Written evidence submitted by the Russell Group (IGR0032)

Russell Group response to the Science, Innovation and Technology Select Committee call for evidence on innovation, growth and the regions

1.        Summary

         Working in partnership with business, the public sector and local government, research-intensive universities support growth across the UK’s nations and regions. Government can maximise opportunities for innovation-led growth across the whole of the UK by supporting research-intensive universities to act as conveners and shape decision-making on growth strategies.

         The UK has a track record of success in commercialising university research (and other ideas) including through spinning out new high-value companies. To support universities to rapidly scale up their capacity to engage with businesses and drive innovation and productivity, government should increase support through the Higher Education Innovation Fund (HEIF). HEIF provides flexible and long-term funding and as such is highly effective, delivering a £12.46 economic return for every £1 invested at a large research-intensive university.

• A lack of early-stage funding remains a key barrier for new businesses to start and scale in the UK. UKRI, Innovate UK and the BBB should coordinate activity to ensure a clear continuum of funding for early-stage high-growth university spinouts. In addition, government should consider developing new ways to encourage private investment at an earlier stage, for example through upskilling the venture capital sector to create a stronger network for R&D start-up investment in the UK.

2.        About the Russell Group

2.1          The Russell Group represents 24 research-intensive universities located in every region and nation of the UK. Through collaboration and advocacy, we advance and champion the positive economic, societal and cultural impacts research-intensive universities make across the UK and around the world. Harnessing their excellent research, innovation and education at scale and with purpose, our universities are working in partnership to generate prosperity, improve lives and help build a bright future for everyone.

3.        How does the Government drive research and innovation in our regions?

How effective are the government’s policies in supporting the innovation ecosystem across the UK’s nations and regions, particularly through commercialisation initiatives?

3.1          In every nation and region of the UK, research-intensive universities are helping to drive productivity in high-growth sectors such as life sciences and digital technologies. By acting as partners and conveners, they have coordinated efforts to deliver tangible outputs from their innovation investments for both local and national economies. These include creating new businesses, boosting jobs and increasing UK resilience in strategically important disciplines.

3.2          Many businesses conduct their R&D in the UK because they want to work closely with research-intensive universities and the innovation clusters they support: from Unilever in Liverpool, and GSK in Oxford and Cambridge, to JLR in Warwick and Boeing in Sheffield. Universities provide access to cutting-edge research, a pipeline of highly-skilled people working at the forefront of their fields and access to state-of-the-art facilities and infrastructure. These partnerships solve complex industrial challenges, contribute to increased productivity, attract additional private sector investment and drive economic growth across the UK.

3.3          Alongside the UK’s strength in discovery research – covering everything from social science to quantum physics – our country has a track record of success in commercialising university research (and other ideas) including through spinning out new high-value companies:

         In 2023, UK university spinouts raised £1.66 billion in equity funding, representing 9.54% of all equity funding raised by UK companies. This positions the UK second only to the United States in terms of total investment in spinouts.[1]

         Businesses spun out of Russell Group universities alone generated £17.8 billion in economic output in 2021/22.[2]

3.4          The UK should be ambitious in developing our strengths in spinouts even further. It is also crucial that we address the 6% decline in business investment in R&D in the UK between 2021 and 2023, primarily driven by SMEs.[3] This trend risks stalling productivity and missing valuable opportunities for growth through the development of new technologies, skills, and sectors.

3.5          There are four ways in which the government could increase the overall effectiveness of the innovation ecosystem and therefore unlock barriers to growth:

(a)           Uplift the flexible funding stream HEIF: The most successful funding initiatives for innovation provide long-term stability, flexibility, and alignment with regional strengths. The Higher Education Innovation Fund (HEIF) is one of the only funding streams that supports universities to deliver a range of innovation activities including university-business collaborations, licensing, creating opportunities for student entrepreneurs and supporting high-growth spinouts. It is flexible and long-term and as such is highly effective. HEIF currently delivers a £12.46 economic return for every £1 invested at a large research-intensive university, but it is capped. One university estimates that funding limitations have prevented 60% of their potentially viable spinouts from being developed. Increasing HEIF funding would enable universities to scale up their business engagement and commercialisation capacity and increase the number of high-growth spinouts.

