National innovation strategy 2023 to 2033

9. The Adoption And Diffusion Of Innovation

The Strategy's fourth and final programme of activity is focused on the adoption of innovation across the economy and how this can help improve productivity across the country. This chapter will set out the context for where we are now, the vision for where we want to be and the actions which will help us achieve that vision over the next ten years.

'Typically, we think of "Research and Development" (R&D) as a rhyming couplet. In the UK's case, the R and the D do not seem to rhyme. The UK does R well, as a world-leading innovation hub. But it does D poorly, where the D refers not just to development but the diffusion and dissemination of innovation to the long, lengthening, languishing lower tail. When it comes to innovation, the UK is a hub without spokes.'

Andy Haldane, Chief Executive of the Royal Society of Arts and former chief economist of the Bank of England

For Scotland to benefit from being a world-leading innovation nation, then every business or organisation – wherever it is – should have the opportunity to adopt innovation. Innovation should be accessible to everyone, not just those businesses working at the cutting edge.

'Effective diffusion of innovation is an essential part of any highly innovative economy. Not only does it ensure that business, large and small, are taking advantage of the latest technology to improve their products, systems and customer proposition, it also provides the means to support upstream innovation continuing a virtuous cycle of pushing on frontiers and making that new knowledge and insight more widely available.'

John Fingleton, Entrepreneur

Strategic Context

Scotland has fewer 'innovation-active' businesses (see footnote 9) than most other parts of the UK (Figure 6), although this percentage has risen over the past decade.^[21]

Source: UK Innovation Survey, 2021

On all measures of innovation activity Scotland remains below the UK average. Businesses in the 'research and experimental development in social sciences and humanities' sector were the most likely to be innovation-active in Scotland (70.2%) and the UK (66.5%), whilst businesses in the 'accommodation and food services,' 'renting of machinery equipment and personal and household goods' and 'construction' sectors were the least likely to be innovation-active.^[22]

The 39% of Scottish businesses innovating cooperate with a range of partners, mostly with suppliers and private sector clients. Businesses in Scotland were also more likely to cooperate with higher education institutions and public research institutions than other parts of the UK.^[24]

Source: Scottish Business Monitor Q2 2022, Fraser of Allander Institute

This data aligns to more recent survey evidence from the Fraser of Allander Institute which confirms that one in every three businesses in Scotland are currently planning to make major changes for the purpose of innovation in the coming 12 months, whilst 60% were not (up slightly from Q1).^[25]

There is a clear link between the majority of our businesses not adopting innovative technologies and the resulting impact on productivity on Scotland's economy.

'If Scotland's productivity matched that of the OECD top quartile, average annual wages would be almost 10% higher.'^[26]

In its report 'Digital Dividend',^[27] the OECD notes that the polarisation between businesses that adopt new technologies and those that don't has far-reaching implications for economic growth and inclusion. Sluggish productivity means limited economic growth, poor wage growth, depressed tax revenues and increasing income inequalities.

Without intervention this polarisation of the economy is projected to get worse. If SMEs are not able to adopt simple and relatively cheap technologies (such as cloud computing), there is little prospect of them having the capital, strategic capacity or skills necessary to invest in far more powerful and sophisticated

technologies such as AI, data analytics and 5G. In contrast, frontier firms concentrated in major cities will continue to invest, train staff and grow faster and more productive. The risk is this will substantially deepen regional and skill-based wage inequality, dampen job creation (especially high value jobs) and weaken the competitiveness of Scottish SMEs compared with European competitors who will benefit from the EU Commission's prioritisation of SME digitalisation, adoption and diffusion.

There is strong evidence (from comparator nations such as Norway and Denmark) that establishing mechanisms for peer-to-peer support and collaboration between businesses is especially effective at improving strategic management capacity, digital adoption and boosting productivity. Numerous OECD reports echo this evidence, highlighting the 'spillover effects' of firms learning and mirroring the practices of highly digitalised supply chain partners, customers and competitors.

Vision and Opportunity

Scotland has achieved improvements in innovation and productivity performance over recent years. But we need to do more if we are to become a world-leading innovative nation. We need more businesses to innovate and make money from that investment, as the evidence highlights that those businesses are more resilient and successful. We need more of our businesses to invest in the adoption of technologies and capital equipment to drive improvements in productivity. We need to challenge and inspire business leaders to embed innovation as a culture across everything they do, responding to and embracing international opportunities.

If we do, we have enormous potential to increase the impact of innovation across the business community. Our aim is to unlock as much of this untapped innovation potential as possible. To do so we need more businesses innovating to - improve processes, develop new products or services, adopt new digital technologies, diversify into new markets, embrace automation, invest in skills, and adopt, fair work practices, and invest in plant and machinery to increase productivity.

Regional productivity gaps exist between urban and rural areas. Regions identifying and focusing on particular sectoral and place-based strengths and having effective support from government to do so will result in a narrowing of productivity gaps.

Evidence from the OECD illustrates that the highest productivity gains in Scotland over the last few years came from rural businesses innovating to make better use of resources. OECD's study on 'Unlocking Rural Innovation' highlights that in the midst of a global slowdown in productivity, unlocking the innovative potential of rural places is more important than ever.

