A smart, sustainable nation? A review of Scottish research and innovation policy in the context of the smart specialisation agenda

Abstract

This paper reviews the Scottish strategic policy framework for research and innovation policy as a pilot contribution to the application of the new RIS3 approach to designing and implementing EU Cohesion Policy support through the Structural Funds in the upcoming 2014-20 programming period.

Full text

www.technopolis-group.com
August 2012
A smart, sustainable nation?
A review of Scottish research and innovation policy in the context of the
smart specialisation agenda
Alasdair Reid

A smart, sustainable, nation?
A review of Scottish research and innovation policy in the context of the
smart specialisation agenda
technopolis |group|, August 2012
Alasdair Reid

A smart, sustainable nation? i
Table of Contents
1. Scottish economic and innovation policy priorities: an overview 3!
1.1 The Scottish policy context for smart specialisation 3!
1.1.1 The Government Economic Strategy 3!
1.1.2 Science and innovation frameworks 6!
1.1.3 Scotland’s emerging ‘framework’ for smart specialisation 8!
1.2 Scottish policy in the context of multi-level governance 10!
1.2.1 Inter-linkages and synergies with UK wide policies 10!
1.2.2 The contribution of European programmes to Scottish policy 11!
1.3 The governance system and stakeholder involvement 14!
2. Scottish innovation performance and specialisation 16!
2.1 Research and innovation inputs (expenditure and people) 16!
2.2 Scientific and technological output and specialisation 19!
2.3 Business innovation performance and trends 23!
3. Scottish innovation policy: an appraisal 25!
3.1 Sectoral strategies and sector specific support measures 26!
3.2 Stimulating business R&D and innovation investments 28!
3.3 Cross-clustering, entrepreneurship and demand side policies 30!
3.3.1 Emerging clusters and cross-cluster opportunities 30!
3.3.2 Entrepreneurship, high-growth firms and scale companies 32!
3.3.3 Improvement of demand side conditions. 36!
3.4 Case studies: sectoral and place based strategies 37!
3.4.1 Boosting innovation in a traditional sector - Scottish Food and Drink 37!
3.4.2 An emerging global leader ? The Scottish marine energy sector 38!
3.4.3 Innovation everywhere ? Innovation policy in rural Scotland 41!
4. Conclusions and recommendations 45!
4.1 Summary conclusions 45!
4.2 Recommendations 47!
Appendix A Guidance for expert assessment from DG REGIO 49!
Appendix B Statistics on Scottish scientific and innovation potential 52!
Appendix C Studies, policy documents and programmes on research and innovation 54!
Appendix D Scottish innovation policy governance system 55!
Appendix E Social network analysis of Scottish participation in FP7 56!

ii A smart, sustainable nation?
Table of Figures and boxes
Figure 1 Scottish Government Economic Strategy (2011)............................................... 3!
Figure 2: Measures in the 2011 SGES to support innovation and commercialisation ....5!
Figure 3: Science for Scotland - priority actions ............................................................. 6!
Figure 4 : Scottish Performance in FP7 ..........................................................................13!
Figure 5: Scotland’s economic and innovation performance relative to EU27 .............16!
Figure 6: R&D expenditure per capita (in euro) by sector performance (2009)........... 17!
Figure 7: researchers per sector 2009, Scotland compared to Finland and Norway .... 17!
Figure 8: Income from research grants and contracts by Scottish HE institution
2009/10 (£ thousands) ...................................................................................................18!
Figure 9 Scottish scientific output by scientific field (2000-2011)............................... 20!
Figure 10 Scotland - Relative citation impact compared to the world average ............. 21!
Figure 11: High-tech patenting trends by UK region .................................................... 22!
Figure 12: Business infrastructure projects per growth sector ......................................27!
Figure 13: distribution of R&D and innovation grant awards by sector 2009-12 ........ 29!
Figure 14 Main policy measures addressing smart specialisation topics ..................... 30!
Figure 15 : Scotland’s Cluster Portfolio ..........................................................................31!
Figure 16 : The market for company growth in Scotland (SE, 2012)............................ 34!
Figure 17: Scottish Enterprise account managed high-growth firms (2010-13) by sector
........................................................................................................................................ 35!
Figure 18 : growth in scientific publications (2000-2011) ............................................ 52!
Figure 19 Scotland versus England – relative citation impact 2003-07....................... 52!
Figure 20: Scotland versus Finland, relative citation impact 2003-7 .......................... 53!
Box 1: key challenges for science in Scotland (2008) 6!
Box 2: Enterprise Areas policy 32!
Box 3 : Scottish Investment Bank equity and loan instruments 33!
Box 4: Evidence on high-growth and technology based firms in Scotland 35!
Box 5: A96 corridor digital health cluster – entrepreneurial discovery in rural areas 36!
Box 6: rural innovation challenges in the Northern Periphery 43!

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Executive Summary
The European Commission is proposing that the use of the European Regional
Development Fund, during the 2014-20 period, to support research and innovation
should be subject to an ‘ex-ante conditionality’. If approved by the European Council,
Member States and regions should present a ‘Smart Specialisation Strategy’ (RIS3) for
approval to the Commission services. A RIS3 strategy is an “integrated, place-based
economic transformation agenda’ that should meet five key principles:
• focuses policy support and investments on key priorities, challenges and needs for
knowledge-based development, including ICT-related measures;
• builds on strengths, competitive advantages and potential for excellence;
• supports technological as well as practice-based innovation and stimulates private
sector investment;
• fully involves stakeholders and encourage innovation and experimentation;
• is evidence-based and includes sound monitoring and evaluation systems.
As part of the preparations for the ‘roll-out’ of the smart specialisation concept and to
inform the Commission services about the extent to which current policy frameworks
are susceptible to be further honed and focused in line with the above five principles, a
number of pilot reviews of European regions were commissioned by the Directorate-
General for Regional Policy (DG REGIO). This review of Scottish innovation policy
applies the peer review methodology proposed by the Commission (see Appendix A).
Scotland’s innovation performance can be summed up as a form of dichotomy with a
relatively strong higher education and public research performance contrasting with
business innovation and entrepreneurial activity lagging far behind other small
northern European countries. Indeed, the innovation system is highly skewed in both
terms of funding flows and human resources available to the higher education sector
versus the business sector. A main focus of Scottish policy over the last decades has
been on the commercialisation of the strong research base. Yet, technological
performance remain less impressive than scientific output: whilst revenue from
intellectual property management and spin-off generation rates are stronger than in
the UK as a whole, ‘high-tech’ spin-offs have not had the hoped for employment and
economic growth bonus on the Scottish economy. Indeed, evidence suggests that
positive business R&D trends are being pushed by ‘non-high-tech’ sectors and that
high-growth firms in the economy are similarly not concentrated in the high-tech
sectors. Scotland’s economic and innovation geography is more complex than a first
glance at indicators might suggest and specialisation opportunities may emerge in
‘unusual suspects’, both in terms of sub-sectors and technology fields.
In this context, the Scottish Government, and its agencies, have developed distinctive
national1 economic policy and research and innovation policies, both before and,
particularly since, devolution in 1999. At the same time, Scottish policy still needs to
take account of potential interactions and dependencies with UK and European level
policies. The UK research council funding system still exerts a strong influence over
the Scottish academic research base and UK wide legislation still influences areas of
importance for innovation policy such as intellectual property rights, taxation,
immigration, etc. Similarly, Scotland has a distinct approach to attracting and
managing funds from EU programmes (both competitive funding and Structural Fund
programmes). While Structural Funds may be declining in importance in absolute
1 Hereafter, nationally is used to mean within Scotland, whilst the term regional refers to a Scottish region.

A smart, sustainable nation?
ii
terms, the overall importance of external funding and linkages means that the Scottish
‘partners’ are actively working to draft a Scottish contribution to the UK negotiating
position for a ‘Partnership Agreement’ with the Commission for the 2014-20 period.
Since 2007, the Scottish Government’s ‘purpose’ has been ‘to make Scotland a more
successful country, with opportunities for all to flourish, through increasing
sustainable economic growth’. This objective is structured around six strategic
priorities: Supportive business environment; transition to a low carbon economy (new
in 2011); Learning, skills and well-being; Infrastructure development and place;
Effective government; and Equity. The Scottish Government’s Economic Strategy
(SGES, 2007, refreshed in 2011) is the overall policy framework for achieving the
Government’s objectives. The SGES is translated operationally by both specific policy
documents for innovation and science funding and by the multi-annual (business)
plans of the principal agencies as well as sectoral strategies. A key missing element of
the current science and innovation policy is a longer-term investment framework.
The SGES incorporates a broad specialisation focus on: ‘growth companies, growth
markets and growth sectors’. The latter are defined as sectors offering particular
opportunities for growth, in all or part of that sector, due to existing comparative
advantages or through the potential to capitalise on Scotland’s unique natural assets.
These are sectors where Scotland typically has distinctive capabilities and businesses
with the potential to be internationally successful2. The interviewees and evidence
gathered during the review underline that the sectoral approach is a ‘work in process’
with the industry leadership groups, the agencies and other stakeholders seeking to
further refine the focus of support and tailoring policy measures to provide support to
emerging clusters or optimising the potential of enabling technologies, etc.
In order to illustrate the multi-faceted nature of the on-going policy challenges, three
specific cases, two sectoral and one ‘place-based’, are used to explore the development
of ‘smart specialisation’ in Scottish research and innovation policy:
• The Food and Drink sector is one of the most important ‘traditional’
manufacturing sectors in Scotland. It is a complex sector driven by a mix of
premium (whisky, salmon, etc.) and traditional products (meats, soft fruits, etc.)
and characterised by a range of firms in terms of size and ownership with a
number of subsidiaries of large ‘global’ firms, medium-sized national firms and a
majority of smaller ‘family-run’ firms. Innovation intensity as measured by
standard indicators is low but the sector has adopted a holistic strategy where
innovation is about much more than formal R&D.
• Scotland has placed a strong policy focus on developing renewable energy
technologies and businesses. Within this field, the marine energy is the one in
which Scotland has both a natural ‘competitive advantage’ (with a large share of
the EU27 wave and tidal energy capacity in Scottish waters) and a global
technological lead. The challenge for the sector is to turn this potential into a
market lead through the testing and deployment of advanced technologies in
Scottish waters and the consolidation of the existing ‘start-ups’ into larger Scottish
based global leaders. The sector also has significant implications for the peripheral
and fragile communities of the Highlands & Islands region.
• Thirdly, in terms of responding to the different economic geography of Scotland,
the specific customer processes and types of innovation support delivered to firms
in rural Scotland illustrate the need for a multi-faceted innovation approach.
Highlands & Islands Enterprise has developed a specific approach to innovation
support and to attracting and retaining skilled people into the region, including
research teams linked to traditional and emerging clusters. Similarly, in the South
2 The growth sectors identified in the strategy are: Creative Industries (including digital); energy (including
renewables); Financial and Business Services; Food and Drink (including agriculture and fisheries); Life
Sciences; Sustainable Tourism; Universities (new in 2011).

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iii
of Scotland, Scottish Enterprise has experimented with novel approaches to
supporting business innovation in rural areas.
Applying the five key principles of the RIS3 concept to assess Scottish policy, the
following conclusions are drawn from the peer review:
1. Does the strategy focus policy support and investments on key
national/regional priorities, challenges and needs for knowledge-
based development, including ICT-related measures?
The Scottish Government’s Economic Strategy provides a solid framework for
policy intervention in a number of key growth sectors. The strategy is
implemented and pursued in a coherent and unified way by the work of the
enterprise and research funding agencies that translate the national goals and
objectives into operational interventions. In doing so, the agencies are given
sufficient autonomy to further define the focus on specific sectors and enabling
technologies. Moreover, there is an almost continuous process of consultation and
strategy development at sectoral level through industry leadership groups, co-
chaired by industry and senior government members (to the level of the First
Minister in the case of energy) or officials. Similarly, the medium-term objectives
set out in the SGES are regularly updated at the operational level through the
three-year business/operating plans of the agencies. A number of elements of the
Scottish policy process may be considered good practice (e.g. setting of a number
of inspirational targets such as for export growth or renewable energy production,
the clear performance framework and regularly published reports on progress to
target or the process of definition and renewal of the sectoral strategies).
If there is a less positive side to the story, the two separate research and
innovation policy frameworks (which while they were the subject of considerable
stakeholder consultation lacked a multi-annual funding framework) and are
largely ‘redundant’ since they no longer appear to influence the implementation of
policy. There are plans to refresh Scotland’s approach to innovation. This has been
driven by extensive and Scotland-wide efforts to revitalise Scotland’s regional
innovation system.
2. Does it build on national/regional strengths, competitive advantages
and potential for excellence?
The existing strategic framework is strongly focused on a number of growth
sectors and also takes account of the importance of the influence of a key enabling
technologies. The choice of key sectors is broadly justified and is being further
refined through an analysis of the cluster portfolio and emerging clusters.
Moreover, at the operational level there is sufficient room for manoeuvre for the
agencies to adapt policy implementation to local or sub-sector needs. The major
driving sector in the Scottish economy (and to a large extent in the innovation
system) is clearly energy: currently this means oil & gas, followed by offshore
wind; where the technology is mature but where Scotland does not have a
significant technological lead. However, the real opportunity for Scotland is to
emerge as both a technological and market leader in marine energy (wave and
tidal). This will not be easy despite significant natural resource and technological
know-how advantages. Indeed, there is risk that large multinational firms will
acquire smaller Scottish marine energy firms before they can coalesce into one or
more ‘national champions’.
3. Does it support technological as well as practice-based innovation and
aim to stimulate private sector investment?
The understanding of the need to boost ‘innovation activity’ and not just R&D or
technological development is manifest in policy circles. Terms such as market-
driven, customer-focused, etc. are used regularly not just as catch-words but as a
reflection of both a strategic and operational focus on making sure policy is
helping Scottish businesses to become or stay aware of the market opportunities

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iv
(notably in export markets). Moreover, there is a shift towards supporting
‘innovation through testing’ to allow Scottish firms to gain a competitive
advantage as ‘early movers’, of which the recent targeted measures (WATERS,
POWER) in the field of renewable energy are good examples.
This said, Scotland faces a significant and real challenge to increase the number of
firms that are innovation active: 5000 more innovation active SMEs are needed,
according to Scottish Enterprise. To date, there has been an over-emphasis on
academic spin-offs and commercialisation with limited returns in terms of high-
growth firms from this investment. However, there is an understanding that high-
growth firms are not only found in a few high-tech fields and that scientific
specialisation (e.g. in medicine and other life sciences) does not necessarily
translate directly into business growth.
Nevertheless, the balance of public funding is still heavily on commercialisation
support and knowledge transfer. Indeed, the evidence suggests that the impact of
spin-off companies (the IP to IPO route) whilst not negligible is not making a
significant impact on the Scottish economy. Hence, efforts to raise the business
expenditure levels on R&D (BERD) need to be seen more broadly than increasing
the number of ‘high-tech firms’ in the economy. The aim should be rather to
increase the capability to access and assimilate technologies by existing ‘growth’
companies. Such a strategy is complementary to the commercialisation agenda not
competing since, logically, even if knowledge transfer activities are as effective as
possible, Scottish businesses are not going to source all required technologies from
Scottish universities. However, given the relatively low internal financial and
human means available to many smaller firms, the various R&D and innovation
grant schemes (awarding 100+ grants annually) are not sufficient if Scotland is to
achieve a qualitative as well as quantified increase in business innovation activity.
4. Are stakeholders fully involved and is innovation and experimentation
encouraged?
The Scottish policy-making and implementation process involves stakeholders
(industry, education, social economy, etc.) in both the design phase and to a
degree in the implementation of policies (e.g. the key role of the industry
leadership groups). The Scottish Government sets a series of targets and priorities
in the economic strategy, which is complemented by process of adapting these
targets to sectoral needs and of drafting, and regularly refreshing, sectoral
strategies. It is recognised that the implementation of this policy needs to be
flexible in order to respond rapidly to changing market conditions or to grab
opportunities such as major inward investment, etc.
There is a growing debate about ‘Scotland’s economic geography’, which is partly
about tailoring policy to urban/rural realities but also about selecting the right
spatial level to intervene.. Innovation support is being tailored to firms in specific
sectors (e.g. in food and drink), specific areas (e.g. the enterprise areas policy) or
rural and sparsely populated regions. In the latter, innovation policy is more
‘hands-on’ in order to support small but ambitious firms, irrespective of their
sector, that can make the difference to the development of ‘fragile’ communities.
5. Is the policy evidence-based and include sound monitoring and
evaluation systems?
There has been a considerable amount of analysis and reflection over the last
decade in Scotland on the scientific potential, innovation system and specific
sectoral or thematic technological strategies. The Scottish Government and its
agencies apply good practice principles by making available evaluation and study
reports online (see http://www.evaluationsonline.org.uk). The evaluations are
generally of good quality, however, there tends to be a focus on a ‘market failure’
rationale and relatively simplistic ‘multiplier’ calculations (GVA, etc.).

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Recommendations
1. Innovation policy in Scotland is an integrated element of a broader and coherent
economic development strategy. The strategy is already highly focused on a
number of key sectors, is further enhanced and developed at operational level by
the main agencies and has broad stakeholder backing and indeed involvement.
The current policy framework could, however, benefit from an overhaul of the
innovation and research policy documents that are now outdated. The aim here
should be to bring together and critically examine progress made on the
commitments of the previous strategies and applying the ‘Team Scotland’
philosophy propose a multi-annual cross-agency action plan that could serve as a
medium-term framework for prioritising available budgets. This would be the
basis for the future RIS3 strategy that should make a long-term strategic
commitment to enhanced funding for innovation, akin to what Finland did in the
1990s, linked to a more sophisticated and specific performance framework.
2. The critical weakness of the Scottish innovation system remains the low number of
enterprises involved in formal R&D and innovation activity. Inspirational target
setting has proved effective, for instance in mobilising each sector to work towards
raising export intensity in the economy. The same type of process is urgently
required to raise the ‘game’ in terms of innovation and broaden innovation activity
away from the usual suspects. Target setting alone will not be sufficient and there
is a need to rebalance funding away from the commercialisation of academic
research, which has failed to significantly impact on the Scottish economy. A
greater emphasis could be given to thematic or sectoral collaborative innovation
projects of smaller firms in partnership with ‘companies of scale’ and the HEIs. A
second strand of support should be to expand the number of science and
engineering graduates working in business in order to raise internal capabilities of
smaller firms and to foster a better balance of human resources in the innovation
system, currently dominated by the academic sector. The dedicated sectoral
innovation services, e.g. in the food and drink sector, should be considered as an
option for other sectors where overall innovation activity is well below par.
3. In governance terms, the Scottish experience is positive and provides a good
practice model of cross-agency co-operation and industry and stakeholder
ownership of strategies. The proposal to create a single Knowledge Exchange
office would appear relevant in order to reduce the number of specific ad hoc
projects funded in each of the Scottish universities. At the same time, the
advantage of a national knowledge exchange, innovation and commercialisation
service needs to be balanced with focused interventions in specific areas or
sectors. Equally, industry groups should be regularly refreshed in order to avoid
‘lock-in’ to specific technologies or sub-sectoral interests. The need for flexibility
in the policy response and a continuous review of sectoral strategies should be
enshrined in the strategy process.
4. In terms of further expanding the evidence base for a RIS3, it would be helpful to
deepen the analysis of innovation processes in enterprises, notably within
emerging clusters. This would require greater access for analysts to micro-data in
business statistics, which the Scottish Ministers have the legal powers to grant.
Similarly, there is a need to gather and share disaggregated company data across
agencies. Finally, the Scottish Government should consider sponsoring or co-
funding (e.g. with a UK wide Research Council) a multi-annual programme of
research into innovation in the Scottish economy. This programme could be used
to fund both doctoral and post-graduate research on specific sectoral innovation
systems as well as commissioning studies in support of the various sectoral
industry leadership groups. Finally, an overall system evaluation, similar to those
undertaken in Finland or Austria, should be undertaken in order to complement
the specific programme level evaluations and assist in identifying the ‘missing
links’ hindering an across the board improvement in innovation performance.

