Innovation boosts productivity by two-thirds

Innovation is an essential driver for regional economic growth and a new national report has revealed how significant it can be in closing the productivity gap.

Two thirds of private sector productivity growth between 2000 and 2007 was driven by innovation, claims a new report by NESTA.

The findings are revealed in The Innovation Index: Measuring the UK’s investment in innovation and its effects (PDF, 1.59mb), the most ambitious attempt yet to measure the contribution of innovation to the UK’s economic growth.

The Index, which will be published on an annual basis, reveals a direct link between the amount of innovation that companies invested and productivity output.

UK businesses invested £133bn in innovation in 2007 (the most recent year covered by the Index), representing 14% of private sector output.

The effect of all this innovation is increased productivity. Two-thirds of UK private sector productivity, 1.8 percentage points of productivity growth per year, between 2000 and 2007 was a result of innovation.

This compares favourably with the best data available for countries like France and Germany, and similar to the US levels.

It may account for why the UK has enjoyed higher productivity growth in recent years than France or Germany: 2.0% compared to 1.3% and 1.1% respectively.

The Index also reveals that:

Innovation is linked to business growth across a range of sectors

Innovative software firms enjoyed a much faster growth rate than non-innovative ones (13% average revenue growth per year compared to just over 0%).

But this relationship holds true even in sectors not traditionally associated with innovation, such as legal services, where innovative firms enjoyed average revenue growth of over 10%, while non-innovative firms’ revenues shrank on average.

The UK is a relatively good place to innovate but has some shortcomings

The UK is a mid-table performer when it comes to the wider conditions for innovation compared to other leading economies (the US, France, Germany, Japan, South Korea and Finland).

However, it performed poorly on three important indicators:

• Access to finance
• Demand for innovation (in particular the use of government procurement to encourage innovation)
• Skills for innovation

This post was contributed by Brian MacAulay, Director Innovation Index at NESTA.