The UK Innovation Report 2022

What makes this report different?

While numerous sources of data on the topic of innovation exist, the UK Innovation Report aims to make a contribution by bringing together, in a single place, innovation and value-added indicators in a concise and accessible format. The report seeks to demonstrate the value of combining different types of indicator and data sets to facilitate policy discussions on innovation and industrial performance – and the interplay between them.

Instead of structuring the report according to input and output indicators, as is typically done in reviews of innovation activity, the focus has been on bringing together indicators that provide rich quantitative representations that are relevant to the vitality of the UK’s innovation activity and its industrial performance in an international context. While the report does not make specific policy recommendations, it does highlight areas where additional evidence and policy action may be required.

Motivation

• To review the UK’s innovation and industrial performance and compare it with that of other selected countries;
• To facilitate discussions on the relation between innovation and sectoral competitiveness; and
• To contribute to the evidence base that is available to inform industrial and innovation policy.

1: Structure and Performance of the UK Economy

Key policy questions addressed:

• How has the structure of the UK economy changed in the last few years?
• Are these changes affecting economic performance?
• How does this compare with other countries?

Key findings:

• In the last two decades the share in the UK economy of high-productivity sectors such as manufacturing and mining has reduced, while the participation of sectors such as construction and services has grown. Between 1998 and 2019, the manufacturing sector had one of the highest productivity growth rates in the UK economy, but it was also the sector whose share in the economy decreased the most (from 16.1% to 9.7%) during this period.
• Finance was the main driver of productivity growth prior to 2008 but its contribution became negative in the post-crisis period. Before the financial crisis, finance was the main driver of productivity growth in the UK, but Bank of England analysis suggests that this was likely driven by “unsustainable increased debt and higher risk tolerance”. The contribution of finance to national productivity growth became negative post-crisis.
• The loss of manufacturing has imposed a penalty on UK productivity growth of half a percentage point, on average, each year for the last two decades.  In contrast, manufacturing was responsible for around 30% of aggregate productivity growth in China and almost half in Taiwan during the 1998–2017 period. It also contributed to around 30% of aggregate productivity growth in Korea between 2005 and 2017 and 15% in Singapore between 2010 and 2017.

2: Investment in Innovation

Key policy questions addressed:

• Is the UK spending enough on R&D?
• How do the public and private sectors contribute to national expenditure on innovation?
• How does the UK compare with other countries?

Key findings:

• The UK spends less on R&D than the OECD average; a significant increase in public funding for R&D has been announced but delayed. At 1.74%, the UK’s gross domestic expenditure on R&D remains well below the 2019 OECD average of 2.5%. The UK government has committed to investing £22 billion in R&D by 2026/27 (pushing back the original target date of 2024).
• Compared to other countries, the business sector in the UK contributes less to R&D funding; universities perform significantly more of the country’s R&D and the government significantly less. In the UK the business sector funds around 55% of R&D – a lower proportion than in countries such as Germany, Korea and Japan. The UK’s higher education sector stands out from comparator countries, performing 23.1% of the country’s R&D in 2019. The government sector in the UK performs only 6.6% of R&D, well below comparator countries.
• Very few firms headquartered in the UK are global leaders in R&D investment and patent applications. In 2020 only two companies headquartered in the UK were among the top 100 R&D investing firms and no firms headquartered in the UK were among the top 100 patent applicants at the United States Patent and Trademark Office (USPTO).

3a: Industrial Performance – Focus on the Pharmaceutical Manufacturing Sector

Key policy questions addressed:

• Are UK sectors becoming more or less competitive internationally?
• How are UK sectors performing in terms of productivity, value added and employment?
• What are the drivers behind the observed performance trends?

Key UK pharmaceutical manufacturing trends in the last decade:

• The value added and productivity of the UK pharmaceutical manufacturing sector have declined significantly in the last decade. Of the top 13 countries by pharmaceutical value added in 2018, the UK was the only one to have experienced a significant productivity decline, at a rate of -7.9% per year between 2008 and 2018.
• The UK trade balance in pharmaceuticals has deteriorated significantly since 2014. The UK has recorded deficits in pharmaceutical product trade in all years between 2014 and 2020, except in 2015, with the trade balance going from a $9.6 billion surplus in 2010 to a deficit of over $1 billion in 2020.
• Pharma business R&D expenditure in the UK has remained stagnant in the last decade and remains significantly lower than comparator countries. The sector spent only 6% more in 2018 than it did in 2008, compared to increases of around 30% in the US and Germany and over 100% in Korea.

Drivers identified in literature review and sector expert consultations:

• Company restructuring and site closures, including those by major sector employers;
• Increased offshoring of pharmaceutical manufacturing, including a large share of APIs;
• The UK’s inability to capture the “second wave” of international manufacturing investments;
• Greater incentives (e.g. tax) offered by other countries to attract manufacturing;
• New entrants focusing on early-stage drug discovery and non-manufacturing activities;
• An inability to commercialise and scale up the manufacture of technologies developed in the UK;
• Caps on drug spending having an impact on the perception of the UK by investors;
• Increased use of generics pushing prices downwards and driving imports upwards;
• The 2016 EU membership referendum adding uncertainty to investment decisions;
• The large share of domestic business R&D expenditure decisions taken abroad;
• Competitor countries having greater incentives to attract R&D investment;
• Difficulties accessing scale-up funding locally, leading to firm decisions to migrate; and
• UK companies reducing in-house R&D investment in favour of acquiring small firms.

3b: Industrial Performance – Focus on the Automotive Manufacturing Sector

Key policy questions addressed:

• Are UK sectors becoming more or less competitive internationally?
• How are UK sectors performing in terms of productivity, value added and employment?
• What are the drivers behind the observed performance trends?

Key UK automotive manufacturing trends in the last decade:

• The value added and productivity of the UK automotive sector grew steadily between 2008 and 2018. The UK belongs to a group of nations where productivity was high and rising over the 2008–18 period, together with Germany, Korea and the US.
• Despite being the ninth largest exporter of vehicles in 2020, the UK maintains a significant deficit in automotive product trade. Since 2010 the UK has recorded a persistent trade deficit in automotive products, standing at $21.8 billion in 2020. Industry reports suggest that 50% local content is a plausible target for the UK car industry.
• UK business expenditure on automotive R&D grew rapidly between 2009 and 2016 but has declined in recent years. UK business enterprise expenditure on R&D (BERD) for automotive grew by 11.7% (CAGR) between 2009 and 2018 (but with a slowdown in 2017 and 2018).

Drivers identified in literature review and sector expert consultations:

• Increased specialisation of the UK’s automotive sector in premium product segments;
• Future sector growth dependent on the UK’s ability to produce electric and hydrogen vehicles and components;
• High levels of automation influencing the growth in employment in recent years;
• Skills’ shortages, particularly in higher technical education reported by industry;
• Decisions by foreign original equipment manufacturers (OEM) favouring other locations;
• Increased competitive pressures from both established and upcoming nations;
• Increased uncertainty around trade and investment as a result of the 2016 EU membership referendum; and
• R&D investment decisions mostly driven by foreign OEMs.

4: Science and Engineering Workforce

Key policy questions addressed:

• Is the UK producing enough scientists and engineers?
• Is the UK government investing enough in technical and vocational education?
• How does this compare with other countries?

Key findings:

• Tertiary education attainment in the UK is well above the OECD average – and a comparatively larger share of graduates is found in science, technology, engineering and mathematics (STEM) disciplines. In 2019 graduates in STEM disciplines accounted for 43.4% of the total number of graduates in the UK, above comparator countries such as France (36.8%), Canada (37.8%) and the United States (37.6%)
• Women are under-represented in STEM disciplines. Only 27% of the STEM workforce in the UK is female, compared with 52% in the total workforce. For UK engineers a gender pay gap exists but it is smaller than the pay gap for all UK workers.
• Higher technical education enrolment is comparatively low in the UK. Enrolment rates in post-secondary education courses, below the standard three-year Bachelor’s degree, are comparatively low in the UK when compared with countries such as the US, Korea and France. The government’s White Paper, Skills for Jobs, recognises a “significant shortage of vital technician-level STEM skills”.

5: Net Zero Innovation

Key policy questions addressed:

• How does the UK compare in low-carbon and renewable-energy technology research and development (R&D) investment?
• How is R&D expenditure translating into patenting performance?
• Is the UK capturing the economic potential of the transition towards net zero?

Key findings:

• The UK is one of the global leaders in both public R&D budget and patenting of net-zero-related technologies. The International Energy Agency (IEA) estimates that in 2020 the UK’s public R&D budget in low-carbon and renewable-energy technologies was $1.2 billion (USD $2020), lower than France, Japan and the US but ahead of Germany and Canada. The UK ranks eighth in the registration of climate-change mitigation technology (CCMT) patents, behind Japan, the US, Germany, Korea, China, France and Taiwan.
• Most of the low-carbon and renewable-energy sectors in the UK have been declining over the last five years. The ONS defines the low-carbon and renewable-energy economy (LCREE) as 17 low-carbon sectors, including wind, renewables, PV, CCS, nuclear and energy-efficient products. A total of 10 out of 17 LCREE sectors showed a decline in turnover between 2014 and 2019. Overall, there were 27,000 fewer LCREE business and 33,800 fewer jobs in LCREE sectors in 2019 than in 2014.
• There are some national disparities, with Scotland performing strongly. At £1 million turnover, 4.1 jobs and 2.2 businesses per 1,000 inhabitants, Scotland performed above the UK annual average for all categories between 2014 and 2019. Wales also performs above the national averages for LCREE businesses and jobs, at 2.46 businesses and 3.35 jobs per 1,000 inhabitants.

The aim of the UK Innovation Report is to facilitate policy discussions on innovation and industrial performance – and the interplay between them. The 2022 edition of the report is published amid a changing policy landscape.

In March 2021 the UK government released a new strategy, Build Back Better: our plan for growth, which replaces the 2017 Industrial Strategy and sets out the government’s plan to address the “invented in Britain”/“made elsewhere” disconnect. A new Innovation Strategy published in July 2021 sets out a “long-term plan for delivering innovation-led growth”, announcing a commitment to increase annual public investment on R&D to £22 billion. The government has also established a new Office for Science and Technology Strategy and a National Science and Technology Council. In February 2022 the first chief executive of the new Advanced Research and Invention Agency (ARIA), modelled after the US Advanced Research Projects Agency (ARPA), was appointed.

