North East

Headline

• Investment in Research and Development in the North East is below the national average, although there has been growth recently.

Introduction

Innovation is a necessary, although not sufficient, condition for economic success and is therefore recognised as an important driver of productivity. Innovation comprises, amongst other matters, the development of new technologies that increase efficiency and the introduction of new, more valuable goods and services. It also includes intangibles such as new methods of working and improvements to services.
R&D represents one of the determinants to the innovation process and is defined by the Organisation for Economic Cooperation and Development (OECD) in its Frascati Manual, which proposes a standard practice for surveys on R&D, as ‘creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to create new applications’. The OECD definition of R&D covers the following:

• basic research: experimental and theoretical work to obtain new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view
• applied research: work undertaken to acquire new knowledge, which is directed primarily towards a specific practical aim, and
• experimental development: systematic work, drawing on existing knowledge, which is directed at producing new materials, products or devices, installing new processes, systems and services, or at improving substantially those already produced or installed

The OECD definition excludes education, training and any other related scientific, technological, industrial, administrative or supporting activities. However, innovation depends on a wider set of inputs than R&D, including skills training, design, software and organisational investment by firms. HM Treasury Economics Working Paper No. 1 quantifies these broader knowledge economy inputs at UK level; more work is needed before these factors can be measured effectively at regional level.

Innovation in the North East

The Northern Way (2008) analysis of the OECD review of innovation in North East England identifies that North East England ranks 78th in the EU Regional Innovation Scoreboard, compared with the South East at 12th, East 17th, North West 56th and Yorkshire & Humber 72nd.  The report attributes this to a “UK innovation system (that) is strongly centralised, with few spatial aspects”; the outcome of which is that rather than stimulating new areas of expertise, resources are allocated to existing strengths.  In order to redress this balance, the report proposes that: firstly, national government must recognise the key assets of national interest within the regions; and secondly, more resources should be controlled at a regional and local level.

A report (Realising the Potential of the North East's Research Base) by Arthur D Little in 2001 assessed the potential for the North East research base to improve the region's economic performance.  The report quantified that the shortfall in R&D investment in the region (in 2001), in relation to the region's GDP, was over 60% and equivalent to £430million per year.   Whilst the region's universities performed well against UK norms, business did not and the lack of a non-university public sector research establishment had a significant impact.  The strengths of the universities and demand from regional firms are not well matched, which limits the opportunities for intra-regional collaboration.

The region has strong research strengths in both the pure and applied science base at Durham and Newcastle Universities.  The newer universities have specific expertise in virtual reality and food at Teesside, computer science at Sunderland and design & engineering at Northumbria.  The private research sector is dominated by chemical, materials and specialities but there are also strengths in design and development for offshore, engineering and component supply.  However the dominance of the chemical sector is a risk for the research position of region (ADL, 2001).

ADL reported that, in 2001, Durham and Newcastle Universities derived 9% and 11% (respectively) of their income from research grant and contract income from businesses – just below the 12% average for the top 30 UK universities (ADL, 2001).  The ADL report also identified that whilst there were some examples of good practice in technology transfer from universities to industry there were too many “intermediary and technology transfer organisations”.

Investment in R&D

According to the ONS, UK Spend (in £000s) rose steadily from the early 1990s to 2008, almost doubling during that time period.  The North East trend has been more erratic, with a steep decline from 1994 to 2001 and growth between 2004 and 2009.  

1994 was a peak year for the region’s share of both national expenditure and employment in R&D, at slightly more than 3%, but this had declined to less than half those levels by 2002.  There has been some growth since then with employment in R&D growing to almost 2.5% and expenditure of around 2% by 2007.

This above chart presents statistics on Business Expenditure on Research and Development (BERD), which are consistent with internationally agreed standards. It shows business expenditure on R&D as a percentage of workplace-based GVA. This is a measure commonly used in international comparisons as it takes account of the size of regional economies. The figure shows that the East of England has been the region with by far the highest percentage of R&D expenditure in terms of GVA over recent years. The South East had the second highest percentage in all three years shown.  London, Yorkshire and The Humber and the three Devolved Administrations of Wales and Scotland had the lowest shares in 2009 at between 0.3  and 0.7 per cent each. London’s very low share of expenditure on R&D might not necessarily suggest low levels of innovation but might be due to it having a large concentration of service industries, which may not be R&D intensive (within the OECD definition) if, for example, they rely heavily on human capital.

The North East has remained consistently behind the UK and English average of R&D activity as a percentage of GVA, which is one of the proxy indicators for ‘innovation’ in a region.  Despite fluctuations over the years, the North East has maintained a similar position in comparison with other regions over the years, generally ahead of Scotland, Wales, London and Yorkshire & Humber, and trailing the other regions.

Apart from the West Midlands, the North East was the only region or country with no measureable public sector expenditure on R&D, despite the public sector comprising such a significant proportion of the North East economy.  This might imply that the public sector activity in the North East is dominated by lower level, routine activity, and innovation is taking place outside the region.  The private sector accounts for just over half of innovation expenditure in the North East.  This seems to be a trend in the low spending regions, where the higher education sector accounts for a large proportion (more than half in some cases) of expenditure.

One NorthEast spends 19% of its budget encouraging innovation activity in the region, this compares with 25% supporting the regions enterprise culture and 35% for regeneration (Sainsbury Review, 2007).  The three northern RDAs allocate between 33% (Yorkshire) and 44% (North East) of their funding on wider enterprise support (i.e. innovation + enterprise) compared with smaller figures for the southern RDAs (e.g. 24% for London, 30% for the South East).  Re-enforcing a view “Innovation spending by central government is concentrated outside the North” (Northern Way, 2008).

Employment in ‘high and medium technology’ industries

Nationally there has been a decline in medium and high tech employment between 1998 and 2008, and this is reflected in the north east as well as every other region and country in the UK and is probably as a result of the decline in the UK manufacturing industry during that period.  However the North East has one of the highest proportions of technology employment.  Only the West Midlands and Wales were higher.  This can probably be attributed to the above average proportion of manufacturing in these economies.

Firms actively engaging in cooperative innovation

Firms in the North East are about as likely as any others in England to be actively engaging in cooperative innovation activity with other firms or institutions, and significantly more likely than firms in Northern Ireland, Scotland and Wales.

Innovation in new and established businesses

Table: Growth Potential of Entrepreneurial Activity in the North East, UK and the US, 2008

The Global Entrepreneurship Monitor (GEM) is a not-for-profit academic research consortium that interviews a representative sample of the population to establish the rate of total entrepreneurial activity (TEA) and the expectations and experiences of established business owners. The North East survey reported some interesting findings about growth and innovation.  When asked if their product was ‘innovative’ (new product or new market), early stage entrepreneurs (TEA) in the North East were as likely as those in the UK as a whole to respond positively.  Established business owners (EBO) in the North East were also as ‘innovative’ as the UK average, although UK businesses lag significantly behind those in the US.

However when new and established business owners in the North East were asked if their business is in a medium or high tech sector there was a significant gap between the North East and the UK.  What is possibly concerning is that new businesses are even more unlikely to be in medium/high tech sectors (only about one third of the UK figure, while established businesses are more than half as likely)