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Target 2.4%: R&D expenditure in the UK

Juan Fernandez, Senior Economist at the ATI, takes a look at the role of R&D in the UK.

By ATI Comms

07 July 2020 04:00:PM
Read time: 4 mins

The Government’s recent research with Cambridge Econometrics, Macroeconomic modelling of the 2.4% R&D target, highlights the key role played by technology in economic growth and how the UK would benefit from higher research and development (R&D) expenditure, reinforcing its position in the world economy.

R&D investment leads to growth through positive effect on innovation, productivity and employment. We should not forget that improvements in technology through industrial innovation have been the driving force behind the existing standards of quality of life.

The total expenditure on R&D in the UK in 2018 was 1.7% of GDP, a relatively low level of R&D intensity than most of our competitors. R&D expenditure in Germany is the equivalent of 3.1% of GDP, in the US it is 2.8% and in France, 2.2%. The 2018 total was also lower than the 2% of GDP invested in R&D in the UK in 1981. In the 2017 Industrial Strategy white paper, the UK Government committed to meet a target of 2.4% of GDP invested in R&D by 2027, and 3% in the longer term. The business sector is the largest funder of R&D performed in the UK, but market mechanisms alone do not support innovation to its full potential, highlighting the vital role of public R&D funding.

The UK’s world-class aerospace companies continue to focus on delivering technology excellence and driving state-of-the-art innovation while boosting local economies, creating high value jobs and addressing the global challenges faced by the aviation sector, including the development of electric aircraft. Investment in R&D is vital for the UK aerospace sector to continue to play an essential role in driving growth and employment. Furthermore, higher R&D expenditure from Government on aerospace supports a highly skilled industry, mainly based outside the south east’s ‘golden triangle’, that contributes to Government efforts to level up the British economy.

Cambridge Econometrics’ analysis recognises the importance of spillover effects. Spillovers in aerospace come as a result of the technology and knowledge generated being utilised by and delivering wider economic value across other sectors. The ATI’s 2019 analysis on spillovers shows that over a 10 year period every pound spent on R&D in the UK aerospace industry generated (on average) an additional 70p of GVA into other industries.

The role of innovation is key to increasing the country’s productivity and ensuring the resilience, economic growth and prosperity of the UK. However, innovation is a risky process and the benefits materialise over very long timescales. Furthermore, most UK companies in the aerospace sector have to make global decisions about where to locate their high value R&D activities. In the highly competitive and internationalised aerospace sector, it is vital that the UK Government supports a competitive research, innovation and business environment to attract skilled workers and global investment, thereby incentivising companies to locate their R&D activities in the UK.

Although the private sector is the largest performer of aerospace R&D, publicly funded R&D is more than ever a key foundation of future innovation for the UK aerospace sector. Achieving the 2.4% of GDP target is very ambitious and it will require further public investment. However, in the existing turbulent economic times, available levels of financial state aid may not be enough to ensure the go-ahead of some R&D projects, help to attract or maintain R&D projects in the country, or increase the existing level of R&D.