National Centre for Universities and Business (NCUB) response to the House of Commons’ Business and Trade Committee’s ‘Financing the real economy’ inquiry

Summary of response

• The UK faces a structural shortfall in private investment when compared to other countries, resulting in a weaker capital stock.
• Data shows that UK investment into gross fixed capital formation is persistently lower than the rest of the G7.
• Despite deep and world-renowned financial markets, patient capital has not been made available to more innovative sectors of the economy, with a focus instead on low-risk assets.
• A lack of access to external finance, a persistent funding gap, and an overly complex research, development and innovation ecosystem, are holding back UK businesses from investing.
• Clear mandates from governments help to drive investment at scale.
• Countries that ensure public investment aligns to commercial activity and industrial priorities see higher rates of investment.
• The UK underperforms on SME support and direct finance, as well as technology extension and advisory services.
• The UK does not lack initiatives to support investment, but these are not as coherent, integrated, or accountable when compared to other nations. Adopting a more strategic, business-facing, and evidence-led approach would help close the UK’s persistent investment gap.
• The Government should push on with its recent Mansion House pensions reforms, to unlock new pools of institutional finance and ensure UK firms can access the capital they need.
• Scaling models of collaboration with universities can help to further de-risk investment for businesses.
• Simplifying the support landscape for businesses, particularly SMEs, should make it easier for companies to access support at different steps in their investment journeys.
• Enhanced and strengthened training for businesses can help improve investment readiness.

Introduction

The National Centre for Universities and Business (NCUB) welcomes the opportunity to respond to this consultation. NCUB brings together the UK’s universities and businesses to enhance collaboration, innovation, and growth. Our evidence draws on engagement with our members, analysis of UK and international data, insights from our business-led R&D taskforce and our analysis of key metrics.

The UK has long experienced persistent underinvestment in capital formation compared to international peers. This has constrained productivity growth, slowed the diffusion of new technologies, and limited wage growth. While recent policy initiatives—such as the Mansion House reforms, changes to the British Business Bank’s growth mandate, and the UK spinout review—signal progress, systemic barriers remain. Tackling underinvestment requires mobilising both public and private finance, domestic and foreign, into firms and infrastructure, with a particular emphasis on innovative SMEs and scale-ups.

Questions answered

Why has UK investment lagged so far behind peers for decades?

What is the scale of the investment shortfall, and how does it affect productivity, growth and wages?

What international models or policy frameworks offer lessons

What challenges do UK businesses face in accessing growth finance—especially at the scale-up stage?

What support do businesses need to become investment-ready, and how can government or industry provide it?

Why has UK investment lagged so far behind peers for decades?

UK investment levels, both public and private, have been consistently below those of international peers for more than 30 years. The causes are systemic and interconnected:

• Structural shortfall: UK private investment as a share of GDP has been 2-3 percentage points lower than Germany and France for decades, leaving the UK with a weaker capital stock across plant, machinery, digital infrastructure, and housing (Office for National Statistics (ONS), 2024[1]; Productivity Institute, 2025[2]).
• Fragmented finance ecosystem: Survey evidence shows SMEs are disproportionately reliant on internal finance, with limited uptake of growth finance schemes. Mid-sized firms also face an equity gap, as UK markets have not supported scaling to the same extent as in the US (NCUB, 2025; ScaleUp Institute, 2024[3]). There is a persistent funding gap between early-stage grants/seed funding and late-stage private equity. Many innovative firms struggle to access the growth-stage finance needed to scale globally, with the UK losing firms to US investors at critical stages (ScaleUp Institute, 2024[4]; Council for Science and Technology, 2024[5]).
• Productive versus unproductive: The UK has deep financial markets, yet capital is often channelled into property and financial assets rather than productive investment. UK pension funds and insurers historically shifted away from equities and venture investment into gilts and low-risk assets, limiting the pool of domestic patient capital for scaling firms. This has been repeatedly flagged in government reviews (Hill Review 2021[6]; Mansion House reforms 2023[7]) and attempts have been made to address it through a range of policy interventions. However, the pace of change has not been adequate.
• Policy instability: Frequent changes in industrial policy, tax incentives and regulation have undermined investor confidence. Business leaders consulted by NCUB highlighted that uncertainty around future regimes for capital allowances, energy transition, and industrial strategy priorities raises hurdle rates for projects (NCUB, 2025[8]; Nurse Review, 2023[9]). A lack of coherence and consistency in policy, alongside policymaking in a vacuum without industry, reduce business confidence in investment.
• Regional disparities: Investment is disproportionately concentrated in London and the South East. ONS data shows that in 2023, London, the South East, and East of England accounted for 58.4% of UK business R&D, while most other regions saw year-on-year declines. NCUB’s Collaboration Progress Monitor has also shown a decline in SME–university collaborations across regions, limiting access to the networks and resources needed to catalyse investment (NCUB, 2024[10]).
• Inexperience in scaling up: A lack of in-house knowledge and awareness of how investment can act as a barrier to scaling up for businesses. Companies recognise upskilling senior leadership and management as vital to growth ambitions, but more work is needed to support business leaders as their firm seeks to scale (Scale Up Institute, 2024[11]).

