Increased production squeezes innovation

NatWest bank and trade body EEF’s joint annual survey on manufacturers’ investments in product and process innovation shows that the number of companies reporting innovation in three activities or more has halved compared to last year from 75% to 38%.

The 2014 EEF/NatWest Innovation Monitor shows strong demand is now putting pressure on manufacturers’ internal resources, from management time to working capital.

The increase in activity is forcing manufacturers to re-focus their innovation activity and leading them to fear for their competitive position

EEF chief economist Lee Hopley

As a result, manufacturers have focused on a smaller number of innovative activities aimed at satisfying existing customers.

Manufacturers continue to prioritise innovation and most plan moderate increases in expenditure, but resources are now spread more thinly.

This has led to an increase in the proportion of manufacturers who are concerned that their level of expenditure on innovation is not enough to keep pace with competitors, from 19% in 2013, to 26% in this year’s survey.

“Innovation is a critical part of manufacturers’ growth strategies and most have the ambition to do more,” said EEF chief economist Lee Hopley.

“However, while they are now reaping the rewards of previous activity, and stronger demand is boosting growth prospects, the resultant increase in activity is forcing manufacturers to re-focus their innovation activity and leading them to fear for their competitive position.”

The report shows that the UK still lags behind other competitor nations when it comes to spending on research & development (R&D): UK Business Expenditure on R&D (BERD) is only 1.1% of GDP, while the OECD average is 1.6% and Germany is at 2%. The proportion of UK SMEs bringing new products to the market also falls way below the EU average.

Government has taken a number of steps to boost innovation support such as strengthening the R&D tax credit, and increasing the budget for the Technology Strategy Board (TSB).

However, EEF in the report claims that if the UK is to continue to compete internationally then both the level and effectiveness of innovation must be increased. To achieve this, the report makes a number of recommendations, including:

• Funding for the TSB must be sustained in real terms, at the very least at 2015/16 levels
• Funding for the High Value Manufacturing Catapult should be increased and the structure adjusted to encourage SME engagement
• The R&D tax credit should be maintained and the definition of R&D within the credit should remain broad and stable

“If the UK is to continue to compete internationally, both the level and effectiveness of innovation must be increased,” added Hopley.

“Many of the recent changes to policy have been supportive and these should be maintained, together with a longer-term, more strategic approach from government over successive Parliaments.”