms in Austria receive state support for their innovation, albeit at a substantial cost to the Austrian government.

Austria’s R&D premium has been one factor in the very sharp rise in the level of national R&D spending in the country over the last decade – it now stands at over 3 per cent of GDP compared to less than 2.0 per cent in the UK. It has also been a potentially significant factor in attracting mobile R&D investment, although other factors – skills, location – have also been important. More generally, however, the premium supports R&D and innovation at, and well behind, the leading edge and encourages both new-to-the -firm and new-to-the-market innovations. As in the UK, however, some R&D premium payments go to Austria’s most profitable companies who may not actually need state support.

Innovate UK’s grants and Austria’s R&D premium both support firms across each country with no regional or locational variations in terms of availability. This tends to mean that support is concentrated in the most innovative regions – Vienna and the UK’s ‘Golden Triangle’ (Oxford, Cambridge and London). Spanish R&D, by contrast (whilst also having a competitive national element which supports leading edge research) also has a stronger regional element. This means that around 1:5 innovating firms in Spain receive support from national and regional government. National and regional support in Spain also have a rather different impact: national support measures promote novel innovation, while regional support measures support more broadly-based, productivity enhancing innovation.

There are – as the old saying goes – many ways to skin a cat! What is surprising perhaps is that even across Europe countries adopt such different approaches to supporting R&D and innovation with very different implications and outcomes. In the UK, we may need to re-consider our focus on the leading edge, and be open to lessons from elsewhere in how we can diffuse innovation to lower productivity firms.

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.