The UK Innovation Report 2022 maintains last year’s four core sections (structure and performance of the UK economy, investment in innovation, industrial performance and science and engineering workforce) and incorporates a new one (net-zero innovation). It not only provides updates using newly available data but also seeks to address policy questions from different angles. The report uses new indicators and longer time series, integrates additional national and international databases, and analyses more granular data at industry and firm level.

Section 1 provides new decompositions of productivity growth rates and international productivity comparisons at sector level, building on a related project being conducted by the Policy Links Unit in collaboration with the National Institute of Economic and Social Research. Section 2 presents firm-level data on R&D investment and patent applications. Section 3 deep-dives into the pharmaceutical and automotive manufacturing sectors, incorporating insights gathered during consultations with industry experts from the public and private sectors from around twenty different organisations. Section 4 places additional emphasis on science, technology, engineering and mathematics (STEM) disciplines and technical education. Finally, Section 5 incorporates data on innovation and the economic performance of low-carbon and renewable-energy sectors.

New section in this edition: Net zero innovation

For many, the greatest challenge of the 21st century is climate change. Net zero refers to achieving a balance between the carbon emitted into the atmosphere and the carbon removed from it. Markets for new technologies that can help businesses and countries to achieve net zero are expanding, and therefore they are a key area in which innovative activity has the potential to contribute to national economic growth and competitive advantage. Our 2022 report has chosen net-zero innovation as a topic in focus, to highlight how the UK is performing in what has the potential to be a high-growth economic sector.

Theme 1: policy questions and key messages

1. How has the structure of the UK economy changed in the last few years?
2. Are these changes affecting economic performance?
3. How does this compare with other countries?

In the last two decades high-productivity sectors such as manufacturing and mining have reduced their participation in the UK economy in favour of sectors such as construction and services

• The manufacturing productivity growth rate was among the highest in the UK economy between 1998 and 2019, but it was also the sector whose share in the economy decreased the most (from 16.1% to 9.7%) during this period.
• Services whose share of the economy increased during this period include (change in value-added shares in brackets, percentage points): human health and social activities (2.1); professional, scientific and technical activities (2.0); and administrative service activities (1.4).

Finance was the main driver of productivity growth prior to 2008 but its contribution became negative in the post-crisis period

• In the period 1998–2007, finance was the main driver of productivity growth in the UK, adding 0.37 percentage points, on average, each year to aggregate productivity growth. After the crisis, finance’s contribution to national productivity became negative.
• Administrative services, construction, information and communication, and professional, scientific and technical activities were among the top contributors to aggregate productivity growth in the post-crisis period (2011–19).
• Following  the COVID-19 pandemic the main contributor to productivity growth was human health and social activities.

The loss of manufacturing has imposed a penalty on UK productivity growth of half a percentage point each year, on average, for the last two decades

• The reduction in manufacturing share in economies is a common feature across most of the economies examined between 1998 and 2017. But as a result of its high-productivity growth rates, manufacturing is one of the sectors that makes the largest contribution to aggregate productivity growth in the best-performing countries.
• During 1998–2017, manufacturing was responsible for around 30% of the aggregate productivity growth in China and almost half of productivity growth recorded in Taiwan during 1998–2017. Manufacturing also contributed to around 30% of aggregate productivity growth in Korea between 2005 and 2017 and 15% of productivity growth in Singapore between 2005 and 2017.
• In contrast, manufacturing had a negative contribution to aggregate productivity growth in the UK during this period, mainly due to a reduction in its participation in the economy (as reflected in a negative allocation effect of -0.5 percentage points).

• In the pre-crisis period (1998–2007) UK labour productivity growth rates were similar to those observed in other developed countries such as Germany and the US. China, Korea and Taiwan recorded the strongest performance during this period.
• In the aftermath of the financial crisis (2008–10), most countries analysed experienced a significant slowdown in productivity growth. However, the UK was hit the hardest, recording a negative growth rate of -0.5%.
• In the post-crisis period (2011–17) the strongest productivity performance was recorded by China, Korea and Germany (7.3%, 3.2% and 2.3%, respectively). Productivity growth in the UK, the US and Taiwan was considerably weaker (0.7%, 0.7% and 1.1%, respectively).

• Sector-level analysis reveals the key structural factors behind the relatively slow rates of productivity growth in the UK. The contribution of economic sectors to aggregate productivity growth depends on how productive they are (usually measured by value added per hour), their rate of productivity growth and their relative size in the economy (usually measured in terms of value added and employment shares).
• In 2019 the most productive market sectors in the UK economy included (overall value added per hour worked in brackets): mining and quarrying (£163.2), electricity and gas (£98.9), water supply (£98.8), financial and insurance activities (£63.9), information and communication (£50.4) and manufacturing (£39.1).
• The case of manufacturing stands out. While manufacturing productivity growth was among the highest between 1998 and 2019 (with an annual growth rate of 2.2%), it was the sector with the largest decline in value-added shares during this period (-6.5 percentage points).
• Meanwhile, mining and quarrying almost halved its labour productivity, while reducing its value-added share by 0.5 percentage points during this period.

• Chart 1.3 shows the productivity in 2019 and the changes in value-added shares between 1998 and 2019 for selected sectors.
• The participation of manufacturing in the economy declined significantly during this period (by 6.5 percentage points). Meanwhile, construction and both high- and low-productivity service activities increased their participation in the economy.
• Services that experienced the largest increase in value-added shares during this period include (changes in percentage points in brackets): human health and social activities (2.1); professional, scientific and technical activities (2.0); and administrative and support-service activities (1.4).

• Sectors contribute differently to aggregate productivity growth because of disparities in their productivity performance and their participation in employment and output.
• In the pre-crisis period (1998–2007) financial and insurance activities were the main driver of productivity growth in the UK, with an average annual contribution to productivity growth of 0.37 percentage points. In contrast, manufacturing had a negative contribution (-0.31).
• In the post-crisis period (2011–19), the contributions of the financial and insurance sector to aggregate productivity growth declined to negative levels (-0.17 percentage points), with real-estate activities, administrative and support services and information and communication having among the largest contributions (0.19, 0.14 and 0.10, respectively).
• A likely explanation for the decline of the financial sector is that, in the pre-crisis period, high growth was mainly driven by unsustainable increased debt and higher risk tolerance.^[1]
• It is important to note that the contribution of the real-estate sector is distorted by the inclusion of imputed rents from owner-occupied dwellings in the value added of this sector.^[2]
• The increasing demand for health and social services during the COVID-19 pandemic meant that this sector was responsible for the largest contribution to aggregate productivity growth in 2020 (1.97 percentage points). Meanwhile, accommodation and food-service activities had a negative contribution (-1.18 percentage points).

^[1] Teneyro, S. (2018). The fall in productivity growth: causes and implications.

^[2] Riley et al. (2018). Below aggregate: a sectoral account of the UK productivity puzzle.

• In the decade before the financial crisis (1998–2007) the sectors with the largest contributions to aggregate productivity growth were: financial and insurance activities (0.37); construction (0.29); human health and social activities (0.29); professional, scientific and technical activities (0.29); and information and communication (0.23)
• The contributions of financial and insurance activities, information and communication and professional, scientific and technical activities during 1998–2007 were mainly driven by the growth of productivity in each of these sectors (intra-industry productivity effect).
• Meanwhile, the contributions of the construction and human health and social activities sectors during this period are largely explained by their expansion (allocation effect).
• At 4.2%, the productivity growth rates of the manufacturing sector were among the highest during 1998–2007 (resulting in an intra-industry productivity effect of 0.57). However, its employment share declined by 5.5 percentage points (resulting in a negative allocation effect of -0.89). As a result, the contribution of manufacturing to productivity growth in this period was the lowest in the economy (-0.31).

• In the decade after the financial crisis (2011–19) the sectors with the largest contributions to UK aggregate productivity growth included: real-estate activities (0.19); administrative and support-service activities (0.14); construction (0.11); information and communication (0.10); and professional, scientific and technical activities (0.08).
• Except for real-estate activities, the contributions of these sectors are largely explained by relatively higher productivity growth rates (intra-industry productivity effect).
• The sectors with the weakest contributions to aggregate productivity in the reference period include: financial and insurance activities (-0.17); mining and quarrying (-0.08); manufacturing (-0.07); public administration (-0.06); and wholesale and retail trade (-0.06).
• Except for mining and quarrying, the negative contributions of these sectors were due to their contraction in size (allocation effect). Among these activities, the wholesale and retail trade sector experienced the largest contraction in employment.

• During the COVID-19 pandemic (2019–20) the sectors with the largest contributions to aggregate productivity growth included: human health and social activities (1.97); real-estate activities (0.63); education (0.56); public administration (0.53); and financial and insurance activities (0.62).
• Other sectors (not presented in the table) with relatively large positive contributions in the reference period include professional, scientific and technical activities (0.28) and information and communication (0.10).
• The sectors with the weakest contributions to aggregate productivity in the reference period include: accommodation and food services (-1.18); administrative and support services (-0.64; construction (-0.56); manufacturing (-0.44); and  transportation and storage (-0.41).
• The negative contributions of accommodation and food services and transportation and storage during this period are explained by both deterioration in productivity growth (negative intra-industry productivity effect) and a reduction in size (negative allocation effect). Meanwhile, the negative contributions of administrative and support-service activities, construction and manufacturing are a result of their reduction in size.

• Between 1998 and 2017 China and Korea experienced the strongest productivity growth among the eight economies studied (8.9% and 5.1% on average per year, respectively).
• The UK showed the lowest productivity growth rate in this period. However, some UK sectors performed relatively better. Service sectors in which the UK may have comparative advantages include (average annual growth rate in brackets): information and communication (4.0%); financial and insurance activities (2.3%); professional, scientific and technical activities (2.3%); and administrative and support services (2.3%).
• In contrast, UK market sectors that performed relatively worse than those in other countries in the reference period include (average annual growth rate in brackets): mining and quarrying (-2.8%); transportation and storage (0.4%); wholesale and retail trade (1.4%); and manufacturing (2.5%).

• The shrinking of manufacturing is a major structural change observed in most of the economies examined between 1998 and 2017.
• The biggest declines in manufacturing shares were recorded in (changes in percentage points in brackets): Singapore (-8.6), the UK (-5.9%) and China (-5.6). There have, however, been some exceptions. Manufacturing output shares expanded in Germany (0.7), Korea (3.6) and Taiwan (7.4). And while Singapore reported the largest decline in manufacturing output shares among the countries examined (-8.6), this trend has reverted in the years since 2017.
• Meanwhile, service activities have expanded in most of the countries analysed. This is true for both knowledge-intensive services and other services (see note).
• The largest expansions in output shares of knowledge-intensive activities were seen in (changes in percentage points in brackets): China (5.7), Singapore (4.3) and the UK (4.1). Other service activities have also expanded; changes range from 1.7 percentage points in Germany to 12.5 in China.

