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Why R&D spending should remain a priority for the UK

The government must protect R&D spending in its Autumn Statement: the UK’s future as a science and technology superpower depends on it

Rishi Sunak’s new government faces two difficult, sometimes competing, challenges: balancing the books to reassure the markets and confronting the longstanding issue of stagnating UK productivity. Sunak as Chancellor demonstrated an impressive appetite to solve both, but the risk remains that the search for short-term savings in the current context could restrict growth and productivity in the longer term. This pressure is potentially particularly acute in R&D, where the value generated by government funding and incentives is often only realised in the long term. In its forthcoming Autumn Statement, the government must resist this temptation and ensure it protects public support for R&D.

Shortages throughout the pandemic highlighted the importance of semiconductors – a uniquely R&D-intensive industry – for cutting-edge technology, consumer products and national security. The UK’s semiconductor industry has developed a clear comparative advantage in the design and intellectual property (IP) stages of the production process. UK success stories such as Imagination Technologies, ARM and Graphcore all relied on – and continue to make – significant R&D investments to become world-leading design firms.

At Imagination, we choose to spend £51 million on R&D every year – well over half our annual revenue. This significant sum is the engine at the core of our business and means we are frequently ranked among the UK’s top ten businesses for patents granted and filed. Moreover, our R&D spending and that of other private companies have significant multiplier effects by funding and upskilling researchers and scientists, product development and knowledge creation.

These multiplier effects work in three main ways. First, such spending benefits consumers and businesses who use the innovations (such as advanced chips) it enables, in the latter case often using it for further innovation. Secondly, it strengthens the knowledge skills of the employees undertaking that research, boosting the UK’s STEM talent pool. Thirdly, it creates knowledge which can be shared with trusted partners – such as universities – to generate additional benefits. For example, Imagination’s University Programme gives students throughout the UK a theoretical and practical introduction to our technologies, equipping them with valuable skills and exposing them to new career paths.

Despite the clear benefits, R&D represents a high upfront cost to businesses – which spend £20 billion on it annually – and innovation can take years to turn into widely-used products. This is where government support plays a crucial role. Historically, the UK government has recognised there is a strong case for supporting R&D investment in the UK through policy levers such as tax credits and direct public spending targeted at cutting-edge research.

Such incentives encourage Imagination and other deep-tech companies to develop the advanced IP in the UK that will underpin the products of the future, just as R&D investments made in the past underpin many of the products we take for granted today – from smart watches and games consoles to smartphones and digital TVs.

In recognition of this and in response to public consultation, the 2021 budget saw the scope of R&D tax credits extended to computational needs and pure mathematics, demonstrating the government’s willingness to listen to business and ensure its policies continue to stimulate innovation. Even more promisingly, in his February Mais lecture, now-Prime Minister Sunak acknowledged the ability of the tax regime to spur business investment in R&D and subsequently future UK productivity.

Despite these positive developments, amidst a troubled macroeconomic picture and renewed emphasis on fiscal retrenchment, there is a risk that policymakers lose sight of the value of public investment. Yet at a time of increasingly intense economic and geopolitical competition, and a greater understanding of the role of technology in protecting national security, it would be counterproductive for the government to reduce its backing for our R&D-intensive industries. It would also be fiscally counterproductive: R&D investment drives innovation, growth and ultimately tax receipts.

Adding urgency to this picture, over the past few years geopolitical tensions have revealed the fragility of the global semiconductor supply chain. Other major economies are reacting to the shifting sands: the US and EU recently allocated $53 billion and €43 billion respectively to onshore the semiconductor production process and decrease dependency on global supply chains. While we do not believe the UK government should try to match these funding commitments, it must ensure that the conditions – including appropriate R&D incentives – are in place to maintain and strengthen the UK’s leadership in semiconductor design and IP. Success here will maximise the chances of achieving its objective of becoming a “science and technology superpower” by 2030 – but failure could be terminal.