Sustainable Business Growth

The Royal Society of Edinburgh (RSE) is pleased to respond to the Scottish Parliament Enterprise and Culture Committee Inquiry into sustainable busin ess growth. This response has been compiled by the General Secretary, Professor Andrew Miller and the Policy Officer, Dr Marc Rands, with the assistance of a number of Fellows with considerable experience in this area. There are many competitive challenges facing the Scottish economy, including demographic, social and industrial shifts, which must be set against the background of the age of in formation which is opening up with dramatic speed, due to ever cheaper and faster computing and global connectivity. As a consequence, whole new opportunities and challenges are emerging where: - Commodity products will be provided by the cheapest producer - Anywhere in the world can be centre stage - Dynamic new economies are emerging - Creativity and enterprise will differentiate the leaders - Winners will compete on the global stage The question is where does Scotland fit in this changing world, and how can it grasp the opportunities this brings. To understand this, Scotland must assess where it stands in economic and competitive terms, in comparison with the UK, in the EU and internationally. First, in the UK, Scotlands top 100 companies have been achieving well above trend growth and the economy needs a much larger share of that enterprise dynamism. The second area of reference is the OECD, where Scotland scores well on input and investment factors with: - Employment level at the top of top quartile - 50% of young people go in to higher education, which is one of highest in Europe - Investment on training compares well with other OECD countries - Scotland is third per capita in learned and scientific paper publication - 17% of in tellectual property patents from higher education institutions in the UK come from Scotland This is a tremendous starting point. But in stark contrast, provision of opportunity trails in mid to low 2nd quartile as indicated by the low level of graduates in the labour force, as many of those graduating find employment elsewhere, and high youth unemployment. Equally the creation of opportunity in high growth company starts also trails at lower end of 2nd quartile, and this is a key driver in the creation of opportunity. But perhaps the most telling is the lo w level of research and development in the business sector, which are vital elements in an enterprise economy. The equation is unbalanced, where Scotland is making above average input investments in capability, while receiving below average payback in wealth creation. It is vital that Scotland builds a sustainable and competitive economy which has the capacity to create caree rs and opportunities for the young, and in vestment for its long term and sustainable future. In responding to the Inquiry, the first thing is to recognise the positives. In the age of information, Scotland has a first class starting point: - High employment level - World class creativity in research - High levels of training for work - Scotland is sufficiently small to be able to make changes quickly - Stable and successful UK macro-economic environment - Outstanding top-100 company growth

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Scotland also has very successful and emerging sectors in finance, energy, tourism, life sciences, informatics and high value added manufacturing. This is a powerful platform from which Scotland can take great encouragement, but it is only a start. To create a competitive and sustainable economy, there is a need to capitalise on these investments and improve Scotlands overall productivity by basing opportunity for Scotlands entrepreneurs in Scotland, as well as through greater investment in skills, higher expenditure on research and development, in creased appetite for innovation, and an improved environment in Scotland for business, whether home-grown or otherwise. Basing Opportunity in Scotland There is a growin g body of very able and enterprising business people in Scotland; some as entrepreneurs, others just as competent and innovative managers. Alongside them, there are many with relevant skills and talents generated by Scotlands hig her education sector. However, the reality is that the South of England offers, on a continuing basis, a vast diversity of opportunities, which will attract those who are at the most mobile stage of their personal development. This is not a cultural or ethnic failing, but a competitive situation at the level of personal aspiration in the face of an overwhelming plethora of alternatives in the South. The issue is promoting opportunities and then basing such opportunities here. There are two components to this. Although Scotland has a modest level of R& D in vestment, the one major source of R&D Scotland does have is its world class Universities. However, reliance on this as a principal source means that the creation of opportunities will continue to be a slow incremental process, but as Scotlands principal source of R&D, it highlights the priority of the promotion of the commercialisa tion of research from Scottish universities. Secondly, with over 90% of companies in Scotland having less than 10 employees, it means that the bulk of opportunities for some time to come will derive from Scotlands SME businesses. The challenge here will be to facilitate competitiveness in the broadest sense (i.e. transport facilities and links, specific skill needs and overall fiscal and regulatory environment), and to extend the life of the SMEs Scotland does have. Education and Skills Risk taking and reward are not always seen as virtues. There needs to be continued investment in Scotlands education system both at primary and secondary schools levels, with particular investment in science, technology, wealth creation and competition. Innovative initiatives such as Generation Science and Young Engineers Clu bs should be utilised to foster greater interest in science and its application in both children and parents. From the beginnin g of secondary schools, the curriculum should include technological studies alongside applied business and entrepreneurship studies. Consid eration should also be given to ensuring that a greater variety of relevant work experience is available to pupils who seriously wish to consider a career in the scientific fields outside of the professions. In order to improve productivity, the basic skills which any child should be expected to have on leaving formal education needs to be improved. Further Education Colleges should be encouraged to provide more Continuin g Professional Development courses for employees. In this context, the research and development (R&D) tax credit has been successful in increasing levels of companies R&D spend and consideration should be given to similar incentives for small to medium sized enterprises (SMEs) who train employees with direct results on their employers productivity and profitability. Consid eration should also be given to increasing Scotlands pool of labour. For example, consideration should be given to incentives for employers for introduction of flexible working arrangements to increase the numbers of women in employment, and in making greater use of older generations in the work force. There is also a need to ensure that the Fresh Talent Initiative is successful on an ongoing basis to attract and retain highly skilled workers either to join employers or to establish their own busin ess. R&D and Innovation Further and continued investment should be made in Scotlands Universities to ensure that they are in a position to attract and retain academics of international standing. Scotlands science base provides an excellent resource for commercialisation, not only by start up companies but by existing indig enous companies. In this context, research-based universities are now regarded as important drivers of economic development. Although they are most effective in this where there are mature R&D-based industries able to pull on the research base, the example of the USA demonstrates that research/university push can also be a powerful driver of regional development and the creation of R&D based industry. It is primarily for these reasons that in the USA about 2.5% of GDP is spent to support tertiary education and 2.7% of GDP to support research, and why other countries (e.g. Chin a, Singapore, India) are committing major sums to enhance universities and their research roles. In contrast, EU in vestment in Tertiary education is an average of 1.2% of GDP, and 1.93% of GDP in 2

