The role of R&D in the West of England’s productivity

What does the evidence tell us?

While firms in the region value R&D and innovation, it is often challenging to translate these activities into real improvements in productivity. Larger firms are typically more willing to take risks on novel R&D because they can wait for long‑term returns, while smaller firms focus on organisational improvements or individual innovations that offer quicker gains.

Understanding these differences is important for two key reasons. First, ‘new to the world’ innovations carry a high risk of failure that requires scale, capital or public support to sustain. Second, even when R&D succeeds, the “valley of death” creates two-way challenges for firms, both those widely seen in bringing innovations to market, and in the return to / continuing R&D once these innovative products are being delivered. As a result, the economic value of R&D often relies on a firm’s capacity to commercialise innovative products at scale while balancing everyday challenges.

Strategic R&D support should focus on reducing the cost and risk of maintaining research intensity after market entry, and on working with firms to communicate and develop schemes that improve their uptake of existing and emerging schemes. Such targeted support is disproportionately impactful as young businesses produce the greatest aggregate growth when incentivised to conduct R&D (Ignaszak et al., 2025: 30).

Further, previous IPR research suggests that there is higher productivity in the WECA area despite lower rates of process and product innovation than other combined authorities, making the role of innovation in local businesses’ successes unclear (Dimos and Pearce, 2023; Dimos et al., 2024). This article therefore investigates the causes and consequences of this landscape.

Defining R&D and innovation

Due to the wide range of interpretations regarding the concept of innovation (Innovate UK, 2024: 9), this qualitative case study begins with individual definitions of the terms ‘R&D’ and ‘innovation’. A components manufacturer that supplies the aerospace sector provides a clear distinction between the two:

we have two very separate processes, R&D and innovation. And they're separate but we can't divorce them from each other because they're very interlinked. So R&D is the process of turning money into ideas. Innovation is the process of turning ideas into money.

This draws attention to how firms navigate the risks, costs and returns associated with innovative activity. By framing R&D as a process that “turns money into ideas”, it is perceived as a cost for the business rather than a source of revenue. This perspective of R&D can act as a barrier to the intensive innovation activity that researchers argue leads to ‘new to the market’ products but is less frequently engaged in by companies in the West of England (Dimos and Pearce, 2023).

Innovation does not have to break the mould for all businesses. An innovation accelerator working with the aerospace sector argues that different interpretations of innovation bring different benefits depending on the businesses’ needs:

we have now split the term innovation, I guess, into two different categories… ‘new to the world’ is the groundbreaking, never seen before, first-of-a-kind stuff that, our startups and our scale up companies are kind of working on. And then the ‘new to the firm’ is the ‘what can I buy off the shelf that's going to help me reduce my waste or, you know, improve in process inspections?’

This distinction is different from the approach above that focused on turning early research into new technologies ready for the market. Instead, it looks at how new or useful an innovation is for a specific business. This is important as the benefits of being a first mover on a ‘new to the world’ technology may not outweigh the lower cost of incremental refinements for business operations (Jibril and Roper, 2025). This distinction is therefore increasingly relevant to the different roles that R&D and innovation can play in improving firm productivity.

The role of R&D in productivity

The definitions discussed above represent a variety of benefits, costs and risks to businesses engaged in innovation. Organisations conducting ‘new to the firm’ innovations are choosing incremental benefits, such as reducing waste, over the potential benefits of bringing groundbreaking technologies to market. But these different approaches are rarely shaped by benefits alone, as an aerospace manufacturer argues that the firm’s capacity to absorb the risks and costs of intensive R&D are crucial:

It is cost heavy, but you expect, you're never going to do all of your research and it's all going to be successful. So, there is a failure rate. And there's different models that people adopt. And some people even set targets. We don't, you know, you expect to see a failure rate of 40%. And if you're not getting failure rate, then you're not being innovative enough

This highlights the expense and uncertainty of R&D, and shows that to compete in the market of ‘new to the world’ innovations, often only firms that are large enough, well-capitalised, or publicly supported have the ability to absorb the costs of these high failure rates (Innovate UK, 2024: 16). Although an elevated tolerance for failure may be indicative of forward-looking innovation, it is not a realistic model for all businesses.

