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News : Innovation Last Updated: Apr 26, 2015 - 7:50 AM


UK and Irish business R&D heavily reliant on foreign-owned firms
By Michael Hennigan, Finfacts founder and editor
Apr 17, 2015 - 8:02 AM

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R&D expenditure generated by foreign-controlled affiliates, 2008 — Published figures for international comparisons are limited. However, data published by the OECD illustrate differences in the proportion of business R&D expenditure by foreign-owned businesses in different countries.

Total business R&D expenditure in the UK is fairly evenly split between foreign-owned and domestically-owned businesses. This can be compared to Ireland where in 2007 over 70% of business R&D expenditure was by foreign-owned businesses. The other extreme would be Japan where in 2008 only 5% of business R&D expenditure was by foreign-owned businesses. Source: UK Office for National Statistics

Both the UK and Ireland have low levels of business research and development (R&D) spending compared with other advanced economies and they are also heavily reliant on foreign firms.

The latest OECD estimates confirm the continued growth of Gross Domestic Expenditures on R&D (GERD) in 2013 following the decline caused by the global economic and financial crisis of 2008. China’s GERD estimate has, for the first time, surpassed that of the EU on the purchasing-power adjusted measure used by the OECD for international comparisons and it is set to overtake the US in 2019 — the top global R&D spender.

R&D intensity in 2013, as a ratio of gross domestic product (GDP) based on the latest national accounts standard, was largest in Israel at 4.2%, followed by Korea 4.1%; Japan was at 3.5%; Denmark 3%; Sweden & Finland at 3.3%; Germany 2.9%; US 2.8%.

In 2013 the UK was at 1.6% and Ireland was at 1.6% in 2012 — in effect Irish-based R&D was higher as GDP is inflated by the profits of the foreign-owned sector.

Until 1978 the US business sector accounted for less than half of R&D spending with a rising trend in the R&D/GDP ratio from 1.4% in 1953. According to the US National Science Foundation (NSF) the business sector accounted for 69% of gross expenditures on R&D in 2011. Japan’s business sector was the highest, accounting for 77% of the country’s overall R&D performance. China (76%) and South Korea (77%) were also well above the US level. Germany, at 67%, was close to the level of the United States. France and the United Kingdom were somewhat lower, at, respectively, 63% and 62%.

Ireland is consistent with this pattern with about two-thirds privately funded.

The NSF says none of the other top seven R&D-performing countries come close to the United States in its $74bn of support for basic research in 2011. The next closest is Japan, at $18bn, and then France, at $13bn. The US basic research share (17%) is also high among this group, although it is exceeded by France (25%). China has the lowest share of basic research (5%) in this group of countries.

The NSF puts the UK level at $4bn or 11% of total spending.

Why manufacturing still matters?

While manufacturing has declined in most advanced countries, it accounts for over 20% of GDP in Germany, 12% in the US, 19% in Japan, 9% in the UK and 30% in China.

Manufacturers have accounted for about 70% of all R&D conducted by businesses in the United States in recent years. This compares with Germany, Japan, Korea, and China, where manufacturers account for 85%-90% of all business-financed R&D. In the UK in 2009 service companies accounted for three-fifths of all business R&D spending while in Ireland in 2005 according to the OECD, services accounted for 33% of business spending.

Manufacturing in Ireland accounts for about 20% of GDP but most of the big manufacturers are American-owned while European Commission data show that only 3% of SME firms in Ireland are engaged in manufacturing compared with about 10% across the Union.

In recent decades the UK has focused on financial services while much of the remaining manufacturing is owned overseas e.g. the car industry in mainly owned by Japanese, German and Indian firms.

Why foreign-ownership matters?

According to the Office for National Statistics, foreign-owned businesses, those where a single foreign owner has more than a 50% shareholding, have become increasingly significant contributors to the total business R&D expenditure in the UK. In 2011, these businesses were responsible for approximately 50% of this expenditure compared to 30% in 1995.

