Innovation strategy: economic evidence paper

Summary of the theory and selected evidence on the role of innovation and its drivers in generating economic growth and Scotland’s innovation performance to provide context for and inform the development of Scotland’s National Innovation Strategy.


1. These figures are currently under review by ONS, please see Box 1 for further information.

2. "Research and development comprise creative work undertaken on a systematic basis to increase the stock of knowledge and the use of this knowledge to diverse new applications" – OECD Factbook 2013

3. OECD, 2018, Oslo Manual 2018 – Guidelines for Collecting, Reporting, and Using Data on Innovation, 4th Edition

4. A seminal example is the work of Robert Solow which posits that, in the long-run, only technological change driveseconomic growth; Solow, Robert M. (February 1956). "A contribution to the theory of economic growth". Quarterly Journal of Economics. (Also subsequent papers).

5. Nesta, 2009, 'Innovation, knowledge spending and productivity growth in the UK'

6. Department for Business, Energy and Industrial Strategy, 2021, From Ideas to growth: Understanding the drivers of innovation and productivity across firms, regions and industries in the UK

7. Office for National Statistics, August 2021, Management practices and innovation, Great Britain

8. Office for National Statistics, May 2021, Management practices in Great Britain, 2016-2020

9. The term human capital refers to the economic value of a worker's experience and skills.

10. Digital Economy Business Survey 2021: Findings

11. In his Theory of Economic Development (1961), Joseph Schumpeter maintains that the creative destruction process is mainly due to entrepreneurs' innovations that create an endogenous motion which revolutionizes economic structures.

12. Scottish Government, March 2022, Scotland National Strategy for Economic Transformation: evidence paper. Based on OECD and ONS Business Demography data.

13. Scottish Government, National Performance Framework - National Indicator Performance

14. The TEA rate measures the proportion of the working age population that is actively trying to start a business or that own or manage a business, which is less than 3.5 years old.

15. Enterprise and Skills Strategic Board Annual Analysis 2020

16. The latest published 2019 TEA rate for Ireland was 12.4%, compared to 7.2% in Scotland in the same year.

17. Beauhurst and Barclays Eagle Labs, 2021, Unlocking Growth report and summary

18. Spigel, 2017, The Relational Organization of Entrepreneurial Ecosystems, Entrepreneurship Theory and Practice, vol. 41, no. 1, pp. 49-72

19. Logan, August 2020, Scottish Technology Ecosystem Review

20. Ibid

21. The natural rate refers to the natural narrowing of the number of firms from start-up to scale-up given that not all start-ups do or should become scale-ups and not all scale-ups do or should become unicorns. The natural rate is impossible to improve upon.

22. Shaping Scotland's Economy: Inward Investment Plan

23. A Trading Nation – a plan for growing Scotland's Exports

24. Boosting UK Productivity with SME Growth

25. RAND Europe, 2017, Evidence synthesis on measuring the distribution of benefits of research and innovation

26. Please note that for figure 10, some programmes were counted more than once if they related to multiple aspects of the innovation framework.

27. Enterprise and Skills Strategic Board's (ESSB) Innovation Review

28. Bloom, Van Reenen and Williams, 2019, A toolkit of policies to promote innovation, Journal of Economic Perspectives—Volume 33, Number 3—Summer 2019—Pages 163–184

29. Column 1 summarizes the authors' view of the quality (in terms of quantity and credibility) of the available empirical evidence; column 2 summarizes the conclusiveness of the evidence for policy; column 3 scores the net benefit (benefits minus costs) in terms of a '+' ranking where three is the highest. This ranking is meant to represent a composite of the strength of the evidence and the magnitude of average effects. Columns 4 considers whether the main effects would be short term (three to four years), medium term, or long term (ten years or more), and column 5, the likely effects on inequality.

30. Scottish Government, Gross expenditure on research and development Scotland 2020

31. The methodological changes to BERD (see box 1 for more detail) have been implemented for the period 2018 onwards. Comparisons prior to 2018 are therefore not possible.

32. While 2021 headline BERD data is available for Scotland, only 2020 data is available for international comparisons.

33. Scottish Government, National Performance Framework

34. The UKIS defines as business as being 'innovation active' if it has engaged in any of the following activities: the introduction of a new or significantly improved product (good or service) or process; engagement in innovation projects not yet complete, scaled back, or abandoned; new and significantly improved forms of organisation, business structures or practices, and marketing concepts or strategies.

