R&D spending by UK industry declines despite tax breaks

Spending by UK companies on research and development is continuing to decline despite generous tax breaks from the Government aimed at stimulating more investment in innovation.

Figures published today by the Department for Trade and Industry show that R&D spending by British industry fell 1 per cent last year to £17bn. By contrast, overseas rivals increased spending, with R&D investment by the world's top 1,000 companies up by 5 per cent to £220bn.

This is the second year running that R&D spending by UK companies has slipped, even though new tax incentives introduced in 2000 and 2002 enable firms to offset more than 100 per cent of their investment against tax.

The DTI's 2005 R&D Scoreboard also shows that UK companies still lag a long way behind the international average in terms of the relative amount spent on innovation. Internationally, spending on R&D was equivalent to 3.8 per cent of turnover but in the UK the figure was only 2 per cent.

Mike Tubbs, the author of the report, said this was partially explained by the fact that the UK has a high concentration of companies in industries such as oil, telecoms and food processing where turnover and capital expenditure was very high but pure R&D spending tended to be low.

Of the 31 UK industrial sectors covered in the scoreboard, 19 reported a decline in spending and 10 showed an increase. Significantly, however, spending increased not just in sectors where the UK is traditionally strong, such as aerospace and pharmaceuticals, but also in industries where it has tended to lag in the past, including IT hardware and software.

Mr Tubbs also said there was evidence of an increase in R&D spending among small and medium-sized companies, which the new government tax credits are specifically aimed at. This year there are 116 UK-owned companies where R&D spending exceeds 4 per cent of sales, compared with 108 last year and 88 in 2001. Excluding six UK companies where spending fell sharply, among them MG Rover and BT, R&D investment rose 1.7 per cent.

The biggest R&D spenders worldwide were DaimlerChrysler and the US drugs company Pfizer, each with budgets of £4bn. The highest spending UK company was once again GlaxoSmithKline on £2.8bn, putting it in eleventh place.

Spending by pharmaceuticals rose by 4 per cent and, together with aerospace and defence, made up more than half of the total expenditure of the UK's largest 750 companies.

The survey showed that large foreign R&D investors chose the UK as a location. The 17 foreign-owned UK companies with R&D of more than £50m invest more than a tenth of their UK sales in R&D, five times the average for UK-owned companies.

Of those 17, 12 had a much larger R&D intensity than their parent companies - meaning they have chosen to divert a high proportion of their global budget to the UK.

But there is so far no evidence of substantial spending on R&D by the world's two fastest growing economies, with only three Chinese companies and just one Indian company in the top 1,000.

Steve Radley, the chief economist of the manufacturers' group EEF, said: "While we can take some encouragement from these figures, there should be no let up in our efforts to secure a step change in the level of investment into research and innovation.

"The rise of firms in South Korea and Taiwan illustrates the growing threat from emerging nations but the virtual absence of India and China manufacturers as major R&D investors shows that UK firms retain a lead, at least for now."