The Scottish Government

« Previous | Contents | Next »

Listen

Section 3 - Benchmarking the Scottish Innovation System

3.1 Introduction

In this section we focus on benchmarking the institutional composition and innovation performance of the Scottish Innovation System to that in some other small countries and regions. Sections 3.2 and 3.3 begin by introducing the key actors involved in the governance and operation of the SIS. Linkages between organisations are considered in later sections. Section 3.4 compares SIS institutions to those in the Norwegian and Swedish innovation systems.

Subsequent sections focus on more quantitative benchmarking of the performance of the SIS. Section 3.5 begins with some global regional and OECD comparisons before focussing on an analysis of European Innovation Scoreboard data for European regions in Section 3.6. Finally, in Section 3.7, we consider some intra- UK comparisons based on R&D and innovation data. A particular focus in these latter comparisons is the major difference between specific industries in Scotland

3.2 Governance within the SIS

Figure 3.1 provides an overview of the main organisations which play a part in shaping the SIS, with organisations grouped by their main function. The inclusion of EU and UK national institutions emphasises the multiple levels of governance which influence the SIS. At an EU level, Commission decisions on EU policy agendas and the scale and focus of Structural Funds and Framework programmes will both influence the funding available to Scottish organisations for investment in R&D and innovation. At a UK level, DTI and research council decisions will also shape the available funding as well as identifying national policy priorities.

At a national level, the Scottish Executive has a dual role in the SIS, having responsibility for policy formulation and development but also having a direct role in administering a number of schemes designed to enhance innovation in Scottish businesses. In terms of Figure 3.1 the Executive thus has a role in policy making (F1) and policy formulation and implementation (F2), but also in support for innovation and R&D (F3)

Scottish Enterprise plays a key role in the SIS in terms of the implementation of policy on R&D and innovation (F2), and to a lesser extent in the support and direction of R&D and innovation in Scotland (F3). The activities of Scottish Enterprise within the SIS are wide-ranging including skills development and support of cluster initiatives and incubation. In terms of innovation and knowledge exploitation specifically, Scottish Enterprise is active in four main areas: the provision of advice to firms; provision of grant funding for innovation and R&D; measures designed to help with commercial exploitation of the science base; and, the development and support of venture capital activity in Scotland. Highlands and Islands Enterprise has a broadly similar role to that of Scottish Enterprise, albeit with a more limited geographical focus. The roles of both organisations, and an evaluation of their position within the SIS is considered in more detail in Chapter 7.

Given the range of organisations involved in the governance of the SIS, a key issue is maintaining coherence. Co-ordination between the Scottish Executive, Scottish Enterprise and HIE is generally effective, however, helped by the unifying policy agendas defined in documents such as A Smart Successful Scotland and A Science Strategy for Scotland.

3.3 Organisations within the SIS

In Figure 3.1, we distinguish four groups of R&D performing organisations which dominate R&D spending in Scotland: the HEIs, research institutes ( e.g. Roslin, the SABRIs), foreign-owned R&D performing businesses and locally-owned R&D performing businesses. Reflecting this split, we also identify four groups of firms who differ in terms of the strength of their backwards and forwards links into the SIS. For example, locally-owned firms may be more strongly embedded in the local economy than externally-owned firms, while academic spin-outs are likely to have stronger connections to universities than small firms in more traditional sectors.

Linking or intermediate institutions have often been regarded as a weak point in UK innovation systems. We have identified five groups of actors in this area in Scotland, stimulating links both within the SIS and between SIS organisations and other actors outside the region. Scottish Executive operate the SCORE and SEEKIT schemes which stimulate collaborative activity between firms and universities. Similarly the university tech-transfer offices are able to draw on expertise from other members of the Association of University Research Industry Links ( AURIL) network. The main development in this type of activity in Scotland over the last two years has of course been the development of the Intermediary Technology Institutes for Life Sciences, Information and Communication Technologies ( ICT), and Energy. Their role is to identify emerging global market opportunities (where Scotland has the chance of capturing a share), and then to identify the technology platforms that will enable exploitation, and what research needs to be done to develop these to allow exploitation in Scotland.

