GROWING VALUE SCOTLAND. Phase 2 Research Report Submitted to The Growing Value Scotland Task Force

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1 GROWING VALUE SCOTLAND Phase 2 Research Report Submitted to The Growing Value Scotland Task Force by Graeme Blackett and Shona Glenn March 2016

2 2 Growing Value Scotland Interview Programme Findings A report to the Growing Value Scotland Task Force 29th January 2016 Editorial input was provided by Martin Ince

3 3 Introduction to the National Centre for Universities and Business The National Centre for Universities and Business The National Centre for Universities and Business develops, supports and promotes world-class collaboration between universities and business across the UK. We are: Led by leaders and guided by our networks of universities and business; Informed by research, providing independent myth-busting analysis; Digital innovators and curators of opportunities for universities, business and government; Change managers, through our Task Forces which tackle talent and innovation challenges. A National Centre Task Force brings together leaders from universities, government and business to focus on a particular economic sector or issue. We work together to identify problems, and examine issues in depth. The Growing Value Scotland Task Force, chaired by Rob Woodward (STV Group) and Sir Ian Diamond (University of Aberdeen), builds on the success of this UK-wide report. It explores the R&D capabilities of the Scottish economy, the innovation culture of firms and their relationships with universities, and the potential for change and change management. Dr David Docherty Chief Executive

4 4 Foreword on the Growing Value Scotland Task Force This document reports independent research, which was commissioned by the National Centre for Universities and Business (NCUB) for its Growing Value Scotland Task Force Phase 2 research programme. The research details a series of semi-structured deep-dive interviews with eighty-four senior leaders from businesses, universities and policy organisations on the level and nature of university-business collaboration and innovation in Scotland. Using a broad definition of innovation, this carefully designed research programme assimilated the views, experiences and perspectives from interviewees, two-thirds of whom were from businesses in sectors central to the Scottish economy (Creative, Digital & IT, Energy, Financial services, Food & Drink, Life Sciences and Tourism). The resultant findings provide a high-quality evidence base with invaluable insights and best practice exemplars that will inform and shape the Steering Group s final reflections and recommendations to grow the value of Scotland s university and business innovation system. The outcomes from the Growing Value Scotland Task Force will culminate in a May 2016 launch of its final report. We would like to thank Graeme Blackett and Shona Glenn from BiGGAR Economics for their professional expertise in producing this research report. Professor Sir Ian Diamond Co-Chair, Growing Value Scotland Mr Rob Woodward Co-Chair, Growing Value Scotland

5 5 Task Force Co-Chairs Prof. Sir Ian Diamond Principal and Vice-Chancellor University of Aberdeen Rob Woodward Chief Executive STV Group plc Executive Group Stephen Blackman Group Economist The Royal Bank of Scotland Group Dr. David Docherty Chief Executive National Centre for Universities and Business Prof. Sir Pete Downes Principal and Vice-Chancellor University of Dundee Prof. Anton Muscatelli Principal and Vice-Chancellor University of Glasgow Steering Group Louise Alford Director of Business HR BSkyB Alison Bryce Partner Maclay, Murray & Spens LLP David Brown Partner PricewaterhouseCoopers Robert Calderwood Chief Executive NHS Greater Glasgow Dr. Alasdair Cameron Executive Director AURIL Melfort Campbell Chairman Imes Group Dr. Jamie Coleman Managing Director Codebase Prof. Jon Cooper Vice- Principal Innovation & Knowledge Exchange University of Glasgow Jeremy Cutler Head of Technology Innovation Total Exploration & Production UK Ltd. Dr. Stuart Fancey Interim Director Research & Innovation Scottish Funding Council Adrian Gillespie Managing Director, Operations (Growth Companies, Innovation & Infrastructure) Scottish Enterprise Dr. Iain Gray Director of Aerospace Cranfield University Prof. Paul Hagan Vice-Principal Research Robert Gordon University Prof. Alan Hughes Senior Research Associate & Director Emeritus University of Cambridge Dr. Siobhán Jordan Director Interface David Lott Deputy Director (Policy) Universities Scotland Dr. Bridgett McConnell Chief Executive of Culture and Sport Glasgow City Council Lee McLaughlin Founder IC Mobile Lab Andrew Milligan Head of Global Strategy Standard Life Investments Gavin Nicol Director of Operations Support & Development Weir Group Prof. Andrea Nolan Principal and Vice-Chancellor Edinburgh Napier University Prof. Sir Timothy O Shea Principal and Vice-Chancellor University of Edinburgh Dr. Alan Rowe CEO, Rowett Research Services University of Aberdeen Prof. Rick Rylance Director, Institute of English Studies University of London, School of Advanced Studies David Scott Senior Director Tepnel Pharma Services Prof. Nigel Seaton Principal and Vice-Chancellor Abertay University Tim Summers Former Group Manager Digital Marketing Freescale EMEA Dr Ken Sutherland President TMVS Chris van der Kuyl Chairman 4J Studios Dr. Rebekah Widdowfield Head of Higher Education Scottish Government Charlotte Wright Sector and Business Development Director Highlands and Islands Enterprise Task Force Support Dr. Elspeth Elliott Growing Value Scotland Project Manager NCUB Dr. Sarah Walker Project Manager - Innovation NCUB

