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Business Enterprise Research and Development in Scotland 2002

1 Introduction

1.1 This is the third Scottish Executive analysis of Business Enterprise Research and Development (BERD) activity in Scotland. The aim of this report is:

• to present statistical information that illustrates the extent and type of expenditure on R&D performed in Scottish enterprises in 2002,
• to highlight Scotland's strengths and weaknesses and
• to inform the debate on the factors that might explain levels of BERD activity across Scotland.

1.1a This report has mainly been compiled from National Statistics ¹ sources, including R&D expenditure data and employment, supplemented by non national statistics sources, for example on graduates and international comparisons. Appendix 1 lists the sources used and indicates their status within the National Statistics Framework.

1.2 In the context of economic development the interest in Research and Development activity stems from a desire to increase productivity and competitiveness through innovation. Basic research, often undertaken in universities or government research institutes is at the beginning of the innovation process. Universities are encouraged to commercialise their findings through licensing to enterprises - local, national and international - and by entering the marketplace directly though spin-outs and collaborative ventures. These may include business funding for broad areas of research or more direct contract research commissioned by businesses.

1.3 Research and experimental development undertaken by business enterprises directly is the second key ingredient in the innovation process. There is robust evidence to suggest that R&D expenditure has a positive impact on productivity within the company undertaking research and development activity ². Furthermore, R&D activity has been shown to result in positive spill-overs for the rest of the economy ³.

1.4 R&D can finally be used by enterprises for the creation of innovative manufactured or service products and for the renewal of processes. Their aim is to reduce costs and time to the market through process innovation and to gain a temporary monopolistic position in the market for their new products, leading to relatively higher product prices and profits, initially protected by patents and other mechanisms.

1.5 The innovation system has been described in more detail in Appendix 1 of the 2001 report, available at http://www.scotland.gov.uk/library5/enterprise/berd01-08.asp.

Relevance

1.6 The earlier Scottish Executive reports on Business Enterprise R&D (Business Enterprise Research and Development in Scotland 2000 and 2001 ⁴) identified a significant shortfall in levels of Scottish expenditure on R&D, compared with the rest of the UK and other competitors. This is of concern to policy makers in Scotland given the link between R&D activity and productivity growth. The level of business investment in research and development as a proportion of GDP has been adopted by the Executive as a key target for improving Scotland's long-term economic performance. The "Framework for Economic Development in Scotland - 2004" ⁵ identifies R&D and innovation as one of its five key priorities, seeing these as "the foundations for improvements in productivity and for sustainable global competitiveness".

Scope

1.7 This report focuses on the Scottish findings of the UK wide ONS BERD survey. The UK survey results for 2002 were published on 28th November 2003, followed by a more detailed tabulation for the UK as a whole known as Business Monitor MA14. This report is based on special analysis of the results of this survey undertaken by the Office for National Statistics on behalf of the Scottish Executive. The amount of Gross Expenditure on Research and Development (GERD) which includes government and higher education expenditure is available in "Research and Experimental Development Statistics 2002", published by ONS in the Economic Trends series.

1.8 Compared to last year the report has been extended to cover age, size and ownership of businesses in more detail.

Related Data

1.9 Other data on aspects of the Scottish innovation system (references in Appendix 1):

• Details on research expenditure in the higher education and government sector are published by the Department of Trade and Industry.
• The results of a survey of the commercialisation activities of universities is available from the Scottish Executive.
• The Community Innovation Survey, undertaken every few years throughout the European Union, deals with wider innovation. The most recent survey, undertaken in 2001 relates to innovation undertaken between 1998 and 2000. The next survey, to be undertaken during 2005, will deal with innovations introduced between 2001 and 2004.
• The Scottish Executive has commissioned a research study to determine the ways in which firms make decisions regarding the development of new products and processes and the importance of different factors influencing the extent, type and location of activity undertaken in support of R&D and innovation; the study is expected to be complete towards the end of the year.

