National innovation strategy 2023 to 2033

6. Innovation Clusters

The Strategy's first programme of activity is focused on Innovation Clusters and is designed to support our priority areas to grow, scale and deliver world-class economic performance.

In this chapter we will define what we mean by clusters, set out the opportunities that exist to catalyse their rapid growth and propose a new vision for a more systematic approach to achieving that goal.

'Industry-led clusters have demonstrated they are a powerful enabling vehicle for delivering economic growth, high-value jobs and entrepreneurial start-up and scaling enterprises through impactful innovation and collaboration. I have valued the opportunity to share our cluster experience and expertise with a range of stakeholders and to now see the role of clusters form an integral part of the Innovation Strategy.'

Stephen Ingledew, Executive Chair FinTech Scotland

Strategic context

Economic Clusters consist of dense concentrations of interconnected businesses, supply chains, skilled labour pools, economic and education institutions, public sector organisations and related infrastructure all operating in a particular field. Together, these actors create an ecosystem of collaboration, healthy competition, knowledge exchange and often close working partnerships.

There are numerous benefits to the formation and growth of economic clusters. They have been shown to drive the pace and quality of innovation; increase productivity and boost wage growth. Clusters are also strongly correlated with the formation of new high growth businesses, expanding and reinforcing the strength, competitive edge and innovation of the cluster. A good example is Scotland's emerging fintech sector, which has risen from a thriving financial services sector, to compete with existing businesses, driving innovation and ultimately reinforcing the scale and performance of the original cluster.

The reason that clusters are capable of having such a powerful economic impact is that they are uniquely capable of delivering the benefits of both competition and cooperation. Many similar firms operating in similar markets and supply chains drives competitive innovation as they refine products to compete for customers. The fruits of that competitive innovation are then absorbed into the broader cluster, increasing its overall strength and productivity. Yet cooperation also takes place – not all actors in a cluster are competitors and companies are able to collaborate with supply chain partners, informed customers, universities and other public institutions to drive performance. Moreover, geographically concentrated clusters often foster a rapid learning 'grapevine' effect through which common relationships with major clients, supply chain partners and R&D facilities leads to clustered companies having much stronger intelligence on market needs, technological advances and new processes, machinery and production techniques.

Clusters also have social and environmental benefits that are wide-ranging and extend beyond immediate macroeconomic measures. The wellbeing and prosperity of particular regions and localities is very often driven by cluster activity, supporting local people whilst also attracting other professional services and inward migration that supports regions to thrive. An excellent example is the oil and gas sector in the North East of Scotland.

The importance of involving communities and citizens in this cluster activity, in setting and co-creating innovative solutions to deliver social and socially responsible innovation, as well as the importance of social and community innovation is an important part of the wider innovation ecosystem.

Social Innovation is critical, especially in rural contexts, to addressing societal challenges (health, wellbeing, social care, climate response) through the effective delivery of public services and its value is heightened in a turbulent and fiscally challenging environment where new models to address such challenges are a necessity. Social innovation promotes the application of more sustainable and resilient models, so is an important driver of rural resilience.

Over time, the scaled development of clusters can have a profound effect on a country's economic performance and its ability to be internationally competitive. In the highest-performing clusters, such performance can be sustained over long periods of time as competition, deep expertise, innovation and collaboration lead to an anti-fragile effect in which the cluster continually adapts and regenerates.

Opportunity

As we have seen from the evidence in the preceding chapter, Scotland has a range of established, growing and emerging clusters which can act as a foundation for a vibrant innovation-led economy. The question is therefore how the relevant actors can best collaborate to drive their rapid growth.

In this regard it is worth reflecting on the nature of Scotland's approach to economic development prior to the publication of NSET. While many outstanding and successful initiatives exist, as the New Markets chapter of NSET makes clear, we have not historically concentrated our efforts and resources in a systematic and sustained way on a clearly defined set of priorities. For the remainder of the chapter we examine the potential for just such an approach drawing, as usual, on examples of international best practice.

A new approach to cluster building

At a minimum, a new approach to cluster building approach must:

• provide focus on the scale of opportunity and global potential within our national innovation priorities.
• be capable of identifying weaknesses or growth opportunities in key clusters and provide a systematic plan for addressing them.
• provide context on Scotland's international standing and competitiveness in global markets.
• provide alignment of policy and investment support across the public, private and academic sectors.
• clearly and visibly promote our world-leading capability to international audiences.

