Blog

London’s lagging R&D spending is a problem for the UK’s innovation

If the UK as a whole is to become more innovative, businesses in the Capital will need more reasons to invest in R&D and other intangible assets.

Blog post published on 5 April 2023 by Stuart Bridgett

London’s productivity growth has spent much of the last decade in stagnation, and low amounts of investment by businesses in R&D and other intangible assets may be part of the reason why, recent Centre for Cities research has found.

In his growth speech in January and in last month’s Budget the chancellor has put a lot of emphasis on innovation and supporting the cutting edge of the economy. So far though policy to boost this has been pretty light, with higher rates of R&D tax relief to businesses being the only change so far. Whatever policies are brought forward and how they play out across geography will be an important factor in how effective they are at boosting innovation in the UK. In particular, the chancellor is going to need a lot more out of the Capital if the UK is to become more innovative.

London’s businesses spend little on R&D

London lags both UK and international comparators for business investment in R&D. Figure 1 shows that London’s ‘Business Expenditure on R&D’ (BERD) as a share of GVA is among the lowest of any UK ITL2 region. While London’s BERD was only 0.6 per cent of GDP in 2018, the UK total was twice that at 1.2 per cent. East Anglia and the region of Berkshire, Buckinghamshire and Oxfordshire have much higher BERD, at 3.8 and 2.4 per cent of GDP respectively.

Figure 1: London’s business spend on R&D is lower as a share of GDP than most other regions of the Britain

*ITL1 region used for London
Source: Eurostat; ONS; Centre for Cities calculations

Even more concerning for the chancellor is that other large cities are struggling too. Greater Manchester and West Yorkshire have similar rates to London. Newcastle and its surroundings do little better. And the West Midlands trails the national average too. Boosting business investment in innovation in these places will likely be important for dealing with their longer term underperformance too.

A driver of these patterns could simply be a statistical artifact – it’s easier to measure such investment in manufacturing activities, and they are more likely to be based on the fringes of cities rather than within them. While this in part may be true, comparing London to international cities shows that it certainly isn’t the whole picture. Figure 2 shows that Paris’ business spend on R&D is more than three times as much as London’s, and New York’s is more than twice as much. Stockholm’s BERD spend is nearly five times higher than London’s as a share of GVA.

Figure 2: London’s BERD as a share of GDP is much lower than other global cities

*Data for Paris is for 2013 due to data limitations.
Source: OECD; US National Science Foundation; Federal Reserve Economic Data; Centre for Cities calculations

The ONS has recently proposed a new methodology for calculating R&D that would uplift the UK’s overall R&D estimates. It is not clear yet how this will affect the subnational estimates, but what is clear from the figures above is that any revision of London’s BERD estimates would have to be very significant to narrow the R&D gap between it and other global cities.

There are some green shoots in London but more is needed

The good news is that London’s R&D spending has at least been increasing, with BERD more than doubling as share of GVA between 2010 and 2019. Figure 3 shows London’s BERD increased by 0.4 percentage points to 0.7 per cent of GVA between 2010 and 2019, while there was almost no change in BERD the Greater South East, and a much smaller increase in the rest of the UK.

Figure 3: London’s business expenditure on R&D has been growing much faster than elsewhere in the UK, but is still very low

Source: ONS; Centre for Cities calculations

This increase in London’s BERD seems to be driven mainly by one sector. Tax credit data (noting its imperfections) shows that R&D spend in the professional, scientific and technical services sector grew 66 per cent more in London than elsewhere in the UK between 2015 and 2019. This aligns with the professional services sector’s strong productivity growth between 2010 and 2019, where it grew faster than most other sectors and faster than in other global other cities. BERD growth in other knowledge intensive service sectors which are also prominent in London’s economy, like ICT and finance, was less remarkable though, growing no more than elsewhere in the UK.

So what does this mean for the chancellor? In London’s case he may have few direct levers to pull. The Capital already receives a large share of public R&D spending, so that doesn’t seem to be a problem. A greater focus on encouraging investment in intangible activities may well be needed though.

What the Government can do is look to resolve the broader challenges that prevent London from attracting the talented workers it needs and providing enough space for firms to grow and start-ups to form, both factors likely to have an impact on innovation. Extending the graduate visa to five years so that London can retain talented workers, and reforming the planning system so that more housing and workspace can be provided are two key policies that Government should commit to.