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The following OECD assessment and recommendations summarise Chapter 7 of the Economic Survey of the United Kingdom 2005 published on 12 October 2005.
How can innovation performance be improved?
Across a range of conventional indicators, innovation performance is mediocre in comparison with the best performing OECD countries. Nevertheless, strengths in services, where innovation is less likely to be picked up by such indicators, probably mean that they under state aggregate performance. For example: much of the R&D intensity gap with many of the top performing countries can be explained by industry mix effects; while patenting performance is mediocre there has been extremely rapid growth in other forms of intellectual property protection, such as the use of trademarks that are more prevalent in services; finally, while the share of researchers in total employment is unexceptional, this is not because of a shortage in PhD graduates in science and technology subjects. These considerations suggest a degree of caution is warranted in pursuing the government’s targets specified in its recently announced “10 year plan for Science and Innovation”. At the same time the cross country evidence linking innovation with aggregate growth performance implies that this should be a policy area under constant review, and there is a growing body of evidence which, while far from conclusive, is at least suggestive regarding which policies are most helpful in promoting innovation.
The industrial structure and cross-country differences in R&D intensity
Relative to the United Kingdom, percentage points, 2002 (1)
1. 2000 for Sweden and 2001 for the United States.
Source: OECD calculations based on the STAN and ANBERD databases, July 2005.
Recent OECD empirical work has confirmed that innovation performance depends both on framework conditions and specific policies regarding science and innovation. The study found the United Kingdom close to best practice in terms of framework conditions, but suggested scope for improving specific policies directed at science and innovation.
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The recent shift in emphasis away from grants towards tax incentives is likely to be beneficial in boosting R&D spending, although it is too early to judge the results yet. Given this lack of results, there is not yet a clear case for further extending the generosity of R&D tax incentives. Tax incentives should continue to be market based, and it is important to ensure that they are well understood by businesses and provide certainty that they will be maintained at existing levels.
Tax treatment of R&D
Rate of tax subsidies for $1 of R&D, 2004 (1)
1. Tax subsidies are calculated as 1 minus the B index. The B index for Australia was adjusted to show the correct weights of the volume-based, 125% tax concession and the 175% incremental tax concession for R&D. The B index in Japan covers only large firms with a ratio of R&D to sales of less than 10% (the B index is 0.831 for those with a R&D-to-sales ratio above 10% and 0.782 for research conducted in collaboration with universities).
Source: OECD (2004), OECD Science, Technology and Industry Outlook.
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Despite a recent streamlining of fiscal measures to support R&D, there is still potential overlap between R&D tax incentives and remaining grant schemes. There is a need for improved evaluation of fiscal measures to support R&D as officially acknowledged. Future evaluations of all fiscal measures should also address the extent of overlap between different policy instruments, whether there are barriers to take up in the services sector; whether measures encourage firms to become innovative (rather than increasing the extent of innovation already taking place within a firm). In addition, the balance of direct funding for R&D between SMEs and larger companies who receive most current support might need to be reconsidered.
Government R&D funding is concentrated on larger firms
Per cent, 2002 (1)
1. 2003 for Finland, Sweden and the United Kingdom; 2000 for Italy and Switzerland; 1999 for Germany.
Source: OECD (2005), Science, Technology and Industry Scoreboard.
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There is scope to exploit the strength of the science base through further promoting university business collaboration. The emphasis of current university funding on research excellence will help to foster elite universities which should attract increasingly mobile multinational companies. However, to compete with the best universities worldwide further changes will be required, including a streamlining of university governance procedures and clearer guidelines concerning intellectual property rights. Eventually, a higher cap on university fees may also be required to provide additional financial resources to attract and retain the best academic talent. In line with the recommendations of the Lambert Review, consideration should also be given to increasing the funding for those universities that have shown a track record of successful collaboration with businesses, which are not always the same universities that appear at the top of the academic rankings determining the bulk of university funding.
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Return to the Economic Survey of the United Kingdom 2005
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
To access the full version of the OECD Economic Survey of the United Kingdom:
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Government officials can go to OLISnet's Publication Locator.
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For further information please contact the United Kingdom Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by David Turner and Jens Lundsgaard under the supervision of Peter Hoeller.
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