The Impact of COVID-19 on Firm Innovation: The Case of the West Midlands

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In this blog, Dr Chloe Billing explores the impact of COVID-19 on innovation activities in the West Midlands.

A full range of business support measures has been made available to UK businesses to help with the current COVID-19 crisis. These were discussed in a recent blog by Professor Raquel Ortega Argiles and include the Coronavirus Job Retention Scheme, Deferral of VAT payments due to coronavirus (COVID-19), Business support grants, and the Coronavirus Business Interruption Loan Scheme (Gov.uk, 2020). However, there are expected to be long-term impacts on the region’s local businesses post COVID-19, which these business support measures will not cover. One example is the expected decline of innovation activities, as firms are unable to invest and lack the incentives to innovate. In response to this, “the importance of innovation to future recovery has been recognised by the UK government, in its announcement of a £1.5bn loan and grant package for the UK’s most innovative companies” (Enterprise Research Centre, 2020). But what will the impact be on West Midlands based firms post-COVID 19?

Innovation can be defined as the ‘commercialisation of new ideas’ for a new product, service or business process. More innovative firms are more competitive and adaptable in the face of external threats and opportunities (Collinson, 2018). They tend to export more (a result of their competitiveness and a factor behind their resilience) and they employ higher-skilled, more productive, and higher-paid employees and therefore produce larger positive multiplier effects for their host regions (Collinson, 2018). Innovation is needed if regional/local economies are to bounce back from the COVID-19 shock in a more resilient, more inclusive, and more productive way of working. In recent City-REDI blogs, Professor John Goddard and Professor Simon Collinson explored the role of universities in this, as did the latest REDI-Update. This blog address four key questions:

  1. How did the levels of innovation activity for firms in the West Midlands compare to the rest of the UK pre the COVID-19 outbreak?
  2. What are the biggest barriers to firm-innovation post the COVID-19 crisis?
  3. How might the factors driving innovation and the type of firm-innovation change post the COVID-19 crisis?
  4. What business support measures would help?
1. West Midlands Innovation Activity pre-COVID-19 Vs. UK Average

The UK Innovation Survey (UKIS) provides the main source of information on business innovation in the UK. The data analysed here corresponds to the statistical annex based on the tenth iteration of the survey, which covered the period January 1, 2014, to December 31, 2016. The UKIS (2017) found that in the West Midlands, 52% of the organisations were ‘innovation active’ meaning they had introduced a significant innovation in the last 12 months. This figure was very similar to a survey of 300 firms that City-REDI conducted in 2019, which found that 53% of the organisation were ‘innovative active’. Comparison across different regions shows that the West Midlands is above the national average (of 49%), coming fourth out of nine English regions and ahead of all three of the devolved nations.

Firms rated ‘cost factors’ as the most pressing constraint to innovation.
2. Barriers to firm-innovation pre and post-COVID-19

The UKIS (2017) observed that ‘availability and costs of finance’, together with ‘innovation costs’ and perceived ‘economic risks’, are the most common barriers to innovation. These findings are consistent with City-REDI’s recent survey of 300 firms across the Advanced Manufacturing, Business Professional and Financial Services (BPFS), Retail, and Hospitality sector (Billing et al., 2020). The surveyed firms in the West Midlands reported a range of barriers to innovation limiting their ability to improve products and services or the way these are produced/sold. Collectively, the firms rated ‘cost factors’ as the most pressing constraint, as do UK firms generally. Retail (53.3%) and hospitality (53.8%) firms, in particular, identified this as a high barrier to innovation, compared to 27.4% in advanced manufacturing and 31.1% in BPFS firms. A contributing factor to the cost constraints observed by the region’s firms is the disproportionate regional distribution of funding for research and business. Research published by UKRI in 2020 shows that the so-called ‘Golden Triangle’ benefits disproportionately from public investment, compared with other regions of the UK. The headline stat is that 52% of gross domestic expenditure on R&D (GERD) goes to London, the South East, and East of England regions. In 2018-18, the West Midlands received only 9%.

UKRI analysis: R&D Activity by Region 2017-18

Region Gross Expenditure on R&D (GERD) Gross Expenditure on R&D (GERD) % Business Enterprise R&D (BERD) Business Enterprise R&D (BERD)%
NUTS 1 Region 2017, £m 2017 2017, £m 2017
East Midlands 1,938 6% 1,521 6%
East of England 5,938 17% 4,677 20%
London 5,548 16% 2,796 12%
North East 707 2% 384 2%
North West 3,040 9% 2,174 9%
Northern Ireland 695 2% 512 2%
Scotland 2,529 7% 1,247 5%
South East 6,730 19% 4,860 21%
South West 2,334 7% 1,652 7%
Wales 744 2% 457 2%
West Midlands 2,965 9% 2,467 10%
Yorkshire and The Humber 1,641 5% 938 4%
United Kingdom 34,809 100% 23,685 100%

Source: GERD/BERD figures: ONS, Gross domestic expenditure on research and development, by region, UK

Investment in Research and Development (R&D) and therefore innovation, is a topic that has been at the forefront of public policy in the last few years, with the 2017 Industrial Strategy pledge to increase investment in R&D from 1.7% to 2.4% of GDP by 2027. More recently, Science Minister Chris Skidmore set out his vision on how to level up research and development “so that it benefits every corner of the UK” (Gov.uk, 2020). Consequently, pre COVID-19 the amount of R&D investment for the West Midlands and other regions was expected to rise. However, there are unlikely to be the same certainties post-COVID 19 and the Government’s loan and grant package can only go so far in substituting these funds.  As the biggest constraint on innovation in the region, this is likely to reduce innovative activity in the West Midlands post COVID-19. The latest report by the Enterprise Research Centre observed that data from successive UK Innovation Surveys suggest that the proportion of innovation active firms fell 58 per cent during the last recession (2008-10) with parallel falls in product/service innovation (26.6 per cent), process innovation (22.6 per cent). Therefore, the region should expect sharp falls (perhaps a third) in the proportion of innovating firms (Roper, 2020).

