AD10-15 Innovation-Friendly Scotland: Priorities for Innovation & Business Development

8/6/2019 AD10-15 Innovation-Friendly Scotland: Priorities for Innovation & Business Development

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Advice Paper (10-15 )D E C E M BE R 2 0 1 0

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Innovation-Friendly Scotland: Prioritiesfor Innovation & Business Development

Summary

Background

• The RSE Business Innovation Forum has a membership largely made up of current or recent senior

business executives who combine great experience of business process with high levels of technical and research expertise. Its principal objective is to identify and advocate processes that will stimulate innovationand business growth.The purpose of this report is to review the landscape for innovation in Scotland and some of the issues that need to be addressed if business innovation is to be enhanced.

• Approaches that seek to identify generic processes that enhance national competitiveness often ignore the fact that the conditions that determine competiveness vary from sector to sector. The search for the golden bullet of a national “innovation system”is flawed.Aggregate competitiveness is a mosaic of sectoral innovationssystems.

Scotland’s economic performance in an international setting • The performance of the Scottish economy has, over the years, fallen short of national aspirations, in the face

of a global economic transition to information and knowledge based economies.

• There are few and indeed a diminishing number of large companies with research capability which are headquartered in Scotland,and a particular paucity of other companies with a turnover in excess of £100m.

• As we emerge from the first global recession in 60 years, there are two major challenges. One is current, from Asian economies that are adding to their success in bulk manufacture by competing in the provision of research-based,high value goods and services.Another is imminent, that of increasing pressure on resourcesand the need to meet statutory carbon emission targets by decarbonising energy generation and use.

Friendliness to business innovation & the importance of sectoral focus

• Government strategies need to work with businesses in Scotland to create a more business innovation- friendly environment that positively encourages innovation and business development and uses the leverage of government in market positioning.

• It is particularly important that governmental support for business recognises the distinctive needs of different sectors, and the distinctions between those firms that engage with global markets and others that primarilyengage with domestic markets.



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Advice Paper (10-15 )

• International analysis of business sectors shows:> The service sector competitiveness is the key to job generation.> In the non-tradable sector, it is vital to set appropriate rules of the game.In telecommunications or retail,

for example, regulation that facilitates business entry tends to increase productivity.> In traded sectors, where companies must compete globally, effective policy interventions must be based

on understanding of the global landscape.> New innovative sectors are not themselves enough to boost overall growth.It is the diffusion of

technologies into major players in the economy that is the key driver of growth. Regulatory policy canenhance this process.

• Government needs to be bolder in focusing support on those initiatives that are having the greatest impact

but carefully differentiated by sector.• There needs to be systematic, targeted and sustained support for specific technology & innovation areas,

which align public and private areas of activity.

• More use should be made of public procurement to stimulate innovation particularly through national infrastructure projects in IT, energy and transport.

Medium to large enterprises and their supply chains

• More attention needs to be given to creating a larger pool of companies around the £100m turnover level,which can drive SME supply and value chains, and often provide greater opportunities for connections withthe research base.

• A greater focus should be placed on encouraging innovation in Scottish companies, with mechanisms suchas public procurement for novel technologies explored as a possible stimulus.

• To enable the development of more £100m companies, Scottish companies need to develop a wider international outlook, and initiatives to provide international experience at boardroom level should be further developed.

• Transport infrastructure is an essential factor in both attracting businesses, and enabling businesses to remainand grow in Scotland.

Business innovation & the research base

• The strong Scottish research base provides a fertile part of the environment in which business can flourish,but it should not be seen as a principal driver of major business growth.

• Longer term funding models need to be developed to enable start-up companies the time to find marketsand investment to grow, without having to be taken over by larger companies.



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Rationale for this report1 Stimulation of economic growth has long been a

priority for government in Scotland,and has beenstrongly reiterated by the present Scottish Government,given that a competitive economy is assumed to be apre-requisite for high levels of employment,for the reduction of poverty and for the health andvitality of society.

2 In 1996 the Royal Society of Edinburgh (RSE)collaborated with Scottish Enterprise in aCommercialisation Inquiry 1 that sought to encouragegreater efforts to commercialise ideas arising fromthe research base in Scotland’s universities and researchinstitutes.The publication of the Inquiry provided theimpetus for processes created by Scottish Enterprise,the Scottish Higher Education Funding Counciland the RSE, in collaboration with the universities,that have led to progressively greater engagementby universities and research institutes in thecommercialisation of research findings andcommendable successes in creating start-up andspin-out companies and in licensing researchfindings2.

3 The Society now wishes to address the broader issueof innovation and economic growth.With theencouragement of the Scottish Government 3, itdecided in 2009 to draw on the experience of itsmany senior business Fellows to create a BusinessInnovation Forum.The Forum is distinctive in itsmembership largely made up of current or recentsenior business executives who combine greatexperience of business process with high levels of technical and research expertise (Details of itsmembership can be found in Appendix 1). Itsprincipal objective is to identify and advocateprocesses that will stimulate innovation and businessgrowth. Furthermore,the Society provides anindependent voice with no vested interests to defend,nor any preference for a particular outcome.The Forum does not replicate the role of other bodies, such as the Council of EconomicAdvisors,which advises the First Minister on macro-economicissues that frame sustainable economic growth inScotland,or Scottish Enterprise and HIE with their wide ranging operational role to deliver high quality,practical support to businesses in Scotland that willenable them to maximise their contribution toeconomic growth.

