Enterprise and Skills Review report on Phase 2: Innovation

Section 2: Summary of Evidence

A key part of this review was to assemble and analyse a wide range of data on innovation in Scotland.

Evidence gathered includes:

• A data review of Scotland's current innovation performance.
• A literature review of existing reports on the Scottish innovation system.
• Focus group sessions with business, universities and colleges.
• Perspectives on innovation support.
• An audit of public sector innovation products.

The full outcomes of this work will be published separately.

Current Innovation Performance:

• Scotland's Gross Expenditure on Research and Development ( GERD) ^[4] in 2015 was 1.46% of GDP compared to 1.95% for the EU as a whole. That gap remains the same size now as in 2006. Over the same period Scotland narrowed the gap with the UK from 0.36% to 0.22%.
• Scottish Higher Education Research and Development expenditure ( HERD) is the 4th highest in the OECD (top quartile). Nevertheless, there are continuing concerns that industry does not fully exploit these academic strengths and assets.
• Scottish Business Expenditure on Research and Development ( BERD) grew by 41% between 2007 and 2016, compared to just 17% for the UK as a whole. BERD employment is at its highest ever level, and, as reported by Ernst and Young in May, in 2016, " Scotland attracted more R&D projects than any other UK region, with software and life sciences the main drivers" ^[5] . Nevertheless BERD remains just 0.6% GDP in Scotland, 9th amongst 12 UK regions. Countries comparable in size such as Finland and Sweden spend over three times as much on BERD.
• Scottish business innovation showed significant improvement between 2013 and 2015, with Scotland moving from third to first quartile of the EU28 in business innovation activity ^[6] . Scotland (and the UK) outperformed the EU average in organisational innovations, but performed less well than the EU average in process, product and marketing innovation. There is also a performance gap in terms of medium and large sized businesses in Scotland.
• In the UK Innovation Survey 2015 ^[7] , businesses report that availability of finance, cost of innovation and economic risks of innovation were the most highly rated factors in terms of their importance in constraining innovation activities, but lack of qualified personnel and of required information also featured, as did uncertain demand for innovative products.

Innovation Literature Review

A key theme emerging from the literature review suggests that innovation activities in Scotland are constrained by a mismatch between areas of scientific strength and industrial capacity - Scotland's public research base is strong, but the industrial capacity or "absorptive capacity" to exploit specific outputs can be lacking and a key challenge will be how to address that mismatch. The review also suggests that other small innovative countries with strong BERD performance invest in applied research and technology development and downstream innovation and argues for an emphasis on stimulating industry demand as the basis for the approach to innovation.

The review also suggests that financial issues as barriers to innovation can be understood at least in part as risk aversion and information deficiencies in which firms lack information in order to assess likely returns on investment. Thus, market opportunity information and public sector procurement practice give more certainty around potential customers and scale thereby stimulating potential suppliers to innovate by addressing that information deficiency and risk aversion.

Focus Groups

Six focus groups involving businesses, universities and colleges were undertaken and the gathered evidence generated a number of interesting observations on current challenges and suggestions for change. For example, strong messages emerged around the need for clear communication of the benefits of innovation, what support is on offer and how to access it, and on the strengths of Scotland as an innovation nation.

The proposed streamlining and simplification of the innovation support landscape was welcomed, but with a desire to retain flexibility within the system and ensure that the positive and effective elements of existing support were retained, including direction to appropriate regional and sectoral advice and support.

The significant number of innovation infrastructure investments underway in Scotland was welcomed though the need for a more strategic and coordinated approach to such investment, for example through City Deal proposals, the National Manufacturing Institute for Scotland and other national or regional demonstrators and Innovation Centres was noted. This will be a key issue for the Strategic Board and partners to consider.

A number of Scottish businesses reported insufficient in-house capability to undertake R&D or non-technological innovation. It was highlighted that colleges are well connected to the local business base, including SMEs, and are well placed to support business innovation in that group. They also reported a need for better alignment between innovation and the skills and technical development that needs to sit alongside them was suggested.

