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R&D as % of GDP

Why this is a poor measure of innovation

The recently published white paper on the Government Industrial Strategy focuses heavily on research activity but fails to recognise the importance the policies which are required to enable businesses to accelerate growth and boost the UK economy. An indicator of this is how the report still falls back in the old measure of R&D as a % of national GDP.

For businesses this is a meaningless measure. We have been here before. In 2002 the EU Lisbon agreement and subsequently the 2003 “Barcelona target” set the target at 3%. In those days, R&D was mostly focussed on research as defined by Frascati. The UK government embodied this target (albeit at a reduced 2.5% level) in the 2004 Science and Innovation Investment Framework[1]. Despite being championed by arguably the strongest Chancellor in the last 30 years, policies never achieved this target or even prior to the financial crisis any progress towards it.

So why doesn’t this target encourage more R&D especially in business? There are several reasons but perhaps the most significant are:

  • Companies do not measure their R&D expenditure against national GDP. In the last 40 years I have worked for several large multinational corporations, for government and as an innovation consultant to many smaller companies.  During that time I have never heard any Chairman or Chief Executive talk about their company’s R&D investment in terms of national GDP. So if they don’t measure it what is the point of such a measure?  Perhaps, what doesn’t get measured doesn’t get done?
  • There is huge variation in corporate R&D intensity (R&D as % of sales) within sectors – clearly R&D investment decisions involve complex management trade-offs, for example

_____________Pharma: GSK 13% v Astra Zeneca 23%

_____________Auto: Toyota 3.7% v VW 6.4%

_____________Software: Apple 3.45% v Microsoft 14%

  • Many companies now capitalise R&D spend amortised as part of their intangible assets. This is not picked up in the analysis of company financial accounts for the R&D % of GDP statistics.  So for example Rolls Royce report their ‘Research’ activity as R&D but capitalise the ‘Development’. You can also see this in high tech companies such as BP (R&D intensity 0.19%).
  • The statistic also misses huge technical spend/capability in software/ professional services companies.  For example, WS Atkins, a high tech professional services company with turnover approaching £2 billion, adding significant value and with some the best and brightest engineers in the country, barely reports ‘R&D’ spend.

So is there a better way to focus Industrial Strategy? The key to policy actions in this area is to focus on the commercialisation of technology to enable established companies to accelerate growth and enable small companies to scale up their activity. To do this we need a full understanding of how the components of the whole R&D landscape fit together so that gaps in policy can be identified and Government can aim support at where it is needed to achieve the strategic goals of an industrial strategy. A recent book, Camels Tigers and Unicorns, co-authored by one of my R&D Society colleagues, Uday Phadke and based on extensive company research, highlights some possibilities[2]. And there are signs that some of our large company CEOs are recognising this emphasis. For example, Emma Walmsley (GSK) recently demanded bigger returns from R&D, she is reported as having said:

 “The clear priority here is making the right choices to develop our pharma pipeline which is promising but unproven.  We have a lot of work to do here to make sure our R&D and commercial organisations are partnering really effectively together.”

CEOs with a clear focus on adding value and growth can drive their businesses forward by focusing the whole organisation on the commercialisation process of new ideas. We need more of these business leaders involved in shaping the Industrial Strategy.

[1] http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/media/7/8/bud06_science_332v1.pdf

[2] http://www.worldscientific.com/worldscibooks/10.1142/q0093

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