Skills shortages threaten innovation plans for Britain's small firms

16 November 2015

  • Four in 10 small firms plan to ramp up investment in R&D
  • But 62 per cent risk being held back by a lack of innovation skills
  • Every £1 invested in R&D generating £1.74 of additional sales**
  • Small firms expect to generate £121bn of additional sales next year*
  • Three quarters say innovation ‘vital’ to growth forecasts

Britain’s army of small firms are planning a fresh wave of R&D investment in a bid to boost sales but risk being held back by a lack of relevant skills, according to a new survey by Lloyds Bank Commercial Banking.

Four in ten firms (40 per cent) expect to increase their investment in new products and services over the next five years, while a further 54 per cent say they will do more if they can access the right funding.

In a further sign of growing business confidence, bosses at Britain’s small firms expect annual sales to increase 7.4 per cent over the next two years driven by new innovation, against UK GDP growth predictions of 2.4 per cent. This would add £121.87bn of additional sales to the UK economy***. 

But despite the upbeat outlook, 62 per cent of small firms said their R&D plans were being held back, with the most common cause being a lack of skills needed to drive innovation, including science, technology, engineering and maths (37 per cent).

Last month, the CBI called on the government to prioritise innovation and science funding in the Comprehensive Spending Review, highlighting that the UK’s research and development spending is now the lowest amongst the G8. In September, the World Economic Forum’s global competitiveness index showed Britain had slipped to 10th place in the rankings, being overtaken by Sweden.

Gareth Oakley, Managing Director, SME Banking, Lloyds Bank Commercial Banking said: “What we’re seeing is a growing determination amongst Britain’s small and medium sized firms to innovate in order to drive competitiveness and secure their long-term success.

“SMEs are ideally placed to lead this charge. They have the advantage of being closer to their customers and more internally flexible, which makes the process of listening to feedback and adapting products and services a shorter cycle.”

He added: “The scale of the challenge, however, is equally clear. Unless we provide access to the talent necessary to deliver that innovation, we run the risk of missing an enormous economic opportunity. That requires a concerted and collaborative effort on the part of the UK’s innovation ecosystem, with skills and funding being the killer ingredients. As a major supporter of small firms, we’re determined to play our part.” 

According to the survey, small businesses said their investment in innovation over the last five years had increased profits (42 per cent) and led directly to them securing new contracts (43 per cent).

Britain’s SMEs invested on average 8 per cent of revenue on R&D over the last five years which was responsible for 15 per cent of sales, meaning every £1 spent generated £1.74 of sales.

In total, half (51 per cent) plan to raise external funding to support their innovation rather than working capital.

Two thirds (67 per cent) of firms polled said innovation was vital to their growth strategy.


*Based on the average annual growth forecast of respondents being 7.4 per cent for 2015-2016 against the combined annual turnover of Britain’s SMEs in 2014 of £1,647bn according to government sources)

**Based on a mean average of 8.4% of revenue invested generating a mean average of 14.6% of revenues

***UK GDP growth estimates published by the Office for Budget Responsibility