Europe 2020: Scotland's National Reform Programme 2018

Chapter 5: Research And Development

Innovation is vital for improving economic growth and Scotland has many strengths in this area. It has a strong commitment to research and science, a highly-skilled workforce and world-renowned universities producing high-impact research.

This chapter outlines the actions taking place throughout Scotland aimed at fostering a culture of innovation and Research & Development (R&D). It also highlights actions that create wider support for innovation through the business environment, supporting entrepreneurship, and developing Scotland’s digital economy, highlighting the Scottish Government’s support for the EU’s flagship initiatives, ‘Innovation Union’ and ‘Digital Agenda for Europe’.

Europe 2020 headline target:

Raising the combined public and private levels in research to 3% of GDP.

Current Scottish Performance

Scotland’s entrepreneurship, innovation and R&D performance is measured through a range of indicators, with Table 3 outlining current performance on key indicators.

Table 3: Current Scottish Performance against Entrepreneurship, Innovation and R&D Indicators

Indicator	Current Level	Change Over Year	Reference Period
The total number of VAT/ PAYE registered private sector enterprises in Scotland per 10,000 adults	391 businesses per 10,000 adults	Above the rate of 388 in the previous year	2017
Gross expenditure on research and development as a share of GDP	1.54% of Scottish GDP (0.32% pts above the baseline year of 2006)	0.02% pts above the previous year	2016
Weighted, inflation-adjusted index of the Scottish Funding Council’s Knowledge Transfer Metrics	14.3% above the baseline year of 2007-08	1.0% below the previous year	2016-17
Proportion of innovation active businesses in Scotland	46%	5% pts below previous reference period (2012-14)	2014-16

Table 3 shows that:

• The 2017 registered business stock rate of 391 businesses per 10,000 adults represents an increase from the 2016 rate of 388 businesses per 10,000 adults. Note that the 2017 rate is the highest rate recorded since the start of the series in 2005.
• In 2016, Scotland’s Gross Expenditure on R&D as a share of GDP was 1.54%, representing an increase from 1.52% in 2015. Spend in 2016 was also well above the 2006 baseline level.
• The knowledge exchange index is estimated to have increased by 1.0% between 2015-16 and 2016-17, driven by an increase in income from venturing and external research grants and contracts. However, fluctuations over time suggest that we should not read too much into one year’s change in the index as some of the components can be quite volatile. Since 2007-08, there has been a gradually positive trend in the index, with the current level at 14.3% above the baseline year.
• The proportion of innovation active businesses in 2014-16 was five percentage points below the previous reference period (2012-14).

Boosting Innovation In Scotland

Through Scotland’s Economic Strategy, and the Programme for Government, the Scottish Government is fostering a culture of innovation and research and development. Scotland CAN DO is our statement of intent to be a world-leading entrepreneurial and innovative nation. Developed and delivered jointly with partners across the public, private and third sectors, it embodies a shared vision where growth and innovation go hand-in-hand with wider benefits to all of society. An example of the collaboration that drives Scotland CAN DO is the Scottish EDGE Fund. Led by a partnership of public, private and third sector interests, the Scottish EDGE Fund delivers investments of up to £150,000 to those early-stage businesses with the most growth potential. Over the last eleven rounds, more than £10 million has been awarded, with the winners generating an additional £79.78 million in turnover and creating 2,214 jobs.

The CAN DO Innovation Action Plan, published on 11 January 2017 ^[11] , focuses on the steps the Scottish Government can take now to improve Scotland’s innovation.

Key priorities of the Plan are to:

1. Directly encourage more business innovation

2. Use public sector needs and spend to catalyse innovation

3. Support innovation across sectors and places

4. Make best use of University research knowledge and talent to drive growth and equip Scotland’s people with the tools and skills needed to innovate.

Key Policies

To implement the CAN DO Innovation Action Plan to help encourage more businesses in Scotland to increase their level of innovation commitment we will:

• Utilise public sector needs and spend to catalyse innovation through public sector challenges such as the Innovation Centre Challenge Fund and CivTech.
• Develop a more innovative and entrepreneurial culture and drive increased business demand for innovation.
• Simplify and streamline innovation support, finance and bureaucracy.

Scotland CAN DO sets out some immediate steps to improve Scotland’s innovation performance. The plan aims to create a culture in Scotland that supports ambitious businesses to use innovation to grow, underpinned by a clear, easy to navigate, well connected system of information, advice and support. The plan includes the use of public sector investment to catalyse innovation, with projects such as CivTech, the world’s first cross public sector technology accelerator.

