Numerous studies have pointed to investment in research and development as an important factor driving productivity growth in the economy and in determining the international competitiveness of firms in competitive global industries.

Research spending can take many forms. Typically it will be on the development of new products and production processes. Firms may be seeking patents from their investment - a way of providing protection of intellectual property rights that will help finance the development costs incurred.

In recent years, the UK economy has invested less in new research spending than other industrialised countries.

According to a recent Government report, in 1997 the UK expenditure on R&D was £14.7 billion which represents 1.80 per cent of GDP. This is just below the EU average of 1.83 per cent and puts the UK in fifth place compared to other G7 countries.  Of the G7 countries the UK and the USA devoted the highest proportion of their total government R&D funding to defence.

The highest expenditure on R&D in the business sector was in pharmaceuticals, medical chemicals and botanical products, which accounted for £2.2 billion, followed by motor vehicles and parts at £963 million. It is often the case that firms operating in oligopolistic markets invest more heavily in R&D because of the importance of non-price competition in protecting and gaining market share from rival firms.