Spending Review – what does it mean for innovative business?

At least on the surface, the government’s 2015 Spending Review was kinder than predicted on innovation support, and particularly on investment in ‘basic’ science and research of the kind primarily undertaken by universities. Although this has been widely heralded as a positive move for the UK economy, the general relief hides potential problems when we take a more sophisticated analysis of the drivers of innovation: economic growth will come from more than simply investing in science and research.

Although ‘research and development’ for most people conjures images of scientists in lab coats, in fact it was private business that contributed the majority - 64% in 2013 - of the total UK investment . And although this investment is an important factor in creating business growth, we also know that activities such as developing new software, training staff on new processes, or signing new products are forming a far larger part of innovative investment and activity by businesses. Research by Nesta has found that in the UK this wider innovation investment far outstripped ‘tangible’ investments in things like building and machinery (£137bn in 2011 versus £89.8bn for tangible investments in 2011) and the gap has been widening.

We also know that businesses look to a variety of sources for innovation, going beyond universities and public research institutes. These include clients or customers and suppliers of equipment, materials, services or software. Therefore any changes to the way in which the Government supports businesses to innovate could have a substantial impact on the UK economy.

Take for example the government’s main agency for directly funding business innovation, Innovate UK. Established in 2004, it has weathered much of the recent politics of austerity. In fact its budget has steadily increased as it took on programmes from other casualties of reductions in Government spending, and responsibility for the rapidly expanding network of institutions in key technologies which link universities and commercial research, known as the ‘Catapult’ Centres. However, the Spending Review also gave us some ominous signals as to how the Government now sees its future: it will be ‘integrated’ into a new research umbrella body, Research UK, alongside the seven Research Councils.

Although it’s easy to see the thinking behind better aligning research and business innovation funding, it will be essential to ensure that the business-facing elements of Innovate UK’s work are not lost along the way.

There will also be changes to the way in which Government structures and funds its business support programmes. Some of Innovate UK’s portfolio of grants that currently go to businesses for innovation activities will be transferred to a loans system. The details of how this will work are still to be determined, but balancing the objectives of getting some return to the public purse with a product that encourages businesses to experiment and take risks is a tricky task. And following the Spending Review, the Government announced it was ceasing activity on its national Business Growth Service, potentially with a view to delivering this business support at a regional or local level.

Given the importance of innovation created by businesses, the big challenge for the Government will be implementing these changes in a way that continues to encourage businesses to invest in innovation.

Jen Rae is a Senior Researcher at Nesta, the UK’s innovation foundation