City-REDI research by Dr Abigail Taylor, found that local universities will need to continue to play an active role in continuing to attract investment to the region. This research examined the experiences of Local Enterprise Partnerships (LEPs) and their partners in securing funding. The research found that the presence of research-intensive universities in Birmingham is a central factor in the success of the Greater Birmingham and Solihull LEP (GBSLEP) and its ability to attract funding awards. The GBSLEP has received significant levels of funding from Horizon2020 (53,590,192 euros for 2014-2018) and research Council/Innovate UK (£997,002,402 for 2012-2021). When we account for the unequal LEP geographies, by standardising funding data per head of population in each LEP, we find that the GBSLEP sits in the top ten LEP areas outside of London, in terms of its success at winning both European and UK research funding. The Midlands Engine receives the highest level of Innovate UK Funding awards, reflecting its strong history of manufacturing. Having strong research universities is critical to this success because they tend to be awarded to the strongest consortia of university research groups and R&D focused businesses in key technology areas. But high levels of science, technology and engineering skills, strong regional partnership networks, and coherent local industrial policies are also all important factors.

City-REDI research by Dr Abigail Taylor, found that local universities will need to continue to play an active role in continuing to attract investment to the region.
3. Factors driving innovation and the type of firm-innovation post COVID-19

There are varying motivations for firms to engage in broad forms of innovation which may relate to firms’ business strategies of improving quality, reducing costs, or diversifying their range of products and services. Changes in these motivations can vary over time, reflecting an evolution in the external environment and market conditions.  The economic uncertainty and unstable market conditions post COVID-19 are likely to influence the motivations for West Midlands firms to innovate, with ‘reducing costs per unit produced’ and ‘improving production flexibility’ expected to take precedence, as firms focus on cutting costs and becoming more resilient to future shocks. This aligns with a recent TechNation survey of 116 scaling tech companies, which found that 77% of these businesses had reported that they expected cash flow to be impacted by recent events, 80% of companies said they expected securing new customers to become a challenge, with 40% of companies saying they planned to lay off staff. Changes to the factors driving innovation will affect the type of changes introduced. For example, investment in capital equipment is expected to decrease. Additionally, the ERC’s study observed “firms’ willingness to invest in intangibles will fall sharply with implications for future innovation and growth”. These investments include the marketing of innovations, design, external knowledge, and training are expected to decrease. Further research is needed to identify the precise impact that COVID-19 will have on innovation activity in the West Midlands region.

4. Business Support Measures

The region needs an evidence-based, practical approach to strengthening its innovation-driven entrepreneurial (IDE) ecosystems to support innovation activity in the region post-COVID-19 (Szerb et al., 2020). The ‘MIT REAP’ programme focuses on delivering this; the West Midlands is one of six regions currently part of a ‘lite’ version of the global REAP programme. The objectives of the programme are as follows:

  • Understand the key strengths and weaknesses of your innovation eco-System
  • Evaluate the engagement and level of collective action of your ecosystem Stakeholders
  • Design a Strategy to strengthen and catalyse your ecosystem to build innovation-driven entrepreneurship
  • Find resources and engage stakeholders to move strategy into Implementation

The West Midlands Team ‘lite’ REAP team is sponsored by the GBSLEP, BCCLEP and the West Midlands Combined Authority (WMCA), whilst also representing the Coventry & Warks LEP area. WM REDI is part of this team, which includes representatives from Government, Academia, Corporates, SMEs, and Risk Capital.  Other organisations involved include the WMCA (Innovation Lead), Innovate UK, GBSLEP, Black Country Growth LEP, West Midlands Combined Universities, Aston Centre for Growth, Birmingham University, Midlands Aerospace Alliance, KPMG, Greater Birmingham Chambers, Black Country Chamber, Innovation Alliance West Midlands, and the British Business Bank. The team is currently focussed on delivering the following actions:

  1. Customer Research – surveying entrepreneurs (SMEs) and Risk capital providers to analyse their view of the innovation ecosystem.  We aim to understand our regional portfolio of innovation actors (sector, maturity, profile, etc.) and identify the most vulnerable sectors and those that have the biggest economic impact on the region, so we can match them to appropriate business support.
  2. Assessing the ecosystem – developing a set of indicators to assess the capability to support Innovation and Entrepreneurship in the region. WM REDI is adding to the metrics supplied by MIT to ensure they are useful for our region, pairing them with regional datasets and comparing this data against the national averages
  3. Mapping Current Business Support – this will let us see if we as a region are supporting the development and growth of ‘innovation-driven enterprises’ (IDEs) and if not what areas of business support need to change / gaps need to be addressed. For example, is there appropriate business support available to help firms to build resilience post COVID-19, around the re-purposing, re-positioning, and re-validating of their business?
  4. Identification of Innovation Driven Enterprises – these companies pursue global opportunities based on bringing to customers’ innovations, which have a clear competitive advantage and high growth potential (Aulet and Murray, 2013).

City-REDI / WM REDI have developed a resource page with all of our analysis of the impact of Coronavirus (COVID-19) on the West Midlands and the UK. It includes previous editions of the West Midlands Weekly Economic Monitor, blogs and research on the economic and social impact of COVID-19. You can view that here.


This blog was written by Dr Chloe Billing, Research Fellow, City-REDI / WM REDI, University of Birmingham. 

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Disclaimer: 
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI / WM REDI or the University of Birmingham

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