Innovation – the introduction of new products, services and ways of doing business – will be a critical element of the recovery post-Covid-19.

Undertaking R&D and innovation is always risky, however, with uncertain technical and commercial outcomes. Post-covid, firms with less financial slack may be less willing to make such risky investments. Weak market demand, and potentially volatility, may also reduce the incentives to innovate.

The importance of innovation to future recovery has been recognised by the UK government in its announcement of a £1.5bn loan and grant package for the UK’s most innovative companies. Fast-growing, equity backed firms will be able to access matched loan funding, while firms already in receipt of Innovate UK funding will be able to access additional loan and grant finance. A group of 1200 other innovating firms will also be able to access additional funding. This targeted initiative is welcome and will help support innovation in what the OECD calls ‘frontier firms’ – some of the most innovative and best performing firms in the country .

What about the rest?

What of the other firms in the economy – the non-frontier firms? Reference to HMRC’s statistics shows that some 45,000 SMEs made claims in 2017-18 under the R&D Tax Credits scheme, with an average claim of around £50,000.

How will they adapt their innovation activity in the period post-Covid? Which sectors and types of firms may be most vulnerable post-crisis? And, how long will it take before firms get back to ‘normal’?

An interesting report recently published by the Enterprise Research Centre (ERC) looks back to the financial crisis of 2008-10 and examines its impact on R&D. It then uses this analysis to predict the implications of the current crisis.

Implications

The 2008-10 crisis suggests four key lessons for the current crisis:

  • First, we should expect sharp falls (perhaps a third) in the proportion of innovating firms. Recovery to previous levels will be slow – 4-6 years perhaps.
  • Second, firms’ willingness to invest in intangibles will fall sharply with implications for future innovation and growth. Again, recovery is likely to be slow.
  • Third, while these short-term effects will be evident across almost all sectors and regions, recovery will be highly skewed by region and sector. Based on firms’ engagement with wider innovation, recovery is likely to be stronger in services and larger firms.
  • Fourth, regional recovery in R&D spending will be strongly shaped by clusters of industrial activity. Where recent growth has been slowest, recovery is likely to be weaker. This applies to the East of England, the South West, the North East and the North West. A strong concentration of R&D activity in a particular sector (automotive) also makes recovery more vulnerable to sectoral conditions in the West Midlands.

The challenge for the Government

The UK Government recently published its future UK R&D strategy to make the UK a research and science superpower.

The announcement reaffirms the Government’s pledge to double public R&D investment to £22 billion a year by 2025 in the March 2020 Budget, and initiates a consultation on how this should be allocated setting out a number of key questions as the Government develops it’s R&D plan.

Recognising and addressing the need to level up across the UK and not abandon the smaller innovator will be a major challenge.

MSC R&D's mission is to support tech businesses throughout the innovation life cycle, with a focus on funding.

Contact us on 0114 230 8401 to discuss how we might help you get your innovation back on track.