Innovation strategy: economic evidence paper

1. Introduction

1.1 Purpose

The purpose of this economic evidence paper is to provide a summary of the theory and selected evidence on Scotland's innovation performance to provide context for and inform the development of Scotland's innovation strategy.

In particular, it:

• sets out the aspects of innovation in which Scotland currently performs well and those where it can further improve upon
• identifies the sectors in which Scotland currently performs comparatively strongly on innovation and where it has the potential for further growth. It is anticipated that the sectoral analysis will be used alongside other analysis and expert advice from key stakeholders to identify a number of innovative technologies and economic clusters in which Scotland has the potential to be world-leading which can be supported through the strategy
• Identifies a set of indicators (a "scorecard") to enable us to track Scotland's innovation performance over time against a set of comparator countries to assess whether the strategy is meeting its core objective to make Scotland one of the most innovative small nations in the world.

The paper sets out a brief summary of:

• the role of innovation in driving economic growth
• the key drivers of innovation
• the rationale for government intervention in promoting innovation and international evidence on policy effectiveness
• the current innovation support landscape in Scotland
• Scotland's recent innovation performance
• Scotland's sectoral strengths in innovation
• Options for indicators for tracking Scotland's innovation performance over time.

1.2 Background

1.2.1 What is innovation?

In Scottish legislation, innovation is defined as "the introduction and implementation of a new or significantly improved product, service, process, or method with the purpose of helping to solve societal challenges or delivering economic growth". It is important to be aware that innovation goes far beyond the boundaries of traditional research and development^[2] (R&D) it is typically associated with. The Oslo Manual^[3] for measuring innovation defines four separate types of innovation:

• Product innovation: A good or service that is new or significantly improved. This includes significant improvements in technical specifications, components and materials, software in the product, user friendliness or other functional characteristics.
• Process innovation: A new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software.
• Marketing innovation: A new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing.
• Organisational innovation: A new organisational method in business practices, workplace organisation or external relations.

All four of these aspects of innovation have a role to play in helping Scotland deliver economic prosperity.

1.2.2 The role of innovation in driving economic growth

Widely considered essential for economic growth and productivity^[4], innovation drives the development of new or improved products and services or makes their production more efficient, increasing economic output, and ultimately creating wealth and employment.

R&D is often considered central to innovation and productivity growth. While many innovations are technological – faster computers, more powerful phones and more fuel-efficient cars – innovation is also about doing things better through better business models.

While the link between innovation and productivity is complex, evidence suggests that innovation plays a key role in productivity growth, which ultimately feeds into economic growth. Indeed, work by the OECD and Nesta suggest that innovation could account for between 25% and 50% of labour productivity gains^[5]. Productivity growth can be a result of increasing output at a rate faster than resource growth, but also through increasing the efficiency of firms' operations.

The gains from innovation activities also do not solely accrue to the organisations undertaking the work, as the benefits tend to spill over through adoption and further development of those innovations, further increasing productivity and output. Furthermore, benefits arising from R&D and innovation go beyond the economic. Innovation can produce, for example, better medicines, more effective public services and greener energy with resulting social and environmental benefits.