Note: Knowledge-intensive services group together information and communication, financial and insurance activities, professional, scientific and technical activities, and education, with the exception of China, which only groups together financial and insurance activities. Other services include wholesale and retail, transportation and storage, accommodation and food-service activities, real-estate activities, administrative and support-service activities, public administration and defence, human health and social work activities, arts, entertainment and recreation, and other service activities, with the exception of China, which groups together wholesale and retail, transportation and storage, and community, social and personal services.

• As a result of its high productivity growth rates and relatively large output shares, manufacturing is one of the sectors with the largest contributions to aggregate productivity growth in the best-performing countries.
• Manufacturing was responsible for around 30% of the aggregate productivity growth in China and almost half of the productivity growth recorded in Taiwan during 1998–2017. Manufacturing also contributed to around 30% of the aggregate productivity growth in Korea between 2005 and 2017 and 15% of the productivity growth in Singapore between 2010 and 2017.
• In contrast, manufacturing had a negative contribution to aggregate productivity growth in the UK during this period, mainly due to a reduction in its participation in the economy (as reflected in a negative allocation effect of -0.5, on average).
  §This means that the loss of manufacturing imposed a penalty on UK productivity growth of half a percentage point per year between 1998 and 2017.
• Another distinctive feature of the UK economy is a lower intra-industry productivity growth effect (due to lower productivity growth) than the other countries analysed across most sectors.

• Across the countries studied, the contraction of the manufacturing sector has been mirrored by a greater contribution of services to aggregate productivity growth.
• Between 1998 and 2017, the contribution of knowledge-intensive services was positive in all of the countries analysed (ranging from 0.2 in Taiwan to 0.55 in the UK and 1.2 in China). The positive contribution of knowledge-intensive services is mainly explained by high productivity growth rates (as reflected in positive intra-industry productivity growth effects).
• In comparison, other services contributed less to aggregate productivity growth in the UK than they did in the other seven countries during this period. The contribution of other services to UK productivity growth was 0.65, compared to 3.44 in China, 1.91 in Korea and 1.88 in Singapore.

Note: Knowledge-intensive services group together information and communication, financial and insurance activities, professional, scientific and technical activities, and education, with the exception of China, which only groups together financial and insurance activities. Other services include wholesale and retail, transportation and storage, accommodation and food-service activities, real-estate activities, administrative and support-service activities, public administration and defence, human health and social work activities, arts, entertainment and recreation, and other service activities, with the exception of China, which groups together wholesale and retail, transportation and storage, and community, social and personal services.

Theme 2: policy questions and key messages

1. Is the UK spending enough on R&D?
2. How do the public and private sectors contribute to national expenditure on innovation?
3. How does the UK compare with other countries?

The UK spends less on R&D than the OECD average; a significant increase in public funding for R&D has been announced but delayed

• At 1.74%, the UK’s gross domestic expenditure on R&D (GERD) remains well below the 2019 OECD average of 2.5%.
• The UK’s expenditure on R&D has risen steadily over the past decades but, as a proportion of GDP, its growth has been slower than the OECD average.
• The UK government has committed to investing £22 billion in R&D by 2026/27 (pushing back the original target date of 2024).

Compared to other countries, the business sector in the UK contributes less to R&D funding; universities perform significantly more of the country’s R&D and the government significantly less

• In the UK the business sector funds around 55% of R&D – less than in Germany (64.5%), Korea (76.9%) and Japan (78.9%).
• The UK’s higher education sector stands out from comparator countries, performing 23.1% of the country’s R&D in 2019, compared to 20.1% in France and 17.4% in Germany.
• The government sector in the UK performs only 6.6% of R&D, well below comparator countries.

Very few firms headquartered in the UK are global leaders in R&D investment and patent applications

• Only two companies headquartered in the UK are among the top 100 R&D investing firms in 2020.
• Among the top 2,500 R&D investing firms in the world, only 105 were UK-based in 2020 (779 were based in the USA, 597 in China, 293 in Japan and 124 in Germany).
• There were no firms headquartered in the UK among the top 100 patent applicants at the United States Patent and Trademark Office (USPTO) in 2020.

• At 1.74%, the UK’s gross domestic expenditure on R&D (GERD) remains well below the 2019 OECD average of 2.5%.
• The UK spends less on R&D as a percentage of GDP than OECD countries, including Israel, Korea, Japan, Germany and the United States.
• The UK also spends less than non-OECD countries such as China and Singapore.
• The UK government has set a target to boost investment in R&D to 2.4% of GDP by 2027. This includes a commitment to increasing public funding for R&D to £22 billion per year by 2026/27.

• The UK’s gross domestic expenditure on R&D (GERD) as a share of GDP increased from 1.59% in 2000 to 1.74% in 2019.
• This represents an average annual growth rate of 0.5%, while the OECD average grew at an annual rate of 0.9%.
• To narrow the gap between the UK’s GERD and the OECD average, the UK’s 2017 Industrial Strategy committed to spending 2.4% of GDP on R&D by 2027.

• From 2007 to 2019 the UK government’s net expenditure increased from £9.8 billion to £13.1 billion in current prices. This represents an annual growth rate of 2.8%.
• The government net expenditure in 2020, however, was expected to be lower than in 2019.
• Reaching the £22 billion target would require an annual increase by more than 10% in the next four years.
• In the March 2020 Budget the government announced that public R&D expenditure would rise to £22 billion by 2024/25.
• However, in the 2021 Autumn Budget and Spending Review, the date to reach the £22 billion target was pushed back to 2026/27.
• Reaching the 2.4% target (R&D investment as a percentage of GDP) will require a significant increase in private investment, in addition to public investment.

• In the UK the business sector contributes to around 55% of R&D funding. This is less than in comparator countries, such as Germany (64.5%), Korea (76.9%) and Japan (78.9%).
• The UK government (including national and regional governments, as well as their agencies) funds roughly 26% of total R&D expenditure, which is higher than Japan, Korea and China.
• The UK has a relatively high share of R&D funded by businesses and institutions located abroad (13.7% in 2018).

• In terms of R&D expenditure by sector of performance, the UK’s higher education sector stands out from comparator countries, with a 23.1% share in 2019, above countries like China, Korea, Japan, the United States, Germany and France.
• Conversely, the government sector in the UK performs only 6.6% of R&D, well below comparator countries.
• In line with comparator countries, the business enterprise sector performs the highest share of R&D, at 66.6% in the UK in 2019.

• In 2019 most (38.9%) of the UK government net expenditure on R&D was allocated to UK research and innovation (UKRI). This represents an increase by 10 percentage points in comparison to the proportion spent by research councils in 2016.
• The proportion of government expenditure on R&D by higher education funding councils also increased, from 19.6% in 2016 to 21.9% in 2019.
• Meanwhile, the absolute and relative expenditure on R&D of civil departments decreased from £3,249 million (28.9%) in 2016 to £3,190 million (24.4%) in 2019.

• Most of the public expenditure on R&D in the UK is delivered through the Department of Business, Energy and Industrial Strategy (BEIS), which allocates funding to different agencies and programmes, including UKRI, the UK Space Agency and the National Academies.
• UKRI funding includes the investments of the seven research councils, Research England and Innovate UK.
• In the March 2020 Budget the UK government committed to the creation of the Advanced Research and Invention Agency (ARIA), an independent research body to fund high-risk, high-reward scientific research.
• The commitment to create ARIA involves an allocation of £800 million over the next four years. From this amount, £50 million is included in the 2021–22 Budget.

• The chart shows the top 20 R&D investing companies in 2020.^[1]
• The USA (nine companies) and Germany (four companies) are followed by companies based in Japan, Switzerland, China and Korea.
• Industries of specialisation include: pharmaceuticals and biotechnology; automobiles and parts; software and computer services; technology hardware and equipment; and electronic and electrical equipment.^[2]

^[1] R&D investing companies are the 2,500 firms that invested the largest sums in R&D worldwide in 2020, as defined in the EU Industrial R&D Investment Scoreboard. Those companies have headquarters in 39 countries and represent 90% of the expenditure in R&D by the business sector in 2020.

^[2] Sectors are defined according to the Industry Classification Benchmark (ICB) FTSE International.

• The chart shows how the 2,500 companies that invested the largest sum in R&D in 2020 are distributed across countries, focusing on the top 15 countries.
• There were 105 companies with headquarters in the UK among the top 2,500 R&D investing companies in 2020.
• Most of the top R&D investing companies have headquarters in the USA (779), China (597) and Japan (293), accounting for 66.8% of the total 2,500 R&D investing companies worldwide.
• Germany has 124 firms among the top R&D investing companies, accounting for 31% of the top R&D investing firms based in the European Union.

• In 2020 the top 2,500 R&D investing companies worldwide invested a total of €908.9 billion in research and development activities, as reported in the EU Industrial R&D Investment Scoreboard.^[1]
• Companies headquartered in the USA invested €343,6 billion, accounting for 38% of the total expenditure worldwide and more than what companies based in China, Japan and Germany invested all together.
• R&D investing companies based in the UK invested €28.9 billion, making the UK the eighth in the world country rank.

^[1] The 2,500 R&D investing companies have headquarters in 39 countries and own around 800,000 subsidiaries around the world. The EU Industrial R&D Investment Scoreboard, however, reports R&D investment data, as reported by the 2,500 companies, regardless of where research and development activities are conducted.

• The chart shows the top 10 companies headquartered in the UK, which are among the 2,500 firms that invested the most in R&D in 2020, as reported by the 2021 EU Industrial R&D Investment Scoreboard.
• The first two UK-based firms among the world leaders investing in R&D in 2020 belong to the pharmaceuticals sector, with GSK and AstraZeneca ranking 29 and 31 worldwide, respectively.
• The UK top 10 R&D investing companies invested a total of €17.4 billion. However, those companies may have several subsidiaries around the world, while the 2021 EU Industrial R&D Investment Scoreboard reports data on R&D, regardless of where the research and development activities are conducted, whether in the UK or abroad.

• The chart shows the top 100 patent applicant firms per country for patents published with the USPTO in 2020.^[1]
• More than 70% of all top 100 patent applicants are represented by companies based in the USA (44) and Japan (29).
• Companies from Korea (9), Germany (6) and China (5) are also represented among the top 100 patent applicants in the USPTO in 2020.
• The top 10 patent applicants at the USPTO include the following firms: IBM, Intel, Apple, Microsoft, Qualcomm (USA); Samsung Electronics, LG Electronics (Korea); Canon (Japan), Huawei (China); and Taiwan Semiconductor (Taiwan).