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research. Research fundin g has also grown at rates less than that of our competitors, and the financial flexibility/viability of the universities has been severely eroded. Start Up Strategy and Access to Capital Existing schemes appear to be working for spin out companies from Universities and for start-ups generally, and these schemes should be continued. While through a combination of the Proof of Concept Fund, RSE Enterprise Fellowships, the Small Firms Loan Guarantee Scheme, the Co-investment Fund and equity from Scotlands growing Business Angel community, access to capital for start-ups has improved dramatically, there is now a gap for growth capital. A Scottish Growth Fund, along the lines of the original Scottish Investment Partnership, should be established to provide such equity to companies, alo ng with a venture fund that aids R&D and market expansion. An investment programme, which is an extension to the Co-Investment Fund, has however been recently introduced by Scottish Enterprise to close the venture capital gap. At the same time, the provision of training for skills for growth should be reviewed as there are still shortages of various categories in the work force. Growth Strategy The main challenge is to encourage more companies to innovate. Innovation does not necessarily mean research but to examine new markets, acquisitions of new business or simply improvement of internal processes. In this context, the acquisition of a new type of machinery is as important an innovation for some as the commissioning of new research. Through Scottish Enterprise there are a plethora of tools and schemes that should be examined to establish whether or not they are fit for purpose. Many schemes are tried and tested but many Scottish SMEs do not believe that they qualify for such schemes, believing their ideal applicant to be either a technology start up or an inward investor. Scottish Enterprises marketing and promotion of such schemes should, therefore, be reviewed. Recent initiatives such as the Intermediate Technology Institutes (ITIs) are a welcome development but consideration should be given now as to the mechanics of engaging with more indigenous SMEs and dissemination of the research bank that the ITIs aim to create. University commercialisation activities have also improved radically in the last 10 years. Further investment should be made in the transfer of knowledge and skills into indigenous companies and incentives should be provided to those Universities that participate in commercialisation activities that meet Scotlands national economic aims. However, Scotlands economy is dominated by SMEs and it is widely recognised that it is extremely difficult to achieve effe ctive interactions between our universities and this highly diverse business sector. The importance of this issue was recognised by Technology Ventures Scotland, which produced a report Bridging the Gap (2003) specifically to consider the barriers between SMEs and the intellectual capital residing in our universities. In addition, one of the hazards with the creation of the entrepreneurial university model (including spinouts and consultancy) is the increased profile given to the value of intellectual property. As a consequence, universities and individual academics have begun to seek early financial reward for the intellectual property they acquire. This can create a barrier to engagement with the SME sector, since many small companies become concerned that they may face significant costs in gaining technolo gy access without any guarantee of gainin g business benefits. In addition, continued support is required to promote Scotland abroad. This should be in the form of support for trade missions, and the Scotland House concept of multi-agency presences in key urban areas such as Shanghai and Mumbai, which are required to support business that wishes to grow internationally. Better signposting is required in Scotland to alert busin ess to the opportunities available to them and a cadre of successful exporters should be established to partner/mentor companies who wish to export and require support. Infrastructure and Connectivity Continued investment should be made in Scotlands transport infrastructure. While significant investment is promised for our road and rail networks, the Route Development Fund should be extended to support introduction of further long haul flights from Scotland and more direct flights into the enlarged European Unio n. Equally important will be ensuring that Scotlands telecommunications network, including broadband, is world class. Scotland needs to remain at the forefront of telecommunications and there is no reason why it should not, given the excellent research capabilities within its University base. Regulation Business currently feels overburdened with regulation, although much of the regulation emanates from Brussels or Westminster rather than Holyrood. The British Chambers of Commerce 2005 Burdens Barometer calculates that the total cost of major regulations to business approved since 1998 is 38.9bn. This figure is calculated using data provided by the Government through Regulatory Impact Assessments. British business is now required to collect up to 22 different taxes and credits for Government agencies, includin g the Inland Revenue 3

