It’s breath-taking that the UK government can seek to reduce its own debt burden by transferring that same burden to small businesses – specifically to the most innovative of the UK’s SME sector…
Driven by the exchequer’s target to cut the deficit, Innovate UK, under the department of business, innovation and skills (BIS) misguided leadership looks set to swap its grant funding for debt finance. In effect, reducing the deficit by getting innovative SMEs to borrow more. Hardly a step forward in encouraging R&D investment.
“High quality science and innovation, spreading fast” is what the UK government promised in its policy paper on “fixing the foundations: creating a more prosperous nation” and as far back as 2001, the OECD linked R&D to productivity growth. It’s hard to see how this can happen without appropriate finance to assist the creation of a world class intellectual asset. This requires the support of government not the additional burden of interest bearing debt.
It’s a fundamental testament of investment management, that assets are matched with liabilities. Long term investment requires long term funding and small businesses, many still being paid late by their suppliers, need encouragement to get innovative ideas off the ground – ideas which are the germ of a “more prosperous nation”. Swapping R&D grants for debt financing is a backward step hitting British invention and the UK’s concomitant commercial future.
It’s strange behaviour, not least because elsewhere in the world R&D and investment in it is seen as the jewel in the crown, helping companies to develop and grow and secure global benefits. Seed corn and development grants match the expenditure requirement with appropriate funding. Debt does not, it just discourages the brightest ideas’ people from putting their best foot forward.
An example is the USA where equity is easier to find and whose government in 2013 funded business R&D to the tune of $29.4bn. Total R&D in the USA amounts to some $450bn – about ten times that of the UK and double the UK per capita.
What other examples can we draw from the USA? Well to start with it guards its intellectual property jealously; one reason why USA companies can legally avoid paying international taxes. For example, foreign companies setting up manufacture in the UK can charge their UK subsidiaries a royalty for the manufacturing process developed in their home country. These royalties are tax deductible in the UK and very hard to measurably define (without employing expensive tax consultants). This means the more IP at home the bigger the royalty that goes bank home from foreign owned subsidiaries. The more global your corporation the more you benefit. Small wonder the USA ranks supreme in the technological development stakes.
New flexible company structures also have a bearing. Last week’s Economist concluded in its leader that “…today’s start-ups… (Airbnb, Uber and the rest) are pioneering a new sort of company that can do a better job of turning dreams into businesses.” It might have added “more likely in the USA”, where R&D is quintessential.
One immediate response from UK business? Virginia Acha, executive Director Research, Medical and Innovation at The Association of the British Pharmaceutical Industry (ABPI) with a responsibility for driving the agenda for innovation in the UK was quoted by the FT as saying “…this (action) would have potentially devastating consequences for the whole life-sciences sector, particularly the small to medium-sized biopharma enterprises…
“It takes on average 12 years and £1bn to develop a new medicine and, without support in the early stages to support SMEs in de-risking the process in a notoriously uncertain sector, innovation across life sciences would be seriously affected…” Acha said.
It is surely time for business ministers Sajid Javid and Anna Soubry to reverse this proposal and find some additional innovative R&D funding methods for SMEs to match the obvious need for the UKs future.
Helping the Chancellor to reduce the deficit by shifting the burden of interest bearing debt to innovative SMEs and potentially beggaring advanced development investment by UK business is hardly a recipe for successful productive growth, nor one which helps the UK to compete globally with world class intellectual capital.
As the FT commented last week “Britain’s R&D funding needs no innovation – Turning research grants into loans risks stymieing successful industry”
Time to recognise the consequences for R&D, rethink the actions and maintain effective grant funding…
- Plans to swap grants for loans will hit R&D - FT 27 Oct 15 (registration required)
- Britain’s R&D funding needs no innovation - Turning research grants into loans risks stymieing successful industry - FT 28 Oct 15 (registration required)
- Reinventing the company – The Economist 24 Oct 2015
- Fixing the Foundations: Creating a more prosperous nation
- Productivity Plan from BIS
- Innovate UK
- R&D and productivity growth – OECD 2001
- UK Grant funding for R&D
- UK R&D expenditure - ONS
- USA research funding for small businesses
- USA R&D – federal support