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Executive Summary
Introductory Remarks
This report provides a 'rough guide' to the Scottish Innovation System ( SIS). A key focus is the identification of the main actors, their roles in the system, and the level of system interaction. An evaluation of system strengths and weaknesses is provided at the end of this Executive Summary and in Section 8 of the report.
The report stems from recent academic thinking which has emphasised the importance of adopting a systemic approach to the analysis and support of innovation. An innovation system comprises the 'institutions which jointly and individually contribute to the development and diffusion of new technologies, and which provides the framework within which government forms and implements policies to influence the innovation process'.
It is necessary to meet three criteria if an innovation 'system' is to be said to exist. First, there must be a degree of coherence between organisations agendas and orientation. Secondly, there should be widely agreed and unified objectives. Third the system must be bounded by geography, sector or technology. Whether Scotland has such an innovation 'system' is discussed further below.
Mapping Approach
We develop our view of the SIS in four stages:
1. Benchmarking - how do the inputs and outputs of the SIS compare to that elsewhere?
2. Functions - we first identify the key functions undertaken by organisations within the SIS. In addition, we consider two national ( i.e.UK - wide) functions which also have implications for the SIS.
3. Organisations - we identify the key organisations within each function and consider their capabilities.
4. Linkages - we consider the linkages between organisations within the SIS. This analysis is at two levels - within and between functions.
System Benchmarking
A key comparison is that with other EU regions, and here we use data from the European Innovation Scoreboard to compare the SIS to other areas. A number of points stand out:
- In terms of those indicators dominated by public investment decisions, Scotland is in the top quartile of EU regions - levels of tertiary education, public R&D expenditure and lifelong learning. Performance on all other indicators is notably weaker.
- Business R&D spend in Scotland is in the third-quartile of the distribution of EU regions.
- Scotland has below average (third quartile) employment in medium or high-tech manufacturing although knowledge diffusion among Scottish manufacturing companies is in the second quartile of the EU distribution.
- By contrast, employment in high-tech services is above average (second quartile), while knowledge diffusion among Scottish services companies are below average (third quartile).
- Scotland is in the third quartile of EU regions in terms of the key measure of innovative outputs in the comparison - the share of sales of new-to-the-firm products in manufacturing. Scotland is in the top quartile of European regions in terms of the overall regional innovation index. This is something of a chimera, however, as the overall indicator is a composite measure based on the values of the other indicators and Scotland's position is due largely to its strong standing in terms of human resource measures.
Scottish Innovation System: European Regional Benchmarking
Innovation System Anatomy
The figure below identifies a series of six functions which together contribute to the development of innovation capability within the SIS. These are:
- Function 1 - Policy Making
- Function 2 - Innovation Policy Formulation and Implementation
- Function 3 - Support and Direction of Innovation and R&D
- Function 4 - Undertaking R&D
- Function 5 - Facilitating and Conducting Knowledge Diffusion
- Function 6 - Knowledge Exploitation
In addition, the 'region-state' status of Scotland means it is important to recognise the influence of national and supra-national policy making and innovation support organisations in influencing the SIS. Two national functions - the national allegories of F1 and F2 - are also therefore important as are the role of EU policy in shaping and supporting innovation policy and support measures within the SIS.
Main Functions Within the SIS
Main Actors Influencing the SIS
The figure below provides an overview of the main organisations influencing the SIS, with organisations grouped by their main function. Scottish Enterprise National and Highlands and Islands Enterprise both span the F2 (policy formulation) and F3 (Support and direction of innovation) levels.
Knowledge generation
Knowledge generation in the SIS is undertaken primarily within the HEIs and research institutes and R&D performing businesses. The latter group is dominated by externally-owned firms. The figure below summarises our assessment of the main linkages within the knowledge-generating elements of the SIS. These are discussed in detail in Section 4.
The figure highlights the relatively strong linkages between HEIs and research institutes and their funding bodies, and their relatively good performance in terms of spin-outs, licensing and related activity.
The major weakness evident in this part of the system relates to the interaction between HEIs and the indigenous commercial base. In many respects Scottish HEIs have stronger links with externally-owned and other UK-owned firms than with indigenous SMEs, because the former are more able to absorb the knowledge generated at Scottish HEIs and maximise the economic returns from it.
Scottish Executive initiatives such as SCORE and SEEKIT are welcome attempts to overcome this disconnect but influence a relatively small proportion of firms.
Knowledge exploitation
Our view of linkages within the knowledge application function of the SIS is discussed in detail in Section 5 and summarised in the figure below (5.1).
We see relatively little evidence that many locally-owned medium and low tech firms are very actively engaged with other local companies in their innovation activity. Links between locally-owned high-tech firms, externally-owned firms in Scotland and spin-outs are stronger, with each group also having relatively strong link to externally-owned firms. We include here the Scottish Enterprise cluster and industry groups to reflect their role in network building and strengthening local linkages.
Geographical factors, and the location of higher education institutions, also create a profound distinction between the situation of firms in the Central Belt and Tayside/Grampian regions of Scotland and companies in the Highlands and Islands and the more rural areas of the Borders and Dumfries & Galloway. Firms in these areas are, in large part, excluded from any positive system dynamic within the SIS.
