The number of innovative firms in Wales has fallen sharply
The number of innovative firms in Wales has fallen.
The real test of whether an economy is becoming more productive is not found in political speeches but in the behaviour of businesses. Are they investing in new products? Are they new products, adopting technologies and finding new ways to compete?
That is why the latest UK Innovation Survey matters so much, as it tells us something important and uncomfortable namely, that Wales is not only below the UK average in innovation activity but has fallen further behind over the last three survey periods.
In 2018-20, 43.5% of Welsh businesses were classified as innovation-active, compared with a UK average of 44.9%. By 2022-24, that had changed dramatically and whilst the proportion of innovation-active businesses had fallen to 34% in the UK, in Wales, it had crashed to just 27.7%.
For an economy that has long struggled with productivity, that should be a serious concern because innovation is one of the routes through which businesses become more productive. It is not just about laboratories, patents or university spinouts, although those have their place.
It is also about new ways of working, better technology, improved systems, stronger management, new services and more efficient processes. If fewer Welsh firms are doing these things, then closing the productivity gap becomes even more difficult.
The comparison with the rest of the UK is also uncomfortable and in the latest survey period, England had an innovation-active rate of 34.8%. Northern Ireland was at 30.3%. Scotland was at 29.4%. Wales was last, at 27.7%.
Nor is Wales simply behind London and South East England; it is below every English region and therefore the worst-performing part of the UK. That should challenge any explanation normally out forward by those in power that Wales is only being held back by the exceptional strength of the south-east of England, and the latest figures suggest something broader and more worrying.
The survey also shows that several core innovation activities have weakened across the UK, and the proportion of businesses investing in computer software, computer hardware and internal research and development as part of innovation activity fell from 2018-20 to 2022-24.
These are not marginal business activities as software, hardware and R&D are among the practical foundations of modern productivity, and they are the ways firms improve what they do and how they do it. If these activities are weakening nationally, and Welsh firms are less likely to be innovation active in the first place, the challenge for Wales becomes even greater.
The survey also reminds us that larger firms are more likely to innovate. In 2022-24, some 47% of large UK businesses were innovation active, compared with 34% of SMEs. That matters because Wales has a business base heavily shaped by small and medium-sized enterprises and fewer large private-sector headquarters than stronger-performing regions.
This is not a criticism of Welsh SMEs, as many are ambitious, creative and resilient, but smaller firms often have less time, less capital, fewer specialist staff and less management capacity to invest in innovation. The owner-manager, dealing with cash flow, recruitment, customers, regulation and day-to-day delivery, may recognise that technology adoption or process improvement is necessary but still struggles to make it happen.
The barriers identified in the survey underline this point and among broader innovators, 21.6% identified the cost of finance as a barrier, 20.3% cited the availability of finance, and 19.6% said the direct cost of innovation was too high.
So the issue is not simply whether firms have ideas, it is whether they have the money to act on them and, as I have pointed out so many times, questions need to be asked as to why the Welsh Government own funding body, the Development Bank of Wales, has not specifically addressed this critical issue.
The technology findings are equally important as broader innovators are far more likely than non-broader innovators to use artificial intelligence, CRM (customer relationship management) systems, ERP (enterprise resource planning) software, project management tools and other management technologies.
This matters because productivity – which is now the touchstone for this new Plaid Cymru Government – is often lost not in dramatic failures, but in ordinary inefficiencies, including poor customer management, slow invoicing, poor workflow and inconsistent project delivery.
This means that for many Welsh firms, the biggest productivity gains may come not from a breakthrough invention but from better use of everyday technology. And yet such changes have not been the focus of the activities of Business Wales which is allegedly there to support Welsh businesses.
The export data tells a similar story and in 2024, 28.3% of broader innovators exported, compared with only 9.2% of non-broader innovators. Among SMEs, 27.6% of broader innovators exported, compared with 8.9 per cent of non-broader innovators. Innovation and exporting are therefore closely connected and firms that innovate are more likely to sell beyond their immediate markets, and firms that export are often pushed to become more competitive.
For Wales, this is crucial as a small economy cannot build prosperity by selling mainly to itself and needs more firms competing in wider markets but that requires stronger products, better systems, improved quality, sharper branding, more efficient processes and greater confidence.
Therefore, latest UK Innovation Survey should be seen as more than a statistical report, but as a warning that Wales has a productivity problem, and it is getting worse
Six years ago, Wales was close to the UK average, but it is now clearly behind and has not only fallen faster than the UK, but it is behind every UK nation and every English region. It has fewer innovation-active firms at a time when technology adoption, new products, better processes and stronger exports should be at the heart of economic renewal.
There is no easy route from a low-innovation economy to a high-productivity one, but if Wales wants higher wages, stronger firms and a more resilient economy, these findings cannot be ignored. Innovation cannot remain a specialist policy interest or a slogan attached to political manifestos, but must become central to how Wales thinks about business growth, productivity and the future of the economy
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