The Scottish Government

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Section 7 - System Governance and Co-ordination

7.1 Introduction

This section provides an overview and critique of the roles played by the organisations which have central roles in innovation policy making and formulation in Scotland: the Scottish Executive, Scottish Enterprise ( SE) and Highlands and Islands Enterprise. In terms of the key components of the SIS identified in Figure 3.1, these three organisations are the only ones which have a role in three separate areas: policy making (F1), policy formulation and implementation (F2) and support and direction of R&D and innovation (F3).

7.2 The Scottish Executive

7.2.1 The Role of the Executive in the SIS

The Scottish Executive has a dual role in the SIS, taking a lead role in policy formulation and development, and 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 directly in support for innovation and R&D (F3)

The general framework for policy was developed in 2001 with the publication of A Smart Successful Scotland, which laid out a policy agenda to develop and enterprising, knowledge-based economy. The role of science, technology and innovation in increasing competitiveness and improving Scotland's economic performance is stressed in the Executive's enterprise strategy, and highlights two areas in particular:

• Science strategy (F1 policy making; F2 policy formulation) was highlighted with the publication of A Science Strategy for Scotland (2001). This advocated a focus on targeting areas of scientific strength in Scotland and appropriately funding them, as well as maximising their positive economic impact by increasing the effective exploitation of the scientific research base. The document also involved the establishment of the Scottish Science Advisory Committee ( SSAC) in 2002, with a remit to "provide advice to Scottish Executive Ministers on science strategy, policy and priorities, and to allow the Scottish Executive to make effective use of available scientific advice, knowledge and techniques in formulating and implementing policies to support the full range of its objectives". An evaluation of the SSAC and Scotland's science strategy is given in the next section.
• Business and innovation support (F3 support for innovation and R&D) involves a range of financial support measures for innovation and related activities (see Box 7.1). Three of these programmes ( SMART: SCOTLAND, SPUR and SPUR+) are grant schemes targeted at promoting innovation, are part funded by the European Regional Development Fund and have equivalents throughout the UK. By contrast, SCORE and SEEKIT are specific Scottish Executive initiatives, aimed at encouraging greater co-operation between SMEs and the Scottish science base.

7.2.2 Evaluation of the Science Strategy and SSAC

As indicated above A Science Strategy for Scotland (2001) developed a framework to inform the development of science policy in Scotland, and to help its economy meet the challenge of global competition. The goals of the strategy resonate with the goals of other agencies involved in Scotland's innovation system. They include: strengthening the science base, improving exploitation, training more scientists, promoting science in society, and utilising science in evidence-based policy formulation and implementation.

One of the key achievements of the science strategy was the establishment of the Scottish Science Advisory Committee ( SSAC) as an independent source of advice to the newly appointed Minister of Science. SSAC exists under the wing of the Royal Society of Edinburgh but is funded by the Scottish Executive. Work across as many as 55 topic areas identified in the science strategy has proven challenging, but SSAC's existence has assisted formation of an internal group to co-ordinate matters relating to science policy within the Scottish Executive. This has contributed to an improvement in science governance within the administration though not necessarily its innovation governance. This is because the group receiving advice remains a Scottish Executive group with no representation from Scottish Enterprise or the Scottish Higher Education Funding Council.

In 2004, the first report of SSAC was published ²⁰ and its theme reflected its earlier concerns, namely better integration of science governance to assist improved innovation. A number of other points were also emphasised:

• the need for organisational boundaries to be viewed as conduits not barriers to knowledge flows;
• the desirability of strong links between actors within the SIS and UK and EU networks; and
• the importance of local networks and forums involving scientists, policy makers, funders and users of science.

In each case the recognition of the need for increased levels of association is positive, and is consistent with the aspiration of Scottish Enterprise's cluster and sectoral groups as well as the ITIs. Less positive is the rather science-centric view espoused by the SSAC and its emphasis on out-dated notions like 'picking winners' and the 'linear model' view of innovation, with little recognition that innovation is very often stimulated by demanding lead users. In this sense there may be some value in a reformed Science & Innovation Advisory Council, which would be a real organisational innovation confronting science with the users and policy makers from outside the Scottish Executive and science community. Such an organisation could perform an important integrating service further assisting the formation of a well-functioning innovation system in Scotland.

