Investing in research and development (R&D) is the key to companies boosting their growth.

The Department of Trade and Industry (DTI)

said companies with sustained high R&D investment benefited from higher sales growth, higher productivity and better shareholder returns.

By contrast, the DTI found firms which focused on growth through major acquisitions were more likely to show underperformance in terms of returns to shareholders.

The Scoreboard report, which looked at data for the top 600 UK and international R&D investing companies, found the average investment by UK firms has been steadily rising during the past few years, closing the gap on American companies.

Average UK investment has increased from 1.8 per cent of sales in 1998 to 2.2 per cent, while in the United States, investment has remained static at 4.3 per cent for the past two years.

The number of UK firms investing more than ten per cent of sales in R&D has risen from four per cent in 1999 to 11 per cent.

Firms in the UK invested in R&D above international levels in pharmaceuticals and biotechnology, aerospace and defence and health.

Trade and Industry Secretary Patricia Hewitt said: "This once again highlights the importance of R&D to a company's long-term growth strategy.

"Taking full advantage of science and innovation is crucial to driving up productivity and generating wealth."

To encourage R&D, the Government had included a new tax incentive for large and medium-sized firms and a tax credit for smaller ones in the last Budget.