4 The purpose of this report is to review the landscapefor innovation in Scotland and some of the issues thatneed to be addressed if innovation in the economy isto be enhanced. In this context we define innovationin business as a new idea that leads to a practicaloutcome in the form of new products, moreefficient systems or processes that increase productivity.It is important to distinguish between invention, anidea made manifest, and innovation, ideas appliedsuccessfully in practice, and to realise that innovationdoes not take place exclusively in the domain of technology.The purpose of this report is to summarisethe issues in relation to innovation and economicgrowth for Scotland. More detailed analyses are beingaddressed as part of the Forum’s work programme.

5 As we slowly recover from the first global recessionfor 60 years, governments and business seek waysof steering their economies towards increasedcompetitiveness and growth. For governments,the pressure on the public purse demands that theyget policy right, for although past interventions havehad some successes, there have been damaging failureswith ineffective interventions that have proved costlyto public finances.

6 Approaches that seek to identify generic processesthat enhance national competitiveness often ignorethe fact that the conditions that determinecompetiveness vary from sector to sector. It has beenargued that the search for the golden bullet of anational“innovation system” is flawed,that aggregatecompetitiveness is a mosaic of sectoral innovationssystems4 and that policymakers, in government andbusiness,should analyse the competiveness of differentsectors and develop policies tailored to thecircumstances of those sectors.

7 By competitiveness,we mean the capacity to sustaingrowth through increasing productivity or expandingemployment 5.A competitive sector is one in whichcompanies improve their performance by increasingproductivity through managerial and technologicalinnovations, and offer better quality or lower-pricedgoods and services thereby expanding demand for their products.


1 Commercialisation Enquiry: Final Research Report (1996) Royal Society of Edinburgh

2In 2007-08, as in previous years, Scotland was generally more active in knowledge transfer than the UK as a whole.http://www.scotland.gov.uk/Topics/Statistics/Browse/Business/HEBCIS

3 A strategic framework for science in Scotland (2008). Scottish Government. http://www.scotland.gov.uk/Publications/2008/11/28105254/0

4 David,P.A.and Metcalfe, S.2007. Universities and Public Research Organisations in the ERA. EC,DG-Research Expert Group on Knowledge and Growth,55pp.

5 McKinsey Global Institute,2010. How to compete and grow; a sector guide to policy, 54pp.



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Current performance8 The performance of the Scottish economy has,

over many years, fallen short of our aspirations.Scotland provides a comparatively small market.According to OECD figures 6, Scotland is in the4th quartile for GDP growth; the 2nd quartilefor employment; and in the 4th quartile for exports.From 2001-2010,Scotland’s economy grew byan average of 1.3% per quarter overall, comparedto 1.6% per quarter overall for the UK as a whole 7.

9 In terms of innovation, the position of Scotland is lessclear. OECD figures put Scotland 28th out of 31 for Business R&D 8, while the UK’s 2009 Department of Business Innovation and Skills (BIS) 2009 Business

R&D Scoreboard puts Scotland 5th out 13 UKregions in terms of their list of the top 1000 UKcompanies for R&D investment (see Table 1).NESTA’s Innovation Index report 9 has argued,however, that R&D might not be the best measureof innovation,and if product and service design,the development of innovative skills and organisationalinnovation were included, then the UK’s privatesector invested more in innovation than manydeveloped economies. In the UK’s 2009 BISValueAdded scoreboard 10, Scotland is 3rd in the UK for the financial value added by its companies, outof the UK’s top 800 companies.


6 Economic performance indicators - June 2009 update,Scottish Enterprise. (http://www.scottish-enterprise.com/about-us/research-publications/~/media/publications/About Us/economic research/economic_performance_indicators_.ashx)

7Gross Domestic Product - GDP: UK Comparison (www.scotland.gov.uk/Topics/Statistics/Browse/Economy/TrendLongerGDP)

8 In 2008 BERD was 0.48% of GDP in Scotland compared with 1.11% of GDP in the UK (http://www.scotland.gov.uk/Publications/2010/02/BERD08)

9 The Innovation Index: Measuring the UK’s investment in innovation and its effects. November 2009. NESTA

10 Value Added = Sales less Costs of bought-in goods and services;

Table 1: BIS 2009 Value Added Ranking of top 800 UK Companies and R&D scoreboard of top 1000 UK Companies

Value Added R&D

Region Value Added (£M) Region R&D investment (£M)(number of companies) (number of companies)

London (361) 506,476.1 London (246) 15976.8

South East (143) 95,656.9 South East (275) 3816.8

Scotland (36) 46,970.7 Eastern (126) 2156.7

Eastern (57) 28,489.8 SouthWest (63) 1063.3

West Midlands (44) 17,313.4 Scotland (44) 932.6

SouthWest (32) 14,219.2 West Midlands (54) 875.5

Yorkshire & Humber (33) 14,078.2 Offshore islands (10) 602.9

East Midlands (33) 13,093.9 NorthWest (61) 323.7

NorthWest (33) 10,963.1 North East (16) 290.7

North East (13) 5,214.4 East Midlands (29) 234.9

Offshore islands (7) 3,179.6 Yorkshire & Humber (45) 220.0

Wales (6) 1,382.8 Wales (25) 112.0Northern Ireland (2) 378.1 Northern Ireland (6) 37.5

Source: http://www.innovation.gov.uk/value_added/; http://www.innovation.gov.uk/rd_scoreboard/



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10 There are few large companies that are headquarteredin Scotland and few large companies with researchcapability or that operate at the high-value,knowledge-intensive end of the business spectrum.There is a particular paucity of companies withturnovers in excess of £100m.