3.4 Benchmarking SIS Institutions

It is beyond the scope of the current study to conduct a detailed benchmarking exercise of the institutional composition of the SIS. It is, however, appropriate to compare the overall structure of SIS institutions with those in some other small economies. Figure 3.2, for example, provides an overview of the innovation support institutions in Sweden, while Figure 3.3 relates to Norway. Both are small very open economies - like Scotland - although there are clear differences in terms of governance. Note that in each case while the basic functions considered are similar to those used in the SIS Figure 3.1, the labelling of the different functions ( i.e. F1, F2) differ in each case. Note too that in both cases the figures relate to the institutional structure at the time of the mapping exercise (1999), and some organisational change has taken place since that date ( e.g. the introduction of Vinova in Sweden in 2001).

Two overall characteristics of the institutional figures are striking. First, it is clear that the basic functions of institutions within the three innovation systems (Scotland, Norway and Sweden) are similar, encompassing the support and conduct of R&D and innovation, technology diffusion and the governance of innovation activity. Second, both the Swedish and Norwegian examples have the advantage of relating to a nation-state instead of the region-state context of Scotland. Scotland's status inevitably makes system governance more complex with potential conflicts arising between regional and national policy agendas. In theory, at least, such conflicts are less likely with the simpler governance structure of a nation-state. Two examples may suffice. In Sweden, national public procurement has been used as an effective instrument of innovation policy in the past - something which is perhaps more difficult to operationalised in the context of the region-state (see Box 3.1).

Second, in the Norwegian system (F6) 'public regulatory, standard-setting agencies' are given some prominence. These are generally national powers and in the UK the majority of the regulatory framework is determined nationally. Ensuring coherence between these regulations and the specific requirements of the SIS is therefore likely to be more difficult than if the regulatory structure was determined at a regional level. A number of other contrasts are worth noting between the Norwegian and Swedish figures for 1999 and that for the SIS:

• Neither the Swedish nor Norwegian figures makes a distinction between the types of firm which is conducting R&D and innovation. In Scotland, given the strong concentration of R&D activity in externally-owned firms this is a potentially important distinction.
• In the Norwegian figure in particular (F6) the role of municipalities and county councils in the innovation system is considered. This type of organisations have not figured largely in our review of material on the SIS, perhaps reflecting differences in governance structures or the importance of the LECs within the SIS.
• Both the Norwegian and Swedish charts highlight a broader range of technology transfer or intermediate institutions than we identified in the SIS. This perhaps reflects the longer history of such public activity in the Scandinavian economies.
• In the case of the Norwegian SIS the promotion of technological entrepreneurship is highlighted although this is omitted from the Swedish institutional chart. This emphasises a slightly different view of the boundaries of the two innovation systems.

Figure 3.2: Institutional Profile of the Swedish Innovation Support System (1999)

Source: OECD, 1999, p. 107.

Figure 3.3: Institutional Profile of the Norwegian Innovation Support System (1999)

Source: OECD, 1999,p. 36.

3.5 Global Comparisons of SIS Performance

A recent report for Scottish Enterprise by Robert Huggins Associates (2005) compares the position of Scotland against a wide range of the world's leading regional economies and also provides some summary benchmarks for Scotland relative to other OECD countries. RHA's analysis is inevitably restricted to quantitative indicators and in some cases is also restricted by the data available. In general, however, their comparison of Scotland with 161 leading regional knowledge economies emphasises the somewhat unbalanced nature of the Scottish economy; its strong public emphasis and its weaker private sector. More specifically:

• Scotland is found to have above average performance in terms of employment in IT and computer manufacturing and public expenditure on R&D.
• Scotland has average performance in terms of gross monthly earnings, economic activity rates and the employment rate.
• Scotland is below average for business investments in R&D, public investments in education, patenting performance, GDP per capita, and employment in medium and high-tech manufacturing and services.

Comparison with OECD economies suggests that the overall level of R&D spend in Scotland is relatively low by international standards, below that of all of the Scandinavian economies but above that in Ireland and Italy (Figure 3.4).

Figure 3.4: Total R&D Spending by OECD and Scotland, % of GDP: 2001

Source: Robert Huggins Associates (2005), Figure 12.

More unusual in international terms, however, is the exceptionally high contribution of higher education to total R&D spending in Scotland (Figure 3.5). In Scotland, slightly over 40 per cent of R&D expenditure is performed by business enterprise, whereas in the US, Sweden, Finland, and Japan over 70 per cent of R&D expenditure is undertaken by business. Notably too, with the exception of the Slovak Republic and Australia, Scotland had the lowest average annual growth rate of business enterprise expenditure on R&D (measured by 1995 constant prices) over the period from 1995 to 2000. This clearly indicates that Scotland's weak position in business R&D expenditure has actually deteriorated over the period with a growing gap with other (national and regional) economies.

