Download Overview of Performance Committee Research

OVERVIEW OF PERFORMANCE COMMITTEE RESEARCH
AUGUST 2006 to AUGUST 2007
The main highlights from research and analysis carried out for the Performance
Committee is:
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1.
Relatively low economic growth in Scotland is due to a weak private sector reflected by a
low business stock, low levels of innovation and weak entrepreneurship – all of which
contributes to low productivity. Scotland’s ‘supply side’ (skills) performs far better.
A smaller business services sector in Scotland, a dynamic growth sector nationally and
internationally, is also a factor in explaining lower economic growth.
Scottish business innovation and R&D is low due to its industrial structure and the high
degree of foreign ownership of manufacturing. Weak management practices may also be
an additional factor.
There is tentative evidence that competition in Scotland, one of the main drivers of
productivity, is low in Scotland. This also affects innovation levels.
Small successful economies are characterised by high levels of innovation and the
availability of a skilled workforce and the interaction between these. Higher education
plays an important role in both innovation and skills provision.
Government policy can drive the development of successful innovation systems through
overall setting of strategy, providing funding and building consensus. This stimulates
strong inter-firm collaboration, and collaboration between firms and high education.
Performance Committee economic indicators and MSSS indicators (ongoing)
Objectives
The Performance Committee has been tasked with monitoring the progress of the Scottish
economy using a small number of indicators (a subset of the Measuring Smart, Successful
Scotland indicators). Scotland’s performance is compared to OECD countries and UK regions
in terms of quartile position and the latest trends are monitored in terms of whether the gap
between Scotland’s performance and the top OECD/UK quartile is growing or narrowing.
Main findings
Compared to OECD comparators, Scotland’s quartile position and trends are:
1. Growth in GDP – Q3, gap closing
2. GDP per head – Q2, gap closing
3. Employment rate – in Q1 and position improving
4. Productivity (GDP per hour) – Q2, no change in gap
5. Entrepreneurial activity – Q3, gap closing
6. Business R&D as % GDP – Q3, gap widening
7. Graduates as % of the population – Q2, gap closing
8. Net migration as a % of the population – Q2, gap closing
9. Export sales per worker – in Q1, but position deteriorating
Figure 1 below provides a more detailed overview, and Figure 2 shows Scotland’s quartile
position compared to a small number of benchmark economies.
Conclusions
Despite high employment levels, Scotland’s in GDP growth is relatively low and the level of
GDP per head is behind many OECD economies. This is due to relatively low population
growth and low productivity levels. Scotland performs relatively well on ‘supply’ side indicators
(high skills, improving migration/population) but less well on the ‘business demand’ indicators
(business R&D, entrepreneurship). Export performance has been hit by the downturn in
electronics manufacturing mainly as a result of competition from low cost economies.
Figure 1: Scottish Economy/Scottish Enterprise Performance Indicators June 2007 Update
(Benchmark is top international/UK regional quartile)
Measure
International
Quartile
Position
Trend with
1st OECD
quartile
To reach OECD 1st
quartile, Scotland needs
additional
UK Region
Quartile
position (out of
12)
Trend with
1st UK
regional
quartile
Growth in GDP
21nd of 31
countries

