The U.K. game development sector"s global ranking is at risk of dropping from third place in 2007 to fifth place in 2009 as the country faces "severe skills shortage, funding crisis and the industry’s poor record for online development," the National Endowment for Science, Technology and the Arts said in a new report, Raise the Game.

The rankings, based on global revenues, could shift as Korea, Canada and China become increasingly more important competitors in the games industry. The report focuses on how governments in competing countries have helped support their local game developers. U.K. game makers have been petitioning their government for more tax breaks and educational opportunities with the "Games Up?" campaign--many feel developers don"t have adequate government support.

Prominent U.K. development figure Ian Livingstone, creative director at Eidos, said, "Despite the creative and technical talent that exists in the UK, in the last six years half of the independent development studios have closed or have been bought by foreign companies who see greater value in our studios and intellectual property than we do ourselves.

"The UK is becoming a work-for-hire nation and this trend seems certain to continue unless government takes action. Cash tills at games stores might be ringing loudly but not through sales of games developed in the UK.”

NESTA chief Jonathan Kestenbaum argued that tax breaks from other countries have prompted a "mass exodus" of U.K. games talent. "In order to put a halt to this, the UK needs to wake up to the value in this sector and beat these foreign incentives with our own supportive measures."

NESTA added, "The UK must not fall under the false assumption that our games sector is alive and healthy based on the success of one blockbuster video game–namely Grand Auto Theft IV–when behind the gloss the reality is increasingly about studio closures, relocations and workforce downsizing.”

The organization offered solutions that could help the purported decline of the U.K. development sector (reprinted from NESTA"s press statement):

1. A simplified R&D tax credit system: The current system does not provide games developers with the intended support and a simpler model, similar to the tax breaks offered to film investment, is needed.

2. Develop and retain skills: The UK suffers a major skills shortage in games development. The current specialist courses are not producing sufficient talent, with only 18% of specialist games course graduates actually ending up working in the industry.

3. Support for Intellectual Property development: Currently most Games SMEs are doing too much work for hire and not developing their own IP, which is stunting UK innovation in the sector. Addressing this through public development grants and support incentives will be the key to developing sustainable business.

4. Increase presence in online: The world of online and serious gaming is booming, however the UK’s presence in this space is low and industry action to increase the UK’s presence is needed.

5. Combat foreign competition: Competition from other countries in the form of generous production tax credits is stripping the UK of talent and tilting the playing field against UK studios. The jury is still out on whether the UK should introduce its own production tax credit, but the UK must wake up to the value of this sector to the economy and match foreign incentives with its own supportive measures.