35. Scottish Government, August 2022, UK Innovation Survey 2021: Results for Scotland

36. Comparative data for OECD countries for 2018-20 is not yet available. Comparison is therefore with EU countries.

37. It is important to note that for international comparisons, data on the percentage of innovation active firms is based on a subset of sectors of the sectors covered by the UKIS survey (focussing on the most innovative sectors).

38. A number of sectors (post and courier activities; motion picture, video and TV programme production/programming and broadcasting; telecommunications; and advertising and market research) are excluded from this chart as the data for Scotland is disclosive.

39. European Commission, Regional Innovation Scoreboard 2021

40. It should be noted that this analysis will have been based on BERD data using the old methodology. Under the new methodology (see box 1 for further details), Scotland's BERD spend in 2021 as a share of GDP was higher than the EU-27 average (1.43%).

41. Dashed black line indicates no difference, above indicates stronger performance and below indicates weaker performance.

42. The countries for which complete BERD data was available are: Czechia, Denmark, Germany (until 1990 former territory of the FRG) Ireland, Greece, Spain, Croatia, Italy, Malta, Portugal, Romania, Iceland, Serbia, Turkey, Bosnia and Herzegovina, South Korea

43. Please note that for some sectors, larger divisions have been split, in order to draw out certain SIC codes. Please also note that only sectors in which BERD performance was positive are shown, in order to only compare sectors in which Scotland's BERD growth as a share of GDP is outperforming the comparator countries considered.

44. The latest period available for international comparisons prior to the Covid pandemic.

45. BERD 2019 Data used in conjunction with BRES (employment growth) and SABS (GVA) to create table, all data for 2019 except where otherwise specified

46. Includes: Creative, arts and entertainment activities; Libraries, archives, museums and other cultural activities; Gambling and betting activities; Sports activities and amusement and recreation activities.

47. Includes: Data processing, hosting and related activities; web portals; Other information service activities.

48. Includes: Rental and leasing activities; Employment activities; Travel agency, tour operator and other reservation service and related activities; Security and investigation activities; Services to buildings and landscape activities; Office administrative, office support and other business support activities.

49. The vast majority (99.5%) of BERD spend under SIC 72 falls into SIC 72.1 (Research and experimental development on natural sciences and engineering), which is part of the Life Sciences sector. It should be noted, however, that for the Life Sciences sector as whole, Scotland does not perform well against the international comparators due to very low BERD spending in SIC 21 (Manufacture of basic pharmaceutical products and pharmaceutical preparations).

50. The UKIS defines as business as being 'innovation active' if it has engaged in any of the following activities: the introduction of a new or significantly improved product (good or service) or process; engagement in innovation projects not yet complete, scaled back, or abandoned; new and significantly improved forms of organisation, business structures or practices, and marketing concepts or strategies.

51. UK innovation survey 2021: results for Scotland - (

52. Includes: Publishing activities (Publishing of books, periodicals and other publishing activities; Software publishing); Computer programming, consultancy and related activities; Information service activities (Data processing, hosting and related activities; web portals; News agency activities)

53. Includes: Specialised design activities; Photographic activities; Translation and interpretation activities; Environmental consulting activities; Quantity surveying activities.

54. Includes: Publishing activities; Computer programming, consultancy and related activities; Information service activities.

55. Includes: Specialised design activities; Photographic activities; Translation and interpretation activities; Environmental consulting activities; Quantity surveying activities.

56. Scottish Enterprise, July 2022, 'Investing in Ambition: Scotland's Risk Capital Market in Context-2021'

57. It should be noted that there is no single way of allocating companies to market sectors which paints the whole picture, because companies usually have multiple activities and multiple target markets for their sales. For the SE analysis, deals have been allocated to more than one sector where information is available - a deal can be counted in as many sectors as are relevant. The sectors chosen for analysis are a combination of those representing a core activity (Digital & IT, Business Services) and/or a target market (Fintech, Food & Drink, Oil & Gas).

58. See, for example, Does inward investment make regions more innovative? | Global Investments & Local Development (

59. Shaping Scotland's economy: inward investment plan - (

60. Scottish Government Inward Investment Plan, 2020

61. NESTA, Mapping Innovation in Scotland (unpublished 2020)

62. The NESTA analysis segmented official 4-digit SIC codes used to classify businesses into sectors into a set of 72 industries based on their economic similarities, which they estimated using measures of geographical co-location, distribution of occupations in their workforce and input-output flows.

