Exactly sixteen years on from my 2009 article on the UK’s economic imbalance, I reflect on how services continue to dominate GDP, while manufacturing still punches above its weight in R&D. I was right about the R&D gap — but missed the rise of intangible capital and startup-led innovation. Cybersecurity emerged as both a strategic asset and an innovation driver. Government efforts have been patchy, and real balance remains elusive. The future lies in resilience, not symmetry.

Contents

Introduction: Recap of 2009 Articles and Four Key Issues

On Tuesday, the 5th of May 2009, I wrote “Industry contributions to the UK economy and investment in R&D; by industry” an article about what I saw as a dangerous imbalance in the UK economy. I followed this up with “UK innovation ranking compared to the rest of the World – why do we get so little ‘bang’ for our ‘buck’?” a few months later on Wednesday, the 9th of September 2009. In the initial article, I specifically highlighted two deeply intertwined issues, followed by two more in the later article:

• The disproportionate reliance on services, especially financial services, to generate GDP.
• The startling concentration of R&D investment in manufacturing, despite it contributing a much smaller share of GDP.
• The spend on R&D in the UK in terms of where in the process (theoretical, rather than applied, rather than productisation)
• How we ranked globally, in terms of R&D spend and focus (of that spending)

Sixteen years later, with the benefit of hindsight (and more than a little data), I think it’s fair to say I was partially right, partially wrong, and, perhaps most intriguingly, I missed something profound that has since reshaped the landscape.

Programmes like DSIT’s Cyber ASAP were a welcome intervention, a clear attempt to shift UK R&D funding away from the purely theoretical end of the pipeline and closer to commercial application. Similarly, accelerators like NCSC for Startups and Cyber Runway helped channel entrepreneurial energy into real-world innovation, in the spirit of Y Combinator or Techstars. But with these initiatives now paused or under review, the momentum they generated risks stalling, casting a shadow over efforts to build a more agile, innovation-led economy.

1. Was I right about the imbalance in GDP contribution?

Yes — and no. The services sector still dominates UK GDP, accounting for over 80% of total economic output as of 2024. Financial services have somewhat reduced in relative weight (now closer to 7–8% of GDP, depending on how you count), largely due to the post-2008 regulatory clampdowns and the long shadow of Brexit. But other service areas, particularly digital, creative industries, and professional services, have surged.

Meanwhile, manufacturing has held steady or slightly declined, hovering between 9–10% of GDP, despite ongoing automation, global supply chain shifts, and recent re-shoring efforts. But what’s remarkable is not the decline, but the resilience of advanced manufacturing. From aerospace to precision medicine and quantum technologies, UK manufacturing has quietly carved out deep niches, especially in the so-called “Catapult” centres and university-linked innovation hubs.

The UK cyber sector, virtually invisible in national strategy discussions in 2009, has since emerged as a high-value export and economic contributor. From the NCSC to regional cyber clusters like the West Midlands, cyber has become both a service and a sovereign capability. While not broken out explicitly in GDP statistics, cyber contributes significantly to national resilience, trust in digital infrastructure, and the competitiveness of the UK’s tech sector overall.

Still, the structural imbalance I highlighted — the UK being a “one-trick pony” — remains relevant, though the trick has evolved from purely financial services to broader “intangible capital”: IP, data, design, and digital services.

2. Was I right about the R&D investment gap?

On this point, I remain convinced — and so do most economists. The core figures haven’t changed dramatically: around 65–70% of business R&D is still performed by the manufacturing sector, while it contributes only around 10% of GDP. Services — despite their growing dominance — continue to underinvest in innovation.

But what’s more interesting is that how we define R&D has evolved. In 2009, R&D was still framed in terms of lab coats, whiteboards, and product patents. Today, innovation in services increasingly includes software development, data science, user experience design, behavioural insights, and yes, even AI prompt engineering. These don’t always show up in official “R&D” stats, but they represent real, measurable innovation.

Cybersecurity innovation, particularly at the intersection of AI, behavioural science, and supply chain risk, is a case in point. While much of this is service-based, it’s research-intensive, combining software development, threat modelling, and increasingly, human factors research. Startups and scaleups in the cyber space are pushing the boundaries of what counts as “R&D”, yet many still struggle to access traditional innovation funding mechanisms due to narrow definitions.

The reclassification of R&D by the ONS in 2023 (which now includes more software and digital design activities) shows this evolution in thinking. It turns out, services were investing in innovation — we just weren’t measuring it properly.

3. Did we ever fix the ‘bang for buck’ problem?

Not really — though we’ve learned to frame it differently.

Back in 2009, I was focused on the stark mismatch between the UK’s relatively high R&D spend and its middling performance on global innovation league tables. The frustration was clear: how could we spend so much and still fall short of top-tier innovation outcomes?

Sixteen years on, we’ve arguably made modest progress in innovation output — but the core issue of conversion efficiency remains. The UK still struggles to translate research investment into widespread commercial success or productivity gains. And while the UK has climbed some innovation indices since 2009, we’ve done so largely thanks to the strength of our universities and a few standout sectors (e.g. fintech, AI, cyber), rather than systemic reform.

