Enterprise and Skills Review report on Phase 2: Innovation

Section 4: Building on the Innovation Action Plan

Following Phase 1, the aim of this report was to consider how the innovation system can be improved to deliver greater level of business innovation in Scotland. The streamlining activity set out above is important both to encourage more companies to invest in innovation and to reduce the time they spend navigating the system.

Nevertheless, system changes on their own will not deliver the significant improvements in Scotland's innovation performance that we need. For this, we must focus on driving up levels of business engagement in innovation. We need to deepen levels of engagement of existing innovators and support significantly more businesses to invest in innovation. This is the key theme that has emerged from across the evidence and is the main aim of the Innovation action plan.

This section therefore builds on the innovation action plan and its four key priorities, providing supplementary, evidence based analysis and recommendations.

Innovation Action Plan Priority 1: Directly encourage more business innovation

Management Skills and Finance for Innovation

Scotland has a number of world leading companies at the cutting edge of innovation in their sectors. However recent analysis ^[11] has suggested that the UK and Scotland's relatively poor productivity performance can be substantially attributed to a long tail of companies that are less likely to innovate, with slow productivity growth and which have not been able to keep pace with frontier companies ^[12] .

The role of innovation in boosting SME productivity growth is becoming better recognised ^{[13], [14]}. It has been suggested that a relative lack of management skills "is a plausible candidate explanation for the UK's long tail of companies" ^[15] . The particular productivity challenges of some family businesses are also highlighted ^{[16], [17], [18]}. Digital and management skills are also as a challenge for many Scottish businesses ^[19] . A relative lack of long-termism in some Scottish and UK ^{[20], [21], [22], [23]} businesses has further been suggested as a barrier to certain kinds of innovation and investment. A lack of skills in these areas is likely to play an important role in the ability of some Scottish businesses to adopt and make the most of innovations.

These issues, where they exist, require long term and consistent efforts across the public, private and academic sectors to encourage change. Competence in these areas is central to the capability of our businesses for innovation, and for our long-term economic performance. Furthermore, while the education level of managers and other workers is positively associated with quality of management within businesses, it has also been suggested that management quality can be improved through more basic business education on issues such as budgeting, data analysis and standard human resources practices ^[24] .

This suggests that as well as encouraging dynamic frontier companies, we must think carefully about how we can support small improvements across many companies in this "long tail", including by reaching more businesses with simple innovation support and an affordable innovation journey.

Finance for Innovation

Businesses continue to highlight access to finance as a key barrier to innovation. The need for patient long-term capital, and access to capital particularly for start-ups and young innovative technology companies has also been highlighted. The Scottish Government want to address such gaps in the market, where financial support needs to be boosted.

To help address these issues we will:

• Undertake additional research on the interplay between management skills and innovation demand in Scottish businesses, including the specific challenges and needs of family businesses.
• Create better linkages between innovation support and skills development and training.
• Consider further the impact of in-work training and the role of our colleges and universities in driving improvement.
• Ensure the Flexible Workforce Development Fund plays an important role here through in-work training delivered through colleges.
• Task the analytical unit with exploring how innovative finance, including peer to peer lending, could be utilised by Government and agencies to efficiently increase investment in R&D, innovation, uptake of existing technology and management practices.
• Continue with the significant existing and planned activity in finance for innovation including delivery of the Scottish Growth Scheme to support businesses in accessing the finance and investment they need to help realise their growth ambitions.

Benchmark Scottish Business Innovation Performance

Raising awareness of productivity and innovation performance amongst businesses, encouraging action on addressing skills issues, and facilitating networks and collaboration amongst partners, cannot and should not be addressed by the public sector alone. We are interested in learning more from how businesses themselves, including through their representative organisations, address such issues in comparator countries.

In addition to addressing the core capabilities within businesses that allow subsequent innovation, it can be important for businesses to know how they perform relative to companies of similar size within their sector ^[25] . A lack of information in that regard may suppress the motivation to innovate, because some businesses might over-estimate their level of performance ^[26] .

To address this we will:

• Work with Scottish business organisations to commission comparative research in this field, and engage with business organisations on the findings of that research and associated next steps.
• Ensure the dissemination to Scottish businesses of relevant innovation and productivity information covering Scotland, the UK, and comparator countries. This will include case studies on the adoption of innovative approaches in other countries ^[27] .
• Investigate and report on the scope to enhance connections and networking between private, public and third sector organisations as a way of driving innovation performance.

Continue to Support Workplace Innovation

Workplaces and employees are at the heart of innovation processes. The Scottish economy performs relatively poorly on labour productivity, and the under-utilisation of workers skills is a designed, how internal decisions are made, how workers are treated and engaged and the way jobs are designed matter to the bottom line and have important benefits for employers, for individuals and for society. Unlocking the innovative potential of employees depends on Fair Work and employers' ability to be innovative in how the workplace is designed.

Applying the principles of the Fair Work Framework is important for workplace innovation. The Framework defines Fair Work as work that offers effective voice, opportunity, security, fulfilment and respect. Security at work includes factors like having a secure contract, fair pay and pay transparency and plays an important role in behaviours and attitudes within workplaces. Where managers are able to make workers feel secure, this can increase their willingness to adapt and change and the chances of them going 'the extra mile' to innovate and add value to the business.

Likewise, workplace innovation around effective employee voice and engagement make workers more likely to engage with their employer and offer insights and ideas that can stimulate change and improvement. Organisational innovation is already supported in Scotland ^[28] and recent figures suggest stronger performance in this area than the rest of the UK ^[29] .