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Introduction
Over the last decade, innovation has become a core element of most national and
regional policies and is viewed as means to foster sustained economic development.
The European Union (EU) has set ambitious goals for growth and jobs, first in the
‘Lisbon Strategy’ and then in the Europe 2020 strategy, that are predicated on more
focused and ‘smart’ investment into research and innovation. In this context, the
European Commission has called for the preparation of research and innovation
strategies for smart specialisation (RIS3), defined as “integrated, place-based
economic transformation agendas that do five important things”:
• They focus policy and investments on key national/regional priorities, challenges
and needs for knowledge-based development, including ICT-related measures;
• They build on national and regional strengths, competitive advantages and
potential for excellence;
• They support technological as well as practice-based innovation and aim to
stimulate private sector investment;
• They fully involve stakeholders and encourage innovation and experimentation;
• They are evidence-based and include sound monitoring and evaluation systems.
Scotland is one of the four countries that form the United Kingdom (UK). Since 1999
and the reconvening of the Scottish Parliament, Scotland has a high degree of political
autonomy, as yet not matched by a similar degree of fiscal autonomy. Successive
Scottish governments have developed distinctive policies in response to the specific
economic, social and environmental challenges facing the country.
Scotland has one of the oldest traditions in public education (Europe’s first obligatory
public education system from 1496 and the establishment of a first university as early
as 1413) and in scientific excellence (the Scottish Enlightenment in the 18th century
placing Scottish scientists at the forefront of philosophical, economic, medical and
engineering sciences amongst other). It was also at the forefront of the industrial
revolution with economic development driven by international trade, finance and the
emergence of heavy industry from the 18th century onwards. In the second half of the
20th century, Scotland suffered significant deindustrialisation as mining, steel-making,
shipbuilding and other heavy industries declined.
However, the national economy has been reconfigured since the 1980s driven in part
by the oil and gas industry but also by the emergence or development of specialist
engineering firms, the life science, food and drink, tourism and creative industries,
sectors. Moreover, despite the recent global financial crisis and the adverse effects for
some of the main Scottish financial institutions, the financial sector remains a major
employer and internationally competitive in specific niche.
This historical perspective is important since it underlines that Scotland has already
gone through several phases of economic development and structural adjustment in
the last century alone. Hence, a challenge facing Scottish policy-makers and
stakeholders is to continue to foster such adjustments in order to keep pace with a
shifting technological frontier and globalisation trends.
In this context, this paper reviews the Scottish strategic policy framework for research
and innovation policy as a pilot contribution to the application of the new RIS3
approach to designing and implementing EU Cohesion Policy support through the
Structural Funds in the upcoming 2014-20 programming period. The report applies
the set of questions suggested by the European Commission services (see Appendix A)
structuring them according to the five criteria for a RIS3 mentioned above.

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The report is structured as follows:
• A first section summarises the current economic development, science and
innovation policy framework in Scotland, inter-linkages with UK and European
Union policies as well as the governance system and stakeholder involvement.
• the second section reviews the main strengths, weaknesses, opportunities and
threats of the Scottish innovation system as a baseline for examining the
coherence and relevance of the policy measures.
• the policy mix is considered in more depth in section three which reviews the
measures supporting sectoral innovation, R&D and innovation investments,
entrepreneurship and cross-clustering. Three case studies are used to further
deepen the analysis on the potential for smart specialisation.
• The final section presents the overall conclusions and recommendations to assist
the Scottish authorities in the further development of their research and
innovation policies in the context of the smart specialisation agenda.
Acknowledgements and disclaimer
The author has benefited from in-depth discussions with and comments on a first
draft from: Alison Hunter of Scotland Europa, Alison Munro, Senior Manager,
Strategy Development, Strategy and Economics, Scottish Enterprise, Rob Clark, Head
of Policy, Regional Development Directorate Highlands & Islands Enterprise.
In addition, interviews were carried out (June-July 2012) with senior officials from:
• Scottish Enterprise (SE): David Smith, Director of Innovation & Enterprise
Services; Richie Malloch, Food & Drink Team; and Andy McDonald, Director of
Renewables & Clean Technologies
• Highlands and Islands Enterprise: Calum Davidson, Director - Energy and Low
Carbon; Morven Cameron, Head of Academic Development; Donna Chisholm,
Head of Business Innovation and Growth Sectors.
Thanks are due to all interviewees who discussed openly and candidly the challenges
and opportunities concerning their area or sector. The report also draws on interviews
carried out in January 2011, by the author, for the Regional Innovation Monitor
project of DG Enterprise. As per normal social science standards, comments are not
attributed to individual respondents.
The author was given access to a range of internal working papers and notes of the
enterprise agencies, which has greatly contributed to the understanding of emerging
policy orientations.
The usual disclaimer applies and any misinterpretations or factual errors are entirely
the responsibility of the author.

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1. Scottish economic and innovation policy priorities: an overview
Since 2007, the Scottish research and innovation policy objectives have been relatively
stable and are set out in the 2007 (updated in 2011) Scottish Government’s3
programme for government and Economic Strategy (SGES). Progress towards the
Scottish Government’s purpose and strategic objectives is monitored through the
National Performance Framework (NPF), a 10-year plan that is accompanied by a set
of national outcomes, indicators and targets4.
In addition to the SGES, two separate policy documents on science policy and
innovation policy have been drafted since 2007 and can be considered as important
framework policy documents. In addition, a number of sector specific policy
documents have been issued since 2007 as the Scottish Government, and its agencies,
has sought to (re)focus and refine science, higher education and economic
development (innovation) policies.
Moreover, the various quasi-governmental agencies (Scottish Enterprise, Highlands &
Islands Enterprise, and Scottish Funding Council) that operate in support of scientific
research, innovation and business development also issue their own (multi)-annual
‘business plans’ or policy notes. These documents explain how the agencies aim to
contribute to the Government’s programme and to the national outcomes.
1.1 The Scottish policy context for smart specialisation
1.1.1 The Government Economic Strategy
The SG’s purpose and the strategic objectives (see Figure 1) have remained broadly the
same since 2007. In 2011, the major change was to add a priority on the transition to a
low carbon economy.
Figure 1 Scottish Government Economic Strategy (2011)
Purpose & strategic priorities
Specific initiatives (selected)
The purpose of the Scottish Government is
to make Scotland a more successful
country, with opportunities for all to
flourish, through increasing sustainable
economic growth
• Supportive business environment
• Transition to a low carbon economy
(new 2011)
• Learning, skills and well-being
• Infrastructure development and place
• Effective government
• Equity
− Strengthening levels of innovation and commercialisation
including improving the links between our universities
and private sector companies
− Using the Scottish Investment Bank to support early stage
innovative technology based businesses and growth and
exporting companies
− £70 million National Renewables Infrastructure Fund to
leverage private sector investment
− A commitment to investment in higher education so that
Scotland remains an international centre of excellence for
learning and creative thinking.
− Setting out plans for next generation digital fund to
accelerate the delivery of superfast broadband across
Scotland
− Increasing the public sector’s direct contribution to the
economy through smart use of public procurement in
order to promote jobs and growth encourage innovation.
Source: Scottish Government (2011)
The SGES places a strong emphasis on investing in a ‘supportive business
environment’, which can be justified by the relatively weaker performance, on average,
3 From 2007-11, the Scottish National Party (SNP) Government functioned with a minority of parliamentary
seat, but was re-elected in 2011, for five years, with an overall majority in the Scottish Parliament.
4 http://www.scotland.gov.uk/About/Performance/scotPerforms

A smart, sustainable nation?
4
of the business sector in Scotland (as measured by indicators such as GDP growth and
productivity). The SGES underlines that these efforts are focused on: growth
companies, growth markets and growth sectors. A further underlying thread of the
strategy is an emphasis on export companies. This is consistent with the evidence that
the export intensity of the Scottish economy is lower than the UK average.
The SGES does not precisely define what is meant by growth companies, however,
growth sectors are defined as: sectors offering particular opportunities for growth – in
all or part of that sector – due to existing comparative advantages or through the
potential to capitalise on Scotland’s unique natural assets. These are sectors where
Scotland typically has distinctive capabilities and businesses with the potential to be
internationally successful. The growth sectors identified in the strategy are:
• Creative Industries (including digital media)
• Energy (including renewables)
• Financial and Business Services
• Food and Drink (including agriculture and fisheries)
• Life Sciences
• Sustainable Tourism
• Universities
The Scottish approach has priorities supporting the technologies that contribute to the
development of the growth sectors. The sectors have remained similar since 2007
aside from a new emphasis on sustainable tourism and the addition of the Universities
sector in 2011. The latter is an ‘odd-man-out’, since it is not a business sector, even if
the strategic and economic importance of higher education as a ‘tradable service’ is
evident. The SGES foresees the renewal, development and roll-out of ‘industry
strategies’ for each sector.
Indeed, the strategy is based on a well-established key sectors approach that is derived
from an initial identification of clusters dating back to the early 1990s (subsequent to
an initial study by Porter’s Monitor Group) and initial funding for clusters in fields
such as life science, electronics, tourism, etc. This policy has evolved over the last 15-
20 years with a shift to an industry level strategy. The current focus of attention is on
identifying building on competitive strengths in global value chains as well as
identifying the cross-sectoral capabilities that will allow Scotland to take advantage of
‘emerging’ market opportunities (see section 3.3.1).
In terms of innovation, the 2011 strategy confirms the long-standing emphasis on
research commercialisation (‘Innovation and Commercialisation’, page 47). At the
same time, the strategy notes that innovation occurs often through incremental
change; and that “innovation in its widest sense must be recognised and encouraged
across the entire business base”.

A smart, sustainable nation?
5
Figure 2: Measures in the 2011 SGES to support innovation and commercialisation
• Launch a Scotland-wide Interface service to provide a central point of access for business to the
knowledge and expertise within Scottish universities and research institutes;
• Streamline the commercialisation and innovation support delivered by Scottish Enterprise and Highlands
and Islands Enterprise;
• Introduce a new approach to help improve Scotland’s leadership and management skills to promote
innovation and drive company growth;
• Develop a culture of innovation across the Scottish economy, including the public sector. For example, we
will examine different approaches to further incentivise research within the NHS, building on the work of
NHS Research that complements our research intensive universities so that Scotland becomes an even
more attractive location for investment by international pharmaceutical companies;
• Build on the success of the research pools – which are focussed on the sharing of research resources and
infrastructure across our universities to improve research capacity and capability – and supporting them
to collaborate more effectively with Scottish businesses, particularly SMEs; and in competing for
European funding and influencing research calls to maximise the return on Scotland’s capabilities; and
• Continue to engage with the European Commission to ensure the design of Europe’s future research and
innovation funding programme, Horizon 2020, complements Scotland’s research and innovation
strengths.
Additional opportunities for driving business development through innovation and
technology elsewhere in the strategy include through the focus on ‘economic
opportunities from low carbon (page 53 of the SGES 2011 and see also the 2010 Low
Carbon Economic Strategy); and through innovative public procurement.
The low carbon strategy is strongly entrenched in the Scottish Government’s
internationally recognised ambitious targets for “transformational change” including
the equivalent to 100% of Scotland’s demand for electricity to be met by renewables by
2020. Moreover, the transition to a low-carbon economy is seen as a multi-
department, multi-agency effort, multi-instrument (e.g. via legislation, funding, public
procurement, encouraging demand for low carbon goods and services, etc.). This is
exemplified by initiatives such as the Environmental Clean Technologies (ECT)
Strategic Partnership that will deliver coordinated support for businesses and
academia within the emerging ECT sector.
Public procurement as a means to stimulate demand for new innovative products and
services is clearly identified in the SGES in several places (e.g. in support of innovation
more generally and the low carbon sector). The strategy specifically commits to ‘using
public procurement to encourage innovation in both the public and private sectors –
allowing bidders to come up with new ideas wherever possible’ (pg.87).
In conclusion, the SGES is a high quality, comprehensive framework for economic
development. The strategy sets clear priorities linked to qualitative outcomes and
quantified targets. Moreover, the 2011 re-election of the Government means the
strategy will be pursued over the medium term making targets more likely to be
achieved. The main policy shift has been towards a full integration of the low carbon
strategy and a strong focus on renewable energy opportunities, based on a mix of
natural resources, technological capacity and business know-how. This shift appears
justified given the challenges and potential opportunities in the Scottish economy.
While the overall strategy is coherent and well structured, the ‘devil may
be in the detail’; in other words, the strategy is only as robust as the
capacity of the Scottish business and innovation system actors to deliver
the expected outcomes. In terms of the indicator used to track research
and innovation outcomes, there is unlikely to be a significant change in
performance given the structure of the Scottish economy. Further
thought should be given to a specific performance framework for
innovation performance in Scotland that provides a more comprehensive
assessment of change in both formal R&D and non-technological
innovation performance across the economy.

A smart, sustainable nation?
6
1.1.2 Science and innovation frameworks
Innovation for Scotland (2009) and A Science Strategy for Scotland (2008) further
develop the priorities for research and innovation policy set out in the SGES.
The Science for Scotland ‘strategic framework’, drawing on background research and a
consultation, identifies a number of key challenges. Importantly, the strategy clearly
states that there is a need for a partnership-based approach to meet them.
Box 1: key challenges for science in Scotland (2008)
• Maintaining our global pre-eminence in science teaching and research and continuing to attract science-
related inward investment;
• Encouraging more young people to study science subjects and build careers in science, technology and
engineering in Scotland; developing a science workforce which is aligned and responsive to the future
needs of the science base and the economy as a whole;
• Increasing business research and product development capacity, and business demand for and utilisation
of the science base in ways which support economic growth, including deriving more from intellectual
property and growing companies of scale;
• Ensuring that the science base responds effectively to business demand, producing research and
knowledge that is of economic value and supports sustainable economic growth;
• Taking advantage of the opportunities provided by the challenges of climate change and sustainable
energy to build on our excellent research base to develop new industries, technologies and products;
• Improving the international marketing of Scotland’s science and seeking broader and deeper
international collaborations with existing and new partners.
Source: Science for Scotland 2008
Science for Scotland sets out proposed actions in five priority areas as summarised in
Figure 3. While the strategic framework is comprehensive many of the actions are
worded in a relatively vague way that makes tracking achievement difficult.
Figure 3: Science for Scotland - priority actions
Priorities
Key actions
Developing individuals
• 3-year Do something creative. Do Science marketing campaign
• The path is SET - new science careers guidance programme
• Introduction of a new science baccalaureate
• Improving match between science course and provision involving
concerted action with SFC, SEMTA, etc.
• Targeted and sustained growth in postgraduate number (e.g. increasing
number of RSE research fellowships)
Scientific Research:
• Continue to support science infrastructure which underpins existing and
emerging world-class research in order to sustain and enhance
international standing and competitiveness
• Provide an integrated agenda linking strategic research through to science
application in government-funded rural, environmental and marine
scientific work
• Promote growth in medical and related research
• Build on the success of research pooling to promote inter-disciplinarily by
promoting collaborative and inter-disciplinary working across pools and
also with business to improve knowledge exchange
• Enhance links with the UK Government, Research Councils and with the
EU (Horizon 2020, ERA)
Economic and Business
Demand:
• Increasing investment in knowledge exchange over time in order to
support industry-led strategic projects – helping key business sectors to
articulate their research needs and better utilise science
• Optimise the economic contribution of intellectual property from publicly
funded research – incl. a proposal from Universities Scotland to create a
single forum for all available IP from Scottish universities (2009)
• Encourage research collaborations between business and academia that
focus on growing businesses – assist businesses to share knowledge,
costs, risks and benefits of R&D
• Use industry expertise to identify emerging market opportunities where
Scotland has both the research capacity and commercial potential to
exploit scientific advances

A smart, sustainable nation?
7
Priorities
Key actions
• Promote investment in Scotland’s R&D base
• Influence creation of most appropriate fiscal and taxation regime to
stimulate innovation
International:
• Build on international profile and wider benefits of Saltire Prize
• Develop international lifelong learning strategy further
• Strengthen Scotland’s international reputation for science (using Global
Scots, travelling scientists, international partnerships, etc.)
• Promote increased scientific interchange with the EU and make full use of
EU opportunities for collaborative working.
Connections in Scotland
and in Government:
• Increase activity including themed conferences and smaller events to
improve connectivity within Scotland
• Initiate a cross-cutting review of Scottish Government science and
research expenditure.
• Improve collaboration and identification of strategic opportunities for key
science industry sectors to lead global markets.
Source: Science for Scotland 2008
Interestingly, Science for Scotland acknowledges the need to improve the absorptive
capacity of firms. It noted that “The Innovation Framework and the new delivery focus
of Scottish Enterprise and Highlands and Islands Enterprise will present a new
approach to boosting innovation performance in Scotland – moving beyond science
and technology to impact on areas such as services, business model innovation and
procurement. This will address the key issue of how, over time, to work with
businesses in Scotland to help them increase their absorptive capacity (a firm’s ability
to value, assimilate and apply knowledge) for science based innovation.”
As well as stating what Government will do, the document identifies actions required
by a range of agencies and stakeholders. However, it does not include an explicit
multi-annual budgetary framework for the implementation of science policy.
Nevertheless, one of the actions was to initiate a cross-cutting review of Scottish
Government science and research expenditure to inform the “next spending round”. It
seems this review did not take place, however, a mapping of public support for
research and innovation is being conducted in 2012 (see section 3)
The introduction to Innovation for Scotland argues that it shares, with the Skills for
Scotland and Science for Scotland strategies, a commitment to a demand-led,
outcome-focussed approach. According to the Innovation for Scotland strategy, the
Government’s approach to innovation is based upon four underlying principles:
• public agencies to focus on working with business to stimulate greater demand for
innovative ways of working and aligning support to meet that demand;
• support for innovation beyond the commercialisation of science and technology to
include new service innovation, new sources of innovative ideas from customers
and suppliers, the transfer of innovative ideas from one industry to another – all
delivering better value and quality of service to customers;
• a systems-based approach so that the public sector, private sector, academia and
the third sector, are aligned with each other and work together in partnership to
achieve greater wealth creation and sustainable economic growth;
• a focus on innovation outcomes and how they contribute to increased, sustainable
economic growth.
Contrary to the claim that it ‘focuses on outcomes’, Innovation for Scotland is a
relatively confused document to read, mixing commentary on specific issues with a
description of on-going initiatives and proposals for streamlining the management of

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8
public support across the various agencies5. It sets neither targets nor objectives to be
achieved, nor does it fix specific timescales in which actions are to be taken. At most, it
affirms a specific rationale for intervention that can be summed up as: the need to
extend innovation activity beyond science and stimulate a demand pull from
business, open- and user-led innovation so as to increase levels of innovation
throughout the system. Indeed, the final chapter underlines the need to look beyond
aggregate measures of R&D spending to measure innovation activity.
Like the Science for Scotland strategy, the Innovation for Scotland document does not
include a multi-annual budgetary framework for the implementation of the policy.
The absence of a clear publicly communicated funding framework for science and
innovation can be considered a weakness of the Scottish policy.
The introduction to Innovation for Scotland underlines that the two enterprise
agencies (Scottish Enterprise and Highlands & Islands Enterprise) had published a
specific document that “details of how practical help will make a real difference’.
However, Growing Innovation (SE/HIE, 2009) does not add specifically to the
strategic discussion but rather sets out how the enterprise agencies have been helping
Scottish businesses to innovate. Again the document, clearly underlines that
innovation is not only science based and that there is a need for “an open approach”.
In order to understand the specific role and priorities of the enterprise agencies, it is
more relevant to consider their multi-annual business plans (see details in section 3).
The two specific research and innovation strategy documents are by now
‘superseded’ by the on-going policy developments both at overall level, the
updated SGES, and sectoral level. There is need for a stock-taking on
progress towards the objectives and targets set in the two papers and this
could involve a formal external evaluation and stakeholder consultation
in preparation for the upcoming 2014-20 EU funding period in order to
align EU funding behind Scottish policy priorities. On a cross-sectoral
level, more work could be done to deepen the understanding of the role of
key enabling technologies in driving business competitiveness in the
Scottish economy.
1.1.3 Scotland’s emerging ‘framework’ for smart specialisation
Given the existing overall policy framework described above, Scotland Europa (on
behalf of the Scottish authorities) produced, in January 2012, a first outline response
to the Commission’s smart specialisation agenda6. The paper summarise Scotland’s
innovation policy approach (see also section 3) and outlines the core elements of
Scotland’s innovation system: its infrastructure, key players, the rationale and
direction. It argues that Scotland’s innovation governance system is robust and that
policy design and implementation is based on an established process of Scotland-wide
engagement of key ‘partners’.
Scotland Europa argues “it is not our intention to radically change our existing RIS.
Rather, we seek to extend the reach and potential of our existing economic activity,
building on a base of core, regional assets”. After reviewing briefly the economic and
innovation context in Scotland (see also section 2), the paper confirms that the
foundation of a future S3 strategy will be the SGES through adopting a rationale of
‘what works locally’ and by building on ‘Scotland’s core assets’. The assets mentioned
are “its geography, its global dominance in serving international markets through
5 e.g. consolidating the management of all knowledge transfer measures under the Scottish Funding Council
or transferring the responsibility for the Intellectual Assets Centre and Innovators Counselling and
Advisory Service Scotland to the enterprise agencies.
6 Scotland’s Approach to Smart Specialisation: Describing the Journey and ‘Distance Travelled’, January
2012. Produced by Scotland Europa in partnership with Scottish Enterprise and Highlands and Islands
Enterprise, and in collaboration with the Scottish Government

