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How the Economy Depends on Innovation

Innovation is synonymous with disruption, but with disruption comes change that pushes organisations to evolve if they wish to remain relevant in today’s economic climate.

As one of the most significant factors contributing towards growth, innovation is critical for sustained economic prosperity.

“In economic terms, innovation describes the development and application of ideas and technologies that improve goods and services or make their production more efficient,” according to the European Central Bank (ECB).

Innovation is what stops established businesses from becoming stagnant, and it is in the DNA of all exciting startups.

With true innovation comes job creation, shifts in old paradigms, new ways in thinking and improvements in people’s quality of life.

Naturally, of course, innovation requires money, particularly on the Research and Development (R&D) front.

In 2000 the British government unveiled the R&D Tax Relief Scheme for Small and Medium-sized Enterprises (SMEs) as the foremost source of state support in Britain for innovative businesses.

The R&D tax relief for SMEs is accessible to any kind of incorporated company conducting innovation, irrespective of its sector of activity.

It consists of an R&D tax relief incentive for SMEs that allows enhanced deductions of 230% of eligible R&D expenditure from a company’s taxable income – offering a significant decrease in cost of 26%, once the corporate tax rate has been applied.

According to F. Initiatives, a consultancy firm which specialises in financing innovation, there are three key steps to the cycle of innovation, which starts with an idea that is developed into production, and from the production comes growth, and the cycle repeats.  

1) Development

New ideas are formulated, which create unique products or services that bring about improvements in efficiency or new markets being explored.

2) Productivity

Improved efficiency enables businesses to generate improved output for the same input. For example; an innovation allows a baker to produce twelve loaves of bread instead of tenfor the same number of hours worked. This innovation has therefore led to a 20% gain in productivity.

3) Growth

Increased productivity will mean improved profits for the company which can then be reinvested to provide further growth, explore new markets or develop additional enhancements to provide more development.

Innovation Fuels the Economy

Out of this cycle, the ripple effect begins to take form on the economic system as a whole.

The actual innovation or new ideas approach brings about new opportunities in productivity. Higher productivity can result in new employment opportunities, which in turn energises the economy.

A stimulated economy causes higher growth. The business becomes more profitable, workers enjoy better pay, and the boost in capital can be used to fund more inventive endeavors.

In the digital age, jobs are increasingly automated, sparking fears that more jobs will be lost.

At the same time, while automation may not generate new jobs initially, it does pave the way for spheres of employment that were never thought possible before.

Just last year VentureBeat reported, “A Deloitte study of automation in the U.K. found that 800,000 low-skilled jobs were eliminated as the result of AI and other automation technologies. But get this: 3.5 million new jobs were created as well, and those jobs paid on average nearly $13,000 more per year than the ones that were lost.”

To allow innovation to create new jobs, an educated workforce is essential.

For innovation to succeed, F. Initiatives recognises three key avenues that must be explored: better education, enhanced investment in research and development and improved access to funding for entrepreneurs to bring innovations to market.

In the UK, R&D tax relief is available to SMEs that have:

– Less than 500 employees.

– Either: annual turnover < €100 million OR total balance sheet < €86 million.

– All entities within a group are included when estimating the threshold.

F. Initiatives’ extensive expertise in the UK R&D tax relief schemes – as well as its exhaustive tracking of changes in legislation – combined with a proven working methodology, guarantees the maximum optimisation of its clients’ claims.

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