6 6 01. Executive Summary In 2015, the Growing Value Scotland Task Force published research that quantitatively benchmarked Scotland s relative position in research and development (R&D). Following the completion of this research, further work was commissioned in an effort to identify and understand the underlying factors that contribute to Scotland s innovation culture. This report presents the findings of that second phase of research. It is based on the outputs of 84 semi-structured interviews with businesses (62%), business sector organisations (13%), universities (13%) and policy makers from universities and government agencies (12%) across Scotland. This breadth of experience has provided an extraordinary depth of insight into Scotland s innovation landscape and, while the emerging picture is complex, it can be distilled into the following central observations: The Scottish businesses that participated in this study appear to be much more innovative than the quantitative evidence might at first suggest. Very often businesses tend to see innovation as part of a process of continuous improvement rather than as a discrete event. Sometimes this activity is undertaken formally using specific tools such as Six Sigma or Total Quality Control. But more often it is a more ad hoc process of constantly striving to develop, improve and refine product and service offerings. This type of innovation is often overlooked by the measures typically used to quantify R&D and innovation. The businesses that participated in this study appear to be adept at bringing in and utilising knowledge from outside the organisation. This is somewhat surprising given the findings of the first phase report, which suggested that businesses in Scotland lack absorptive capacity. Differences in research methodology mean that the findings of the two phases of research are not necessarily inconsistent. But the reasons for the difference will be an important issue for the Task Force to consider in formulating its final recommendations. Although the businesses that participated in the study felt that they were adept at bringing in new ideas, they agreed too that there was room for improvement. This implies that innovation should remain a top policy priority. Although there may be more innovation happening within the businesses that participated in this study than might have been expected, this is not necessarily the case across the board and does not imply that innovation should be a lower priority for policy makers within government and its agencies. If anything, the opposite is the case. Most of those who contributed to this study regarded innovation as essential for maintaining economic competitiveness, and felt that more could be done to increase the level of innovation within the Scottish economy. While the businesses that participated in this study were all open to ideas from outside, they were only interested in ideas with clear market potential. Business perceptions of the market value of a new idea may be closely linked to its apparent market-readiness.

7 7 For businesses, innovation is a means to an end, not an end in itself. Businesses do not aspire to innovate. They aspire to thrive and grow, and often see innovation as a way of achieving this. To understand the innovation needs of Scottish businesses, it is essential first of all to understand the market challenges and opportunities they face. What innovation means and how it happens varies from sector to sector and from business to business. The structure of the sector, the size of the individual business, the professional networks and experience of its leadership team and the effectiveness of its support mechanisms all have an influence. But the market factors affecting each sector are the most important factor in their innovation decisions. Interaction with universities is only part of the overall picture of business innovation. Often the most important sources of innovation for businesses are their own staff, and other companies within the supply chain. Businesses take a holistic approach to interaction with universities. For businesses, interaction with universities can take many forms ranging from student projects and consultancy to professional training and graduate recruitment. While collaborative R&D is and will remain an important part of this overall picture, a disruptive technology-push approach to innovation is not always appropriate, particularly for mature service sectors such as tourism and finance, which are often heavily regulated. Most of the businesses that contributed to this study regarded issues around intellectual property (IP) as inconveniences rather than major barriers to innovation. Although moves to improve the policies and procedures used to assign IP were generally welcomed, they are unlikely to deliver a step-change improvement in innovation. Many of the businesses and organisations consulted believed that there is potential to achieve a step change in innovation in Scotland. Although this study has identified many examples of good practice in innovation support and university-business interaction, the number of businesses supported by existing initiatives is relatively small. The step change in innovation which is required to increase the productivity of the Scottish economy significantly will require a substantial increase in the number of businesses which are supported to engage in innovation. Universities could play a more important role in delivering this step-change improvement in innovation support. Most of those consulted as part of this exercise believed that universities have the potential to play a much greater role in supporting innovation within Scottish business. Personal relationships are at the heart of all successful interactions between businesses and universities. Many consultees believed that the key to enhancing university-business interaction lies in empowering those tasked with delivery. Many consultees also believed that there is a need to achieve greater alignment between the incentives for university staff and those facing business. There was a consensus amongst consultees that knowledge exchange offices should be better resourced, with stronger capacity to engage at a senior level. Many also believed that there is a need for knowledge exchange functions within universities to be more focused on economic development rather than on sales and income generation. A more holistic approach is required. Those we consulted believe that to achieve a significant increase in the volume of university-business engagement, universities and policy makers within government and its agencies will need to take a more holistic approach to innovation support that recognises the full spectrum of university-business interactions. While collaborative R&D is and will remain an important component of this, it can only be part of the solution. From these key findings a number of issues have been identified that the Task Force may find it helpful to consider when developing its recommendations. These issues relate to businesses and the organisations that represent their interests, universities, and policy makers within government and its agencies.

