By Conor Lambe, Chief Economist at Danske Bank

The coronavirus pandemic has had a striking impact on the UK and Northern Ireland economies, but with the vaccine programme continuing to be rolled out and the restrictions being gradually eased, the hope is that the economic recovery can now really begin to take hold. In recent weeks, policymakers have been setting out how they plan to support the recovery and a renewed vision for the economy over the years ahead. One of the key themes now emerging is a focus on innovation.

The UK Government has published its ‘Build Back Better’ plan to support the economy, with innovation included as one of the three key pillars of the strategy. The Government is aiming to improve access to finance to encourage innovation, foster increased innovation through regulatory reform and support SMEs with management training and to become more digitally enabled.

In Northern Ireland, the Department for the Economy has published its strategy to create a ‘10X Economy’ through a ‘decade of innovation’. This new economic vision centres around five key delivery steps – a focus on new technologies and clusters of strength, talent and skills development, diffusing the benefits of innovation across the economy, a new approach to funding mechanisms and, with regards to place, attracting people to come to Northern Ireland and creating an environment that supports and encourages innovation.

A new partnership, known as Innovation City Belfast, has also been formed. This initiative involves six organisations – Belfast City Council, Belfast Harbour, Catalyst, Queen’s University, Ulster University and Invest Northern Ireland – and some of its priorities include the formation of an Innovation District and an Innovation Investment Service, as well as the development of digital skills.

Given this new policy focus, I thought it would be interesting to look at recent levels of innovation among businesses in Northern Ireland. The latest data published by NISRA, which draws on the wider UK Innovation Survey, relates to 2016-2018 and was published in the final quarter of last year. It is worth noting that this data relates to firm activity prior to the onset of the coronavirus pandemic.

Before exploring and commenting on the figures, it’s helpful to set out what exactly is meant by innovation.

The NISRA report draws on an international definition of innovation and defines businesses as ‘innovation active’ if they have introduced new or improved goods, services or processes; engaged in an innovation project that hasn’t yet been completed or stopped; or improved their business structures, practices or marketing strategies.

A wider definition of a ‘broader innovator’ includes firms that have conducted any of these three activities or engaged in other activities related to innovation, such as internal research and development, training or acquiring new equipment for innovation purposes.

The headline data shows that there is scope to expand the amount of innovation in Northern Ireland. During 2016-2018, 32 per cent of local businesses were defined as innovation active. That was lower than had been recorded in the previous survey, for the 2014-2016 period, and lower than the average for the whole of the UK (38 per cent). Along with Scotland, Northern Ireland ranked bottom of the UK regions on this measure of business innovation. While this alone shows the merit of this new policy focus, delving into the data a bit deeper reveals some interesting factors that these new policy initiatives will perhaps seek to change.

As might be expected, large businesses are more likely to be engaged in innovation than small and medium sized firms. In Northern Ireland, around half of large businesses are classed as innovation active, which is broadly similar to the proportion across the whole of the UK. But only 32 per cent of local SMEs are in this category, behind the 37 per cent at a UK-wide level. Therefore an aim of these new policy initiatives should be to encourage more small businesses to start undertaking innovation activities.

When working on innovation projects, some firms will decide to work with another organisation to support them in making the endeavour a success. Of those firms that opted to engage with another body to innovate, the most common choice of partners were their suppliers and their customers. Only around 1 in 5 of these firms were working with government or a university on new innovations. The fact that the two local universities and Belfast City Council are involved with Innovation City Belfast and that the strategy to create a ‘10X Economy’ talks about businesses, academia and government working together, suggests this is something that policymakers will attempt to encourage more of in the years ahead.

Of the factors that led firms to innovate, the one most commonly cited as having a high impact was to improve the quality of goods or services. Interestingly, during the 2016-2018 period, the factor cited least as having a high impact was to reduce environmental impacts. Looking forward, and given the increasing focus on climate change from both governments and businesses, I suspect that this will become a more significant driver of innovation in the coming years.

Since the onset of the coronavirus pandemic, innovation has become increasingly evident. From the development of vaccines, to the adoption of new technologies and remote working, to firms diversifying to make new products or beginning to sell online, the importance of innovation has been very clear.

As we move forward, that same drive for innovation will be essential if we are to tackle, for example, the low productivity levels in Northern Ireland and respond to climate change.

The latest data shows that there is scope to drive more innovation in Northern Ireland and so this new policy focus on doing that is indeed a positive development.