Interviews

Why investing less in innovation is a good thing

4 min read

18 July 2012

Investment in innovation has been falling since the financial crisis, and there's no sign of recovery. Reason to worry? For the mid-market, it's actually an opportunity.

Investment in innovation by British businesses has fallen by £24bn since the recession began, and shows no sign of recovery, according to Nesta’s Innovation Index.

Innovation investment fell by £7.4bn between 2008 and 2009, and a further £17bn between 2009 and 2011. Nesta says the figures should act as a wake-up call for government and business as innovation is one of the most important drivers of sustainable economic growth.

Is it a crisis or an opportunity? That depends on the perspective. For businesses who are prepared to grow, this is a highly exciting time, said Alex Macpherson, head of Ventures at Octopus Investments.

“The report’s results are not particularly surprising – in recessionary times, large corporates tend to cut back to that sort of investment. The natural reaction of any finance director will be to stop spending, or delay their spend. But the byproduct of that is that it’s a fantastic time for entrepreneurial businesses to take market share from larger companies.”

In times when larger businesses aren’t looking to invest in their own departments, there rises the opportunity for mid-market businesses to innovate and take market share.

“The mid-market is more nimble and quick than the corporates. The reluctance to innovate we saw in the wider economy last year was one where large businesses were trying to protect what they have; smaller businesses are able to provide new service and can change their proposition and adapt to their marketplace,” said Macpherson.

The biggest innovation investors in the UK can indeed be separated by their size and their sector, the Innovation Index proves. Among the most innovative sectors in Britain is manufacturing, representing 17 per cent of GDP and accounting for 77 per cent of business investment in R&D and 23 per cent of total business innovation investment. Only 13 per cent of all innovation investment now takes the form of R&D.

The lowest investors in innovation are agriculture, mining and construction – although the construction sector spends the most on design. The business services sector’s largest investment is in skills and organisational innovation.

Geoff Mulgan, Nesta’s CEO, said that innovation is the “only route to long term growth” and needs to be supported a great deal more. “Other countries are making investment in innovation a top priority and the UK cannot afford not to do the same,” said Mulgan. “Our data shows that British business prioritised cash and concrete over investment in future technologies and services, a potentially disastrous decision that now needs to be put right.”

Entrepreneur culture in the UK, however, has been in the spotlight ever since 2008 and the development of Silicon Roundabout, the technology and start-up hub in East London. With organisations and incubators such as Seedcamp, Google Campus and TechHub, London is widely seen the brimming centre of innovation in Europe.

“We’ve always been innovators, and we’ll continue to be,” said Macpherson optimistically. “Could we be more innovative? There can always be more. But the UK doesn’t lack innovation.”