4. R&D alignment: Still too upstream?

One of my core criticisms in 2009 was that UK public R&D was heavily skewed toward basic research, with too little emphasis on applied R&D and productisation. That critique holds up.

Although efforts like Innovate UK, SBRI, and more recently DSIT’s Cyber Local programme have tried to plug the applied innovation gap, UK R&D funding still leans towards early-stage science, not late-stage scaling or commercial development. Compared to the US, where public civil R&D puts ~15% into development, the UK’s ~2–3% is paltry.

This upstream bias explains why we’re rich in discovery but often poor in deployment. From quantum to clean energy, we’re still exporting potential rather than capturing full economic value.

5. The complexity problem: Still unresolved

In 2009, I pointed out the labyrinthine structure of UK R&D funding — research councils, agencies, intermediaries, and universities all slicing the pie in different ways. Sadly, that spaghetti bowl remains. While there have been attempts at simplification (e.g. UKRI’s formation in 2018), for most startups or SMEs, the funding landscape is still confusing and opaque.

The consequence? Many innovative firms never bother applying. Others spend more time chasing funding than building products. Complexity is not just inefficient, it deters the very entrepreneurialism we claim to want.

6. Measuring innovation: Then and now

Another key issue I raised in 2009 was how we measure innovation. I flagged concerns that the UK’s innovation performance wasn’t just a failure of output — it was a failure of classification.

That critique aged surprisingly well.

In 2009, most R&D measurement was grounded in industrial-era definitions — patents, lab research, capital investment. Today, we recognise that innovation also lives in software, design, behavioural insight, and human factors. The ONS’s 2023 update to R&D accounting was long overdue — and quietly revolutionary. It finally began to include areas like software development, UX design, and even elements of data science.

If this broader lens had existed in 2009, the UK might have looked more innovative on paper. But it still wouldn’t have solved the deeper issue: how to connect innovation spending with meaningful economic transformation.

7. What did I miss in 2009?

Looking back, two major blind spots stand out:

i. The rise of intangible capital:
I was stuck in a binary between manufacturing (tangible) and services (intangible). What I failed to anticipate was how intangibles would become the primary source of economic value. Today, over 60% of business investment in the UK is in intangible assets — from software to branding, organisational capital to databases.

ii. The role of startups and ecosystems:
In 2009, the government and big corporations dominated the R&D and innovation conversation. What I missed was the startup ecosystem revolution that would kick off in the 2010s, powered by cheap cloud computing, open source software, accelerators, and venture capital. London, Cambridge, Manchester, and Birmingham have all since become hotbeds of digital innovation. Services may not invest in R&D in the traditional sense, but they’ve been reinventing themselves from the ground up, especially through platform businesses and AI-first models.

The UK cyber ecosystem has exemplified this shift. Once confined to central government and defence contractors, it’s now brimming with agile startups tackling everything from quantum-resistant cryptography to ransomware mitigation. These firms, particularly those outside London, are a bellwether for regional digital resilience and economic autonomy.

8. How did the government respond?

The lack of an “industrial strategy” I bemoaned in 2009 did see some redress, albeit patchy.

From 2017 to 2020, the UK had a formal Industrial Strategy under BEIS, with missions around AI, clean growth, mobility, and ageing. Post-Brexit, it was abandoned for a more sector-agnostic “Plan for Growth.” Funding for Catapult Centres, ARIA, Innovate UK, and recent DSIT programmes (like Cyber Local) show a renewed attempt to coordinate innovation ecosystems, but consistency remains elusive.

It’s still true that the UK punches above its weight in science but struggles with scaling and diffusion, especially outside London and the South East.

9. Looking 16 years ahead: The UK in 2041

So, where do we go from here?

Here’s what I’d wager we’ll be talking about in 2041, when someone stumbles on this piece:

• AI and Automation will force a rethink of what “services” even are, most low-value services will be digitised or AI-assisted.
• Resilience and local capability will become even more important in the face of global shocks, from pandemics to supply chain wars and climate crises. Manufacturing may not grow as a percentage, but strategic sectors like semiconductors, energy, and bioengineering will get disproportionate policy focus.
• Cybersecurity will become foundational. It won’t be a vertical, it will be a horizontal necessity. Whether it’s critical infrastructure, digital identity, or AI model integrity, cyber will be an embedded part of every sector’s risk and innovation agenda. The UK’s success will depend on whether it can build not just a skilled cyber workforce, but a cyber-resilient economy.
• Innovation metrics will radically shift. Expect new measures of creativity, wellbeing impact, data ethics, and even AI stewardship to supplement R&D spend as core innovation indicators.
• Regions will matter more. Levelling up may be more buzzword than policy now, but place-based innovation strategies, from West Midlands cyber to Northern biotech, will be critical.
• And finally, intellectual property, data governance, and human capital will define the UK’s economic future more than any sectoral percentage ever could.

Conclusion and Final Thoughts

Back in 2009, I called for a balance between sectors and between present output and future investment. I stand by that. But I now see that balance doesn’t mean symmetry. It means resilience, diversity, and the ability to adapt.

We didn’t rebalance the economy, but we did begin to rethink it. And that might be an even more powerful legacy.

Let’s see what we’ve learned, built and where we are in 2041.