7.3 Scottish Enterprise

7.3.1 The Role of Scottish Enterprise

Scottish Enterprise impacts on the SIS at various levels. It has the key role in 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 the support of the cluster initiatives and incubation activities described in the previous chapter. In terms of innovation and knowledge exploitation specifically, Scottish Enterprise is active in four main areas:

1. Advice.SE provides advice to companies on product and process development and innovative ways of working, and on the funding available for innovative projects.
2. Funding. Although most public support for innovation in businesses comes from the Scottish Executive (see Box 7.1), Scottish Enterprise provides some direct funding through its Small Company Innovation Support, administered through the LECs, and R&D Plus, designed to support the research activities of large companies with an R&D presence, or a planned R&D presence, in Scotland.
3. Exploiting the scientific knowledge base. Scottish Enterprise funds or co-funds several of the public policy initiatives summarised in Box 4.3, including the Proof of Concept programme, Enterprise Fellowships and Technology Ventures Scotland, as well as individual initiatives with Edinburgh, Glasgow and Strathclyde Universities. Scottish Enterprise also established and funds the three ITIs.
4. Venture capital. The Scottish Co-investment Fund ( SCF) is a £45 million equity investment fund set up by Scottish Enterprise, and part funded by the European Regional Development Fund ( ERDF), to invest from £10,000 to £500,000 in company finance deals between the sizes of £20,000 and £2 million. The fund invests only in partnership with private sector investors.

7.3.2 Evaluation of the Role of Scottish Enterprise

Interviews with various actors in the SIS emphasised the pivotal role played by Scottish Enterprise in the governance and development of the SIS. In part, this relates to the range of activities and functions which Scottish Enterprise performs, and in part to the scale and pervasiveness of the influence of the organisation. Actor's views were less uniform in terms of whether the extent and influence of Scottish Enterprise were positive. Among firms in particular (Chapter 5) our interviews suggest a balance of views, with some firms emphasising the positive role of the LECs and others being more critical of Scottish Enterprise national and its activities.

Interviews with senior innovation and competitiveness executives in Scottish Enterprise emphasised the rationale for improving innovation as part of the agency's broader competitiveness agenda. A key issue which arose in these discussions - and which is echoed earlier in this report - was the perception that Scotland's SME sector is insufficiently collaborative, both with enterprise support organisations and with each other. Accordingly Scottish Enterprise looks closely at the most competitive 10% of its approximately 150,000 firms which it is willing and interested sufficiently to support. This is a not an unreasonable posture given the impossibility of serving all firms, and the perceived weakness of many of Scotland's SMEs.

There was also a perception that the Scottish capital investment market is small and otherwise inadequate for meeting expansionary needs. This was seen as creating pressure for Scottish Enterprise to re-establish new forms of enterprise investment funding despite having privatised its in-house venture capital fund nearly five years ago. This had led to the successful 'Co-investment Fund' with the Scottish business angel community.

Scottish Enterprise plays - and is likely to continue to play - a key co-ordinating role within the SIS. Indeed, the broad scope of Scottish Enterprise's activities and influence within the SIS put the agency in a unique position to achieve this role. There is a clear need, however, for policy to adopt a systemic perspective with intervention being shaped in relation to its system impact rather than as a response to specific market failures. In other words, Scottish Enterprise is perhaps uniquely placed within Scotland to adopt a role focussing on the management and integration of the SIS. The OECD (1999) study referred to earlier, for example, stresses the importance of this role in ensuring the effective function of the innovation system. Hence, in the view of the OECD, agencies should 'address systemic failures that block the functioning of innovation systems, hinder the flow of knowledge and technology and, consequently, reduce the overall efficiency of R&D efforts. Such systemic failures can emerge from mismatches between the different components of an innovation system, such as conflicting incentives for market and non-market institutions ( e.g. enterprises and the public research sector), or from institutional rigidities based on narrow specialisation, asymmetric information and communication gaps, and lack of networking or mobility of personnel' ²¹.