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and Customs and Excise. For many small business, the impact of this regulation is a major disincentive to growth. While Regulatory Impact Assessments are being undertaken in the UK prior to any new regulatory proposal that has an impact on business being introduced, it is essential that the work of the Better Regulation Task Force is applied as widely as possible in the UK and EU. In Conclusion Some of the above issues can be achieved with investment, but the majority represent the need to base more opportunities for company growth in Scotland and a deeper cultural challenge, which is about aspiration and the will to compete and excel in a commercial world and in making wealth creation an honoured contribution. Scotland should have confidence in itself, and realise that in a global world smallness can be a disadvantage, but it can also be a huge advantage. In many ways, Ireland and Finland have given a lead, and shown what can be achieved. Challenges are not solved in compartments. Good health and education cannot be separated from wealth creation they are solved together, and that is what the Scottish Parliament can accomplish. Culture change happens slowly unless there is a crisis, and while there is not yet a crisis, there are worrying trends which through time could become a crisis. Tackling these should be an urgent priority, but that urgency may not be perceived by the population at large. It must start with a lead from the politicians, but will also need: A focus on developing the potential of Scotlands strength, e.g. : finance, energy, tourism, life sciences, informatics and value added manufacturing - Genuine joined up government to tackle the economy - More honesty on the economic challenge - Powerful wealth creating role models - Greater pride in Scotlands heritage Additional Information The Royal Society of Edinburgh in partnership with Scottish Enterprise has run a successful series of Enterprise Fellowships since 1997. These one-year Enterprise Fellowships have equipped post-doctoral researchers, or younger lecturers, with the hands-on busin ess knowledge to enhance the commercialisation potential of their own research. They encourage the establishment of new start-up companies and allow young researchers to devote time to develop their research from a commercia l perspective. In Spring 2001, Scottish Enterprise commissioned SQW Ltd to carry out an independent review and evaluation of the 13 Enterprise Fellowships that had been completed at that point. Its report concluded that: The Enterprise Fellowship programme is shaping up to be an excellent contributor to economic development in Scotland. It is enabling progress to be made in the commercialisation of university research and the establishment of technolo gy-oriented new businesses. The companies which these Enterprise Fellows have created to date in clude: Intense Photonics, Microemissive Displays, Surfactant Solutions, Edinburgh Biocomputing Solutions, Photonic Materials, Kymata and Intrallect. In recognition of this, Scottish Enterprise have expanded the number of Enterprise Fellowships to be run by the RSE, with funding of 5.5 million for a further 80 new Enterprise Fellowship s in Scotland. 50 thousand has also provided by the Gannochy Trust per year for a Royal Society of Edinburgh Innovation Award to recognise individual young innovators in Scotland. In responding to this In quiry the Society would also like to draw attention to the followin g Royal Society of Edinburgh responses which are of relevance to this subject: A Science Strategy for Scotland (July 2000); Review of the supply of scientists and engin eers (August 2001); Research and Knowledge Transfer in Scotland (September 2002); Science and the Regional Development Agencies: The Scottish experience (March 2003); Lambert Review of Business-University Collaboration (April 2003); The Future of Higher Education (May 2003); The Role of the Universities in the Europe of knowledge (May 2003); and Science and innovation: working towards a ten-year investment framework (April 2004) Copies of this response and of the above publications are available from the Policy Officer, Dr Marc Rands (email: mrands@royalsoced.org.uk) and from the RSE web site (www.royalsoced.org.uk). Professor Andrew Miller General Secreta ry Royal Society of Edinburgh 22-26 George Street Edinburgh EH2 2PQ Tel: 0131 240 5000; Fax: 0131 240 5024 March 2005

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