Definitions

1.10 The ONS survey follows the definition of research and development proposed by the Organisation for Economic Co-operation and Development (OECD) and published in the 'Frascati' Manual. According to the manual, R&D is defined as

The definition therefore excludes activities such as market research, most software development, routine testing and quality control and artistic design work.

1.11 Business Enterprise Research and Development (BERD) refers to R&D undertaken within business enterprises, irrespective of the source of funding. Excluded is R&D undertaken in higher education institutions or government establishments (such as research council facilities or hospitals), even if funded by business enterprises. Public corporations are counted as business enterprises.

Sources

1.12 The survey sample is based on a list maintained by ONS of enterprises that are believed to undertake R&D activities, containing about 12,000 enterprises. This list has been compiled on the basis of the responses to the previous survey, filter questions in other ONS enquiries (in particular to the Annual Business Inquiry), and lists used by government departments for the administration of business support. All large R&D providers (those believed to undertake more than 3 million worth of R&D) were included in the sample (399 enterprises in the UK); another 3,600 companies which were identified as undertaking some R&D received an abbreviated questionnaire. The large companies accounted for about 85% of R&D expenditure. Altogether just over 3,800 UK businesses responded to the survey, a response rate of 96%.

1.13 In the questionnaire large R&D performers were asked to identify the sites at which they undertook research and development activity by postcode and to indicate the percentage of the company's activity that takes place there. The Scottish data contained in this report are based on survey respondents' allocation of overall UK expenditure to individual sites. Smaller R&D providers were assumed to undertake R&D at the site from which they reported it. Using this procedure identified 901 enterprises as undertaking R&D in Scotland.

Estimation

1.14 Results for non sampled and non responding enterprises have been imputed using ratios (per employed person).

1.15 The accuracy of the estimates is affected by sampling errors and non sampling errors. Sampling errors have been quantified for the UK but not for Scotland. Based on the UK calculation a 95% confidence interval for the overall Scottish figure of 640 million is probably in the region of +-20m, i.e. there is a 19 in 20 chance that the true value lies between 620m and 660m.

1.16 Non sampling errors are not systematic and are hard to quantify. This includes mis- interpretation of the definition of R&D, lack of coverage of the sampling list, and supplying incorrect information or unreliable estimates. Because of the difficulty of applying the Frascati definition these are important.

1.17 Results in this report are presented in terms of the best estimate available from the source. However small differences or year on year changes have to be treated with considerable caution. Some results cannot be made available to protect the confidentiality of respondents.

1.18 Most of the report deals with comparisons between Scotland and the UK for 2002. Longer term time series data have been adjusted for inflation using a GDP deflator supplied by ONS. The adjustment probably understates the growth of R&D volumes over time, because inflation for products benefiting from R&D, which are mainly manufactured products, is less than GDP inflation. Costs of inputs (wages and salaries and high tech equipment could be assumed to average out at the GDP inflation rate). The EUROSTAT "Handbook on price and volume measures in national accounts 2001 Edition " concludes that a satisfactory index of price changes for R&D does not exist.

1.19 As the price change between 2001 and 2002 is less than 3% comparisons between 2001 and 2002 have only been price adjusted when part of a long term time trend.

1.20 Regional GDP figures have been estimated by scaling regional GVA to the UK GDP figure.

Further sources

See Appendix 1 for further sources.

1.21 The report makes use of the number of employees by industry. These have been obtained from the Annual Business Inquiry (ABI) via NOMIS and refer to a fixed date in December 2002. Special analysis from the Labour Force Survey is used for occupation and qualifications. Graduates in disciplines relevant to R&D come from HESA.

1.22 International comparison use the publication "Main Science and Technology Indicators", available from the OECD.

Revisions

1.23 ABI employment is revised annually to take account of further information received. The magnitude of these revisions for 2001 is relatively small: -8,200 for Scotland; +30,300 for GB. In manufacturing -9,100 in Scotland and -6,700 in the UK.

1.24 BERD data for 2001 have also now been revised following correction of company misreporting. This led to an upward revision of the 2001 Scottish figures by 0.8 million (0.15%) and a downward revision of the UK figure by 346 million (2.8%).

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