Given the above we will:

• Ask the Fair Work Convention to identify how our agencies can further embed workplace innovation through enhancing support for adviser training and focusing on demonstrating the productivity benefits of workplace innovation.

Innovation Action Plan Priority 2: Use public sector needs and spend to catalyse innovation

Increased business innovation investment and demand will not be created solely by improving the innovation support system. Opportunities and incentives need to be made available and the public sector can take a lead in this. The OECD has noted that public procurement has become a major feature of the innovation agenda that will grow in prominence as more countries develop demand-side policy instruments ^[30] . There is a distinction to be made between encouraging demand for innovation support services, for example through electronic communication with many businesses using the Digital ID, and encouraging demand for innovative products or services, for example through public procurement.

The Scotland CAN DO Innovation Action Plan sets out a range of activity in this area, including work with the Scottish Government's Procurement Directorate to ensure that procurement acts as a catalyst for business innovation. It also sets out Scottish Government plans for a coordinated programme of mission-oriented challenges including a Public Sector Innovation Challenge Fund, and expansion of the CivTech pilot, which is harnessing new technologies to drive innovation in the public sector.

To build on this we will:

• Double funding for CivTech to £1.2 million to scale up their activity to address public sector needs with business led innovation.
• Look across the Scottish Government to identify further opportunities in this area, starting with NHS Scotland. The health and social care delivery plan published in December 2016 seeks to position Scotland as an international leader in innovation in health and life sciences, speed up the adoption of innovation into practice in NHS Scotland and improve patient experiences and clinical outcomes. We will accelerate and deepen this collaboration, with a focus on data driven innovation in health and life sciences.

Innovation Action Plan Priority 3: Support innovation across sectors and places

In addition to the activity outlined in the Action Plan, which focuses on driving greater innovation in FinTech, manufacturing, digital and health care, there are a number of other areas for development which the evidence has highlighted.

Collaboration

When business collaborate on innovative projects of mutual interest, all parties can benefit greatly. Recent research from Scottish Enterprise shows that companies which have made use of their innovation support "display much more open characteristics than other surveys have identified, with large numbers collaborating with suppliers, customers and universities to deliver their innovation projects." ^[31] Most of this collaboration (62-63%) is across supply chains.

Given this, there remains significant opportunity for Scottish companies to supply other businesses in Scotland that are currently securing supplies from elsewhere and with that comes increased opportunities for innovative collaboration.

We will therefore ensure that support for innovation is fully integrated with further work on the identification of such supply chain opportunities.

Regional Variations

There is also a regional dimension to our innovation challenge: different regions in Scotland display very different productivity performance, due to variations in economic structures, company profile and management practices.

The spatial distribution of innovative businesses and the capabilities that underpin innovation are important to our understanding of local economic development, and long term action in underperforming localities should be a key focus for the Strategic Board.

Industry Leadership Groups

The role of Industry Leadership Groups should be maximised to stimulate innovation and improve BERD and help capture the full benefits of the UK Industrial Strategy for Scotland, working here with our universities and colleges.

Manufacturing

To support the manufacturing commitments in the Innovation Action Plan, we will also continue preparatory work on the National Manufacturing Institute of Scotland (NMIS) to support translation of cutting edge manufacturing research to application at industrial scale, with appropriate engagement of the college and university sectors.

National Innovation Infrastructure

As noted earlier in the report, there is a requirement for a more strategic and coordinated approach to innovation infrastructure investment, for example through City Deal proposals. This will be a key issue for the Strategic Board and partners to consider.

Innovation Action Plan Priority 4 Make best use of university and college research, knowledge and talent to equip Scotland's people to innovate

Colleges and universities can support business innovation in many ways. The innovation action plan highlights how we will work with them to deliver leadership and entrepreneurial skills training for emerging entrepreneurs, innovators and businesses and improve the signposting and mapping of academic facilities for businesses.

The Innovation Scotland Forum Action Plan, the Five Point Plan of Universities Scotland and the outcomes delivered through the Scottish Funding Council ( SFC) University Innovation Fund will all be critical to securing the intended improved interface between businesses and universities, to help grow innovation-active companies, and maximise the impact of the innovation activity of our universities.

The Colleges Innovation Action Plan will be important for driving improvement at the college interface with business and engagement with the Innovation Centre Programme.

Encouraging demand-led research

As noted earlier, it is important that we continue to support demand-led research and increase the conversion of academic research into business growth. The OECD Science, Technology and Innovation Outlook 2016 ^[32] notes that:

"Globally, Science, Innovation and Technology (STI) policies have slightly changed focus, form and target in recent years. A growing share of public spending for R&D has been allocated to the business sector, instead of the public research system, signalling a shift in strategic objectives (to increasing business capacity to innovate), instruments and targets."

Whilst Scotland already does well in regard to the creation of spin-off companies - Scottish universities saw an increase of 16.7% in 2015-16 (relative to 2014-15) compared to a fall of 5.7% in the UK - there is an opportunity to work collaboratively with our universities to maximise the economic impact of these companies and our broader research investment.

We will:

• Pilot a £500k College Innovation Fund to support Scotland's colleges to work with businesses on innovation activity.
• Work with the SFC and our Enterprise Agencies to explore how Scotland's Innovation Centres might improve their engagement with businesses and drive increasing levels of collaboration between business and universities and colleges.
• Work in partnership with SFC and the Enterprise Agencies to develop a sustainable funding model for the Innovation Centre Programme as recommended by the Reid Review.