8 8 1.1 Issues Relating to Businesses and Business Groups Be willing to participate. A common complaint from the businesses consulted for this study was that teaching and research within universities are often not as relevant to the challenges and opportunities faced by businesses as they might be. Part of the solution to this lies with universities. But businesses also have an important role to play by engaging on a variety of levels, from contributing to curriculum development to supporting student projects and staff secondments. There may also be an opportunity for business support groups to help coordinate this engagement. Learn to speak the same language. The language used to describe innovation can be a barrier to business engagement with others in innovative activity. Businesses can help overcome this problem, by discussing the benefits of innovation with policy makers from government and its agencies, with business organisations, and with universities. Where commercial interests allow, they can also share experience of best practice. Take a strategic approach to working with universities. Universities are not businesses. They are not required to have an in-depth understanding of markets and are not designed to work to short timescales. They are best regarded as potential long-term strategic partners rather than providers of off-the-shelf solutions or quick fixes. Business sector organisations can take a lead on innovation strategy. The ability of business sector organisations to lobby and influence policy on behalf of their members is well recognised. There is the opportunity for them to use this experience to develop sector-wide approaches to innovation strategy. Help to disseminate best practice. Many businesses, particularly SMEs with limited resources to commit to R&D, take a me too approach to innovation, based on experience elsewhere in the sector. By helping to disseminate best practice, business sector organisations could enhance the benefits of innovation for entire sectors of the economy. 1.2 Issues relating to Universities Be open to a wider range of university-business interaction. Businesses tend to take a wide view of interaction with universities that goes far beyond traditional knowledge transfer. Interaction with business also generates wide educational and research benefits. Universities should encourage these wider interactions by identifying opportunities to engage with businesses across the spectrum of research and teaching. and by marketing a full range of opportunities for interaction. Engage with more businesses. The number of businesses in Scotland far exceeds the academic resources available to engage with them. Universities should seek to identify innovative ways of engaging with businesses in volume. Student placements and external student projects are good examples. Learn to speak the same language. Many businesses find technology and innovation language off-putting because it is seen as irrelevant to core business needs. To overcome this, universities should be approachable, and communicate with businesses on their own terms by presenting opportunities in terms of potential market value. Regard business interaction as a long-term relationship. University-business interaction generates the greatest value when it is based on a long-term, strategic partnership rather than being a purely transactional relationship. Universities should focus on developing such relationships rather than on selling services or IP. The skills required to develop long-term relationships will differ from those required to commercialise research. Additional staff training may be required to achieve it.

