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Business Enterprise Research and Development in Scotland 2001

Appendix 1 - Context ⁷

1. This report deals with R&D according to the 'Frascati' definition agreed by OECD and used for international comparison, that is R&D that "increases the stock of knowledge including knowledge of man, culture and society", and its "use to devise new applications". This definition of R&D as something genuinely new to mankind however may only give a partial impression of the innovativeness of a society. This chapter looks at related factors and brings together a set of basic statistics on more broadly defined innovation activity.

2. The EU's Community Innovation Survey (CIS) for example is based on the wider 'Oslo' definition of innovation and there respondents are asked to state whether they meant 'new to the firm', 'new to the industry', 'new to the region/country', 'new to the world', or similar.

3. It is widely accepted that R&D understates innovation particularly in SMEs.

4. Classically, innovation is divided into product innovation and process innovation. This leaves out, for example, organisational innovations. Moreover in many service activities, and in software, the dividing line between the product aspects of the innovation and the process aspects are somewhat arbitrary.

5. The motivations for innovations include the generation of extra revenues (on the demand side) and the lowering of costs (on the supply side).

6. There is an implicit view that the ultimate objective is to raise productivity. However there has to be some balance between productivity growth and output growth.

7. An important factor influencing innovation is demand. What is its scope? Is it local, Scotland, the UK, European, global? Is it mainly for export or home markets? Is it for a highly differentiated good ... broad class of goods? How important is the quality of the product as distinct from quantity.

8. The so-called Schumpeterian hypothesis asserts that innovation in the modern era requires large firms or concentrated industries. Possible explanations are:

• scale economies in R&D itself;
• economies of scope through diversification;
• larger sales volumes spread the fixed costs of innovation;
• access to capital;
• complementarities with other functions.

On the other side, there may be diseconomies associated with larger firms:

• SMEs are thought to be more entrepreneurial and 'agile';
• SMEs may act as technological pioneers in some sectors;
• SMEs may be more autonomous;
• SMEs may be better employers of labour than large firms.

9. Much attention has focused on the notion that oligopolistic industries (medium-high concentration) may have the strongest innovation records.

10. Patents or similar 'objective' forms of ownership can offer protection of ownership, however many industries resort to alternatives to patents, such as trade secrets or just lead time.

11. Imitation has long been regarded as the poor cousin of innovation - copying is regarded as easy and sometimes unethical. However recent studies suggest that much R&D is carried out in ways that look more like imitation than genuine innovation. R&D that partially duplicates research done elsewhere is still thought to increase the firm's capacity to absorb genuinely new developments. Thus R&D in firms has both an 'innovative' face and an 'imitative' face.

12. An important factor of innovation is that radically new areas of technology developed elsewhere may become relevant for an organisation. In particular ICT can integrate separate functions of buying and selling, distribution, product development and manufacturing, and its benefits are usually associated with organisational change.

13. The skills required for innovation can be categorised as - skills for creating innovations, skills in producing innovations, and skills in using innovations. The time paths of requirements may vary between these categories and this is a potential explanation of the 'productivity paradox' of slow productivity growth following radical change. Skill shortages remain a key issue in many practical situations of innovation.

14. Funding is another possible constraint for innovation. There is evidence that:

• small innovative firms experience high costs of capital
• costs of capital in large firms vary, and there is a preference for in-house sources.

15. While most findings have stated a positive link between diversification and R&D intensity, the fashion in recent times has been to move back towards specialisation, using outsourcing or similar procedures to obtain complementarities.

16. Networks can involve functional links, such as outsourcing, resource links (supply chain), geographical links.

17. University-industry relationships have promoted an interest in commercialising university research. Governments have had a part to play in bringing together universities and industry. In the UK, the performing of R&D by higher education institutions (HEIs) has risen from well below the figure in comparable countries around 1980 to at least the equal of 'rivals' nowadays.

18. R&D is often thought of being concentrated in hi-tech sectors. The point about low-tech industries is that they are primarily users rather producers of technology, so they score low in terms of own R&D; but without them there would be little demand for that R&D from the high-tech sectors. The low and medium tech manufacturing sectors, plus (importantly) services, are the 'carriers' of technology.

19. Similar points can be made about the 'medium-tech' industries, which display potential for continued resurgence through integrating the new technologies.

20. The extent of locality of innovation can be studied at three levels:

• 'exploitation' of technologies,
• 'collaboration' in developing technologies,
• 'generation' of technologies.

There is evidence for globalisation in the first two, but most new technologies still emanate from the same short list of advanced industrial countries.

21. Governments have tended to see their contribution to technology as coming from pump-priming funding of basic research, with the emphasis on basic research in turn coming from concerns about 'market failure'. Such funding adds to business R&D in two main ways: through the subsidising of the performance of R&D carried out in private-sector laboratories, and through the 'spillovers' thereby made possible to complement private R&D activities.

22. In the UK R&D tax incentives were introduced for revenue expenditure incurred after 1 April 2000 by small and medium sized companies, extended from April 2002 to large companies. SMEs can deduct 50% of expenditure from profits, the rate for large companies is 25%. Capital expenditure qualifies for 100% R&D allowances.

University - industry links

23. The next table gives an indication of the contribution of Scotland's higher education sector the commercialisation of their research. A survey undertaken by the UK Funding Councils tracks the number of spin-out companies from university departments. Despite the fact that Scottish enterprises perform only 4% of all R&D in the UK, 14% of all UK academic spin-out companies started in the academic year 2000/2001 were Scottish. An increasing level of BERD in Scotland would provide the environment for retaining more of the benefits of university research commercialisation within the local economy.

Table A1: Higher Education Institutions: Selected Commercialisation Activities 2000/01

Source: HE-BI Survey 2000/01

Patents

24. The Patent Office publishes statistics on a regional basis. These are derived from the postcode of the applicant. Scottish applicants filed 1,120 UK patents in 2001, 5.3% of UK total. This represents a decline from 5.6% a year earlier. The number of patents granted to Scottish applicants was 107, 3.8% of the UK total in 2001, compared to 4.7% in 2000.

25. As table A2 shows the percentage of patents filed broadly reflects the regions' share of R&D spending. The patent figures for London are higher than its R&D spending, with the opposite being the case for the research active areas around London.

Table A2: Patent Applications and R&D Expenditure by Region 2001

Sources: The Patent Office Annual Facts and Figures http://www.patent.gov.uk/about/reports/anrep2001/facts/ff20002001.pdf
Business Enterprise Research and Development 2001: http://www.statistics.gov.uk/pdfdir/berd1102.pdf

1. Includes patents which could not be allocated to a region

Innovation

26. The DTI Innovation Survey (2001) is the UK element of an EU wide Community Innovation Survey. It covered the period 1998-2000. The size of the UK sample was 8,200 enterprises of which 800 were located Scotland.

27. Innovation activity is defined as:

• introduction of a new or significantly improved good, service or process
• longer term innovation activity such as basic R&D or technology watch
• expenditure in areas such as internal R&D, training, acquisition of external knowledge or machinery and equipment linked to innovation activities
• formal co-operation on innovation with other enterprises or institutions.

28. The differences between Scotland and the UK are not large. Scotland appears to have a higher proportion of large enterprises that are active in product innovation new to the market and in local process innovation.

Table A3: Innovation in Scottish Enterprises

Source: DTI Innovation Survey 2001

* employment of 250 or more in the UK

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