1.4 % points / annum
growth
9th

GDP per head
15th / 31

£1,800 per head
4th

Employment
7th / 31

In top quartile
5th

Entrepreneurship
19th / 23

90,000 entrepreneurially
active
10th

Business R&D (% GDP)
23rd / 31

£1.1 bn business R&D
expenditure
7th

Productivity
14th / 27
-
£3.10 per hour
4th

Graduates (% of Population)
11th / 31

50,000 graduates
2nd

Net Migration (% of Population)
8th / 22

6,600 net in-migration
6th

Export sales / worker
6th / 30

In top quartile
10th

Data: 2004; 2005; 2006
1st Quartile
2nd Quartile
3rd Quartile
4th Quartile
Growth indicator and OECD
Quarter ranking
Sc
ot
la
nd
Ire
la
nd
Fi
nl
an
d
D
en
m
ar
k
M
as
sa
ch
us
Ic
el
et
an
ts
d
N
or
w
ay
Figure 2: Economic Performance – Scotland and Benchmark Economies
Growth
3
1
2
4
2
1
3
GDP per head
2
1
2
2
1
1
1
Entrepreneurship
3
2
3
3
-
1
1
R&D
3
3
1
1
1
2
2
Productivity
2
1
2
2
1
3
1
Graduates
2
2
3
1
1
1
1
Migration
2
1
4
4
-
-
2
Employment
1
3
2
1
1
1
1
Export Sales
1
1
2
1
-
2
1
2.
Competition (August 2007)
Objectives
Competition is one of the drivers of economic growth identified by the HM Treasury, and a
number of economic commentators have suggested that competition levels in Scotland are
lower than other economies – which in turn may contribute to Scotland’s relatively low
economic growth. The paper outlines a range of potential measures of competition and the
available data on Scotland’s performance.
Main findings
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Competition is an important source of economic growth and is a principal driver of
productivity growth.
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Competition drives productivity by promoting efficiency, shifting market share to more
productive producers and by encouraging innovation.
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Of all the drivers of productivity, competition though is the hardest to measure and our
understanding is least developed in terms of data availability, particularly at the regional
(Scottish) level.
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At a UK level, measures suggest that the broad competitive environment (e.g. legal
framework) is conducive to and supports competition.
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At a Scottish level, proxy measures tentatively suggest that competitive pressures may be
relatively weak compared to the UK.
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Prices for some goods and services in Scotland are higher than the average of some UK
regions. Although this could potentially reflect weaker competitive pressures, other factors
such as the nature of Scotland’s geography and sparse population may be a cause.
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Scotland’s business stock and firm entry/exit rates are lower than most other UK regions,
potentially resulting in weaker competitive pressures.
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However, much of the available data for Scotland is at an aggregate level (in terms of
industrial sector) and this does not provide a definitive assessment of the competitiveness
of sectors in the Scottish economy and how this effects economic growth.
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More detailed analysis is required to more robustly assess competitive levels within
sectors using a wider set of indicators.
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Scottish Enterprise can indirectly encourage markets to be more competitive through, for
example, removing some barriers to new firm formation, encouraging internationalisation
and providing assistance for firms to innovate.
Conclusions
There is some tentative evidence that competitive pressures may be weaker in Scotland than
other parts of the UK in some sectors. However, the available data does not allow a definitive
assessment of this. More detailed work is required, potentially with the Scottish Executive, to
access robust data.
3.
The Finnish innovation system (May 2007)
Objectives
The analysis of the performance of Finland’s economy highlighted the role that the innovation
system played in economic growth. A more detailed analysis of Finland’s innovation system
was requested to assess its characteristics, the main players and level of investment.
Main findings
The Finnish innovation system displays the following characteristics:
 Level of investment/spend high at all levels of the system, particularly business R&D
spend (significantly higher than in Scotland).
 High level commitment to innovation policy at the government level and long term strategic
approach taken. Strong consensus at government, education and business level
 Focus on business research and the need for collaboration between businesses and with
HE (driven by, for example, requirements of government funding)
 Strong technology focus of R&D government funding
 High degree of co-ordination across the main players (ministries and business
organisations) - spreads the innovation message
 Cultural norms and characteristics an important factor - high trust in government
Conclusions
Finland’s innovation system is government driven but also characterised by a high degree of
co-operation and co-ordination among the main players (government, education and business
organisations). A long term view towards policy making has been adopted, and investment is
significant across basic, applied and business R&D.
4.
Massachusetts (May 2007)
Objectives
Continuing the series of comparisons between Scotland and similarly sized, successful
economies to identify drivers of economic growth and potential lessons for Scotland.
Massachusetts was selected as an example of a successful regional economy.
Main findings
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Massachusetts’ GDP per head outperforms all other OECD countries and is ranked 2nd
(out of 125 world regions) in the ‘2005 World Knowledge Competitiveness Index World’
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High levels of productivity and a high employment rate have both contributed to high GDP
per head
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The Massachusetts economy is strongly dependent on knowledge intensive, high value
sectors such as education, IT, lifesciences, healthcare and business/financial services.
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R&D has been a main driver of productivity growth - Massachusetts outperforms other
OECD countries on a range of R&D measures
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World-class universities and research institutes play an important role in driving R&D
performance, attracting significant government R&D funds and business R&D activities
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Massachusetts has a highly skilled workforce, again outperforming other OECD
economies - the state’s higher education sector again plays an important role here. The