Emerging challenges11 The present time is a period of global economic

transition and the rate of change is accelerating.It involves a shift from economies based on land,labour and capital to ones based on informationand knowledge, and a geographic shift, in whichglobally mobile capital has increasingly investedin developing economies where costs of manufactureare relatively low and skills and political stability arehigh.A continuing global increase of labour supply inthe coming decade, as population grows by anestimated 12%, predominantly in developingcountries, is likely to maintain their low labour costs,to the detriment of high labour-cost economies.Meanwhile, it has been a mantra in developedeconomies that they must compete in high valuegoods and services rather than relatively low valuemanufactures that are increasingly located indeveloping economies.The assumption that thisimperative offers a unique opportunity for developedeconomies now appears fragile,as systematic, targetedinvestment in education and research in manydeveloping countries,particularly in China and India,

is enhancing their competitiveness,not only in lowunit-price mass manufacture,but also in providingresearch-based,high value goods and services,but at relatively low unit costs.

12 At the same time, there is an imperative to meetstatutory carbon emission targets by decarbonisingenergy generation and use, and maximising energysecurity.Although this is likely to increase the priceof energy to business and citizens, these measuresalso challenge Scotland to maximise economic gainor minimise loss by efficient exploitation of itsrenewable energy potential and by exploiting itstechnological expertise in devising and implementingefficient engineering solutions.Awareness has alsogrown of the need to apply the idea of sustainabilityto the use of Earth resources and to humancommunities, as well as to the economy.As anexample of the dilemma of sustainability posed bycurrent development trajectories, if China continuesto hurtle down its current,western-style, developmentpath, it will have a US-level income per head by 2020,requiring the equivalent of current global energyconsumption to support it, and having more carsthan the rest of the world combined.

13 The challenges posed by these longer-term, structuraltrends have been compounded by the severe recessionassociated with the unravelling of the competitiveposition of the banking industry in Scotland; reducedaccess to banking finance for business;and the need toreduce a massive public debt, in a setting where the

public sector takes up a large share of the economy 11.A difficult balancing act is in prospect,of finding anoptimal route through the trade-off between publicand private sector activity; about the extent and therate at which the former might be squeezed to thebenefit of the latter; how public investment ininfrastructure can be used to stimulate private sector activity;and the route that will optimise employment.

14 The actions of government, both in Westminster andHolyrood, will be vital in helping business in Scotlandface these emerging challenges and constraints – incompeting on price; in investing in and creatinginnovative products and solutions that address a globalmarketplace; in showing the flexibility needed torespond to global changes; and in using the leverage of government in market positioning.A particularlydifficult and vital issue is the extent to which Scotlandcan find ways of investing for future benefit whilstmaking the draconian cuts in public expenditure thatare needed in the short term.The recent report of theIndependent Budget Review underlines this difficulty.

The Forum’s Approach15 The Forum has taken the view that the ideas of

highly experienced managers of successful businessesare an important source of practical ideas for stimulating innovation and business growth.It therefore advanced a series of propositionsabout key priorities for the support of businessinnovation development in Scotland.These werethen “road-tested” through discussion with senior members of a series of companies broadlyrepresentative of a range of business sectors(appendix 2).Their comments have led to theacceptance, amendment or rejection of theinitial propositions,and their re-formulation inthe sections that follow.

16 Current circumstances are determined by a number of external influences that support or deter innovationand business development.They include:

i. Physical infrastructureii. Government regulation and planning

(national and regional)iii. Location and distance to marketiv. Size of population/market/skilled workforce,

including leadership and management skills

v. Access to finance


11 Public expenditure is forecast to be 44% of GDP in the UK in 2009/2010 (The size of the public sector. SPICe Briefing 09/11, 2009).The public sector accountedfor 24.8% of all jobs in Scotland in 2009 (Scottish Government,Public sector employment in Scotland: Statistics for 4th Quarter 2009)compared with 21.1% in the UKas a whole. (Office for National Statistics,Public sector employment Q4 2009).



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17 The Forum has addressed these five influences in thefirst phase of its activity, setting out propositions in threekey areas which link to these influences in the followingway:

• Business innovation-friendly environments

(i.Physical infrastructure, ii.Govt.planning)• Medium to large enterprises and their supply chains

(iii.Location, iv.Population/skills)

• Business innovation and the research base(v.Access to finance)

18 Many of the areas below are currently part of theexisting innovation portfolio,but the Form believes thatgreater focus should be made in the following areas.

Business innovation-friendlyenvironments19 A persistent refrain amongst correspondents is the

need for a more business innovation-friendlyenvironment that positively encourages innovationand business development.While there are numerousinitiatives designed to promote innovation,businessstart-ups and growth, there is little clarity abouttheir relative impact. Government and ScottishEnterprise/HIE should conduct an overarchingcomparison of their relative merits across businesssectors so that focus can be given to providingstronger support for those that have the greatestimpact on business, are simple, cost-effective toapply and easy to manage.

The importance of sectoral focus20 It is particularly important that governmental support

for business recognises the distinctive needs of different sectors, and also recognises the distinctionsbetween those firms that engage with global marketsand others that are primarily concerned with thedomestic market. For the former, the location mustbe attractive to new investment and the environmentmust offer the capacity for local operations tocompete globally and generate growth. For the latter,the local service sector must offer appealing services atattractive prices to create jobs and boost productivity.

21 A recent sector-stratified analysis in 20 countries and30 business sectors12 draws the following principalconclusions:Service sector competitiveness is the key to jobgeneration .Though many governments look tomanufacturing as a source of growth and jobs, servicesector growth is critical.Between 1995 and 2005, allnet job growth in high-income economies came fromservices, and even in middle income economies, 85%

came from the service sector.