Knowledge Mediation and Sharing
This is a key function within the SIS, being the bridge between the knowledge generation and knowledge exploiting functions. This is reflected in the significant efforts have been made by Scottish Enterprise and its partners to develop linkages and networks within the SIS (Figure 6.4). Scottish Executive schemes such as SCORE and SEEKIT have also been significant in this respect.
Despite these endeavours, our discussions suggest continuing doubts about the level of horizontal connectivity between Scottish firms, and links between smaller indigenous firms and the universities. Absorptive capacity - and the low priority given by many smaller locally-owned firms to technological development - may help to explain the low level of horizontal connectivity; similar factors together with a mismatch between the technological focus of the universities and the needs of local companies may be influencing the weakness of university-industry links.
The ITIs clearly represent a major new initiative in this area, and are an imaginative and innovative intervention with the potential to have a substantial impact on innovation levels in Scotland. Our view is that at present, however, links remain relatively weak (Figure 6.4).
Is there a Scottish Innovation System?
Within limits our view is that the SIS may be said to exhibit each of the three necessary conditions for the existence of an innovation system: coherence, unified function, and boundedness.
- Coherence - there is evidence of an array of organisations with common development trajectories, feedback loops and complementary competences between agents. There are, however, limits to the degree of coherence, notably in the lack of connection between the HEIs and research institutes and the indigenous SME sector. This leads to a sense of 'imbalance' within the system, and a need for some agenda re-alignment if greater coherence is to be achieved.
- Unified Function - policy documents such as A Smart Successful Scotland and A Science Strategy for Scotland provide, for the first time, a set of objectives for the SIS and beyond.
- Bounded - while the SIS is less evidently bounded than, say, that of the UK as a whole, it clearly is possible to determine geographical, institutional and to some extent sectoral boundaries of the system. The boundaries of the SIS are probably narrower than those of Scotland as a country, however. For example, it is clear that there are geographical areas of Scotland, notably in the Highlands and Islands, and perhaps in the Borders and Dumfries & Galloway which are effectively excluded from the system.
Strengths of the SIS
The knowledge generation capacity of the system is high with some key areas of strength. The commercialisation activities of the universities are effective and we see no evidence of any unwillingness to explore alternative avenues for commercialisation on the part of the universities. Scotland's record on spin-outs, licensing and commercialisation is well up to par.
Policy innovation within the system is relatively strong. For example, the ITIs represent a major policy initiative both in terms of investment and prestige and although it is early days show some promise of making an effective contribution both to start-up activity and the commercialisation of university research. They may also play a useful 'flagship' role, championing innovation within the Scottish system.
R&D support measures within the SIS are fairly comprehensive with the LECs having considerable autonomy - and using it - in support of local firms. Some confusion was evident over the number of different support measures available. LECs felt a key role was helping firms to identify the appropriate support measure. We feel there is too little emphasis in the support regime on encouraging partnership between firms and, despite SCORE and SEEKIT, on encouraging university-company interaction.
Weaknesses of the SIS
The pattern of R&D spending in the SIS is well known, with very low levels of R&D in firms and particularly in the majority of indigenously owned firms. This is clearly a weakness of the system and limits both the capacity of firms to develop their own knowledge bases and innovation but also no doubt hinders their ability to absorb external knowledge.
This issue is exacerbated by what we feel are low levels of innovation networking between firms and between locally-owned firms and the universities. Indeed, there is evidence of an almost complete mismatch between the output of the research active HEIs and the absorptive capacity of SMEs, and between the requirements of SMEs and the ability or willingness of HEIs to help.
Differences in the level of investment in R&D and innovation between knowledge generating and knowledge exploiting organisations within the SIS lead to a sense of 'imbalance' - with a university sector reminiscent of a 'core' EU region and a corporate sector in keeping with Scotland's more 'peripheral' location. Differences in organisational agendas also lead to something of a disconnect between the university and (indigenous) corporate sectors.
The result is a lack of university-industry links and a mismatch between the type of knowledge being generated and demanded. Issues therefore arise on both sides. For the universities there is an issue in terms of more closely attuning their activities to the needs of the Scottish economy. For firms there is an issue of the priority they give to R&D and innovation investment, to upgrade their absorptive capacity and adopt a more 'open' stance to innovation links.
A positive model for policy development here is the Finnish organisation TEKES which combines the roles of research council and industrial development agency, providing substantial funding for collaborative research activity between HIEs and companies. It is also likely to be necessary to re-focus support for innovation at project level on collaborative or co-operative projects. SCORE, SEEKIT, and SHEFCs' Knowledge Transfer funding are a start in this area.
Geographical factors, and the location of higher education institutions, create a profound distinction between the situation of firms in the Central Belt and Tayside/Grampian regions of Scotland and companies in the Highlands and Islands, Borders, and Dumfries and Galloway. Proximity to universities, and the potential for interaction, differ markedly - to the extent that Highlands and Islands firms and those in the Borders and Dumfries & Galloway are in many ways excluded from any positive system dynamic at the moment. A partial exception to this may be firms in the medical cluster in Inverness. In the HIE area this may be at least partly addressed by the development of the UHI Millennium Institute.
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