availability of high value jobs allows the State to retain and attract skilled workers
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Massachusetts is not an overly entrepreneurial economy, although does perform well for
high growth businesses
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The interaction between the higher education sector, R&D activity, skilled workforce and
knowledge intensive industries, which all depend on and influence each other, explain
Massachusetts’ economic performance.
Conclusions
As the review of the Massachusetts, Finnish and Danish economies highlighted, the
combination of innovation, R&D, a skilled workforce and the education system are crucial
drivers of successful knowledge economies.
5.
Innovation in Scotland (March 2007)
Objectives
Innovation has been identified as one of the key drivers of economic growth and Scotland
tends to lag other economies on a range of measures of innovation. The paper summarised
how innovation is measured, levels of innovation activity in Scotland and the reasons behind
recent performance.
Main findings
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Business R&D expenditure in Scotland is below the levels of most OECD countries –
higher education R&D spend, however, is high. Scottish business R&D is concentrated in
the pharmaceuticals sector.
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Compared to the OECD average Scotland has:
a high level of economic activity in high tech manufacturing – but low R&D intensity
a low level of economic activity in med-high tech manufacturing – and low R&D
intensity
a high level of activity in services, a sector that has low R&D intensity across all
countries
These combinations explain Scotland’s relatively weak business R&D performance.
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Low R&D intensity is in part caused by the large number of overseas companies in
Scotland’s manufacturing sector – R&D tends to be carried out in the country of
ownership
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R&D measures do not capture all innovation activity. Taking a wider definition of
innovation (including more than just R&D activities), 56% of Scottish businesses are
innovation active. This suggests that a significant proportion of Scottish businesses are
not involved in innovation activity.
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Innovation in Scotland occurs across most sectors, including the service sector. Overall
most innovation occurs outside manufacturing.
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Scottish (and UK) innovation levels are low compared to a number of European
competitors
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Most Scottish businesses not involved in innovation state that that the nature of their
product does not require any R&D expenditure.
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Barriers to innovation cited by businesses include the costs associated with R&D, access
to finance required for R&D, the risks associated with R&D and lack of qualified R&D staff
Conclusions
On R&D measures, given the industrial structure and ownership structure of Scotland’s
manufacturing base, narrowing the business R&D expenditure gap with other OECD will be
challenging. On the wider definition of innovation, a large proportion of Scottish SMEs are not
innovation active, with SMEs in other EU countries more likely product or process innovate.
Given the important role that innovation plays in productivity and economic growth, this is a
gap that needs to be addressed.
The Performance Committee noted the importance of innovation within SMEs and asked for
further work to be carried out on the link between Scottish Enterprise innovation activities and
measures of progress used (see August 2007 outputs).
6.
Scotland and Finland (March 2007)
Objectives
Continuing the series of comparison between Scotland and highly performing small
economies to identify differing drivers of growth and lessons.
Main findings
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Finland is regarded as one of the world’s leading knowledge economy and scores highly
on a number of international competitiveness and innovation indices - although, GDP per
head, productivity and the employment levels are all below Scotland’s
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Since the early 1990s, though, employment rate, productivity, GDP and GDP per head
growth have all been significantly above the Scottish and OECD averages.
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Growth has been driven by a high skilled workforce, strong innovation performance and a
growing ICT sector.
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Finland’s workforce is one of the highest educated in the OECD, with a particular focus
on technology related subjects and polytechnic level education.
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On a range of innovation measures, such as R&D spending and patenting, Finland
outperforms nearly all OECD countries.
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Finland was the first country to adopt an ‘innovation system’ approach, with a range of
government policies to bring together private and public sector players.
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Co-operation between businesses on R&D activity (driven in part by government policy),
the strength of the ICT sector (with Nokia at the heart) and the education system are key
features of the innovation system.
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Finland is successful at converting innovation inputs into outputs – a high proportion of
Finland’s SMEs introduce new products and processes to the market.
Conclusions
Finland’s recent strong economic performance highlights the role of innovation, skills and
education combining to drive growth. The role of the Finnish ‘innovation system’, built through
government policy and a national consensus has been key to this - providing potential
lessons for Scotland. The role of Nokia, a large indigenous technology company, should not
be overlooked as a source of innovation spend and activity. Further work on the Finnish
innovation system and comparisons with Scotland were requested for the May 2007
Performance Committee meeting.
7.
The business services sector in Scotland (November 2006)
Objectives
An analysis of Scotland’s economic performance compared to other regions of the UK
highlighted the importance of business services (BS) in terms of its size and recent growth
performance. A more detailed analysis of the business services sector was requested by the
Performance Committee.
Main findings
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BS accounts for 19% of Scottish GVA and 13% of employee jobs, although the sector in
Scotland is smaller than in most other UK regions

