Tom Wrenn, Managing Partner at ECI Partners

During his first major speech of 2023, Prime Minister Rishi Sunak highlighted the importance of furthering scientific and technological innovation to support the government’s pledge to make the UK ‘the world’s next Silicon Valley’. This statement echoed the Chancellor’s Autumn Statement last year, with Jeremy Hunt designating digital technology as one of the country’s five growth industries critical to making this vision a reality.

Turning the UK into the next Silicon Valley by implementing more robust digital incentives and infrastructure is vital to the nation’s growth as it can help to lift up the economy and provide new job opportunities. In fact, a report from Local Government Association has revealed that supporting and strengthening the digital economy could help grow the UK tech sector’s annual gross value added by an additional £41.5 billion by 2025, creating 678,000 jobs. However, with the UK currently facing high inflation, rising interest rates and sluggish economic growth, encouraging businesses to retain research and development (R&D) in tech will certainly prove a challenge amidst damaged business confidence.

Incentivising innovation

Creating incentives for businesses to develop their technological capabilities will prove crucial to promoting innovation and growth in the UK’s thriving tech sector. By ringfencing the £20 billion commitment to investment in R&D for 2024/2025, the government has laid the groundwork for future innovation by ensuring the funding remains for AI, fintech and green technology. The decision to not introduce an Online Sales Tax will also avoid penalising consumers and disincentivising businesses from growing their digital offerings.

Similarly, start-ups and investors were encouraged by the Chancellor’s decision last November to retain Kwasi Kwarteng’s extension of the Seed Enterprise Investment Scheme (SEIS). The investor-relief programme now allows companies to raise up to £250,000 of investment in return for funding early-stage ventures.

Policies like this, which encourage investment in start-ups , not only bolster the economy but are a vital tool for laying the foundations for future technological advancements and ensuring that Britain remains a key player in the global digital landscape.

Increases to the Research and Development Expenditure Credit (RDEC) relief rate from 13% to 20% in 2023 should further reward companies that invest in innovation through tax breaks. However, despite this incentive, it’s also worth noting that the SME additional deduction will decrease from 130% to 86%. The Chancellor has justified this decrease as a protective measure to combat fraud in the SME scheme, but the move has attracted criticism for reducing tax relief and incentives for smaller businesses, which are most likely to reinvest profits back into the UK economy.

Despite this, it’s clear that UK businesses face more barriers to research, growth and development than a mere lack of incentive. Whilst the most recent ONS GDP figures show the UK economy growing marginally, a recession is still possible, and business confidence continues to be dented by rising inflation and interest rates. Energy prices are also chipping away at profit margins, divesting money that may well have otherwise been spent on R&D. As a result, it’s not entirely surprising that the British Chambers of Commerce Q4 Economic Survey reported that 57% of firms had no plans to increase business investment, whilst 22% reported a decrease. Therefore, whilst government schemes to increase financial incentives to retain R&D are welcome, the extent to which they will be able to stimulate investment and growth in such challenging economic circumstances remains to be seen.

Growth through competition 

Legislation to activate the Competition and Markets Authority’s (CMA) Digital Markets Unit will also prove crucial on the journey to the UK being the next Silicon Valley. It can stimulate innovation through competition, and this new unit will ‘challenge monopolies and increase the competitive pressure to innovate, allowing regulators to take a more proactive approach to curbing big tech dominance’.

Ultimately, that could help open up space for creative start-ups to compete with established incumbents.

Laying the foundations

Alongside promoting innovation, it’s equally important that infrastructure is sufficient to support fast-evolving technological advancements and create an environment where entrepreneurs can thrive, and developing vital infrastructure such as 5G networks is also key to attracting investment. With 5G’s economic impact for the UK projected to be £43bn by 2030, the government’s launch of the UK Telecoms Innovation Network at the start of 2022 is certainly a step in the right direction to ensuring the UK has the infrastructure it needs to become a leading force in technology and digital.  However, the government must also ensure that regional development, or “levelling up” takes place in other key sectors such as high-speed rail and affordable housing, to support a geographically flexible workforce and to play a part in growing digital ecosystems and research hubs outside London.

Attracting talent

The focus on stimulating innovation is to be commended, but digital skills shortages and access to talent consistently pose barriers to growth in the tech industry. Despite competitive salaries and remote working perks helping to attract employees, there’s still a serious dearth of digital skills amongst UK workers, particularly outside of London and other tech hotspots.

Our recent Growth Characteristics research highlights the scale of this challenge, with more than one in ten (14%) tech CEOs saying that finding the best talent is their biggest business concern. Digitally upskilling the UK workforce must remain a priority in order for capability to keep up with demand in the sector and ensure the UK remains a prime location for digital investment and innovation.

Ultimately, the adoption of technologies is accelerating and will continue to be an important driver of growth and productivity, as key sectors and businesses increasingly digitalise. Although the government has signalled positive measures in creating a regulatory landscape that is conducive to innovation and growth, it’s also evident that businesses face an uphill battle in terms of balancing sky-rocketing business costs against retaining budget for development. Alongside regulatory changes, the government should also seek to prioritise long-term structural transformation and investment in upskilling and infrastructure in order for the UK to have a real chance of becoming the next Silicon Valley.