(b)           Ensure challenge-led funding supports industry and university collaboration: To maximise the impact of the new R&D Missions Fund, it should build on existing capability and experience from other challenge-based funding models such as the Industrial Strategy Challenge Fund (ISCF). Challenge-based funds should support activities across all technology readiness levels, align with industry needs and processes, and include measures to incentivise SME engagement.

(c)           Leverage public procurement: As the largest buyer of goods and services in the UK, central government can play a role in creating demand-side pull for innovation. Using public procurement power and the full range of regulatory, legislative and financial levers available would stimulate demand for innovation, aligned with the government’s wider missions. This could include ensuring support for innovation and innovative delivery of public services is specified in a new National Procurement Policy Statement.

(d)           Address barriers to SME engagement: It is especially challenging for SMEs to collaborate with universities due to limited resources, both in terms of funding and expertise. This could be addressed through initiatives to include specific support to encourage SME engagement or trialling new forms of innovation vouchers specifically targeted at SMEs. Better promoting existing schemes that SMEs can currently benefit from including R&D tax credits would also help.

3.6          A high-quality pipeline of ideas will also be essential for successful long-term innovation. It is crucial that innovation-related policy development is therefore complemented by the appropriate interventions to stabilise the earlier stages of the research pipeline. Notably, quality-related research (QR) funding is a unique funding source that enables universities to attract external investment, quickly respond to challenges and opportunities, support strategic projects and provide career stability for our research community. For example, QR funding was fundamental to drive the Nobel Prize-winning R&D into graphene at the University of Manchester which has contributed to the development of an advanced materials innovation cluster in the North West of England.

3.7          However, QR funding in England has dropped by 16% in real terms since 2010/11, with even sharper declines in the devolved nations.[4] This is limiting the ability of universities to maintain a balanced research ecosystem, invest in emerging opportunities, and sustain the research talent needed for future innovation. To maintain the agility, innovation, and long-term planning that it affords, we recommend the decline in value of QR funding is addressed across the UK’s nations.

How should devolution be harnessed to support innovation across the regions and nations, and what role should local government play in supporting research and development?

3.8          The government’s devolution agenda presents a chance to expand on proven innovation initiatives and develop new ways to address challenges such as access to proof-of-concept funding and venture capital investment. Collaborative initiatives like Northern Gritstone, Midlands Engine, and SETsquared exemplify how partnerships between universities, investors, and industry can transform regional innovation capacity. These initiatives not only streamline research commercialisation but also provide mentorship and resources to academic entrepreneurs, ensuring equitable economic growth across the UK.

3.9          Research-intensive universities work in close collaboration with local government, delivering research and innovation that has wide-ranging impact for places and supporting skills pipelines locally and nationally. For example, Newcastle University and the University of Durham have a long-standing relationship with their local government and the new North East Combined Authority (NECA), whilst the University of Exeter – in collaboration with the universities of Plymouth and Falmouth – has set up the South West Think Tank to create policy options for local government.

3.10      Universities in the devolved administrations have also been pivotal in implementing City Deals and realising growth opportunities in their localities. Examples include the Edinburgh and Southeast Scotland City Region Deal, where the University of Edinburgh’s Data-Driven Innovation initiative is supporting businesses in 10 priority industries including health and social care and agritech.

3.11      Devolution can be harnessed to support innovation by:

(a)           Ensuring university involvement in strategic decisions and innovation-led growth: There is an emerging risk that places without the new Mayoral Strategic Authority status could be disadvantaged due to a lack of formal collaboration mechanisms and additional funding opportunities. Universities should have opportunities to inform strategic decisions on innovation-led growth, including through the development of local growth plans, regardless of the devolved structures in which they are operating. This will leverage their expertise in identifying regional strengths and opportunities and their ability to act as local convenors of different stakeholder groups including researchers, local government, investors, industry and the NHS.

