Industry reaps rewards of innovation – but concerns grow about falling behind competitors

Darrell Matthews

The latest EEF/NatWest Innovation Monitor shows that growing numbers of manufacturers are concerned that their investment in innovation is not enough to keep pace with competitors.

• 95% of manufacturers have engaged in innovation in the past three years 
• But the number reporting innovation in three activities or more has more than halved in the last year, falling from 75% to 38% as companies refocus on satisfying existing customers 
• Manufacturers plan to spend moderately more on innovation, but 26% are concerned about falling behind competitors – up from 19% last year 
• UK Business Expenditure on R&D (BERD) is only 1.1% of GDP, while the OECD average is 1.6% and Germany is at 2% - over the last decade the UK’s relative position has declined as BERD intensity in many competitor economies has improved 
• Study calls for Technology Strategy Board and Catapult Centre funding to be sustained. 

UK manufacturers are reaping the rewards of high levels of innovation over the past few years, but now report growing concerns about falling behind competitors, according to a major study published today by EEF, the manufacturers’ organisation, and NatWest Bank.

Activity to develop products and services for new customers and markets has seen manufacturing growth pick up. But, the 2014 EEF/NatWest Innovation Monitor shows that the strong demand has put pressure on manufacturers’ internal resources, from management time to working capital. As a result, while manufacturers continue to prioritise innovation, with most planning to spend moderately more in this area, they are now focussing on a smaller number of innovative activities aimed at satisfying existing customers.

This has led to an increase in the proportion of manufacturers who are concerned that their level of expenditure on innovation is not enough to keep pace with competitors – up from 19% in 2013 to 26% this year. And this has worrying implications for the UK economy’s long-term competitiveness.

In recent years, the Government has taken steps to boost innovation support. But as the economy starts to expand and grow, there are no guarantees that the UK’s innovation performance will accelerate. This means that the Government cannot afford to ease off the pedal.

Darrell Matthews, North West Region Director at EEF, says: “Innovation is a critical part of manufacturers’ growth strategies and most have the ambition to do more. However, while they are now reaping the rewards of previous activity, and stronger demand is boosting growth prospects, the resultant increase in activity is forcing manufacturers to re-focus their innovation activity and leading them to fear for their competitive position.

“If the UK is to continue to compete internationally, both the level and effectiveness of innovation must be increased. Many of the recent changes to policy have been supportive and these should be maintained, together with a longer-term, more strategic approach from government over successive Parliaments.”

Dave Meredeth, Director of Commercial Banking for the North West at NatWest and RBS, says: “Last year's report showed a very different picture, with manufacturers committing to several innovation projects and making it an investment priority.

“The change we are seeing this year may be that, due to increased demand, manufacturers are refining the innovation projects they are working on and focusing on those that are going to achieve the biggest return. However, to remain competitive in a domestic and global market, manufacturers need to continue to invest to ensure they are not falling behind.”

According to the report, 95% of companies have engaged in some form of innovation in the last three years. In addition, nearly all plan to continue innovating in the next three years, although their expenditure plans are generally moderate.

However, the number of companies reporting innovation in three activities or more has more than halved compared to last year, falling from 75% to 38%. This highlights the fact that companies are engaged in a narrower range of innovations, with a focus on satisfying existing customers in more traditional markets.

The report also shows that the UK needs to increase its expenditure and performance when it comes to innovation, especially applied research, if it is to catch up and overtake key international competitors.

UK Business Expenditure on R&D (BERD) is only 1.1% of GDP, while the OECD average is 1.6% and Germany is at 2%. Furthermore, over the last decade the UK’s relative position has declined as BERD intensity in many competitor economies has improved. The proportion of UK SMEs bringing new products to the market also falls way below the EU average.

According to the report, the main barriers to innovation are persistent – speed to market and overcoming technical barriers. Manufacturers are taking action to overcome these barriers, such as engaging in a high level of collaboration with customers. Government support also plays a key role in increasing the level of innovation - schemes such as the R&D tax credit and Knowledge Transfer Partnerships are particularly valuable.

The Government has taken a number of steps to boost innovation support, such as strengthening the R&D tax credit and increasing the budget for the Technology Strategy Board (TSB). However, EEF believes that if the UK is to continue to compete internationally then both the level and effectiveness of innovation must be increased. In response, EEF has made the following recommendations:

• Funding for the Technology Strategy Board must be sustained in real terms, at the very least at 2015/16 levels. 
• Funding for the High Value Manufacturing Catapult should be increased and the structure adjusted to encourage SME engagement. 
• The R&D tax credit should be maintained and the definition of R&D within the credit should remain broad and stable. 
• Longer-term, the Government should develop a framework for regular assessment of the breadth of science and innovation support to ensure all schemes remain well-directed and adequately funded.