A new report by the Centre for Business Research reveals that the UK economy is suffering due to “large, profitable UK-based companies” being “sold early and usually to overseas multinationals”.
The Centre for Business Research (CBR), which is based at Cambridge Judge Business School, is pioneering new methods of data collection and analysis of enterprise and innovation to better understand how to achieve a sustainable economy and society.
The authors of the report, David Connell, a senior research fellow at the centre, and Bobby V Reddy, a professor of corporate law and governance at the University of Cambridge, have assessed business development trends over the last 25 years. Their findings show that while many more science and technology-based companies are being started each year, and with much more funding available than in 1999 (just before the dot.com bubble burst), the availability of investment is not translating into the creation of large, profitable, UK-controlled companies that continue to grow and innovate within the country.
The Cambridge cluster, the CBR finds, “is now less effective at turning start-ups into sizeable UK businesses than it was a quarter of a century ago”. Instead, they conclude, “the nature of the UK’s position within the global economy, and the VC (venture capital) funding model on which most R&D-based start-ups are based, has resulted in the most promising start-ups tending to be sold early, before they are profitable, and usually to overseas multinationals, with subsequent UK growth curtailed or worse”.
Sales to overseas strategic buyers and private equity have become “a routine outcome, while not necessarily the best outcome for those companies or the wider UK economy”. And IPO’s for UK companies on the Nasdaq and NYSE are increasingly popular because “a perception exists that valuations are significantly lower for IPOs – particularly of tech companies – on the London Stock Exchange than on US markets”.
A recent league table of UK-listed technology companies includes only nine valued at over £1billion as of 2 May, 2024, and the shareholders of one of those firms, Darktrace, agreed a £4.25bn acquisition by US private equity firm Thoma Bravo in June.
Pharmaceuticals is the industry in which UK-listed companies figure most strongly in global league tables, says Companies Market Cap. AstraZeneca (AngloSwedish) at number eight and GSK at 19th are included in the 50 largest pharmaceutical and biotech companies by market capitalisation globally. Both are multi-nationals, so even though UK academic research enjoys a high reputation in these fields, and there is support via the NHS, UK Research Councils and UK medical research charities, the UK might be expected to have led to a much stronger UK industrial position globally. The evidence, suggests the report, is that the public sector has been largely unable to play this “pre-commercial procurement” role.
A sea change is needed at the heart of policy is required, say the authors, and “the government must therefore do much more to support entrepreneurs with the desire and ability to build a major UK business over the long term”.
If the government is the investor, subsequent growth benefits the UK. The development contracts advocated in the CBR study are not R&D grants – as typified by Innovate UK – but direct drivers to profitability which replace external finance. The returns then accrue within the UK rather than being siphoned off overseas.
“Development contracts with phased deadlines can often be a much better driver of innovation than pure financial investment,” the report, Selling Less of the Family Silver, states.
For STEM-based businesses the authors look to the US, where public sector customers can also be “powerful drivers of innovation for the development of new STEM-based businesses”. US Federal Government Agency R&D procurement contracts “have long been its most important mechanism for funding innovative new companies, utilising Department of Defense, NASA and other agency R&D budgets”.
Typically 100 per cent-funded by the US government, such STEM projects “move through to higher technology readiness levels (TRLs), taking the product or technology closer to the point at which it is safe and reliable enough to use in a real operational situation”.
So what’s the suggested route to maximise the potential of the UK’s start-up environment? The CBR concludes that “what is increasingly clear is that new approaches and a change in the overall policy mix is likely to be needed if the UK is to maximise its potential as a science and technology-based economy”.
The authors add: “Success is unlikely unless a properly resourced mechanism is put in place to help plan and monitor innovation and industrial policies across government as a whole, one which is authoritative, independent, enduring, and capable of deep, critical and forensic analysis of all the evidence.”