BS has been one of Scotland’s fastest growing sectors in recent years, accounting for
over a third of all growth - though growth has been below that of all other UK regions.
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40% of BS GVA (and 7% of total GVA) is accounted for by the consumption of housing by
owner occupiers and renters (due to the way owner occupation is treated by National
Statistics)
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Other important sub sectors include accounting/book-keeping, labour recruitment
agencies and industrial cleaning.
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The sector exports £5.4 billion worth of goods and services (70% of which are to the rest
of the UK), accounting for 12% of all Scottish exports
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The growth of business services is linked to overall growth of the economy. Another
important driver is increased outsourcing of activities by other industries.
Conclusions
The business services sector has been the fastest growing sector in the Scottish economy
(and other UK regions) in recent years. However, the size of the sector in Scotland is lower
than most other regions as has been the rate of growth. It is not clear why thus is. This has
been a significant factor in Scotland’s lower than average economic growth (compared to the
UK).
8.
Scotland and Denmark (November 2006)
Objectives
To compare Scotland with a high performing, small European economy to identify drivers of
growth and any lessons for Scotland.
Main findings:

Denmark is considered to be among the world’s most competitive economies and has
been among the OECD’s most prosperous countries

Denmark’s employment rate is 2nd highest in the OECD due to liberal labour markets and
highly educated population – although Danes work fewer hours (due to high personal tax
rates)

Denmark has relatively high productivity driven by high business R&D and a highly skilled
workforce (all higher than in Scotland)

Denmark is in the top quartile of OECD economies for business R&D and for graduates
as % population

Denmark has a large public sector – 2nd highest spending relative to GDP in OECD
Conclusions
Denmark’s stronger performance compared to Scotland due to higher productivity and a very
high employment rate. Productivity driven by a highly skilled workforce and high business
spend on R&D.
9.
Scotland, the South West and East of England (August 2006)
Objectives
A comparison of Scotland’s economic performance with the East of England and the South
West of England, two regions that have been performing relatively well in recent years in
terms of economic growth. Drivers of growth in each region were compared to performance in
Scotland.
Main findings:

Overall economic growth in the East and South West have been significantly higher than
in Scotland, but growth of prosperity (GDP per head) has been relatively similar

Population growth in the East and South West has far outstripped Scotland’s, resulting in
higher economic growth

The East has higher productivity than Scotland, but the South West’s is lower

The business and financial services sector is larger in the East and South West than in
Scotland, and has been growing faster

Manufacturing decline in Scotland has been more pronounced than in the East and SW.

Scotland’s skills levels higher than both the East and the SW – although only the East is a
net recipient of graduates

Scotland’s businesses spend less on R&D, and have fewer entrepreneurs

R&D in the East is centred on pharmaceuticals, automotive, ICT clusters – in the SW
aerospace, electronics, creative industries, marine sector are the main R&D sectors

The ‘London effect’ is particularly important for East (transport hubs, commuting, access
to high value jobs)
Conclusions
Reasons for Scotland’s slower growth compared to Eastof England and the South West
include population dynamics, industry structure and dynamics (especially business services),
lower productivity, weaker R&D and innovation, less entrepreneurship and the lack of a
‘London effect’.
Business services identified as an important driver of economic growth. More research was
requested carried out on this for November 2006 Performance Committee.