We caught up with Mark Smith, Partner for Innovation Incentives, UK & Ireland, at the launch of Ayming’s International Innovation Barometer 2020, to get his views on the report’s key findings.
The Innovation Landscape
With government targets reportedly not being met, there appears to be a big disparity between the view within the industry and the view of governments. What can be done to bridge this gap?
First, this doesn’t mean we shouldn’t be excited about the future. Indeed, the view within the industry is remarkably optimistic. A huge majority of those we surveyed are expecting R&D budgets to increase over the next three years. Yet, it is now clear that a disparity exists between the perceptions of business and government, and we need to bridge that gap.
Now that research and development (R&D) is widely accepted as prerequisite for economic growth, governments the world over have engaged in an intense rhetoric of boosting innovation spending to turbo-charge their economies.
However, if governments are to hit their ambitious spending targets, they need those in industry to be striving for more and, as it stands, more than four fifths of respondents seem satisfied with their current R&D activity, indicating they do not see a boost in R&D ventures as wholly necessary. But the intended drive will have to come primarily from companies so there is an undeniable obstacle in getting those workers on board.
So how can governments bridge this gap? The answer lies in support. If a business leader sees that their company has the capacity to undertake more R&D and is fully aware of the potential benefits this could bring, they will strive to. As such, the challenge is to make sure businesses are equipped, well-funded and able to match the views and ambitions of governments. In the UK, for example, innovation could be boosted by ensuring that incentive schemes are run efficiently, by establishing better education & training and by creating more regional hubs.
Does the high level of R&D spending in East Asian nations throw up any potential cause for concern for the economies and governments in the rest of the world? If so, how do other nations keep up?
We advocate innovation in all its forms but yes, it is true that spending in R&D is very high in some East Asian nations. A recent UNESCO Institute for Statistics survey lists both South Korea and Japan in the top three nations when it comes to percentage of spending on R&D in the business sector.
Interestingly though, China’s R&D spending is surprisingly low when measured as a proportion of GDP. China has a reputation for having a dynamic economy which innovates very effectively, and creates globally leading technology, so why the anomaly?
China’s R&D spending is heavily concentrated among several key companies which champion innovation and allocate large budgets to R&D. But things are changing rapidly. Recent figures indicate R&D spending in China grew by 11.8% in 2018 and, in an attempt to catch up with the US, China has put in place it’s ‘Made in China 2025’ policy, which focuses on increasing innovation spending in certain R&D intensive sectors such as robotics, aerospace and pharma. They are catching up, and fast.
Looking at Western countries, the same UNESCO report finds 11 of the top 15 nations for spending to be in Europe and North America, so they are still currently still leading the way. But for how long? This competition is healthy, though. National markets are faced with the challenge to innovate or their businesses, and therefore economies, will lose out to international competitors.
The results suggest a very mixed approach when it comes to collaboration, in fact most rely on in-house teams. Whilst there is good reason to protect intellectual property, the report suggests that more collaboration could be key in the future. How do you suggest cultivating a more collaborative, open-source culture when it comes to R&D might be achieved?
The current status quo for the industry is still quite old-fashioned on this front. Our survey suggests that 63% of the industry currently relies on internal resources to carry out R&D, meaning organisations keep all their R&D activity in-house. It’s true that developing cutting edge new technologies requires a very broad range of expertise in many different sectors and only the largest businesses can afford to have all this expertise in-house, but there could definitely be more collaboration. Organisations need to be aware of all the positives resource and knowledge sharing can bring.
Getting into the habit of managing multiple stakeholders would present an initial challenge to most, but these initiatives are often worthwhile. Organisations can pool resources and share expertise. It makes no sense for businesses to separately go through the same trial to come to the same conclusion. It’s obviously complex because businesses will have spent resources on that finding but, for research which has an ideological purpose, it makes lots of sense to publish any reports or findings of unsuccessful R&D.
Does the suggestion of big companies investing in certain markets for their R&D capabilities pave the way for some markets to lose out in the long run?
It is an understandable fact of life for R&D that companies want to invest in countries where the best talent exists. This is an area where the responsibility lies, initially at least, with governments. If strong education and training pathways are established then great talent will come through. The positive news is that governments around the world are generally committed to high levels of investment in this area, so there are certainly reasons to be cheerful.
Setting up an R&D base abroad is a strategic decision. There are many incentive schemes to choose from and the potential benefits of setting up in the right location are vast. There’s lots to weigh up though. Aside from financial benefits, businesses need to establish how simple the application process is and if there is anything they need to factor in, such as when they would receive credits back. The launch of Ayming’s ‘The Benchmark’ report last year, which provides a snapshot of 14 countries R&D regimes, should help with decision making.
Would you say that the fact that government spending targets aren’t being met might actually be linked to the difficulty of the incentive application process that firms have to go through?
