Innovation is often thought of as a key strength of the UK economy, with internationally renowned universities and schools helping to drive a highly educated workforce. Research and knowledge gained at UK universities and companies is exported all over the world and contributes to a wide array of projects and products.
Examples over time range from work done at The University of Birmingham that contributed to the Manhattan Project in 1945, to more recent developments at UK based companies that have become crucial elements of Apple’s iPhone over progressive iterations. Further, R&D work undertaken in the UK has value to the economy beyond the products or technologies it directly paves the way for. Better scientific and technological understanding have secondary positive effects on a range of variables from productivity to the quality of life of a population.
The implicit value of R&D work to a country can also be be explained through the concept of absorptive capacity. This term was coined to explain a company’s ability to understand and internalise knowledge and information from elsewhere in their field. Companies with a high absorptive capacity are able to recognise new external developments, and understand the science or technology that underpins them, gaining in knowledge from this. Through increasing their absorptive capacity, firms gain a greater appreciation and understanding of new external information, and subsequently benefit more from such information. This creates a positive feedback loop for those firms with high absorptive capacity. They draw an understanding benefit both from their own R&D work, and also from other external sources of new information.
These principal benefits of R&D investment are thought to be the rationale for the government’s R&D tax credit scheme. A range of factors have been demonstrated to impact the level of R&D investment in countries. But at its most basic level, R&D expenditure is effected by the perceived cost and financial risk of undertaking it to a relevant company. It follows that as the perceived cost of R&D falls, the amount of R&D expenditure will rise. This is demonstrated in a number of economics papers through statistical modelling and testing. A particular paper by Harris et al. (2009) finds that an 11% fall in the perceived cost of undertaking R&D, results in a 15% increase in R&D expenditure by effected companies.
As arguably the market leader in Innovation Incentives in the UK, Leyton can attest to the demonstrably significant benefits that the tax credit scheme has brought to thousands of UK companies. Enabling substantially reduced costs of undertaking R&D and, according to economic theory, increasing the amount of R&D expenditure by our clients, the scheme has its clear merits. This is despite thousands more are still not claiming R&D tax relief or other R&D incentives such as Patent Box Tax Relief or Innovation Grants/subsidies potentially available to them.
Despite these systems that have helped the UK R&D sector to grow, it’s worth noting that there are risks for the sector on the horizon. Particularly as economic headwinds such as Brexit begin to increase the firm level perceived cost of undertaking R&D work. In the face of this uncertainty, ensuring the effective implementation of the governments’ R&D Incentives system could be said to be even more essential. However, at a certain point the argument to make the scheme more lucrative for firms becomes unavoidable. Notwithstanding the innovation funding support already provided to UK companies, it will be down to Westminster to decide on how valuable R&D activity is to the UK. If it is still believed the UK wants to remain the leading research and advanced innovator economy it has been until now, at the very least sustaining or potentially enhancing the R&D incentives available may be appropriate post Brexit.
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