FST JOURNAL

How do the R&D revisions being made by ONS change our view of UK performance? In the figures published by OECD in summer 2022, the UK lags behind its competitors. Use the revised ONS figures, however, and our R&D looks rather better. Yet if the back series has not been updated, we cannot see the whole story. Indeed, the overall picture has a number of moving and interconnecting parts.

If the data were backcast, what would it look like? It might be reasonable to draw a line back from the point at which the revised ONS figures appear to the date at which the R&D tax credit began, around the beginning of the century, so that the original and revised lines intersect. That might provide a broader picture of how things have developed.

Conversion

The next moving part is to convert the nominal R&D spend, in pounds and pence, into real spend accounting for inflation. We have to divide the nominal amount by a deflator in order to get real euros, real pounds, real dollars, etc. However, there are a variety of R&D deflators used across different countries. So, there are differences between countries about how this nominal spend converts into real money.

The official UK deflator rate rises particularly sharply after 2015, which means essentially, that the UK trend of R&D is determined by an aggressively rising number: the result being less real R&D than other countries – another moving part!

We need then to understand not just the nominal R&D figures, but also how the real underlying R&D figures are calculated, which makes international comparisons extremely difficult.

Looking at recent R&D investment, for example, it is clear that post-Brexit investment was much flatter relative to the previous trend. That is part of the economic reality we are living in.

Intangibles

That is conventional R&D. Now, do the same exercise on intellectual property, which includes R&D on software and artistic originals, and the numbers look very similar. However, there has not been much change in the trend for these materials, which suggests that maybe Brexit did not have so much of an impact (although that reignites the debate on how this is all measured and is it being done in a consistent manner).

The modern economy is indeed a knowledge economy – and R&D is an important part of that knowledge. Yet it is just one area in a whole group of intangible investments. These include software, databases and artistic originals which are included in GDP numbers, but other types of knowledge such as investment design, training, branding, business process reengineering under the name of organisational capital – these are not included (see Table 1).

It is necessary to build a broader understanding of the kind of knowledge economy that we are moving into, and its implications. Looking specifically at R&D, a great deal is still carried out in manufacturing, in aerospace, in chemicals, etc. Yet there is also a great deal of investment in economic intangibles, in particular in the service sector.

That suggests, if one wants to understand productivity in the service sector, it is not only R&D that is important but also this broader range of investments as well.

R&D and beyond

The evidence suggests that public sector R&D is complementary to that in the private sector and that it spills over and benefits the private sector as well. If there is one thing that investment needs, though, it is stability. The uncertainty and the instability that has been affecting the economy for various reasons has hurt investment.

AI, artificial intelligence, also has a role here. It is, of course, embodied in software and in databases, which is captured in the existing data. However, the broader issue with AI is whether AI is itself an innovation in the way of doing innovation. It may help the scientific community to innovate much more quickly. It could then be a source of future productivity in its own right.

Finally, looking at intangibles outside the manufacturing sector, that opens up the possibility of achieving productivity gains in what have hitherto been rather hard-to-improve sectors such as health.

 Table 1. Intangible assets