9 9 Focus on economic impact rather than income generation. In most cases university-business interaction is unlikely to be a major source of income. The benefits of interaction will be for the wider economy rather than for the university alone. Universities should focus on generating economic impact and wider benefits to society rather than on income. Understand that businesses often have shorter time lines and are subject to commercial pressures the issue is not that they lack vision. Make more use of alumni connections. For many businesses, employees are an important source of innovation. Businesses that employ graduates are more likely to interact with universities. Provide appropriate incentives for academics to work with business. Recognition and career progression are important incentives for academics and should be linked to business engagement activity. Universities should also ensure that academics have sufficient time to engage with businesses, encourage secondments to industry, and learn from best practice outside Scotland where appropriate. Invest additional resources in business development and Technology Transfer Offices. Empower those tasked with business development to engage at a senior level. Explore opportunities for multidisciplinary engagement. The solutions to business innovation challenges often lie outside traditional disciplinary boundaries. Universities should seek multidisciplinary solutions where appropriate. Investigate opportunities to drive innovation. There may be cases in which innovation is needed but business is not motivated to take a leading role. In such cases, universities should seek to drive innovation. 1.3 Issues Relating to Government and its Agencies Consider whether there is a need to adopt a wider definition of innovation or to improve how our current understanding of the concept is communicated. Many of those consulted felt that current definitions of innovation can be overly restrictive, and make it difficult for some types of innovative activity to obtain innovation support. Broaden the scope of innovation policy. Different sectors of the Scottish economy have different innovation needs. Not all are best addressed through technology-driven innovation. Government should consider whether the scope of innovation policy needs to be broadened to reflect this reality. Focus on market- and opportunity-based innovation. For businesses, innovation is always a means to an end. Effective innovation support - and the language used to describe it - must always reflect this. Celebrate and communicate everyday successes. Disruptive, technology-driven innovation is not something that the majority of businesses can relate to. To encourage more businesses to engage with innovation, the government and its agencies should promote examples of innovation in dayto-day activities that large numbers of businesses can relate to and hope to replicate. Undertake a review of the funding and support landscape for innovation from an end user perspective and on a sector-by-sector basis. Businesses want an uncluttered innovation landscape, but a diversity of models are required to meet different needs. Government should focus on eliminating duplication and simplifying access for different types of user.

10 10 Recognise that innovation is a people business. Personal relationships are key to innovation. So innovation support should focus on facilitating relationship-building rather than providing digital platforms or one-stop-shop initiatives that collate existing information without adding to the existing capabilities of partner organisations. Incentivise universities to work with businesses. The remit of knowledge transfer staff and technology transfer offices should be changed to aim for economic growth rather than university income. A diversity of models will be required and a top-down approach is not appropriate. This diversity is likely to be costly and is unlikely to generate significant financial returns to universities. It will need to be supported with appropriate resources. Incentivise academics to work with business. Government should support universities to incentivise academics to work with business. This could involve investing in new structures to provide industry feedback on basic research. Promote the benefits of engaging with industry. Many academics have no experience of working in or with industry and find it difficult to identify appropriate opportunities to engage with businesses. Promoting and celebrating examples of a variety of successful interactions could help to overcome this obstacle. Recognise innovation spending as investment. Spending on innovation is comparable to infrastructure investment. It should not be regarded as a cost, but as an investment in future economic capacity. Government should recognise this reality and ensure that it is reflected in key national strategic documents as a goal or as a way of achieving goals such as economic growth. Identify and promote best practice. This study has identified several examples of good practice in university-business interaction. Government should undertake a review of current activity and practices in Scotland with a view to promoting what works. Explore new fiscal incentives for innovation. This study has shown that there may be potential to encourage innovation through the tax system. The Scottish Government should explore this possibility by undertaking further research into the applicability of a form of R&D Income Tax as a potential model for Scotland, subject the income tax powers set out in the Scotland Bill 2015/16. Consider new open innovation structures. This study has found that there may be occasions on which there is a need for innovation, but business is unwilling to take the lead, for example in financial services or tourism. Government should consider how new, open innovation structures might be used to address this need.

11 11 Contents Page 02 Introduction and Study Objectives Methodology Factors Influencing Business Innovation The Role of Universities in Business Innovation Absorptive Capacity Sectoral and Regional Differences Potential Public Sector Action Models and Practices of Note Conclusions and Issues Arising Appendix A: Business Sector Organisation Topic Guide Appendix B: University Organisations Topic Guide Appendix C: Policy Makers Topic Guide Appendix D: Topic Guide for Businesses Appendix E: List of Persons and Organisations Interviewed 83

