UK businesses spent 6% less in Research and Development (R&D) in 2023 than they did in 2021, according to new data from the Office for National Statistics (ONS).
The ONS UK Business Research and Development (BERD) expenditure data – which was released last week – measures how much businesses spend on R&D. The most recent figures paint a concerning picture. In 2023, total BERD reached £49.97 billion, marking a 3.0% real-terms decline from 2022. This continues a worrying trend that began in 2021, which has seen R&D investment fall by £3.4 billion in real-terms. The drop in BERD between 2022 and 2023 is partly explained by sustained growth in price levels, as the BERD rose by 2.9% in nominal terms during this period.
The decline in BERD also resonates with recent HM Revenue and Customs data which identified a 2.4% real terms decrease between 2022 and 2023 in R&D expenditure used to claim R&D tax credits.
Weakened emphasis on R&D among UK businesses poses a critical challenge for the UK at a time when it must strive to strengthen its position as a global leader in innovation. That is why NCUB has formed a Business-led R&D Taskforce, dedicated to transforming the UK into a global leader in business-led research and development (R&D). In March 2025, the Taskforce will unveil its conclusions, outlining how the UK can boost its competitiveness in R&D.
Over the last decade, UK business R&D spending showed promising growth, as illustrated in Chart 1. From 2014 to 2021, BERD consistently increased. Since then, however, there has been a sharp reversal, with 2023 marking the second consecutive year of decline. This data anticipates a significant decline in R&D intensity for the UK economy in 2023, which stands at 2.77% of GDP in 2022.
In the long-term, the forecast (Chart 2) suggests that the downward trajectory may persist unless interventions are made. That persistence would threaten the UK’s innovation ecosystem, its ability to compete globally on research and innovation, and its wider economic growth.
R&D underpins productivity growth, technological innovation, and long-term economic resilience. A prolonged reduction in business R&D risks:
The implications of sluggish R&D are especially relevant now, as the UK struggles to stave off a recession, with GDP falling two months in a row.
Small and medium enterprises
As Chart 3 reveals, the decline in R&D spending is not uniform across all businesses. Large firms have experienced a relatively modest decline of 0.9% in R&D spending between 2022/23, whereas small and medium-sized enterprises (SMEs) have seen a much steeper contraction of 6.4%. The sharp drop in SME R&D spending aligns with the R&D tax credit data for 2022/23, which indicates a 7% real terms decline in SME R&D expenditure used to claim R&D tax credits.
SMEs, often the bedrock of innovation, appear to be disproportionately impacted by challenges such as limited access to funding, rising operational costs, and economic uncertainty.
Domestically owned
Our analysis also finds that domestic companies slowed their R&D investment, while foreign-owned companies increased their R&D spending (Chart 4). Such increasing foreign direct investment (FDI), which now accounts for 48% of the total business investment in R&D, is a promising development. It not only underscores the UK’s continued attractiveness as a global hub for innovation but also provides a critical boost to economic activity. Increased FDI in R&D enhances UK’s access to global expertise, fosters knowledge exchange, and strengthens supply chains, according to an NCUB analysis. This trend suggests that, despite current challenges, the UK remains a competitive destination for international businesses looking to innovate. Leveraging this momentum will be vital to driving sustained growth and reinforcing the UK’s position as a leader in global R&D.
Economic sectors
Chart 5 highlights significant disparities in R&D spending across sectors. Industries traditionally reliant on R&D, such as Life Sciences and Information Technology, have fared better than sectors like Manufacturing and Construction, which have experienced notable declines. This uneven performance suggests that some sectors view continued investment in R&D as critical despite difficult external conditions, whereas others do not.
London, the West Midlands, and Northern Ireland
The data also reveals that most businesses across the UK have experienced declines in R&D spending over the last two years, with only businesses in London, the West Midlands and Northern Ireland experiencing some level of growth (see Chart 6).
International data on business expenditure on R&D will not be available until March 2024, when the OECD releases its full dataset. However, insights from the OECD Short-term Financial Tracker of Business R&D, which monitors trends among the world’s major R&D investors, offers a preliminary view. According to this tracker, there was no real growth in business R&D in 2023, coinciding with cooling investment between 2022 and 2023.
It remains unclear whether the UK’s 3% real-terms decline in business R&D is more severe than trends observed across the OECD or G7 economies. The forthcoming data will be crucial for contextualising the UK’s performance and understanding how it compares to its global peers in sustaining business-led R&D during a challenging economic period.
The decline in UK business R&D spending is a stark warning. If the trend continues, it will erode the UK’s competitiveness and hamper its ability to respond to global challenges. A slowdown in business R&D also undermines the current Government’s growth agenda by stifling innovation and subsequently hindering productivity. Reversing this trend requires a collaborative effort across government, industry, and academia to ensure a thriving innovation ecosystem that supports growth, production, and societal progress.