Policy impacts most directly on thenon-tradable sector. Sector performancedepends on policies that set the rules of the game.In telecommunications or retail, for example,regulation that facilitates business entry tendsto increase productivity.

In traded sectors, where companies mustcompete globally, effective policy interventionsmust be based on understanding of the globallandscape . Some regulations can halt growth andill-devised financial incentives can be very costly tono good effect. Efforts to support sectors should bebased on realistic potential (see following section).

New innovative sectors are not themselvesenough to boost overall growth . Many policymakers pin their hopes for growth on high-techsectors,but such sectors are too small to make adifference to economy-wide growth. Whilst thesector’s direct impact on GDP is limited, it is thediffusion of technologies into major players in theeconomy that is the key driver of growth. Policy canenhance this process.For example, building andheating regulations, or a regulatory requirement for low carbon solutions can provide greater stimulationto growth than focussing on technology solutions.

Sustained and aligned commitment to technology areas22 There has been an understandable reluctance

amongst policy makers to “pick winners”,by whichis generally meant strong financial support for thedevelopment of a technology in the hope that it willcreate its own market or be successful in an existingmarket.This is very different from giving support tohighly-developed technology areas with provenpotential where large markets exist and where there isan opportunity for government to “tip the playingfield” in favour of national companies.Such targetingof key technology areas has been successful inmany countries:examples include Taiwan incommunications technologies; the USA in silicontechnologies and many others;and Germany inindustrial chemistry. In these cases, governments takea strategic lead in collaborating with business insetting objectives, identifying and removing barriers toexploitation and determining where enabling actioncan be taken by government. Such sustainedGovernment commitment to specific technology andinnovation areas can also be a powerful contributor tobusiness growth by giving companies a clear signalthat investment in these areas would be profitable.


12 McKinsey Global Institute, 2010. How to compete and grow; a sector guide to policy



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23 The criteria for making strategic choices in Scotlandwould be 13:

• Scotland is a world leader in the technology andhas an appropriately skilled workforce.

• There exists or there is emerging a large global market

for the technology.• Scotland has the companies and the mechanisms to

take the technology to market (see appendix 3).

• There are mechanisms in Government hands thatcould facilitate development,such as use of publicprocurement,regulatory and fiscal intervention,facilitating international collaboration and linksbetween academia and industry, R&D investment,funding demonstration projects, and promoting publicengagement.

• There is no strong public aversion to implementationof the technology.

24 The steps currently being taken by the ScottishGovernment to support the development of renewable energy is an example of such a strategicchoice. It is particularly important that this is done inareas of national infrastructure (such as IT, transport,and electricity grids), which also deliver public benefit

and are a necessary part of the national allure for inward investment, as well as encouraging businessescurrently based in Scotland to remain and grow.In this context, the Royal Society of Edinburgh hasrecently published a report 14 arguing that investmentin fast digital broadband communication would be anattractor for business and investment and a stimulusfor business start-up and business and social innovation.


13Strategic Decision Making for Technology Policy.Council for Science and Technology, 2007. http://www.cst.gov.uk/reports/index.shtml

14 Digital Scotland, Royal Society of Edinburgh,October 2010 http://www.royalsoced.org.uk/enquiries/Digital_Scotland/index.htm



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25 The above figure illustrates how the nature of Government intervention should be adapted to thecharacteristics of the sector.They include 15

Setting ground rules and direction , includingsetting the regulatory environment and broad national

priorities and roadmapsBuilding enablers by support for the private sector inthe education and training of a relevantly skilledworkforce and supporting R&D.

Tilting the playing field by creating favourableconditions for local business through publicprocurement or financial incentives.

Playing the role of principal actor through directfunding of infrastructure, where public investment hasoften had the most powerful impact and where privatemechanisms tend to produce sub-optimal solutions.

Use of public procurement and nationalinfrastructure projects as drivers of innovation26 An important potential tool in supporting such

developments is to exploit the power of publicprocurement as a technology driver 16. Publicprocurement through mechanisms analogousto the US Small Business Innovation Researchscheme17 should be used as a powerful stimulus totechnological and business development 18. In thiscontext, although the Scottish Government’sInnovation Framework 19 highlighted the importantrole of public procurement, the Forum believes thatmore needs to be done on the crucial role thatprocurement can have in stimulating growth of innovative business and that NHS Scotland, inparticular, needs to become more responsive toinnovation,with more opportunities for newinnovations to be demonstrated to NHS practitioners.This principle may also apply to other areas withinthe public sector, such as in energy and transport.

27 National infrastructure projects could again providea key focus for this, covering telecommunications,

broadband access, water, energy and transport, whichcould be used in a way to drive innovation andencourage the development of supply networkswithin Scotland.Projects should be planned over thelong term, rather than as a series of quick one-offs, toallow the development of supply networks andinnovative solutions.Such supply networks facilitatethe engagement of smaller businesses in major

projects, and the sharing of best practice betweencompanies working towards a common goal.TheRSE’s “Digital Scotland”report identifies areas of ITwhere such stimulation could exert considerablebusiness leverage.

Key insights:• Government needs to be bolder in focusing supporton those initiatives that are having the greatest impactbut carefully differentiated by sector;

• There needs to be systematic, targeted and sustainedsupport for specific technology & innovation areas,which align public and private areas of activity;

• More use should be made of public procurement tostimulate innovation particularly through nationalinfrastructure projects in IT, energy and transport.

