New data published by Nesta shows that UK investment in innovation has been increasing, reaching £137.5bn in 2011.
This paints a different picture to the R&D investment figures, which show the UK at a static or slightly declining level, in contrast to many other countries where it has been growing.
But innovation amounts to much more than just R&D. It also includes activities such as developing new software, training staff on new processes, or designing new products. These activities are also particularly relevant in the UK, where the majority of our economy comes from services rather than manufacturing.
Nesta’s Innovation Index aims to measure the full range of ‘intangible’ investments that help to make innovation happen, going beyond research and development (R&D). In fact, R&D investment was just 12% of all innovation investment in 2011.
The growing importance of innovation and knowledge in our economies is also captured by this data. Innovation investment far outstripped 'tangible' investments in 2011 (£137.5bn versus £89.8bn), and the gap has been widening.
Tangible investments include more traditional forms of business investment, such as new vehicles, buildings and machinery. Innovation investment tends to build knowledge – another term is ‘knowledge-based capital’ – such as expertise, intellectual property, new processes and designs. What's more, innovation investments held up better during the recession, and have grown significantly since.
This is not surprising. What made Apple the largest company in the stock market were not its buildings, plants or machines, but good design, a skilled workforce, and creative business models.
Overall, this approach to measuring innovation leads to a different assessment of UK’s performance. While R&D figures show the UK lagging further and further behind other countries, measures of innovation based on intangible investment show the opposite picture, with the UK being among the leading economies.
This is partly a reflection of our economy, but it’s possible that it also reflects another facet of British business - the tendency to look at short-term investments and benefits, rather than investing for the long-term. While investments in training or software may pay off within one or two years, R&D investments might be expected to have a longer time horizon.
This is something we will be exploring further this year, with a project looking at investor attitudes to intangible investment.
For more about intangibles, and Nesta’s Innovation Index: http://www.nesta.org.uk/project/innovation-index
The full results of this work are described in Nesta Working Paper 14/02, ‘Estimating UK investment in intangible assets: a report for Nesta’, by Peter Goodridge, Jonathan Haskel and Gavin Wallis, available at Nesta’s website.