63. Includes: Computer consultancy activities; Computer programming activities; Accounting, bookkeeping and auditing activities; tax consultancy; Computer facilities management activities; Other information technology and computer service activities; Other information service activities n.e.c.; Data processing, hosting and related activities.

64. This relates to SIC 72 only: Scientific R&D.

65. Includes: Other business support service activities n.e.c; Combined office administrative service activities; Activities of call centres; Activities of collection agencies and credit bureaus; Photocopying, document preparation and other specialised office support activities. Note that these fall under the Business Services sector as defined by the Scottish Government's growth sectors.

66. Includes: Specialised design activities; Photographic activities; environmental consulting activities; quantity surveying activities; Translation and interpretation activities; Convention and trade show organizers. NESTA note that "hidden in uninformative SIC codes we find what seems to be a thriving ecosystem of technical and architectural consultancies developing innovations related to Oil and Gas, Civil Engineering and Measurement. Perhaps their innovative capabilities could be deployed in other sectors in order to make Scotland's economy more diversified and resilient."

67. Includes: Human health activities; Fitness facilities; Physical well-being activities; Hairdressing and other beauty treatment; Washing and (dry-)cleaning of textile and fur products.

68. Includes: Water collection, treatment and supply; Construction of utility projects for fluids; Engineering activities and related technical consultancy; Technical testing and analysis.

69. Includes: manufacture of optical instruments and photographic equipment; Manufacture of medical and dental instruments and supplies; Repair of electronic and optical equipment; Manufacture of watches and clocks; Manufacture of motorcycles.

70. Includes: Extraction of crude petroleum and natural gas; Support activities for petroleum and natural gas extraction.

71. The analysis matched the organisations that participate in UKRI-funded research collaborations with Companies House. This allowed NESTA to assign each of these organisations a SIC code, and to analyse the sectoral distribution of collaboration between different industries and universities.

72. Includes: Architectural activities; Creative, arts and entertainment activities; Activities of membership organisations Web portals; News agency activities.

73. NESTA, Mapping Innovation in Scotland (unpublished 2020)

74. NESTA, Mapping Innovation in Scotland (unpublished 2020)

75. The data covers funding secured by HEIs and secondary education establishments.

76. The three pillars were 'Excellent Science', 'Industrial Leadership', and 'Societal Challenges'.

77. Scotland in 2019 had a nominal GDP approximately 1.2% the total size of the EU-27. All funding allocations by thematic objective were therefore reduced to 1.2% of their value for comparison with real Scottish observed figures.

78. The areas highlighted below are those that correspond most closely with sectors. The 'thematic objectives' where Scotland performed strongest were 'research potential' and 'develop the accessibility and use of publically-funded research'.

79. The methodology used to produce the Business Enterprise R&D spend estimates has been improved to better represent smaller businesses. However, there is currently uncertainty around the robustness of the estimates for Scotland. Therefore the Scottish Government has temporarily paused the National Statistics status of the Scottish Government R&D publications. Scottish Government statisticians will be working with the ONS on the next stage of the data development and hope to be able to resume with the National Statistics badge on the Scottish Government R&D publications in 2023. More information is available at: Gross expenditure on research and development Scotland 2020 - (

80. Regions in this case have been combined into; Wales, Northern Ireland, North (North East, North West, Yorkshire and the Humber), Midlands and South West (East Midlands, West Midlands, South West), East of England, London and South East

81. Scottish technology ecosystem: review - (

82. Scotland's export strategy notes that, as well as driving business performance and scale, access to international markets and competition drives innovation and productivity growth. Evidence indicates that there is a strong correlation between exporting and innovation. Innovative businesses are more likely to export and the experience of exporting can be a strong driver of investment in innovation and R&D as businesses compete in new markets.

83. Analysis underpinning Scotland's Inward investment plan finds that there are strong links between Scotland's university knowledge base, inward investment and innovation, and that foreign owned businesses typically invest more in business R&D spending. Additionally, these inward investors can further boost innovation in the Scottish economy through their engagement with domestic businesses.

84. NSET identified a number of sectors in which Scotland already occupies a position of global leadership in and/or has the opportunity for growth


Email: Innovation@Gov.Scot

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