What is the scale of the investment shortfall, and how does it affect productivity, growth and wages?

• A systemic capital gap: The UK suffers from a deep, long-term shortfall in investment. The Productivity Institute estimates that in 2019 the UK’s capital stock was about 33% lower per hour worked than in higher-productivity peers such as the US, Germany, France and the Netherlands. This amounts to a £2 trillion capital gap. Closing this gap at current investment spending levels would take at least a century – far beyond what can be closed by marginal annual increases of tens of billions. This gap extends across physical infrastructure, housing, equipment, digital systems, and intangible assets including R&D (Productivity Institute, 2025[12]).
• Persistently low investment rates: ONS data shows that UK gross fixed capital formation (GFCF) has averaged just under 18% of GDP over the past three decades, compared with 22% in Germany and France and 21% in the US (See Figure 1 for most recent data). This entrenched weakness in investment has left the UK with less productive capacity and weaker resilience to economic shocks.

Figure 1: GFCF by G7 country, % of GDP, 2022

Source: NCUB analysis based on data from OECD, 2023.

• Misunderstood and underweighted GFCF: GFCF is critical for long-term growth, as it covers both physical capital (machinery, buildings, infrastructure) and intangible assets (intellectual property products (IPP) such as R&D, mineral exploration, software and databases). Yet in the UK, overall GFCF has been stagnant for nearly three decades, and the share of investment directed towards intangibles has declined in recent years.

Figure 2: Gross Fixed Capital Formation by type, % of GDP (adjusted for inflation and seasonally adjusted)

Source: NCUB analysis based on ONS, 2024.

• Cyclical imbalance between physical and intangible investment: The distinction between physical capital and intellectual property products (IPP) becomes especially relevant in periods of economic downturn. During the financial crisis (2008) and the Covid-19 pandemic, for instance, physical capital investment dropped sharply, while IPP investment slightly increased. However, in the recovery periods, physical investment surged while IPP investment fell behind. This trend is especially concerning now, as IPP investment continues to decline relative to physical capital. This cycle has meant that the UK has consistently failed to build up its intangible capital stock, despite its growing importance in the modern economy.

• Intellectual property products shortfall – business R&D decline: Within this wider picture, business R&D is also lagging. NCUB analysis shows that between 2021 and 2023, UK private sector R&D investment fell by £3.4bn in real terms (-6%), at a time when many competitor countries were increasing their R&D spending (See Figure 3). Business R&D intensity has stagnated at 1.84% of GDP, below the OECD average and well behind leaders such as the US, Germany, Japan and Korea (NCUB, 2025[13]). This reduces the UK’s ability to develop and adopt the technologies that drive long-term productivity.

Figure 3: Business expenditure on R&D, growth rate since 2021 across select economies

Source: NCUB (2025), based on ONS data 2024, and MSTI OECD (2025).

• Productivity consequences: The combined shortfall in physical and R&D capital translates directly into weaker productivity. The UK’s output per hour worked is 15-20% lower than peers such as Germany, France and the US. Decades of underinvestment mean workers have less access to modern machinery, digital technologies, and infrastructure, while firms innovate less and adopt new technologies more slowly.

Impact on wages and living standards:

• Entrenched regional disparities: Low investment is not evenly distributed. London’s productivity is 26% above the UK average, reflecting higher concentrations of capital and R&D, while most other regions lag behind. NCUB’s Collaboration Progress Monitor shows that SME-university collaborations have fallen in most regions, reducing firms’ ability to access knowledge, finance and skills to invest in growth (NCUB, 2024)[14]. This entrenches regional inequalities and makes “levelling up” harder to deliver.

What international models or policy frameworks offer lessons

Drawing on comparative evidence from the OECD STIP Compass database[15], NCUB benchmarked the UK’s policy mix against other G7 economies. We analysed initiatives and instruments targeted at firm-level innovation and entrepreneurship, normalising them on a common scale to provide a comparative picture across eight dimensions (initiatives, instruments, SME support, clusters, tech extension, direct financial support, tax incentives, and evaluation).

The findings highlight where the UK diverges from peers and what lessons can be learned:

• Sharpen mandates and scale: Countries such as France and Germany deploy large, mission-oriented programmes that provide clarity of purpose and direction for businesses. By contrast, the UK’s objectives are spread across multiple smaller initiatives, which creates ambiguity and dilutes impact.
• Strengthen governance and integration: The US and Germany integrate cluster policies and collaborative infrastructures into governance frameworks, ensuring research activity is tightly aligned with industrial needs. This provides firms with confidence that public investment will support commercial outcomes.
• Improve business-facing functions: Canada and Germany outperform on SME support and direct finance, while the US leads in technology extension and advisory services. These are areas where the UK underperforms, in part due to the incomplete integration of Innovate UK’s business-facing functions.
• Embed evaluation and learning: France and Canada evaluate a much higher share of innovation programmes than the UK, building robust evidence of impact and reinforcing business confidence. The UK’s comparatively weak evaluation culture undermines both accountability and the ability to adapt policies over time.

