The software industry is becoming one of the most active sectors of the economy for research and development (R&D).

Software and computer services is the UK’s fifth largest sector for R&D, with
an average intensity – the proportion of R&D against sales – of 5.2 per cent up from 4.5 per cent last year, according to the Department of Trade and Industry’s DTI 2005 R&D Scoreboard report.

Report author Dr Mike Tubbs, senior industrialist in the business finance and investment unit of the DTI’s innovation group, says that software is growing in strength and importance.

‘It is the best example of a flourishing sector,’ he said.

Software firms account for 117 of the UK’s 750 top companies, says the report.
More than 90 per cent of these companies have an R&D investment rate of more than four per cent, with 70 per cent putting at least 10 per cent of their sales back into R&D.

The growth of the UK’s software business is helping to close the gap in the global software sector, which is dominated by the US. But there are some hindrances to growth, such as the lack of suitable skills, says the report.

The most difficult task facing software firms in western Europe is finding engineers to produce specifications, says Richard Longdon, chief executive of UK software firm Aveva.

‘To innovate and maintain ownership of the applications market, we will need to keep adding experienced talent to our workforce,’ he said.

IT hardware is the UK’s next biggest technology sector, with an average intensity of 4.8 per cent – see box, below left, for sector breakdown.

The report also highlights the changing patterns in R&D spending in the world’s largest technology companies.

In terms of general R&D investment across all firms, just six countries account for the bulk of global spending.

The US (42 per cent), Japan (21 per cent), Germany (6.3 per cent), the UK (5.4 per cent), France (4.5 per cent) and Switzerland (2.8 per cent) dominate the list, comprising 86 per cent of the top 1,000 organisations.

But the rate of growth tells a different story, rising most quickly in South Korea (40 per cent), followed by Switzerland (10 per cent) and then the US (seven per cent). In South Korea, Hyundai has doubled its spending to £976m, while Samsung increased spending by 37 per cent, to £2.5bn.

In contrast to a recent Booz Allen Hamilton report (Computing, 13 October), which questioned the relationship between spending on R&D and corporate performance, the DTI study shows a clear link between the two.

The growth in market value in the portfolio of FTSE 100 companies with the highest R&D intensities was 69 per cent over the past eight years, compared with just seven per cent for the FTSE 100 index.

‘If you are looking for a link between R&D spending and corporate performance, it matters which sector you look at,’ said Tubbs.

‘You need to look at markets where R&D spending is key, such as the software and hardware sectors.’

Top 10 UK sectors by R&D, 2005

Sector                                                  % UK 750       % R&D 2004        Global Rank
Pharmaceuticals and biotechnology       39.6              39.3                     3
Aerospace and defence                      12.3              11.9                     7
Automobiles and parts                         7.7                6.9                     1
Food producers                                  5.5                5.5                     -
Software and computer services           5.2                4.5                     5
IT hardware                                      4.8                5.7                     2
Chemicals                                         3.5                3.4                     6
Oil and gas                                       3.4                3.5                     -
Electronic and electrical                      3.4                 3.5                     4
Telecommunication services                 2.9                3.1                     9 

 Source: DTI 2005 R&D Scoreboard