Figure 3.5: Composition of R&D Spending in OECD nations and Scotland: 2001

Source: Robert Huggins Associates (2005), Figure 13.

3.6 European Comparisons

Significant effort has been invested in recent years into benchmarking national innovation systems and policy within the EU, although less attention has focussed on comparisons of regional innovation capabilities. Quantitative indicators on innovation systems are compared in the annual European Innovation Scoreboard published by the EU Commission, while innovation policy has been the focus of both commission research projects and more academic networks. The epub network, for example, have developed an RTD Evaluation Toolbox while attempts have been made to benchmark evaluation methodologies in a range of different countries ⁸. In terms of Scotland, these national comparisons are of little very direct relevance. They do however provide an important context for more specific comparisons.

International comparisons involving the UK tend to suggest, for example, that UK levels of overall R&D spend are low by international standards. Figure 3.6, reproduced from DTI/ FDES/ HMT (2004), for example, highlights the decline in UK overall R&D spending as a percentage of GDP during the 1985-1998 period and the moderate recovery since. It also highlights the growth path which will be necessary to meet the 10-year target set for 2014 in the Science and Innovation Framework. Slightly less depressing is Figure 3.7, which suggests that business R&D spend in the UK, although below France and Germany, is broadly mid-range within the G7.

Figure 3.6: Total R&D Spend as share of GDP and UK Future Scenario

Source: DTI/ FDES/ HMT (2004), Figure 1

Figure 3.7: Business R&D as percentage of GDP, G7 Countries

Source: DTI/ FDES/ HMT (2004), Figure 4.

A crucial element in any international R&D comparisons, however, is the sectoral mix of the economies being compared. Indeed, such structural adjustments are much more important in R&D and innovation than in other areas (productivity, international trade) where they are much more common. This is because sectoral disparities in technology intensity are much more extreme than those between productivity levels, say, and so structural effects are even more important. For example, comparing UK data for 2-digit manufacturing industries for 1998, 1999 and 2000 suggests a coefficient of variation for GVA per employee between sectors of 0.9-1.1. For the same sectors (for 1999, 2000 and 2001) the coefficient of variation for R&D intensity ( i.e. R&D as a proportion of sales) is 2.6-2.8 ⁹.

The importance of such effects is illustrated by a shift-share analysis comparing business R&D intensity in the UK and other countries reported in DTI/ FDES/ HMT (2004), Table 4. This shows that of a difference in R&D intensity of -1.99 per cent between the UK and Germany, for example, 0.33 per cent was due to differences in R&D intensity levels within sectors but -2.32 per cent was due to differences in industrial structure. In other words, on a like for like basis UK firms were actually investing more than their German counterparts in R&D but that German firms were concentrated in more R&D intensive sectors. This type of consideration will be important when comparisons are made between levels of business R&D investment in Scotland and the UK, for example.

The European Innovation Scoreboard 2004, for example, suggests that the UK innovation system is 'moving ahead' in terms of aspects of human capital investment and ICT spending but 'falling behind' in terms of employment in medium/high-tech manufacturing and R&D investment (Figure 3.8).

Figure 3.8: UK Summary Chart: 2004 European Innovation Scoreboard

Source: http://trendchart.cordis.lu/scoreboards/scoreboard2004/pdf/eis_2004_annex2.pdf

Other studies have focussed in more detail on the structure and orientation of innovation policy in different countries. EU (2003), for example, provides an indication of leading practice in innovation policy formulation and emphasises nations' very different approaches to innovation policy. This is illustrated neatly by the composition - inevitably approximate - of each country's innovation budget allocated to the different types of policy initiative (Table 3.1). The pattern in the UK mirrors relatively closely that in the US with support balanced roughly equally between fiscal incentives for innovation, subsidy measures and 'integrated packages of support'. Other countries suggest different approaches with Finland emphasising direct support measures (subsidies and loans), the Netherlands emphasising fiscal incentives and France placing more emphasis on direct credit and loan support. The UK therefore is somewhere in the 'middle' in terms of its policy-mix towards innovation at the moment using a balanced mix of innovation support measures. It is important to acknowledge, however, that this position is relatively new, with the increased emphasis being placed in recent years on R&D tax credits. Previous periods would have seen the UK with an emphasis more like that of the US with a greater emphasis on subsidy schemes.