The Department for Science, Innovation and Technology (DSIT) has undertaken its own analysis of other countries' policies to support private sector investment into R&D (DSIT, 2025)[16]. Their literature review showed a need for a combination of 'demand pull' and 'technology push' policies, which impact R&D to different degrees at different stages of the R&D and commercialisation journey. 'Technology push' policies are described as those that increase the availability of knowledge, and are most important at the early stages of R&D investment. 'Demand pull' promote incremental innovations, by expanding market size through direct incentives such as R&D tax credits, subsidies, and public procurement.

Policy learnings for the UK

There are some important policy learnings for the UK from these reviews:

• Move from dispersed small-scale initiatives to larger, mission-driven programmes.
• Align industrial policy and R&D through integrated cluster and infrastructure strategies.
• Enhance SME-facing and translational support, building on international best practice in direct finance and advisory services.
• Develop a stronger evaluation culture to demonstrate effectiveness, attract private co-investment, and build trust.

This evidence shows that the UK does not lack initiatives, but it lacks coherence, integration, and accountability compared to peers. A more strategic, business-facing, and evidence-led approach would help close the UK’s persistent investment gap.

What challenges do UK businesses face in accessing growth finance—especially at the scale-up stage?

• Persistent funding gap: The UK remains a difficult environment for firms to scale. The ScaleUp Institute estimates a £15 billion funding gap, concentrated in the “valley of death” between start-up and maturity. This is not a new challenge—stakeholders have highlighted it consistently over the past decade (Scale Up Institute, 2020;  2024).
• Restricted access to external finance: Barriers to securing appropriate growth finance reduce firms’ ability to invest and expand. In 2024, NCUB launched its Business-led R&D Taskforce, chaired by Sir John Manzoni, to examine how to increase private sector R&D spending. Our survey of more than 2,000 SMEs showed that most rely on internal finance, while fewer than half have engaged with UKRI, Innovate UK, or R&D tax credits to support investment.[17]
• Complexity of the system: NCUB’s Taskforce evidence shows that the UK’s research, development and innovation ecosystem remains too complex and fragmented for businesses, particularly SMEs, to navigate. Firms often lack the bandwidth or specialist knowledge to identify the right schemes. This conclusion reinforces earlier findings from the Dowling Review (2015) and the Nurse Review (2023), and aligns with NCUB’s Collaboration Progress Monitor, which has tracked a decline in SME-university interactions in recent years
• Dilution of public investment impact: Successive governments have rightly raised public investment in R&D. NCUB analysis shows that every £1 of public R&D spending stimulates £3-4 of private sector investment (NCUB, 2024[18]). Yet duplication and overlap between schemes dilute this effect and create confusion for firms seeking to engage.

What support do businesses need to become investment-ready, and how can government or industry provide it?

The UK must strengthen the conditions for firms to become investment-ready if it is to translate its research and innovation strengths into scaled companies and high-value jobs.

• Mobilising long-term patient capital: The recent Mansion House reforms to pensions represent an important step toward unlocking new pools of institutional finance. These reforms must now be directed strategically into productive assets, ensuring UK firms can access the capital they need to scale and remain in the UK, rather than relocating overseas or exiting prematurely. Alongside this, expansion of the British Business Bank’s co-investment model is essential to bridge the scale-up funding gap.
• Ambitious but aligned public-private support: While the UK cannot match the scale of US venture markets, it can ensure that the support it provides is ambitious, coordinated, and focused. Innovate UK, the British Business Bank, and private investors must align their interventions to provide firms with a clear pathway from proof-of-concept through to growth and internationalisation.
• Universities as anchors of investment readiness: Universities already play a central role in de-risking investment through collaboration, skills development, and commercialisation. Initiatives such as Midlands Mindforge[19], Northern Gritstone[20] and Cambridge Innovation Capital[21] demonstrate how university-led patient capital can support IP-intensive firms in their regions. These models should be scaled nationally to provide more firms with the opportunity to establish and grow.
• Translating research into marketable products: The creation of a proof-of-concept fund in the 2024 Autumn Budget was a welcome step. Increasing translational funding streams should help to reduce the reliance on premature external capital, supporting the investability of UK start-ups and spinouts.
• Simplifying the support landscape: NCUB’s Business-led R&D Taskforce found that SMEs in particular are deterred by a complex and fragmented ecosystem of schemes. Government should rationalise overlapping programmes and create a single, unified support architecture, accompanied by clear mapping of opportunities for businesses at each growth stage.
• Building financial and leadership capability: Many SMEs lack the financial literacy, governance structures and leadership capacity that investors look for. Accelerators, mentoring, and business-school-led training programmes can help bridge this gap, improving investment readiness across regions and sectors.

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