12 Introduction and Study Objectives 2.1 National Centre for Universities and Business The National Centre for Universities and Business (NCUB) was established to develop, support and promote world-class collaboration between universities and business across the UK. Its membership of Vice-Chancellors, business leaders and high-level experts tackles strategic challenges and opportunities for the UK. The Growing Value Scotland Task Force is considering the challenges and opportunities for the future of Scottish innovation. Co-chaired by Rob Woodward (Chief Executive, STV Group plc) and Professor Sir Ian Diamond (Principal and Vice Chancellor, University of Aberdeen), the Task Force convenes an Executive and a Steering Group, bringing together leading experts and leaders from across industry and academia to identify and prioritise actions specific to Scotland that will enhance the value of publicly-funded research, and increase university-business collaboration. More details on the Task Force and a report on the first phase of research that was undertaken are available at the NCUB website Study Objectives The Task Force commissioned BiGGAR Economics to design and undertake an interview programme, consisting of interviews with stakeholders, which would provide a greater understanding of the level and nature of innovation in Scotland, including innovation occurring through university-business interaction. These interviews were undertaken between October and December For the purposes of the study, innovation was defined using the definition contained in the OECD s Oslo Manual 2, which identifies four types of innovation: Product innovation: a good or a service that is new or significantly improved; Process innovation: a new or significantly improved production or delivery method; Marketing innovation: a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing; and Organisational innovation: a new organisational method in business practices, workplace organisation or external relations. This definition includes research and development (R&D) activity but is a wider concept than traditional R&D OECD and Eurostat (2005), Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data, 3rd Edition.

13 13 The study objectives that were agreed with the Task Force during the research design were to: 1. Identify the underlying factors that influence how businesses located in Scotland engage in innovation. 2. Consider the current and potential role of university interaction in business innovation in Scotland. 3. Consider whether and to what extent Scottish businesses reported lack of capacity to recognise, assimilate and apply new knowledge is related to their relationships with Scotland s universities. 4. Identify and explain differences in university-business interactions and business innovation across sectors. 5. Identify and explain any regional differences in university-business interactions and business innovation. 6. Identify whether future changes in public sector strategy, fiscal powers or regulation might influence how businesses located in Scotland engage with innovation. 7. Identify examples of models and practices in university-business interactions that are considered to be successfully addressing Scotland s economic needs and policy priorities. 8. Identify opportunities to enhance the scale, process and outcomes of university-business interactions and business innovation, including changes needed in businesses, universities and government and its agencies.

14 Methodology 3.1 Sample Selection The interview programme was undertaken over a seven-week period with the aim of interviewing individuals, the majority of whom would represent businesses. The programme aimed to gather views from: business sector organisations (10%); university organisations (10%); policy makers (10%); and businesses, including from six target sectors (70%). The six target sectors were the growth sectors identified in Scotland s Economic Strategy 3 and in previous Scottish Government economic strategies. They are: creative, digital and information technology; financial and business services; energy; tourism; life sciences; and food and drink. The interview programme was designed to meet the following objectives: undertake a business-focussed interview programme; capture sub-sector diversity so that no one type of business within the sector is disproportionately represented; ensure the sample has balance in terms of size of business, defined by employment numbers; include both Scottish-headquartered businesses and businesses with headquarters outside Scotland; ensure that businesses located throughout Scotland are included in the sample; and secure interviews with businesses that are actively engaged in collaborative innovation, with those that are looking to engage, and with others that are innovation-inactive. The approach that was adopted to selecting a sample which would meet all of these objectives is summarised in the following diagram. 3 Scottish Government (2015), Scotland s Economic Strategy.

15 15 Figure 3-1 Organisation of interview Programme: Targeting of Organisations SECTOR RELEVANT BUSINESS SECTOR ORGANISATION SUB-SECTOR RELEVANT UNIVERSITY ORGANISATION Micro-Enterprise (<10 employees) Small (10-50 Employees) Medium ( Employees) Large (250+ Employees) Large MNC (10,000+ Employees) HQ: Scotland HQ: Rest of UK HQ: International Exporter Non-exporter Foreign Owned Domestic Highlands and Islands Engaged Glasgow & South West Not Engaged North East Want to Engage Edinburgh & South East Regional Policy Innovation Policy & Incentive Structures POLICY MAKERS CEO/MD R&D Director Founder/Partner Organisations targeted occasionally driven by the individual - willingness to talk/appropriateness/network + knowledge Source: BiGGAR Economics The businesses were selected initially by identifying organisations through databases and company lists from a number of sources, including: membership lists of industry bodies; attendees at workshops hosted by Growing Value Scotland; contacts suggested by universities and others included in the interview programme; and contacts already held by BiGGAR Economics. The objective, which was achieved, was to interview senior executives at chief executive or R&D director level. In addition, each organisation interviewed was invited to suggest other contacts. For example, businesses were asked about competitors that are already engaged with universities, and about those that are not already engaged and might contribute to the study.