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9
specific products and services (ranging from whisky to niche tourism) and its
reputation for outstanding quality in areas such as science and technology”. There is a
clear intention to build on the SGES’ growth sectors but in doing so to focus on specific
high-potential firms or scientific teams (one interviewee described this as a process of
‘drilling-down into niche’) and to identify intersections between the key sectors (e.g.
by considering where the application of key enabling technologies7 leads to new
economic opportunities).
The importance of ‘specialist centres’ in the Scottish innovation system is underlined
and three are specifically mentioned: Edinburgh Bioquarter, the International
Technology and Renewable Energy Zone and the Power Networks Demonstration
Centre. However, the paper does not sufficiently explain why these three centres are
highlighted and the extent to which Scotland’s research or business communities have
a competitive advantage in these fields.
Concerning clusters, it is argued that ‘there is a clear, historical ‘evolution’ in how
Scotland has aligned its sector
‐
driven approach to economic development with its
cluster development infrastructure. The connectivity between these components is a
fundamental driver of identifying new and emerging specialisms to drive future
economic growth’. Interviewees underlined that the renewed interest in ‘cluster
analysis’ was essentially aimed at trying to better understand emerging ‘niche’ in sub-
sectors and the potential for cross-sector activity (e.g. linking current capabilities in
engineering & technologies, life sciences (health) and financial and business services
to address emerging Big Data opportunities). A strategic review of the latest
international cluster policy and practice was undertaken in the first half of 2012 (see
more details in section 3.3). This work is expected to deliver three outputs of relevance
for smart specialisation: reinforce current sector strengths; identify new and/or
emerging sector strengths in Scotland; and establish Scotland’s unique
complementary regional strengths, which occur where two or more sector strengths
combine or overlap.
The paper also points to a number of new ideas under development that may be used
to ‘revitalise’ Scotland’s innovation policy including innovation challenges (prizes), a
market-focused innovation service, even greater integration of academic and
industrial research, revitalising an evaluation approach and, as mentioned, refreshing
the cluster portfolio. The paper concludes with a number of ‘good practice’ examples of
interest to other EU regions and underlines that the Scottish authorities are keen to
learn from relevant cases from other countries and regions.
Although the paper seeks to sum up existing evidence and strategic plans, it makes a
number of 'claims' or 'assumptions' that would require further evidence or referencing
to be substantiated. For example, it refers to a dynamic innovation system even
although it acknowledges a number of weaknesses in performance. There is a need to
outline at least the basis (indicators, etc.) on which the Scottish innovation system is
judged to be dynamic. Similarly, the paper underlines the use of a partnership-based
approach but there is no discussion of whether the forms and intensity of partnerships
vary across sectors, etc. or whether there is room within well-established ‘social
networks’ for new and emerging firms, technology providers, innovators, etc.
The paper considers some elements of the current policy framework and underlines
how policy has evolved over time, e.g. in terms of research commercialisation, in the
light of evaluation and review evidence. However, the extent to which other policy
measures are contributing (or not) to reducing relative performance gaps (notably
weaknesses in business R&D intensity and turnover from innovation or productivity)
is not subject to a critical review. In short, the paper does not clearly identify why,
7 Towards a Brighter Future, a 2009 report by an expert group (the Technology Advisory Group, TAG) for
Scottish Enterprise, set out a nine point action plan for leveraging the potential for key enabling
technologies. See: http://www.scottish-enterprise.com/publications/enabling-technologies-strategy.pdf

A smart, sustainable nation?
10
from a comparative perspective, Scottish innovation performance is weak and does not
examine critically enough whether the current policy can resolve the underlying
bottlenecks in the innovation system.
The initial smart specialisation paper from ‘Team Scotland’ is a
reasonable baseline but there remain a series of points and topics that
require further analysis and consultation with stakeholders before
drafting in earnest a full Smart Specialisation Strategy.
1.2 Scottish policy in the context of multi-level governance
The Commission is concerned that a Smart Specialisation strategy should seek to
produce synergies between different policies and funding sources and to foster
appropriate co-ordination between authorities in a ‘multi-level governance’
context. In the case of Scotland, this means essentially with respect to specific UK
wide initiatives or reserved powers (e.g. taxation); as well as how to optimise the use of
EU funds whether allocated directly to Scotland (the Structural Funds) or secured
through competitive bids (e.g. the EU’s Research Framework and Competitiveness and
Innovation programmes in the 2007-13 period).
1.2.1 Inter-linkages and synergies with UK wide policies
Interviews with Scottish policy makers suggest that there is a relatively good and
continuous level of co-operation with the UK level institutions that provide additional
and complementary support for research and innovation actors in Scotland.
While innovation policy is largely, but not exclusively designed, funded and delivered
in Scotland, research policy is a field where Scottish institutions continue to receive a
large share of funding from UK wide institutions. The UK research councils provide
approximately 39% of funding for research carried out at Scottish universities. Aside
from the UK research councils, the main additional UK level sources of funding and
support come from the Technology Strategy Board and the R&D tax credits system8
managed by HMRC. NESTA is also active in supporting pilot initiatives in several
areas of innovation policy in Scotland9, however, these tend to be pilot projects and
are not a significant source of funding.
Since 2010, the Scottish agencies have sought to build a stronger and more structured
co-operation with the UK wide Technology Strategy Board (TSB)10. Interviewees
underlined that this was done to help influence TSB priorities and align them with
Scottish research and innovation actions in support of the growth sectors. An example
of recent TSB joint co-operation on innovation funding with Scottish Enterprise11 is
the support for collaborative projects in a broad range of growth-creating technology
areas, from biosciences to advanced materials and from nanotechnology to electronics
and ICT. Grant funding totalling over £18 million, from the TSB, Scottish Enterprise
and the Biotechnology and Biological Sciences Research Council (BBSRC) will be
invested in over 40 major business-led collaborative R&D projects for the creation of
new products and processes to be used across a variety of different application areas.
However, data from the TSB, covering the period to mid-2012, suggests that Scottish
organisations are struggling to compete for funds from the various programmes
launched to date. Scottish participants have received on average only 4% of total
funding and the average 'value' of grants per Scottish participants is £102,598
8 http://www.hmrc.gov.uk/ct/forms-rates/claims/randd.htm
9 http://www.nesta.org.uk/areas_of_work/scotland
10 http://www.innovateuk.org/
11 The Technology Strategy Board will invest £15m in 41 of the collaborative R&D projects while Scottish
Enterprise provided support totalling £2.68m to 12 projects and BBSRC has offered grants to two projects,
totalling £434,000. In addition, the Technology Strategy Board will invest £2m in 82 feasibility studies.

A smart, sustainable nation?
11
compared to an average for all UK programme participants of £165,277. The Scottish
participants 'value' is only above 8% (a rough population share benchmark) for seven
programmes: Creative Industries (feasibility studies) (8.0%); Creative Industries
(8.2%), Materials for Energy (8.5%); Network Security - Information, Infrastructure,
Protection (10.2%); Oil and Gas - Maximising Recovery of UK's Oil and Gas Resources
(43.5%); Photonics (Feasibility) (22.6%); and Technologies for Health (10.6%).
Hence, Scotland may not be getting a greater return from co-operation with the TSB
programmes than it would from running its own dedicated technology programmes.
More specifically, interviewees, notably from rural Scotland, while recognising the
potential of the UK Knowledge Transfer Partnerships to provide access for firms to
specialised know-how, criticised the imbalance in risk taking between business and
academic partners. One interviewee noted that “KTPs are a fantastic programme but
often prohibitive to SMEs since it is a resource burden and return is uncertain” while
another noted that a ‘business can end up investing £60k and get nothing out of the
project, while university partners have their costs fully covered’.
According to figures from HMRC, in 2008-9, Scottish based companies received a
total of £25m or 2.5% of the total cost to the UK Treasury of support claimed by UK
companies through the R&D tax credit scheme. London (30%) and the South-East of
England (34%) account for the lion’s share of the R&D tax credit funding, although, as
HMRC notes, this may be due in part to a HQ effect. Given the relatively low share of
tax credits obtained by Scottish companies, even taking into account the weaker rates
of business R&D expenditure, an information campaign was undertaken in 2011 to try
and increase take-up.
In terms of the third corner of the knowledge triangle, education policy is a devolved
power and hence, there is no UK wide policy framework to align with. A key
divergence between Scottish and rest of UK higher education policies is that that the
principle of free higher education has been retained in Scotland. This has led to some
discussion on the relative impact on university finances, a topic which this report will
not consider further. Although education policy is devolved, other powers ‘reserved’ by
the UK Parliament, such as immigration policies, have negatively impacted Scottish
policy objectives to attract and retain skilled students and graduates12.
Co-operation between the Scottish Government, its agencies and
counterparts at the UK level is good with active efforts to ensure that
Scottish companies and universities access and participate in the
remaining UK wide initiatives. However, while the university sector is
well positioned in challenging for UK research council funding, Scotland
is not ‘punching above its weight’ in terms of participation in the
Technology Strategy Board programmes and R&D tax credits. There is a
need to review whether Scottish participation in these schemes can
provide a sufficient return.
1.2.2 The contribution of European programmes to Scottish policy
Interviewees underlined that there is on-going work being done by an inter-agency
committee on the steps required to align and leverage EU funds (both Structural
Funds and future Horizon 2020 funding) to support the Scottish economic and
innovation policy agendas. The Scotland Europa paper on Smart Specialisation
specifically references the Scottish National Reform Programme (NRP) and notes that
the main aim is to create a dynamic infrastructure for research and innovation to
enable Scotland to compete in those industries set to drive the global economy; such
as low‐carbon and digital. Chapter 3 of the Scottish NRP addresses specifically
12 Scotland has already pursued separate policies, albeit this is tinkering at the edge as long as immigration
policy remains under Whitehall control. There is a separate Scottish list of shortage occupations for the
points-based system, for example, and students from abroad are encouraged to stay in Scotland to work.

A smart, sustainable nation?
12
research and innovation policy. The Scottish Government did not set specific targets
in its NRP, but instead monitors its progress against the EU headline targets (in this
case the 3% of GDP on R&D expenditure target). However, the Scottish NRP also
underlines the importance of other indicators such as the knowledge transfer index.
The Commission in its response to the UK NRP recommended an increased focus on
public investment in R&D and other forms of growth‐enhancing expenditure.
However, in Scotland, the main issue that should be a cause for concern is rather
increasing business expenditure. Indeed, there is a risk that public expenditure on the
higher education sector may even be ‘crowding-out’ some potential business R&D (if
not directly then at least in terms of the competition of the academic sector for skilled
scientific personnel and engineers).
Interviewees underlined the importance of the various sources of EU funding as inputs
to the Scottish innovation system notably the Structural Funds but also FP7 and the
CIP (e.g. funding for the Scottish Enterprise Europe Network)
1.2.2.1 Structural Fund interventions for research and innovation
The EU’s Structural Fund operational programmes provide an additional intervention
framework in favour of science and innovation, even if the overall importance of
Structural Funds investment, relative to Scottish public sector budgets has declined
over time. The ERDF operational programmes for the Lowland & Uplands (LUPS) and
for the Highlands & Islands both prioritise innovation. The former Priority 1: and the
latter. In the Lowlands & Uplands programme priority 1 Research and innovation
received nearly a quarter of the funding (ERDF funding of €92.1m), “reflecting the
importance of research and development” within the OP and the role of Scottish
Enterprise as a SDB in delivering some of the priority’s objectives. The 2010 annual
implementation report noted strong interest in this priority and nearly 82% of the
available budget13 had been allocated to 54 projects. As a consequence, it was forecast
that some indicators would be fully achieved as early as 2010.
In the Highlands and Islands, Priority 1: Enhancing business competitiveness,
commercialisation and innovation also received the joint highest level of support,
(ERDF funding of €47.5m) “reflecting the importance of enterprise development in
the region, the need to support entrepreneurship and the effort to raise innovation
levels”. Moreover, Priority 2: Enhancing Key Drivers of Sustainable Growth aims ‘to
enhance the sustainable value of the key drivers of the regional economy, specifically
the UHI, the wider research capacity of the region14 and the use of the region’s
natural, historical and cultural assets’. In particular, the OP stated that
“Transforming the UHI and its network into a major research and training resource
for the region’s key sectors will be one of the key legacies of this Programme”15. By
the end of 2010, both priority 1 and priority 2 were fully committed16 and this led the
13 This includes the two SDB bids by Scottish Enterprise which were awarded a grant of nearly £20 million.
14 The OP mentioned specifically the role of the European Marine Energy Centre in Orkney and the
Sustainable Research Development Centre in Forres (Moray) for the renewable energy sector.
15 The OP noted that developing the capacity of the region’s teaching and research underpins not just the
ERDF Programme for the region, but the ESF Programme as well. Developing a strong university and
college cluster of learning that can support not just skills development in the area but the research
excellences that will reinforce the competitiveness of key Highlands & Islands industries will be a critical
legacy of the Programme (such as life and environmental sciences and nuclear decommissioning). Support
will be available for key investments in improving the research and learning capacity of the UHI and its
network, including the ICT/communications links that facilitate remote learning and research centres
(especially for the more peripheral and fragile areas of the region and non-traditional groups of learners).
16 This was partly due to the large allocations to strategic delivery bodies (SDBs): up to 70% of the total
allocation of Priority 1 – Enhancing Business Competitiveness, Commercialisation and Innovation, was
allocated to HIE, a total of €33.268 million; and up to 50% of the total allocation of Priority 2 – Enhancing
Key Drivers for Sustainable Growth, was allocated to UHI Millennium Institute, a total of €20.716 million.

A smart, sustainable nation?
13
Programme Monitoring Committee to recommend a transfer from the under-
committed Priority 3 into Priority 1.
Both programmes identify the need for support in increasing business expenditure on
R&D and non-technological innovation activity, including through making available
qualified personnel. Equally, both emphasise improving research-industry links (in
the Highlands & Islands the absence of a university at the programme outset was
considered a weakness) and research commercialisation. In line with the 2011 SGES,
innovation funding was reprioritised in the Structural Fund programmes towards the
low carbon economy to support the development of innovative low carbon
technologies ‘where Scotland has the greatest competitive advantage’.
1.2.2.2 Scottish involvement in the EU research and innovation programmes
In terms of the EU’s Research Framework Programmes, the Scottish Parliament’s
European Committee has conducted a consultation17 on the Horizon 2020 programme
and current experience with the FP7 (and previous rounds). The Committee’s initial
finding of poor Scottish awareness of European funding opportunities in general and
FP7 opportunities in particular was countered by evidence submitted by Scotland
Europa. This evidence demonstrated that Scottish performance was in fact slightly
better than the EU average in this respect (see text box below). Other evidence
received by the Committee showed that business engagement in Scotland is lower than
other parts of the EU. The Committee underlined the importance of establishing
networks to share good practice, provide mentoring and resource and early warning
offer of developments.
Figure 4: Scottish Performance in FP7
Scotland‘s performance in FP7 has been slightly better than the EU averages. The total amount
of funds secured in Scotland from 2007 to April 2012 is equal to € 351 Million, with a national
success rate of about 20%. Participation is particularly high across the country, with 789
Scottish organisations being involved in a total of over 4000 projects submitted at the EU level.
The number of leading organisations is also growing, with 255 Scottish leaders directly involved
in managing large projects with a long term and increased impact on the local growth.
According to Scotland Europa, Scotland has exceeded the EU target of 15% SME involvement,
with an overall 18% participation from SMEs, accounting for 10% of the total Scottish funding.
This represents a 17% increase in SME participation from FP6/FP5. However, Scotland Europa
concede that, in Scotland, the Programme remains dominated by the Further Education and
Research sectors that together account for nearly 80% of the funding attracted to Scotland.
Source: Scotland Europa (evidence submitted to the Scottish Parliament, 2012)
One possibility is clearly for the Scottish HEIs to use their experience and networks to
leverage opportunities to involve more Scottish SMEs. A social network analysis
undertaken using FP7 participant data (see Appendix E) suggests that the main
Scottish HEIs play slightly different roles. In the only Scots network, the University of
Edinburgh clearly plays a pivotal role in linking Scottish organisations, but the
University of Strathclyde is in second position and it is well connected with private
sector participants. Looking at Scottish participants in the overall FP7 health sub-
network, the University of Edinburgh is again top, followed by University of Glasgow
in second place. There are only two other Scottish participants in the top 100 at
European level: University of Dundee and University of Aberdeen but which are much
less influent ‘network players’.
Despite an overall improvement in Scottish SME participation, the Scottish
Parliament argued that there is a need to go “beyond the ‘usual suspects’ and get fresh
talent into the system. It suggested that SMEs in certain Scottish growth sectors, such
as finance and health may still be unaware of the Horizon 2020 programme. Hence,
17 Scottish Parliament European and External Relations Committee, 4th Report, 2012 (Session 4) The EU's
Horizon 2020 Programme for Research and Innovation. June 2012.

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14
the Parliament recommended to the Scottish Government to assign a proportion of the
available funds as ‘market reactive’, thereby allowing enterprises (particularly SMEs)
to respond to market opportunities and emerging demand. It regretted that the SPAF
(Scottish Proposal Assistance Fund)18 is to be discontinued. However, the Scottish
Government argued that sufficient advice and assistance was still available through
networks such as the Enterprise Europe Network Scotland, which works in
partnership with Scotland Europa to provide a dedicated support service.
Scotland is an active participant in EU wide programmes and performs
well in the competitive funding programmes with, however, similar
difficulties to those observed for UK wide programmes in mobilising the
business sector. The Structural Funds support is channelled increasingly
through the enterprise agencies and is generally well-aligned with the
implementation of the SGES. However, there is a still some risk of
fragmentation of effort, e.g. in the knowledge transfer field, and the need
for further concentration of funding in the 2014-20 behind a limited
number of major initiatives at sectoral or thematic levels.
1.3 The governance system and stakeholder involvement
One of the five guiding principles of the Commission’s smart specialisation agenda is
that RIS3 should ‘get stakeholders fully involved and encourage innovation and
experimentation’. This topic is explored in various sections of the report and notably
in the three cases examined in section 3.4. However, this section briefly summarises
the evidence on how the innovation policy governance system works in Scotland, the
degree of stakeholder involvement in strategy development and delivery and the
extent to which policy innovation and experimentation is encouraged.
The Scottish Government research and innovation strategies all place emphasis on
strong partnerships and identify not only what the Government should do but also
what is expected of different stakeholders in the system. For instance, Innovation for
Scotland (2009) argues that the “challenge is to create, in partnership with all those
involved in the innovation system, a shared vision of how we stimulate and increase
innovation demand; a recognition of the interdependent roles each of us plays in
meeting that increased demand; and how, working together towards shared
outcomes, we maximise the innovation capacity of Scotland and its contribution to
the Purpose of increased sustainable economic growth”.
Such declarations are not only a statement of intent but are part and parcel of a
structured process of consultation and stakeholder involvement by both the
Government and its agencies. The stakeholders consultation process on strategies, on
delivery and during evaluation of policies are multiple and space and time limits what
could be reviewed in this report. Two examples are worth highlighting since they
illustrate, on the one hand, the intensity of cross-agency co-operation within the
governance system and, on the other, the diversity forms in which stakeholder
involvement in business development and innovation policies has developed.
Interviewees consistently used the term ‘Team Scotland’ to refer to the structured co-
operation that has developed between the Government services, the three main
agencies and Scotland Europa. An extended version of ‘Team Scotland’ would include
a number of additional networks and services (Enterprise Europe Network Scotland,
Interface Scotland) and industry (see below on industry leadership groups) and
academic (Universities Scotland) representative bodies. The recent (June 2012)
18 The SPAF scheme provided grant support for Scottish companies preparing proposals for the EU‘s
Framework Programme. The scheme provided financial assistance to small and medium sized companies
(SMEs) based in Scotland. The grant (of up to 50% of eligible costs) could be used to engage a consultant
to assist in the preparation of an application and/or to contribute towards travel costs to meet potential
consortium partners. The Scottish Government ended the scheme in the 2011 spending review.

