Innovation is a potentially key driver of growth in the UK - but levels of innovation across business have declined in recent years, and the downward trend looks likely to continue.
These are two of the conclusions to be found in the UKRI and Innovate UK report: The State of Innovation 2024 report: What life was like for innovating businesses, which covers 2,000 businesses spanning all regions and devolved nation in the UK.
It found that innovation levels in UK firms are in decline: 56% of UK businesses said they had made changes to products or services over the last year: a fall from 61% in 2023. Innovation rates fell most in smaller businesses. It’s a trend that’s likely to continue: according to the data, 47% of UK firms plan to invest in R&D over the next 12 months, down from 53% in 2023. “This suggests a continuing pressure on innovation activity for the year ahead,” the report said.
Still, for the businesses that do innovate, there is a clear pay-off: during 2023, sales growth of innovating firms was 10% compared to 3% for non-innovating firms, while in 2024 it was 7% versus 2%, respectively. The survey made note of the tightening economic conditions during the past year.
One third of businesses reported recruitment difficulties were restricting their innovation work. And while 39% of firms collaborated with other organisations for innovation over the last year that’s a decrease from 41% in 2023.
Looking at investment in R&D the report records that smaller firms are less likely to engage in R&D. “The smaller the business, the smaller the proportion of firms conducting R&D,” the report noted. Engagement in R&D was significantly greater amongst larger firms, standing at 80%, while only 31% of small businesses reported R&D activity. “Notably, between 2023 and 2024, the proportion of micro firms investing in R&D dropped by 3%, whereas all other firm sizes increased R&D investment or remained stable,” the report said.
Highlighting the importance of smaller innovative businesses the report stated: “Perhaps most concerning, given their significant contribution to the economy, is that innovation rates fell most in small and micro businesses between 2023 and 2024. Both micro and small businesses saw a decrease of innovation activity by at least 4%, whereas large firms saw a fall of just 0.4%.”
The report also shines a light on how businesses are funding their innovation. The majority of innovators are using internal sources, while funding mechanisms used by a smaller number of innovators included: R&D tax credits 12%, grants 10%, bank loans 7%, government loans 6%, and equity finance 3%.
However, when looking at the barriers to innovation during 2024, the most common challenge was “the cost of doing business crisis.” Specific barriers included the lack of finance, cited by 38% of those surveyed, lack of government support: 40%, and regulations: 38%.
Expressing the importance of the report’s findings Stella Peace, the interim executive chair at Innovate UK, said: “We take these insights seriously. It is only by understanding the challenges and opportunities facing businesses that we can be part of creating the most beneficial environment for innovation.”
SCI has been advocating for a comprehensive Industrial Strategy that champions science-based businesses. Key recommendations include establishing an Innovation & Science Growth Council, reforming pension funds to encourage investment in start-ups to commercialise their innovations in the UK and simplifying the complex R&D tax relief system. SCI believes that, with the right conditions and package of support for science-based businesses, the UK should aim to see 15 start-ups scaling to £500m, five unicorns listing in the domestic market, and ten investments of £500m+ being made in manufacturing - by 2030.
Further reading:
• Five ways to unlock scale-up finance for science innovation companies
• PwC Poll: Skills and education key to industrial strategy
• MSMEs: Engines of social mobility and equality
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