The increase in the share of R&D expenditure by foreign-owned businesses has not been constant during this period. The share rose to 45% of the UK total in 2003 but dropped to 39% by 2007. The increase resumed in 2008 but then fell before peaking in 2011.

Of foreign-owned businesses, those that were United States-owned had the largest R&D expenditure (23% of business R&D expenditure in the UK in 2011), followed by businesses with ownership in France (6%) and India (4%).

The ONS says that the majority of foreign-owned business R&D is performed by businesses owned in a small number of foreign countries. However, the overall R&D landscape has diversified, with over 60 countries represented in 2011, more than double the number represented in 1995. In 1995, approximately 99% of business R&D expenditure was accounted for by businesses owned in the UK and seven other countries. By 2011, businesses owned in the UK and 16 other countries accounted for 99% of business R&D expenditure.

Irish Government data show that foreign-owned firms accounted for 67% of total R&D expenditure in 2012 while just over 100 firms accounted for most of the spending in the foreign-owned sector in that year.

More than half of foreign firms in Ireland are not R&D active and this sector responsible for about 90% of annual headline tradable exports, produces little research that merits patenting.

As for the UK, most of the big US firms that have significant overseas presences, carry on most of their research in the US.

So it's not surprising that the UK is not an innovation powerhouse.

In Ireland the mainly US-owned business sector does not generally fund academic research.

We have more here on the lack of Irish scaleups and the poor business funding of academic research:

Ireland: Innovation with or without R&D/ scientific breakthroughs

UK great at science but not commercialisation

If the size of spending on research and innovation in the business sector mattered for individual firms beyond a viable level, Nokia not Apple would be today's leader in smartphones.

This week we highlighted how a British engineer outlined the concept of the microchip six years before a prototype was developed in the US.

In 1990 a firm was founded in Cambridge to design chips. Today ARM Holdings is the UK's biggest listed tech firm and its technology is in billions of devices including Apple's iPhone.

However, it only employs over 3,000 people worldwide compared with about 80,000 at Apple (excluding its contract manufacturing).

The Royal Society says the UK accounts for 15.9% of the world’s most highly cited articles and UK research is cited in 10.9% of all patent applications worldwide.

Bank of England economists say R&D expenditure is only a measure of innovation input. "Measures of innovation output are, for example, the proportion of companies that have introduced new goods or services (‘product innovation’) or new productive processes (‘process innovation’). Available data on innovation outputs from the UK Innovation Survey indicate that spending on R&D has resulted in fewer implemented innovations in the years following the onset of the Great Recession...crucially, it is the implementation of innovation, not merely the investment in it, that matters for productivity."

The share of companies that introduced new products from 2008 to 2012 declined from 24% to 18%.

In 2006 we published research on UK firms: London School of Economics/McKinsey study says the best way to ruin a UK family business is to give it to an eldest son

The Economist noted in a report last week: "too many of Britain’s family-owned firms still prefer primogeniture over meritocracy to select their top bosses, three times as often as German family-run firms do. But poor generals skills are to blame, too. Even after all the extra money spent on schools since the mid-1990s, Britain still performs at a mediocre level in internationally comparable tests. Recent reports suggest that about one-fifth of the adult population still lacks basic literacy and numeracy skills."

The report cites the difficulty Sir James Dyson, the country's leading inventor and innovator, has in hiring about 1,000 engineers in the UK.

Graphene: Discovered in UK - commercialisation gains maybe elsewhere

Conclusion

On Monday Ibec, the business lobby, called on the Government to deliver: "An ambitious long-term vision for science, technology and innovation funding by resetting the R&D intensity target to 3% of GDP in line with the Europe 2020 strategy."

To become a knowledge economy similar to for example Sweden, Denmark and Finland, the delusion that what is required is more funding, is a certain recipe for failure.

Public science policy has cost over €20bn in a decade but with little to show for it.

We could become a world centre of science like the UK, with little impact on the economy, and funded by the typical Irish private sector worker, without even an occupational pension!

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