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submission by the three main agencies to the Scottish Government concerning
‘Knowledge exchange, innovation and commercialisation’ reviews some of the
practices that have been put in place over the last few years to ensure ‘alignment and
connectivity’. Other Member States, and constitutional regions, could learn from and
seek to apply a number of these tools and processes, including for example:
• A single project evaluation methodology across agencies and the systematic
involvement of officials from other key agencies in the assessment of proposals;
• A ‘default mindset’ shift towards highlighting major project opportunities brought
to one agency to the other agencies and a high degree of regular contact between
all three agencies at both senior and operational level;
• Although the funding is allocated on a project basis that there is a need to foster a
‘portfolio view’ across all project to avoid approval of competing proposals that
add to the complexity of the landscape (notably from a business view point).
The report recommended that in order to further improve cross-agency synergies that
there should be a focus on funding ‘transformational projects’ with a smaller number
of larger scale opportunities supported and overseen by a cross-agency team. Annual
joint strategy days between the three agencies are also recommended.
The ‘Team Scotland’ approach is also used in the preparation of future strategic
orientations for economic and innovation funding programmes, including the
ERDF/ESF programmes and their integration with other EU funds such as Horizon
2020. A number of working groups are currently operating across agencies and other
stakeholders to prepare for the negotiations with the Commission services, etc.
Industry advisory boards, now called Industry Leadership Groups (ILG) were initially
set up by and to support the sectoral work of SE. Interviewees underlined that the
work in a variety of ways from more formal structures with a CEO to more informal
'lunch clubs’. A recent review (not publicly available) of the ILG has been carried out
and led to a clarification of their remit: "Industry Leadership Groups are responsible
for developing and delivering forward looking industry strategies. The Groups
provide strategic leadership and advice to industry and the public sector in Scotland,
drawing on their members’ national and international expertise on global trends and
issues and the niche areas where Scotland has global competitiveness”. Although the
remit of the ILG was extended to cover all of Scotland, HIE interviewees still tended to
consider the ILG as an ‘SE vehicle’ that was not always relevant to regional firms.
Finally, SE interviewees were positive about the role the ILGs play as a filter for the
agencies by 'endorsing projects' that are going forward for funding. There is scope to
further strengthen the role of partnerships in structuring priority projects into a
‘portfolio’ that supports the implementation of a sectoral or regional strategy. This
approach could draw inspiration from the competitiveness clusters in France or
similar partnership based implementation bodies, e.g. Vinnvaxt in Sweden or regional
R&D plans in Norway.
The Scottish experience in developing cross-agency co-operation and in
implementing industry led public-private partnerships at sectoral level is
positive. There remains room for further refinement and deepening and
widening of the sectoral partnerships to ensure full coverage across
Scotland and in emerging clusters in each sector. The role of the ILG in
supporting the selection of a strategic portfolio of projects to implement
the sectoral strategies could be further extended.

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2. Scottish innovation performance and specialisation
This section reviews the main strengths, weaknesses, opportunities and threats facing
the Scottish innovation system, in order to consider the extent to which the current
Scottish strategy builds on competitive advantages and specialisation potential.
In terms of economic performance, the SGES (2011) argues that Scotland in the period
since 2007 has broadly outperformed the other countries of the UK. Some analysts
challenge the interpretation of specific data/indicators by the SG, however, whether
the outcome is that Scotland is slightly above or slightly below the overall UK trend on
specific indicators would appear to be a moot point. A more important issue would
seem to be how Scotland, through pursuing, a tailored economic strategy can break
away from the broadly under-performing UK economic ‘model’ (e.g. low business
R&D, low relative productivity, weak industrial structure etc.) and align its economic
development model with the performance of the smaller more dynamic (and more
equitable) northern European countries.
Figure 5: Scotland’s economic and innovation performance relative to EU27
Source: Regional Innovation Monitor. Data 2011 or latest available year; trend from 2000.
As can be seen from Figure 5, Scotland’s innovation performance can be summed up
as a form of dichotomy with a relatively strong higher education and public research
performance, but business innovation and entrepreneurial activity lagging behind
other small northern European countries.
2.1 Research and innovation inputs (expenditure and people)
Given Scotland’s remarkably strong higher education R&D performance, it could be
assumed, and indeed this is an explicit policy assumption over the last decade, that
economic growth and business development can be boosted by exploiting knowledge
generated in the higher education sector.
Figure 6 shows that per capita Scotland as a whole spends slightly less per year on
R&D than the UK (although the North-East of Scotland outperforms all comparators).
However, the balance between R&D performed in the higher education sector and the
business sectors is significantly different from the UK, the Nordic and EU27 averages.

A smart, sustainable nation?
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Figure 6: R&D expenditure per capita (in euro) by sector performance (2009)
Source: Eurostat, calculations authors
The skew of the Scottish innovation system towards the higher education sector is
even more flagrant if the research workforce is considered. Figure 7 compares the
number of researchers in Scotland to two similarly sized (in population terms) Nordic
countries. Finland in quantitative terms is ahead of both Scotland and Norway but
Scotland’s higher education research workforce dwarfs both of the other countries;
while in contrast the business researchers numbers paint a sorry picture for Scotland.
Figure 7: researchers per sector 2009, Scotland compared to Finland and Norway
Source: Eurostat, calculations authors
Data from the Higher Education Statistics Agency (HESA) suggests that in the
2009/10 academic year, Scottish HEIs received 13.8% of the total UK research and
contract income. However, compared to universities in the rest of the UK, Scottish

A smart, sustainable nation?
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HEI’s generated a slightly larger share of income from UK research councils (38.9%
versus 36.5%) and from the private sector (7.9% versus 6.4%) and a slightly lower
share from UK central government funds (16.7% versus 17.9%). While Scottish HEIs
perform above the UK average in terms of attracting private sector research funding,
the total share of private finance remains marginal compared to other funding sources.
Moreover, the 13 Scottish HEIs’ capacity to attract research funding is highly skewed
since, in 2009-10, two universities, Edinburgh and Glasgow, accounted for 52% of
total Scottish HEI research income; if Aberdeen and Dundee income is added then
four universities generated almost three-quarters of all research income. The same
four universities generated 64% of UK private sector funding acquired by Scottish
HEIs in the same year (the Scottish Agricultural College accounting for a further 10%).
Given the findings on the level of research funding required to generate a spin-off in
research intensive universities (see above), this suggests that at best a knowledge
transfer route focused on spin-offs is viable in only a few Scottish universities.
Figure 8: Income from research grants and contracts by Scottish HE institution
2009/10 (£ thousands)
Source: Higher Education Statistics Agency, calculations authors
There are also marked differences in the sources of funds between Scottish HEIs:
• Four HEIs were more dependent on UK Research Council funding in 2009/10:
Edinburgh College of Art (54.7% of total income), Heriot-Watt University (53.8%),
St Andrews University (58.5%) and Strathclyde University (54.1%).
• Three universities (Abertay Dundee, Dundee and Glasgow) had a significantly
higher share of income from UK Charity funding (between 30-38%);
• Five HEIs receive a significantly larger share of revenue from the private sector
than the Scottish average: University of Abertay Dundee (15.6%), Glasgow
Caledonian University (15.4%), Glasgow School of Art (24.3%), Heriot-Watt
University (15.5%) and the Scottish Agricultural College (59.5%).
Hence, the Scottish HEIs are highly varied in their scientific versus applied research
profiles: HEIs dependent on research council funding are orientated towards basic
research while those with a higher share of charitable or private sector funding are
more applied. In addition, a number of HEIs are largely dependent on Scottish, UK or
EU public funds without which they may not be otherwise sustainable.

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The findings suggest that the knowledge transfer policy needs to be
tailored to the different patterns of research activity and types of research
conducted. There may be furthermore, a rationale to clearly distinguish in
Scottish higher education research policy between funding aimed at
reinforcing the international ‘competitiveness’ of a few selected research
intensive universities and ‘applied R&D and teaching HEIs’ (potentially
operating closer to the indigenous SME base needs).
The research pooling policy, that seeks to create virtual Scotland-wide research
faculties (merging universities, as has occurred in Finland with the Aalto University, is
not on the political agenda), is a de facto recognition of the relative fragmentation and
strengths and weaknesses of the Scottish HEIs in research and doctoral studies.
An analysis of Scottish participations to the EU’s Framework Programmes for
Research (FP6, full period, and FP7, data to 2010) tends to confirm the dominant
position of Edinburgh University as a central player (45% of all pairs of Scottish
participants ‘pass’ through the University) ‘sustaining’ a network of R&D co-operation
within Scotland. Considering all FP6 projects with Scottish participants, only four
Scottish HEIs are ‘hubs’ (Edinburgh, Glasgow, Aberdeen, St. Andrews) within the full
network. In terms of internationalisation of the Scottish research base through FP
participation, relatively few countries are in the top hubs with which the Scottish
participants co-operate through the FP projects (notably France, Netherlands, Italy
and the Nordic countries). Closer examination of thematic fields within FP6, helps to
differentiate roles of Scottish participants, with for instance, the University of Glasgow
being the key player in aerospace research networks involving Scottish participants;
while the Universities of Edinburgh and Glasgow are important nodes in life science
co-operation but interestingly both are less ‘central’ in the life science FP6 network
than the Swedish Karolinska Institutet for Scottish participants.
Further analysis of research co-operation patterns and intensity in
specific priority sectors and technology fields would assist in tailoring
support policies to better exploit international networks. The existing
international research networks could be potentially used as means to
boost the business sector co-operation linkages, if university teams can be
encouraged to introduce Scottish SMEs to partners in other regions.
2.2 Scientific and technological output and specialisation
Scientific output19 is only one measure of the knowledge base of a country. Scientific
output can be highly cited and hence have high scientific ‘impact’ but be, at least
directly, of very low societal or economic relevance and hence have very little impact
outside of the scientific community. Nevertheless, scientific output is one source of
knowledge that can support or sustain economic development. In terms of relative
scientific output, Scotland punches above its weight producing 11.70 % of all UK
publications and 2.61 % all EU publications with only 10.3% of the UK’s R&D
personnel and 1.7% of the EU27’s in 2009. Moreover, in terms of internationalisation
of the research system, Scottish researchers appear to be broadly more likely than the
UK average to produce scientific papers collaboratively with other European or non-
European affiliated authors20. Scottish publications record a positive growth rate (see
Figure 18), however the growth is slowing down since 2008 and this is more
pronounced in Scotland than the UK total (including Scotland) or the EU27.
19 Bibliometric data indicates that researchers affiliated to Scottish HEIs produced 158,018 publications
between 2000 and 2011, of which 91.50% are journal articles and 6.27% conference proceedings.
20 Scottish researchers co-authored 13.49% of publications with researchers affiliated to a US university,
7.23% with German 5.47% French 5.29% Canadian and 4.76% Australian affiliation. In contrast, for the
UK as a whole 11.2% of publications are co-authored with a US affiliation, 5.64% German and 4.23%
French.

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20
In terms of Scottish scientific specialisation, Figure 9 breaks down total scientific
output by field. From 2000-2011, 83% of Scottish publications were concentrated in
only five scientific fields. Indeed, the two life science fields (medicine and biomedicine,
genetics and molecular biology) dominate Scottish scientific output.
Figure 9 Scottish scientific output by scientific field (2000-2011)
Source: SCOPUS, calculations authors
Scientific impact is generally measured by two criteria: publication rates in high-
impact journals and citation rates. Scotland, due to scale, is not among the top 20
countries in the world in terms of total publications in any field, but does perform well
in terms of relative citation impact (in a number of fields and notably in space-science
(91%), materials (86%), pharmacology & toxicology (84%) and physics (68%).
The citation impact of Scotland compared to the UK and Finland provides two
contrasting examples in terms of scientific profiles (see Figure 19 and Figure 20).
Scotland matches the English performance in a number of fields and has clear lead in
space science and to a lesser extent clinical medicine. England outperforms Scotland
notably in geosciences, neurosciences and behaviour and plant and animal sciences
(the latter perhaps reflecting the applied nature of agricultural research in Scotland).

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21
Figure 10 Scotland - Relative citation impact compared to the world average
Source: Science Watch, calculations authors
Over the period 2003-2007, Scotland and Finland spent roughly the same (around
€1.05bn) per annum on R&D in the higher education sector. Yet, in terms of impact
Scotland outperformed Finland in most fields, apart from geosciences, education and
social sciences where Finland has a lead and ecology/environment and clinical
medicine where performance is similar.
Scottish scientific output is well above average and outperforms similarly
sized northern European countries with similar levels of investment. In
absolute terms, scientific output is heavily skewed towards life sciences
but scientific specialisation (in relative terms) is more diverse and
includes ‘unexpected’ fields like space sciences.
However, scientific impact is not a sufficient measure of scientific specialisation nor
does it say anything about technological specialisation or more importantly economic
impact. The question remains whether these areas of top performance contribute to
the priorities of the Scottish Government’s economic strategy. Indeed, for scientific
results to have an economic or societal impact they need to be developed into
exploitable technologies or, perhaps more importantly, foster the skills base via
education and other forms of knowledge transfer.
Patent statistics are often used as a proxy for innovation output. Bearing in mind that
the propensity to patent varies a lot per sector it is relevant to focus on the high-tech
sector. Comparing trends in high-tech patents in Scotland and the UK regions, Figure
11 suggests that there is deterioration in high tech patenting activity across all regions
over the period 2000-2008. Scotland performs similarly to the UK average with an
observable stagnation in patenting rates despite the very high impact factors of
publications and the Scottish Government’s efforts to invest in research
commercialisation.
Even looking at disaggregated data on the patents per high-tech sector, neither the UK
nor Scotland record noticeable growth in any of the high-tech fields. Moreover, the
trends for Scotland appear to be more volatile than the overall UK trends. From the
available EUROSTAT data, it is impossible to disaggregate further to investigate the
drivers behind the observed patterns.

A smart, sustainable nation?
22
Figure 11: High-tech patenting trends by UK region
Source: Eurostat, calculations authors
However, Harrison and Leitch (2010, page 1246) observe that Scotland has an
intellectual property (IP) income above average compared to the rest of the UK, a
relatively strong performance in IP income generation, but a low performance in
revenue from university spin-off sales. This could be considered paradoxical, since
Scottish universities perform relatively well in comparison to other parts of the UK:
over the decade to 2010, Scottish institutions created 172 firms, followed by London
(115) and the south-east of England (85)21.
However, the evidence on the contribution of these spin-offs created in Scotland to the
Scottish economy is at best mitigated. A 2008 study22 found that of 200 spin-outs
from Scottish universities (created since 1997): 30% are no longer trading, 55%
employ less than 10 people, while just 15% employ more than 50 people. Although
around 3,000 people overall were employed by the Scottish spin-outs, only six spin-
outs had developed to become substantial businesses (200-400 employees at the time
of the study). The authors concluded that ‘a choice needs to be made between
spreading resources (both private sector investment and public sector support)
thinly to give as many as possible a chance, or progressively focussing on an
selective few’.
As a result of such findings, SE undertook a review of its support for
commercialisation and investments through a number of initiatives and programmes
that aim to support ‘IP to IPO’. A first strategic review in 2008 led to a re-focusing of
support on fewer companies with the ambition to achieve significant scale. In 2011, an
update of the commercialisation review23 was published and found that the impact of
SE’s support on company performance has significantly increased since the initial
review in 2008: “The 'return on investment' to the public sector purse between 2004
and 2011 has increased from £1.2 to £3.2 for every £1 spent. Future impacts, for the
21 http://www.bbc.co.uk/news/uk-scotland-scotland-business-13147563
22 Targeting Innovation (2008): Scottish Spin-out Study.
23 Frontline (2011): Commercialisation programme longitudinal review: final report for Scottish Enterprise

A smart, sustainable nation?
23
full period to 2004-13, forecast a return of £6.1 for every £1 spent and £509.9 million
of net additional GVA to the Scottish economy.” However, the majority of impacts are
driven by a small number of start-up companies in the enabling technologies sector,
even if there is a gradual increase in the contribution from spin-out companies and life
science businesses.
Technological performance is less impressive than scientific output, for
instance, Scottish high-tech patenting follows a declining trend similar to
the UK as a whole. At the same time, both revenue from IP management
and spin-off generation are stronger than in most other parts of the UK
but job and GVA growth and IP revenue from spin-offs have not led to
hoped for returns to the Scottish economy.
2.3 Business innovation performance and trends
Scottish business expenditure on R&D (BERD) is significantly below the UK average,
which, in turn, is well below the EU27 average. As BERD is important not only in
terms of product and process innovation but also in terms of the capacity of firms to
absorb technologies developed elsewhere, this is a cause for concern.
Given the structure of the Scottish economy and ownership patterns (e.g. a large share
of US owned firms in BERD performing companies), it is possible that BERD may be
under-estimated. Industrial structure is one explanatory variable behind differing
BERD trends and the OECD calculates adjusted BERD rates24, however for the UK as a
whole, such calculations do not change the BERD intensity significantly. Coad & Reid
(2012) analysed Scottish BERD trends from 2001-2010 and found that:
• Over the period, there is almost no perceptible growth in absolute or relative
BERD rates, suggesting that the current policy mix is at best maintaining BERD
intensity in Scotland at ‘historical levels’.
• Although manufacturing is important in absolute terms, the trend line is flat since
2001 and no noticeable growth is observed in any sub-division of the
manufacturing sector (machinery; transport equipment and aerospace; electrical
machinery; mechanical engineering; chemicals).
• The fastest growth in R&D expenditure is recorded in the “other” sectors group,
notably driven by the extractive industries (oil and gas sector presumably as is
further suggested by the intensity of BERD in North-East Scotland).
• Since 2006, the share of high-tech sectors in total BERD has actually declined,
with a noticeable decline in hi-tech manufacturing BERD not fully compensated
by a slight increase in BERD by high tech knowledge intensive services
• Scotland, like the whole of the UK, belongs neither to the group of high average
annual GDP growth/low BERD (Norway and Ireland) nor the group of high-
intensity BERD investors/lower growth (Denmark and Finland).
Hence, the sectors driving (or rather maintaining) BERD intensity in Scotland are not
the ‘usual suspects’ (hi-tech manufacturing) but sectors classified as low-to-medium
tech. Similarly, when looking at the contribution to GVA growth or employment, there
is no robust evidence that higher tech sectors or knowledge intensive services made a
strongly positive contribution to Scottish growth over the last decade. Indeed, Mason
and Brown (2010) findings challenge the preconception that high-growth firms are
high-tech, since they found that HGFs are relatively scarce in high-tech sectors. This
24 See: http://www.oecd-ilibrary.org/sites/sti_scoreboard-2011-
en/06/08/index.html;jsessionid=848899nnkjumg.delta?contentType=&itemId=/content/chapter/sti_sc
oreboard-2011-62-
en&containerItemId=/content/serial/20725345&accessItemIds=/content/book/sti_scoreboard-2011-
en&mimeType=text/html

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24
may imply that high-tech firms may have difficulties growing or may simply lack
growth ambitions or growth prospects.
Moreover, using data from the Community Innovation Survey, Turnbull and
Richmond (2011) observe that (p68): "Scotland's business innovation performance
lags the UK as a whole for most innovation indicators", and that the lagging
performance of Scottish firms is primarily due to SMEs, since large firms seem to be
relatively successful in terms of innovation indicators. Again, parallels can be drawn
with growth potential, since Mason & Brown (2011) found that medium and large-
sized firms dominate the Scottish HGF population.
Policy measures that seek to enhance innovation skills and capacity for
innovation activity in “larger-small” firms and medium-sized firms
(irrespective of whether they are in ‘high-tech’ sectors or not) in order to
increase the number of medium-to-large internationally competitive firms
may be more conducive to increasing overall business R&D and
innovation intensity, than efforts to create high-tech start-up firms.

