Closure of Pfizer site in Kent and 10% fall in defence research spending push down total R&D expenditure, ONS says

The closure of Pfizer's research and development site in Kent signalled a dramatic downturn in spending during 2012 by the pharmaceutical industry and the first fall in the UK's overall R&D spending since the financial crash.

According to official estimates, pharmaceutical firms cut their R&D spending by 15% in 2012 while defence contractors sliced 10% from their spending on research into new manufacturing processes and equipment.

The total R&D spend fell 4% in constant prices from a year earlier to £17.1bn as the economy flatlined and businesses faced the prospect of a triple-dip recession.

According to the Office for National Statistics, manufacturing companies maintained a steady increase in spending after a dip that followed the recession in 2009, though much of this investment was by foreign businesses, including the major carmakers. Foreign-owned businesses accounted for 51% of UK R&D.

The fall in spending is likely to have long-term implications for Britain, especially its reliance on pharmaceutical research. Sandwich in Kent, where Pfizer employed 2,400 people, has struggled to recover from the loss of so many high-grade jobs, and now ranks as one of the more deprived areas in Britain.

GlaxoSmithKline remains a significant investor in UK research facilities and is a major recipient of EU research funding. In 2012, Britain received the largest slice of EU R&D funding, with much of it going to the pharmaceutical industry.

However, the UK's commitment to private sector R&D remains low compared with many of its competitors at 1.1% of GDP. According to figures from the Organisation for Economic Co-operation and Development (OECD), R&D by public and private organisations accounted for 1.77% of UK GDP in 2011, well below 3.37% in Sweden, 2.84% in Germany and 2.25% in France. The EU average was 1.94%.

UK research and development spending from 2002 to 2012. Source: ONS

Successive governments have attempted to lift R&D spending through a system of generous tax reliefs. Small and medium-sized businesses can claim tax relief on their research costs of 225% compared with large companies, which can claim 130%, though neither benefit has raised spending levels significantly.

The ONS said earlier this year in a report on international variations that "the business enterprise component of R&D expenditure in the UK is low by international standards, even after adjusting for structural difference between countries. It is also concentrated in the hands of a few very large firms and the small number of industrial sectors in which they are based."

Steve Radley, director of policy at EEF, the manufacturers' organisation, said: "The data is a clear reminder that the UK has some way to go to catch up with our international competitors.

"The fall in expenditure does follow a strong increase in 2011, and the latest figures show pockets of strong growth in sectors such as motor vehicles. However, the key message for government is that it needs to build on the strong policy foundations it has put in place and be ambitious to drive up sustained increases in R&D spending."

The ONS said employment in R&D has remained relatively stable in recent years. "The lowest level in the last decade occurred in 2005, when 146,000 FTE were employed, while the highest level [160,000] was reached in 2011," it said.