It is widely recognised that business innovation is a driver of economic growth and that R&D in business is a driver of innovation. Yet Scotland is characterised by a relatively low level of business R&D compared to the rest of the UK and other comparable countries.

In contrast, Scotland’s Universities are recognised as highly competitive earners of research income and for the quality of their research. Scotland’s universities output (research, consultancy, trained PhD graduates) are not being captured by Scottish industry, which in turn exerts little influence on the research undertaken in academia

The facts
Expenditure on research in the higher education sector stood at 12.4% of the UK total in 2005 with a total spend of £688m or 0.7% of GDP, comfortably leading the other countries of the UK on a population basis.

By contrast, Business R&D conducted in Scotland under-performs the rest of the UK, contributing only 0.56% of GDP compared with 1.08% for the UK as a whole in 20062. Overall, Business Enterprise Research & Development (BERD) expenditure in Scotland was £584m in 2005, or 4.4% of the UK total.

Including industry
SSAC set out to attempt to understand the various factors that impact on the
volume of industrial R&D in Scotland. Although SSAC’s membership most strongly represents the science base, restructuring of the Council increased industrial representation and motivated it to focus on and address this issue.

The level of industrial R&D activity in Scotland not only influences economic growth but also impacts on the academic research base by:
• Providing a market for knowledge transfer from academic research;
• Creating postdoctoral employment opportunities for PhD graduates (and
graduates with specific skills from certain disciplines, e.g. science & engineering), retaining highly-skilled individuals in Scotland; and
• Supplying a source of informed guidance and support for strategic or applied academic research activities.

SACC recommends:

1: Resolving apparently contradictory findings from recent policy research on the capabilities of the Scottish business base.

The Scottish Government with Scottish Enterprise
should ensure that apparently mixed messages
about innovative behaviour and capabilities of the Scottish business base are re-examined and resolved as far as possible. This could be done in the context of an analysis of the recently published UK data for CIS4.

In addition to grant schemes (e.g. SCIS, SMART etc.), tax relief for R&D expenditure has been available in the UK since 2000, initially for SMEs and since 2002 for larger companies. The R&D Tax Credit is to incentivise and reward firms investing in R&D to enhance their performance and ultimately contribute to the competitiveness of the UK.

In a UK-wide survey of businesses conducted by Deloitte in 2006, it was found that fewer than 50% of eligible smaller firms were taking advantage of the R&D Tax Credit. Furthermore, of those firms responding to the survey that had failed to claim, around 25% were reported as being unaware of the scheme’s existence.

The Scottish Government has in place a so-called “pipeline of support” for R&D and innovation for Scottish business. Although R&D grant schemes managed by Government are focused on “new to the market” innovation, we argue the merits of encouraging, a wider cross-section of companies to engage in R&D, because “undertaking R&D is normally a pre-requisite before firms participate in collaborative projects with the science base”. Analysis of the Community Innovation Survey results for Scotland indicate Scotland’s  performance lags behind the average of all UK areas in investment terms in extra-mural R&D per employee. “Entry level” schemes to support R&D should be encouraged and given a high profile.

2: Recognise the value of investment in R&D.

Although R&D is only one input to business innovation and productivity
performance, given the importance accorded to it for Scotland there would be merit in the Scottish Government establishing a high profile, integrated and nationally agreed action plan focused on promoting the business value of investment in R&D.

This should be complemented by existing and where appropriate, targeted new business support interventions (including interventions that do not include provision of financial support for R&D projects), by a cadre of expert advisors on R&D management for businesses, and tracked by statistics on activities, outputs and outcomes to measure progress towards the policy goal of increased BERD.

3: Ensuring effective incentives
Given its aim of encouraging firms to invest in R&D and the importance of  smaller companies to the Scottish economy, it is recommended that the Scottish Government analyse the take-up, success, or otherwise, of the R&D Tax Credit scheme in Scotland in incentivising additional investment in R&D

4: Strengthening the pipeline of support
The Scottish Company
Innovation Support Scheme (SCIS), managed by Scottish Enterprise, provides support to businesses for R&D, market research and product aunch. It is aimed at R&D to support innovation that is “new to the firm”.  Anecdotally, it appears that SCIS is given a relatively low profile in the Scottish business base. We recommend  Scottish Enterprise re-examines the balance between supply, demand (and opportunity) relating to SCIS and re-assess if the present access to SCIS is optimal given the findings.