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3. Scottish innovation policy: an appraisal
This chapter reviews the sectoral, technological or supply-demand side focus of
Scottish research and innovation policy and, in particular, the measures stimulating
private sector R&D and innovation investment and the extent to which financial
engineering is used to foster innovation. The Scottish research and innovation policy
mix is relatively well developed and provides both general support services and
funding to enterprises as well as funding for technology and sector-specific initiatives.
Support is generally delivered through one of the two enterprise agencies or the SFC,
although other government agencies such as Creative Scotland, Visit Scotland and
Skills Development Scotland are also active in supporting actions in their field.
Innovation support services are delivered both directly by the two enterprise agencies
and through networks or services (often contracted out after a competitive tender).
As noted above, a weakness of Scottish research and innovation policy is the absence
of a multi-annual financial framework enabling an assessment of the extent to which
available funds are being focused on the stated priorities. This in part reflects the
annual budget process and the fact that more detailed instructions to the
implementing agencies are set out in annual guidance letters from their respective
ministers (or cabinet secretaries to use the Scottish Government’s terminology).
Indeed, interviewees welcomed the practice of Government ministers to set out
expected outcomes with respect to specific financial allocations in annual ‘letters’ as an
element helping the agencies to steer and adjust the focus of their efforts over time.
Moreover, in 2012, the three main agencies (SE, HIE and SFC) were requested by the
Scottish Government to ‘review their interventions knowledge exchange, innovation
and commercialisation activities area to ensure that they are fully aligned and that
investment is focussed into those areas with the greatest contribution to Scotland’s
economic growth objectives’. A cross-agency team reviewed the interventions, their
alignment and the context within which they operate and add value to the Scottish
Innovation System. The interim findings (Knowledge Exchange, Innovation &
Commercialisation: Alignment and Connectivity, June 2012) is that Scotland’s
agencies are performing well in generating economic benefit from research driven
activities with a return on investment of between 1:6 and 1:10 across programmes. The
review found no obvious overlaps between the initiatives funded by each of the
agencies but recommended that “A secondary exercise should be undertaken to better
understand whether there is duplication of any activities (e.g. the range of
mechanisms to support R&D in the renewables sector) and ensure that alignment is
maximised and associated spend reductions are tailored accordingly”.
As part of the review, the agencies mapped spending during 2011/12 and identified
investment of £53.9m across 62 projects and programmes, with a rise in both
expenditure and project numbers anticipated during 2012/1325. The review considered
where spend is incurred within Scotland’s innovation system and found that the
majority takes place in supporting two-way knowledge transfer from academia into
business (£26.1m in 2011/12). A second group of 34 projects or programmes fund new
innovation activities, attracting £18.8m of spend across the three agencies.
Compared with the funding allocated to priorities in the Nordic countries26, a key
difference is a stronger focus on thematic collaborative innovation programmes, on
innovation in the service sector, and on public-private partnerships. For instance, the
25 Primarily a result of (i) spend on projects approved in 2011/12, such as ‘ITREZ’ and ‘WATERS’; and (ii)
significant new investments such as ‘Innovation Centres’ (an additional £10m).
26 Data sources for the Nordic Countries are the annual country reports and funding data available from the
European Commission’s ERAWATCH and Innopolicy TrendChart monitoring platforms.

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26
2011 TrendChart Report for Finland underlined that an important role is given to
thematic programmes: in 2010, 16% (€99m) of Tekes funding went to six sector
specific SHOKs27 and a further 36% was channelled to thematic programmes.
There is scope in Scotland’s innovation system for a re-balancing of
funding towards projects involving more collaboration partners with a
nearer to market/industry or demand led focus. The 2012 innovation
centres call28 can be seen as a first test of such an approach but the
funding levels when compared to the Finnish example are relatively low.
3.1 Sectoral strategies and sector specific support measures
The Scottish Government’s economic strategy is predicated on the development of
seven growth sectors. While this strategic focus has been reaffirmed and reinforced
since 2007, it is in many respects the logical extension of work begun in the 1990s to
identify and support a number of clusters. Scotland was an early front-runner in
applying the ‘cluster concept’ championed by Michael Porter leading to the launch of
four pilot cluster initiatives by SE in 199929. From 2004, the cluster policy was
replaced by the growth sector concept, which was considered to better suit the needs
of the broader Scottish economy.
Interviewees stressed that the sectoral approach has evolved over time and in different
ways across sectors. One example is the life science sector where policy has shifted
from a ‘broader brush’ approach to ‘drilling down’ into niche by increasing the
understanding of ‘technical’ (scientific) capabilities and business
capacities/opportunities. Interviewees underlined that there is no necessary linkage
between these two aspects, e.g. scientific capabilities may be subject of
commercialisation efforts rather than be directly applicable in a promising existing life
science company. This dual approach is outlined in the Scottish Life Sciences Strategy
2011 where a distinction is made between strengths in the company base in two
sectors of the human healthcare industry30 and strengths in the research base in stem
cells and regenerative medicine and translational and clinical medicine skills. While
there are clearly areas of overlap and transfer to the existing company base, the
strategy underlines that the research excellence fields “are now ripe for translation
into new business opportunities and as targets for inward investment”.
27 Strategic Centres for Science, Technology and Innovation – see http://www.shok.fi/en
28 For further information see:
http://www.sfc.ac.uk/web/FILES/CNP_Councilmeeting24August2012_24082012/SFC12_74_Innovatio
n_Centres.pdf
29 In 1993, a study by Michael Porter’s Monitor Group identified 13 'key industries' central to Scotland's
global competitive advantage. Subsequently, biotechnology (together with Food & Drink, Oil & Gas, and
Semi-Conductors) comprised one of the pilot clusters launched by SE in 1997. This led to an extensive
industry consultation and research and mapping phase undertaken over an 18 month period, and
culminated in the development of a cluster strategy and funding support for implementation from SE. For
instance, Biotechnology: A Framework for Action, a cluster strategy for Scotland, was formally approved
by the Scottish Enterprise Board in May 1999. The Board supported investment of up to £38 million for
the period 1999-2004 to deliver the Strategy. For a useful summary of the cluster development process
see Alison Munro, presentation to the TCI Conference in Ottawa
http://tci-network.org/media/asset_publics/resources/000/000/496/original/AMunro-scotent.pdf).
Formative evaluations of the clusters were carried out by Ecotec in 2005 and are available at
http://www.evaluationsonline.org.uk
30 Two sectors of the human healthcare industry are considered to comprise the strongest springboard for
growth in Scotland: 1) Medical technology, covering diagnostics and medical devices, comprises more than
150 companies, ranging from global multinationals to university start-ups. 2) Pharma services,
encompassing more than 60 companies offering contract research in manufacture, pre-clinical, clinical
and biosafety testing, and many more businesses providing allied professional services (such as
intellectual property, legal and regulatory advice).

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27
Figure 12: Business infrastructure projects per growth sector
Infrastructure Project
Growth Sector
National Renewables Infrastructure Fund (NRIF)
BioQuarter
International Technology and Renewable Energy
Zone (ITREZ)
Dundee Waterfront (Seabraes Yard and V&A)
Advanced Forming Research Centre (AFRC)
Energy Park Fife and Energetica (NE Scotland)
Clyde Waterfront:
• Scottish Hydro Arena, SECC
• Creative Clyde
• International Financial Services District (IFSD)
Edinburgh International Conference Centre
Aberdeen and West of Scotland Science Parks
Energy
Life Sciences
Energy
Creative Industries
Enabling Technologies
Energy
• Tourism
• Creative Industries
• Financial and Business Services
Tourism
Multi sector
Source: Scottish Enterprise Business Plan 2012-15: Evidence Base (2012)
The strategic commitment to supporting specific sectors has been followed through by
both hard and soft support measures. Firstly, funding has been channelled to ‘flagship’
business infrastructure projects relevant to one or more of the growth sectors. Figure
12 lists the projects identified as the main business infrastructure projects in the 2012-
15 Scottish Enterprise Business Plan. Additional business infrastructure project in the
HIE area include: the UHI campus in Inverness, the developments around the
European Marine Energy Centre (the world’s first wave and tidal energy test centre in
Orkney), a new £6m Moray Life Sciences Centre in Elgin, the construction of
European Marine Science Park in Argyll, etc. Secondly, the Scottish Government
directly or via SE have also supported capacity building notably through the industry
leadership groups and funding and support for the development of governance
structures and sectoral strategies. This has led to the creation out of ‘industry
leadership groups’ of stand-alone organisations such as Scotland Food & Drink.
At the same time, targeted direct funding to businesses or consortia of firms from a
specific sector for innovation and product development is something that has been
relatively absent in the last decade in the Scottish policy mix. However, a number of
recent shifts in the targeting and type of financial support provided and/or the process
for delivering support are worth underlining.
• A first attempt, in the food and drink sector, to structure services and funding
cross-agency within a multi-annual road map (see section 3.4.1).
• The ILG have been asked to carry out an analysis of their sectoral innovation
systems during 2012 in order to identify gaps and opportunities that are not yet
being addressed by current policy measures.
• A perceptible shift to more targeted funding initiatives for sectoral innovation and
technology development notably in the renewable energy and low carbon fields
through the WATERS and POWER measures (see section 3.4.2).
• The Scottish Funding Council (SFC) launched, in 2012, a call for innovation
centres inviting bids from industry-led partnerships. The SFC, working with
Scottish Enterprise (SE) and Highlands and Islands Enterprise (HIE), is making
up to £10 million available, initially, to support the development of the innovation
centres. The centres should become sustainable communities of university
academics and researchers, businesses, entrepreneurs and others that will drive
innovation in and across Scotland's key economic sectors.

A smart, sustainable nation?
28
The innovation centres may be seen as a first response to a weakness of
the Scottish policy framework, namely the lack of support measures for
consortia of smaller firms to co-operate on innovation and product
development within a medium-term road-map (e.g. the competence
centre model applied with success in countries like Austria, Estonia and
Sweden). As will be seen in the next section, direct grant funding for R&D
and innovation is delivered on a single company basis and while available
to all sectors, the take up of R&D grants is heavily focused in a few sectors.
3.2 Stimulating business R&D and innovation investments
The European Commission has recommended that future support for innovation
through the Structural Funds should foresee an appropriate mix of grants, loans and
financial engineering (see section 3.3.2). The need to increase the intensity of private
R&D&I investments is clearly recognised in Scottish innovation policy and specifically
in the Scotland Europa paper on smart specialisation. The main forms of grant based
financial support for business R&D are the SMART and R&D Grant instruments31.
These measures are generic (non-sectoral) and provide support to a single company to
undertake commercially relevant R&D. In its 2011 election manifesto32, the SNP
Government made a commitment “to invest £45 million through SMART:
SCOTLAND to support near market R&D projects by SMEs”. They also committed to
provide £17 million, ‘specifically to stimulate growth in the key industries set to drive
the global economy, like life-sciences, digital and energy’.
According to data provided by Scottish Enterprise, the grants awarded are focused on
three sectors in the last three years: creative industries (37% of total awards 2009-12,
but the classification is dominated by software and digital technology companies),
energy (25%) and life sciences (22%). The other three sectors, including one of the key
sectors - food and drink - account for only 8% of all awards.
A number of comments can be made concerning the sectoral focus of R&D funding
support. Firstly, interviewees pointed out that the distribution by volume of funds
would be significantly different since a few large R&D awards (to large multinational
firms) account for a majority of total R&D and innovation funding. The sectoral focus
would presumably shift towards the energy (e.g. a number of wave and tidal
development projects are listed), life science (a large R&D grant was given for an R&D
facility for one of the largest multinational pharmaceutical firms) and chemicals
sectors (the latter accounting for three out of five large R&D grants to ‘other sectors’).
31 In 2010/11 SE R&D Grant expenditure was £20.4m which levered an additional £51.4m from supported
companies (in total around 13% of Scotland’s BERD). Source: Scottish Enterprise (2012)
32 http://votesnp.com/campaigns/SNP_Manifesto_2011_lowRes.pdf The SNP Government also made a
committee to continue to support the expansion of the International Technology and Renewable Energy
Zone (ITRZ), a hub of engineering excellence in Glasgow.

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29
Figure 13: distribution of R&D and innovation grant awards by sector 2009-12
Source: Scottish Enterprise, data received by email July 2012.
Secondly, a review of the project titles suggests that grant support for creative
industries is essentially for ‘ICT’ projects covering fields such as: wireless systems,
optoelectronics, artificial intelligence, robotics and various software or web based
applications. Indeed, the overall dominance of ICT projects is in line with what is seen
in other countries R&D grant funding systems.
It would be instructive, given the emphasis on cross-sectoral linkages, to understand
the extent to which these ‘creative industries’ (ICT) projects are supporting
developments in other sectors (e.g. the use of AI or robotics in marine energy or
deepwater oil and gas energy exploration or the application of ICT in production
processes in say the food and drink sector).
This said, the importance of R&D and innovation grant funding in supporting sector
growth strategies need to be considered in a more holistic perspective. Whilst R&D
and innovation funding can be critical to assist leading (growth) firms to stay at the
forefront of ‘technological development’, other forms of support may be not only
complementary to R&D and innovation grants but also critical for the success of
business strategies in specific sectors (e.g. regulatory framework in energy) or places
(e.g. firms in rural areas).
In terms of effectiveness of the current measures, interviewees expressed concern that
while evaluations of specific programmes (e.g. the R&D grant or Smart Scotland
measures) generally find that there have been positive effects on innovation activity or
sales (gross value added), and that the public support is ensuring additionality (at a
minimum, in terms of speeding up the innovation process), that there is not an overall
perceptible improvement the broader indicators of innovation performance across the
economy. Indeed, SE consider, in their business plan, that “to reach the top quartile of
EU economies (for rates of innovation active firms), 5000 more Scottish SMEs would
need to be innovation active”.
A range of interviewees from both the business support and research side of the
innovation system underlined that the persistent business innovation deficit raised the
question of a ‘missing link’ in Scottish innovation policy. While, as noted above, part
of the explanation may be sought in the structure of the Scottish economy and while
there may be a degree of ‘hidden innovation’ in certain sectors, SE’s own estimate of
the need for 5000 more innovation active SMEs, suggests that providing R&D and
innovation grants to around 100 enterprises a year is at best scratching the surface.
Moreover, despite the evaluation findings of positive additionality, there must be a
suspicion that firms being awarded R&D grants are at least in part ‘the visible tip’ of
the iceberg (i.e. are the firms that are capable and would probably be engaged in R&D
whatever the support available). The case of the food and drink sector underlines that
the barriers innovation activity are indeed partly financial but above all about access to
the necessary know-how and skills (including specialised innovation advisory services
but also in-company personnel).

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30
Interviewees underlined that a major policy shift in the last few years has been the
decision to make explicit the financial allocations for specific initiatives (notably in the
energy sector). A key plank of the new approach is to launch ‘calls for opportunities’
with pre-announced financial envelopes (example WATERS, POWERS). This is in
contrast to the general practice where agencies have an annual budget and companies
can bid for funds on an open basis with no pre-set allocation of funding between
measures. This new approach has led to a change of mentality within the enterprise
agencies and helped to stimulate competition for funds by the business sector (and
other stakeholders). Similarly, the fact that up to £70m was set aside for investment in
ports that serve the offshore wind and marine energy sectors was considered, by an
interviewee, to give a clear signal to the business sector about the intentions of the
public sector to support long-term development33.
3.3 Cross-clustering, entrepreneurship and demand side policies
The Commission’s S3 assessment framework places a particular emphasis on three
more novel types of policies to encourage and support business innovation. Scottish
innovation policy addresses each of these topics to differing degrees (see Figure 14).
Figure 14 Main policy measures addressing smart specialisation topics
Specific issue
Main policy measures
Cross-clustering and the
identification of innovation
opportunities at the interface
between different disciplines/
industries/clusters
• Emerging policy discussion but no specific measures
• Key enabling technology potential identified in 2009 report
and on-going work on pursuing specific cross-sectoral
opportunities.
Entrepreneurship and the
innovation capabilities of SMEs for
instance by facilitating the
diffusion and adaption of
technologies, incl. key enabling
technologies
• Scottish Seed Fund and other equity financing instruments of
the Scottish Investment Bank
• High growth start-up unit (SE)
• Various innovation advisory services: Interface Scotland, Food
& Drink innovation service
• Proof of concept and enterprise fellowships for research spin-
offs
• Business and research infrastructure projects in fields like
biotech, informatics and energy
The improvement of demand-side
conditions and especially public
procurement as a driver for
innovation
• NHS Research Scotland Innovation Fund
• Sectoral and national procurement Centres of Expertise
• Renewable energy measures: Saltire Prize, POWERS,
WATERS2, National Renewables Infrastructure Fund, etc.
3.3.1 Emerging clusters and cross-cluster opportunities
Interviewees from both SE and HIE recognised the importance of encouraging cross-
sectoral (clustering) co-operation and supporting the diffusion of
enabling technologies across sectors. A significant effort has been made in
Scotland already to identify and examine such opportunities, both by the agencies and
industry groups. As mentioned above, a 2009 report, by the Technology Advisory
Group for SE, examined the potential of specific key enabling technologies and their
application in the Scottish economy. The four most promising ‘enabling technology
groups’ identified were advanced engineering, communications & networks,
informatics & computing, and devices & systems. The analysis of the TAG report
crossing these four groups and identified three specific areas where Scotland has
global expertise with potential for application across a number of key sectors: in
33 Scottish Enterprise established a £70m National Renewables Infrastructure Fund to support private
sector investors in the development of manufacturing locations. The fund aims to stimulate an offshore
wind supply chain to help realise the opportunity for off-shore wind in Scotland.