(b)           Upskilling and increasing capacity of Strategic Authorities to make informed decisions on innovation: We welcome the recognition in the devolution white paper of the need to “better support strategic leadership, peer-to-peer support and sharing best practice on innovation”. This should include capacity building for local government to understand and deliver funding and support for innovation-led growth. Facilitating best practice sharing between the regions and nations would be particularly valuable – and we would also hope to see more engagement with the extensive economic, social, regulatory and business development expertise available across universities such as those in the Russell Group. The intention for UKRI (including Innovate UK) and DSIT to include Mayoral Strategic Authorities in the development and delivery of future strategies and investment plans is also welcome. This work could be extended to include relevant funders and public bodies located in the devolved administrations.

3.12      The loss of European Regional Development Fund (ERDF) funding post-Brexit led to the shutdown of over 100 successful university-led innovation, skills, and business support programmes across the UK. Its replacement, the UK Shared Prosperity Fund (UKSPF) distributed by local authorities and devolved administrations, has failed to fill this gap, particularly for university programmes, due in part to limited local government understanding of the value of such funding.

3.13      To maximise the impact of place-based funding, the aim should be to improve the long-term international competitiveness of a region’s R&I performance. This should include:

(a)           targeting investment into areas of genuine regional strength or with evidenced promise. Strength should combine excellent research with translational capabilities (or the capacity to grow these) where there are clear paths to impact. This will require collaborative working with regional stakeholders, including universities and combined and local authorities to map areas of strength.

(b)           using transparent, evidence-based methodologies which consider the whole R&I ecosystem and enable cross-governmental join-up, as place-based funding requires a whole-systems approach to be effective.

(c)           providing long-term funding commitments with lead times that support the strategic regional investments and partnerships needed to deliver lasting impact.

(d)           giving regional decisionmakers with powers to distribute funding the resource and capability to assess bids appropriately and ensuring accountability on the way funds are spent.

(e)           including specific protections to ensure funding in reserved policy areas delivered through devolved administrations is spent on innovation to support overall UK R&I competitiveness.

(f)             ensuring alignment with other regional/national funding programmes including local growth plans, devolved initiatives such as the Scottish Government’s Green Industrial Strategy and the UK Industrial Strategy to create a coherent long-term funding framework. Existing initiatives that support place include the CCF, RED fund, Innovation Accelerator Pilot, Investment Zone and Freeport policies.

3.14      Although not currently in scope of government devolution plans for England, for clarity we would not support devolving the allocation of fundamental research funding. We believe a national mechanism with a focus on excellence is crucial to ensuring the UK remains internationally competitive and can secure a strategic edge in emerging scientific fields, including in the high-growth sectors identified in the Industrial Strategy green paper.

What challenges do innovation-focused researchers and businesses face in spinning-out or scaling-up, such as accessing venture capital, infrastructure and intellectual property rights?

3.15      Russell Group universities excel in R&D commercialisation, offering support for progressing an idea to market, raising investment, access to cutting-edge facilities, and more. In 2021/22, they matched US universities in spinouts and patents relative to research income and supported over 80,000 UK jobs.

3.16      Our members also work hard to improve the quality of their offer to spinouts and entrepreneurs. All Russell Group universities are updating spinout policies to align with the Independent Review of University Spinout Companies and TenU guidance. Typical equity stakes will now range from 10-25% for life sciences spinouts and <10% for software spinouts, with royalty rates of 0.5%-5%.

3.17      We should be ambitious in developing our strengths in spinouts even further. In part, this means consolidating progress universities have already made in implementing the recommendations of the spinout review. But further work is required to tackle some of the long-standing investment and structural challenges which make it more difficult for new businesses to start-up and scale in the UK.

3.18      Access to early-stage finance: The funding gap between identifying a possible research idea and progressing it through to a viable proposal for private investment is reducing the number of spinouts in the system, hindering innovation and growth. To address this, we propose uplifting the HEIF budget (as discussed above) and developing new ways to encourage private sources to invest at an earlier stage, aligning to the high-growth areas identified in the Industrial Strategy.

3.19      There is also an opportunity to better join up the UK funding ecosystem to support spinouts. We would like to see UKRI, Innovate UK and the British Business Bank coordinating activity to offer a clear continuum of funding for early-stage high-growth university spinouts so that promising spinouts are not lost between funding opportunities and innovation can be pulled through to impact at pace.