^[1] The United States Patent and Trademark Office (USPTO) is the second largest patent office globally, second only to the National Intellectual Property Administration of the People’s Republic of China. USPTO data is widely used in academia and policy-making and makes analyses comparable. The USA is the country that best represents global technological developments, and therefore they would most naturally be considered when applicants want to protect their invention. USPTO data is also known to be of high quality and well accessible. For a comparison of patent data sources, see Kim J. and Lee S. (2015). Patent databases for innovation studies: A comparative analysis of USPTO, EPO, JPO and KIPO. Technological Forecasting and Social Change, Volume 92, pp. 332–345.

• The chart shows the UK top 10 patent applicant firms for patents published in 2020 with the USPTO.
• There is no company with headquarters in the UK among the top 100 patent applicants at USPTO for 2020.^[1]
• ARM is the top UK patent applicant, ranking 103 globally among the top USPTO patent applicants in 2020.
• The second-best UK applicant is Rolls-Royce (635 patents), which ranks the company 135th among the top USPTO patent applicants.
• The presence of few companies with headquarters in the UK among the top patenting firms worldwide is consistent with analyses conducted by the European Commission and the OECD, covering the world’s five largest patent IP offices.^[2]

^[1] A similar analysis was conducted for 2019 and 2018, and companies with headquarters in the UK were not among the top 100 applicants firms for patents published at the USPTO.

^[2] Amoroso et al. (2021). World Corporate Top R&D investors: Paving the way for climate neutrality. A joint JRC and OECD report.

• The chart shows the top 10 UK patent applicants for patents published in 2020 with the USPTO by industry.^[1]
• The majority of top 10 UK patent applicants in the USPTO in 2020 were companies in the field of semiconductors and aerospace and defence.
• Semiconductor companies account for almost half of all USPTO published patents for the top 10 UK-based applicants, with 1,539 out of 3,228 patents.
• Companies in the field of automotive (Jaguar Land Rover), telecommunications (British Telecomm), chemicals (Johnson Matthey) and commercial support services (University of Oxford Innovation) are also represented among the top 10 UK-based USPTO patent applicants.

^[1] The industry classification adopts the Bloomberg Industry Classification Standard (BICS). The displayed industries match the respective “sub-industry” level, as provided by Bloomberg.

Theme 3: Policy questions and key messages

• Are UK sectors becoming more or less competitive internationally?
• How are UK sectors performing in terms of productivity, value added and employment?
• Are UK sectors investing enough in R&D compared to their international competitors?

The Pharmaceutical Manufacturing Sector

Key UK pharmaceutical manufacturing trends in the last decade

The value added and productivity of the UK pharmaceutical manufacturing sector have declined significantly in the last decade

• Of the top 13 countries by pharmaceutical value added in 2018, the UK is the only one to have experienced a significant productivity decline, at a rate of -7.9% per year between 2008 and 2018.

The UK trade balance in pharmaceuticals has deteriorated significantly since 2014

• The UK recorded deficits in pharmaceutical product trade in all years between 2014 and 2020, except in 2015.
• The UK’s pharma trade balance went from a $9.6 billion surplus in 2010 to a deficit of over $1 billion in 2020.

Pharma business R&D expenditure in the UK has remained stagnant in the last decade and remains significantly lower than comparator countries

• The business expenditure on R&D has only grown marginally in the last decade, both in manufacturing and non-manufacturing activities. Adjusting for inflation, R&D in the Pharmaceutical Product Group in 2020 was still only 83% of its peak in 2011. The sector spent only 6% more in 2018 than it did in 2008, compared to increases of around 30% in the US and Germany, and over 100% in Korea.
• On average, between 2014 and 2020, 50% of the pharmaceutical R&D performed in the UK was conducted by foreign-owned businesses.

Drivers identified in literature review and sector expert consultations:

• Company restructuring and site closures, including those by major sector employers;
• Increased offshoring of pharmaceutical manufacturing, including a large share of APIs;
• The UK’s inability to capture the “second wave” of international manufacturing investments;
• Greater incentives (e.g. tax) offered by other countries to attract manufacturing;
• New entrants focusing on early-stage drug discovery and non-manufacturing activities;
• An inability to commercialise and scale up the manufacture of technologies developed in the UK;
• Caps on drug spending having an impact on the perception of the UK by investors;
• Increased use of generics pushing prices downwards and driving imports upwards;
• The 2016 EU membership referendum adding uncertainty to investment decisions;
• The large share of domestic business R&D expenditure decisions taken abroad;
• Competitor countries having greater incentives to attract R&D investment;
• Difficulties accessing scale-up funding locally, leading to firm decisions to migrate; and
• UK companies reducing in-house R&D investment in favour of acquiring small firms.

• The UK was ranked twelfth in the world in the production of pharmaceuticals in 2018 by value added in current US$. The value added per employee metric showed that UK productivity within the pharmaceutical sector declined between 2008 and 2018 at a rate of 7.9% per year (CAGR), as a result of both decreases in value added and increases in employment over this period.
• Unlike top-performing countries, the UK has recorded negative growth rates in value added and value added per employee over the past decade.
• At ~$157 in 2018, UK value added per employee was at a similar level to Germany, Italy and France but lower than the productivity levels of most comparators, except India and Brazil.
• Singapore has the highest value added per employee of comparator countries. Belgium, Denmark and Switzerland are countries with high growth in value added per employee over the decade.

• Of the top 13 countries by value add in 2018, in billions of US dollars, the UK is the only one to have experienced a significant productivity decline between 2008 and 2018.
• Other countries, including Belgium, Denmark, Switzerland and the United States, saw productivity growth between 2008 and 2018, measured as growth per year in value added per employee.
• France and Germany, which have similar productivity to the United Kingdom, also experienced smaller declines in productivity during this time period; however, the decline in productivity in the UK was 4–8 times larger than these comparable nations.

• The UK has suffered from a rapid loss in trade competitiveness in pharmaceutical products from the perspective of trade balance over the past decade.
• The UK was the fourth largest net exporter of pharmaceutical products in 2010, with a surplus of ~$10 billion.
• Since 2014 the UK has recorded deficits in pharmaceutical product trade in all years except 2015. Its trade deficit widened to ~$1 billion in 2020, placing it among the third quartile of countries according to trade balance.

• This loss in trade competitiveness for the UK over the past decade, leading to a ~$1 billion trade deficit in 2020, is the result of an annual 1% increase in imports (CAGR) and an annual 2.8% CAGR decline in exports (CAGR) between 2010 and 2020.
• Of the comparator countries, the UK is the only country where exports were smaller in 2020 than they were in 2010.

Note: Trade balance is based on gross exports and gross imports of goods at HS 2-Digit level for HS 30 – Pharmaceutical Products.

*Global ranking excludes countries for whom data for the year in question is not available.

• There have been some successes in the UK pharmaceutical trade over the past decade. The UK has exported more medicinal and pharmaceutical products to China and Belgium, with a 13% CAGR between 2010 and 2020, bringing in £1 billion more in exports in 2020 than 2010 from each country.
• Imports from Italy rose, while exports to this nation declined (5.8% rise in imports, -9.7% decline in exports), with a similar but smaller picture occurring with France (2.7% rise in imports, -6.3% decline in exports). This resulted in a net reduction of just over £1 billion in trade for the UK in 2020 than 2010 from Italy and France.
• The rise in imports outstripped the growth in exports from countries, including the Netherlands (14.4% vs 1.5%), to the tune of a £3.2 billion lower trade balance in 2020 compared to 2010, and to a lesser extent in Germany (4.4% vs 0.9%, with a £700 million difference between 2020 and 2010).
• This analysis identifies that, although some traditional markets for UK pharmaceuticals in the EU may be declining, new export markets with growth potential are also opening up (e.g. China).

• Developed by the ONS, the term "product group" refers to business R&D expenditure allocated to the product group that best describes the subject type of R&D activities carried out by firms.
• This is in contrast to the “industry classification”, where SIC codes are allocated based on the main activity of the business – in this instance, companies whose main activity is pharmaceutical manufacturing. These are more often used for international comparisons.
• The difference between these two measures indicates that only a fraction of all R&D in the pharmaceutical industry is conducted by businesses whose main activity is pharmaceutical manufacture. Companies that may account for the difference include contract R&D organisations and pre-commercial SMEs.
• Adjusting for inflation, R&D in the Pharmaceutical Product Group in 2020 was still only 83% of its peak in 2011.
• While R&D in pharmaceutical manufacturing (SIC Code 21) dipped to just 39% of its 2011 value in 2020, it had been relatively stable throughout the decade.

• Comparing pharmaceutical manufacturing, the decline experienced by the sector in terms of GVA and productivity may have affected business R&D expenditure.
• The sector spent only 6% more in 2018 than it did in 2008, compared to increases of around 30% in the US and Germany and over 100% in Korea.
• In absolute terms, however, business enterprise R&D expenditure in the UK remains comparatively lower than that of Korea, Germany and the US.

• Most pharmaceutical R&D conducted by businesses in the UK is funded by the companies themselves (~70%).
• Around 25% of pharmaceutical R&D performed by businesses in the UK is funded by overseas organisations. While overseas investment in R&D makes up a substantial portion of the total R&D, this has not been increasing.
• Only a small fraction of R&D performed by business is funded by the government (~£12 million in 2020).
• The graph on the right shows that, on average, 50% of the pharmaceutical R&D performed in the UK was conducted by businesses owned overseas.

What is driving value added, productivity and trade trends in pharmaceutical manufacturing?

• The value added and productivity of the UK pharmaceutical manufacturing sector have declined significantly in the last decade 
• The UK trade balance in pharmaceuticals has deteriorated significantly since 2014

Potential drivers identified from literature review and consultations with sector experts (see Appendix 3.1 for details):

Company restructuring and site closures, including those by major sector employers

• Some top companies (e.g. Pfizer, GSK), who are major employers in the industry, completed reorganisations over the last decade, resulting in site closures [Bioscience and Health Technology Sector Statistics, 2019].

