National innovation strategy 2023 to 2033

5. Innovation Priorities

Vision

Scotland has high innovation potential and a tradition of great ambition and success. It is blessed with strong natural assets and excellence across its academic and business communities. Yet for a country of Scotland's size to be at its most successful it must prioritise a number of areas in which it can be truly exceptional.

In this Strategy we contend that Scotland continues to possess all of the ingenuity and assets necessary to once again take our place as a world-class innovative nation with consequent economic benefits through the creation of high value jobs, wage growth and increased tax revenues.

But to realise this vision, we must confront the reality that the world has changed and that we operate in a global environment that is deeply competitive. For a country of Scotland's size to excel it must concentrate its effort and resource on a set of focused priorities where it has the educational, industrial and natural assets necessary to be truly world class.

That is why in developing this Strategy we have undertaken a rigorous data-driven exercise to identify what those priorities should be. We also recognise that rapid change is inherent in the concept of innovation and that our approach needs to be agile enough to identify and catalyse nascent clusters as they emerge.

Opportunity

There is a great deal that Scotland can learn from comparably sized nations with globally competitive innovation systems. Countries such as Denmark and Finland have achieved great success by pivoting their economies towards a small set of innovation priorities that play to their unique strengths. Both countries have adopted a missions-oriented, place-based approach to innovation aligned with the EU's Smart Specialisation approach, which provided a blueprint for the deep engagement with business, civic Scotland and the higher education sector that we have undertaken in developing this Strategy.

Smart Specialisation is 'a place-based approach characterised by the identification of strategic areas for intervention based both on the analysis of the strengths and potential of the economy and on an Entrepreneurial Discovery Process (EDP) with wide stakeholder involvement.' The EDP is an inclusive process of stakeholders' involvement, whereby 'market forces and the private sector discover and produce information about new activities, and the government assesses the outcomes and empowers those actors most capable of realising this potential.'

Source: What is Smart Specialisation - Smart Specialisation Platform (europa.eu)

This approach mirrors the analysis in NSET, which describes an approach to innovation based on the principle of identifying and focusing on sectors and technologies where we can objectively demonstrate that we have a competitive advantage. This is an approach that has served us well in the execution of our Export, Inward Investment and Global Capital Investment Plans, where clarity of focus on specific areas of opportunity is delivering strong results.

This exercise has been data-driven and expert-led, supported by a solid evidence base, expert advice from industry, academic input and alignment with existing Government commitments and targets.

The Current Landscape

Scotland performs well in a range of prominent, well-established sectors, that serve a number of key international markets and contribute significantly to Scotland's national and regional economies.

Scotland's food and drink sector is one such sector of key importance to our economy. A £15 billion industry comprising over 17,000 businesses that in total employ around 129,000 people, it reaches into all parts of Scotland's communities, playing a hugely important role in supporting our most remote and rural communities. The sector accounts for 4.9% of total employment in Scotland and 15.1% of employment in Food and Drink across Great Britain and employment in Scotland in the sector increased by 8.4% in 2021. The appetite from across the globe for our fine produce is borne out by the latest export statistics which show that overseas food and drink exports were worth a record £8.1bn in 2022.

We are continuing to support the food and drink sector and committed support of £15m over 2020-2023 towards the Industry's Recovery Plan to assist all sectors of Scotland's food and drink industry in recovering from Covid and the disruptions of Brexit. In addition, the Scotland Food & Drink Export Plan for which we have provided £2.7m in funding over 2019-2024 is helping to grow the sector on the global stage. With the Recovery Plan phase coming to an end we are continuing to work with the Scotland Food & Drink Partnership on a refreshed food and drink industry strategy to be published in the near future which will outline the sector's aims and ambitions over the next ten years, setting out a range of activities to be delivered over the short, medium and long term.

Other well-established sectors in Scotland's economy include vibrant creative industries and a thriving blue economy, as well as additional fast-growing sectors that are pivoting in line with Scotland's just transition toward a fair and greener future. These include thriving sub-sectors of Scotland's life sciences sector, such as the industrial biotechnology sector and the animal bioscience, AgriTech and aquaculture sub-sectors.

Natural capital (defined as the utilisation of the natural environment for the benefit of communities and the economy) is a similarly emerging opportunity area for Scotland, and our enterprise agencies in the Highlands and Islands and the South of Scotland are committed to building and scaling research and innovation in this emerging area.