With relatively high levels of social capital, and a diverse fabric of social innovation actors, Scotland has one of the most advanced ecosystems to support social innovation and social entrepreneurship in the world. This social capital is a supporting factor for social innovation, and has a positive impact on firms' labour productivity, especially across smaller, less productive and lower tech firms.^[28] These are mutually reinforcing.

A business environment that is 'innovation-active' is one where supply chains and ecosystems will grow. It is an environment where businesses invest and investment flows in, and where jobs and prosperity are sustained by highly productive businesses.

Approach

The approach we will take to supporting more of our businesses to become innovation-active will be twofold – diffusion and adoption.

This starts by diffusing the message that companies of all sizes can innovate, and that innovation is not solely about the invention of new technologies. Innovation also means the adaptation of existing technologies and the adoption of new ways of working to do things better and increase productivity.

We want more of the Scottish business base to be ready to innovate – whether that is to adopt new digital technology, to trial a new business process, to embark on a complex decarbonisation programme, or to engage with our world-leading academic research base. Achieving this will require collaboration and partnership across a wide range of stakeholders across Scotland. Taking a place-based approach, we will build significant momentum and buy-in over the ten-year period of this Strategy.

Actions

11. We will introduce an innovation themed National Productivity Programme.

The Productivity Programme will deliver, over the ten-year lifetime of the Strategy, an ambitious increase in the level of innovation taking place by businesses across the whole of Scotland. This will result in raised productivity, improved economic outcomes, and a more inclusive economy.

We will work with partners including our Enterprise Agencies, Business Gateway and Local Authorities to develop a programme that diffuses the benefits of innovating for productivity gains. It will make full use of our Innovation Architecture to support more of our SMEs to innovate to increase their productivity.

Adoption activity within the productivity programme will comprise:

• supporting the capacity and capability of business leaders to adopt a culture of innovation and investment.
• supporting businesses' access funding (public and private) to increase the levels of innovation and capital investment leading to more widespread adoption of digital technologies, automation and energy efficient business processes, including investment in plant and machinery (where appropriate).
• identifying demand-led Open Innovation opportunities that connect businesses to customer challenges in the public and private sectors.
• exploring options to develop an 'Innovation Marketplace' as a platform that facilitates and connects companies looking for solutions to innovation challenges, to those that can potentially provide the solutions, including the provision of funding to encourage large corporates to source solutions from innovative Scottish SMEs who have the capacity and capability to develop and deliver solutions to challenges.
• assessing options for some form of 'Customer Platform' that allows companies to try new products or services developed by early-stage Scottish businesses on a 'try before you buy' basis as a means of gaining both customer traction and adoption and also feedback and validation, supporting ambitions to ensure that innovation and commercialisation are working in tandem.
• Skills Development Scotland working with our Enterprise Agencies and other partners to ensure we are investing in skills demanded by our prioritised sectors.

Diffusion activity within the productivity programme will comprise:

• telling our story of innovation more creatively by utilising multiple channels, demonstrating the diversity of innovations and innovators and using case studies that resonate with businesses of all sizes.
• utilising our innovation architecture
• to showcase how we are supporting businesses to innovate and become more productive.
• supporting businesses to de-risk and understand how to embed new processes, automations, technologies, and digital solutions to boost productivity.
• the delivery of innovation masterclasses to support clusters of companies to understand more fully the benefits of innovating and opportunities connected to the priorities set out in this Strategy.
• bringing supply chain companies together to share good practices and explore together the scope for productivity improvements.
• utilising SCDI Productivity Clubs to support peer-to-peer networking on key themes which help increase productivity.
• raising awareness of the benefits of fair work practices and the positive impacts on productivity.
• celebrating success through events/awards ensuring the full diversity of innovation is recognised and valued across Scotland.

We will link the Innovation Productivity Programme into the development of our Cluster Network, so that the wider supply chain of current and potential SME customers and suppliers can be brought into our success in our identified priority areas. This will drive a more inclusive economy where innovation at the cutting edge benefits a greater number of people and communities across Scotland.

12 We will encourage more of Scotland's businesses to grow and diversify through innovation.

The priority themes and cluster approach set out in this Strategy encourage businesses to grow and diversify through innovation. We will ensure that support is tailored to company and sector needs, is easier to navigate and innovation journeys are joined up and complementary. This will build on the work of the Business Support Partnership 'one

front door' approach. An innovation adoption referral charter will be introduced to ensure that any business being referred from one part of government or one agency to another, experiences a warm and effective handover to a named contact.

13. We will establish Scotland as a global leader in adoption and diffusion evidence and practice.

A key aim will be to test new thinking and gather new evidence. We will harness Scotland's extensive international network to identify, engage, and share good practice with international partners. We will work with expert organisations such as the Royal Society of Edinburgh, SCDI, the Fraser of Allander Institute, the Productivity Institute, The Scottish Centre of Employment Research and the Bayes Centre on a new strand of evidence-gathering. Our Innovation Scorecard will be updated to incorporate metrics and indicators of our innovation diffusion performance. This will enable us to benchmark against comparable metrics internationally.