Increased offshoring of pharmaceutical manufacturing

• The consulted stakeholders highlighted that the last decade saw a move by UK pharmaceutical manufacturers towards the outsourcing of some manufacturing activities.
• There seems to be a greater degree of firm mobility in the pharmaceutical sector than in other industries as a result of shorter factory life cycles, lower-scale operations and lower capital embedded in facilities and the supply chain.
• Together with superior incentives from overseas markets, these traits may help to explain the closure and/or migration of some key operations outside the UK.
• Both the literature and interviewees suggest that a large share of advanced pharmaceutical ingredient (API) chemicals and materials production has moved offshore over the last 10–15 years, mostly driven by cost considerations [Medicines Manufacturing Industry Partnership, 2017].
• The stakeholders consulted also highlighted that contract development and manufacturing companies (CDMOs) owned and located abroad, taking on tasks such as drug development and manufacturing, have become more common.

The UK’s inability to capture the “second wave” of manufacturing investments

• The second wave of manufacturing investments on new plant and equipment for the manufacture of biologics and other novel medicines has largely gone to Ireland, Singapore, Germany and the US, which together have attracted the bulk of US$ 125 billion investment between 2011 and 2017 [LSIS, 2017].
• The 2017 Life Sciences Industrial Strategy therefore suggested that the UK should not miss the next wave of manufacturing opportunities in the sector in order to close the export gap and boost productivity [LSIS, 2017].
• The 2021 Life Sciences Vision identifies areas in which the UK has, or could develop, a meaningful competitive advantage, including: cell and gene therapies, oligonucleotides, viral vectors, advanced diagnostics or wound care [HMG, 2021].

Other countries provide greater incentives – particularly tax – to attract manufacturing investment

• The 2021 Life Sciences Vision recognises that it is essential to provide incentives to support company growth, innovation and investment and to help new companies develop products and sales based in the UK [HMG, 2021].
• Key competitors such as Germany, the US, Switzerland, Ireland and Singapore have all prioritised life sciences manufacturing, with Ireland landing manufacturing investments from 9 out of 10 top pharmaceutical companies and Singapore having 30 of the world’s leading biopharmaceutical companies’ HQs [LSIS, 2017].
• The consulted stakeholders highlighted that lower business tax rates, including incentives for companies to locate headquarters and R&D facilities within countries, may out-compete the UK offering regarding international investment. This is seen particularly in the cases of Ireland and Singapore, which have highly attractive business tax structures, better rates of return of investment, access to capital and other financial incentives.
• There was a perception among the consulted experts that, although the UK has started to offer R&D grants and other innovation incentives, the total UK budget for R&D grants remains lower than that of competitor countries.
• There is also a concern that, although the UK has traditionally offered some advantages for R&D-intensive pharmaceutical companies to operate in the country, such as good access to skills and the presence of a vibrant innovation ecosystem, these might have eroded over time.
• Both the literature and interviewees identified difficulties in recruiting highly qualified workers in categories such as the core scientific disciplines of biological and chemical sciences; a wide range of computational disciplines; and clinical pharmacology [ABPI, 2019]. The consultees also mentioned that the UK has lower proportions of skilled technicians with specific knowledge of the sector than other competitor countries.

New UK sector entrants focused on early-stage drug discovery and other activities outside manufacturing

• While the sector has historically been dominated by a small number of large players (e.g. AstraZeneca and GSK), ONS data suggests that 65% of 610 companies registered as pharmaceutical manufacturing enterprises at the start of 2018 were micro-firms with fewer than 5 employees [Make UK, 2018].
• The interviewees suggested that the UK has developed a strong presence of start-ups in the last decade, many of which focus on new discoveries and operate on loss-making models while these developments get to market.
• From the perspective of some interviewees, trade deficits could be a symptom of the UK focus on basic R&D but not commercialisation in recent years, which could be leading to UK innovation being exploited abroad and therefore lower exports.

Inability to commercialise and scale up the manufacture of technologies and products developed in the UK

• Technologies and products that were originally developed in the UK have not been commercialised or manufactured in the UK, and globally mobile inward investments have tended to go to competitor countries [HMG, 2021].
• For example, there is concern that, despite the discovery of monoclonal antibodies in the UK, the country has failed to capitalise on this by securing commercial manufacturing of these products [LSIS, 2017].
• The UK government’s recognition that the high costs of developing a drug and getting it to market are prohibitive factors for many manufacturers has resulted in attempts to develop a streamlined pathway to bring products to market through programmes such as the Accelerated Access Collaborative [Make UK, 2018].

Caps on drug spending may have an impact on the perception of the UK by investors

• An opinion found in the literature and expressed by various interviewees is that, although drug spending decisions do not directly influence investments because companies operate in a global market, they might affect the perception that global companies have of the UK’s commitment to the sector [Make UK, 2018].
• In this regard, the Association of the British Pharmaceutical Industry [ABPI, 2020] suggests that the drive by the NHS to purchase the lowest-price product and single-supplier contracts has resulted in manufacturing being driven to low-cost labour markets, thereby weakening the resilience of UK supply.

Increased use of generics could be pushing prices downwards and driving imports upwards 

• The UK pharmaceutical industry has seen increased price pressures, both nationally and globally, from generics [Enterprise Ireland, 2020].
• The consulted stakeholders highlighted that, in terms of generics manufacturing, other countries such as India and China are the preferred options to manufacture basic chemistry at a lower price. Increased generic use by the NHS may be driving imports upwards.

The 2016 EU membership referendum added uncertainty to investment decisions in the sector

• There was a common perception among the stakeholders consulted that the 2016 EU membership referendum resulted in pharmaceutical companies becoming more cautious in their spending and putting larger capex on hold.
• In the view of some interviewees, the referendum decision created a perception that the UK could become a smaller domestic market, which reduced some of its attractiveness. IP protection considerations added to these concerns, as it became unclear whether the UK would remain part of the EU Unitary Patent Initiative and the European Patent with Unitary Effect (EPUE) scheme.
• There is also a perception that the UK’s new trade relationship with the EU has reduced the attractiveness of producing final products in the country, as these would need to be re-released and approved in other markets.
• Both interviewees and literature sources suggest that longer lead times and increased paperwork caused by border and custom checks affect profit margins, particularly for products with a short shelf life, leading to companies transferring specific production lines outside the UK [Make UK, 2018].

What is driving business R&D expenditure trends in pharmaceutical manufacturing?

• Pharma R&D expenditure in the UK has remained stagnant in the last decade and remains significantly lower than comparator countries

Potential drivers identified from literature review and consultations with sector experts (see Appendix 3.1 for details):

A large share of domestic business R&D expenditure relies on decisions taken abroad

• Around half of the UK’s pharmaceutical R&D expenditure was performed in businesses owned by overseas companies in 2020. As a result, the investment decisions of multinational companies located in the UK may be made by headquarters located elsewhere.
• In the view of some interviewees, this may have impacted R&D expenditure decisions and has potentially lessened the UK’s speed of innovation, particularly for technologies where the development process is highly iterative and requires proximity to the manufacturing base [HMG, 2021].

Competitor countries offer greater incentives to attract R&D investment

• There was a perception among the consulted stakeholders that firms receive more favourable grants and tax credits in other countries.
  §Capital allowance regimes in the UK may be particularly disadvantageous for the pharmaceutical sector because of its high R&D intensity, making it relatively less attractive to invest in pilot and full-scale manufacturing facilities in comparison to other countries [LSIS, 2017].
• For example, France and Canada offer capital allowance rates of 28% and 50%, respectively, in comparison with an annual rate of 18% on a reducing balance basis in the UK [LSIS, 2017].
• Although the UK’s current corporation tax is the lowest in the G20, the UK government recently announced significant rises from 19% to 25%, with effect from 1 April 2023.

UK companies may struggle to access scale-up funding locally and decide to migrate, impacting R&D expenditure

• The access to scale-up funding in the UK has been identified as a constraint despite a strong performance in research and innovation, across a number of fields. The ease of accessing funding in the US is seen as greater than in the UK.

Decision of UK companies to reduce high-risk in-house R&D investment in favour of acquiring small companies

• According to the consulted experts, large pharmaceutical companies are preferentially providing seed funding for small companies conducting R&D and then acquiring these companies if successful. This may be reducing the overall business R&D expenditure in the UK.
• The long lag times and costs between the research beginning and a drug being patented can be prohibitive for firms, leading to mergers and acquisitions across the industry in order to gain the economies of scale and financial capability to manufacture pharmaceuticals [Make UK, 2018].

Smaller innovative companies tend to outsource R&D

• As suggested by the UK Bioindustry Association, smaller innovative companies often operate on an outsourcing model, whereby they rely on universities and other companies to conduct R&D on their behalf [BIA, 2022].
• In the view of some interviewees, this sectoral trait may be reducing the R&D identified as being done by manufacturing firms, while not necessarily reducing total R&D.
• Similarly, there was a view among the consulted stakeholders that foreign contract research organisations (CROs) servicing the pharmaceutical and biotechnology industries may be affecting domestic R&D expenditure statistics.

The automotive manufacturing sector

Key UK automotive manufacturing trends in the last decade

The value added and productivity of the UK automotive sector grew steadily between 2008 and 2018

• In 2018 the UK automotive industry was the eighth largest in the world in value-added terms, growing at around 2.3% annually from 2008 to 2018.
• The UK belongs to a group of nations where productivity was high and rising over the 2008–18 period, together with Germany, Korea and the US.

Despite being the ninth largest exporter of vehicles in 2020, the UK maintains a significant deficit in automotive product trade

• Since 2010 the UK has recorded a persistent trade deficit in automotive products, standing at $21.8 billion in 2020.
• Industry reports suggest that, given the ownership structure of the tier-1 supply base in 2017, 50% local content by value was regarded as a plausible target for the overall UK car industry. However, as the sector transitions to electrification, new opportunities and challenges will arise for UK auto-makers.

UK business expenditure on automotive R&D grew rapidly between 2009 and 2018 but has declined in recent years.

• UK business enterprise expenditure on R&D (BERD) for automotive grew by 11.7% (CAGR) between 2009 and 2018, with a slight decline in 2019 and 2020.
• Overall, total UK business enterprise expenditure on R&D in automotive remains an order of magnitude lower than in competitor countries.

Drivers identified in literature review and sector expert consultations

• Increased specialisation of the UK’s automotive sector in premium product segments;
• Future sector growth dependent on the UK’s ability to produce electric and hydrogen vehicles and components;
• High levels of automation influencing growth in employment in recent years;
• Skills’ shortages, particularly in higher technical education reported by industry;
• Decisions by foreign original equipment manufacturers (OEM) favouring other locations;
• Increased competitive pressures from both established and upcoming nations;
• Increased uncertainty around trade and investment due to the 2016 EU membership referendum; and
• R&D investment decisions mostly driven by foreign OEMs

• In 2018 the UK automotive industry was ranked eighth in the world in value-added terms.
• This was supported by value added growing at around 2.3% annually from 2008 to 2018.
• Employment levels reduced at an annual rate of 0.6% between 2008 and 2018.
• From 2008 to 2018 UK automotive productivity grew at comparable rates to other world leaders (2.9% annually).
• With value added per employee of $135 in 2018, the UK had higher productivity than France but lower productivity than comparable high-income nations, including the USA, Japan, Korea and Germany.