Scotland can learn from international examples of best practice from countries of a similar size and outlook, where rigorous cluster-building approaches are the norm; underpinning national economic growth and signalling world-leading capability. Countries that have successful and highly productive and collaborative innovation ecosystems such as Norway and Denmark maintain tiered cluster development programmes that visibly define their national strengths and innovation capabilities, incorporating different regional strengths and then focus investment, business support and knowledge exchange accordingly.

With a similarly unified national network of high-performing clusters in each of our innovation priority areas, we will visibly demonstrate how Scotland can effectively harness different regional strengths and excellence into a collective national effort to become globally competitive. As with Denmark's Cluster Excellence network, a visible cluster network will unify different regional strengths to indicate a collective national expertise in a few specialisms, and can provide valuable signposting to attract further international investment, collaboration and talent.

Aligning public and private sector support for innovation priority clusters according to their specific needs will help businesses within our innovation priority areas to scale and grow, maximising their productivity and economic impact in accelerating Scotland's economic growth. As with the Norwegian Innovation Clusters, tailored packages of public support that catalyse growth and stimulate further private sector investment will support innovation priority clusters to achieve their world-leading capabilities.

Actions

1. We will work closely with our Enterprise Agencies and other relevant partners across industry, academia and the broader public sector to develop a Scottish Cluster Scheme.

This scheme will define a rigorous and systematic approach to the identification, evaluation and growth of priority Scottish clusters.

This will involve a detailed analysis of the cluster's size, potential, level of maturity and development needs.

We will look at 'best practice' approaches taken by comparator nations across Europe as we develop the scheme and the new system will align with the current EU cluster management accreditation scheme EUCLES, enabling clusters to benchmark themselves against others and to promote international collaboration.

While we begin this work with a focus on priority areas, it is crucial that other key and emerging clusters have the opportunity to use this system to accelerate growth. We recognise that rapid change is inherent in the concept of innovation and that our approach needs to be agile enough to identify to catalyse nascent clusters as they emerge. As we develop the scheme and associated tiered support packages we will work with the enterprise agencies and cluster leaders to ensure that the model is capable of broader application and that all clusters have an opportunity to undertake the process and form a deeper understanding of the actions necessary for growth.

2. We will begin our work on Cluster evaluation and facilitation process with a focus on each of the innovation priority areas identified in this Strategy.

The Scottish Government will work with cluster lead partners to undertake an evaluation and facilitation process to identify barriers and opportunities for each innovation priority area. This evaluation will be used to develop tailored packages of support according to each priority area's specific requirements to assist scale and growth toward world-leading status. As noted, these packages will be aligned with the Scottish Government's Innovation Funding Review, and a phased approach will be taken to delivery over the lifetime of the Strategy.

This will not always require the investment of funds. For example, clusters often grow exponentially as a result of non-financial factors such as the creation of key infrastructure, new opportunities for export, the arrival of an anchor inward investor, international connectivity, improved arrangements for peer learning or the expansion of skills and knowledge exchange activities. Compounding effects are often observed when such interventions are executed in combination.

For Scotland to achieve world leading capability in our innovation priority areas, we must harness the exceptional talent from all areas of our society through a cluster approach that encourages and facilitates growth of increasingly diverse innovation ecosystem.

We will ensure that clusters grow in a way that harnesses the diversity of innovation talent throughout Scotland, and a core part of the evaluation process will be evaluating the diversity of the current workforce, innovation actors and future talent pipelines each innovation priority area.

In line with the analysis in Ana Stewart's Pathways report^[17] we will take a tailored approach to addressing particular barriers to widening access to innovation activity for female entrepreneurs, stimulating innovative business opportunities for individuals from ethnic minority backgrounds, and encouraging an entrepreneurial mindset and engagement from Scotland's young people through promoting career opportunities in highly innovative sectors.

Not all innovation priorities will have manufacturing and supply chain opportunities (e.g. fintech). Our cluster approach will support the identification of manufacturing and supply chain opportunities, highlighting them as priorities for Making Scotland's Future, our programme for advanced manufacturing, which draws together the support of our wider enterprise and skills network. We will also ensure companies with the potential to access new market opportunities in our priority areas are supported by our growing industrial innovation support infrastructure.

