Scotland's National Strategy for Economic Transformation

3. New Market Opportunities

Rapid global decarbonisation will represent a profound change, far outwith the control of any government or sector. The transition to net zero is not just an environmental imperative but an economic opportunity - one where Scotland will become world leading and secure first-mover advantage.

3.1 Our Aim

To strengthen Scotland's position in new markets and industries, generating new, well-paid jobs from a just transition to net zero.

3.2 The Opportunity

As the global economy accelerates towards a net zero future and artificial intelligence, genomics and other scientific advances change the way we live, new markets will be created and new industries will emerge. Scotland has the potential to build world-leading industries in areas where our human and natural capital and technology and research capabilities provide the basis of global competitive advantage. Realising that potential requires a coherent and focused set of strategic interventions including a new Net Zero Industrial Strategy that successfully blends inward investment with the building of strong indigenous local supply chains to develop strategic clusters.

Scotland already occupies a position of global leadership in the design, development and operationalisation of a range of current and future key industries including:

• renewable energy, with Scotland enjoying a quarter of Europe's wind potential and home to globally leading businesses in tidal energy as part of a wider energy industry with strengths in the company base, financial capital, infrastructure, knowledge and knowhow;
• the hydrogen economy, with vast generation potential of renewable hydrogen for export markets;
• the decarbonisation of transport, particularly the development of a high-value manufacturing base for low-volume, high-value zero-emission vehicles;
• space, leading Europe in end-to-end capability for small satellite design, manufacture and launch, including earth observation data solutions that are critical in tackling climate change;
• the circular economy, where resources are kept in high-value use, creating new market, innovation and job opportunities that will be key to achieving our targets for net zero and nature;
• the blue economy, utilising the potential, and sustainable management of our ocean, sea and coastal resources;
• sustainable farming & forestry, nature restoration, eco-tourism, and nature-based solutions to climate change mitigation and adaptation;
• our financial services and fintech sectors including Scotland's leading positions in responsible and ethical finance;
• industrial biotechnology, where Scotland has developed innovative technology that can transform traditional industries and offer greener alternatives to fossil fuels;
• enabling and emerging technologies such as photonics and quantum technologies which can contribute to improved productivity of traditional industries and underpin the industries of the future and where Scotland enjoys a world-leading position;
• digital technology including AI and cyber security, building on Edinburgh as the Data Capital of Europe and Dundee's global leadership in gaming;
• one of the biggest life sciences clusters in Europe, which played a key role in tackling Covid, with world-leading expertise in drug discovery and precision medicine, medical technologies and pharmaceutical services, advanced therapies, digital health and care, animal health and agritech;
• food and drink innovation including Scotland's long-standing strengths in premium food and drink products, a key export market, and the transition to technologies of the future, including our world-leading position in vertical farming; and
• creative industries, major events and tourism, which draw on Scotland's long-standing cultural assets and reputation for expertise in delivery, innovation, and growing strengths in digital skills and technologies.

But we will be agile and alive to further new industries that could emerge over the next decade.

Our existing Inward Investment Plan and Scottish Enterprise's National Programmes are already aligned to support these sectors. Our forthcoming Innovation Strategy will describe how we will build competitive advantage in these and other areas where our research and existing business base provide us with a competitive advantage. The just transition to net zero offers Scotland a particular opportunity building on our historic expertise in energy, our engineering skills and reputation. The next ten years are critical if we are to generate significant economic opportunities from that transition. The development of our regional Just Transition plans is already underway, and will identify green industrial opportunities and set priorities, whilst also making a meaningful contribution to tackling child poverty.

These will range from the construction and development of on- and off-shore energy generating technologies, to the development of a hydrogen economy, the decarbonisation of heat in buildings and construction, innovation in the circular economy and opportunities resulting from improved land-use and forestry including increasing the proportion of timber used in construction.

Our new Net Zero Industrial Strategy, our Supply Chain Development Programme and our Making Scotland's Future programme will maximise opportunities for the use of Scottish manufactured components and ensure that high-value technology and innovation that is developed in Scotland can be manufactured in Scotland.