This uncovers key drivers behind the WECA region’s low levels of internal product innovations – 22% of innovation-active businesses in WECA introduce product innovations, over 10% behind the UK’s top-performing local enterprise partnership (LEP) areas (Dimos and Pearce, 2023: 37). The financial burden of early-stage R&D makes low-risk innovation strategies more viable for the high number of small- and medium-enterprises (SMEs) in the area (Regal and Grimshaw, 2025: 17). A small aerospace materials innovator suggests that they deprioritise earlier stages of R&D because of these risks:

we're a university spin-out, primarily that is exactly what we do, research and development. But because we're commercially focused, I'd say with a heavy slant on the development. As I keep telling my R&D team: do more development than research. So, if you want to do research, please go back to university. If you want to do development, then this is where you need to be. Because research kind of never stops, and getting the wrong answer in research is quite normal, but we can only do that a couple of times and then it's a major problem.

This interviewee maintains an innovation-intensive image through their origins in research as a university spin-out, but their commercial needs have led to a separation of research from development. This aligns with the earlier definition of R&D as “turning money into ideas” rather than raising revenue. Although the firm was founded on the open-ended uncertainty of early-stage research where inconclusive or wrong answers are routine, this culture of R&D conflicts with the firm’s need for stable progress to market.

The failure tolerance described above is a structural barrier for this small business. While large firms can embrace a substantial failure rate as a sign of ambitious innovation, university spin-outs often lack the funds to continue after several unsuccessful attempts. This is not to say that the business is not innovative; the firm instead balances cycles of research, development and production by controlling and making crucial decisions at each stage. This interviewee expands on these decisions:

financial and budgetary parameters are put around… development. You know, we have to develop this material by this date, bluntly, then we run out of money. So, if you don't get that material to a satisfactory level that I can then put it in front of people, then we run out of money and then we close the company. It's as simple as that… we're saying, well, 80% of the strength, that's fine for 75% of the market. So, let's stop there.

The commercial considerations of research also extend to development activities where they are balanced with marketability. Even at the institutional procurement level, ‘narrowly defined value for money can hinder access to innovative solutions’ (STC, 2025: 16). But these specific definitions of research, development and production for market enable businesses to negotiate the risks of R&D by balancing their levels of product innovation with the firms’ productive capacity to supply customers’ specific needs. This may limit the innovation of the product itself, but it enables firms to conduct innovative activity that is directly marketable.

The transition between strong foundations in R&D and commercialisation are well-documented as the ‘valley of death’ that limits the volume of R&D that makes it to the market (STC, 2013: 8). The founder of a medium-sized aerospace components firm describes their difficulties in attempting to move from one side of this ’valley’, where they rely on grant funding, to the other, where they can support their innovation through the commercialisation of their own products:

we're in that sort of maturation stage where grant funding is applicable. And of course it's helpful to keep the level of resources there for maximum speed and whatnot. That would get us to the first product. What you want to do, obviously as a business is to keep scaling the technology and investing in the next generation of technology. And you know the grant journey, the R&D journey goes on forever in this industry.

It's great to get into market on a smaller products Obviously that product will generate some revenues, but not the sort of level of revenues you'd like in order to run, you know, at pace and continue to scale the technology and invest it as quickly as you can to stay competitive.

This adds a further dimension to the structural challenges described above. When innovation is fuelled by grant support, early commercialisation often fails to generate revenues at a scale sufficient to maintain R&D intensity. This can create a dependence on episodic public funding in a grant and R&D journey that “goes on forever”. That is, strong support for early-stage R&D is not matched by equivalent support for scale-up, testing, iteration and market expansion. As a result, firms struggle to convert promising research into the level of commercial success needed to reinvest in continued innovation.

In addition to the impact of the ‘valley of death’, this case study highlights a second challenge: firms in the West of England that have crossed the ‘valley’ face barriers in sustaining the R&D that catalysed their establishment. Without mechanisms that reduce the cost and risk of maintaining research intensity after market entry, firms may deprioritise innovation in favour of short-term survival.

For companies that bring R&D to the market, support that enables them to continue innovation intensity has an outsized benefit for regional growth, because young businesses generate the highest total growth when encouraged to invest in R&D (Ignaszak et al., 2025: 30).

