The key to the UK’s productivity puzzle might lie in the lack of R&D spending

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The UK does not spend much on research and development and it could be the key to solving the country’s low productivity problem.

The puzzle is simply put: why do UK workers take five days to make what the French do in four? It has become a long-term challenge for politicians and central bank policymakers alike. Low productivity holds back future investment and wage growth for workers. It is one of the most important — yet poorly understood — concepts in economics.

Low productivity figures in the UK compared to France and Germany mirror the lack of research and development spending.

According to figures from the World Bank, the UK spent 1.7% of GDP on research and development in 2014 – the same as was spent 20 years earlier.

Meanwhile Germany is up at 2.8%, a rise from 2.1% in 1996 and France is at 2.2%.

Here’s the data visualised in a map from the World Bank:

World Bank

It is an issue highlighted by Oxford University’s Sciences Innovation fund, which takes investment money to turn students’ ideas into businesses and products.

According to a report by the BBC, the fund has now attracted £600 million in investment, up from £320 million a year ago. But that increase has been fuelled by investors from China, Singapore and the Middle East, rather than the UK.

Oxford Vice Chancellor Professor Louise Richardson is quoted as saying: “It does speak to the disappointing investment by British industry in research and development. We are way below our competitors in France and Germany and below the EU average.”

“In fact, 40% of the R&D spend in the UK is by subsidiaries of foreign companies. British businesses are very loath to invest and that really has to change,” she said, according to the BBC report.

If the UK is going to keep pace with the rest of the world, its businesses might have to forego some short term profit now for investment in future growth.