GUEST ARTICLE: R&D in Construction – it’s (not) coming home

As England’s run in the European Championships continues, the national team is once again under pressure to ‘bring football home’. But it’s not just football that we need to come home – this is in reference to R&D in construction. Robert Miles, Senior R&D Tax Manager at Ayming, the innovation consultancy, writes the following article…

“Despite the sector turning a corner on innovation, new research from Ayming UK has found that construction firms are offshoring R&D en masse, with 83% of the industry planning to carry out R&D abroad. This could create a cycle of decline whereby the UK construction industry continuously offshores innovation due to insufficient UK expertise, compounding the problem and failing to invest in UK R&D.

To avoid this and truly reap the benefits of the first reported rise in UK construction activity in two years, Britain must do everything it can to encourage firms to take a leaf out of the England team’s book and innovate at home.

Playing the international championships  

Globalisation has meant R&D often extends beyond borders, whether it’s to source specific skills or to bring costs down. The reality is that the UK construction industry is competing with other markets for innovation activity and the benefits that come with it. 

Of course, it’s a huge win that the sector is innovating. Not only has growth been consistently sluggish, but the construction sector is caught between a rock and hard place whereby it must play its part in addressing the UK housing shortage while simultaneously reducing its carbon footprint.

To make matters worse, inflation, supply chains and the war in Ukraine have resulted in a surge in the cost of raw materials over recent years, further adding to the pressure. Despite many expecting the sector to see a resurgence in 2024, the latest figures show that construction outputs decreased 0.9% in Quarter 1 2024 compared with Quarter 4 2023.

However, Ayming’s research reveals that a colossal 83% of construction firms are offshoring R&D in 2024. That is compared to 46% undertaking R&D in the UK – meaning less than half of firms are innovating domestically.  

Instead, our economic (and football) rivals are drawing in the activity. The European bloc has proved highly popular, with 66% of construction firms undertaking R&D activity across the continent. In terms of individual countries, USA is leading with  12% of firms offshoring R&D there, followed by China, Brazil, and Ireland, all at 11%.

This mass-offshoring of innovation presents several risks in the long run.

The own goal of offshoring  

While it’s true that firms will still benefit from innovation done abroad, the consistent offshoring of R&D activity sets a dangerous precedent. Essentially, it means the UK will finance the R&D abilities of other countries while neglecting our own. This could create a snowball effect that leaves us increasingly dependent on expertise and skills from abroad

Beyond the economic factors, this also presents certain geopolitical risks. R&D is by nature experimental and secretive. If lots of it is being done abroad, it increases the possibility that foreign companies – or even governments – will gain insights into UK innovation.

Not only do different countries have different legal regulatory frameworks around intellectual property, but there have been numerous cases of R&D espionage. The unfortunate reality is that not all foreign entities can be trusted to keep R&D secrets safe from prying hands.

On the other hand, investing in domestic innovation allows the UK to generate greater economic benefits. This means that UK companies are behind the ingenuity and creativity in developing new cutting-edge technologies, products, and services as opposed to international firms.

The UK’s aim should be to create a rich innovation ecosystem and economy, with collaboration between businesses, academia and government. This will help to create specialised talent that can drive a constant cycle of innovation and stimulate economic growth

Looking at the game plan

So, what’s the game plan to keep R&D activity onshore? Well, it’s important to establish why UK firms are offshoring in the first place.

For starters, construction firms have been caught up in the instability with the UK R&D incentive schemes. HMRC has pursued an aggressive compliance programme in reaction to cases of fraud

This has caused widespread friction, with more than a quarter (27%) of construction firms having recently experienced delayed payments, and a third (31%) saying their recent experience with HMRC has put them off from claiming R&D tax credits.

Internal conflict is never good for team outcomes, so we need to make sure that everyone in the UK’s innovation ecosystem is pulling in the same direction. This is because – with problems accessing this vital funding – construction firms have less of an incentive to innovate in the UK, and offshoring suddenly becomes a more attractive option.

However, according to Ayming’s research, the most common reason for offshoring is lower wages, with it being a factor for 38% of companies. 29% of firms identified better access to R&D talent abroad as an influencing factor. Ultimately, the search for skilled talent is one of the key driving factors and is exactly why construction firms are having to offshore their innovation.

There’s a lack of skills in the UK, which might suggest that we are already caught in a cycle whereby UK R&D talent is in decline because of the widespread offshoring and a lack of historical investment. We need to break that cycle before we are left dependent on skills abroad.

Bringing innovation home

It’s clear we need British firms not only to invest in innovation, but to innovate at home.

Above all, construction firms need access to specialist skills. While talent can be trained and imported, the Government must do everything it can to encourage firms to invest locally. Where would English football be without talent being developed through academies?

England are a favourite to win the European Championships and major tournaments in recent years have garnered more positive results. Why? This is largely due to the strategic overhaul of English football youth development over the last decade, aligning training needs, international objectives, and club investment. The resulting academy players having now matured into world-beating talent.

For the construction sector, the lesson from the beautiful game is clear – a clear industry strategy to incentivise investment in homegrown talent is the only route to bring innovation home. If the industry can do this, it will develop the highly skilled talent, stimulate regional innovation and drive technological advancements the sector desperately needs.