In its election manifesto, the current Labour government put economic growth at the centre of its plans. It rightly argued that “Sustained economic growth is the only route to improving the prosperity of our country and the living standards of working people.” Of course, this point of view is not new; most previous governments have sought to address this issue in a variety of ways. But a key point we made in a newsletter back in 2021 was the need to make a plan and then stick to it, which was something the last government failed to do. The current government has started to develop its plans. A Green Paper Invest 2035: The UK’s Modern Industrial Strategy talks of a “10-year plan to deliver the certainty and stability businesses need to invest in the high growth sectors that will drive our growth mission”. It sought input from interested parties and the R&D Society provided our input in a series of blogs.
The follow up White Paper, due to be published in the early summer, will present the proposed industrial strategy and we look forward to critiquing that and then playing our role, as an authoritative voice for UK S&T innovation enabled companies, advocating to government, investors, and intervention agencies on the implementation of strategy and long-term growth plan.
As part of our activities, we are planning a series of blogs focusing on the growth agenda, how this can be best advanced and what challenges will need to be overcome. Although our blogs will reflect the views of the R&D Society, we are also eager to hear from others so will continue to publish guest blogs starting with a piece from Will Hutton in which he outlines his vision for remaking Britain.
In the rest of this blog, we will set the scene for the growth agenda and why it matters to the nation.
Why does economic growth matter?
It matters because it generally leads to a higher standard of living, more jobs, and increased public spending on services like education and healthcare. With a growing economy, businesses earn more, workers have higher incomes, and governments collect more taxes to reinvest in society to improve the provision of services such as education and healthcare; better infrastructure; investment in R&D to drive future growth; a welfare state as a safety net for those who are disadvantaged or fall on hard times such as unemployment or the inability to work due to illness of disability. We also need to invest in protecting ourselves from foreign aggressors and in environmental policies to address the impact of climate change and global warming.
How is economic growth achieved?
In simple terms, growth results in higher economic output which can be achieved by expanding the work force and/or by improving the productivity of those in work. Historically the UK achieved prosperity by being at the forefront on the industrial revolution beginning in the 18th century, which heralded a period of unprecedented and sustained growth that has spread across the globe. This also provided the UK with the military power to establish the largest empire that the world has seen. Of course, times have changed, the empire has gone, and UK manufacturing has undergone rapid decline, shrinking by around two-thirds between the 1980 and 2010. The great hope was that the service sector would fill the void, yet the UK’s balance of trade has been negative for most of the past 50 years. Today, although the UK has become the world’s second-largest exporter of services, after the US, it has not made up the trade gap that has arisen from declining manufacturing where it has slipped from 6th place 20 years ago to only 14th place, today.
Growth in the UK has stagnated since 2010, as shown the figure below. Most economists believe that the main reason for this lack of growth has been a decline in productivity growth compounded by a period of austerity after the financial crisis that has resulted in less investment in infrastructure. Brexit has also impacted trade with the European Union. As the Figure shows, the UK is not alone, the European Union, Japan and the US have all seen a decline in growth whereas emerging economies such as India and Poland have seen increasing growth.
Average % GDP Growth (Source: World Bank)
So what can be done to restart growth in the UK?
It has been argued for some time that the UK needs to renew its economy with a focus on developing business utilising advanced technology, high value manufacturing and related services. The past 30 years we have seen a rapid increase in the number of high tech start ups in many advanced economies, particularly those spun out from academic institutions. The UK has achieved considerable success here, with Cambridge, Oxford, and Imperial College second, third and fourth respectively in the world in terms of the number of deals in their spin-outs between 2013 and 2017 and a fivefold increase in investment into spinouts from 2014 to 2021 according to a government report. Analysis by Universities UK (UUK) echoed in a House of Lords Communications and Digital Committee report has highlighted the problem that the UK risks becoming an incubator economy in which promising technology developed in the UK are acquired and taken abroad, an issue that we highlighted back in 2020 in an article for Research Fortnight. The previous government sought to make the UK a science superpower which seemed to put more of an emphasis on science than on business. Science is not the fundamental issue - the UK continues to punch above its weight in terms of academic publications. The problem is a failure to convert this science base into scalable business.
The UK desperately needs a new approach to address the decline in productivity and increase economic growth. Back in 2023 we set out our thoughts in a paper entitled Blueprint for a UK Industrial Strategy in which we argued that the innovation ecosystems needs to be considered in 3 layers:
- A macro level which considers on economy at the national or international levels, focusing on broad measures of economic activity such as GDP, inflation, interest rates, trade balances, employment levels, fiscal and monetary policy. The level includes objectives such the UK's target to reach net zero emissions by 2050 and to raise R&D investment to 3% of GDP by 2035.
- A meso level that focusses on the interaction between firms, institutions, and infrastructure within specific domains, regions and market spaces. This includes the activities of regional clusters and innovation hubs. This is a key area of focus for the R&D Society with our programmes in Life Science Commercialisation and Emerging Technologies in the Defence sector.
- A micro level that focuses on firms, individuals and institutions and the action of individual buyers and sellers responding to market signals to set production and distribution of effort. Activities to improve performance here include programs to upskill employees, finance support for SME, or employer-led training initiatives.
We have argued that historically, insufficient consideration has been given to the meso level and this should focus on selected market spaces where we can compete globally rather than thinking in terms of traditional industry sectors. Furthermore, building on the Triple Chasm Model we recognise the need for the commercialisation journey to cross three distinct hurdles or chasms:
- Chasm I: Prototype creation
- Chasm II: Translation of prototype to commercial product
- Chasm III: Scale-up of product
We continue to focus a significant part of our effort around chasm II which we feel has been neglected in previous government policy. We are also exploring how the meso and macro layer can be best linked in innovation policies, which will be the topic of a future blog in this series.
We look forward to seeing the UK government plans when published in the white paper. We will then both seek to challenge the approach where we see weaknesses but also offer support as a voice for UK S&T innovation enabled companies, to ensure the ambitions for growth have the best chance of being realised.