Even where businesses and support institutions align to address the gaps between firms’ approaches to innovation, routine business pressures relative to size and stage remain a barrier to R&D. This was highlighted by an innovation accelerator working with SMEs in the aerospace sector:

it's been really, really interesting offering SMEs: would you rather be paid for this work but not have visibility of the intellectual property and access to the OEMs [original equipment manufacturers] that are sponsoring this particular work? Or do you want to come in as a partner and provide your input as benefit in kind, knowing that you're not going to get paid for it, but you do get access and get to sit in the room with the decision-makers in these large organisations. So far, most of the uptake has been, we'll take the revenue, thank you, rather than we want to go in and have the opportunity to buy a licence for the IP and things like that. There are some that were a little bit on the fence about it, but ultimately, and part of that might be down to current market conditions… it comes down to survivability.

Despite policies designed to address levels of risk for smaller and younger firms, businesses still prioritise cash flow that enables them to continue day-to-day business. The financial constraints for small firms therefore create challenges in creating local R&D policy.

Although attempts to densely co-locate small and large firms to generate agglomeration effects have grown in popularity at the local policy level, evidence for the effectiveness of these policies is ambiguous (Bloom et al., 2019: 178). Even well-designed regional innovation strategies cannot, therefore, compensate for structural pressures on many firms. Local policies need better coordination to encourage businesses to focus on long-term, higher-risk innovation. Collective action across multiple stakeholders, including institutions and firms, is necessary to ensure that R&D translates into regional productivity gains.

Conclusion

Large, innovation-intensive firms often recognise that the benefits of R&D can take time to materialise. This means that they are more inclined to take on the risks associated with genuinely novel ‘new to the world’ activities to gain long-term advantages in the market.

Smaller firms, which tend to have a lower capacity for risk, are more likely to approach innovation at an organisational level. This may involve adopting technologies and ideas that are ‘new to the firm’ to improve operations, or develop individual isolated innovations from past R&D. Both approaches focus on capturing the short-term gains from innovation.

Regional schemes should prioritise support for young and scaling firms, helping them to maintain R&D intensity after they enter the market and to manage the associated risks and costs. Further research in the West of England can strengthen this by embedding evaluation and communication functions that assess how effective current and emerging schemes are and provide a conduit between institutions and businesses seeking support.

References

Bloom, N., Van Reenen, J., and Williams, H. (2019) ‘A Toolkit of Policies to Promote Innovation’, Journal of Economic Perspectives. 33(3), 163-184. Available at: https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.33.3.163

Dimos, C, and Pearce, N. (2023) ‘Understanding Productivity, R&D, and Innovation in the West of England’. IPR Report. Available at: https://www.bath.ac.uk/publications/understanding-productivity-r-d-and-innovation-in-the-west-of-england/

Dimos, C., Garcia Lazaro, A., and Carter, C. (2024) ‘Revisiting Productivity and Innovation in the West of England: Analysis based on microdata’. IPR Report. Available at: https://researchportal.bath.ac.uk/en/publications/revisiting-productivity-and-innovation-in-the-west-of-england-a-m/

Jibril, H. and Roper, S. (2025) Factors influencing firms’ adoption of advanced technologies: A rapid evidence review. DSIT and DCMS. GOV.UK. August. Available at: https://www.gov.uk/government/publications/barriers-and-enablers-to-advanced-technology-adoption-for-uk-businesses/factors-influencing-firms-adoption-of-advanced-technologies-a-rapid-evidence-review 

Science and Technology Committee [STC] (2013) ‘Bridging the valley of death: improving the commercialisation of research’, House of Commons, Eighth Report of Session 2012-13. Available at: https://publications.parliament.uk/pa/cm201213/cmselect/cmsctech/348/348.pdf

Science and Technology Committee [STC] (2025) ‘Bleeding to death: the science and technology growth emergency’, House of Lords, 2nd Report of Session 2024-26. Available at: https://publications.parliament.uk/pa/ld5901/ldselect/ldsctech/192/192.pdf

Ignaszak, M., Robbins, D., and Sedláček, P. (2025) ‘The Bang for the Buck: Aggregate Impact of Firm-Level R&D Incentive’. The Productivity Institute. Available at: https://www.productivity.ac.uk/research/the-bang-for-the-buck-aggregate-impact-of-firm-level-rd-incentives/

Innovate UK (2024) ‘The state of Innovation 2024’. UKRI. Available at: https://www.ukri.org/publications/state-of-innovation-2024/

Regal, B., and Grimshaw, D. (2025) ‘The Productivity Picture: London and the South’. The Productivity Institute https://www.productivity.ac.uk/wp-content/uploads/2025/01/PI71F81-1.pdf