Funding and skills gaps still holding back Midlands’ innovation

Neil Murray, Impact Data Metrics

The Midlands is in danger of missing out on growth opportunities presented by emerging technologies such as smart vehicles, artificial intelligence and advances in life science, according to a major new research to be published at Invest Midlands on Wednesday (26 May).

Chasing Unicorns: Innovation-led Growth in the Midlands, produced by Impact Data Metrics, presents stark evidence of funding and skills gaps, laying bare the challenges facing the government’s ‘levelling-up’ agenda, and delivery of the UK Industrial Strategy, which is focused on innovation.

Analysts at Impact Data Metrics drew on a comprehensive range of sources including the Department for Business, Energy and Industrial Strategy, as well as their own datasets, to demonstrate that the Midlands’ success in attracting equity funding pales in comparison with other UK regions.

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Despite the pandemic, venture capital funding into innovation-based companies in UK cities/hubs actually grew slightly in 2020, increasing from $14.8bn to $15.0 billion. However, Birmingham, the only Midlands city in the top 20, was vastly outperformed by London, Oxford and Cambridge, the long standing ‘Golden Triangle’ of UK innovation.

In 2020 Birmingham attracted just £8 million of venture capital, down from £33 million in 2019.  In the same period, London secured £8.1 billion, the figure barely dipping from the previous year, whilst Oxford attracted £414 million and Cambridge £206 million in 2020.

The figures were not much more encouraging for other forms of private investment. Successive UK governments have used significant tax breaks through the Enterprise Investment Scheme (EIS) and its sister Seed Enterprise Incentive Scheme (SEIS) to draw money towards R&D focused businesses.

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Impact Data Metrics found that London, the South East and East of England accounted for 76% of the £1.99 billion of EIS/SEIS funding raised by companies in 2018/19. The Midlands only secured a fraction of this, £200 million.

The report says the barriers to attracting private funding are already well evidenced by the Midlands Engine Investment Fund (MEIF), one of the key investment vehicles targeted at the region. A collaboration between the British Business Bank and ten Midland Local Enterprise Partnerships, the fund is tasked with investing more than £250 million between 2017 and 2022.

The most recent evaluation report of MEIF’s progress sets out a basic lack of investment readiness in Midland companies – described as a “significant and persistent” issue. MEIF highlights issues such as “a lack of financial literacy and experience, limited awareness of options and an inability to present propositions.”

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The overall picture was more encouraging in terms of the ability of firms in the region to attract public sector investment into research and development based enterprises.

Public research funding is largely governed by UKRI, which includes Innovate UK, the agency focused on driving productivity and economic growth by supporting businesses to achieve the potential of new ideas.

Since being established in 2007, Innovate UK has invested more than £2.2 billion to help businesses. This has spanned more than 11,000 projects that have generated up to £16 billion in Gross Value Added for the UK economy and around 70,000 jobs.

Innovate UK funding in the Midlands totaled £1.4 billion spread over 3,185 grants between 2015 and 2020. Of this money, £548 million has been provided directly to businesses to fund R&D projects leveraging a further £541.9 million of R&D spend.

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Over this period, the Midlands received around 20% of total Innovate UK funding compared to 47% for London/Oxford/Cambridge combined. The ratio is worse when direct funding to businesses is analysed as opposed to Innovate funding to academic partners, Catapults and the like – 15% for the Midlands, 56% for the Golden Triangle.

Solihull is the most successful Midlands Local Authority for securing Innovate UK funding with a total of £664 million across the period, followed by Coventry, £227 million, and Rugby, £101 million.

The full report makes ten recommendations to achieve a step change in rebalancing the UK science and technology economy.

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The most radical calls for the creation of a new statutory body, the Midlands Innovation Forum. It would enable the region to speak with one voice on the investment needed to drive transformational growth. The new organisation would help connect the different elements within pan-Midlands innovation – the business community, universities, Local Authorities and Local Enterprise Partnerships. It would not replace or replicate the work of existing bodies but add strategic value by ensuring that funding and strategy decisions are informed by local knowledge and requirements.

The authors also call for the Midlands Engine Investment Fund to be refilled with funds specifically targeted at dynamically growing businesses in the developing industry sectors aligned with priority areas of innovation with fund management incentives that reward greater risk taking.

Neil Murray, chief executive of Impact Data Metrics, said: “The ability to create base layers of start-ups and scaling companies that can successfully innovate is a huge factor in how the Midlands remains competitive. The advance of digital into all aspects of our lives and the demand for low carbon or clean energy in sectors like automotive and manufacturing are just two examples of the powerful tectonic forces shaping the future. Our findings show the extent of the challenge in the Midlands and the need for radical action.”

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