A smart, sustainable nation?
31
sensors, modelling & simulation and informatics. The report aimed to encourage and
enable the use of these new technologies across the seven key sectors.
Building on this KET analysis, SE is currently engaged in a review, requested by their
board, designed to map Scotland’s cluster portfolio, identify emerging opportunities
and helping existing sector strengths to re-affirm their competitive position . A first
discussion paper, presented to the board in June 2012, has already outlined Scotland’s
‘cluster portfolio’ (Figure 15) and this work has confirmed the relative dominance of
just four industries34 in the Scottish economy: energy (where the key companies are in
Oil & Gas, Utilities and Chemicals), Financial Services (where the Banks still create
significant wealth); Food & Drink – where growth is being driven by traditional whisky
brands and new food producers; Engineering – where services, consulting and
fabrication excellence upgrades global supply chains in many key sectors.
Figure 15: Scotland’s Cluster Portfolio
Source: Scottish Enterprise, unpublished Board discussion Paper 2012
A second key element of the SE analysis has been to underline the high degree of
interconnection between the main industries and areas of significant
complementarities, the most significant being centred on the energy sector. A third
key finding is that the companies that drives Scotland’s economic performance are
within ‘enduring’ industries with a long history of adapting to changes in economic
and market conditions’. These findings nuance the long-standing focus on sectors like
life sciences and on ‘high-tech start-ups’ (see evidence below on high-growth firms).
The paper goes on to identify a number of emerging new clusters or new
configurations of existing clusters around new market opportunities such as Enhanced
Energy (smart grids, energy storage, etc.), Innovating to Zero, Premium and
Provenance, Enhanced Health and Big Data. Considering the case of Premium and
Provenance, this opportunity is visualised as grouping sub-sectors such as luxury
textiles, Golf, Business Tourism, Bakery, Fish & Seafood, Whisky, Heritage and
34 These four industries account for 40% of Scotland’s GVA and £15.3bn of exports (70% of total Scottish
exports). The productivity levels in these industries are at least 50% higher than the Scottish average

A smart, sustainable nation?
32
Nature, etc. Such work underlines the existing and future potential for cross-sectoral
co-operation and interaction. One obvious option would be to launch and run
dedicated innovation programmes or centres around these emerging cluster themes in
order to give a kick-start to more intensive co-operation; similar to what has been
done say in Finland with the technology programmes in the past.
However, the interest in cross-clustering is not necessarily as present yet at the
operational delivery level of policy: concrete actions to foster specific linkages or cross-
sectoral innovation projects need to be developed further. For instance, the innovation
centres being launched by SFC are required to be focused on a specific sector but also
need to prove how they will be open to firms on a cross-sectoral basis. Yet many
interviewees underlined existing cases and the potential for enhanced cross-sectoral
linkages both in terms of business development in general but also in terms of
innovation. Examples given included aerospace expertise in wind-turbines, obvious
linkages between food and drink and tourism products and services, engineering
services related to oil and gas, biotech applications across a range of sectors, etc.
Hence, this is an area where further operational developments are required.
3.3.2 Entrepreneurship, high-growth firms and scale companies
Entrepreneurship35 and the growth performance of Scottish firms are
viewed as a weakness of the Scottish economy and innovation system. Business
support in Scotland has evolved over several decades (from the late 1970s and the
creation of the Scottish Development Agency) and is today multi-faceted combining
business advisory services (Business Gateway for start-up firms, account management
of selected firms by SE and HIE, Interface Scotland, ICASS, etc.) and financial
support. Moreover, in 2012, the Scottish Government announced four thematic
enterprise areas located at 14 sites (see Box 2) to reinforce further business
development support.
Box 2: Enterprise Areas policy
In January 2012, the Scottish Government decided to create four enterprise areas: one in Life Sciences, two
in Low Carbon / Renewables in North and East Scotland and one in General Manufacturing / Growth
Sectors. The four enterprise areas, covering 14 strategic sites, will benefit from enhanced incentives for five
years. Each Enterprise Area site will offer the following financial incentives: Business Rates Discounts or
Enhanced Capital Allowances for investment in plant and machinery.
As well as the financial benefit of rates relief or capital allowances, the package of incentives available at
Enterprise Area sites will include: A streamlined approach to planning; High speed broadband connections
International promotion and marketing of Enterprise Areas by Scottish Development International and
advice to help businesses grow in global markets; and skills and training support.
The incentives available at each location are designed to encourage businesses to bring forward investment
decisions while also providing the support necessary to enable business start-ups to become established and
to compete internationally, leveraging the human knowledge and natural resource advantages of each
location, when the incentive period ends.
Source: Scottish Government
In terms of financial support for spin-offs and start-ups with high-growth potential,
Scotland has developed a range of equity and loan finance instruments over the last
decade, in part with the support of the ERDF. This includes seed capital funding for
start-up firms and later stage funding for growth companies from the Scottish
Investment Bank division of SE (see below). There is also a vibrant business angel
35 The Global Entrepreneurship Monitor Report for Scotland (2011) reports some positive developments in
entrepreneurial aspirations with Scotland now performing similarly to the rest of the UK. However,
overall, shows that Scotland remains ranked in the third quartile of innovation-driven countries for total
entrepreneurial activity. See: http://www.strath.ac.uk/huntercentre/research/gem/

A smart, sustainable nation?
33
community36 which works on a distinct, and arguably more successful, co-investment
model from the rest of the UK business angel sector37.
Box 3 : Scottish Investment Bank equity and loan instruments
The Scottish Investment Bank (SIB) supports the development of Scotland’s private sector SME funding
market to ensure both early stage and established businesses with growth and export potential have
adequate access to growth capital. SIB offers a suite of investment funds:
• the Scottish Seed Fund (SSF) provides company loans and equity investment from £20,000 to £250,000
to early stage companies that possess growth ambitions
• the Scottish Co-investment Fund (SCF) can invest between £50,000 to £1m in company finance deals up
to £2m in partnership with private sector investors
• the Scottish Venture Fund (SVF) can invest £500,000 to £2m alongside private sector partners, in
finance deals of between £2m and £10m
• the Scottish Loan Fund (SLF) provides mezzanine loans ranging from £250,000 to £5m to qualifying
Scottish SMEs on a wholly commercial basis.
The SSF, SCF and SVF are equity products which adopt an innovative co-investment and share risk
intervention model to encourage more private investors to invest in early stage Scottish companies with high
growth potential. The SLF is a debt product which is aimed at established growth and export SMEs (with
turnover above £1m). The SLF is managed by a third party fund manager, with an investment of £55m from
the public sector and £39m from private sector institutional investors.
Source: Scottish Enterprise, information from 2012-15 Business Plan.
An independent evaluation (cited in the SE Business Plan 2012-15) has considered the
benefits, up to 2010, for 83 companies supported through SSF and 28 companies
supported by the SVF. The evaluation found high levels of investment additionality
suggesting the funds are supporting business growth and will likely contribute to
future economic growth and job creation Importantly, SE concluded that “the
investments were ‘necessary but not sufficient’ to bring about the impacts and that
wider support provided by SE and partners, such as strategy development,
internationalisation and innovation support, was a very important contributing
factor to achieving these impacts. Thus, the provision of equity finance cannot be
viewed as a product that operates and delivers impacts in isolation”.
According to SE: “There are around 3,200 growth companies (with annual sales
growth of £1m plus over three years), while there are few high growth firms
(companies growing by 20% per annum for three or more years) and just a small
number of companies of scale (firms with over £100m turnover) alongside a much
wider base dominated by small businesses and the self employed”38.
Within its overall objective of increasing the number of growth firms in the Growth
Portfolio, SE focuses its support on two specific types of companies:
• Companies of Scale: identifying in the portfolio companies in the £15-20m range
which merit support to fast-track their growth to reach the £100m scale.
According to data provided by SE, the largest number of firms either currently in
the COFS portfolio, being considered or which are ‘alumni’ are from the energy
sector (12 out of 30), followed by (business) services (7) and software firms (5).
• High growth companies: the aim is to increase the number of companies in the
portfolio, which achieve three consecutive years of 20% growth.
36 http://www.lincscot.co.uk/
37 See for instance Mason C.M. & R.T. Harrison (May 2011) Annual Report on the Business Angel Market in
the UK 2009/2010. Available: http://www.bis.gov.uk/assets/biscore/enterprise/docs/a/11-p116-annual-
report-business-angel-market-uk-2009-10.pdf LINC Scotland investments are slightly larger than those of
counterparts in the rest of the UK with 51% of £200,000 or more compared with 45% of the British
Business Angels Association (BBAA) investments, reflecting the impact of the Scottish Co-Investment
Fund which is drawn down in the majority of angel deals in Scotland.
38 Scottish Enterprise (2012) Evidence Base for the 2012-15 Business Plan

A smart, sustainable nation?
34
Figure 16: The market for company growth in Scotland (SE, 2012)
Source: Scottish Enterprise Business Plan 2012-15, Evidence base
In contrast, in the Highlands & Islands, interviewees underlined that HIE supports
companies for other reasons than growth. Indeed, it was argued that there is a need
for a diversity of approaches, “there is no one size fits all support model”, and policy
makers need to take into account that rural Scotland faces different challenges. For
example, HIE has a ‘fragile areas’ policy, which is not something that SE prioritises.
Hence, HIE will intervene to secure jobs when it contributes to the sustainability of
communities. For instance, an investment that would create 10 jobs in South Uist in
customer care services would get significant support. Hence, ERDF investments in
infrastructure like broadband can be crucial enablers for such business development.
Data provided by SE on their portfolio of 140 or so high growth companies39 they
account manage gives an insight into the sectoral distribution, with the oil and gas
sector followed by ICT and construction dominating. In its business plan for 2012-15,
SE sets itself the target of increasing the number of account-managed companies
achieving ‘High Growth’ status to 200 by 2014-15. This would suggest that there is a
need for SE to target growth in a number of the other key sectors than oil and gas,
which is apparently already the dominant sector. The relatively low number of HGS in
low carbon, life sciences and food and drink in the current portfolio suggests that these
may be areas where additional HGFs may be ‘lurking’.
39 High Growth Companies are defined by growth of 60%+ over 3 years from a base of £1m+ turnover.

A smart, sustainable nation?
35
Figure 17: Scottish Enterprise account managed high-growth firms (2010-13) by sector
Source: Scottish Enterprise, calculations author
Indeed, a number of recent studies conclude that Scotland does not under-perform
compared to the UK average but that the Scottish HGF are less employment rich and
may suffer from a lack of ambition (see Box 4). The evidence suggests that while an
over emphasis in focus on high-tech high-growth firms is not optimal there is a
relative deficit in Scotland of high-tech firms in the business base that could if resolved
give a further boost to business growth.
Box 4: Evidence on high-growth and technology based firms in Scotland
Recent studies suggest that the main issue for business growth is not the absolute or relative (per capita)
numbers of entrepreneurs. It appears to be rather about as the level of ambition (and internal capabilities)
and barriers to Scottish firms sustaining growth and attain sufficient scale to compete on European and
global markets. In the context of smart specialisation, the body of evidence in the academic literature and
recent research in Scotland, itself, calls into question a common policy focus on ‘high-tech-high-growth
firms’. Research by Mason & Brown (2010) has shown that HGFs in Scotland are: firstly, located in a variety
of sectors and technology sectors do not account for a disproportionate share; secondly, HGFs are not small
firms –medium and large-sized firms dominated the Scottish HGF population; thirdly, HGFs are not young
firms – few are less than 5 years old.
In a 2012 follow up study, Mason and Brown concluded that ‘Scotland performs well in relation the rest of
the UK in terms of the presence of high-growth businesses. However, Scotland performs less well in terms
of high growth, high
‐
tech firms40. They suggest that the main reason is that Scotland’s proportion of high
tech firms in its business base is the second lowest amongst UK regions. At the same time, they find that in
Scotland, as in the UK as a whole, the proportion of high tech firms which achieve high growth (18.4
percent, or 188 firms) is greater than for non‐high tech firms.
Mason & Brown’s work also reinforces the view that the barriers to growth of high-tech HGFs are a lack of
strong ambitious leadership and management ambition, or weak management capabilities and ownership
(just 30% are Scottish owned and headquartered) rather than access to finance or university-linkages
(which they argue are of marginal importance to high-tech HGFs).
Mason & Brown argue that one possible route to boosting high-tech HGFs is to acknowledge the strategic
40 High-tech firms represent around 12% of the overall population of HGFs. High-tech HGFs exhibit
considerable diversity in terms of age, size and sector. Only 20% are less than 20 years old. Many are
long‐established engineering companies with a tradition of innovation. Technology companies vary in
size from under £1m turnover to over £1,000m turnover, but concentrated in the under £50m range.
Perhaps not surprisingly, they found that the energy sector, particularly oil and gas, is a significant source
of technology businesses and also as a major market for technology firms in other sectors.

A smart, sustainable nation?
36
role that ‘companies of scale’ play in their development in Scotland, notably as a source of market pull and
important supply for emerging companies. They also argue that given the nature of the successful TBFs in
Scotland (low R&D, applied focus, end‐user engagement) that there is merit in ascertaining the types of
problems less successful TBFs face in terms of their ‘absorptive capacity’.
Source: Mason C. & R. Brown (2010), High Growth Firms In Scotland; Mason C. & R. Brown
(2012), Technology‐based firms in Scotland: A Report for Scottish Enterprise. Both available
from: http://www.evaluationsonline.org.uk
3.3.3 Improvement of demand side conditions.
As noted earlier, public procurement for innovation is a stated priority of the SGES
and a number of actions have been taken to improve the degree of innovation within
the scope of the existing regulatory framework (Scottish procurement policy
handbook, etc.). In addition, there is a broader attempt to use public sector ‘demand’
to drive the development of key sectors and this is clearly visible in the low carbon
strategy and related investments in the renewable energy field. The importance of
inspirational target setting or pricing of renewables (where Scotland has a much more
generous system than the rest of the UK) by the current Government was underlined
as being of critical importance in influencing business investment decisions by a
number of interviewees.
The SNP Government’s 2011 election manifesto underlined that ‘The NHS has a big
part to play …as a major public procurer” and that they would “examine different
approaches to incentivise research within the NHS, building on the work of NHS
Research Scotland so that Scotland becomes an even more attractive location for
investment by international pharmaceutical companies”. One example of this type of
policy approach that illustrates rather well an “entrepreneurial discovery process” is
the digital health cluster in north-east Scotland (see the box below).
Box 5: A96 corridor digital health cluster – entrepreneurial discovery in rural areas
The digital health cluster in the Inverness and Moray area is an emerging niche cluster that brings together
about 40 organisations including 10 companies as well as social enterprises, the NHS, etc. The majority of
cluster activity is geographically focussed along the A96 (the main road between Inverness and Aberdeen on
the north-east coast of Scotland) corridor between Inverness and Elgin, even if a number of important
capabilities lie in more peripheral areas such as Skye, Wester Ross and the Western Isles.
A range of incentives are being designed to support investors that are keen to become part of this cluster of
expertise available along the Inverness-Elgin corridor. For example, both the Forres Enterprise Park and the
Inverness Campus have been designated as Enterprise Areas by the Scottish Government. In addition, HIE,
Moray College, NHS Grampian and the European Regional Development Fund are investing £6m in a
Moray Life Science Centre in Elgin, which will provide opportunities for new businesses and research in the
sector with a specific focus on digital healthcare. It will create important links between the private sector,
medical practitioners and academia.
Like in the marine energy sector, the aim in the digital healthcare field is to create a test bed for innovation
in Moray. NHS Grampian is working with health sector firms to make records available for particular
groups of patients (by type of illness, etc.) and as the records go back several generations this allows for
ground-breaking research and testing to take place. This is a good example of public-private-non profit
partnerships fostering innovative testing of new services and products in rural Scotland.
In general, there is a relatively good understanding in policy circles of the potential to
use public procurement and other forms of demand side policy (regulations, etc.) and
a strong emphasis on aligning innovation and business support policies to market
demand and customer needs. The development of public-private partnerships to test
or develop technologies and service solutions is growing in importance. However,
there is probably room to do more for instance in the fields of low carbon technologies,
Interviewees mentioned a number of pilot projects in the field of low carbon vehicles:
e.g. support for Alexander Dennis to develop hybrid buses or Caledonian MacBrayne
to invest in a hybrid ferry. However, there is nothing as yet of the scale of ambition
shown, for example, by the Estonian Government in using the sale of carbon-offset

A smart, sustainable nation?
37
credits (AAUs) to create the first nationwide electric car network (EEMO41). Similarly,
interviewees pointed to opportunities in the urban built environment (applying
retrofitting technologies, in particular, given the age of buildings in Scotland’s cities)
but that this would require a significant scale of funding. Launching a programme of
retrofitting and/or ‘urban mining’ on a significant scale could create a competitive
cluster of engineering, architecture and construction know-how if associated with an
appropriate funding programme of technology development for the sector.
3.4 Case studies: sectoral and place based strategies
3.4.1 Boosting innovation in a traditional sector - Scottish Food and Drink
Scottish Food and Drink is one of the most important manufacturing sectors in the
country and has recorded in recent year excellent rates of growth, notably in exports,
achieving the 10 year target the industry set itself in 2007 – to grow total exports by 38
per cent –six years early.42 Paradoxically, in the face of such strong growth,
interviewees acknowledged that business R&D in the food and drink sector is
‘bumping along at low levels’ if indicators based on official statistics (like R&D/GVA)
are used. Innovation survey results indicate that innovation intensity is higher than
when measured as technological R&D but still below what is needed. In this context,
the relatively low ‘penetration rate’ of the food and drink sector in the R&D and
innovation grants system is surprising given the strategic importance placed on the
sector by the Scottish Government and the enterprise agencies in Scotland. Indeed,
taking into account that around 10% of the SE account managed firms, roughly 250
companies, are from the food and drink sector, would suggest that the sector is
punching below its weight in terms of innovation activity. However, rather than focus
on overall aggregate trends, SE tries to track the companies that are potentially
interested in food and drink R&D and work to encourage them to become more active.
According to interviewees, out of the 250 SE account managed companies, a small
share (50+) are able to do in-house R&D, but a larger group has an appetite for new
product development and will consider to contract out for R&D services. A main
barrier to investment in R&D is that a majority of food and drink companies have
under £10m in turnover and rather low profit margins. Hence, the main focus of
innovation in the sector tends to be on process innovation, although SE is making
efforts to increase interest in design innovation.
The SE food & drink team works closely with Scotland Food & Drink (SDF,
http://www.scotlandfoodanddrink.org/), which is a membership based not for profit
organisation created in 2007 funding roughly 50/50 from public and private sources.
A CEO and executive team report to the SFD board, drawn from a mixture of industry
and public sector bodies, with a role is to approve and guide the strategy of the
organisation. An Executive Group, comprising leaders from across the industry is the
key delivery vehicle for SFD. Interviewees noted that it took about three years for SFD
to get going as it took time for a consensus to build with the trade associations.
However, according to interviewees, the various stakeholders are now much more
aligned behind the strategy with a key success factor being that SFD created a role for
itself by focusing on boosting exports of the sector (assisted by the recent inspirational
target set by the Scottish Government to raise Scottish exports by 2017).
The SE specialists have worked closely with SFD in developing a sectoral strategy that
has been built on background research (carried out by Genesis Consulting) with a
strong focus on customers/consumers and future consumer trends. Three key trends
have been prioritised (linked to specific markets: UK, EU, etc.): healthier products,
premium products and provenance (other trends like indulgent products or value
41 See: http://www.elmo.ee/en/ELMO and http://www.hybridcars.com/news/estonia-starts-nationwide-
push-towards-evs-47276.html
42 See: http://www.scotland.gov.uk/News/Releases/2012/03/foodanddrinkexports270312

A smart, sustainable nation?
38
products were identified but given a lower priority after consultations). Interviewees
noted that strategies must remain flexible in order to allow industry players to grab
opportunities (as when the Scottish Salmon Producers Organisation mobilised to
capture markets following an outbreak of salmon farming disease in Chile43).
The strategy was followed by an action plan with each agency taking responsibility for
specific work-streams to avoid duplication of effort. SE, for instance, is leading on
innovation for healthier products with a focus on two strands: 1) what do we have
already that can be marketed better, e.g. Omega 3 in salmon 2) structuring the
fragmented supply side and linking it better to the business needs.
Two main initiatives have been taken to support the structuring of the supply side.
Firstly, Interface Scotland has been tasked with a specific mission to support food and
drink innovation acting as a single entry point for firms to 17 HEIs
(http://www.interface-online.org.uk/4423). A second initiative is the Food & Health
Innovation Service44 (http://www.foodhealthinnovation.com/) that has been
contracted out to a private RTO, Campden BRI (http://www.campden.co.uk/)45 which
counts about 200 of the 250 SE account managed companies amongst its members.
Interviewees considered that the new SFC innovation centres measure offers an
opportunity for a next step in developing strategic research partnerships. Four
applications have been submitted by food and drink sector, all industry led. This was
considered to be evidence of a positive trend of industry engaging more with the
research sector and with each other in innovation processes.
However, interviewees underlined that there remain gaps to be tackled in the sectoral
innovation system. In particular, while there is plenty of top-level expertise at the
primary end of the food sector value chain, such as the James Hutton Institute46, there
is not the same level of expertise in food manufacturing and processing stages. Hence,
there is a need to increase the facilities/expertise around demonstration and testing of
products and food concepts. As an example, interviewees noted that work is being
done on making better use of natural assets such as oats and berries but that the main
barriers arise at the stage of integrating such resources into existing products or
manufacturing processes (e.g. keeping consistency of a bread with berries). Similarly,
there is very little being done on functional foods due to the lack of expertise and so
there may be an opportunity for developing a collaborative programme. The interview
evidence points to future support continuing to support market trend anticipation,
tackle gaps in expertise, foster collaborative innovation and create testing facilities.
3.4.2 An emerging global leader? The Scottish marine energy sector
Energy has been a key element of the Scottish innovation framework since at least
2000. Whilst historically oil and gas is the mainstay of the energy sector (and accounts
for a large slice of the Scottish economy), the renewables sector is expanding rapidly,
in commercial terms, this has been first through technologies ‘developed elsewhere’,
notably on-shore wind farms. The current focus of commercial, and to some extent
technological development in Scotland is offshore wind. Interviewees underlined that
offshore wind47 is driven by scale and that the key players are ‘non indigenous’, in
ownership terms, including two key ‘utilities’ (Scottish & Southern and Scottish Power
Renewables) which play a key role since they have a broad reach into the supply chain.
43 Scotland is the largest producer of farmed Atlantic salmon in the EU and the third largest globally,
behind Norway and Chile
44 http://www.scottish-
enterprise.presscentre.com/Content/Detail.aspx?ReleaseID=831&NewsAreaID=2&ClientID=1
45 Leatherhead (http://www.leatherheadfood.com), another RTO, was also invited to bid to run the service.
46 http://www.hutton.ac.uk/
47 See: http://www.offshorewindscotland.org.uk