For example, it is possible to envisage a situation in which the effectiveness of the ITIs within their fields of operation may either be constrained by a lack of specific skills, investment or entrepreneurial talent. Or, a situation may arise where highly effective ITIs which stimulate activity within their own sector might exacerbate skill or financial shortages in other sectors. In either case a systemic perspective would highlight such effects, avoiding potential system failures.

7.4 Highlands and Islands Enterprise

7.4.1 Role of Highlands and Islands Enterprise

Highlands and Islands Enterprise operates in parallel to Scottish Enterprise with a specific geographical focus on the Highlands and Islands region. Our discussions with the agency, and other actors in the region, emphasised the particular development challenges of the Highlands and Islands region linked to peripherality as well as low business density.

HIE was originally established around 40 years ago to address the specific problems faced by the economy of the Highlands and Island. More recently the agency has sought to change its focus, and the aim is now to create new opportunities in the local economy with a specific focus on stimulating knowledge intensive business activity. HIE have an annual budget around a fifth that of Scottish Enterprise and like Scottish Enterprise operate primarily though the LECs.

Our discussions with HIE emphasised the priority being put on the development of knowledge generation and diffusion capacity in the region - a key focus being the University of the Highlands and Islands ( UHI) - and cluster building ( e.g. the Inverness medical cluster). Both priorities are intended to overcome the region's lack of current university level research infrastructure and institutions and strengthen firms' innovative capacity. Both are also intended to develop the specific competencies and capabilities present in the region. The UHI, for example, has since 1999 been developed as a teaching institution, but developments in research capability are planned based around marine ecology and the SAMS research centre in Oban as well as nuclear decommissioning.

Other key issues faced by firms operating in the Highlands and Islands region, and emphasised by our informants, are:

• The absence of a university presence limits the possibility for direct knowledge sharing but also reduces firms' access to such schemes as KTP. This deficiency has, in part, been addressed by the College-Business partnership scheme.
• Agglomeration advantages are also missing from the region due to the low density of population outside the Inverness area. A key response has been the development of broadband networks throughout the Highlands and Islands region to facilitate the development of virtual networks.
• Other barriers to connectivity are: the preponderance of small firms, sectoral concentration in traditional sectors, and a lack of graduate managers. The Fusion scheme - which facilitates networking between firms - is one HIE measure designed to increase connectivity.

Statistical evidence is lacking but anecdotal evidence also suggests that the Highlands and Islands area is marked by a particularly low level of R&D and innovation activity.

7.4.2 Evaluation of the Role of HIE

HIE and its LECs face substantial challenges in trying to promote innovation and technological development among firms in the Highlands and Islands region. While some firms are highly innovative and have strong links to universities in Scotland and elsewhere, there is a consensus that the number of such companies in the H&I region is small. The preponderance of firms tend instead to be small and concentrated in either service industries or mature manufacturing sectors.

Outside the Inverness medical cluster, and public research institutes, there is also a consensus that knowledge generation capacity within the region is very limited. This limits the potential for spin-out creation as well as local knowledge spillovers.

Our discussions with HIE emphasised a response focussing on business development rather than start-up, accompanied by support for the development of the UHI. The latter is clearly a long-term strategy which depends crucially on attracting high calibre research staff to the region, and retaining existing staff members. The development of UHI from the ground-up, however, also offers a unique opportunity for the Highlands region to develop a university whose research activities are more directly linked to the needs of local firms than that of the more established Scottish universities. This may eventually lead to stronger local synergies and spillovers.

To date the impact of the UHI initiative on business innovation in the Highlands and Islands region has been minimal, although other initiatives such as Fusion are better developed. As a result, many firms in the HIE region remain marginalised rather than embraced within the SIS, with a potentially negative impact on their long-term competitiveness. This is, and will clearly remain, a central concern for HIE.

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