5: Address the limits on expansion of KTP in Scotland
Scotland performs well relative to other parts of the UK in terms of take-up of Knowledge Transfer Partnerships (KTP) support. Again, we suggest merit in the Scottish Government re-assessing the balance between supply, demand (and opportunity) for KTPs in Scotland and whether present provision is optimal.

6: Expansion of Proof-of-Concept-type support
Proposals seeking R&D grant support emerging from SE Proof of Concept Programme tend in the main to be strong candidates for support –  “SMART-investment” ready. Subject to constraints  placed on investment by European State Aid rules, we propose investigation of needs/opportunities to develop innovative product and processes of value from economy sectors other than the Universities, Research Institutes and NHS. Feasibility and attractiveness of proof/concept type support for other sectors of the economy should be assessed.

7: Management Capacity and Capability
Scottish Government and Scottish Enterprise should undertake a needs/
opportunities assessment for enhancing business management skills directed
towards utilising and exploiting R&D investments as an input to business
competitiveness. This is likely to involve two strands of investigation:
• enhancing capability amongst the current cadre of business managers; and for the longer term
• ensuring a flow of prospective future managers capable of bridging between
science/technology and business.

This should include an assessment of the various existing initiatives where  Government and Enterprise seek to build R&D management capabilities. POC, SMART and SPUR grants incorporate external project management support. Scottish Enterprise has a national “Product Development Improvement Programme”. SE Lanarkshire had an initiative to develop innovation management skills in executives from its high growth company portfolio, many of which were traditional and family-run businesses. It also ran overseas management development missions, providing access to executives in worldleading innovative organisations.

8: Tools for businesses investing in R&D
Scottish Enterprise should consider introducing a “national product” concerned with the management and quality assurance of business R&D.
In the same way as Scottish businesses can access tools for developing business plans, marketing strategies etc., tools to assist in ensuring the quality of  R&D undertaken by or for the firm would be useful in the business toolbox, contributing  to overall awareness raising and promotion of business R&D. Exploratory research indicates that the R&D Effectiveness Index may provide a suitable basis for tool development, specifically for SME

9 Engage with the Financial Services Sector
The research-intensive Scottish universities along with the Scottish Funding
Council, given the latter’s interests in knowledge transfer, should engage proactively with the global banking sector headquartered in Scotland and elsewhere to assess areas of mutual value that can be exploited through research collaborations. It seems intuitively obvious that, given prominence of the banking sector in the Scottish economy, and work of  Scottish university sector in research and knowledge transfer, should be seen to relate and be responsive to the sector’s needs and opportunities.

10: Achieve a better understanding of R&D/innovation in Service Sector
We believe that there would be merit in a closer examination of the R&D (and innovation) performance of the services sector in Scotland in order to fully understand and respond to the evidence of seemingly low investment in BERD. There would be value in analysing the bias introduced to these headline figures by the knowledge-intensive banking sector (and other financial services) in order to examine and better understand, the determinants of R&D investment patterns in other service sub-sectors.

11: A Public Forum for dissemination and consensus  building
This study by the SSAC has been conducted at a time when the Scottish
Government, Scottish Enterprise and the Scottish Funding Council (through its KT and Innovation Group) are all engaging in policy related research relevant to R&D and innovation in Scotland. A wider debate is needed to make the case for greater investment in industrial R&D and align the interests of all stakeholders.

Just as the Royal Society of Edinburgh (RSE above) was instrumental in encouraging commercialisation of academic research, we believe it to be the most appropriate impartial body to take forward the debate. It is proposed that a national conference is convened to disseminate the various pieces of recent and current complementary research that is of of national significance in terms of taking this agenda forward in a consensual manner.

The RSE is actively considering this recommendation and constructing a proposal for a National Forum for Business R&D, which will identify and stimulate processes that will increase business R&D investment and to suggest how appropriate strategies might be developed in Scotland.

R&D in Scotland: A missing link