Innovate UK Grants and R&D Returns: Impact on Business and Economy

Understanding the returns linked to pursuing innovation and investing in R&D is important to both businesses and policy makers. Businesses view R&D and innovation as a strategic investment through which they can achieve competitive advantage and increase their market share and/or performance. However, R&D and innovation activities are costly and understanding their rate of return is crucial for businesses to make decisions on their R&D investment strategy. Significant R&D returns would encourage businesses to allocate more resources in R&D/innovation to leverage their gains. Smaller returns may question the ability of the business to translate R&D and innovation into tangible outcomes and may initiate an internal assessment of its R&D strategy.

On the other hand, policy makers are interested in the “gap” between private and social returns on R&D investment, i.e., the benefits appropriated by the business vis the benefits accruing to other businesses in the economy. The inability of businesses to fully appropriate the outcomes of their R&D and innovation activities constitutes a disincentive for businesses to invest in R&D. The core of this is often attributed to the public good characteristics of new knowledge creation and/or innovation activities reflected in the inability of the R&D performing business to exclude other users from ‘consuming’ or benefitting from the outcomes of its R&D and innovation activities. Difficulties in securing external private financing for business R&D and innovation activities pose an additional obstacle for businesses to invest in R&D.

Public support for business R&D aims at mitigating the market failure of underinvestment in R&D by incentivising businesses to invest more in R&D and innovation. In the UK, public spending on R&D was £10.45 billion in 2019 with most of the spending originating from the Department of Business, Energy and Industrial Strategy (BEIS). The greatest part of these funds is allocated to the UK Research and Innovation (UKRI) and its research councils including Innovate UK, the UK’s national innovation agency supporting business innovation. Indeed, since 2004 Innovate UK has injected more than £2.5bn to support business R&D/innovation in the form of grants, leveraging at least £4.3bn of associated private sector investment. Innovate UK has therefore a critical role to play in increasing the overall level of R&D investment in the economy and fulfilling the Government’s target of raising R&D expenditure as a percentage of GDP to 2.4% by 2027 and 3.0% in the longer term.

An assessment of the returns of Innovate UK grants is therefore of pivotal importance not only to Innovate UK and BEIS but also to the HM Treasury, which also has a vested interest in understanding the returns on public investments in supporting business R&D and innovation. Significant returns would further justify the role of public R&D support programmes and could even trigger an increase in the governmental budget allocated to public R&D support.

This study provides an assessment of the ability of Innovate UK grants to generate returns for businesses, developing new insights on the role of public R&D support for beneficiary businesses. More specifically, the study seeks to answer the following questions:

(a) What are the returns on total R&D investment for UK businesses? In other words, what is the return of £1 of total R&D investment?
(b) How do these returns vary between different types of businesses in terms of size, origin of ownership, knowledge stock, industry and region?
(c) Does the provision of Innovate UK grants influence the private R&D investment of businesses? In other words, do Innovate UK grants induce any additional spending on behalf of recipient businesses – i.e., over-and-above what they would spend in the absence of the grants?
(d) What is the return on R&D investment of Innovate UK grants for businesses? In other words, what is the return of £1 of Innovate UK grants within the business?
(e) How do these effects potentially vary between different types of businesses based on size, origin of ownership, knowledge intensity and industry?
(f) How do these effects potentially vary between different types of Innovate UK products? Being the most frequently used products, the Collaborative R&D and Feasibility Studies products constitute the focus of this investigation.
(g) What is the wider impact of Innovate UK grants for the UK economy? In estimating this impact, direct, indirect and induced effects are considered.

By investigating the impact of Innovate UK grants not only on recipient businesses but also on the wider economy, we contribute towards more holistically understanding the impact of Innovate UK grants and their ability to ‘boost’ the UK economy.