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39
Hence, the offshore wind industry leadership group is dominated by industry, heavily
skewed to larger firms, with a focus on optimising the commercial potential in
Scotland. Interviewees underlined that the strategy process is that priorities are
defined by industry, the public sector then responds with its position, a consensus is
then sought on which leads on to an action plan. Given the sector, the plan needs to
cover more than funding and needs to consider legislative proposals (e.g. by Marine
Scotland48), etc. The strategy and action plan is open to almost continuous review
given the fast moving nature of the sector. This implies that various ‘reference points’
are checked and reviewed by working groups, etc. on a periodic basis.
Interviewees noted that the approach being championed in Scotland borrows lessons
from what the Danes achieved with on-shore wind, where they were able to impose on
the market that you had to have your testing done in Denmark to be taken seriously.
The key elements of the Scottish model include strong government-business-academic
co-operation (structured at the different levels from the First Minister down49), an
attractive regime for investors, subsidies for testing and deploying technologies. The
strategy is to seek to foster multiple opportunities for industry and academic expertise
to be combined in the development and testing of technologies. In the field of offshore
wind, the aim is to establish Scotland as the base for testing new offshore wind
technologies whether they are invented in Scotland or not. For instance, an
interviewee noted that, Glasgow and Strathclyde universities are working on blade
technologies pooling expertise with several multinationals, including from related
sectors (e.g. aerospace for the blades). A key aim of the R&D being conducted is to
reduce cost of renewable energy production to make it competitive and, interviewees
noted that this helps to focus efforts.
However, while offshore wind has significant commercial potential (Scotland accounts
for 25% of European wind energy potential), interviewees stressed that the field in
which Scotland has a real opportunity to dominate globally from both a technological
and business perspective50 is marine (wave and tidal) energy. Scotland is currently a
world leader in wave and tidal (marine) energy technology due to the accumulated
expertise, the range of test facilities and the scale of capacity in Scotland (25% of tidal
stream and 10% of EU27 wave energy potential)51. A philosophy of ‘innovation by
testing’ is thus strongly embedded in the policy approach to marine energy. An
interviewee noted that a parallel in other industries could be how the Nordic (e.g.
Sweden) countries have captured the market for testing and development in cold
climate automotive technologies.
Interviewees stressed that key elements in the development of marine energy (aside
from the concentration in Scottish waters of a natural resource potential) include:
• Ambitious target setting by the Scottish Government (a target of 100% of
electricity demand from renewables by 2020 has been set and Scotland is already
at 28%, compared to the UK’s 6.9%) allied to inspirational incentive to foster
innovation such as the Saltire Prize in the field of wave and tidal energy52.
48 http://www.scotland.gov.uk/About/People/Directorates/marinescotland
49 The FM, himself, co-chairs with the Principal of the University of Strathclyde the Energy Advisory Board
which meets once a quarter. Under this high level board, are five sub-groups including the Renewables
Industry Leadership Group, co-chaired by the Minister for Energy, Enterprise and Tourism and a
representative of Scottish Renewables (the industry group, http://www.scottishrenewables.com/).
50 The Marine Energy Road Map included a supply chain survey that estimate that up to £1.3 billion of
expenditure could be generated in Scotland and as many as 2,600 marine energy jobs created by the
installation of 1GW of wave and tidal capacity by 2020.
51 http://www.economist.com/node/21526931
52 http://www.sdi.co.uk/sectors/saltire-prize.aspx

A smart, sustainable nation?
40
• A policy and regulatory environment53 that is creating the market opportunity
(allied to the significant resources in wave, wind and tidal energy in Scotland).
Notably, the Scottish Government has set and maintained significantly more
generous renewable obligations certificates (ROCs) for wave and tidal than the UK
Government for the rest of the British Isles.
• The investment in the required infrastructure and grants54 to allow development
testing and subsequent deployment of tidal and wave devices and subsequently
arrays. This is allied to significant support for device development in Scotland but
also enables Scotland to attract and co-operate with international developers of
devices who use the Scottish testing sites.
• Finally, early investment in developing a strong pool of expertise in Scotland, and
indeed, in Orkney, one of the islands to the north of the mainland. HIE supported
the EMEC from 2001 onwards, while Heriot-Watt University established a campus
on Orkney over 20 years ago and has been running a Master course on marine
energy (about 20 students per year). This has created a nucleus of people in
Orkney, so that today, while there are only about 1000 experts globally working on
wave and tide innovation, about 250-300 of them are on Orkney. The academic
input has had significant impact in terms of building expertise in new fields, e.g.
environmental impact assessment for deepwater engineering, etc.
Interviewees noted that is possible to trace a form of innovation value chain of marine
energy and engineering expertise: Edinburgh University has the world’s most
advanced marine tank for modelling stage, EMEC has nursery sites, zones for full
deployment are being readied, etc. They also underlined that much of what is being
done is outside of traditional innovation process and involves a lot of learning by
doing. Equally, as EMEC often tests technologies developed in other countries, this
gives the centre a pivotal role in terms of building up global level expertise in Scotland.
Finally, interviewees stressed that the EMEC project has been very successful in
attracting large corporation to undertake testing but also in developing a niche cluster
of small spin-off firms in Orkney.
Finally, in policy terms, there has been an attempt to be more innovative in the types
of support provided through the WATERS and POWERS measures launched to
support early-stage prototyping and testing; and, hence, embed further technology
development in Scotland. A key plank of the new approach is to launch ‘calls for
opportunities’ and announce the available funding. Previously, the available funding
for a call was not explicit so this has been a change of mentality within SE. Similarly,
the fact that £70m was set aside for investment in ports that serve the offshore wind
sector was a clear signal to the business sector55 of the public sector commitment.
From technological potential to Scottish champions?
The model for future development is to mimic the way the Oil and Gas sector is
serviced out of three cities worldwide (Aberdeen, Houston, Stavanger) so that as
53 In June 2012, the industry-led Marine Energy Group (MEG) published a Marine Energy Action Plan that
outlines progress made since the launch of the 2009 Marine Energy Road Map and makes
recommendations to help improve access to finance, grid development, infrastructure and supply chain.
http://www.scotland.gov.uk/News/Releases/2012/06/marine-energy21062012
54 SE, in collaboration with the Scottish Government and HIE, launched two WATERS funding calls for a
total of £13 million to boost early-stage wave and tidal device development, and a £18 million Marine
Renewables Commercialisation Fund (MRCF) to support the deployment of the first wave and tidal arrays
in Scottish waters. The Scottish Government opened in 2012 its £18 million Marine Renewables
Commercialisation Fund (MRCF) for applications to support the deployment of the first wave and tidal
arrays in Scottish waters. The fund comprises half of the Fossil Fuel Levy surplus available to Scotland,
with the remainder helping to capitalise the Green Investment Bank.
55 Scottish Enterprise have established a £70m National Renewables Infrastructure Fund to support private
sector investors in the development of manufacturing locations. The fund aims to stimulate an offshore
wind supply chain to help realise the opportunity for off-shore wind in Scotland.

A smart, sustainable nation?
41
production expands elsewhere, Scotland captures a good share of specialist service
business in support of a global industry. Hence, Scottish companies should develop
installation, deployment and maintenance expertise to have a first mover advantage.
However, interviewees noted that, aside from offshore wind, the renewable sectors,
including the emerging marine energy sector, is rather fragmented and composed of
smaller firms. There is a concern that the big multinationals (e.g. ABB, Alstom) are
starting to move into the marine energy sector and are buying up development teams.
Hence, there is a risk that what happened in the life science sector (with spin-offs
being bought out in trade sales) will happen again.
Interviewees suggested that one problem for growing and scaling up firms in the
marine energy sector is that fund-raising has been fairly ad hoc. Firms have raised
remarkable amounts but in small pieces or combined with grant funding. Hence, there
is a need for investment funding of sufficient scale that could allow them to retain
corporate expertise as well as technological expertise. If this process could be managed
it would allow Scotland to create specialised suppliers to the major multinationals
rather than be bought out by them. As one interviewee remarked “can you encourage
collaboration between smaller Scottish companies so as to retain a degree of
ownership and freedom in the domestic sector”? There is a concern that many of the
firms are trying to be entire device manufacturers whereas in reality they are
specialised in specific elements. Hence, if they could be encouraged to pool expertise,
there is a potential to create a real champion.
A second challenge for the marine energy sector is to take a step up from testing to
setting up a fully operational array. The investment required outstrips what is
available in Scotland or even the UK, so there is a real argument for European added
value in intervention in favour of the sector. Interviews noted that there is a real
potential for Scotland to shape European thinking in this field. The European
Commission should see the sector as a European opportunity, since while Scotland is
in the lead but there is capacity in Portugal, Ireland, Spain, etc. The investments being
made are building up a sectoral innovation system on a European scale.
A third challenge is, as interviewees argued, that there is also a need to make sure that
the technology provides a boost to the rural economy and society and is not just
located there. Once the industry moves into full-scale deployment there is a need to be
able to build large-scale installations. This implies having the skills base ready.
Scotland has the standard project management skills (e.g. from previous oil rig work)
and a range of potential sites for fabrication and engineering. For instance, a former
oil-rig construction yard at Nigg on the Cromarty Firth in the Highlands was bought in
2011 redevelopment by the Global Energy Group56. This will create up to 3000 jobs,
HIE has worked with other agencies (SFC and SDS) to support on-site training that
puts people through the equivalent of three years in college in 12 weeks. There should
be a similar focus on capturing, what one interviewee called, the intellectual legacy by
embedding post-grads and doctoral students at production, fabrication and testing
sites in rural areas on a longer-term basis.
3.4.3 Innovation everywhere? Innovation policy in rural Scotland
Interest in Scotland to the issue of tailoring policy to recognise different needs in
different geographical areas and how these factors influence economic development
(and to some extent related academic or public research activities) is clearly present in
policy circles. The need for a specific approach to innovation in rural areas was
recognised already in a 2006 report (funded as part of the ERDF Regional Innovation
Actions Programme) on The Scottish Innovation System – Actors, Roles and Actions57.
This study concluded that there was a functioning innovation system in Scotland, but
56 http://www.bbc.co.uk/news/uk-scotland-highlands-islands-15382061
57 www.scotland.gov.uk/Resource/Doc/89713/0021562.pdf

A smart, sustainable nation?
42
that it excluded areas both in the Highlands and Islands and in the South of Scotland.
Partly as a result, a number of actions were taken to link rural and peripheral areas to
the knowledge available in Scottish HEIs including the Hi-Links Project (a knowledge
exchange project for the UHI which wrapped up in May 201158) in the HIE area and
SE launched the South of Scotland Innovation System project (see below).
However, some six years on from the Scottish Innovation System study, a number of
interviewees still argued that there is a more or less explicit “urbanisation of
innovation policy” due to the focus on ‘high-tech’ growth companies and certain major
initiatives in the ‘central belt’ (the area of Scotland lying between Glasgow and
Edinburgh). Nevertheless, there is a clear recognition that there is not a one-size-fits-
all approach from a geographic perspective to supporting research and innovation.
Firstly, interviewees from HIE underlined that their approach to supporting both
business innovation and the university sector was designed to take account of the
specific development obstacles and opportunities that exist in the relatively more
sparsely populated North-West of Scotland. Secondly, interviewees from SE pointed
to on-going work on ‘Scotland's economic geography’ that is seeking to shed light on
both the urban/rural dimensions of business innovation support and the identification
of the right spatial level to intervene,
In the Highlands & Islands region, the HIE client base is formed by about 500 account
managed businesses and 80 social enterprises. The HIE business support services and
funding is divided by geographical area rather than by type of support, hence R&D
support is allocated to firms as part of a package of support rather than as a distinct
measure. Individual firms are supported to reach growth targets on a 3-5 year horizon
and an annual review adopts a holistic approach reviewing financial and non-financial
indicators. In additional to the work of the locally based account managers, a small
team within HIE provide horizontal support and complementary projects via the
innovation and skills programme (which has a total annual budget of about £1m, of
which about 35% is ERDF co-financing).
The specificity of innovation policy in the H&I region is illustrated by the focus on
‘people and skills’: both attracting and retaining skilled graduates in the region and
supporting the know-how and skills of both managers and personnel of regional firms.
Interviewees stressed that population and ‘expanding horizons’ were key issues in the
H&I. In budgetary terms, the single largest innovation policy measure (in 2011) was
the graduate placement scheme59, which is a cornerstone of the regional innovation
policy. The graduates bring in ‘time and expertise’ for a maximum placement of 12
months with the objective being to fill 350 vacancies over three years.
Secondly, an ‘inward looking’ attitude and a ‘lack of ambition’ of rural firms (with
many at best looking to ‘export’ to central Scotland or the other UK countries) is a
second issue that HIE addresses through a number of specific actions. In order to
tackle this ‘internal capability’ weakness, HIE is investing a lot of effort in
entrepreneurial development through projects running with MIT and the UK Institute
of Directors. These small-scale initiatives take regional entrepreneurs to Boston for
‘inspirational’ learning and bring leading business people from elsewhere in the UK to
act as mentors for regional firms. Another example of actions designed to encourage
greater ambition are HIE funded trade networks. These networks operate for three
years and are run by facilitators who help firms to share knowledge about markets and
technologies (e.g. more than 300 businesses in the creative industries sector have been
assisted by trade networks funded by HIE). Interviewees also underlined that the
58 The final report of the Hi-Link projects is available at www.hilinks.uhi.ac.uk/files/hilinks-final-report-
FINAL.pdf Subsequently to Hi-Links, Interface Scotland has developed into a national service with a
dedicated team covering the HIE area.
59 Other funding sources are also available to regional businesses including SMART Scotland (via SE) and
the UK wide Knowledge Transfer Partnerships (KTPs), which HIE co-finances.

A smart, sustainable nation?
43
Enterprise Europe Network in Scotland has proven to be a quite effective instrument
of support for the internationalisation of firms.
Box 6: rural innovation challenges in the Northern Periphery
In a blog for the inter-regional RIBS project, John Mackenzie, Development Manager Innovation and
Knowledge Transfer, Highlands and Islands Enterprise asked himself “are we (rural areas) so different to
the urban densely populated areas in terms of the support and infrastructure required to develop a
innovative and entrepreneurial ecosystem ?
So I thought about my experiences in terms of working in innovation support in the highlands and the
challenges faced by the companies I am trying to support. Some of the obvious ones such as distance from
customers, access to networks, lack of R & D investment, transport costs, poor IT infrastructure and
difficulty recruiting. As well as these challenges one of the main obstacles mentioned in the highlands is
access to academia with the University of the Highlands and Islands still in the capacity building phase.
These challenges do exist but they can also exist in an urban capacity albeit to a lesser extent so are we
trying to differentiate rural innovation and the challenges surrounding that for the sake of being
different? In my experience of rural innovation and looking at the feedback from RIBS colleagues I don’t
think we are. I think the type of support rural companies look for compared to urban companies differs in
terms of the levels of confidence and belief that they can actually achieve success beyond their immediate
vicinity. In most cases the bulk of the support given to them is about teaching them to have the confidence
in themselves, their company and in some cases their staff”.
Source: http://www.ruralinnovation.eu/
The on-going strategic importance of ERDF co-financing of innovation related
initiatives in the H&I region was underlined by interviewees. This extends beyond the
mainstream operational programmes to Territorial Co-operation programmes which
are used to learn from and exchange with other northern and Nordic regions. an
example is the €1.1m RIBS project60 funded by the Northern Periphery programme.
Based on a needs analysis of 120 SMEs and the business support community in the
target regions, RIBS will develop business growth programmes products in four main
areas: SME growth, SME internationalisation, entrepreneurship, and rural clustering,
the latter by adopting an explicitly cross-sectoral approach.
Although SE does not explicitly target support on a geographical basis 61, it has
developed a number of initiatives to address specific rural challenges (e.g. the Rural
Leadership and Planning to Succeed programmes). Moreover, the SE account
managers are regionally based and work with innovation, sectoral or technology
specialists who have a national remit but are based regionally. SE did support a
specific rural issue as noted above, through an ERDF co-financed project, the South of
Scotland Innovation System Initiative (SoSISI)62 that ran from 2008 to 2011. The
initiative aimed to increase the level of innovative activity in the South of Scotland
(covering Dumfries & Galloway and the Scottish Borders), and facilitate the
interaction for new and growing businesses with the broader Scottish innovation
system63. Only a couple of further education colleges and Scottish HEI teaching only
campuses are located in the South of Scotland. Interviewees stressed that this meant
there were limited local drivers for business-academia co-operation.
60 See: http://www.northernperiphery.eu/en/projects/show/&tid=79 and http://www.ruralinnovation.eu/
61 SE has five regional advisory boards that provide input to strategy and alignment of service delivery to
regional needs: http://www.scottish-enterprise.com/about-us/our-leadership/regional-industry-advisory-
boards.aspx
62 Based on a January 2011 interview with Colin Meager & Moira Forsyth of Scottish Enterprise, managers
of the South of Scotland Innovation System project and EKOS (2010): Strategic review of South of
Scotland Innovation System (available at http://www.evaluationsonline.org.uk).
63 The project funded two main actions. The first ‘Knowledge Links for Business (KLINKS) funded a team
composed of a dedicated advisor from Interface Scotland for the south of Scotland area plus a team from
Targeting Innovation. The aim was to identify businesses with a capacity to interact with academia and
encourage academics to come down to south of Scotland and meet with groups of companies to explore co-
operation possibilities. The second action Stimulating and Supporting Human Networking through a sub-
project entitled Linking Entrepreneurs was contracted to Fusion, This project built on experience in the
H&I area and aimed to link up entrepreneurs scattered across a relatively sparsely populated area in the
South of Scotland through organising a series of bespoke events and support activities.

A smart, sustainable nation?
44
Similarly to the approach in the Highlands and Islands, the interviewees underlined
that there was no a priori focus on companies from growth sectors, rather the aim was
to develop a culture of innovation and co-operation in firms with ambition to grow.
Interviewees stressed that a lot of the time the main issue is ambition with companies
focused on serving local markets. This meant that the business projects supported
were not necessarily technology focused, for instance academics and their students
were used to support market research. Equally, there was an emphasis on
collaborative projects involving 2-3 companies in the food, tourism or creative
industries sectors. For instance, in the food sector, food forums/clinics were run to
support ‘practical innovation’ such as testing the shelf life of products. Finally,
interviewees underlined that the outcome of cross-sectoral linkages was noteworthy
such as co-operation between a company in the field of medial devices and another
specialised in the treatment of sewage.
The experience from both the Highlands and Islands and the south of Scotland
illustrates that supporting the innovation process in a company located in rural,
peripheral and more sparsely populated areas requires a tailored (and in all likelihood
more time and hence cost intensive) support that places a greater emphasis on
accessing knowledge (on market possibilities, on technologies and on possible
partners) but on raising management capabilities and hence levels of ambition.
Interviewees in both regions argued that they are “doing the right thing” in applying
an intervention logic with a strong focus on socio-economic cohesion and by doing
more over a broader base irrespective of whether for just growth firms.
In the future, Scottish innovation policy priorities (including the next round of
ERDF/ESF funded programmes) will need to strike the right balance between:
• On the one hand, concentrating resources on effective national services (e.g. the
well respected Interface Scotland service which has extended coverage to the
Highlands and Islands region) or a few major ‘business innovation
infrastructures’; and
• On the other, reinforcing the capacity to boost innovation in a broader range of
firms (given the need discussed above to raise the overall number of innovative
active firms) through bespoke support at regional and local levels for ‘firms with
ambition’ whatever their sector and wherever they may be located.
Equally, the perception that certain sectoral or industry leadership groups remain only
relevant to firms in the urban areas of Scotland will need to be countered and a more
inclusive consultative or mobilisation process developed. A competitive call for
funding of localised clusters or innovation networks across Scotland’s rural areas may
be one possible option. This might require additional resources from Scottish and/or
EU funding programmes. In general, the level of funding for innovation support in
rural areas can be considered deficient since it does not allow the agencies to pursue
potential emerging business opportunities (e.g. HIE noted that they did not have the
resources to pursue the full potential of the natural health products sector).