Perspectives on innovation support - Enterprise Agencies

Two pathways shape the experiences of users of innovation advice and support from the Enterprise Agencies:

i. Experiences of Relationship Managed Innovators

ii. Experiences of Innovation Learners or Intermittent Innovators

Relationship Managed Innovators have an existing account management connection with SE, HIE or Business Gateway. Innovation Learners are typically SMEs that have had limited or no engagement with innovation support services. Intermittent Innovators dip in and out of support services and do not generate sufficient turnover from innovation to transition to Relationship Management.

Businesses in each pathway have access to a core range of innovation support (R&D grants such as SMART, Regional Selective Assistance, Environmental Aid etc). Relationship management further coordinates, connects and offers access to "wrap-around" support for business growth strategies, including capital investment, R&D, business efficiency and leadership.

What is clear from the evidence ^[8] is that relationship management matters. It impacts positively on business performance, Gross Value Added ( GVA) and employment. For example, recent analysis undertaken by SE shows that the average GVA impact for relationship managed firms in receipt of SE innovation support was £5.5 million per company compared to £1.7 million per company for intermittent innovators. Intermittent innovators are also more likely to report difficulties in accessing the right services.

The evidence also shows that Scotland's innovation results are reliant on activities delivered by a relatively small number of large companies - to transform our innovation performance we need more companies in more sectors to innovate and for companies to bring forward larger, transformational projects.

Part of achieving this will be to increase interest in innovation from intermittent and learner innovators. As some of these companies find the roles of different organisations difficult to understand, this will require improvements to communication and coordination of support - better coordinated pathways to connect up local and national resources, a clear route to support businesses to scale up their innovations and a shared core message across Enterprise Agencies and others to reinforce a positive image of Scotland as a top location for innovation investment.

Perspectives on innovation support - Universities and Colleges

Business access to academic expertise is facilitated by individual university knowledge exchange offices, by Interface, and through our network of Innovation Centres across Scotland.

A 2013 evaluation of Interface ^[9] indicated it generated £17m of GVA for the Scottish economy and supported c.350 jobs. 97% of businesses engaging with Interface said that their projects would not have happened, would have taken longer, or would have been less valuable without its assistance. 98.5% of customers were satisfied/extremely satisfied with the level of support provided by Interface.

During the business focus groups, participants reported a mixed experience in dealing with universities and colleges. A key theme was the lack of time businesses have to find out what is going on in universities and colleges and it was suggested that the Enterprise Agencies may be able to perform a more helpful information sharing role.

The university focus group session generated a number of key themes, including the importance of stimulating business demand, the need to use the university experience to develop entrepreneurial graduates, and how collaboration and relationships are more important than process change.

With colleges, they reported that that whilst they are often at the sharp end of innovation, the focus is more often than not on interactions between business and universities. Colleges needed to be freed up and encouraged to work more closely with businesses on innovation.

Audit of public sector innovation products

The audit was undertaken on behalf of the review by HIE and looked at innovation support products on offer to business from SE, HIE, SFC and Innovate UK. SDS also provided information on products that they offer in support of innovative activities.

Across the four agencies, 74 products are currently on offer. Most of these products are delivered by a single partner with only one - "Make Innovation Happen" which is focussed specifically on the food and drink sector - delivered by "Team Scotland". Most of the products are financial support (typically grants). Eligibility for products is generally determined by geography and business status - some are only available to account managed businesses and only around one third are available on a pan Scotland basis.

In terms of business size and sector, most products are offered to all sizes of business and very few of them are only available to businesses in specific growth sectors. We also looked at how the products spanned technology readiness levels (TRLs) and there is a reasonable spread across these. Most products were identified as supporting more than one TRL, however there is perhaps some concentration on levels 3-6 which cover proof of concept to demonstrating a prototype.

Further work needs to be done to analyse the impact of these products and also to consider how Scottish Government and Business Gateway offers add to the picture.