Table 3.1: Percentage of Innovation Budgets By Policy Measure

Source: EU (2003), Table 5.1

Among European innovation systems the UK system therefore emerges as being characterised by a broad range of innovation support policies.

Specific inter-regional comparisons of innovation capability in the EU are less common with perhaps the most comprehensive being the study by Hugo Hollanders published as part of the 2003 European Innovation Scoreboard ( EU, 2003) ¹⁰. This uses a series of 14 indicators to compare the human resource, knowledge creation, knowledge diffusion and overall capabilities of EU regions' innovation systems. (These are defined in detail in Annex 1 which also provides an indication of the index methodology). For each indicator EU (2003) essentially defines a European regional league table, and Figure 3.9, provides a summary indication of the position of Scotland. A number of points stand out:

• 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.
• 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 EU regions in terms in those indicators dominated by public investment decisions - 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).

Figure 3.9: Scottish Innovation System: European Regional Benchmarking

Two broad conclusions can be drawn from this regional benchmark comparison. First, relative to other EU regions Scotland does not suffer from any lack of public investment in either knowledge creation or skill building. Second, there is a marked inconsistency between public and private investments in R&D and innovation, with notably lower levels of private investment Unfortunately, the level of innovative outputs ( i.e. the knowledge diffusion indicators) seem to be constrained by the lower levels of private R&D investment. It is true, however, that the knowledge diffusion indicators for manufacturing put Scotland in the second quartile of EU regions while levels of business R&D investment are in the third quartile. This may suggest the effectiveness of policy initiatives to support innovation activity in these firms.

3.7 UK Comparisons

As the EU regional comparison suggests the national profile of R&D spending in Scotland differs markedly from that in the UK as a whole. In overall terms in 2002, R&D investment in Scotland was 89-96 per cent of the UK level depending on the measure used (Table 3.2). Business investment, however, was much lower in relative terms (58-62 per cent), while public investment in R&D (including both higher education and direct investment by government) was disproportionately high - 66 per cent above the UK average level (Table 3.2). Notably also, a higher proportion of Scottish business R&D spending is in US owned companies than in the UK as a whole.

Table 3.2: R&D Spending in Scotland and the UK - 2002

Source: Scottish Executive, 2004.

In terms of innovation outputs the most recent information derives from the CIS-3 and the proportion of manufacturing firms engaging in a range of innovative activities are summarised in Table 2.3. Here, firms are said to be innovation active if they are engaged in one or more of the previous five innovation activities. Scotland generally ranks somewhere towards the upper-middle of the UK regional rankings but there are some notable differences. Overall, for example in terms of innovative activity, Scotland ranks 5/12. Process innovation seems more common, however, with Scotland ranking 3 ^rd, compared to 7 ^th for product change. Most critically, however, Scotland achieves its lowest ranking 11/12 for cooperation agreements on innovation activities suggesting relatively low levels of networking and technology diffusion.

Table 3.3: Innovation by Manufacturing Firms: CIS 3 Data

As indicated earlier, however, comparing aggregate levels of R&D investment or innovation can be misleading due to differences in sectoral composition, and may also disguise strongly varying sectoral relativities. Scottish Executive (2004) provides a good account of the Scotland/ UK relativities in this respect and these are summarised in Table 3.4 for 2002. For some sectors, however, no relativities can be calculated due to disclosure rules. Sectors fall into four main groups:

1. A group of sectors where per capital investments in R&D in Scotland is less than a quarter of the UK average. This group includes: transport engineering (6.8 per cent); motor vehicles and parts, 12.0 per cent; office machinery and computers, 14.1 per cent; food products and tobacco, 18.4 per cent; and, pulp paper and printing etc., 24.3 per cent.
2. Three sectors in which R&D investments in Scotland were around four-fifths of the UK level - textiles, clothing etc. electrical machinery and apparatus and radio, television and communication equipment.
3. Two sectors where investment was broadly in line with the UK level - machinery and equipment and chemicals and pharmaceuticals.
4. Three further sectors where R&D investment levels in Scotland were markedly above the UK level - fabricated metal products, furniture and other manufactured goods and precision instruments.

Table 3.4: R&D Expenditure in Manufacturing: Scotland and the UK - 2002

Notes and Sources: R&D Spending, Table 2, Scottish Executive (2004). Employment, ABI for Great Britain and Scotland (from Nomisweb), ABI report from DETI in Northern Ireland.

« Previous | Contents | Next »