The UK game industry faces being overtaken by Korea, Canada and China in 2009 and dropping to fifth place in global rankings, according to a report by NESTA.
The report, Raise the Game, cites a skills shortage, funding crisis, a lack of global scale publishers and poor online development in the region as the cause of the decline, which would represent a drop of two places since the UK fell to third place in 2007.
"UK videogames producers are recognised to be amongst the most innovative in the world. Our recommendations offer ways that the Government can boost the power of this sector so that we maintain our strong global position," said Jonathan Kestenbaum, chief executive of NESTA.
"The generous tax breaks on offer from other countries are resulting in a mass exodus of some of the best talent in the UK. 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," Kestenbaum added.
NESTA proposed a number of solutions to halt the UK's decline, such as a simplified research and development tax credit system and to focus on the development of skills, citing that only 18 per cent of graduates from specialist courses ending up working in the industry.
The group also advises that the government offers grants to small and medium sized developers to create their own IP and match tax credits offered by rival countries, as well as suggesting that the industry increases its presence in the growing online gaming market.
Ian Livingstone, creative director at Eidos, commented: "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."
"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," said Livingstone.