Medium to large enterprises and their supply chains28 The view of the Forum and from the business

leaders surveyed, supported by both national andinternational evidence 20, is that it is the large andmedium-sized companies that are the main sourceof productivity in the economy. In addition to their direct economic impact, they also create the supplychains that have the potential to provide businessopportunities for the formation and growth of SMEsand, through a more interactive business ecology,create richer value chains in the region and

stimulate innovation.29 This is not to diminish the role of small technology

companies,start-ups or university commercialisationefforts, which are important in stimulating creativityand diversity, but merely to reflect the evidence that itis the diffusion of innovation into major players in theeconomy that is the principal driver of growth.

Increasing the number of £100m turnover companies in Scotland 30 Many of the Scottish Government’s current

activities in business stimulation are inevitably focusedon the creation of small and medium enterprises(SMEs).Although SMEs are and will continue to bean important priority, many are inhibited in their potential for growth by the absence of an environmentof medium to large companies that create demandsthat smaller companies can satisfy and thereby grow.


15 McKinsey Global Institute, 2010. How to compete and grow; a sector guide to policy16 Review of Public Procurement in Scotland . Scottish Executive (2006). http://www.scotland.gov.uk/Resource/Doc/96269/0023302.pdf 17 http://www.sbir.gov/18

Scottish Council of Economic Advisers, SecondAnnual Report (www.scotland.gov.uk/Resource/Doc/293976/0090814.pdf)19 A Strategic Framework for Innovation in Scotland (2009) (www.scotland.gov.uk/Resource/Doc/277577/0083339.pdf)20 McKinsey Global Institute, 2010. How to compete and grow; a sector guide to policy



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In some sectors, the presence of larger companies isactively creating supply chains and value chains, andproviding important managerial and leadershipexperience within Scotland.This is happening inthe oil-inspired businesses based inAberdeen, thegrowth and diversification of energy companies, and

the growth of life-science businesses that are wellcoupled to a strong research base in universitiesand institutes.Prior to the current financial crisis,RBS and HBOS in the financial services industry,with a combined market capital of around£200 billion,were also making a significantcontribution to stimulating innovation in their local suppliers.

31 The Forum believes that more attention needs to begiven to companies below the £100m turnover level,but at the top end of the SME definition to explore

how they can be assisted to exceed this threshold, for example, by providing international, business andtechnical expertise,and encouraging innovation.Government policy should build on the work thatScottish Enterprise/HIE is doing in this area to targetand back winning companies to ensure that they arewell placed to exploit markets.A table of potentialcompanies in Scotland in this category are detailedin Appendix 3.

Improving innovation in existing industries32 Serious and sustained efforts continue to be

necessary to improve the innovation performanceof existing companies in Scotland and the useof new technologies and approaches.Such anoutcome has been achieved for example in therecent rapid growth of Scotland’s pharmaceuticalindustry, through a combination of inward investmentand indigenous growth that strongly links academicresearch and company innovation 21. Existingcompanies therefore need increased encouragementto innovate and should have increased access tosupport funding for innovation 22. A recent opinionsurvey of 300 Scottish companies by ScottishEnterprise showed that funding was perceived to beone of the biggest barriers to innovation (Appendix 4).

33 Although technology start-ups,or university laboratoriesare important sources of seed corn ideas and stimulatorsof talent, it is the diffusion of technology and talent intomajor economic actors that is the means wherebytechnology driven growth occurs 23.An important focusfor action should therefore be to encourage suchtechnology diffusion and transfer.

34 There is often an unwarranted assumption thatEuropean Union rules on state aid are significantinhibitors of Government intervention.The realityis that the rules permit substantial support 24.Whilst not advocating a regime of subsidy,mechanismssuch as public procurement for novel technologies and

sustained support for innovative programmes areroutinely used by powerful market actors such as theUSA,and should be explored more decisivelyin Scotland.

Encouraging a wider international outlook35 In order to develop and exploit the potential for

growth, modern companies in Scotland need todevelop a wider international outlook.The Forumbelieves that schemes that provide companies withglobal ambitions with non-executive directors withglobal experience should be supported, possibly with

the help of a network of mentoring support fromlarger companies and from the “global Scotsnetwork”. Other examples of schemes which providevaluable support in this area are the SaltireFoundation’s Fellowship Programme, the RoyalSociety’s Industry Fellowships,and the RSE/ScottishEnterprise Fellowships.

36 Much of the success of Scottish business will dependon the skills that are available to it and that contributeto it. It is not only important that we train for the craftand technical skills that business will require but thatwe are able to retain and attract some of the besttalents in each generation,not only from Scotlandand the UK, but from the global pool of talent.We need to ensure that exciting opportunities for creativity continue to be generated and that Scotlandis able to maintain some beacons of internationalexcellence.The universities have an important rolehere in continuing to maintain some such beacons inresearch.We need low risk places to do high risk things.

Transport and digital communications infrastructure 37 Maintaining the presence of existing and attracting

new internationally active businesses in Scotlandrequires high standards of public infrastructure.Particularly crucial are transport infrastructurethat facilitates both international and internal traveland accessibility, and an efficient, highly penetrativehigh band-width telecommunications network.


