Enterprise and Skills Review report on Phase 2: Enterprise and Business Support

1. Introduction

The Enterprise and Skills Review has been guided by the principle objective of:

'making a step-change in enterprise and skills support to help progress towards our ambition of Scotland ranking among the top quartile of OECD countries in terms of productivity, equality, wellbeing and sustainability'.

The purpose of public sector business support is to drive new business starts and early stage growth, to increase companies' productivity, skills, employment and wealth, and to help key sectors and the economy flourish overall. It seeks to achieve this by helping to remove barriers to growth and address market failures so that growth is significantly faster, higher and more inclusive. It aligns with Scotland's Economic Strategy, which sees businesses playing both a social and economic role as job creators and wealth generators, with fair work sitting at the heart of many of the proposed solutions to the challenges facing individuals, society and the economy.

Scottish Enterprise ( SE), Highlands and Islands Enterprise ( HIE) and Skills Development Scotland ( SDS) provide direct and indirect support through the provision of information, specialist advice and funding to help businesses and sectors develop and grow. This is alongside support from local authorities through delivery of Business Gateway and broader economic development activities; the Scottish Funding Council through colleges and universities; and, for the tourism sector, VisitScotland. It is also alongside a wide range of non-public sector provision such as from professional financial and legal services; business organisations including the Chambers of Commerce and Federation of Small Businesses; and enterprise support organisations such as Entrepreneurial Scotland, Entrepreneurial Spark, and those that support specific groups such as women's or social enterprise.

The Challenge

Phase 1 of the Review highlighted areas where operational delivery is strong and highly valued by businesses, and also where there is clutter, inconsistency, confusion, and concern about the speed of delivery. It committed the Government to considering how to improve access to services; reach many more businesses; and target specific support more effectively. It also suggested that we consider the right balance of advice and support over grant provision; a stronger role for private and third sector organisations in shaping services; and certain contributions or attributes from companies seeking and receiving public sector support.

In addition, recent analysis has suggested that the UK's and Scotland's relatively low productivity performance can partly be attributed to a long tail of businesses that do not innovate, that demonstrate slow productivity growth, and have not kept pace with the best performing companies. ^[i] There is a regional dimension insofar as different areas of Scotland display very different productivity performance.

As outlined in Scotland's Economic Strategy, innovation, investment and international engagement are key drivers of productivity growth across businesses of all size. Record high levels of start-ups have led to a 15% increase in Scotland's registered business stock from 151,145 in 2007 to 173,995 in 2016. New VAT/ PAYE registrations in Scotland were 21,725 in 2015, the highest level in the current series going back to 2004. Yet Scotland's business stock and business birth rates are, in relative terms, below that of the UK. The registration rate per 10,000 adults for Scotland was 49, compared to a rate of 72 for the UK. ^[ii] This is important since competition drives innovation, efficiency and quality improvements. A broad business base is also essential to provide sufficient businesses of scale. As the MIT REAP Scotland Report points out, Scotland is not meeting its potential in delivering high growth from a population of young, innovative companies. ^[iii]

Small businesses play a vital role in delivering social and economic value for individuals and society as a whole - including by delivering quality work and employment, and addressing important challenges in relation to poverty, inequality and diversity. Over 344,000 small businesses in Scotland with 0-49 employees represent 98.2% of all businesses, provide an estimated 887,000 jobs, and contribute £75bn (27%) of private sector turnover. ^[iv] Of these, 328,000 are microbusinesses employing fewer than 10 people.

At the other end of the scale, there is evidence that a small number of high-growth businesses drive a disproportionately large amount of employment and wealth creation. The MIT REAP report highlights that, despite its strengths, Scotland produces few home-grown enterprises of global scale and the potential to create significant wealth is not being realised. ^[v] Nonetheless, we have seen recent success through the creation and growth of 'unicorn' businesses such as Skyscanner, Fanduel and now Brewdog.

Given our target of being in the top OECD quartile for productivity, action is required both to encourage steady performance improvements across the broad business base and to maximise the impact of dynamic high-growth companies. Boosting productivity growth will require long-term and consistent efforts across the public, private and not-for-profit sectors, with an international mindset, innovation and investment playing a key role.

For the purposes of this report, reference to public sector delivery partners is intended to include the Scottish Government, our enterprise agencies and Skills Development Scotland, as well as Business Gateway and local authority economic development partners. It is our ambition through further discussion to extend the scope of actions to include local economic development functions more directly where appropriate and, in time, third and private sector organisations.

In addition to our enterprise and skills agencies, we are grateful the following for their extensive engagement with the project:

• Business Gateway.
• COSLA.
• The Society of Local Authority Chief Executives ( SOLACE).
• The Scottish Local Authorities Economic Development group ( SLAED).
• Women's Enterprise Scotland.
• The Scottish Council for Development and Industry ( SCDI).
• The Federation of Small Businesses ( FSB).
• Entrepreneurial Scotland and entrepreneur representation.
• The Scottish Trades Union Congress ( STUC).