Evidence shows that companies that are internationally competitive achieve better performance and growth, and economies that have an internationally competitive environment attract more investment and talent.
Increasing Scotland’s productivity is vital to growing our international competitiveness and achieving sustainable economic growth. Our business plan 2015-18 highlights the importance of the following key drivers of productivity growth:
- Internationalisation: helping more companies in more sectors to become exporters, and helping existing exporters to grow their overseas sales
- Innovation: encouraging more companies to invest in R&D, in other forms of innovation and in efficiency improvements, and helping companies maximise the returns their investment
- Investment: supporting companies to invest in new plant, machinery and buildings, and helping companies access the finance needed for growth
- Inclusive Growth: attracting skilled jobs through inward investment, and improving the leadership and entrepreneurial skills of our companies and people
A range of evidence shows the benefits to companies of exporting overseas. Exporters tend to grow faster than non-exporters, have higher levels of productivity and increase productivity further through exporting. Exporters also perform better financially and are more likely to survive. They are more innovative, highlighting the need to ensure products and services are adapted for overseas markets.
Data suggests that Scotland’s exports are relatively concentrated in terms of companies, sectors and markets. Additionally, a lower proportion of Scotland’s small and medium-sized enterprises (SMEs) export overseas compared to the UK as a whole and many European countries. Scotland needs more businesses from more sectors exporting to more markets.
Evidence to support our internationalisation strategy
The barriers to exporting that businesses can face include:
- The suitability of products and services for overseas markets
- Overestimating the difficulties and costs and underestimating the benefits of exporting
- Accessing funding to implement export plans
- Pressure on management time
- Difficulties accessing overseas customers
- Language/cultural barriers
Evaluation evidence highlights the impacts of support to help companies to internationalise and overcome barriers. The Scottish Development International Evaluation shows that support to companies leads to increased exporting confidence, increased knowledge of how to enter markets, improvements in overseas profile and contacts with new customers. Eighty per cent of supported companies either had, or expected to, enter new markets as a result of support.
Our Evaluation of Account Management shows that companies that are active in overseas markets benefit more from account management support. The evaluation also highlighted the links between innovation support, exporting and impact.
The Smart Exporter Strategic Review (the programme is now called ScotExporter) found that companies had increased their awareness and understanding of exporting and what is required as a result of support. Of companies that were already exporting, almost two thirds believe that Smart Exporter support has helped – or will help – to increase their international activity. Over 80% of companies that were non-exporters stated that support was helping them to progress towards exporting in the future (mostly within the next three years). These are high levels of additionality.
Investment in R&D and other forms of innovation (such as efficiency improvements, new workplace, organisational and production processes, new approaches to marketing and investment in ICT) is crucial for businesses to maintain and grow profitability and competitiveness. Evidence shows that innovation is a key factor in improving company productivity, and that there is a strong relationship between innovation activity and exporting.
Although Scotland’s higher education R&D performance is among the best in the world, our business R&D performance, although improving, lags most other advanced economies. On wider measures of innovation, again Scotland’s performance is also lower than a number of other economies. Scotland needs more companies investing in innovation.
Evidence to support our innovation strategy
Barriers to investing in innovation that companies face include:
- The costs of innovation
- Access to funding
- Perceived risk or uncertainty of the benefits or success of investment in innovation
- A lack of in-house R&D and innovation skills
The R&D Grant Evaluation highlights the key role that grant support plays in encouraging additional R&D investment. Companies reported that 60% of R&D projects would not have gone ahead in Scotland without grant support, and a further 30% of projects would have been at a smaller scale or later date.
Our Evaluation of Account Management highlights the links between innovation and internationalisation support, with companies receiving both tending to deliver higher impacts.
Scottish Enterprise also assists high impact entrepreneurs and universities to commercialise and create value from innovation activities. The Commercialisation Evaluation highlights that supporting early market engagement and building skills and experience into entrepreneurial teams are key to delivering successful impacts from commercialisation.
The Evaluation of Efficiency Support reported that 90% of companies assisted by Scottish Enterprise go on to implement efficiency improvements and achieve productivity gains at a greater scale and/or earlier than they would have done without support. In addition, as a result of support, companies develop their own skills and knowledge to implement further change, and this ensures benefits are sustained.
Investment in tangible assets (such as plant, machinery and premises) as well as intangible assets (such as software, brand, design, innovation and R&D) are key drivers of productivity growth. Increasing company demand for growth finance and helping them secure the funding they need helps drive business investment growth.
High quality infrastructure investment is important in creating the globally competitive business environment that facilitates company and sector growth. The availability and quality of infrastructure, such as industrial, office and R&D space, and digital and physical connectivity, can be important factors in attracting inward investment, as well as helping businesses in Scotland achieve high growth.
