Europe 2020: Scotland's National Reform Programme 2019

Chapter 5: Innovation

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 and 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	Same as the rate of 391 in the previous year	2018
Gross expenditure on research and development as a share of GDP	1.63% of Scottish GDP (0.43% pts above the baseline year of 2006)	0.1% pts above the previous year	2017
Proportion of innovation active businesses in Scotland	45%	5.4% pts below previous reference period (2012-14)	2014-16

Table 3 shows that:

• The 2018 registered business stock rate of 391 businesses per 10,000 adults, which is the same as the 2017 rate.
• In 2017, Scotland's Gross Expenditure on R&D as a share of GDP was 1.63%, representing an increase from 1.54% in 2016. Spend in 2017 was also well above the 2006 baseline level.
• The proportion of innovation active businesses in 2014-16 was 5.4% below the previous reference period (2012-14).

Encouraging Entrepreneurship and Building a Supportive Business Environment

The Scottish Government has worked closely with Entrepreneurial Scotland and other partners in the public, private and third sectors to develop Scotland Can Do. This sets out a collective vision to make Scotland a world‑leading entrepreneurial and innovative nation where sustainable growth and innovation go hand in hand with wider benefits to all of society.

An example of Scotland Can Do in action is the Scottish EDGE Fund. Led by a partnership interests from across different sectors, this delivers investments of up to £150,000 to early‑stage businesses with growth potential. After thirteen rounds of awards, the latest of which were made on 6 December 2018 more than £13 million has been awarded to over 300 businesses which have, in turn, generated an additional £131 million in turnover while raising £108 million extra investment and creating over 1,600 jobs.

The Scotland Can Do approach, alongside the combined efforts of the entrepreneurial community, has helped Scotland develop the fifth most supportive business environment in the world, rising above other parts of the UK from 12^th (2013) in the Global Entrepreneurial Development Index. Since the launch of Scotland Can Do in 2014, the proportion of people actively trying to start businesses has doubled. Our commitment to entrepreneurship has been reaffirmed in the Enterprise and Skills Review Strategic Board's Strategic Plan and the Economic Action Plan.

Business Gateway is an integral part of the Scottish Government's public business support offering. This is delivered through local authority partners and offers all businesses in Scotland, regardless of their stage of development, advice and services related to funding, planning, financial management, marketing, sales and growth.

More than 50,000 people a year receive support from Business Gateway to start, run or grow their businesses. In 2017-18, this helped more than 9,000 people to start their own businesses. While over 30,000 attended at least one free Business Gateway event or workshop.

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 turnover increase in 2015‑16 of around £740 million, the creation of 3,500 jobs and the retention of 855 jobs.

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.

In 2016, additional 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.

Boosting Innovation

The Can Do Innovation Action Plan, published on 11 January 2017, focuses on the steps the Scottish Government can take now to improve Scotland's innovation.

Key priorities of the Plan are to:

Directly encouraging more business innovation:

• setting a goal in the 2017 Programme for Government to double Business Enterprise Research and Development (BERD) from £871 million in 2015 to £1.75 billion by 2025, and committing an additional £45 million over the next three years to R&D grants for business to support this.
• Created the Open Innovation Portal to support Scottish companies to innovate and grow as businesses both at home and overseas by providing a platform for collaboration and innovation.
• Scottish Government has been working collaboratively with our Enterprise Agencies to raise awareness of benefits of innovation to businesses.
• Launched VentureFest Scotland; a yearlong festival of discovery, innovation and entrepreneurship.

Using public sector needs and spend to catalyse innovation:

• The £9 million Can Do Innovation Challenge Fund, launched in November 2017, uses private sector innovation to solve public sector challenges. It has funded 16 organisations to run 18 challenges to date and 100 SMEs have applied to the calls so far.
• CivTech - the world's first cross-public-sector tech accelerator - over the past 3 years has worked with over 20 public sector organisations and the companies they have supported have secured over £2 million in contracts

Supporting innovation across sectors and places:

• supporting the development of Fintech Scotland, launched in January 2018,
• developing and delivering the National Manufacturing Institute for Scotland
• supporting a health innovation pilot in the Highlands and Islands on personalising care, education and remote monitoring for people living in Scotland with inflammatory bowel disease.
• Launched £16 million Northern Innovation Hub to help SMEs in the Highland Council area improve their businesses through innovation focusing on Life Sciences, Tourism, Food and Drink and Creative Industries.
• £56 million Medicines Manufacturing Innovation Centre will revolutionise the way medicines are manufactured and will be co-located with National Manufacturing Institute for Scotland.

Making best use of University research knowledge and talent to drive growth and equip Scotland's people with the tools and skills needed to innovate:

• launched the £500k College Innovation Fund on 29 May 2018, invested £5 million in Interface to connect business and academia.
• Companies supported by Interface contribute an estimated £64.2 million (gross value added) to the economy each year and the programme has introduced almost 3000 businesses to academic partners.
• Continuing to support the network of eight Innovation Centres, including backing for the £1 million Innovation Centres: Cancer Innovation Challenge.
• Provided the Data Lab with an additional £13.5 million helping to develop a strong data science community and accelerate Scotland's economic growth.
• Provided IBioIC with an additional £11 million to drive forward Scotland's Industrial Biotechnology sector.
• Provided CENSIS with an additional £9.25 million helping to cement Scotland's place as a world leader in internet of things and sensor technology.

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. There is a range of action being taken by Scottish Government and its agencies:

• Advice & support is available from Scottish Enterprise (SE) or Highlands and Islands Enterprise (HIE) and through Business Gateway - (online, by phone or at a local outlet) - for advice and information on sourcing different forms of finance.
• Stimulating viable demand for finance through Scotland wide Financial Readiness Programme with expert advice and support for SMEs so that a greater number of companies can prepare and consider "options" before seeking finance. In 2017-18 some 508 companies were assisted.
• Scottish Government is 'Investing in ambition' through a £500 million Scottish Growth Scheme (SGS) aimed at helping SMEs realise their growth and export ambitions. Microfinance loans are available up to £25,000 for individuals and small businesses; loans between £25,000 and £100,000 available for companies; loans between £250,000 and £2 million available for companies (delivered by Scottish Enterprise); and access to equity funding below £2 million, and for deals over £2 million.
• Overall the Scottish Growth Scheme has supported some £106 million of equity investment - one fifth of our planned activity - in 82 companies.

The Scottish Investment Bank (SIB)^[5] will continue to play an important role in the business finance landscape in Scotland, delivering risk capital and debt finance to new, innovative, technology-based companies and growth and exporting SMEs. It works with the wider investment community, in particular Business Angel syndicates.

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 900,000 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, 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.