The Process for Identifying Priorities

The accompanying evidence paper to this Strategy looks at our areas of economic strength through an innovation lens. It outlines a broad sectoral analysis of Scotland's economic landscape, identifying those sectors in which Scotland performs comparatively strongly on innovation, where it has the potential for further growth and its overall areas of economic strength, cross-referencing with existing Scottish Government strategies.^[8]

This evidence draws on existing data, employing multiple layers of analysis to identify the sectors in which Scotland currently excels and has the potential for further growth across three tiers:

1. Higher education sector capabilities (furthest from market): to identify the research areas in which Scottish higher education institutions (HEIs) currently excel in. For this, Scottish HEIs' performance relative to UK HEIs on a range of research outputs was analysed, including:

a. technical products

b. spin-outs

c. patents (from HE)

d. publications

e. data on the proportion of EU research funding secured by Scottish HEIs

2. Application of innovation into business: to identify the sectors where the application of innovation into business is highest. Here, we draw upon analysis using sectoral data in terms of:

a. patenting

b. business–higher education collaboration

3. Business capabilities (closest to market): to identify sectors where businesses in Scotland currently perform most strongly in innovation. Specifically, we analysed:

a. Business Enterprise Research and Development (BERD) spend data

b. sectoral data on innovation-active businesses^[9] from the UK Innovation Survey^[10]

c. sectoral allocation of risk capital

d. sectoral distribution of inward investment

The analysis focused on Scotland's innovation strengths in terms of broad sectors, given that data is typically not available at a more granular sectoral level. A summary of the findings of this multi-layered analysis is shown below, and the full detail is contained in the accompanying evidence paper.

Figure 2: Scotland's broad sectoral innovation strengths

Sector	Business capabilities	The application of innovation to business	Higher education sector capabilities
Scientific R&D (part of life sciences)	Yes	Yes	Yes
Computing/ICT	Yes	Yes	Yes
Financial and insurance activities	Yes	No	No
Business services	Yes	Yes	No
Professional services	Yes	Yes	No
Architectural, engineering and technical activities	Yes	Yes	No
Creative services	No	Yes	No
Health	Yes	Yes	Yes
Energy	Yes	No	Yes
Emerging technologies	Yes	No	Yes
Physics and space	Yes	No	Yes

Data analysis is, however, only one stage of any such prioritisation exercise, particularly when the data is available only for broad sectors and by definition focusses on past performance. To identify our innovation priorities for the next ten years, our current strengths and potential must be balanced with industry insight into future opportunities and emerging markets where Scotland can claim a comparative advantage.

The data-driven analysis is therefore supplemented with expert advice and insights from industry, academia and the public sector, capturing new disruptive and radical innovations and highly specific sub-sectors and technologies that, if scaled according to their economic potential over the next ten years, could see Scotland becoming a global competitor.

These expert insights were gathered through an extensive engagement process involving:

• a public call for evidence exercise
• many business roundtable events - crowding in insights from industry representatives from a vast range of sectors and business sizes
• additional roundtable events – including those delivered by the Royal Society of Edinburgh, the OECD, and the Foundation for Science and Technology
• regular Innovation Strategy Steering Group meetings chaired by Sir Jim McDonald and featuring key figures from across industry, investment and academia
• a workshop focused on how we achieve world-leading excellence, with expert representation from universities and colleges, public sector agencies and industry experts, chaired by Innovation Strategy Steering Group member Stephen Ingledew OBE (Chair of FinTech Scotland)
• further discussions with sector-specific industry, academic, public sector agencies and Scottish Government policy experts
• engagement with the relevant Industry Leadership Groups

Innovation Priorities

In consideration of both our current strengths and most significant emerging opportunities, this process has found that the innovation priorities can be grouped into four broad themes of:

• Energy Transition
• Health and Life Sciences
• Data and Digital Technologies
• Advanced Manufacturing

Using a coordinated and phased approach through the ten-year lifecycle of the Strategy, we will seek to support these innovation priorities and the opportunity areas within them to grow and scale into world-class economic clusters. These priorities serve as a starting point for our journey to become one of the most innovative small nations, and we will remain agile to identifying further emerging opportunity areas that arise out of our current broad areas of strength in the future, and to support them through our Cluster Evaluation and Facilitation Process.

For the remainder of this chapter we offer a more detailed analysis of each of these priority themes.

Theme 1 Energy Transition

The priority of energy transition is in line with the Scottish Government's net zero ambitions and just transition agenda, as outlined in the draft Energy Strategy and Just Transition Plan.^[11] The priority transition of skilled workers from the oil and gas industries into renewable sectors augments this opportunity for society and our economy.