The Scottish Government is additionally supporting innovation by:

• Developing an innovation prize to reward, and invest in, innovation in Scottish companies.
• Supporting digital innovation through CivTech.
• Increased investment in Interface, Scotland’s hub to connect business and academia.
• Encouraging public sector and large and small firms to collaborate through Scottish Enterprise’s £2.9 million Open Innovation programme.
• Scotland CAN DO SCALE – an education programme aimed at developing entrepreneurial skills and innovative ideas.
• Continuing to support its network of eight Innovation Centres which use academic expertise to address real world business issues. The Scottish Funding Council has committed up to £120 million over six years (2013-2019).
• Developing a plan for establishing a National Manufacturing Institute for Scotland that will act as a hub for continuous innovation to ensure Scotland remains a sustainable and competitive place to do business.
• Committing further funding to establish and embed Innovation and Investment Hubs in London, Brussels, Dublin, and Berlin.

Scotland’s universities are a key asset in the drive to increase Scotland’s productivity and inclusive growth as demonstrated by their active and valued participation in a range of international research and innovation programmes including Horizon 2020 – the EU’s programme for Research and Innovation. Data to March 2017 indicates that Scottish organisations secured almost €352 million, representing around 10.8% of total funding awarded to UK organisations. Scottish Higher Education organisations and research institutes have secured almost 77% (over €271.5 million) of all funding awarded to Scottish organisations.

Scotland’s network of Innovation Centres bring together universities, businesses and others to enhance innovation and entrepreneurship across key sectors. There are currently eight Centres, collectively spanning Stratified Medicine, Sensors and Imaging Systems, Digital Health, Industrial Biotechnology, Oil and Gas, Big Data, Construction and Aquaculture. The Centres are being supported by up to £120 million of funding from the Scottish Government over 2013-19, administered by the Scottish Funding Council.

Encouraging Entrepreneurship And Building A Supportive Business Environment

As well as providing direct support for innovation, the Scottish Government is committed to ensuring that our business environment is supportive of new ventures, to help encourage companies to grow, innovate and build resilience. Our approach includes, for example, improving access to finance and offering start-up support and advice for new businesses.

Supporting business development in Scotland starts with the Business Gateway service, offering a first point of contact for all publicly funded advice to business in Scotland to support pre-start, early-stage and growing businesses. The Business Gateway service supports new startups, existing and growing businesses in Scotland. It assists around 10,000 individuals to start a business every year by providing advice, information, training and help to find funding. In 2016/17, 10,629 new start-up businesses were helped to start trading.

Scotland’s Enterprise Agencies focus on businesses with the potential to grow and those that are important to a sustainable and inclusive economy. An account management approach helped around 2,500 of Scotland’s ambitious and high growth companies to increase turnover, particularly in international markets, and increase employment. This supported turn over increase in 2015-16 of around £740 million, the creation of 3,500 jobs and the retention of 855 jobs.

In 2016, additional European Regional Development Fund ( ERDF) Business Competitiveness funding of £24 million plus match funding totalling £60 million was invested to enhance the existing provision to grow Scotland’s small and medium sized enterprises ( SMEs). This linked support for innovation and investment to build international capability, particularly in key sectors including food and drink, energy, technology and engineering. The process helped to identify and develop the next generation of growth businesses in Scotland.

Flowing from Phase 2 of the Enterprise and Skills Review (winter 2016 – summer 2017), the Enterprise and Business Support project focused on how we develop still deeper collaboration between delivery partners and take forward further opportunities to improve business support. It also looked to establish stronger mechanisms to facilitate on-going review and continuous improvement.

Access to Finance

The ability for SMEs to access finance is important for funding business investment, ensuring businesses meet their full growth potential and encouraging business start-ups. Support for this includes the SME Holding Fund, which is managed by the Scottish Government and financed by £40 million support from the 2014-2020 ERDF Programmes in Scotland. The Fund supports micro SMEs by improving their access to finance through a range of selected financial intermediaries or delivery agents who manage microfinance, debt and equity funds in Scotland.

The £40 million ERDF is further leveraged by public and private sector support so that more than 500 companies will receive at least £250 million in debt and equity funding to create 2,000 jobs by 31st December 2018. In this role, the Fund contributes to the Scottish Government’s economic development strategy on access to finance and fosters EU objectives in support of entrepreneurship, growth, innovation, research and development, and employment. The four appointed delivery agents reported performance (up to 31 December 2017) indicates 330 companies accessed £223 million, creating 1,005 jobs.

