How Innovation, Productivity & Growth Fuel the Economy

By June 29, 2018

Innovation is synonymous with disruption, but with disruption comes transformation that pushes corporations to adapt if they wish to remain relevant in the economy today.

As a key factor in growth, innovation is invaluable for long term fiscal prosperity.

“In economic terms, innovation describes the development and application of ideas and technologies that improve goods and services or make their production more efficient,” according to the European Central Bank (ECB).

Innovation is what stops proven companies from becoming stagnant, and it is in the DNA of all exciting startups.

With true innovation comes job creation, shifts in old paradigms, new ways in thinking and improvements in quality of life.

Of course, businesses cannot innovate without access to finance, especially when it comes to Research and Development (R&D).

In 2000 the UK government unveiled the R&D Tax Relief Scheme for Small and Medium-sized Enterprises (SMEs) as the leading source of state support in the United Kingdom for innovative businesses.

The R&D tax relief for SMEs is available to any kind of incorporated company conducting innovation, notwithstanding the sector in which it operates.

It comprises of an R&D tax relief incentive for SMEs that enables enhanced deductions of 230% of eligible R&D expenditure from a company’s taxable revenue – delivering a significant cost reduction of 26% after applying the corporate tax rate.

According to F. Initiatives, a consultancy firm which specialises in financing innovation, there are three steps to the cycle of innovation. It begins with an idea, which, with time and investment results in production, which in turn leads to growth. This cycle then repeats.   

1) Development

New ideas are developed, which create unique products or services that bring about improvements in efficiency or exploration of new markets.

2) Productivity

Increased efficiency enables companies to produce improved output for the same input. For example; an innovation allows a baker to produce 12 loaves of bread instead of 10 for the same number of hours worked. This innovation has therefore brought about a 20% gain in productivity.

3) Growth

Improved productivity will mean greater profits for the business which can then be reinvested to deliver further growth, explore new markets or develop additional innovations to offer more growth.

Innovation Stimulates the Economy

From this cycle, the ripple effect begins to take form on the economy as a whole.

The actual innovation or new ideas approach results in new opportunities in productivity. Improved productivity can cause new employment opportunities, which in turn energise the economy.

A stimulated economy causes higher growth. The business becomes more profitable, workers receive better pay, and the increase in capital can be used to fund more innovative.

In the digital age, workplace automation is on the rise, which has fueled fears and speculation that more jobs are going to be lost.

At the same time, while automation may not create new jobs to begin with, it does create spheres of employment that were never thought possible before.

Last year VentureBeat reported, “A Deloitte study of automation in the U.K. found that 800,000 low-skilled jobs were eliminated as the result of AI and other automation technologies. But get this: 3.5 million new jobs were created as well, and those jobs paid on average nearly $13,000 more per year than the ones that were lost.”

To allow innovation to create new jobs, an educated workforce is crucial.

For innovation to succeed, F. Initiatives recognises 3 crucial avenues that need to be investigated: better education, increased investment in research and development and better access to funding for entrepreneurs to bring innovations to market.

In the UK, R&D tax relief is eligible for SMEs that have:

– Fewer than 500 employees.

– Either: annual turnover < €100 million OR total balance sheet < €86 million.

– All entities within a group are included when estimating the threshold.

F. Initiatives’ extensive knowledge of the UK R&D tax relief schemes – and its exhaustive tracking of changes in legislation – paired with an established working methodology, guarantees the maximum optimisation of its clients’ claims.