21 In 2005, 20 per cent of Europe’s life science initial public offerings (IPOs) were Scottish.

(http://www.sdi.co.uk/Key%20Industries/Life%20Sciences/Key%20Facts.aspx)22 Business R&D in Scotland – A Missing Link. SSAC 2009. (www.scottishscience.org.uk/documents/SSAC-Report-business-R&D-in-Scotland-A-missing-link-2.pdf)

23 How to Compete and Grow . McKinsey Global Institute, 2010

24 Regional Aid and UK Assisted Areas (http://www.hie.co.uk/HIE-International-Affairs/EU_state_aid_general_block_exemption_regulation.pdf)



38 The transport infrastructure within Scotland,as wellas connections to the rest of the UK and overseas is avery important factor in encouraging companies toeither relocate to Scotland or to remain based in thecountry.Developing and maintaining such a network isa long term task that cannot be addressed within thelifetime of a single parliament.Efforts should be madeto develop a cross-party consensus on a nationaltransport policy that not only encompasses links withinthe central belt,but also with other commercial centressuch as Dundee, Aberdeen and Inverness. Links tomajor transport hubs in the rest of the UK should beone of the priorities, including a high speed rail link toLondon.Ease of travel to, and air links with, regionalcentres are important in retaining major companies andinternational employment, for example in the case of the oil industry currently based in Aberdeen 25.

39 The advent of digital technologies in the last twodecades has wrought an immense increase in globaleconomic interaction.Information technology is theconnective tissue of modern business,such that, asthe pace of change accelerates rather than falters,the provision of a high band width network that iscomparable with the best internationally will be avital prerequisite for successful business in Scotland.But it will also be necessary if Scotland is to capitaliseon its current strengths in information technology indeveloping new business opportunities and processes,and to create greater business activity in its smaller towns and rural areas.

Key insights:• More attention needs to be given to creating a larger

pool of companies around the £100m turnover level,which can drive SME supply and value chains, andoften provide greater opportunities for connectionswith the research base.

• A greater focus should be placed on encouraginginnovation in Scottish companies, with mechanismssuch as public procurement for novel technologiesexplored as a possible stimulus.

• To enable the development of more £100mcompanies, Scottish companies need to develop awider international outlook, and initiatives to provideinternational experience at boardroom level shouldbe further developed.

• Transport infrastructure is an essential factor in bothattracting businesses, and enabling businesses to remainand grow in Scotland.

Business innovation and the research base 40 The efforts of the universities and research institutes,

and those that fund them, in developing mechanismsto exploit the research base, have led to the creation of many promising start-up and spin-out companies.Though potential valuable seed-corn for futuregrowth, it is not in itself a sufficient basis for wider economic growth, even of R&D intensive growth.The strong Scottish research base provides a fertilepart of the environment in which business canflourish rather than being the principal driver of business growth. Nevertheless, better exploitationof the science base to national benefit could beachieved if companies based in Scotland werepermitted to use research from universities freeof royalties if the university itself could not exploitthe research within two years, but with the universityretaining the IPR.We applaud the pioneering stepstaken by the University of Glasgow 27 to do this.

41 The research base, and spin-outs from it, are mostefficiently exploited where there are major companieswith a large R&D spend that need R&D-intensivesupply chains to support their business and whoseR&D expenditure is also a powerful lever on theresearch base.An important observation is that manypromising start-up companies, rather than finding themarkets and investments that would permit them togrow, have been bought out by non-Scottishcompanies,with a concomitant loss to Scotlandof IPR and growth potential. One contributingfactor is the current equity funding model whichpredominantly involves Angel groups orVentureCapital companies.Angel groups have limitedfinancial firepower (generally up to £2m) but arevery reluctant to move their companies on toVentureCapital due to the risk of heavy dilution.VentureCapital funds are frequently looking to exit within a5-7 year time period.Experience would suggest that alonger time period is required if companies are tobreak the £100m turnover threshold,and that thenormal‘Angel–VC’ escalator is not currentlyfunctional. In addition, increasing uncertainty over future increases in capital gains tax can act as anincentive to owners to sell out earlier than they mightotherwise have done.

Key insights:• The strong Scottish research base provides a fertile

part of the environment in which business canflourish, but it should not be seen as a principaldriver of major business growth.

• Longer term funding models need to be developed toenable start-up companies the time to find marketsand investment to grow, without having to be takenover by larger companies.


25 Power to Connect. Reform Scotland. June 2009 (http://www.reformscotland.com/include/publications/power_to_connect.pdf)26 Scottish University Spin-Out Study, June 08.Targeting Innovation http://clients.digipage.co.uk/?userpath=00000000/00007479/00025542/27 http://www.timeshighereducation.co.uk/story.asp?storyCode=407376&sectioncode=26

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ConclusionsOur major observations and recommendations for keyareas of focus are:

Major observations:• The performance of the Scottish economy has, over

the years, fallen short of national aspirations, in theface of a global economic transition to informationand knowledge based economies.

• There are few and indeed a diminishing number of large companies with research capability which areheadquartered in Scotland,and a particular paucity of other companies with a turnover in excess of £100m.

• In response, government strategies need to workwith businesses in Scotland to enable them tocompete; investing in and creating innovative productsand solutions that address a global marketplace; showthe flexibility needed to respond to global changes;and use the leverage of government in marketpositioning.

• Recent findings from the northwest of Englandshow that it is the larger and medium sized companiesthat are the main source of investment andproductivity in the economy. There seems no reasonto believe that the situation is different in Scotland.

• The strong Scottish research base provides a fertilepart of the environment in which business canflourish,but it should not be seen as a principaldriver of major business growth.

Key areas of focus:• A sectorally focussed business-friendly environment

which is perceived positively to encourage innovationand business development needs to be developed andpromoted within Scotland by the ScottishGovernment. Major businesses and private enterprisein Scotland need to feel valued rather than simplytolerated,and the Scottish Government shouldencourage businesses to make local R&D connectionsthrough initiatives such as innovation vouchers, tomaximise their sense of connection with Scotland.

• In light of the current squeeze on public finances,theScottish Government should identify the relativeimpact of its innovation support schemes, and focussupport on those that create the biggest impact in aconsolidated and co-ordinated way.Applicationprocesses should be made simpler and a Dutchmethod of “Responsible Trust”could be taken withparticipating companies.