• The UK belongs to a group of nations where productivity was high and rising over the 2008–18 period. Other nations with top-performing automotive sectors in this group include Germany, Korea and the US.
• Some countries are experiencing similar levels of productivity growth in the automotive sector, but from lower initial levels of productivity, including China and Indonesia.
• Japan’s productivity was high and stable, while Mexico’s was low and declining over the 2008–18 period.

• The UK was the ninth largest exporter of vehicles by value in 2020, with around 81% of cars made in the UK being exported.^[1]
• It was also the fifth largest importer of vehicles by value in 2020.^[1]
• However, when considering broader trade in automotive components, the country has consistently recorded trade deficits in recent years.
• There was very little change in the automotive trade balance between 2010 and 2020. Its deficit in automotive products trade reduced from ~$22.2 billion in 2010 to ~$21.8 billion in 2020.

^[1] World’s Top Exports https://www.worldstopexports.com/cars-imports-by-country/.

• Between 2010 and 2020 UK imports of automotive products shrank by 0.4%, while exports shrank by 0.3% per year on average (CAGR).
• Of the comparator countries, the UK is the only country where imports were smaller in 2020 than they were in 2010.
• Although the US had an even bigger trade deficit in automotive products in 2020 (~$149 billion), all other comparator countries in the top 10 global ranking by trade balance in automotive products presented positive trade balances in 2020.

Note: Trade balance is based on gross exports and gross imports of goods at HS 1992 2-Digit level, for HS 87: Vehicles, other than railway or tram rolling stock, and parts and accessories thereof.

• As explained by the UK Automotive Council, the amount of locally sourced parts is a key measure of success for the UK automotive industry, as the majority of the sector's value added is created in the upstream supply chain.^[1]
• In value terms, the parts sourced by UK car manufacturers from UK first-tier suppliers increased from 36% in 2011 to 44% in 2017.^[1]
• There are no reliable sources available to establish valid benchmarks, as the actual sourcing patterns of local manufacturing firms can only be established through surveys.^[1]
• The UK Automotive Council suggests that, given the ownership structure of the tier-1 supply base in 2017, 50% local content by value was regarded as a plausible target for the overall UK car industry.
• However, as the sector transitions to electrification, new opportunities and challenges will arise for UK auto-makers. Deeper analysis is needed to understand which UK supply chain segments might be at risk during this transition, and what opportunities exist for capturing value in new areas.

^[1] Automotive Council UK (2017). Growing the Automotive Supply Chain – Local Vehicle Content Analysis.

• Developed by the ONS, the term "product group" refers to business R&D expenditure allocated to the product group that best describes the subject type of R&D activities carried out by firms.
• This is in contrast to the “industry classification”, where SIC codes are allocated based on the main activity of the business – in this instance, companies whose main activity is automotive manufacturing. These are more often used for international comparisons.
• The small difference between these two measures indicates that most R&D in the automotive industry is conducted by businesses whose main activity is manufacturing. Companies that may account for the difference include contract R&D organisations and pre-commercial SMEs.
• The peak in BERD spending in the UK appears to have occurred between 2016 and 2018.
• In 2020 BERD in motor vehicles and parts was at just 70% of its 2018 peak value.

• In 2018 the automotive industry accounted for almost 15% of overall business R&D expenditure in the UK, second only to the pharmaceutical industry.^[1]
• In 2018 the UK automotive sector had an R&D intensity (as measured by the sector expenditure on R&D as a percentage of sales) of 6.6%, behind sectors such as pharmaceuticals, electronics and communication equipment, and computers.^[2]
• UK business enterprise expenditure on R&D (BERD) for automotive grew by 11.7% (CAGR) between 2009 and 2018.
• Although UK BERD showed a high growth rate between 2009 and 2016, growth became stagnant after 2016.
• Despite its high growth, total UK business enterprise expenditure on R&D in automotive remains an order of magnitude lower than in competitor countries.

^[1] OECD (2020). Business enterprise R&D expenditure by industry database.

^[2] ONS (2020). Research and Development in UK Businesses, 2018 Datasets.

• Most automotive R&D conducted by businesses in the UK is funded by the companies themselves (~76% in 2020).
• Around 20% of automotive R&D performed by businesses in the UK in 2020 was funded by overseas organisations and was relatively constant between 2014 and 2020.
• Only a small fraction of the R&D performed by business is funded by the government (~£64 million in 2020, or 2%).
• The graph on the right shows that 78% of the automotive R&D performed in the UK in 2020 was conducted in businesses owned overseas.

What is driving business R&D expenditure trends in automotive manufacturing?

• UK business expenditure on automotive R&D grew rapidly between 2009 and 2016 but has declined in recent years

Potential drivers identified from literature review and consultations with sector experts (see Appendix 3.1 for details):

Although the UK has strong R&D and innovation capabilities, investment decisions are mostly driven by foreign OEMs

• When asked about the potential reasons for the low level of business enterprise expenditure on R&D in the automotive sector compared to other leading nations, the consulted stakeholders highlighted two potential factors: the size of the sector as a whole; and the ownership structure of UK-based OEMs.
• It is believed that R&D investment decisions by foreign-owned OEMs are often made from European or global headquarters against a wide range of criteria that may not favour the UK (e.g. tax incentives for R&D lag behind global leaders), with new developments taking years before being deployed across their international operations (e.g. Nissan, Ford).

However, strong R&D capabilities remain a key instrument to attract high value-added manufacturing into the UK

• Despite OEMs driving R&D investment, there was a view among the consulted stakeholders that the UK has a strong record in design engineering and university collaboration, supported by its premium product manufacturers and its motorsports industry.
• This, in addition to innovation capabilities in industries that can diversify into new electric and hydrogen automotive supply chains, could offer powerful instruments to support the UK’s attempt to capture high value-added segments of the automotive supply chain.
• In 2017 the UK government launched a new Industrial Strategy aiming to boost productivity and earning power throughout the UK, including an automotive sector deal at the start of 2018, to improve supply chain competitiveness, reduce the sector’s environmental impact and boost investment in emerging technology to ensure that the sector remains competitive during the transition to low-carbon vehicles [Make UK, 2019].
• The Industrial Strategy Challenge Fund (ISCF) was developed to support this aim, with three waves launched between 2017 and 2019, committing funding to the “Faraday Challenge” to develop world-leading batteries, designed and manufactured in the UK, leading to the establishment of the Faraday Institution and the UK Battery Industrialisation Centre [UKRI, 2021].

References - sectoral analyses

Pharmaceutical manufacturing sector analysis

• ABPI (2019). Bridging the Skills Gap in the Biopharmaceutical Industry: Maintaining the UK’s Leading Position in Life Sciences. Association of the British Pharmaceutical Industry.
• ABPI (2020). Life Sciences Recovery Roadmap. Association of the British Pharmaceutical Industry.
• BIA (2022). BIA submission: RDI Landscape Review. UK BioIndustry Association.
• Enterprise Ireland (2020). The UK Pharmaceutical Sector: An Overview.
• HMG (2021). Life Sciences Vision. Building Back Better: our plan for growth.  HM Government.
• Make UK (2018). Sector Bulletin: Pharmaceuticals.
• Medicines Manufacturing Industry Partnership (2017). Manufacturing Vision for UK Pharma: Future Proofing the UK Through An Aligned Technology and Innovation Road Map. LSIS, 2017].
• OLS (2020). Bioscience and Health Technology Sector Statistics 2019. Office for Life Sciences.

Automotive sector analysis

• International Federation of Robotics (2021). Robot Density nearly Doubled globally. Available at [https://ifr.org/ifr-press-releases/news/robot-density-nearly-doubled-globally].
• OECD (2021). Education at a Glance database.
• Make UK (2019). Automotive Sector Bulletin: 2018 Update.
• SMMT (2019). 2019 UK Automotive Trade Report. Society of Motor Manufacturers and Traders.
• SMMT (2021). Full Throttle: Driving UK Automotive Competitiveness. Society of Motor Manufacturers and Traders.
• UK Research and Innovation (2021). What Is the Industrial Strategy Challenge Fund.

Appendix 3.1

In an attempt to understand the reality behind the data, Theme 3 was informed by a reduced number of interviews with key UK stakeholders from industry and government – including R&I funding programme management agencies, innovation centres, industry associations and key private-sector organisations. The consultation included representatives from the following organisations:

Pharmaceutical manufacturing sector analysis

• Office for Life Sciences (OLS)
• Innovate UK
• Confederation of British Industry (CBI)
• UK Bioindustry Association (BIA)
• CPI (High Value Manufacturing Catapult)
• National Physical Laboratory (NPL)
• Medicines Manufacturing Innovation Centre (MMIC)
• Medicines Manufacturing Research Centre (University of Strathclyde)
• Alnylam Pharmaceuticals
• Siemens
• AstraZeneca

Automotive sector analysis

• BEIS automotive team
• BEIS advanced manufacturing team
• North East Automotive Alliance
• Advanced Propulsion Centre (APC)
• Innovate UK (Faraday Battery Challenge)
• Society of Motor Manufacturers and Traders (SMMT)
• Ford
• Autocraft

Theme 4: Policy questions and key messages

• Is the UK producing enough scientists and engineers?
• Is the UK government investing enough in technical and vocational education?
• How does this compare with other countries?

Tertiary education attainment in the UK is well above the OECD average – and a comparatively larger share of graduates is found in science, technology, engineering and mathematics (STEM) disciplines

• In 2020 the level of tertiary education attainment in the UK (49.4%) was above the OECD average (39%) and countries such as Italy (20.1%), Germany (31.3%) and France (39.7%).
• In 2019 graduates in STEM disciplines accounted for 43.4% of the total number of graduates in the UK, above comparator countries such as France (36.8%), Canada (37.8%) and the United States (37.6%).
• Within STEM disciplines the share of graduates in “engineering, manufacturing and construction” remains relatively low in the UK, at 8.4%, especially compared to countries such as Germany (27.8%) and Korea (20.7%).

