Ideas Why is innovation important? Innovation is key

Ideas Why is innovation important? Innovation is key

Ideas Why is innovation important? Innovation is key to addressing some of the biggest challenges facing the UK and the Yorkshire economies, most notably productivity. Increasing productivity is inextricably linked to innovation. As the UKs Industrial Strategy Green Paper (2017) notes: Higher levels of investment in innovation correlate with faster growth and higher income levels leads to the creation of new products and services, more effective processes and better ways of doing business. These improvements are the essence of economic growth.

In recognition of this, the national Industrial Strategy sets out a target for the UK to spend 2.4% of GDP on research & development (R&D) by 2027. Current spend is 1.7%, ranking the UK 11th in the EU. Whilst R&D is a critical element of innovation, it is not the only source of innovation which can also come from the development of new processes, products or services to improve efficiency. Innovation and R&D is correlated with productivity The national industrial strategy sets out the ambition for the UK to spend 2.4% of GDP on research & development. Currently, Yorkshire & Humber spends 1.4% of GVA on R&D less than any other English region. The below charts show the correlation between R&D spend and productivity, particularly when outlying regions are removed (left hand chart). Businesses account for two thirds of national R&D spend 68% of spending on R&D in the UK comes from businesses, with another quarter (23%) coming

from universities. Although spend as a share of GDP has been relatively constant in recent years, it has increased from 1.6% to 1.7% since 2013. The region has an internationally significant concentration of universities The North and West Yorkshire area has nine higher education institutions, more than any UK area outside London and representing one of the largest concentrations of HEIs in Europe. Together, these HEIs have around 130,000 students and produce 40,000 graduates each year. The 2014 Research Excellence Framework (REF) identified 23% of research at the areas HEIs as world leading, and 42% as internationally excellent. The area ranks in the top three LEP areas for staff submitted to the REF in 5 out of 9 subject areas. Medicine Subjects Veterinary Engineering Architecture,

Biological Physical Mathematical Computer Allied to Science & & Building & Staff submitted to REF & Sciences Sciences Sciences Science Dentistry Medicine agriculture Technology Planning ranking of all LEPs D2N2 10 15 5 2

13 10 8 12 4 Greater Birmingham 4 11 17 21 6 18 12 7 13 Greater Manchester 2 19 6 21 5

8 6 3 3 Leeds City Region 3 2 2 15 2 6 2 4 9 Liverpool City Region 5 16 14 3 12 15

14 16 7 North East 9 3 7 10 4 7 4 10 5 Sheffield City Region 7 4 8 14 17 13 10

6 2 West of England 8 7 10 4 7 2 3 9 5 Source: LEP Data Framework, Smart Specialisation Hub, November 2018 Alignment of research activity with national priorities The area also ranks in the top three LEP areas for publications in the Innovate UK priority areas of Built Environment and Energy.

North and West Yorkshire rank on Publication Output by Innovate UK priorities, Scopus, 2015-17 Electronics Advanced Agriculture BioBuilt Digital Sensors & Health Materials & Food sciences Environment Economy Photonics Energy and Care ICT 5 4 4 3 6 5 3 4 Resource

Efficiency 4 Space 6 It is also in the top five areas for publications against each of the great technologies. North and West Yorkshire rank on Publication Output by Innovate UK priorities, Scopus, 2015-17 Advanced AgriEnergy Materials science Big Data Storage 5 4 4 Regenera tive Synthetic Medicine Satellites Biology 5

4 4 4 Source: LEP Data Framework, Smart Specialisation Hub, November 2018. Data excludes London. Some sectors excluded where data is unreliable. 4 R&D spend is low in Yorkshire R&D spend in Yorkshire & Humber totalled 1.64bn in 2017, lower than any English region in absolute terms (though data for N. East and N. West are combined). The region accounts for 6.4% of UK economic output, but 4.7% of R&D spend. Yorkshire performs relatively well at attracting university R&D expenditure. The 579m higher education R&D investment in the region is higher than would be expected if this investment matched the regions share of total R&D investment, or its share of total economic output.

Higher education accounted for 35.3% of R&D investment in Yorkshire in 2017, compared to 23.5% nationally. However, business investment in R&D is substantially lower in Yorkshire & Humber. Just 57.2% of R&D spend came from businesses, lower than anywhere in England other than London, and below the UK figure of 68%. Chemicals manufacturing accounts for a quarter of the regions R&D spend Of the 938m business R&D investment in Yorkshire & Humber in 2017, 26% was in chemicals manufacturing. This is above the national average (22%) but below a number of other regions where it accounts for over 30%, including North West (31.9%). Employment in R&D is also relatively low 13,000 people were employed in research & development roles across all sectors in Yorkshire & Humber in 2017. This equates to approximately 0.5% of all jobs, compared to 0.8% in England as a whole.