• To respond to the increasingly competitive globalmarket there needs to be systematic, targeted andsustained Scottish and UK Government support for specific technology and innovation areas,which notonly deliver public benefit,but which are also anecessary part of attracting inward investment andencouraging businesses presently based in Scotlandto remain and grow. Following approaches taken inthe Netherlands, the Scottish Government needs totake greater ownership of Scottish Innovation Policywith the possible development of fiscal tax-creditmeasures to encourage innovation within companies,against researcher costs, and the costs of applying for patents.

• The Scottish Government should make more useof public procurement, and EU Structural Funds,through mechanisms analogous to the US SmallBusiness Innovation Research scheme, to encouragenovel technologies and provide sustained support for innovative programmes within the private sector,particularly through national infrastructure projectsin IT, energy and transport.This will also maximisethe economic gain from the need to meet statutorycarbon emission targets.

• Scottish Enterprise agencies should give moreattention to the pool of companies below the£100m turnover level, but at the top end of the SMEdefinition, to explore how they can be assistedto exceed this threshold.This should include initiativesto provide greater international experience atboardroom level.

• Transport and IT infrastructure development shouldform parts of the Scottish Government’s Business &Innovation strategy. Efforts should be made to developa cross-party consensus on a national transport policy,encompassing not only links within the central beltand major transport hubs within and outwithScotland,but also other commercial centresthroughout Scotland.

• To encourage better exploitation of the science basein Scotland, universities/research institutes should

allow companies based in Scotland to be permitted touse research developed there, royalty free, if it has notbeen exploited by the university/research institutewithin two years.

Any enquiries about this advice paper should be addressed toBristow Muldoon (Email:[email protected])

Advice Paper (Royal Society of Edinburgh) ISSN 2040-2694


The Royal Society of Edinburgh (RSE) is Scotland’s National Academy. It is an independent body with amultidisciplinary fellowship of men and women of international standing which makes it uniquely placed tooffer informed, independent comment on matters of national interest.

The Royal Society of Edinburgh, Scotland's National Academy, is Scottish Charity No. SC000470



Appendix 1: Membership of the Royal Society of Edinburgh Business Innovation ForumChair: John McClelland CBE FRSE – RSEVice-President (Business), Chairman of NQC ltd,and the ScottishFunding Council. Former President of 3Com Corporation and Renfrewshire Enterprise Company.

Steve Beaumont OBE FRSE –Vice Principal at Glasgow University. Member of the Scottish Science Advisory

Council,and led the development of the SSAC report on “Patterns in Business R&D”.Former Director of the Institute for System Level Integration.

Geoffrey Boulton OBE FRS FRSE – General Secretary of the RSE; member of the UK Council of ScienceandTechnology; former member of the SSAC and SFC

Tariq Durrani OBE FRSE – Professor of Signal Processing,Former Deputy Principal, University of Strathclyde.Member of SFC

SirTom Farmer CVO CBE KCSG DL FRSE , founder of the Kwik-Fit tyre company and Director of MaidencraigInvestments Limited

Mr Colin Hood , Chief Operating Officer, Scottish and Southern Energy

Donald MacRae FRSE , Chief Economist Lloyds Banking Group Scotland, director LloydsTSB Scotland plc, boardmember Scottish Enterprise, Interface and member Rural Development Council and Scottish Government EconomicStatistics Advisory Group,Trustee of the David Hume Institute.

Chris Masters CBE FRSE , former Executive Chairman,Aggreko plc and Chairman of SHEFC

David Milne OBE FRSE – Founder of Wolfson Microelectronics and non Executive Director. Chairman of Elonicssemiconductor company and Chair of the Edinburgh International Science Festival and the James Clerk MaxwellFoundation.

Ian Ritchie CBE FRSE FREng – Business Angel andTechnology Entrepreneur. He is co-chair of the Scottish ScienceAdvisory Council,and Chairman of 5 technology companies (including iomart plc.) Formerly a board member of theScottish Funding Council (SFC),Scottish Enterprise,and Channel 4TV Corporation. Board member of NationalMuseums of Scotland, and the Edinburgh Film and Science Festivals.

Appendix 2: Contributors to this paperThe views expressed in the paper reflect those of the RSE Business Innovation Forum.The Forum is grateful to the following for their assistance in the preparation of this paper:Mr Douglas C Anderson, Founder, OptosAudry Baxter, Chief Executive, Baxters Food GroupTom Flockhart, Director, Capital SolutionsSir Bill Gammell, Chief Executive, Cairn EnergyKatherine Garrett-Cox, Director,Alliance Trust plcMr Nick Horler, Chief Executive, Scottish PowerMr Allister Langlands, Chief Executive, John Wood GroupSir Moir Lockhead, Chief Executive, First Group plcMr Ian Marchant, Chief Executive, Scottish & Southern EnergyMr Jim McColl, Chief Executive, Clyde Blowers ltdKeith Neilson, Chief Executive, Craneware plcPhil Newman, Marketing Director,Touch BionicsDr Susan Rice, Managing Director, Lloyds Banking GroupMr Rupert Soames, Chief Executive,AggrekoDavid Srodzinski, Chief Executive, Elonics

Ivor Tiefenburn, Executive Chairman, Linn Products LimitedMr Chis Tiso, Chief Executive,Tiso Head Office


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Appendix 3: Companies in Scotland with turnovers between £60 million and £100 million, fromrelevant industry sectors, taken from the Business InsiderTop 500 League, January 2010