Women are under-represented in STEM disciplines

• In 2019 women represented 25% of new entrants in “engineering, manufacturing and construction” degrees in the UK and 21% of new entrants in “ICT” degrees - these levels are similar to the OECD average.
• Only 27% of the STEM workforce in the UK is female, compared with 52% in the total workforce.
• For UK engineers a gender pay gap exists but it is smaller than the pay gap for all UK workers.

Higher technical education enrolment is comparatively low in the UK

• Enrolment rates in post-secondary education courses, below the standard three-year Bachelor’s degree, are comparatively low in the UK compared with countries such as the US, Korea and France.
• Following publication of the government’s White Paper, Skills for Jobs, new government programmes have been announced with the intention of addressing the “significant shortage of vital technician-level STEM skills”.

• In 2020 the UK presented a level of tertiary education attainment (49.4%) that was well above the OECD average (39%) and countries such as Italy (20.1%), Germany (31.3%) and France (39.7%).
• Similarly to the OECD average, in the UK women’s tertiary education attainment level (51.8%) was higher than men’s attainment level (46.9%).
• Significant differences in tertiary education attainment levels exist across UK regions, ranging from 38% in North East England to 68% in Greater London, this being one of the highest regional variations across OECD countries.^[1]
• In 2019 the share of foreign students enrolled in tertiary education courses in the UK was among the highest in the world (18.7%), only after Luxemburg (48.6%), Australia (28.4%) and New Zealand (20.8%).^[2]
• The share of foreign students enrolled in tertiary education courses in 2019 was: 10.1% in Germany; 9.2% in France; and 5.2% in the USA.^[2]

^[1] OECD (2021) Education at Glance 2021 – United Kingdom Country Note.
^[2] OECD (2022) International student mobility (indicator).

• Although innovation encompasses several disciplines, graduates in STEM disciplines (science, technology, engineering and mathematics) are of particular importance to innovation activities.
• The importance of boosting STEM skills has also been recognised in the UK Innovation Strategy.^[1]
• In 2019, 431,820 students obtained a Bachelor degree from the UK’s higher education institutions.
• Graduates in STEM disciplines accounted for 43.4% of the total graduates in the UK in 2019. This value was above that for comparator countries such as France (36.8%), Canada (37.8%) and the United States (37.6%).
• The share of graduates in engineering, manufacturing and construction remains relatively low in the UK, at 8.4%, especially compared to countries such as Germany (27.8%) and Korea (20.7%).

^[1] BEIS (2021). UK Innovation Strategy – Leading the future by creating it.

• In 2018 the UK’s higher education institutions awarded 17,366 PhDs in STEM disciplines.
• The UK is among the countries with the highest number of STEM PhDs awarded per year, even compared to countries with larger populations.
• The United States has historically been the country with the highest number of STEM PhDs awarded per year (41,071 in 2018).
• China is rapidly catching up with the USA in awarding STEM PhDs, from 7,766 doctoral degrees awarded in 2000, to 39,768 in 2018, representing an increase of 412% in 18 years.

• Similarly to the OECD average, in the UK women are under-represented in some STEM fields of study.
• In the UK women represented 25% of new entrants in engineering, manufacturing and construction degrees (against the 26% OECD average) and 21% of new entrants in ICT degrees (against the 20% OECD average).
• Gender disparities in accessing STEM degrees are reflected in the labour market composition. Against 52% of the total workforce:^[1]
  - 27% of the STEM workforce is female;
  - 40% of the science and maths workforce is female;
  - 21% of the technology workforce is female; and
  - 9% of the engineering workforce is female.

^[1] British Science Association (2020). The State of the Sector: Diversity and representation in STEM industries in the UK.

• In the UK the median salaries for engineering occupations are higher than the average in the job market.
• In 2019 the median gross annual salary for an engineering professional was £42,634, against the £30,378 median gross annual salary of all UK workers.^[1]
• For UK engineers, the gender pay gap is smaller than the pay gap for all UK workers and is mainly due to the under-representation of women in senior and higher-paid roles.^[2]

^[1] Although more recent data is available, the comparison of salaries by occupation in 2020 and 2021 may be impacted by job market support programmes implemented during the COVID-19 pandemic.

^[2] The gender pay gap is defined as “the difference in average hourly earnings for all men and all women across an organisation, a sector, or the economy as a whole”. See Royal Academy of Engineering (2020). Closing the engineering gender pay gap.

• The UK is among the OECD countries with the lowest proportion of researchers working for the government.^[1]
• In 2019 the share of UK government researchers out of total researchers was 2.2%, against 6.5% of the OECD average.
• There have been calls for more people with STEM qualifications to be employed within the UK civil service for reasons connected to, for example, their ability to better understand specific policy issues related to science and technology.
• Analysis finds that the UK may be expected to have a relatively lower proportion of STEM-trained individuals within the civil service, potentially because of the lower starting salaries and the lower likelihood of undertaking skilled work in their area of training.^[2]

^[1] The OECD defines government researchers as “professionals working for government institutions engaged in the conception or creation of new knowledge, products, processes, methods and systems and also in the management of the projects concerned”

^[2] Policy Links (2021). STEM professionals in the UK civil service: an international comparative study. IfM Engage, Institute for Manufacturing, University of Cambridge, Cambridge.

• The UK has a shortage of people qualified in higher technical education (HTE), that is, in those qualifications awarded between A level and undergraduate degrees.^[1]
• In 2019 students who were enrolled in short-cycle tertiary education in the UK made up 12.6% of the total tertiary education, compared to 36.4% for the USA, 23.3% for Canada and 21.7% for Korea.
• Further to the 2019 Independent Review of Post-18 Education and Funding, in January 2021 the UK government published the further education White Paper, Skills for Jobs: Lifelong Learning for Opportunity and Growth.
• To tackle the “significant shortage of vital technician-level STEM skills”, the White Paper made proposals such as expanding the Institutes of Technology programme, continuing with the T level programmes and, more generally, reforming the post-A-level education system.^[2]
• In June 2021 the government also announced a £30 million investment to support higher technical education in 2022. The funding has been allocated, among others, to the Institutes of Technology – consortia of further education colleges, universities and employers with a focus on STEM HTE – that will also work with the High Value Manufacturing Catapult.^[3]

^[1] In the Frameworks for Higher Education Qualifications of UK Degree-Awarding Bodies, HTE corresponds to Level 4 and Level 5, both corresponding to UNESCO ISCED Level 5. See Foster D. (2019). Level 4 and 5 education. House of Commons Library Briefing paper 8732.

^[2] Hubble S. et at (2021). FE White Paper: Skills for Jobs: Lifelong Learning for Opportunity and Growth. House of Commons Library Briefing paper 9120.

^[3] Donnelly A. (2021). Higher technical education gets a boost. Gatsby Charitable Foundation.

• The transition to a net-zero economy may impact 6.3 million jobs in the UK, with around 3 million workers requiring upskilling and 3 million in high demand.^a
• Construction, manufacturing and transport have been identified as the sectors that will be more impacted in terms of job upskilling: it is projected that between 17% and 30% of the jobs in these sectors will require upskilling.^[1]
• As highlighted by the independent report of the Green Jobs Taskforce announced by the UK government, “to set the direction for the job market as we transition to a high-skill, low-carbon economy”, STEM skills will underpin jobs that are critical for the net-zero transition.
• The Green Jobs Taskforce has also identified “cross-cutting” skills as important to transitioning to net zero, including: digital and data skills; project management; education communication and change management; and leadership, management and communication skills.
• The Green Jobs Taskforce has also highlighted the expected increase in demand for engineering technicians in sectors such as offshore wind and in electric vehicles’ manufacturing.

^[1] PCAN (2021). Tracking Local Employment In the Green Economy: The PCAN Just Transition Jobs Tracker. Place-based Climate Action Network.

For many, the greatest challenge of the 21st century is climate change. Net zero refers to achieving a balance between the carbon emitted into the atmosphere and the carbon removed from it. Markets for new technologies that can help businesses and countries to achieve net zero are expanding, and therefore they are a key area in which innovative activity has the potential to contribute to national economic growth and competitive advantage.

Our UK Innovation Report 2022 has chosen net-zero innovation as a topic in focus, to highlight how the UK is performing in what has the potential to be a high-growth economic sector. While climate-change mitigation technologies are not clearly classified within typical economic indicators, this section brings together the available data from global patent data and the so-called low-carbon and renewable-energy economy (LCREE) sectors within the UK. These allow us to provide a snapshot of whether net-zero innovation is translating into economic growth in the UK.

Theme 5: Policy questions and key messages

1. How does the UK compare in low-carbon and renewable-energy technology research and development (R&D) investment?
2. How is R&D expenditure translating into patenting performance?
3. Is the UK capturing the economic potential of the transition towards net zero?

Although the UK’s public R&D budget in low-carbon and renewable-energy technologies is comparable to other leading nations, the country underperforms slightly in terms of patenting

• The International Energy Agency (IEA) estimates that in 2020 the UK’s public R&D budget in low-carbon and renewable-energy technologies was $1.2 billion (USD $2020), lower than the US ($8.1 billion), Japan ($2.9 billion) and France ($2.1 billion), but ahead of Germany ($1.1 billion) and Canada ($0.8 billion).
• In the period of 2013–17, the UK ranked eighth in the development of climate-change mitigation technology (CCMT) patents, behind Japan, the US, Germany, Korea, China, France and Taiwan but ahead of Italy and Canada. Key technology fields covered in this ranking include buildings, carbon capture and storage (CCS), energy, information and communication technology (ICT), manufacturing, transportation and waste management.

Most of the low-carbon and renewable-energy sectors in the UK have been declining over the last five years

• The ONS defines the low-carbon and renewable-energy economy (LCREE) as 17 low-carbon sectors, including wind, renewables, PV, CCS, nuclear and energy-efficient products. Most of the low-carbon and renewable-energy sectors in the UK have been declining over the last five years, except for a small number of activities such as offshore wind. A total of 10 out of 17 sectors showed a decline in turnover between 2014 and 2019.
• Overall, there were 27,000 fewer LCREE business and 33,800 fewer jobs in LCREE sectors in 2019 than in 2014.

There are some national disparities, with Scotland performing strongly

• At £1.073 million turnover, 4.1 jobs and 2.2 businesses per 1,000 inhabitants, Scotland performed above the UK annual average for all categories between 2014 and 2019.
• Similarly, Wales performs above the national average for LCREE businesses and jobs, at 2.46 businesses and 3.35 jobs per 1,000 inhabitants.
• In contrast, Northern Ireland is under-performing relative to its size on turnover and employment in LCREE sectors, whereas England has a lower turnover (£605,000 per 1,000 inhabitants) than the national average (£643,000 per 1,000 inhabitants).