Evidence to support our investment strategy
Scotland’s business investment rate tends to be lower than most other OECD countries, although performance is better when intangible investment is included. Companies can face a number of challenges in taking forward investment plans, for example uncertainty about the potential benefits relative to costs and access to finance.
There are also barriers that can prevent the private sector from providing the business infrastructure that the Scottish economy needs. For example, uncertainty around costs of and returns from specialist business infrastructure such as R&D, lab and incubator space can reduce incentives for private sector developers, and this can be a particular issue for sectors such as life sciences, renewable energy and digital media.
The Evaluation of Regional Selective Assistance (RSA) highlights that grant support is an effective mechanism to encourage companies to take forward investment projects. Almost 60% of companies that received RSA stated that they would not or probably would not have achieved similar business outcomes without the grant, 20% stated they would have achieved some but not all of the business outcomes, and 20% would have achieved similar business outcomes, but not as quickly. This is a high level of additionality. Data analysis also shows that companies receiving RSA tend to grow faster than other businesses.
Demand for and supply of risk finance is important for the growth of innovative, internationally focused high impact companies. In Scotland there is an ‘equity gap’ where small and medium-sized companies are seeking capital investment in amounts too large for business angels and too small for traditional private equity funds. A second equity gap emerges where some companies that had previously received very early stage funding are not able to access further rounds. As well as supply of finance, there is also a need to raise demand by companies in Scotland for growth finance. The consequences of supply and demand challenges are that some businesses cannot achieve their full potential and generate economic growth.
Evaluations of the Scottish Seed Fund (SSF) and the Scottish Venture Fund (SVF) highlighted high levels of investment additionality as a result of Scottish Investment Bank (SIB) co-investment. Fifty five per cent of SSF private co-investors stated that they would not have invested in companies without SIB co-investment (40% of SVF private co-investors also stated this) and 36% would only have made a smaller investment (33% of SVF private co-investors also stated this). No investors stated they would have made the same level of funding without SIB co-investment.
The evaluations also concluded that SIB funds, through the co-investment model, had attracted a number of new and international private sector investors to the Scottish market. As well as funding, SIB supported companies often benefited from co-investors providing advice and support as well as wider Scottish Enterprise support, for example through account management.
A range of evidence shows that tackling inequalities can raise productivity and competitiveness, leading to more sustainable economic growth. For example, economies with lower income inequalities grow faster, and companies that create better workplaces and better paid, quality jobs achieve higher levels of productivity. Evidence also shows that greater diversity in the workplace, for example in terms of gender, ethnicity and age, can also raise company performance. These are all factors reflected in the Scottish Business Pledge.
Inward investment is an important source of good quality employment, and can help increase an economy’s productivity directly and through spillover effects. Research shows that inward investors tend to pay higher wages, have higher productivity levels and higher investment rates than Scottish owned businesses.
Research also shows that higher levels of leadership and management skills improves productivity and growth performance of companies. High growth firms tend to have higher productivity and contribute disproportionately to an economy’s jobs growth, so increasing the number of entrepreneurs creating internationally competitive, early stage ventures is key to the growing the pipeline of future high impact companies and good quality jobs.
Scotland is the top performing region in the UK (outside London) for attracting foreign direct investment, and performs strongly for the proportion R&D projects attracted into Europe. Key factors influencing decisions to invest in Scotland include:
Evidence to support our people strategy
- The availability of skilled labour
- Our reputation for research and innovation
- Ease of international transportation and logistics
- The supportive political and regulatory environment
- The availability of sites and premises
Grant support can also play a role in attracting highly mobile investment. Barriers and challenges to attracting inward investment include availability of information about the advantages of locating in Scotland, and competition from other locations.
The Scottish Development International Evaluation highlights the effectiveness of Scottish Enterprise support to attract inward investment - 25% of inward investment projects would not have happened/would have been less likely without, 35% of projects would have been smaller in scale and 20% would have taken longer. Grant support can also play a role in attracting highly mobile investment and jobs.
Scottish leadership, management and entrepreneurial skills lag those in some other countries, and there is a wide dispersion in the use of key leadership and management practices by Scottish SMEs. Adoption of high performance working practices within businesses is a further way to improve business productivity and competitiveness. However, in 2013, just 12% of employers in Scotland were ‘higher performance working’ employers. This implies that improving leadership and management skills and encouraging more employers to adopt innovating workplace practices would boost productivity performance and growth.
Barriers to companies investing in leadership, management and organisational development include pressures on management time, uncertainty of the benefits and uncertainty about the best way to undertake it/who can provide support. For entrepreneurs, key barriers include knowledge of how to grow their business and how to raise finance.
The Evaluation of Scottish EDGE highlights that support to entrepreneurs can increase confidence and business communication skills. The Evaluation of Planning to Succeed, a programme that helps tourism businesses develop leadership skills, reported significant impacts on the personal development of participants.
Read our business plan update for 2017-2018