Taking the opportunity to harness Scotland's natural capital, regional expertise, internationally leading energy research and innovation capabilities and business activity within energy transition, offers significant potential to build economic advantage and growth.

It also provides substantial impacts for Scotland's societal and environmental wellbeing. Those at the forefront of energy transition will transform the energy efficiency of our built environment and lead the generation and adoption of green energy sources for heat, power and transport. Within energy transition, our highly innovative vertical sector-specific opportunities have been identified as:

• Hydrogen Generation, Storage and Transport
• Floating Offshore Wind
• Built Environment Transition
• Decarbonisation of Transport

Theme 2 Health and Life Sciences

Scotland's health and life sciences sector is highly innovative, with a number of world-leading research and academic institutions supporting Scotland's NHS and the wider public sector to innovate to address national, regional and global societal health challenges. The breadth of expertise within Scotland's health and life sciences sector is united through pioneering health and life sciences innovation research in many of Scotland's universities, a strong base of health innovation companies covering a wide variety of specialisms, and test facilities in the National Health and National Care Services.

One of the biggest life sciences clusters in Europe, the scale of collaborative innovation in the health and life sciences sector has a significant national impact, serving to benefit our economy, the health and care needs of Scotland's citizens and improving outcomes through facilitating widespread adoption.

The scale of opportunity is also able to attract significant levels of private sector investment, as outlined in the Campbell Report: 'A Roadmap to Investment for Health Innovation Life Sciences and Health Tech in Scotland.'^[12]

In addition to substantial expertise and growth potential in health innovation, Scotland's abundant natural assets present innovation opportunities within the Industrial Biotechnology, Animal Health, Agri-Tech and Aquaculture sectors. These sectors are already contributing to a nationwide approach to achieving Scotland's net zero ambitions and addressing the global climate crisis.

Within the breadth of specialisms represented in Scotland's health and life sciences sector, a number of highly innovative vertical sector-specific opportunities within health innovation have been identified as having significant growth potential:

• Digital Health
• Future Medicines Manufacturing
• Precision Medicine

Digital Health & Care Innovation Centre (DHI)

Theme 3 Data and Digital Technologies

The scale of Scotland's data and digital capabilities continues to grow, and has an increasingly vital role in underpinning Scotland's digital economy. The Scottish Government's commitment to augmenting Scotland's culture of entrepreneurship is evident through the STER Review,^[13] NSET and the recent implementation of a national Techscaler network. These commitments build on an existing healthy environment of tech companies that provide enabling technologies that can support all of Scotland's economic sectors.

These commitments particularly apply to Artificial Intelligence. Scotland's AI Strategy^[14] aims to make Scotland a leader in the development and adoption of trustworthy, ethical and inclusive AI. The Strategy is delivered as a collaborative cross-sector partnership – the Scottish AI Alliance. The Strategy's actions are currently being updated to reflect significant developments in AI technology and policy since its publication in 2021, including emerging UK and EU regulation and the widespread availability of generative AI. The increased pace of change presents new opportunities for Scotland but also requires government to accelerate actions to ensure citizens, workers and businesses are ready to seize those opportunities. The AI Strategy update will be published later in 2023, and its delivery will be joined-up with that of the Innovation Strategy, the STER and the Digital Strategy.^[15]

As well as taking a horizontal enabling role in supporting all innovation priorities, we have identified a number of highly innovative vertical sector-specific opportunities within data and digital technologies:

• Quantum Technologies and Photonics
• FinTech and Financial Services

McAteer Photograph / Scottish Enterprise

Theme 4 Advanced Manufacturing

Scotland has a strong tradition of manufacturing capability, with a proportionately high level of business investment compared to its share of Scotland's overall GVA, which only continues to grow its innovative capabilities as new societal challenges emerge.^[16] Strong manufacturing links to the energy transition agenda through initiatives such as the Hydrogen Innovation Fund and Zero Emissions Mobility Innovation Fund, exemplify how Scotland's strong manufacturing capability can underpin a number of Scotland's emerging renewable sectors. Recent investments include the establishment of the National Manufacturing Institute Scotland (NMIS), the Medicines Manufacturing Innovation Centre (CPI led) and the National Robotarium, which offer internationally leading innovation facilities and expertise across multiple sectors supporting Scotland's high-value manufacturing capabilities.

In addition to acting as a horizontal enabler supporting all innovation priorities, we have identified a number of highly innovative opportunities within advanced manufacturing:

• Small Satellite Space
• Robotics and Autonomous Systems