16 Organising the Interview Programme The first contact with potential consultees came from NCUB, in the form of an with an attached letter jointly signed by the co-chairs of the Growing Value Task Force, explaining the background to the study and inviting participation in the interview programme. This was done in five batches: 1st batch: on 17th and 18th of September 2015 an initial letter of invitation was sent out to 73 potential interviewees from; universities, policy makers, business sector organisations, and companies in life sciences, energy and the creative digital industry and IT; 2nd batch: on 29th of September 2015 an initial letter of invitation was sent out to 52 potential interviewees from tourism, food and drink, financial and business services, other sectors and some additional contacts from the other three sectors; 3rd batch: on 13th of October 2015 an initial letter of invitation was sent out to 30 potential interviewees from tourism, food and drink, and financial and business services; 4th batch: on 28th of October 2015 an initial letter of invitation was sent out to 23 potential interviewees from; business sector organisations, food and drink, tourism and other sectors, including some recommended by companies and other organisations already interviewed; 5th batch: on 24th of November an initial letter of invitation was sent out to 14 potential interviewees focussed on a selection of contacts recommended by companies and other organisations already interviewed. BiGGAR Economics waited for three days on average after the initial letter was sent out by NCUB before approaching the organisation. This follow-up involved a telephone call and, for more than half, a further contact. Efforts to follow up potential consultees were prioritised according to whether sample targets had been met for specific types of organisation. This meant that the number of times contact was attempted per interviewee varied. It also varied depending upon: how busy the potential interviewee was, type of job held, out-of-the-office periods and whether the most appropriate person had been contacted in the first instance. Time lags between making contact and finalising arrangements for the interviews were highly variable and non-sector-specific. The developing interview schedule was monitored regularly to ensure it would meet the pre-set aims and criteria. 3.3 Interview Programme The interview programme was undertaken over a seven-week period from mid-october to early December Topic guides were developed for each type of organisation interviewed (see Appendices A to D), and were based upon objectives agreed with the Task Force. The draft topic guides were informed by review of key documents, meetings and NCUB workshop outputs. The review of key documents attempted to capture findings and recommended actions from other bodies involved in developing innovation in Scotland. These topic guides were sent out to consultees in advance of the interviews.

17 17 The topic guides were used to guide a semi-structured interview lasting for approximately one hour. The interviews were undertaken to suit the consultees preferences, with 58% undertaken in person and the remainder via telephone or Skype. A complete list of people and organisations interviewed can be found in Appendix E. 3.4 Profile of Organisations Contacted and Interviewed Contacted and Interviewed In total 184 organisations were contacted, with a total response rate of 68.5%, and 45.7% agreed to be interviewed. The response rate is broken down in the table below. Table 3-1 Response Rate for Interview Programme Response Rate Contacted Responded Declined Arranged Total % 22.8% 45.7% Universities % 7.1% 78.6% Business Sector Organisations % 7.1% 78.6% Policy % 14.3% 71.4% Firms Total % 26.8% 36.6% Life Sciences % 13.3% 53.3% Creative, Digital & IT % 13.3% 53.3% Energy % 26.3% 52.6% Financial & Business Services % 42.3% 26.9% Tourism % 25.0% 16.7% Food & Drink % 34.8% 30.4% Other % 20.0% 40.0% Source: BiGGAR Economics The key reasons given for declining to be interviewed/cancelling a pre-arranged interview (24% of all declined) were: 1) Not viewed as appropriate for them; 2) competing time pressures (some were willing to be interviewed if timeframes could be extended); and 3) not company policy to engage in research exercises. In total 84 interviews were undertaken, with the types of organisation covered summarised in the table on the following page.

18 18 Table 3-2 Interviews Undertaken by Sector Type of Interviewee Undertaken % Businesses 52 62% Life Sciences 8 15% Creative, Digital & Information Technology 8 13% Energy 10 19% Financial & Business Services 7 8% Tourism 4 15% Food & Drink 7 13% Other 8 15% Industry Organisations 11 13% Universities 11 13% Policy Makers 10 12% Total 84 Source: BiGGAR Economics The number and mix of interviews compares well with other similar studies. For example, a UK-wide study focusing on four sectors undertaken for NCUB 4 interviewed 71 individuals, including participants in 36 companies. The majority of sectors are well represented; the scope of sub-sectors covered is outlined in the diagram below. The only exception to this is tourism, where it was not possible to arrange as many interviews as had been targeted. However, the interviews that were undertaken were with businesses that also had a wider role in local or national tourism bodies and which therefore had a wider perspective than their own business interests. Two industry organisations from the tourism sector were also included in the interview programme. The size of the businesses included in the sample broadly reflected the structure of each sector. For example, most of the businesses interviewed from the energy and financial services sectors employed at least 250 people, while most of the businesses interviewed from the tourism and food and drink sectors employed fewer than 50 people. A breakdown of the size of businesses interviewed within each sector is provided below. Table 3-3 Businesses Interviewed by Size and Sector Company Size Sector Large Medium Small Micro (>250) (50-249) (10-49) (>10) Total Life Sciences Creative, Digital & IT Energy Financial & Business Services Tourism Food & Drink Other Total Source: BiGGAR Economics 4 A Mina and J Probert, (September 2012), Enhancing Collaboration, Creating Value: Business Interaction with the UK Research Base in Four Sectors.

