How Are UK Firms Doing on the Three Key Measures?:

In short, the gap between the UK and its four major competitors has grown in terms of R&D investment to GDP. The major source of this underinvestment is to be found in both the Business and Government Sectors. However it is worth noting that the UK has a much more active role in terms of international flows of R&D, both in terms of its role as an investor overseas and in terms of its capacity to attract business R&D from abroad.
In terms of scientific performance does particularly well in terms of overall number of publications per capita which itself is partly a result of specialisation in biomedical-related fields. Hence in other disciplines such as chemistry, engineering, and physics the UK is performing poorly.
On top of this there is the clear evidence that the major new international competitors are rapidly increasing both the volume and impact of their R&D. See Neely et al., AIM and Griffith et al., IFS) and that productivity itself is very dispersed even in tightly defined sectors (see Griffith et al., AIM).

Much of the empirical work on R&D spend still focuses on the manufacturing sector, where at least in superficial terms the measurement of and underlying assumptions about the nature of the innovation process are easier. It is arguable whether this is actually the case but the problems become much more evident when we consider the service sector or what economists often refer to as the market for intangibles. On some estimates the service sector accounts for around 70% of UK economic activity as well as making a major contribution to other key economic measures such as balance of trade (see Haskel et al., QMUL).

Despite the widespread emphasis on the need for firms to pursue high value added strategies to ensure longer term competitive survival in a global economy, there is very little aggregate data on the degree to which UK firms are actually achieving such an objective. If we make some fairly heroic assumptions about the nature of an overall competitive market place then we might argue a suitable proxy would be the trend in aggregate profitability for the UK private sector. Another approach is to look at the trend in expenditure on various expense categories that we might reasonably assume will correlate with higher value added approaches such as marketing expenses.

Recent surveys of management practices have suggested that at least some of the relatively poor performance of firms in the UK economy can be ascribed to the relatively low level of application of modern management practices (see Bloom and Van Reenen, AIM). To be more accurate it seems that the UK has an undue proportion of poor performers in this respect. It is also noteworthy that there appears to be at least some relationship between encouraging a balanced approach to work-life demands and achieving better organisational performance, although, as often, the issue of the causal direction remains (see Bloom et al., AIM).
This observation links, to some extent, to the further fact that in terms of overall performance the distribution of UK firms shows an unusually long tail. Given the openness of the UK market for corporate control the sustained existence of this long tail is something of a mystery, but one intriguing partial explanation could lie in the substantial proportion of UK family owned firms where the managerial control still also resides with the family after the founders generation (see Bloom and Van Reenen, LSE).