• Climate change is a current and pressing global challenge. The Intergovernmental Panel on Climate Change’s (IPCC) most recent report identified that, unless there are immediate, rapid and large-scale reductions in greenhouse-gas emissions, limiting warming to 1.5°C or even 2°C will be beyond reach.^[1]
• The UK is one of the top 20 emitters globally and has above-average emissions per capita, even before accounting for emissions embedded in imported goods. The UK’s emissions are the 17th largest in the world,^[2] with 1% of global emissions produced by 0.9% of the global population.
• The UK’s high emissions represent a significant challenge but also a significant opportunity for innovation under regulatory constraints.

^[1] IPCC (2021). Climate Change widespread, rapid, and intensifying.

^[2] World Bank (2021). Total greenhouse gas emissions (kt of CO2 equivalent), 2018 figures.

• Climate-change mitigation is an international priority. At COP26, countries worldwide reaffirmed their mitigation targets, including the UK’s targets for a reduction in emissions of 78% by 2035 compared to 1990 levels and net-zero emissions by 2050.^[1]
• This is reinforced by significant spending on innovation, including the £1 billion Net Zero Innovation Portfolio announced in March 2021.^[2]
• The International Energy Agency (IEA) estimates that in 2020 the UK’s public R&D budget in low-carbon and renewable-energy technologies was $1.2 billion (USD $2020), lower than France ($2.1 billion), Japan ($2.9 billion) and the US ($8.1 billion) but ahead of Germany ($1.1 billion) and Canada ($0.8 billion).^[3]
• Categories included in the IEA’s analysis include: energy efficiency; renewables; nuclear; hydrogen and fuel cells; other power and storage technologies; and other cross-cutting technologies.

^[1] UK Government (2021). UK enshrines new target in law to slash emissions by 78% by 2035.

^[2] UK Government (2021). Net Zero Innovation Portfolio.

^[3] IEA (2021). IEA Energy Technology RD&D Budgets - October 2021  - Selected data.

• The UK ranks eighth in the registration of climate-change mitigation technology (CCMT) patents, behind Japan, the US, Germany, Korea, China, France and Taiwan but ahead of Italy and Canada.^[1][2]
• Technologies covered under the CCMT group include: buildings, carbon capture and storage, energy, information and communication technology, manufacturing, transportation, and waste management.
• It is unclear, however, whether this strength in patents is translating into economic performance for the UK or if the economic benefits are being exploited elsewhere.

^[1] Climate-change mitigation technologies (CCMT) are defined as patents classified as “Y02” patents within the CPC classification scheme. The Y02 classification covers technologies for mitigation or adaptation against climate change and is a cross-sectional tagging scheme for new technological developments, particularly with the goal of highlighting patents in the field of climate-change mitigation. The classification was jointly developed by the USPTO and European Patent Office (EPO). See Appendix 5.2 for more detail.

^[2] Probst et al. (2021). Global trends in the invention and diffusion of climate change mitigation technologies. Compiled with global data from the Worldwide Patent Statistical Database (PATSTAT) maintained by the European Patent Office (EPO). It contains bibliographical data relating to more than 100 million patent documents from leading industrialised and developing countries

• The chart shows the top 10 UK-based patent applicants for climate-change mitigation technology patents published in 2020 with the USPTO.^[1]
• The top patent applicant in the field of climate-change mitigation technologies is Rolls-Royce, with 385 patents.
• Johnson Matthey (75 patents), Airbus Operations (68 patents) and ARM (44 patents) follow in the ranking of climate-change mitigation technology patents.
• The top 10 UK-based companies patented a total of 703 patents.
• UK-based companies patented a total of 1,578 climate-change mitigation technology patents in 2020 with the USPTO.

^[1] Climate-change mitigation technologies (CCMT) are defined as patents classified as “Y02” patents within the CPC classification scheme. The Y02 classification covers technologies for mitigation or adaptation against climate change and is a cross-sectional tagging scheme for new technological developments, particularly with the goal of highlighting patents in the field of climate-change mitigation. The classification was jointly developed by the USPTO and European Patent Office (EPO). See Appendix 5.2 for more detail.

• The overall turnover of the LCREE sectors showed a slight decline from £44 billion in 2014 to £43 billion in 2019 (for context, the overall automotive industry turnover is estimated at approximately £80 billion).^[1]
• Activity captured within the largest sector – other energy-efficient products – is extremely broad. Examples include the design, manufacture or installation of energy-efficient doors, windows and insulation.
• Ten sectors showed a decline in turnover between 2014 and 2019. The largest growth industry between 2014 and 2019 was the low-emission vehicles and infrastructure sector, with a growth in turnover of just under £2.6 billion, or 12% p.a., between 2014 and 2019. Other growth sectors included offshore wind, renewable heat and hydropower.
• Despite the similar sizes of the onshore and offshore wind sectors, between 2014 and 2019 offshore wind was growing, while onshore wind was declining, in approximately equal proportions. There was a net decrease in turnover in wind between 2014 and 2019 (~-£65 million turnover difference).

Note: This analysis uses results from the low-carbon and renewable-energy economy (LCREE) survey, run by the ONS (2021), which identifies 17 low-carbon sectors within the UK economy (see Appendix 5.2 for full detail).

^[1] SMMT (2021). Economy – Automotive’s Economic Contribution – Key Industry Indicators.

• Despite the potential for LCREE to represent a growth sector within the UK economy during a period of increasing policy importance, the number of businesses and employees within these sectors in the UK declined from 2014 to 2019.
  §There were 27,000 fewer businesses in 2019 than in 2014, a net loss of ~5,400 businesses per year.
• Similarly, there were 33,800 fewer jobs in the LCREE sectors in 2019 than in 2014, a net loss of ~6,700 jobs per year.
• SMEs employed the vast majority (69% FTE) of individuals working in the LCREE sectors between 2014 and 2019.
• Total employment has been falling within SMEs in the LCREE sector, at an average rate of 9,860 fewer jobs in SMEs per year between 2014 and 2019. While employment has been increasing in larger companies, at an average rate of 3,100 jobs per year, this still results in a net decline.

• Analysing LCREE data by country indicates that Scotland punches above its weight, while Northern Ireland is under-performing relative to its size on turnover and employment in the LCREE sectors.
• While England has the highest total turnover in LCREE businesses, Scotland has a higher performance on a per-capita basis.
• Relative to the other countries, Scotland has the highest proportion of its average turnover generated by onshore wind. It also has above-average input from nuclear and hydropower and below-average input from low-emission vehicles and infrastructure.
• Perhaps surprisingly, offshore wind makes up only 5% of Scotland’s average turnover – less than England (8%) or Wales (6%) but above Northern Ireland (0.5%).
• Northern Ireland performs poorly on turnover on a per capita basis. Northern Ireland has the highest per capita share of employment within the low-emission vehicles and infrastructure sector, at 25% of all LCREE employment in Northern Ireland, compared to no more than 5% in other countries. Overall, Northern Ireland has fewer employees in the LCREE sectors despite having more businesses on a per capita basis.

Appendix 5.2: Key definitions

Defining climate-change mitigation technologies (CCMT) within patent analysis globally

• High-value climate-change mitigation technologies (CCMT), compared to other similar countries.
• This analysis is based on the Y02 classification scheme, which provides the most comprehensive and standardised low-carbon patent classification. It covers most technology fields, buildings, carbon capture and storage (CCS), energy, information and communication technology (ICT), manufacturing, transportation and waste management.
• This analysis uses international patent families for high-value inventions (which comprise the top ~25% of all patented CCMT inventions).
• Analysis compiled with global data from the Worldwide Patent Statistical Database (PATSTAT) maintained by the European Patent Office (EPO). It contains bibliographical data relating to more than 100 million patent documents from leading industrialised and developing countries.

More information at:

• https://www.uspto.gov/web/patents/classification/cpc/html/cpc-Y.html#Y02
• https://www.epo.org/searching-for-patents/business/patstat.html

Defining low-carbon and renewable-energy economy (LCREE) sectors within the UK

The low-carbon and renewable-energy economy (LCREE) survey, run by the ONS (2021), identifies 17 low-carbon sectors, as follows:

• offshore wind
• onshore wind
• solar photovoltaic
• hydropower
• other renewable electricity
• bioenergy
• alternative fuels
• renewable heat
• renewable combined heat and power
• energy-efficient lighting
• other energy-efficient products
• energy monitoring, saving or control systems
• low-carbon financial and advisory services
• low-emission vehicles and infrastructure
• carbon capture and storage
• nuclear
• fuel cells and energy storage

Activity captured within the largest sector – other energy-efficient products – is extremely broad. Examples include the design, manufacture or installation of energy-efficient doors, windows and insulation.

Within this report, these sectors are used as the best available proxy to understand the dynamics of the UK’s climate-change mitigation technology economy.

Cambridge Industrial Innovation Policy

Cambridge Industrial Innovation Policy (CIIP) brings together the Centre for Science, Technology & Innovation Policy at the Institute for Manufacturing, the Policy Links Unit from IfM Engage and the Babbage Policy Forum. Our work is based around what we call industrial innovation policy, a policy domain that focuses on the interplay between technology, innovation and industrial competitiveness. CIIP is based at the Institute for Manufacturing, a division of the University of Cambridge's Department of Engineering.

17 Charles Babbage Road, Cambridge, CB3 0FS, United Kingdom

Contributors

The contributors to this report are: Jennifer Castaneda-Navarrete, David Leal-Ayala, Carlos López-Gómez, Michele Palladino and Liz Killen. Technical advice was provided by Ana Rincon-Aznar (National Institute of Economic and Social Research). Research assistance was provided by Maximilian Elsen (Institute for Manufacturing). Cover design by Ella Whellams. Copy-editing by Jason Naselli.

Acknowledgements

The authors would like to thank Tim Minshall and Eoin O’Sullivan, who provided comments and suggestions and reviewed earlier versions of this report. We would also like to thank all of the organisations from the private and public sectors who provided valuable time and insights during the interviews and workshops carried out to inform the report.

Disclaimer

Names of countries and territories follow widely accepted conventions and do not imply the expression of any opinion whatsoever on the part of the authors or their affiliated institutions concerning the legal status of any country, territory, city or area, or of its authorities. Any mention of firm names or commercial products does not constitute an endorsement by the authors or their affiliated institutions.

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Please reference as: Policy Links (2022). UK Innovation Report 2022. Benchmarking the UK’s Industrial and Innovation Performance in a Global Context. IfM Engage. Institute for Manufacturing, University of Cambridge.