Innovation drives productivity, and R&D importantly underpins innovation. Places in the south-east of the UK disproportionately hold the highest rates of public and charitable spending on R&D. In order to mend the geographical imbalances in R&D spending, the way that funding is allocated must be changed. This can be challenging given the patchy nature of devolution across the UK. Professor Richard A.L. Jones argues that an innovation deal would allow for a more even distribution of R&D funding that would, in turn, ‘level up’ the left behind regions in the UK.

• London, together with the two subregions containing Oxford and Cambridge, account for 46% of all public and charitable spending on R&D, with 21% of the UK’s population.
• Changing the way that funding is allocated is the only way to address the long-standing geographical imbalances in R&D spending.
• The idea of an innovation deal provides a way forward that answers these potential objections. In an innovation deal, cities and regions would develop a strong institution to implement an evidence-based local innovation strategy.

The UK has a profound problem of regional disparities in productivity performance. Second-tier cities underperform compared to expectations based on their size, and deindustrialised towns and urban areas have failed to find productive new economic roles. Productivity growth arises from innovation, taking that term in its widest sense, and formal research and development (R&D) is a key underpinning of innovation. So, is there a link between geographical disparities in R&D intensity and regional economic underperformance?

The distribution of research and development investment in the UK – especially in the public sector – is currently highly skewed to the prosperous south-east. London, together with the two subregions containing Oxford and Cambridge, account for 46% of all public and charitable spending on R&D, with 21% of the UK’s population. We know that there are substantial spillovers from public and private R&D, with some estimates suggesting that a 10% rise in public R&D would raise private productivity growth by 0.03 percentage points per annum, with an estimated return on public R&D of 20% per annum. So a correlation between regional R&D intensity and productivity might be expected, but does it matter where the R&D is done?

One key justification for public support of R&D is that firms are unable to capture the whole benefit of the research they undertake – there are spillover benefits to other firms that are able to copy the innovations of the leaders. The geographical aspect of these spillovers is captured in the importance of clusters, something economists have known for over a century. A successful regional cluster draws on a set of collective resources and knowledge that drives innovations in both products and processes.

This set of collective resources has been called the ‘industrial commons’. A successful industrial commons is rooted in large anchor companies and institutions, together with networks of supplying companies. It is characterised by both informal knowledge networks and formal institutions for R&D, training and skills. International examples include advanced manufacturing in Lombardy, Italy, ICT hardware in Hsinchu, Taiwan, and in the UK, biotechnology in Cambridge. A goal of regional economic policy should be to consciously attempt to rebuild the industrial commons in places where de-industrialisation has caused them to wither.

Public R&D in the UK is carried out in universities, and increasingly, in specialist research institutes such as the Crick Institute in London. In comparison to other developed nations, one type of institution that is relatively lacking are translational and applied research institutes such as the Fraunhofer Institutes in Germany, IMEC in Belgium and the Industrial Technology Research Institute in Taiwan. Such institutes may focus more on industry engagement, process innovation, the wider diffusion of existing innovations, and in skills development than is possible in institutions more focused on basic research, and they can play an important role in nucleating and developing an innovation ecosystem of the kind that can anchor an industrial commons.

Recent policy developments in the UK give encouraging signs that some of these issues are being recognised. The UK’s Innovation Strategy, published in July 2021, stated that “we need to ensure more places in the UK host world-leading and globally connected innovation clusters, creating more jobs, growth and productivity in those areas”, while the October 2021 Comprehensive Spending Review announced a £5.2 billion increase in government R&D spending, and made the important commitment that “the government will ensure that an increased share of the record increase in government spending on R&D over the SR21 period is invested outside the greater south-east”.  And most recently, the Levelling Up White Paper has identified a specific mission on R&D investment, with a target of increasing public investment in R&D outside the Greater south-east by at least 40% by 2030, contributing to the goal of boosting “productivity, pay, jobs and living standards by growing the private sector, especially in those places where they are lagging”.

