Stuck in the middle? Finding the UK’s role in the global innovation race 

The UK must find its global niche in emerging technology industries, as reduced domestic political volatility coincides with an increase in geopolitical tensions. As Labour prepares its policies in this area, the March Budget and the rest of the year will see the UK Government making major decisions with impacts on innovation, R&D and the future of growth.  

Life at the frontier

From AI and quantum computing, to clean transport, to bio-engineering, energy storage and fusion, we are approaching tipping points across numerous technological frontiers, with widespread implications for national prosperity, labour markets, and for security and resilience.  

Connected to this is geopolitical tension between the West and China, and the exposure of fragile supply chains to the disruption caused by Russia’s invasion of Ukraine.  

As a consequence, the global race for innovation and the technologies of the future is intensifying and the question of how best to compete has become a central theme for policy makers.

But the strength of the policy response has taken many by surprise, and the US’s Inflation Reduction Act has changed the dynamic. As in so many areas of policy, the US has set the tone; leading the pack with hundreds of billions in green technology and advanced manufacturing subsidies. The European Union will soon follow, unveiling its own semiconductor and critical materials initiatives, as well as plans to alter state aid rules to permit more green subsidies.  

The UK faces enormous pressure not to be left on the sidelines as a mid-sized economy. Recent UK governments have taken action to protect sensitive technologies, for instance through tightening inward investment rules, but the other, growth-oriented side of the coin is now prominent. The UK, while blessed with world-leading research across many areas of the science and technology frontier, has fewer areas of genuine industrial leadership than it would want: the trend towards NYSE listings by innovative UK companies continues, and in areas such as battery manufacturing, the UK could do with some good news. But it is not all doom and gloom. Tailwinds of a new Brexit deal, potential access to Horizon Europe, record levels of venture investment and a period of relative political stability mean the worst may be passed for the sclerotic UK policy approach. 

However, any government action must be squared with other domestic priorities: addressing fiscal challenges amidst multiple competing demands on public spending, reducing regional economic inequalities and focussing on areas where the UK can genuinely be internationally competitive. The challenge for the Government is to find a credible niche for the UK in a global market.  

UK policy – and Whitehall – after the shakeup  

The volatility of the past few years has made setting and sticking to an industrial strategy almost impossible. From the May-era Industrial Strategy, to Johnson’s Innovation Strategy, and now Sunak’s priority technology families, UK policy has been far less certain than its architects – or affected businesses - would have hoped. 

The Sunak Government’s recent reorganisation of Whitehall is a case in point. The creation of a specific Department for Science, Innovation and Technology means the agenda has a unified champion across government, but its precise functioning is still being worked out. The department owns all five of the ‘key technology families’, which include AI, quantum computing, semiconductors, engineering biology and 6G. These are also the focus of the newly-published Science and Technology Framework, released this week, which sets out a high-level approach to talent, infrastructure, access to capital and regulation.  

Against this backdrop, there are big questions around the direction of UK policy. Strategies on semiconductors, quantum, wireless infrastructure and AI all remain to be published. Although the historically large uplift in public R&D spending to almost £40bn over three years was re-confirmed last year, precisely how it will be deployed is still unclear, with ministers said to be frustrated at their limited ability to direct it. The Government’s review of retained EU legislation in emerging technology areas – chaired by former Chief Scientific Adviser Sir Patrick Vallance – is still ongoing.  

Work on financing innovation is also taking place, with this week’s Framework showing that ministers are keen to attract international capital to the UK while also unlocking long-term investment from pensions and other institutions. The Advanced Invention and Research Agency, intended to provide funding to high-risk, moon-shot-style scientific projects, is still in its design phase and yet to get up and running.   

New Labour, New Policy? 

In addition to the Government’s own approach, the oncoming General Election means that a different approach may soon emerge. Labour recently launched a policy paper on their “first mission in Government” of taking UK economic growth to the highest in the G7, emphasising the “opportunities for the taking in the industries of the future”.  

Labour’s policy programme is still being developed, but they have already set out plans to strengthen university-led innovation clusters and increase access to capital, with a focus on clean energy, the digital economy and life sciences. Although there is substantial overlap between this and the current Government’s stated priorities, the guiding philosophy and policy design itself may well differ in important ways.  

In particular, Labour sees a larger role for the state in steering the market, and has asked for ideas from businesses on areas where “catalytic public investment” can tackle long-term UK weaknesses. Labour is also open to ideas on changes to the UK’s institutional set-up, arguing that the status quo fails to embed “genuine long-termism” into policy. Businesses should therefore expect a Labour Government to be far less shy about setting clear aims for science and technology policy, and willing to actively use the state to achieve them. 

A big budget for innovation? 

Against such uncertainty, and long term goals, does the upcoming Budget matter? Surprisingly, yes. 

Sunak’s Government sees R&D policy as one of the areas where meaningful work can happen at pace, and are only too aware that they are on the clock. Despite fiscal constraints, key announcements are yet to be made on science and innovation policy: 

  • The future of Investment Zones, a legacy policy carried over from the Truss administration, which has been re-cast as boosting high-tech clusters near universities. 
  • Decisions on industry-specific funding, such as potential government money for venture capital, scale-ups, or other types of financing in priory areas such as semiconductors or life sciences.  
  • The Government has committed to winding down the generous SME R&D tax credit as a result of fraud and misuse concerns, aligning all R&D credits in a single scheme. Amid significant criticism from businesses, the Treasury is consulting on a replacement, having recognised the change will disproportionately hurt R&D-intensive SMEs. The UK’s total annual R&D tax credit spend is £9bn: any proposed reform is a serious change which will affect all scientific and technology industries. 
  • The pandemic-era super deduction will come to an end in April, following consultation by the Treasury on a successor. Correct policy design will be a crucial first step in addressing the UK’s long-term capital investment underperformance. 
  • The Government may also publish initial findings from the Vallance Review of regulation, with recommendations on digital technology, life sciences and green industries. 

The Chancellor’s job has been made slightly easier by an additional £30bn coming from extra revenue and departmental underspend. However, the mood in government is set against inadvertently following the US and EU into a subsidy war, and so Downing Street and the Treasury remain cautious about large scale industrial interventions.  

 Moreover, the argument within government about what a reasonable cost for government to bear to support industrial activity (in addition to just R&D) in the UK is far from settled.  

As government – and the Opposition – work out their own view on this question over the coming months, there will be an opportunity for businesses to contribute to the debate.  

Zachary Spiro is a Manager in the Flint London office working on emerging technologies and R&D, and a former adviser to Select Committee Chairs. Jon Sell is a Partner and expert on innovation and industrial policy, having previously worked as a senior official in the Treasury.  To find out more about how Flint can help you navigate the risks and opportunities of these developments get in touch.

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