19 19 Figure 3-2: Detailed Breakdown of Interviews Undertaken Sub-Sectors Business Sector Organisations Universities Policy Venture Capital L.S Pharmaceuticals Medical Devices Dundee DDU Edinburgh BioQuarter Innovation and KE Services Data & Business Services Stratified Medicine Scotland Biotechnology Creative, Digital & I.T. Media & Entertainment Digital Education Technology Incubator Design & Development ScotlandIS Creative Skillset Scottish Enterprise Platform Services Oil and Gas Exploration Highlands and Islands Enterprise Engineering PNDC Energy Project Management Offshore Energy Wave Energy Scottish Renewables FloWave Universities Scotland Asset Management Financial & Business Services Legal Services Recruitment Consultancy Platform Services Scottish Financial Enterprise Scottish Financial Risk Academy Innovate UK Tourism Accommodation Hospitality Estate Management Scottish Touris Alliance Association of Acottish Self-Caterer Interface Food & Drink Manufacture Alcoholic Beverages Education Farming Defence and Aerospace Micro-electronics Scotland Food & Drink SCDI CENSIS Converge Challenge Scottish Funding Council Other Engineering Transport Infrastructure Asset Transformation Textiles Harris Tweed Authority Textiles Future Forum Business Gateway CBI Scotland Quantum Tech. Hub Partnership Source: BiGGAR Economics

20 Profile of Businesses Interviewed A breakdown of the businesses interviewed by company size and location is presented below. Figure 3-3: Company Size and Geographical Presence of Interviewees Interviewees: Company Size Interviewees: Geographical Presence 26.9% 7.7% 11.5% 36.5% 32.7% 38.5% 19.2% 13.5% 38.5% Micro-enterprise (<10 employees) Small (10-50 employees) Medium ( employees) Large (250 + employees) Highlands & Islands Glasgow & SW Edinburgh & SE North East Large MNC (10,000+ employees) Note: the geographical presence pie chart sums to more than 100% because approximately a quarter of the interviewees had multiple locations. Source: BiGGAR Economics Analysis of Interview Data The aim of the interview programme was to gather high-quality qualitative evidence from a selection of business leaders with an informed perspective of Scotland s innovation landscape. In designing the research methodology it was recognised that those best placed to provide an informed opinion would not necessarily come from businesses that would be entirely representative of Scotland s business base. While efforts were made to ensure that the survey sample did include a reasonable mix of businesses from different sectors, of different sizes and from different areas, it was not expected to be fully representative. Instead the primary focus was on identifying business representatives who were expected to have well-developed views, and informed opinions, on Scotland s innovation landscape. This approach ensured that the sample identified was well-balanced, if not entirely representative. For example, in total, 11.5% of the businesses interviewed were based in the Highlands and Islands, which is very similar to the proportion of all Scottish businesses based in the area (11.6%) 5. On the measure of business size, however, the sample was less representative, with 53% of the businesses interviewed employing fewer than 250 people compared to 99% for the Scottish economy as a whole. On other measures, one third of the sample was headquartered internationally or in the rest of the UK, approximately 25% had multiple locations in Scotland, less than half (42.3%) had employees based in Scotland only and 82.7% were engaged in exporting. 5 Scottish Government (March 2015), Registered enterprises in Scotland by local authority.

21 Approach to Analysis The approach to analysing the interview transcripts was developed to: meet the eight study objectives; draw out and analyse the implications of themes, ideas and examples of best practice emerging from the interview programme; and examine in more depth observations and findings from the first phase of the research. The analysis was undertaken and reviewed by multiple individuals to ensure that: the results were rooted in the original data (avoiding drifting ); the results were based on the data and were not reported to present an oversimplified picture or narrative that might mask underlying issues of importance (avoiding dumping ); breaking the analysis of data down to address pre-set objectives avoided problems associated with data drowning ; and this qualitative data was not over-interpreted. Conclusions from this data should not be generalised, but rather should be viewed as insights for future research and policy formation. This report has been produced in line with strict data handling and confidentiality policy. In the treatment of representative quotes included in this report, references that could lead to the identification of the source have been removed, and commercially sensitive information omitted. The results of the analysis are set out in the remainder of this report.

