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The UK economy has experienced a 'lost decade' of innovation, with new evidence showing that businesses had a crisis of confidence in the 2000s, prioritising cash and concrete over investment in innovation.

Nesta's latest Innovation Index released today shows that investment in innovation by British businesses has fallen by £24bn since the recession began and has not recovered. This is five times the amount the Government spends each year on science and technology research.

Today's report, including the third Innovation Index, shows:

  • Innovation investment fell by 7% or £7.4bn between 2008 and 2009, as the recession began
  • A further fall of 14%, or £17bn, from 2009 to 2011, according to a survey of 1,200 businesses
  • After rising steadily from 1990 to 2000, innovation stagnated from 2000-2008 at 12% of private sector output

Nesta says the figures should act as a wake-up call for government and business as innovation is one of the most important drivers of sustainable economic growth. Between 2000 and 2008 innovation delivered 63 per cent of the UK's economic growth.

Geoff Mulgan, Nesta's CEO, said, "Everyone agrees that innovation is the only route to long term growth. The concern is that today's report and Investment Index show that investment in the future didn't just fall during the immediate aftermath of the financial crisis, but also continued falling as the economy appeared to stabilise."

The Innovation Index is the most authoritative source of how businesses in the UK invest in innovation. Only 13% of innovation investment now takes the form of R&D. Other important types of innovation investment captured in the index include design, software development, innovative training and organisational development.

Mulgan continues, "Other countries are making investment in innovation a top priority and the UK cannot afford not to do the same.  Our data shows that British business prioritised cash and concrete over investment in future technologies and services, a potentially disastrous decision that now needs to be put right. That's why over the next few months we'll be setting out the details of what we call Plan I - a plan for innovation-led growth - as an alternative to the increasingly sterile debate between Plan A and Plan B."

The report shows how innovation differs across sectors, highlighting the importance of manufacturing to innovation in the UK. Representing 17% of GDP, manufacturing accounted for 77% of business investment in R&D and 23% of total business innovation investment.

Relative to their size, the biggest innovation investors among the UK's sectors are manufacturing, personal services and financial services. The lowest investors in innovation are agriculture, mining and construction - although the construction sector spends the most on design. The business services sector's largest investment is in skills and organisational innovation.

The Innovation Index is the third annual review of business investment in innovation and its effect on economic growth published by Nesta. In September, Nesta will release 'Plan I', its proposals on how to stimulate UK innovation for economic growth.

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Notes to editor:

The components of innovation investment: R&D, design, training and innovative skills, software development, branding and organisational innovation

The Innovation Index: The first Index was published by Nesta in 2009 and covers the period from 1990 to 2007.  The second index, published in 2010 covering the period up to 2008, was published by DBIS as the core of the Government's official innovation report; Nesta also published the underlying working papers.

Methodology: Innovation Index and Innovation Investment Survey

The Innovation Index was undertaken in partnership with a team of leading macroeconomists and statisticians based at Imperial College London and the Office National Statistics, led by Professor Jonathan Haskel. It is a growth accounting exercise that incorporates the contribution of various intangibles to better understand business investment and economic growth.

Its methodology has been endorsed in recent years by the OECD, the US Department of Commerce, and the UK's Department for Business, Innovation and Skills. The underlying data on business investment is collected in a variety of ways: it builds on a large number of existing surveys of businesses' activities and spending plans, and supplements these with a regular detailed survey of over a thousand businesses' innovation investments.

This survey, the Innovation Investment Survey, has been developed in partnership with the Office for National Statistics and is considered the first survey of its type and scale in the world.

About Nesta:

Nesta is the UK's innovation foundation. We help people and organisations bring great ideas to life. We do this by providing investments and grants and mobilising research, networks and skills.

We are an independent charity and our work is enabled by an endowment from the National Lottery.

Nesta Operating Company is a registered charity in England and Wales with a company number 7706036 and charity number 1144091. Registered as a charity in Scotland number SC042833. Registered office: 1 Plough Place, London, EC4A 1DE