Our approach to new market development will be built around the creation of world-leading clusters (see Box D).

In tandem with our just transition to net zero, we will also strive to build a nature-positive economy (see Box E), designed to help reverse biodiversity loss by 2030 and support international efforts to tackle the global nature crisis. This will create significant new opportunities for nature-based businesses and jobs across Scotland, particularly in rural and island areas. It will also help to rebuild the natural capital that underpins our prosperity, health and wellbeing.

3.3 Foundations of Success

The Lloyds Banking Group and Oxford Economics Green Growth Index^[7] ranks Scotland as the number one region in the UK for green growth potential and opportunity. This reflects Scotland's existing green industrial base which supports a growing number of green jobs and innovation activity, the take-up of relevant skills and training and the development and use of renewable energy infrastructure.

We now have the opportunity to go further. As just one example the ScotWind programme of offshore wind farm developments is truly historic. It puts Scotland at the forefront of the global development of offshore wind, represents a massive step forward in our transition to net zero, and will help deliver supply chain benefits and high-quality jobs that will make the climate transition a fair one. ScotWind is also the first programme to see commercial development of floating windfarm technology, putting Scotland and Scottish industry in a position of global leadership, built upon our capability in subsea engineering.

The scale of energy generation potential resulting from Scotland also boosts the potential growth of a hydrogen economy. Our Hydrogen Action Plan sets out the actions, including the need for the creation of transformative regional hydrogen hubs, to become a leading nation by 2045 in the production of reliable, competitive, sustainable hydrogen including for export.

In addition, as innovators in the idea of a just transition, we are already considering the impacts of the move to net zero and how we can manage them in a way that will benefit Scotland economically, socially and environmentally, securing a prosperous and sustainable future for this generation and generations to come.

Much of the supporting infrastructure necessary to help companies realise the opportunities of new markets has also been established. For example, the Net Zero Technology Centre is working to develop and deploy technology for an affordable net zero energy industry.

In other sectors our network of innovation centres, focused on areas such as industrial biotech, data, digital health and care and precision medicine, and the UK's only Fraunhofer Institute, are helping drive the pace of innovation.

In 2019, Scotland ranked 7th among OECD countries for Higher Education R&D (HERD) but only 24th (3rd quartile) for Business Enterprise R&D (BERD), although recent interventions on boosting R&D grants mean we are running ahead of our target to double Scotland's BERD by 2025. Scotland punches above its weight in science and research, accounting for 12% of UK research output. Scotland has been the highest-performing part of the UK outside of London in attracting foreign direct investment for the past seven years.

We are putting in place the necessary institutions and finance to catalyse and take advantage of the new markets and opportunities set out here. This will enable the Scottish financial services industry to reap the benefits of the new energy opportunities. The establishment of the Scottish National Investment Bank, capitalised with £200 million each year, is supporting investment in sustainable technology, services and industry and in innovation and industries of the future, adding to existing investment streams.

We are also equipped to build the international trade and investment relationships we want Scotland to have, as set out in Our Vision for Trade,^[8] which also ensures that our approach to trade contribute to wider economic, social and environmental outcomes. Through our Export Plan^[9] we are taking a targeted sector and country approach to raising the GDP share of Scotland's international exports to 25%. Our Inward Investment Plan^[10] focuses on attracting investment in sectors and opportunities where Scotland has strong advantage and where there is potential for positive spill-over impacts to the wider economy. Our Global Capital Investment Plan^[11] sets a clear path for attracting private capital to support business growth, infrastructure and, crucially, given the scale of the challenge and opportunity, Scotland's transition to net zero.

3.4 Our Programme of Action

Project 5: Build on Scotland's Strengths to Win an Ever Greater Share of Domestic and International Market Opportunities

Who / We will

Government, Public Sector, Business and Partners

Deliver on our export plan which takes a targeted sector and country approach to raising Scotland international exports. Includes actions to scale up trade promotion and Scotland's overseas reach & profile and actions in Scotland to ramp up our support for firms' export capacity.

