Hi-tech spotlight illustrates need for UK to invest in innovation to remain competitive

Emerging markets targeting R&D investment to move up the value chain

Stronger  than  expected  recovery  in  leading  industrialised nations has helped  propel  UK  exporter confidence to a four and a half year high, but Britain  must  raise its investment in research and development (R&D) if it is  to retain its competitiveness in the global economy over the long term, according to HSBC’s latest Trade Forecast.

The HSBC Trade Forecast shows that trade conditions are improving for UK businesses, with 63% of exporters expecting trade volumes to rise over the next six months, up from 61% during the second half of 2013. UK exports are forecast to increase by 5% per annum over the next two years, driven by the economic recovery in Europe and North America, as well as opportunities in faster-growing markets.

HSBC’s  Trade  Confidence  Index  (TCI)  increased  by five points from six months  ago  to  reach  113  (any  reading  above  100  signals anticipated expansion  in  trade  amongst  businesses)  in the second half of 2013, the highest reading in the survey’s four and a half year history.

However,  the  UK  needs  to  encourage  businesses to investment in R&D to capture  more  of  the value of their merchandise exports, enabling them to move  up the value chain over the long term. The latest figures show the UK invests 1.77% of GDP in R&D, a figure that has remained broadly constant over the past 20 years, compared to 2.77% in the US, 2.84% in Germany and 2.25% in France.

It is developing economies that have accelerated investment over the same period. In developing Asia, R&D spend as a percentage of GDP  has more than quadrupled  to  1.8%  and  has  almost caught up with that of Europe, while China  now  spends  the equivalent of 1.8% of its annual GDP on R&D, a near doubling of its expenditure over the past 20 years.

To illustrate the value chain picture, the latest Trade Forecast focused on the high-tech sector.  It  found the UK will be outpaced in the growth of technology exports by both developing economies, including China, Malaysia, Indonesia  and  Turkey,  and  developed  markets such as the US, France and Germany, over the next 15 years.

Improving links between educational institutions and business will be vital in  developing  the  UK’s  high-tech  sector,  as  well as encouraging more graduates   in   STEM   subjects   (Science,  Technology,  Engineering  and Manufacturing), according to the report.

Mark Emmerson, HSBC UK Head of Global Trade and Receivables Finance, said:  “The example of high-tech presents lessons for other sectors and the future pattern of global trade. Companies within developed economies that own the intellectual property of high value goods still enjoy a strong competitive advantage, but under-investment in R&D could threaten the advantage the UK enjoys, presenting an opportunity for emerging markets to gain ground. The world  economy  is  becoming more knowledge-intensive – it is essential for the  UK  to  invest  in  research  and  improve links between education and business to retain competitiveness and enhance future growth.”

He  added: “The UK’s educational institutions are internationally-acclaimed and  Britain  performs  strongly  in  terms  of the share of the population working  in  knowledge-intensive  industries. However, the UK underperforms compared to trading competitors such as the US in terms of the level of Patent Cooperation Treaty patent applications and R&D investment.”

Trade Growth Forecast

The Trade Forecast expects UK exports to increase to 5% a year between 2016 and 2020, falling to 4% in the decade to 2030. Asia (excluding Japan) is forecast to be fastest growing destination for UK exports of goods over the period,  with  growth averaging 7% per annum to 2030, with China accounting for  a  third  of  the  forecast  increase in UK merchandise exports to the region.

However  the  report  states  UK  exporters  should  remain  alert  to  the opportunities  for  expanding  existing  export  routes to more traditional trading  partners in the West, and it forecasts that the US will move ahead of Germany to become the UK’s largest export partner by 2030.

At  the  sector  level,  industrial  machinery  and transport equipment are expected  to  be  the main drivers of growth, accounting for almost half of the  expected  increase  in  the  value of UK goods exports in the years to 2030.  The same two sectors are also expected to account for more than one

third  of  the expected increase in goods imports over this period, in part driven by UK firms sourcing intermediate inputs from abroad. 

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