Science proceeds through error; getting things wrong is often the precursor to getting things right. Karl Popper called it “Conjecture and refutation.” The problem is, of course, that making mistakes, open-ended blue-sky research, is costly and time consuming which is why, paradoxically, commercial enterprises don’t do it. The failure rate is too high; it is financially too risky. Commerce more usually commercialises established research often conducted in the public sector and often, though not always, conducted under military budgets.
Even Apple, the largest company in the world, owes its existence to US military research conducted back in the 1980s and 1990s.
The key point is that research drives innovation which then creates and crystallises new ideas, new products and new markets. It is indisputably part of the wealth creation process. It’s also typically an early victim when budgets need to be cut even though that carries the danger of a long-run erosion of industrial and commercial competitive advantage.
In the 1960s, Italy was a world engineering leader; Italy is no longer a byword for industrial dynamism. It has the smallest budget for R&D of any major economy. The UK is not so far behind devoting just over 1.5% of GDP to blue-sky research.
By contrast in the developing world R&D budgets are climbing sometimes sharply. The fact that Samsung has emerged from almost nowhere to become a major competitor to Apple might have something to do with the fact that South Korea has taken its share of R&D from 2.75% of GDP in 2005 to 4% today. China has increased its budget by 25% in the same period. Remember that these percentages are in the context of growing economies rather than stagnating ones in the West.
The discussion about productivity in the UK is only one sign that investors need to be wary of looking back and extrapolating forward. The economic leadership requires investment and to attract investment we must provide a stable political, economic and legal framework that allows companies to invest without having to worry about a change in direction from a government.
Our thematic approach to investment allows Tacit to include exposure to areas of the world that would not historically be well represented in the UK private client portfolio. This is vital as when looking for long term growth opportunities factors such as spend on research and development give us a clue as to who now is shaping the world of investment opportunity in the future.
At present this has led us to the US and Asia with over 60% of our Growth component of portfolios invested outside of the UK and Europe.