Government and Public Sector

Promote Scotland as an innovative test bed for new technologies and markets and coordinate action across the public sector to leverage our spending power and the CivTech business incubation model to stimulate innovation in our health and other public services. The creation of an International Innovations capability within the Scottish Government will lead on the global economic and societal opportunities created through our expertise in public service innovation.

Government and Public Sector

Provide public sector R&D grant support & finance to businesses to further increase Business Enterprise R&D spend in sectors with the greatest economic opportunity, in particular our key industries (see section 3.2).

Government and Public Sector

Provide capital investment to support renewable hydrogen production to make Scotland a leading nation in the production of reliable, competitive and sustainable hydrogen. The first tranche of investment focus on driving technological progress and advance innovation and cost reduction within the emerging sector.

Government, Public Sector, Business and Partners

Deliver on the ambitions of ScotWind and future renewable energy developments including on developers' commitments to invest at least £1bn in the Scottish supply chain for each GW of capacity. The Scottish Offshore Wind Energy Council (SOWEC) has been identified by both industry and government as the key vehicle for taking forward the strategic supply chain opportunities from ScotWind. SOWEC is leading on the development of a Collaborative Framework Agreement to encourage the sector to come together and work collectively to support the delivery of the volume of offshore wind projects from the ScotWind leasing round.

Project 6: Support the Development of Scottish Supply Chains, Laying the Foundations of a Net Zero Industrial Strategy

Who / We will

Government, Public Sector, Business and Partners

Expand our Supply Chain Development Programme to improve the capacity, capability and development of Scottish supply chains. This will include maximising the manufacture of high-value goods and equipment in Scotland and identifying Scottish companies with the skills, capacity and capability to bid for, win and deliver contracts in our key industries (see section 3.2) and provide access to enterprise and innovation support that specialises in these areas. We will work with recipients of major government-led funding to leave a legacy of stronger supply chains in Scotland.

Government, Public Sector, Business and Partners

Adopt a cluster building approach to strengthen our position in new markets (see Box D) which can attract inward investment and talent, stimulate new business growth and boost research and innovation. This will be a structured approach, including an accreditation process and international benchmarking, focused on our identified key sectors.

Government and Public Sector

Review our strategic approach to public ownership so that public companies are managed, developed and initiated for the public good and work collaboratively to provide support and advice to identify opportunities to establish successful public companies.

Box D: Cluster Building

Clusters, whether geographically focused within Scotland, or, as appropriate for certain sectors, spread across Scotland in various locations, allow us to build coherent attractors and focal points where success breeds success and which create maximum economic impact and opportunities for growth. Clusters attract inward investment, provide opportunities for local businesses and new business creation and attract talent which benefits from multiple employment options and limits risk.

When co-located with technology development, such as around a university or innovation centre, clusters also boost research and innovation. Scotland's fintech sector was identified a number of years ago as a potential new market cluster bringing together our strengths across financial and professional services, digital and data capability as well as the vibrant start-up community and skills base.

Fintech Scotland, as the lead industry body, provides a clear focal point for the development of strategy and actions to support the cluster. The Scottish cluster was identified in the recent UK-wide Kalifa report as a model of best practice.

Collaboration between clusters is being driven by the Scottish Cluster Ecosystem Alliance. This was initiated by ScotlandIS, the membership organisation for Scotland's digital technology industry which achieved Silver Accredited Cluster Management status in 2020 – the first organisation to do so.

Key success factors which we would emulate as we build clusters around new market opportunities include:

• clarity of focus with a clearly articulated strategy and rationale as to the scale of the opportunity and Scotland's global strengths and potential.
• clear articulation of geographical focus, and rationale for that focus – either within specific location or locations, or as a Scotland-wide cluster.
• clarity on the links between key technologies and the global competitive advantage of clusters, ensuring that Scotland can retain competitiveness in the supply chains for each identified cluster.
• the creation of an industry-led cluster-builder organisation, which facilitates close working between public and private sectors and academia.
• clarity on international positioning, with a clear understanding as to Scotland's global strengths, who our competitors are, and who potential international partners are.
• alignment of policy, and investment support, across government, agencies, universities and others, including skills pipeline.
• clarity on our inward and capital investment offers, and how this is positioned to attract international private investment to the cluster and to attract talent.