For increased R&D spending to have a material effect on the UK’s regional productivity imbalances, it will be important to avoid two pitfalls. The first is to recognise the importance of scale. Too often previous attempts to boost innovation in the regions – for example, by the English Regional Development Agencies in the 2000s – have been worthwhile in themselves but implemented at too small a scale. For example, three northern research development agencies spent £157 million on innovation in the three years of the 2004 spending review period – while overall R&D spending over the same period was £20.3 billion, of which £4 billion was in the north. To make a material impact on regional inequality, the resources deployed need to be at least an order of magnitude bigger. A crude calculation shows that to level up per capita public spending on R&D across the UK to the levels currently achieved in the greater south-east, additional annual spending of more than £4 billion would be needed.

The second is to ensure that spending priorities aren’t defined entirely ‘top-down’, from Whitehall or Swindon. To be effective in driving productivity growth, government spending on R&D must be deployed in a way that maximises its effect to ‘crowd in’ private sector investment. This needs to be done in a way that works with local economies, complementing existing assets, and will need local knowledge that it is unreasonable to expect national agencies to possess.

Changing the way that funding is allocated is the only way to address the long-standing geographical imbalances in R&D spending. One way of doing this would be simply to devolve government R&D funding to cities, regions and nations to make their own decisions in the light of their knowledge of local economies.

However, given the very patchy nature of devolution across the UK – and especially in England – places may lack institutions with the analytical capacity to set priorities and make good funding decisions. Another risk is that a lack of coordination, between different regions and cities, and with central government agencies, leads to duplication, unhelpful competition and lack of coherence with national policy and priorities.

The idea of an innovation deal provides a way forward that answers these potential objections. In an innovation deal, cities and regions would develop a strong institution to implement an evidence-based local innovation strategy. Such an agency should be based on a coalition of private sector actors, local government (for example, Mayoral Combined Authorities) and regional R&D assets, and would give central government and its agencies confidence that there was a trusted local partner that would take responsibility for implementing an innovation strategy and developing the region’s innovation ecosystem.

These agencies would give a robust mechanism whereby central government and cities and regions could work together to co-create a set of priorities for those new investments, many of which would be focused on translational research and skills development, that would both be most effective for improving regional productivity, while at the same time supporting national innovation priorities, while at the same time supporting national innovation priorities, such as the 2050 Net Zero target and a drive to reduce inequalities in health outcomes across the nation.

In Greater Manchester, a private sector-led partnership of business, the Mayoral Combined Authority, and universities has come together to create Innovation GM, with an invitation to central government to work with them to make R&D-led levelling up of regional productivity a reality. Other cities and regions are engaged in similar initiatives.

The response from the government in the Levelling Up White Paper is encouraging.  A pilot programme of three “Innovation Accelerators”, centred on Greater Manchester, the West Midlands and Glasgow City-Region, was announced, with £100 million in funding.  The aim of the Accelerators is to bring together national and local government, industry and R&D institutions in a long-term partnership to develop a plan to grow the innovation ecosystems in those city-regions, boost innovation diffusion and maximise the impact of the existing R&D institutions.  There is now a chance to inject a new, place-led, dimension into innovation policy.

The substantial uplift in R&D funding announced in the October 2021 budget, together with the commitment to spend more of this uplift outside the greater south-east, offers a once-in-a-generation chance to make a material difference to the UK’s persistent imbalances in R&D spending.  The “Innovation Accelerator” pilot programme establishes the principle of co-creation of regionally-focused innovation policy through a collaboration of city actors with national government and its agencies.  This kind of initiative needs to be expanded in scale and extended to other cities, regions and nations, in order to maximise the impact of the R&D spending uplift on regional productivity.

Policy Recommendations

• Changing the way that funding is allocated is the only way to address the long-standing geographical imbalances in R&D spending.
• Too often previous attempts to boost innovation in the regions – for example, by the English Regional Development Agencies in the 2000s – have been worthwhile in themselves but implemented at too small a scale.
• A crude calculation shows that to level up per capita public spending on R&D across the UK to the levels currently achieved in the greater south-east, additional annual spending of more than £4 billion would be needed.

This article was originally published in On Productivity, a collection of thought leadership pieces and expert analysis addressing the gaps in economic performance across the UK, published by Policy@Manchester.

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