By the mid-twenties the British film industry was losing out to heavy competition from Hollywood, the latter helped by having a much larger home market. In 1914, 25% of films shown in the UK were British — by 1926 this had fallen to 5%. The Cinematograph Films Act 1927 was passed in order to boost local production, requiring that cinemas show a certain percentage of British films. The act was technically a success, with audiences for British films becoming larger than the quota required. But it had the effect of creating a market for 'quota quickies': poor quality, low cost films, made in order to satisfy the quota. Some critics have blamed the quickies for holding back the development of the industry. However, many British film-makers learnt their craft making these films, including Michael Powell and Alfred Hitchcock.
In the silent era, with English actor Charlie Chaplin its biggest star, audiences were receptive to films from all nations. However, with the advent of sound films, many foreign actors or those with strong regional accents soon found themselves in less demand, and more 'formal' English (received pronunciation) became the norm. Sound also increased the influence of already popular American films.
Alfred Hitchcock's Blackmail (1929) is regarded as the first British sound feature. It was a part-talkie with a synchronised score and sound effects. Later the same year, the first all-talking British feature, The Clue of the New Pin (1929) was released. It was based on a novel by Edgar Wallace, starring Donald Calthrop, Benita Home and Fred Raines, made by British Lion at their Beaconsfield Studios. The first all-colour sound feature (shot silent but with a soundtrack added) was released in the year and was entitled A Romance of Seville (1929). It was produced by British International Pictures and starred Alexander D'Arcy and Marguerite Allan. In 1930, the first all-colour all-talking British feature, Harmony Heaven (1930), was released. It was also produced by British International Pictures and starred Polly Ward and Stuart Hall. A number of all-talking films containing colour sequences, mostly musicals, were also released in the same year. The School for Scandal (1930) was the second all-talking feature to be filmed entirely in colour.
Starting with John Grierson's Drifters, the 1930s saw the emergence of a new school of realist documentary films: The Documentary Film Movement. It was Grierson who coined the term "documentary" to describe a non-fiction film, and he produced the movement's most celebrated film of the 1930s, Night Mail (1936), written and directed by Basil Wright and Harry Watt, and incorporating the poem by W. H. Auden. Other key figures in this movement were Humphrey Jennings, Paul Rotha and Alberto Cavalcanti. Many of them would go on to produce important films during World War II.
Several other new talents emerged during this period, and Alfred Hitchcock would confirm his status as one of the UK's leading young directors with his influential thrillers The Man Who Knew Too Much (1934), The 39 Steps (1935) and The Lady Vanishes (1938), before moving to Hollywood.
Music hall also proved influential in comedy films of this period, and a number of popular personalities emerged, including George Formby, Gracie Fields, Jessie Matthews and Will Hay. These stars often made several films a year, and their productions remained important for morale purposes during the second world war.
Many of the most important British productions of the 1930s were produced by London Films, founded by the Hungarian emigre Alexander Korda. These included Things to Come (1936), Rembrandt (1936) and Knight Without Armour (1937), as well as the early Technicolor films The Drum (1938), The Four Feathers (1939) and The Thief of Bagdad (1940). These had followed closely on from Wings of the Morning (1937), the UK's first colour feature film in the new three colour process (previous colour features had used a two colour process).
After the boom years of the late 1920s and early 1930s, rising expenditure and over-optimistic expansion into the American market caused the production bubble to burst in 1937. Of the 640 British production companies registered between 1925 and 1936, 20 were still going in 1937. Moreover, the 1927 Films Act was up for renewal. The replacement Cinematograph Films Act 1938 provided incentives for UK companies to make fewer films of higher quality and, influenced by world politics, encouraged American investment and imports. One result was the creation by the American company MGM of an English studio MGM-British in Hertfordshire, which produced some very successful films, including A Yank at Oxford (1938) and Goodbye, Mr. Chips (1939), before World War II intervened.