Will Government’s new industrial strategy challenge fund boost both innovation and productivity across UK?

Evidence suggests that the Government is more likely to succeed in its first goal than its second.

In recent months Business Secretary Greg Clark has announced a series of new innovation grants as part of the Industrial Strategy Challenge Fund. Having chosen investment in innovation as one of the ten pillars of the Industrial Strategy, the Government’s hope is that the Fund will raise research and development (R&D) spend, improve productivity and ultimately contribute to its goal of driving ‘growth across the whole of the UK’.

Innovation – change associated with the creation and adaptation of new ideas (as defined by Nesta) – drives long-term economic growth and raises living standards. More efficient processes and better products will spread from the firm generating them to other businesses, and lower prices and new products benefit consumers. The private sector tends to underspend on R&D, so public support is often useful to encourage more innovation.

The Challenge Fund has selected six sectors to support – healthcare and medicines, robotics and artificial intelligence, clean and flexible energy, driverless vehicles, manufacturing and materials for the future, satellites and space technology – with the stated policy objective to ‘boost earnings power throughout the country’. In other words, the Fund aims to improve productivity by making sure the UK remains (or becomes) a key global player in these sectors.

But is the Government’s approach likely to be effective in boosting innovation? And is its aim of using the Fund to boost productivity across the country realistic? The What Works Centre for Local Economic Growth’s review of 1,700 policy evaluations examining the impact of innovation policy programmes offers some insight on these questions. It found 42 which focus specifically on R&D grants, loans and subsidies and meet their minimum research standards.

The first thing to note, however, is that only one study evaluated UK policy, with the rest mainly looking at OECD countries. Following the What Works Centre’s review being launched, a new paper was published examining the impact of Innovate UK’s (the Government’s innovation agency) recent programmes, as explored in Max Nathan’s recent blog. Fortunately the findings of the paper are in in-line with the wider evidence found by the What Works Centre. In the long-term, it is crucial we expand the body of UK evidence, and these new Government initiatives present an opportunity to do so by using robust evaluation techniques to assess their impact.

Will the Challenge Fund boost innovation?

The evidence found by the What Works Centre suggests that the Government’s first aim for the Challenge Fund – boosting innovation – is a realistic proposition. The evidence suggests grants, loans and subsidies can positively impact the amount firms spend on R&D. In addition, they are often found to have increased innovation, as measured by patents or self-reported innovation statistics.

A common concern is that public sector funding crowds out private sector R&D, making it less viable and lowering the incentive to invest. Though the evidence on this is mixed, several studies actually find that public sector funding actually encourages greater private sector investment in R&D, a finding supported by wider economic literature.

Fewer studies consider the impact of grants on economic outcomes such as employment and productivity of the firm undertaking the R&D, the latter being one of the main objectives of the Challenge Fund competitions. But those that do – including the new UK study – suggest that support can positively impact both employment and productivity, as well as firm performance (sales or profit). The evidence suggests it is more likely to increase employment than productivity.

The Government has chosen to support specific sectors, but the What Works Centre’s evidence suggests programmes are more likely to increase R&D spending and innovation when kept sector-neutral (as does Centre for Cities research). But the evidence does suggest that the Government’s use of a competitive process to allocate funds, and its decision to focus on small to medium size companies (SMEs), are likely to be effective in driving innovation.

Can the Challenge Fund raise productivity across the country?

However, the What Work Centre’s evidence is less encouraging when it comes to the Government’s second main hope for the Challenge Fund: that the benefits of these competitions will be realised across the country, and that productivity gains will not be restricted to a sub-set of industries and places.

In their recent update, Innovate UK mapped the 250 projects already approved for Challenge Fund support. While all regions have at least two recipient projects, the Greater South East (South East, East and London) have considerably more, meaning the direct benefits are not evenly spread.

Longer term the benefits should be less geographically restricted, with spill-overs leading to gains for the wider local economy surrounding each pocket of innovation activity. But these will still favour the south east of the country, which is better equipped to both generate and absorb new innovations due to the prominence of high-knowledge businesses.

So there is good reason to be optimistic about the government’s new R&D grants’ chances of success in raising research spend and improving firm performance. While the evidence questions the merits of singling out sectors, it supports many elements of the Challenge Fund’s design. But to boost productivity ‘throughout the country’, a broader set of policies – which improve workforce skills and make cities more attractive to high-knowledge firms –will be required to ensure the capacity to innovate is spread more evenly across the UK.

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