The most R&D active regions, South East and East of England have 1.1% and 1.3% of jobs in R&D respectively. Only 2.9% of manufacturing jobs in the region are in R&D roles, compared to 5.6% across England. 23% of R&D roles in the region are in chemicals manufacturing, compared to 14% nationally and 2nd only to East of England (24.3%). The region has attracted 177m Innovate UK investment North & West Yorkshire has had 1,200 Innovate UK projects with over 177m of grant funding since 2000. This is more in absolute terms than core city LEPs in the North West, but slightly less than those in the Midlands, where Greater Birmingham has attracted 218m and D2N2 229m. However, it is some way below the

500m invested in the South West and the 275m and 320m in Sheffield City Region North East LEP areas respectively. The proportion of Innovate UK investment made in the region as a proportion of GVA has generally been around 150-200 for every million pounds of GVA per year since 2009, with the exception of a significant spike to 880 per year around 2016. However, total innovate UK investment has increased from around 200 per mGVA per year in 2009 to 848 in 2018, suggesting our region has not kept pace in terms of attracting this investment. York, Leeds and Ryedale have attracted most Innovate UK investment As might be expected given their university strengths, York and Leeds have attracted the highest levels of Innovate UK funding in North & West Yorkshire, at 51.8m and 47.9m respectively. The other university

centres of Bradford and Kirklees are also in the top 5 in our area. Ryedale has attracted the third highest level of investment (29.9m) and the highest in terms of investment per m of GVA. The presence of FERA is the source of a substantial amount of this investment, along with BEIS-funded research centres (which are also the source of the funding spike in 2016). Ryedale has also attracted a higher share of Innovate UK investment relative to the size of its business base, with grants offered equivalent to 7,400 per business in the district. York attracted almost 5,800 per business. Across the area as a whole, 1,300 grant funding was attracted per business, half the national figure of 2,600. A quarter of Innovate UK funding was for emerging & enabling technologies Around a third of Innovate UK investment in the region was from non-core Innovate UK programmes (i.e. other than the specific funded areas shown below, along with artificial intelligence). 24% was for emerging & enabling technologies. Both health & life sciences

and manufacturing & materials accounted for 18% of investment in our region each. In the case of health & life sciences, this is marginally higher than its national share of 16%. In the case of manufacturing & materials, it is below the 23% share. Innovation activity has fallen in most categories since 2017 The Leeds City Region Business Survey provides insight on innovation activity for that geography (rather than North and West Yorkshire). It shows that whilst two thirds of businesses are engaged in innovation, the numbers across in most categories of innovation has fallen since 2017. 65% of businesses said they engaged in some form of innovation in the past three years in the 2019 survey, down from 71% in 2017.

There were statistically significant falls in most categories of innovation, though the proportion engaged in R&D held steady at around 25%, and just over 40% participated in knowledge transfer. Innovators are most likely to collaborate with other businesses Of those companies who reported some form of innovation in the LCR Business Survey (2019), 1 in 6 (17%) said they had collaborated with universities on the innovation, and 7% with innovation or research organisations. Businesses were more likely to collaborate with other companies (45%) or business networks (36%). Innovation - conclusions The area has an internationally significant concentration of higher education institutions, and these HEIs help the area perform well on higher education innovation

and R&D spend. This HE strength is supplemented by some nationally significant research capabilities in Ryedale. However, these research strengths do not seem to translate into similar performance among the areas business base. Whilst surveys suggest the regions businesses are engaged in innovation activity, data on investment suggests that this is not at levels seen in other regions. Surveys also suggest innovation activity may have fallen in recent years. This may be down to a less buoyant investment environment, rather than any significant cultural

shift. This suggests there is potential to increase both the number of businesses innovating, and the level/intensity of innovation within businesses who are innovation active. Exporting Why is exporting important? Evidence suggests that businesses who are exposed to international competition tend to perform better than those who are not. International exposure could be in the form of ownership, or through importing or exporting. ONS analysis shows that UK businesses which goods exports or imports were around 21% and 20% more productive respectively than businesses which do not trade after controlling for their size, industry and ownership status.

