In an era of increasing globalisation being competitive is key. And in the UK – with the potential negative trade impact of leaving the EU – this is more important than ever. Though the economy continues to grow, productivity is once again falling – with the level only just about where it was before the financial crisis of a decade ago.
Germany remains some 30% more productive than the UK; France and the US some 25%. This is in part because business investment has stalled, not helped by a retrenchment of public sector capital spending in the years following the crisis. Without investment, innovation atrophies, and with it growth.
R&D expenditure in the UK stands at a paltry 1.67% of GDP – below the European average of just over 2%, and well below world leaders Israel and Japan, both of whom spend over 4%. And within this total R&D, government spends just £10 billion per annum, or a disappointing 0.6% of GDP.
The latest industrial strategy pledges to increase the total spend to 2.4% by 2027 – clearly indicating that the Government sees innovation as a ‘public good’ – but whether that can be achieved remains to be seen.
The worry is that individual companies would not, if left to themselves, make the level of investment needed to boost the economy as a whole. Businesses take a narrow definition of benefits, they do not price in any positive ‘spillover’ effects (seemingly unconnected benefits) or ‘externalities’ (benefits to others) that flow to the rest of the economy as a result of investment.
If the market is failing to innovate adequately, to the detriment of the economy, does that mean that state intervention is justified? In my mind the answer is a resounding: yes! The dilemma, of course, is how best to intervene.
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