A smart, sustainable nation?
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4. Conclusions and recommendations
The European Commission’s RIS3 Guide argues that “Smart specialisation is not
about creating technology monoculture and uniformity; on the contrary, it is likely
to promote greater diversity. Indeed, regions can sustain multiple lines of smart
specialisations (priorities). Most of the above structural changes generated by smart
specialisation strategies actually involve the creation of variety, such as the
transition to new activities or the diversification of existing sectors.” In this context,
Scotland provides an excellent example of a country that has adopted a focused
approach on a limited number of key ‘growth sectors’ that allows for sufficient
flexibility in delivery to take account of the diversity of industrial, market and
technological trends as well as distinct corporate and societal governance cultures.
Scottish stakeholders interviewed for this report underlined repeatedly that they view
themselves as being on a smart specialisation journey64 and that there is not at this
stage a dedicated strategy that can be assessed. From one perspective, this may be
considered to be an overdose of modesty since the Scottish policy framework is highly
sophisticated in comparison to many, if not most, EU regions and bears comparison
with those of the neighbouring Nordic countries. However, this feeling of being on a
journey also reflects a recognition that while the Scottish policy objectives, governance
practices and measures may be well developed and relatively comprehensive, that
there are still areas where there is room for improvement, that for a policy to be
effective it needs to be constantly reviewed and adjusted to demand conditions and
that, to paraphrase the smart specialisation jargon, a process of entrepreneurial
discovery needs to be fostered on a continuous basis.
This report has sought to review the evidence on Scottish research and innovation
policy objectives and challenges and then to explore the current state of development
and effectiveness of policies and the governance processes that will contribute to
“smarter specialisation”. Given the Team Scotland view that they are on a journey, the
report should be seen as a modest contribution that will hopefully provide fuel to the
debate rather than a definitive appraisal of Scottish innovation policy.
4.1 Summary conclusions
As noted in the introduction the European Commission define national/regional
research and innovation strategies for smart specialisation (RIS3) as “integrated,
place-based economic transformation agendas”. The conclusions are structured
according the five key principles of the RIS3 concept.
1. Does the strategy focus policy support and investments on key national/regional
priorities, challenges and needs for knowledge-based development, including ICT-
related measures?
The Scottish Government’s Economic Strategy provides a solid framework for
policy intervention in a number of key growth sectors. The strategy is
implemented and pursued in a coherent and unified way by the various agencies
which translate a set of national goals and objectives. In doing so, the agencies
appear to be given sufficient autonomy to further refine the focus on specific
sectors and enabling technologies. There is an almost continuous process of
consultation and strategy development at sectoral level through industry
leadership groups, co-chaired by industry and senior government members (to the
level of the First Minister in the case of energy) or officials. Similarly, the
translation of medium-term objectives set in the SGES are regularly updated at the
operational level through the three-year business/operating plans of the agencies.
64 http://ec.europa.eu/regional_policy/conferences/strategies2012/doc/munro.ppt

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A number of elements of the Scottish economic policy strategy process may be
considered good practice at European level (e.g. the setting of a number of
inspirational targets such as for export growth or renewable energy production,
the clear performance framework and regularly published reports on progress to
target or the process of definition and renewal of the sectoral strategies).
If there is a less positive side to the story, the two separate research and
innovation policy frameworks (which while they were the subject of considerable
stakeholder consultation lacked a multi-annual funding framework) are largely
‘redundant’ since they no longer appear to influence the implementation of policy.
2. Does it build on national/regional strengths, competitive advantages and potential
for excellence?
As noted above, the existing strategic framework is strongly focused on a number
of growth sectors and also takes account of the importance of the influence of a
key enabling technologies. The choice of key sectors is broadly justified (as is
underlined by the recent analysis of the cluster portfolio, and as noted above, at
the operational level there is sufficient room for manoeuvre for the agencies to
adapt policy implementation to local or sub-sector needs. The major driving
sector in the Scottish economy (and to a large extent in the innovation system) is
clearly energy: currently this means oil & gas, followed by offshore wind (where
the technology is mature enough to be in the production phase but where Scotland
has less of a technological lead. However, the real opportunity for Scotland is to
emerge as both a technological and market leader in marine energy (wave and
tidal). This will not be easy despite significant natural resource and technological
know-how advantages. There is a real risk of a repeat of what has happened to
some extent the life science sector start-ups in Scotland, i.e. that the current group
of smaller Scottish marine energy firms will be acquired by large multinational
firms before they can coalesce into one or more ‘national champions’.
3. Does it support technological as well as practice-based innovation and aim to
stimulate private sector investment?
In both the strategic documents and in interviews with stakeholders, the
understanding of the new to boost ‘innovation activity’ and not just R&D or
technological development was manifest. The terms market-driven, customer-
focused, etc. are used regularly not just as catch-words but as a reflection of both a
strategic and operational focus on making sure policy is helping Scottish
businesses to become or stay aware of the market opportunities (whether it be
export markets or new emerging opportunities). Across a range of stakeholders
interviewed, the idea that innovation through testing can allow Scottish firms to
gain a competitive advantage is growing and the recent focused measures in the
field of renewable energy are good examples.
This said, Scotland faces a significant and real challenge to increase the number of
firms that are innovation active: 5000 more innovation active SMEs are needed,
according to Scottish Enterprise. There has been too much focus on academic
spin-offs and commercialisation with limited returns in terms of high-growth
firms from this investment. The understanding that high-growth firms are not
only to be found in a few select fields of technology and that scientific
specialisation (e.g. in medicine and other life sciences) does not necessarily
translate easily into business growth is present amongst stakeholders.
Nevertheless, the balance of public funding is still heavily on commercialisation
support and knowledge transfer. Indeed, the evidence suggests that the impact of
spin-off companies (the IP to IPO route) whilst not negligible is not making a
significant impact on the Scottish economy. Hence, efforts to raise the business
expenditure levels on R&D (BERD) need to be seen more broadly than increasing
the (small) number of ‘high-tech firms’ in the economy. The point should be rather
to increase the capability to adopt/assimilate technologies in existing companies.
Such a strategy is complementary to the commercialisation agenda not competing

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since, logically, even if knowledge transfer activities are as effective as possible, the
Scottish business sector is not going to source all required technologies from
Scottish universities. However, given the relatively low internal financial and
human means available to many smaller firms, the various R&D and innovation
grant schemes (awarding 100+ grants annually) are not sufficient if Scotland is to
achieve a qualitative as well as quantified increase in business innovation activity.
4. Are stakeholders fully involved and is innovation and experimentation
encouraged?
The Scottish policy-making and implementation process involves stakeholders
(industry, education, social economy, etc.) in both the design phase and to a
degree in the implementation of policies (e.g. Scottish Food and Drink). While the
Scottish Government may set a series of targets and priorities in the economic
strategy, there is an almost constant process of adaptation and refreshing of
strategies at sectoral level. Interviewees underlined the need for policy
implementation to remain flexible in order to respond rapidly to changing market
conditions or to grab opportunities such as major inward investment, etc.
As was noted in the report, there is an increasing discussion about ‘Scotland’s
economic geography’ and a concern to adjust the design and delivery of innovation
policy to the realities of companies in both urban and rural areas; and to
determine the right level of intervention. Innovation support is being tailored to
firms in specific sectors (e.g. in food and drink), specific areas (e.g. the new
Enterprise Areas policy) or rural and peripheral (sparsely populated) regions. In
the latter, innovation policy needs to have a very human face in order to support
small but ambitious firms, irrespective of their sector, that can make all the
difference to the development prospects of isolated communities.
5. Is the policy evidence-based and include sound monitoring and evaluation
systems?
There has been a considerable amount of analysis and reflection over the last
decade in Scotland on the scientific potential, innovation system and specific
sectoral or thematic technological strategies. As can be seen from Appendix C, a
range of both general and sector specific policy documents and reports on research
and innovation have been issued in Scotland since 2006.
The Scottish Government and the principle agencies (SE, HIE and SFC) apply
good practice principles in terms of making available online almost all studies and
evaluation reports commissioned. Scottish Enterprise has created a single
repository of all reports (see http://www.evaluationsonline.org.uk) which is
organised thematically and is searchable. Other agencies and the Scottish
Government itself similarly publish systematically research and evaluations
conducted on their behalf. The evaluations are generally of good quality, however,
there tends to be a focus on ‘market failure’ rationale in the analysis and relatively
simplistic ‘multiplier’ calculations (GVA, etc.) which is at odds with the more
dynamic systems approach mentioned in the strategy document, where the
intervention logic and expected outcomes may be related to system failures as
much as direct effects on specific beneficiaries.
4.2 Recommendations
1. Innovation policy in Scotland is an integrated element of a broader and coherent
economic development strategy. The strategy is already highly focused on a
number of key sectors, is further enhanced and developed at operational level by
the main agencies and has broad stakeholder backing and indeed involvement.
The current policy framework could, however, benefit from an overhaul of the
innovation and research policy documents that are now outdated. The aim here
should be to bring together and critically examine progress made on the
commitments of the previous strategies and applying the ‘Team Scotland’

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philosophy propose a multi-annual cross-agency action plan that could serve as a
medium-term framework for prioritising available budgets.
2. The critical weakness in the Scottish innovation system remains the low number
of enterprises involved not only in formal R&D but also in other forms of
innovation activity. Inspirational target setting has proved effective, it seems, in
mobilising business stakeholders in each sector to work towards raising export
intensity in the economy. The same type of process is urgently required to raise
the ‘game’ in terms of innovation and broaden innovation activity away from the
usual suspects. Target setting alone will not be sufficient and there is a need to
rebalance funding away from the commercialisation of academic research, which
has failed to significantly impact on the Scottish economy, to funding supporting
thematic or sectoral collaborative innovation projects of small and medium sized
firms and larger ‘companies of scale’ as well as partners from the HEIs. A second
strand of support should be to expand the number of science and engineering
graduates working in business in order to raise internal capabilities of smaller
firms and to foster a better balance of human resources in innovation system,
currently dominated by the academic sector. Finally, the experience of the
dedicated sectoral innovation services (of Interface Scotland and contracting in of
a private specialised RTO to provide hands-on practical innovation support) in the
food and drink sector, should be considered as an option for other sectors where
overall innovation activity is well below par.
3. In governance terms, the Scottish experience is broadly highly positive and could
be looked at by other EU countries as a model of cross-agency co-operation and
industry and stakeholder involvement (indeed, ownership) in both strategy
development and implementation. The recommendations in the recent Alignment
and Connectivity review are well-grounded and appropriate. For instance, the idea
of moving towards a single Knowledge Exchange office would appear relevant in
order to reduce the number of specific ad hoc projects funded in each of the
Scottish universities. At the same time, the advantage of moving to national
knowledge exchange, innovation and commercialisation services needs to be
balanced with the need for focused interventions in specific areas (see the
discussion on rural innovation in this report) or sectors. Similarly, there is a need
to ensure that industry groups are broad and representative and are regularly
challenged and refreshed in order to avoid ‘lock-in’ to specific technologies or sub-
sectoral interests. The need for flexibility in the policy response and continuous
review of sectoral strategies should be enshrined in the sectoral strategy process.
4. Concerning the evidence base, there is a need to enhance investment into the
analysis of innovation processes at enterprise level and within emerging clusters.
This would require greater access for researchers and analysts to micro-data that
is currently difficult to access due to UK wide restrictive rules on access to
business data. However, the Scottish Ministers have the latitude, within the
current legislative framework, to grant greater freedom of access to this data.
Equally there is a need to continue to gather and share disaggregated company
data across agencies. Finally, the Scottish Government should consider sponsoring
or co-funding (e.g. with a UK wide Research Council) a multi-annual programme
of research into innovation in the Scottish economy. This could be used to fund
both doctoral and post-graduate research on specific sectoral innovation systems
as well as commissioning studies in support of the sectoral industry leadership
groups.

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Appendix A Guidance for expert assessment from DG REGIO
1. Is the strategy based on an appropriate stakeholder involvement? How does it
support the entrepreneurial discovery process of testing possible new areas?
1.1 Has the strategy been developed through a broadly-based process of direct
stakeholder involvement, including mainly regional government/regional agencies,
entrepreneurs, knowledge providers but also other/new stakeholders with the
potential for innovative contributions, through measures such as surveys,
consultations, dedicated working groups, workshops, etc.
1.2 Has this process been adequately described or referred to in the submitted
document?
1.3 Is there an identified leader of the RIS3 process? If yes, who is it? Does the strategy
identify the leading entrepreneurs involved in the process?
1.4 Is the priority-setting in the strategy based on an identification of market
opportunities/economic potential informed by an entrepreneurial search/discovery
process, i.e. by a process foreseen to identify and test specific entrepreneurial
opportunities?
2. Is the strategy evidence-based? How have areas of strength and future activity been
identified?
2.1 Does the strategy include/build on a sound analysis of the country's/region's
existing situation with regard to scientific/technological and economic specialisations
or refer to such an analysis/related studies?
2.2 Is it based on a sound assessment of the competitive assets of the region, including
an analysis of its strengths, weaknesses and bottlenecks
2.3 Besides a SWOT analysis, what other quantitative and qualitative
information/methods have informed the strategy (e.g. cluster analysis, value chain
analysis, peer review, foresight)
2.4 Does the document propose a vision for the region? Is this vision clearly described,
credible and realistic?
3. Does the strategy set innovation and knowledge-based development priorities? How
have potential areas of future activity been identified? How does it support the
upgrading of existing activities?
3.1 Does the strategy outline a limited set of innovation and knowledge-based
development priorities?
3.2 Are these priorities sufficiently specific identifying existing/potential niches for
smart specialisation and related upgrading of existing activities or potential future
activities?
3.3 Do the thematic priorities chosen in the strategy reflect the description and
analysis of the regional economic structure, competences and skills?
3.4 Does the strategy take into account considerations of achieving critical mass
and/or critical potential in the priority areas selected?
4. Does the strategy identify appropriate actions? How good is the policy mix?

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4.1 Does the strategy include action lines and/or realistic roadmaps in line with the
objectives? Are these sufficient to reach the objectives?
4.2 Does the strategy indicate which bodies are responsible for the implementation of
these action lines/roadmaps?
4.3 How does the strategy support/facilitate:
• Cross-clustering and the identification of innovation opportunities at the interface
between different disciplines/industries/clusters?
• Entrepreneurship and the innovation capabilities of SMEs, for instance by
facilitating the diffusion and adaption of technologies, incl. key enabling
technologies?
• The improvement of demand-side conditions and especially public procurement
as a driver for innovation?
Are there sector-specific support services/schemes foreseen?
4.4 Does the document outline measures to stimulate private R&D&I investments, for
instance through public private partnerships? Does it demonstrate/aim at financial
commitment of the private sector with the strategy?
4.5 Does the strategy identify budgetary sources, and does it present indicative budget
allocations?
4.6 Does it include a sufficiently balanced mix of soft innovation support services and
financial instruments? Does it foresee an appropriate mix of grants, loans and
financial engineering (venture capital)?
5. Is the strategy outward looking and how does it promote critical mass/potential?
5.1 Does the strategy take into account the competitive position of the country/region
with regard to other countries/regions in the EU and beyond, as well as its positioning
within global value chains?
5.2 Does it foster the internationalisation of SMEs and does it stimulate regional
clusters/initiatives to make connections within international/global value chains?
5.3. Does it foster strategic cooperation with other regions (please note whether the
regions foresees the allocation of mainstream Structural Funds within their
Operational Programmes and/or cooperation through INTERREG)?
5.4 Are sufficient efforts being made with regard to avoiding imitation, duplication
and fragmentation, in particular with regard to what is happening in neighbouring
regions?
6. Does the strategy produce synergies between different policies and funding sources?
How does it align/leverage EU/national/regional policies to support upgrading in the
identified areas of current and potential future strength?
6.1 Is the strategy and its priority-setting complementary to national-level priorities,
e.g. is it in line with the National Reform Programme, and is it in synergy with
national research/education policies?
6.2 Is the strategy based on inter-departmental/inter-ministerial/inter-agency
coordination and cooperation covering relevant policies, in particular between
research/science policies and , economic development policies, but also with regard to
other relevant policies such as for instance education, employment and rural
development policies? Does it assess/take into account the existing level of policy
coordination within the region?

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6.3 Does the strategy include a clear reflection/proposal on how to exploit synergies
between different European, national and regional funding sources, in particular
between ERDF and Horizon 2020, but also with other key programmes such as ESF,
EAFRD and COSME?
6.4 Does it consider both, upstream and downstream actions to and from Horizon
2020 financed by Cohesion Policy? How does the strategy link to relevant European
(ESFRI) as well as to smaller national and regional partnering facilities?
7. Does the strategy set achievable goals, measure progress? How does it support a
process of policy learning and adaptation? How is it to be communicated?
7.1 Does the document identify concrete, achievable goals? Does it identify output and
result indicators and a realistic timeline for these goals?
7.2 Does the region have a sound governance and monitoring system in place to
implement, monitor and evaluate the regional innovation strategy? Does this support
a process of continuous policy learning and adaptation? If not, are actions foreseen to
build up capabilities for that?
7.3 How is the strategy to be communicated to stakeholders and the general public?
What are the mechanisms for ensuring support for the strategy from critical groups
and the active participation of such groups in its implementation?
8. What are the conclusions and which advice can be given to improve the strategy?
8.1 In case the strategy is based on an earlier strategic exercise/innovation strategy,
has it been appropriately reviewed and updated? What is done/going to be done
differently as a consequence of the strategy and process compared to the
previous/existing economic strategy?
8.2 Can the strategy be regarded as a regional research and innovation strategy for
smart specialisation? What are its strong aspects? What are its weaker parts?
8.3 What needs to be changed/improved? Feel free to add any other comment you
may have that could help the region to improve its RIS3 process and strategy.

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Appendix B Statistics on Scottish scientific and innovation
potential
Figure 18 : growth in scientific publications (2000-2011)
Source: SCOPUS, calculations authors
Figure 19 Scotland versus England – relative citation impact 2003-07
Source: Science Watch, calculations authors

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Figure 20: Scotland versus Finland, relative citation impact 2003-7
Source: Science Watch, calculations authors

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Appendix C Studies, policy documents and programmes on
research and innovation
Title
Year
Comment
Growth, talent, ambition, the
Government’s Strategy for the
Creative Industries
2011
Summarises action being taken to support the
creative industries sector. Includes some key
sector statistics such as growth in real terms of
25% in GVA from 2000-2010. Lead agency is
Creative Scotland supported by the Scottish
Creative Industries Partnership (SCIP). Strategy
includes a specific chapter on innovation.
Towards a Low Carbon Economy for
Scotland: Discussion Paper
2010
Innovation and technology development are
identified as a core dimension of a low carbon
strategy (chapter 3). Systemic challenge of
transition to low carbon economy recognised.
Low carbon sector predicted to expand to 130,000
jobs by 2020 from 70,000 in 2008. Contribution
of universities is mentioned, including at least 25
relevant research centres and research pooling
such as Energy Technology Partnership.
Summary of low carbon R&D support in Scotland
and UK provided.
International comparative
performance of Scotland's research
base
2010
Updates previous analysis in 2007
CAMERAS: A Co-ordinated Agenda
for Marine, Environment and Rural
Affairs Science
2010
Innovation for Scotland
2009
Scottish Government's framework for innovation
highlights how Government agencies are
supporting business and helping stimulate
innovation.
Demanding Growth in Scotland: why
Scotland needs a recovery plan based
on growth and Innovation
2009
NESTA think piece outlining options for a
demand driven approach to industrial policy.
Enterprise in Scotland: insights from
Global Entrepreneurship Monitor
2009
Report for Scottish Enterprise by Hunter Centre
for Entrepreneurship
Key sectors reports on:
Life Sciences
Creative industries
Energy Sector
Food and drink sector
Tourism
Financial and business services
Universities
2009
Seven separate reports summarising the context
of the sector, description of scope and
performance, productivity and rational for key
sector status. The reports identify challenges and
opportunities and public sector intervention at
both strategic and operational and an assessment
of the effectiveness of interactions and
interventions. Finally, the reports conclude with
an international perspective (notably Nordic
comparator countries
A Science Strategy for Scotland
2008
Replaced previous strategy adopted in 2001.
Accompanied by background analysis.
Highlands & Islands ERDF
Operational Programme 2007-13
2007
Notably Priority 1: Enhancing business
competitiveness, commercialisation and
innovation
Lowland & Uplands Scotland ERDF
programme 2007-13
2007
(2009)
Notably Priority 1 - Research and Innovation
Investment and Economic Growth
2007
Scottish Enterprise review of evidence
Scottish Innovation System: Review
and Policy
2007
ERDF co-funded under regional innovative
actions programme
Scottish Innovation System: actors,
roles and actions
2006
ERDF co-funded under regional innovative
actions programme

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Appendix D Scottish innovation policy governance system

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Appendix E Social network analysis of Scottish participation in FP7

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