3.20      Scaling spinouts with venture capital (VC) investment: In 2023, equity investment in UK spinouts fell, consistent with wider UK investment trends which saw overall VC funding across the economy drop by 30.7% to £1.7bn. This is compounding the challenges faced by high-growth potential spinouts around attracting VC investment. These include:

(a)           long return on investment timelines and high capital needs in deep-tech and life sciences deterring VCs wanting quicker exits and more guaranteed returns

(b)           limited VC expertise/ understanding of the benefits of investing in emerging technologies/ pioneering industries

(c)           disparities between the maturity of innovation ecosystems mean some regions/nations have fewer opportunities to secure the funding and mentorship needed to progress a spinout.

3.21      To help address this, a targeted training programmes for VCs to work with tech transfer offices and other experts in the university commercialisation space could help create a stronger network for R&D start-up investment in the UK. Increasing flow of venture capital from pension funds and other sources into university commercialisation will also act as a powerful incentive for VCs to upskill to understand the university spinout ecosystem.

3.22      Access to facilities and incubation space: There is insufficient lab and incubation space available across the UK, and, in some cases, this is forcing R&D businesses to relocate away from the places they spin out from including overseas. To address this, we propose streamlining planning policy and expanding innovation infrastructure such as lab space, business incubation and scaling space as part of Nationally Significant Infrastructure. This would build on partnerships like that between University of Birmingham and Oxford Science Enterprises which will provide high-growth potential life sciences firms with access to lab and innovation space.

4.        Additional points of consideration

What is the relationship between investment in innovation and economic growth, both regionally and nationally?

4.1          Investment in innovation is a proven driver of economic growth, with significant spillovers in productivity, employment, and regional development. London Economics analysis has found that:

         For every £1 of public funds invested in research at Russell Group universities, more than £8.50 is generated for the UK economy – and as a result, our universities’ research and commercialisation activities deliver almost £38bn for the economy every year (in addition to wider productivity spillovers).[5]

         This activity supports more than a quarter of a million jobs, twice as many as in the chemical and pharmaceutical manufacturing industries combined.

         Our universities support growth across the regions and nations of the UK: for example, approximately £2.4bn was generated in the North West and Scotland, respectively, £2.2bn in Yorkshire and the Humber, and £1.8bn in the West Midlands.

4.2          Evidence shows how investment in public R&D is crucial in stimulating private R&D investment, offering a strong and enduring return on public investment that benefits the economy. New research from the NCUB shows £1 of public R&D investment stimulates between £3.09 to £4.02 of private R&D investment in the long term.[6] Importantly, around 60% of this “leverage effect” is realised in the first three years. Early public investment in R&D across the Spending Review period will therefore have a significant effect in stimulating private investment, with knock-on consequences for economic growth and productivity. 

4.3          The strength of the UK research system is, at least in part, a result of its funding allocation method. Flexible, longer-term funding complements a grant-based approach to research by ensuring there is a pipeline of new ideas, talent and infrastructure to underpin innovation in areas which have not yet emerged as the global challenges of the future. As noted above, QR funding, and its equivalents in the devolved nations, has been crucial to achieving innovations and discoveries across genomics, opto-electronics, cosmology research, and new tests and treatments for everything from bowel disease to diabetes, dementia and cancer. The rapid pace of progress in vaccine development and treatment of Covid-19, for example, was only possible because universities could tap into established discovery research funded by QR and redirect existing resources at pace.

How does the UK’s innovation ecosystem compare to those of other countries, and what lessons can the UK learn from international models in terms of commercialising research and innovation to benefit both regional and national economies?

4.4          PwC will publish an independent report commissioned by the Russell Group in early 2025 evaluating international government R&D funding mechanisms at a system level. The report aims to identify key elements that drive efficient, resilient, and effective research ecosystems internationally. It will compare these mechanisms to the UK's dual support system, highlighting strengths and possible areas for consideration in the UK's current approach. We would be happy to share the report with the Committee when it is available.

15 January 2025