THE EFFECT OF R&D EXPENDITURE ON SME PRODUCTIVITY IN THE UK.

INTRODUCTION

1.1 Background

The UK has an ambitious R&D policy to increase its R&D expenditure from 1.7% of GDP in 2016 to 2.4% of GDP by 2027. The plan envisages a scenario where the UK Research and Innovation (UKRI) will meet its ambitious target by focusing on public investment in R&D as well as stakeholder engagement with business. The goal is to have the UK as the most innovative country in the world.

However, this raises concern as the policy instruments in question cover both public expenditure and support of business to expand their investments in R&D. Given the finite nature of resources for investment in R&D it would be prudent to find the right policy mix to maximize the use of these resources. The strain to these resources is further exacerbated by the recent financial crises and the slow recovery rate of the economy.

It is worth noting that government expenditure is mainly generated from tax revenue. A diversion of funds from private use to government use. In the event these funds are not used optimally, these would compound a penalty to tax payers including businesses. Additionally, mismanagement of R&D resources would dampen economic growth from the opportunity cost of having the funds optimally used in R&D to improve productivity.

The UK has consistently increased its personnel in R&D an indication of the aforementioned ambition. However, compared to other nations, the UK lags behind. For instance, South Korea a leading country in R&D investment invests 4.3% of its GDP in R&D, with 6826 researchers per million inhabitants. South Korea’s business sector spending on R&D stands at USD 57,180.5M compared to the UK’s business sector R&D spending of USD 28,541.9M. The number of researchers per million inhabitants in the UK is 4,227. Despite the numbers, the UK continues to spend higher in University R&D compared to South Korea. The UK spends USD 11,294.4M in PPP while South Korea spends USD 6,614.4M PPP.

Roland (2020) notes that SMEs comprise 99% of private businesses in the UK and account for 73% of net employment. |However, in the UK, their productivity is hampered by among other things technology. This view is shared by Muller et al., (2019) who observe that less than 50% of firms in the EU undertook innovation activity while  most of SME’s increase in value addition and employment took place in less knowledge intensive firms.

1.3 Research Questions

This proposal seeks to determine the optimal allocation of R&D expenditure between government and business allocation.

  1. Does expenditure on R&D influence SME productivity in the UK
  2. What is the difference in productivity from R&D government expenditure and business expenditure?
  • Does the increase in personnel in R&D influence SME productivity in the UK?

1.4 Research Objectives

The overarching objective of this study will be the determination of the optimal allocation of R&D expenditure between government expenditure and business expenditure.

The specific objectives include;

  1. To determine the influence of R&D expenditure on SME productivity in the UK.
  2. To investigate the difference in productivity from R&D government expenditure and business expenditure.
  • To investigate whether an increase in R&D personnel in UK’s SMEs influences productivity.

1.6 Scope of the Study

The proposed scope includes business and government expenditure within the UK. The study will use both time series data on productivity of firms and survey data from firms. Additionally, information on personnel committed to these firms’ R&D departments will be collected.

The anticipated limitation in the use of a cross sectional survey design. These limitations will be resolved by using a mixed approach method of research to complement the cross-sectional study design.

1.2 Statement of the Problem

Despite the need to have investment in R&D, governments have struggled with the right policy mix in allocation of R&D expenditure between business subsidies and government expenditure in R&D. For instance, South Korea’s bigger R&D budget is higher in businesses as opposed to the UK’s greater investment in Universities expenditure. Additionally, a strain on resources in the midst of competing alternatives has necessitated the debated on the optimal allocation of R&D expenditure.

Having identified SMEs as a key component of GDP growth and employment, it would be prudent to analyze the linkage between SMEs investment in R&D and government support for the same. SMEs are plagued by low survival rates, inadequate access to long term debt and weak managerial capacity. These factors influence their dismal investment in R&D further limiting their growth potential and contribution to the economy.

The government has often stepped in to influence the success rate of SMEs owing to their apparent importance. One such intervention is through subsidies and government expenditure in R&D. The relative importance of these policy interventions can be seen from Becker (2015) who identifies a positive signal for firms that receive government subsidies, setting them up as high quality firm. This enables firms to attract longer term debt.

Still, the question of optimal allocation of resources for R&D with regards to SMEs remain unanswered. (Coccia, 2011) concedes, that the debate on the preferred vehicle of investment in R&D remains inconclusive. Consequently, there is no consensus on the best way to allocate R&D resources, there is both support for public expenditure on R&D as well as private expenditure. To determine the optimal allocation of resources for R&D, it is important to ask whether the choice of investment vehicle, public or private, is a matter of parsimony or whether an optimal allocation exists. For this reason, this paper seeks to shed light on the optimal allocation for R&D for SMEs.