Company Name Activity Turnover Sector£M Present

Fugro-Rovetch ROV provision and operation 88.26 Aerospace,defence & marineIntegrated Subsea Services ROV and survey services 87.63 Aerospace, defence & marine

HelixWell Ops UK Subsea Intervention services 64.31 Aerospace, defence & marine

RMJM Group Architectural services 99.88 Construction

Dawn Group Building contractor 93.66 Construction

Bovis Lend Lease (Scotland) Building contractor 82.83 Construction

GAP Group Plant and tool hire 81.00 Construction

Scot JCB Holdings Machinery distributor 80.47 Construction

Muir Group Contractor; private housing; golf club 76.35 Construction

BDW East Scotland Building and contracting 70.71 Construction

CBC Construction& Property Group Construction; property development 65.16 Construction

Ashleigh (Scotland) Builder 60.53 Construction

ITS Tubular Services (Holdings) Oilfield equipment rental/manufacture 98.20 Energy

Wood Mackenzie Energy/Lifesciences consultants 96.64 Energy

Global Energy (Holdings) Energy Contracting/services 94.31 Energy

J Gas Sale/distribution of LPG 94.19 Energy

KCA DeutagTechnical Support Offshore support services 92.73 Energy

Sovereign Oilfield Group Oil and gas services 82.80 Energy

Grangemouth CHP Combined Heat and Power station 80.63 Energy

Hunting Energy Services Offshore connector services 78.71 Energy

Aker Qserv Oil and gas services 68.50 Energy

Thames Gold Holdings Fuel distribution 67.37 Energy

New Hydrasun Offshore equipment and services 61.60 Energy

WJ Harte Construction Civil and marine engineering 91.23 Engineering

RJMcLeod (Contractors) Civil Engineering, building 88.45 Engineering

URS Corporation Structural and civil engineering 68.62 Engineering

Dunne Group Civil Engineering 62.49 Engineering

Ignis Asset Management Investment management 93.60 Financial services

Fortis Lease UK Fixed Asset finance provider 87.72 Financial services

Martin Currie Investment management 87.32 Financial services

Walter Scott & Partners Investment management 79.55 Financial services

Barclays Stockbrokers Stockbroking services 65.42 Financial services

ANM Group Livestock auctions 99.07 Food and drink

Marine Harvest (Scotland) Salmon farming 93.23 Food and drink

United Holdings UK Wholesale Grocers; property rental 89.93 Food and drink

Browns Food Group Cooked meats 86.50 Food and drink

Kettle Produce Vegetable production 84.57 Food and drink




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Company Name Activity Turnover Sector£M Present

Kent Foods Food Wholesaler 81.40 Food and drink

Food Partners Catering food and drink suppliers 81.33 Food and drink

John Dewar & Sons Whisky distiller 80.62 Food and drink Scottish Sea Farms Fish farming 74.72 Food and drink

Seafood company,The/Macrae Foods Herring and vegetable picklers 74.22 Food and drink

Wallaces of Ayre Suppliers to the licensed trade 69.96 Food and drink

A Bulloch (Agencies) Wines and spirits wholesaler 68.15 Food and drink

WN Lindsay Grain merchant;warehousing 64.03 Food and drink

Harbro Group Animal feed 62.39 Food and drink

James Donaldson & Sons Timber engineering, sawmilling 78.10 Forest industries

James Jones & Sons Sawmilling; t imber engineering 76.15 Forest industr iesAxis-Sheild In-vitro diagnostics 85.26 Life sciences

Optos Medical technology 61.02 Life sciences

Hewlett Packard Manufacturing Portable and desktop computers 90.64 Manufacturing

Dingbro Motor component distributor 85.60 Manufacturing

Carron Phoenix Sink Manufacturer 83.90 Manufacturing

Clyde Process Solutions Mater ial handling solutions 81.96 Manufacturing

United Closures & Plastics Bottle tops and closures 80.99 Manufacturing

Brand-Rex Structured cabling systems 78.28 Manufacturing

Scott Group Pallets and crates 73.30 Manufacturing

Mitsubisi Elec Air Con Sys Euro Airconditioning services 69.27 Manufacturing

Divex Diving equipment 65.67 Manufacturing

Honeywell Security UK Alarm detection equipment 64.74 Manufacturing

FLB Group Diary/organiser manufacturer 61.35 Manufacturing

Scottish Leather Group Leather manufacturing 60.46 Manufacturing

Richard Austin Alloys Non-ferrous metal stockholder 81.62 Mineral Resources

John R Adam & Sons Metal recycling 72.23 Mineral Resources

AR Brown McFarlane & Co Steel stockholder 62.95 Mineral ResourcesDobbies Garden Centres Garden Centres 91.96 Retail

Reid Furniture Furniture retail 78.68 Retail

Botterills Convenience Stores Retail convenience stores 77.50 Retail

Charles River LabPreclinical Svcs Edin Scientific Research 63.78 Scientific services

Gulf Offshore NS Offshore supply vessels and transport 89.56 Transport

AM Philip Commercial vehicle retailer 70.02 Transport

Braid Group (Holdings) Shipping/forwarding agent 64.85 Transport

LeasewayVehicle Rental Commercial vehicle rental 61.16 Transport

(Note:The Business InsiderTop 500 League companies only include companies with fully audited accounts,and either havea UK or international head office in Scotland,or 90% of their turnover must be generated in Scotland.)




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Appendix 4: Results of a Scottish Enterprise innovation survey of 300 companiesin Scotland, conducted in January 2010 as part of its quarterly customer research




Documents

AD10-15 Innovation-Friendly Scotland: Priorities for Innovation & Business Development