By Daniel Hunter

The UK economy has experienced a ‘lost decade’ of innovation, with new evidence showing that businesses had a crisis of confidence in the 2000s, prioritising cash and concrete over investment in innovation.

Nesta's latest Innovation Index released today (Monday) shows that investment in innovation by British businesses has fallen by £24bn since the recession began and has not recovered. This is five times the amount the Government spends each year on science and technology research.

The report, including the third Innovation Index, shows:

- Innovation investment fell by 7% or £7.4bn between 2008 and 2009, as the recession began
- A further fall of 14%, or £17bn, from 2009 to 2011, according to a survey of 1,200 businesses
- After rising steadily from 1990 to 2000, innovation stagnated from 2000-2008 at 12% of private sector output

Nesta says the figures should act as a wake-up call for government and business as innovation is one of the most important drivers of sustainable economic growth. Between 2008 and 2009 innovation delivered 63 per cent of the UK's economic growth.

"Everyone agrees that innovation is the only route to long term growth," Geoff Mulgan, Nesta's CEO, said.

"The concern is that today's report and Investment Index show that investment in the future didn't just fall during the immediate aftermath of the financial crisis, but also continued falling as the economy appeared to stabilise."

The Innovation Index is the most authoritative source of how businesses in the UK invest in innovation. Only 13% of innovation investment now takes the form of R&D. Other important types of innovation investment captured in the index include design, software development, innovative training and organisational development.

"Other countries are making investment in innovation a top priority and the UK cannot afford not to do the same," Mulgan continued.

"Our data shows that British business prioritised cash and concrete over investment in future technologies and services, a potentially disastrous decision that now needs to be put right. That's why over the next few months we'll be setting out the details of what we call Plan I - a plan for innovation-led growth - as an alternative to the increasingly sterile debate between Plan A and Plan B."

The report shows how innovation differs across sectors, highlighting the importance of manufacturing to innovation in the UK. Representing 17% of GDP, manufacturing accounted for 77% of business investment in R&D and 23% of total business innovation investment.

Relative to their size, the biggest innovation investors among the UK's sectors are manufacturing, personal services and financial services. The lowest investors in innovation are agriculture, mining and construction - although the construction sector spends the most on design. The business services sector's largest investment is in skills and organisational innovation.

The Innovation Index is the third annual review of business investment in innovation and its effect on economic growth published by Nesta. In September, Nesta will release 'Plan I', its proposals on how to stimulate UK innovation for economic growth.

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