Scottish Growth Scheme

The Scottish Growth Scheme ( SGS) was announced in the 2016 Programme for Government to stimulate economic growth in Scotland. It will deliver £500 million of investment over three years to June 2020 and will target SMEs that have growth potential, both in Scotland and abroad. In particular this will include those young companies, that are technology intensive and which struggle to obtain finance through conventional means. The Scheme currently has two elements; the Scottish European Growth Co-investment Programme ( SEGCP) and new and additional ERDF funding to be distributed as part of the SME Holding Fund.

The first tranche of SGS funding, the £200 milion Scottish–European Growth Co-investment Programme, was announced in June 2017. It will provide equity to companies seeking over £2 million of investment.

In September 2017, we announced new and additional Growth Scheme funding of £25 million for businesses seeking equity investment of up to £2 milion. By early April 2018, 43 companies had received investments totalling £49.4 million under the Scottish Growth Scheme. Further activity will be announced over coming months, seeking to deliver a range of products including microfinance, debt and equity.

Developing Digital Infrastructure

Scotland’s Economic Strategy emphasises the need to invest in digital infrastructure to improve connectivity, helping our cities, towns and regions to drive growth and compete internationally.

Thanks to our Digital Scotland Superfast Broadband programme, around 890,000 additional premises across Scotland have access to fibre broadband, with the majority of those able to access superfast broadband (speeds greater than 30 Mbps). We also exceeded our target of 95% fibre broadband coverage across Scotland by the end of 2017 largely thanks to the current programme’s roll-out.

However, we recognise that we can go further and that is why, in December 2017, we committed £600 million to the initial phase of our Reaching 100% programme that will help to deliver our commitment to extend superfast broadband access to every home and business in Scotland by the end of 2021. Achieving 100% coverage will support rural development, and contribute towards continued innovation and growth across the economy.

We have also agreed an action plan with mobile operators – the first of its kind in the UK – aimed at improving mobile coverage across Scotland. A key part of this is our £25 million Scottish 4G Mobile Infill Programme, launched in March 2018, which will deliver new future-proofed, 4G mobile infrastructure to selected mobile ‘not-spots. The Scottish Government also wishes to drive the development of 5G in Scotland, and will establish a 5G Hub in partnership with industry and academia in order to do so.

The Scottish Government is taking action to improve the use of digital connectivity in the delivery of public services. The first major partnership project in the digital delivery of public services, the Scottish Wide Area Network ( SWAN) is delivering cost efficiencies for public sector organisations by aggregating demand for a single public services communications network in Scotland. SWAN now has 20 members which represent 51 individual organisations. More than 5,000 sites are now connected to SWAN, making a saving of over £30 million across the 51 members.

In addition, a number of SWAN Value Added Services are being developed and delivered over the network, such as voice and video services, an Internet of Things service and connectivity into the major cloud service providers, again in order to aggregate demand and save costs through single, shared procurements.

The Scottish Government’s refreshed Digital Strategy, published on 22 March 2017 ^[12] , makes clear that digital connectivity is a vital part of national infrastructure and sets out our commitment to achieving high‑quality connectivity throughout the whole of Scotland.

Brexit: What’s at stake for Research and Development?

Scotland’s strong commitment to supporting innovation, our highly-skilled workforce and world-leading universities are key parts of our focus on sustainable economic growth, however the UK’s decision to leave the EU undermines collaboration with our European neighbours. This includes:

Missing out on EU research and innovation programmes - It is widely acknowledged that research and innovation policies make a significant difference to increasing productivity and boosting the competitiveness of industry. The Scottish Government believes that our universities, research institutions and businesses must continue to work within the common, and expanding, European-wide collaborative framework to continue to capitalise on these benefits. The recent Multiannual Financial Framework ( MFF) announcement suggested that there would be a significant increase in funding for the next EU research programme. However, it is not just the money: our opportunity to influence the direction of this programme will be severely limited from outside the EU.

Not being a part of the Digital Single Market - A key priority for the EU is completion of the Digital Single Market. This would allow EU citizens and companies to more easily, and more securely, access and sell online goods and services across national boundaries. Digital is a key sector in Scotland which links into wider economic productivity but the UK government has already stated on a number of occasions that, post-Brexit, the UK will not be a part of this innovative and fast moving sector. Scotland in the future therefore risks missing out on the potential benefits of reinforcing the Digital Single Market, which could be annually worth as much as £529 per person in Scotland.

These examples illustrate why the Scottish Government believes that the best option to protect innovation and the key role this plays in Scotland’s economy is through the UK’s continued membership of the European Single Market and Customs Union.