Incentives are put in place to encourage innovation as opposed to funding it entirely so they aren’t the sole reason why R&D spending would increase. The main thing governments should do is make the environment as friendly as possible. And, there are other more important factors at play, for example, some businesses simply aren’t aware that they are liable for funding or, more specifically, what exactly they can count as R&D activity. Any qualifying cost relating to R&D can be put forward for credits and, if that was more widely known, companies might more willingly ramp up R&D spending.
Having said this, the incentive application processes will be having an effect in some cases. For example, The Benchmark report, which examined R&D application schemes and measured them according to generosity as well as ease of application found that South Africa’s scheme to be particularly long and arduous, which will not be boosting innovation.
As for the UK, The Benchmark outlines that application processes are relatively straightforward. And, as a result, we have a good uptake of R&D tax credits comparative to other countries. There are definitely some issues to iron out in terms of processes. For example, recently HMRC apologised for processing R&D tax claims too slowly – in some cases seven months – which can seriously affect cash flow and can therefore be particularly problematic for smaller businesses.
Political factors appear to be the main cause for concern amongst the community when it comes to positivity about the future and future funding for R&D. What can governments do to ease these concerns moving forwards?
Any political concerns, especially with some of the current issues, will take time to heal. Trump’s escalating trade war and isolationist movements like Brexit take their toll on business enthusiasm for investments in innovation. In reality, to achieve the innovation spending targets requires a holistic approach with commitment to large investments in education, institutions, innovation infrastructure and incentives, and therefore achieving these targets requires stability.
Governments can only attempt to ease those concerns by committing to the levels of investment that are being touted in specific sectors. For example, Boris Johnson has identified certain sectors like green energy, biotech and space science as a focus. If these promises come to fruition, concerns should begin to subside.
In the UK specifically, it’s no surprise that Brexit is seen by many as an area of concern with only 48% of those surveyed stating that they expect to see budget increases in the next three years, compared to 92% in Spain and Slovakia.
Linking to this, there are concerns around access to talent. Sentiment with regard to talent has been noticeably weighed down by Brexit, with only 36% expecting talent to positively affect R&D budgets, well below the average from the countries surveyed of 65%. UK R&D is dependent on talent from Europe and also benefits from collaboration. In attempts to settle business concern over talent, the UK has put a plan in place for fast-track visas. But whether this will succeed remains to be seen.
Outside of the UK, budget rise prediction figures are similarly pessimistic in other markets facing economic uncertainty with the US and Canadian markets close behind the UK’s 48% standing at 52% and 56% respectively. Should governments rubber-stamp sizable budgets for the immediate future, you can see how confidence in these areas would start to improve.
Yet despite this, there is a consensus that budget increases are on the horizon, what can businesses do to make the most of the opportunity that this presents?
Budget increases demonstrate huge confidence in the value of R&D which is positive to see. However, pumping money into R&D doesn’t guarantee successful innovation. Businesses must be as productive as possible with new resources, which means putting coherent strategies in place and allocating resources to specific projects. A key step here is to ensure a project has the right talent in place first off. And then there are logistics to bear in mind, for example, where is the optimum place to undertake the project and is collaboration an option?
To add to this, self-funding is not the only available means by which companies can take advantage of financial incentive opportunities. Tax credits and grants are two very important pieces of the puzzle and both are being underused. In short, businesses need to maximise their potential by taking advantage of all opportunities available to them.
Diversity in Innovation
The report is very open about the fact that there is an issue with diversity in R&D. There are some suggestions about what to do in the future but why is this the current landscape? Have R&D professionals been slow to change?
There’s certainly progress to be made. Those in R&D teams must continue to challenge themselves to be better because the facts show that a more diverse workforce is more productive. Teams with more diverse perspectives are better at solving problems. There are, of course, cultural circumstances that have perhaps historically made careers in this field less appealing to women, but we must look past these factors. It starts with the pipeline of talent coming through, we need to work with governments to ensure that education and training infrastructure is in place to generate and convert great talent.
It will take time, but there is a more balanced workforce beginning to come through. The last 10 to 15 years have seen more women embracing technical engineering studies and subsequent associated career paths. Efforts need be made to further develop the best environment possible to retain this talent, including the right benefits and maternity packages put in place. Allowing for a more flexible approach to working, whether that be working from home or flexible working hours, will permit more new parents to stay in their jobs.
There appears to be a significant number of managers and CEOs who feel that diversity isn’t important. Could it be that the issue lies with senior management?
Business leaders hold a responsibility to encourage diversity in their teams so this does need to change. And, for things to truly change, the value of diversity needs to come from the top down. It certainly seems ironic that such a high percentage of R&D professionals don’t seem to appreciate the impact diversity can have on innovation.
Many other industries demonstrate the huge benefit of a balanced workforce so the R&D/innovation field as a whole must task itself with creating a positive environment for STEM-educated women to join. Ensuring this process works well, and that talent is retained once people come through the system, will undoubtedly work to the ultimate benefit of everyone. If R&D activity is to increase, we will need a bigger, more diverse R&D workforce.
Download your copy of the International Innovation Barometer 2020 for the full insights: