1. On the discrepancy between ONS and HMRC estimates of enterprise R&D.

Within the UK, there are two methods by which the full quantity of enterprise R&D (BERD) is measured. The Workplace for Nationwide Statistics conducts an annual survey of enterprise, by which a pattern of corporations is requested to report how a lot R&D has been carried out. In the meantime corporations can report what R&D they’ve carried out to the taxman – HMRC – as a way to declare R&D tax credit, which in accordance with circumstances could be a discount of their legal responsibility for company tax, or an precise money cost. In recent times, the 2 measures of enterprise R&D have more and more diverged, with considerably extra R&D expenditure being claimed for tax credit than is reported within the BERD survey.

The divergence between HM Income and Customs (HMRC) and Enterprise enterprise analysis and improvement (BERD) estimates of analysis and improvement (R&D) expenditure. Supply: ONS.

The ONS has been wanting into this divergence, and has just lately printed a word which concludes that the first motive for the discrepancy is an undersampling of the small enterprise inhabitants. On this foundation, it has adjusted its earlier estimate for enterprise R&D considerably upwards – in 2020, the revision is from £26.9 bn to £43 bn. In future years, ONS will introduce improved, extra sturdy, methodologies that may embody a wider vary of SMEs within the pattern they survey.

In precept, there might be two doable causes for the rising divergence between the full enterprise R&D recorded by the ONS BERD survey and the quantities underlying claims to HMRC for R&D tax credit:

a. The incentives of R&D tax credit have brought about companies to stretch the definition of R&D to allow them to get cash for actions which are a part of regular enterprise (e.g. market analysis, figuring out tips on how to use new tools). That is exacerbated by the expansion of an trade of consultants providing their providers to corporations to assist them declare this cash (in return for a %).

b. The ONS survey of corporations (the BERD survey) has systematically undersampled a inhabitants of small and medium enterprises (SMEs), which prove to have extra R&D exercise than beforehand believed.

In favour of (a) – the discrepancy between the 2 measures hasn’t been fully static, as you’d count on if it was merely a query of lacking a inhabitants of corporations who had at all times been doing R&D at a relentless charge, however who’ve solely simply been found. The hole has risen from £7.3 bn in 2014, to £16.6 bn in 2018. So for this rationalization to carry, we have to imagine not solely that there’s an current inhabitants of SMEs finishing up R&D that has beforehand been undetected, however that this inhabitants has been considerably rising. Is R&D progress within the SME sector at a charge of £2.3 bn a 12 months believable? I’m unsure.

Furthermore, the incentives for stretching the definition of R&D to assert free cash are apparent. HMRC settle for that some claims are outright fraudulent, estimating that 4.9% of the price of the scheme is attributable to error and fraud. However there’s a giant gray space between outright fraud and inventive interpretation of the “Frascati” definitions of R&D.

ONS argues in favour of (b), backing this up with an in depth comparability of the microdata from the ONS survey and HMRCs returns. So as to add some anecdotal help, work in Higher Manchester in collaboration with an information science consultancy does appear to have recognized a inhabitants of progressive SMEs in GM which has beforehand remained invisible, within the sense that they’re corporations who don’t have interaction with universities or with Innovate UK.

In fact, the true reply might be some combination of the 2. We’ll study extra as soon as the brand new methodology has produced an entire information set figuring out the sectors and geographical places of R&D performing corporations.

2. Coverage implications

Figures for whole R&D spending (together with each enterprise and public sector R&D) as a proportion of GDP present a helpful measure of the general analysis depth of the UK financial system and type the premise for worldwide comparisons. The earlier determine for R&D depth – about 1.7% – put the UK between the Czech Republic and Italy. The brand new estimates recommend a revised determine of two.4%, which might put the UK roughly on a par with Belgium, barely above France, however behind the USA and Germany, and nonetheless a great distance behind leaders like Korea and Israel. After all, when making these worldwide comparisons, a pure query is how correct are the R&D statistics in these different nations. It is a good query that might be investigated by OECD, who collate worldwide R&D statistics.

The worldwide comparability has pushed a goal for R&D depth that the federal government dedicated to – that it could obtain an R&D depth equal to the OECD common. On the time when the goal was formulated this common was certainly equal to 2.4%. Nevertheless, the OECD common is a shifting goal since different nations are rising their very own R&D – it’s now above 2.5%. One can even ask whether or not a goal to attain worldwide mediocrity is stretching sufficient.

There are extra basic points with the concept of getting an R&D depth goal in any respect. One quirk of expressing the goal as a % of GDP is that one can obtain it by driving down the denominator; actually GDP progress within the UK has been disappointing for the final 12 years, because the Prime Minister has reminded us. One might argue {that a} numerical goal for R&D is bigoted and one ought to focus extra on the instrumental outcomes one desires to attain from the analysis – larger progress, extra speedy and price efficient progress in direction of web zero, higher inhabitants well being outcomes and so forth. As I wrote myself just lately in my survey of the UK R&D panorama:

“An R&D goal needs to be considered not as an finish in itself, however as a way to an finish. We should always begin by asking what sort of financial system do we want, if we’re to fulfill the large strategic targets that I mentioned within the first a part of this collection. Given a clearer view about that, we’ll have a greater understanding the required fraction of nationwide sources that we should always dedicate to analysis and improvement. I don’t know if that will produce the precise determine of two.4%, however I wouldn’t be stunned if it was considerably larger.”

Maybe probably the most problematic implication of a BERD improve is the enduring puzzle that productiveness progress stays very gradual. This further, beforehand unrecorded R&D, doesn’t appear to have translated into productiveness progress as we’d count on.

This raises the broader query of why we predict the federal government ought to help enterprise R&D in any respect, whether or not by R&D tax credit or by different means. The classical argument is that non-public sector R&D results in wider advantages from the financial system that aren’t captured by the corporations that make the investments, so within the absence of presidency corporations will make investments much less in R&D that will be socially optimum. This results in the query of whether or not all types of R&D, in all types of firm (e.g. giant and small) result in equal levels of wider spillover results (and the identical query will be requested of intangible investments extra typically). If the sorts of R&D that are actually being revealed with the brand new methodology do have smaller spillovers than different sorts, one would possibly ask what sort of interventions might enhance these.

3. Political implications

As others have noticed, the chief hazard of the revision is that in instances of fiscal retrenchment, the federal government might declare “mission achieved” and delay or cancel will increase in public R&D. This hazard appears very actual given the route of the present authorities. The opposition, however, has referred to as for an R&D goal of three% of GDP, so there may be loads of room there.

There’s an argument that the revision means that public R&D is much more efficient than we thought in producing non-public sector R&D – the leverage impact is stronger than we thought. For this argument to be convincing, we’d want to grasp the diploma to which the businesses doing this R&D are related to the broader innovation system. Nevertheless it doesn’t then help the broader argument for R&D as a driver of productiveness progress – we’ve got the R&D depth we aspired to, so why aren’t we seeing the advantages within the productiveness figures?

There are doable arguments that our focus in enterprise R&D has been an excessive amount of on the large incumbents – the GSKs and Rolls Royces – whose R&D could be very seen. Then again, this connects to the long-running query of why we don’t have extra of these massive incumbents? At this level, we should always recall that there are solely two UK firms within the world top-100 of R&D performers – AstraZeneca and GSK. So why aren’t a few of these beforehand unseen R&D intensive firms scaling as much as turn into the brand new massive gamers?

There’s a lot but to grasp right here.