We will also track the data on the delivery of manufacturing and supply chain jobs within each of our priorities, adding this to our innovation scorecard and using it to inform decisions on future priorities.

3. We will support the development of a Scottish Cluster Network aligned to our innovation priority areas.

In recognition of the crucial importance of collaboration, peer learning and productive competition in driving cluster innovation, we will support the development of a new Scottish Cluster Network. The purpose of this network will be to facilitate relationships, knowledge exchange, international connectivity and collaboration across key cluster participants.

International Examples of National Cluster Support

Norway - A Tiered Model of Cluster Support

Norway's national cluster programme has been in operation since the early 2000s with the purpose of strengthening Norway's innovation ecosystem. The cluster support model provides public sector funding to three tiered cohorts that demarcate the level of maturity, the needs of each cluster and the length of funding commitment:

• Arena consists of clusters that are newly established, small and with limited collaboration initiatives on a regional basis.
• Norwegian Centres of Expertise (NCE) consists of clusters that are well-established with a national footprint and the potential for further national and international growth.
• Global Centres of Expertise (GCE) consists of world-leading clusters that are well-established and already entrenched in global value chains.

The cluster support programme is jointly owned by Innovation Norway, government enterprise agency SIVA and the Research Council of Norway, who manage on behalf of the Ministry of Trade, Industry and Fisheries and the Ministry of Local Government and Modernisation.

Denmark – A Hub-and-Spoke Model for National Clusters of Excellence

Denmark's national cluster network is built upon economically leading and emerging industry fields in which Denmark has particular world-leading expertise; environment, energy, maritime sector and life sciences.

A cross-country national coordinated effort, the Cluster Excellence Denmark initiative aims to simplify the landscape for businesses and acknowledge regional expertise whilst bringing together research and business communities in a shared national ambition. The Network is made up of 14 'superclusters', each with central hubs and additional regional spokes spanning across Denmark.

Case Study – High-Tech Dairy Processing in South-West Scotland

Home to over three quarters of Scotland's dairy herds, the South-West of Scotland has long since been at the forefront of dairy production research and innovation. Spearheaded by the Scotland's Rural College (SRUC)-led Dairy Research and Innovation Centre – at Crichton Royal Farm, Dumfries – the region also boasts many innovative dairy farmers and producers who are boosting the value of their industry and the region's economy while also pioneering significant improvements in both environmental sustainability and animal welfare.

Cementing the South as Scotland's 'go to' region for future investment in high-tech, sustainable and regenerative food production systems, are a number of nationally significant projects including the Digital Dairy Chain, which received £21 million from UK Research & Innovation's Strength in Places Fund, and the £8 million Dairy Nexus project, drawing on Scottish and UK Government funding secured as part of the unique Borderlands Inclusive Growth Deal.

Led by SRUC from its Barony campus near Dumfries, the five-year multi-party Digital Dairy Chain project will see SRUC and academic and industry partners focus on developing a fully integrated and traceable dairy supply chain, including the development of new high-value dairy products. Aligning with the ambitions of Scotland's National Strategy for Economic Transformation, the project is expected to create more than 600 jobs and generate £60 million a year of additional value to the economy of the region by attracting large dairy processors and supporting investment in additional industry-focused research and development.

The Dairy Nexus project is creating a state-of-the-art facility at Barony as a catalyst to drive innovation to decarbonise the dairy sector, accelerate productivity growth, enhance animal welfare, and to develop new products from dairy resources. The new space will provide a modern knowledge exchange with co-working facilities, state-of-the-art research and development infrastructure for innovation in biorefinery and milk technology, and a UK-first digital twin of a grass-based dairy farm – boosting investment and employment in the region.

Complementing these investments are wider collaborations including that with Scotland's 5G Centre – which has seen the deployment of a 5G rural 'field lab' across Crichton Royal Farm, supporting new and greater use of sensor technologies and data to optimise processes and add value at every stage.

As pressures grow to produce food products more efficiently, sustainably, in a way which enhance human health and biodiversity, the South of Scotland is better placed than ever to continue leading the way.