Scotland's Greenports are a key element of our cluster building approach, creating globally competitive manufacturing centres of excellence in net zero industries.

Project 7: Attract and Deploy Significant Domestic and International Private Investment in Scotland

Who / We will

Government, Public Sector, Business and Partners

Establish an investor panel, chaired by the First Minister, to attract investment to a pipeline of projects in Scotland that support our transition to net zero and to bring investor intelligence to policy and regulatory development early in the process.

Government, Public Sector, Business and Partners

Improve access to private capital for business investment and growth. Working with financial institutions and the investment community and through the Scottish National Investment Bank and our enterprise agencies to deliver on our Global Capital Investment Plan, focusing on sectors where Scotland can demonstrate a real international comparative advantage.

Government, Public Sector, Business and Partners

Expand and enhance our Green Investment Portfolio to clearly set out the sectors and projects across Scotland seeking private finance to achieve net zero, sending a powerful market signal that Scotland is ready to meet increasing green investor appetite after COP26. Our Green Market Solutions Programme will identify where additional government action is needed to support investment.

Government and Public Sector

Establish a values-led, high-integrity market for responsible private investment in natural capital (see Box E) to build on Scotland's international renown for its nature and its environmental policy framework on land and sea, and supported by a national project pipeline for nature-based solutions.

Box E: A Nature-Positive Economy and Natural Capital

At COP26, the First Minister endorsed the Leaders' Pledge for Nature,^[12] an international commitment to reverse biodiversity loss and create a "nature-positive" world by 2030. The pledge highlights the need to "transform and reform our economic and financial sectors" to safeguard the wellbeing of people and planet.

Recent global studies have shown the health of the world's ecosystems is declining faster than at any point in human history, with a million species at risk of extinction. These trends are reflected in Scotland, where there has been a sustained net loss of biodiversity in recent decades.

This rapid decline in nature has profound implications for humanity. The World Economic Forum's 2022 Global Risks Report^[13] identified biodiversity loss as the third most severe risk the world faces over the next 10 years.

Playing Scotland's part in tackling this crisis will mean transforming our economy, including a shift to more sustainable patterns of production and consumption. It will mean recognising the embeddedness of our economy in the natural world, and the need to live within the sustainable limits of our single, shared planet.

Doing so will also create new opportunities for Scotland to prosper. Globally, the World Economic Forum estimates that transitioning to a nature-positive economy will create up to $10 trillion in annual business value and create 395 million jobs by 2030.^[14] In Scotland, the nature-based sector is already expanding rapidly, growing at more than five times the rate of all jobs between 2015 and 2019 and accounting for a third of all job growth in that period.^[15] There is strong potential for future growth, in areas such as sustainable land and marine management, urban green infrastructure, green finance and research. Rebuilding Scotland's natural capital is key to the long-term productivity of the many sectors of our economy which rely on the resources and services nature provides.

The transition to a nature-positive economy – designed to help reverse biodiversity loss by 2030 – will support our international responsibilities, including the Leaders' Pledge, while also offering enormous opportunities for Scotland's prosperity and wellbeing. Aligning with the further development of Scotland's Environment Strategy,^[16] actions set out in this economic strategy will support this transition, for example by supporting responsible private investment in nature-based solutions (see Project 7).

Natural capital is the renewable and non-renewable stocks of natural assets, including geology, soil, air, water and plants and animals that combine to yield a flow of benefits to people. Adopting a natural capital approach enables us to understand the role of our natural environment, alongside its intrinsic value, as an asset that underpins our economy and society.

It also helps us recognise the need to invest in the maintenance and enhancement of this asset, so that we can continue to enjoy, within safe environmental limits, the many economic, environmental and social benefits it provides.

Scotland has shown an international lead in natural capital thinking and the increasing investment in Scotland's natural capital, including public and responsible private investment, is both an important economic opportunity and essential to meet the pace and scale of our climate change targets, biodiversity goals and wider land use policy objectives.

The Scottish Government is committed to ensuring that local communities are empowered and benefit from investment in natural capital.