These effects appear to differ between the EU and non-EU markets: the productivity premia associated with trading with non-EU markets are considerably larger than those associated with EU trade, suggesting that lower productivity businesses find it easier to access EU than non-EU markets, or those who trade with non-EU markets do so in a planned, strategic manner compared to more reactive, opportunistic exporters. Regional export growth has increased since the EU referendum Yorkshire & Humber has seen the 2nd fastest growth in goods export of any English region since the EU referendum in June 2016. Exports are 25.3% higher than Q2 2016, compared to a 19.5% increase nationally. Only East Midlands (33.8%) has seen faster growth. The regions exporters export less than their counterparts elsewhere The Yorkshire & Humber region accounts for 7.7% of UK goods exporters in 2018, broadly in line with its 7% share of UK businesses. However, whilst the number of exporters has increased by

25% since 2013, it has remained relatively stable since 2016. On average, Yorkshire & Humber goods exporters exported goods worth 1.49m in 2018, up from 1.25m in 2016. However, the value of goods exports per exporter remains lower in Yorkshire & Humber than other English regions other than London. Over half of North and West Yorkshires goods trade is with the EU North and West Yorkshire exported goods with a value of 7.6bn in 2017. This is a similar export value to Greater Manchester, the North East and Merseyside. It is however substantially below the core city NUTS2 areas in the Midlands around Birmingham and Nottingham, and the Bristol area. 56% of North and West Yorkshire goods trade was with the EU in 2017, with 44% heading to

non-EU destinations. Merseyside and the West Midlands had 60% and 62% of trade with non-EU destinations respectively, with the Bristol area also sharing a majority of its trade outside of Europe. It should be noted however that previous analysis has shown different trade balances, and trade patterns can fluctuate. The US is our biggest trading partner, but EU countries dominate the list The US is the areas largest single nation trading partner, accounting for 12.5% of trade. China is the only other non-EU country in the regions top 10 export destinations. Trade with both these nations is lower than their share with the rest of the core city NUTS2 areas, however. This is partly due to West Midlands and Merseyside having over 20% of their trade with the US, and 15% of West Midlands exports heading to China, compared to 3.2% for North and West Yorkshire. Chemicals are the areas key export commodity Chemicals accounted for 23% of goods exports by value from North and West Yorkshire in 2017, more than any commodity group by value. This was a greater share than any other core city NUTS2

area. Transport equipment & machinery accounts for over 70% of exports in four core city NUTS2 areas Notts, Bristol, North East and West Midlands. Food & animals account for almost a fifth of North Yorkshire exports, almost 3 times higher than any other area in this analysis. Services exports account for 10% of services GVA The value of service exports from North & West Yorkshire was 5.42bn in 2017. This is third lowest among core city NUTS2 areas, above South Yorkshire and Derbyshire/Nottinghamshire. Both the Bristol area and Greater Manchester have service sector exports of around 7.5bn. Service exports accounted for 9.8% of services GVA in 2017. Again, this is above the 7-8% seen in South Yorkshire and the East Midlands, but below the c.14% seen in the Bristol and Greater Manchester areas. Goods exports dominate in Wakefield, with services dominating in Leeds

Looking at goods exports as a share of GVA, goods exports accounted for 15.5% of GVA in Wakefield, more than any other NUTS3 area in the geography and slightly higher than Calderdale & Kirklees (14.3%). Both Leeds and North Yorkshire saw around 7.5% of exports as a share of GVA. These ratios were similar in 2016. Although 2017 data is not available for service exports, 2016 data shows a quite different picture with Leeds much stronger in terms of service sector exports as a share of GVA. The city exported services worth 2.8bn, 12.3% of GVA in 2016. Wakefields position is reversed compared to goods exports, with service exports accounting for just 2.4% of GVA. York had the 2nd highest service exports to GVA ratio in the area at 7.8%, with service exports totalling 391m. York has a greater focus on EU markets There is a mixed picture across the area in

terms of exposure to EU and non-EU markets. North Yorkshires 1bn of goods exports are split almost exactly 50:50 between EU and Non-EU markets. This ratio is similar in Leeds and Calderdale/Kirklees. Other areas tend to be more reliant on EU markets, with the European bloc accounting for 60% of trade from Bradford. This rises to 65% in Wakefield, and over 75% in York. Goods exports outstrip service exports in most areas Leeds was the only area of the geography where service exports exceeded goods exports in 2016 the last year for which comparable data is available. Exporting - conclusions

In a similar picture to innovation, HMRC data suggests the number of businesses in our region is not particularly low, but the value and volume of exports from our region is below that seen in other areas. Our relatively low trade with key non-EU markets such as the US and China suggests there may be an opportunity to encourage new and existing exporters into markets further afield, which evidence suggests delivers a greater productivity gain. Within our area, goods exports tend to dominate compared to services, with goods accounting for around two thirds of exports in Bradford, Calderdale and Kirklees and40% of exports in North Yorkshire and York. Leeds and Wakefield represent outliers in this regard, with Wakefield most heavily reliant on goods exports and Leeds the only area where the international trade in services dominates. The picture is more varied in terms of the balance between trade with EU and non-EU

markets. North Yorkshire, Leeds and Calderdale/Kirklees appear to have a near-even balance of trade with EU and non-EU markets, whereas other areas tend to rely more heavily on EU markets. This is particularly important given research showing the productivity premium that trade with non-EU markets can deliver.

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