22 Factors Influencing Business Innovation What are the underlying factors that influence how businesses located in Scotland engage in innovation? To answer this question, it is important to understand why businesses in Scotland engage in innovation in the first place. 4.1 Innovation: A Means to an End Prior to his or her interview, each consultee was provided a topic guide, which included the Oslo Manual definition of innovation being used in the study (see section 2.2). At the outset of each interview, consultees were again reminded of the broad definition of innovation being used in the study and encouraged to think about their activity in these terms. This approach was welcomed by several consultees, who acknowledged the importance of understanding innovation in these broad terms. The starting point for all the interviews undertaken with business consultees was a general discussion about what type of innovation activity the business had engaged in over the past three years. The responses provided to these questions suggest that the term innovation is one that many of the businesses were uncomfortable with, not because they don t innovate, but because innovation is so integral to their business that it generally doesn t require a separate title. For many consultees innovation was simply part and parcel of what they do on a daily basis: Business is built on finding new ways of doing things so this is what we do all the time it s part of our DNA For some businesses, however, the vocabulary that is often used to describe innovation was a source of confusion. Terminology such as R&D and innovation make most people think of labs - this may not be helpful in encouraging more businesses to engage in innovation. One consultee even commented that he had approached the interview with the belief that his company did not engage in innovation, but had realised during the course of the discussion that it did. During the course of the interviews, consultees were also asked whether they believed that businesses in Scotland have the ambition to innovate. This was another question that many consultees found difficult to answer. Most framed their reply in terms of their underlying incentive to innovate: Any business that has the ambition to survive and grow will have the ambition to innovate.

23 23 Innovation is a source of profit so, by definition, businesses must be good at it. Of course companies have the ambition to innovate but only if it creates value for their shareholders. Put bluntly: the businesses that participated in this study did not aspire to innovate. But they did aspire to survive, grow and create value for their shareholders, and in most cases saw innovation as a way of achieving this. The key to understanding what influences how these businesses and others like them - engage in innovation is therefore to understand the commercial challenges and opportunities they face and the broader market context in which they operate. The underlying market factors facing businesses vary considerably from sector to sector, and are considered separately in chapter 7. The remainder of this section focuses on general factors that affect business innovation in a variety of sectors. 4.2 Innovation is Multi-Disciplinary The challenges and opportunities facing businesses, and the wider market context in which they operate, are often determined by external factors that may be far removed from the core activity of the business or industry in question. It therefore stands to reason that the innovation needs of businesses, and the resources, expertise and knowledge they may require to address them, will not necessarily be directly related to their core area of activity. This was something that several consultees alluded to, for example: a consultee from the oil and gas industry highlighted the potential relevance of psychology research to the management of remote workforces; another consultee from the oil and gas industry believed there was scope for the sector to learn from recent developments in IT and digital technologies; a consultee from a food manufacturing business described his experience of collaborating with businesses in the textiles sector that produce one of the raw materials used in his product; two consultees from the food and drink industry described how they were using research from environmental science and nanotechnology to develop new approaches for dealing with waste water; a consultee from the tourism sector highlighted the importance of digital marketing to small tourism businesses; and a consultee from the financial services sector described how digital technologies are helping reshape how the sector engages with and gathers market insight from customers. All of these examples highlight how wider market factors, such as changing consumer expectations or the need to reduce environmental impact, influence the innovation needs of businesses. Collectively, they serve to emphasise the point made above. In order to understand the factors that influence business innovation, it is first necessary to understand the wider market context in which businesses operate. 4.3 Networks, Experience and Ivory Towers During the course of the interviews, consultees were asked about how their business found relevant support for innovation. In responding to this question consultees generally tended to highlight their professional networks and previous work experience. In most cases personal relationships were key.

24 24 Perhaps unsurprisingly, the nature of consultees professional networks and previous work experience tended to reflect the sector in which they worked. In the life sciences, innovation tends to be focused on scientific research and development, so consultees professional networks tended to include academic contacts, and previous experience often included periods in academia. As these consultees were typically very familiar with the academic environment, they tended to see engagement with academia as natural. In sectors such as food and drink and energy, on the other hand, innovation tends to be more process orientated. Here contacts from elsewhere in the supply chain tended to feature more prominently within consultees professional networks. These consultees tended to be less familiar with the academic environment and less inclined to identify universities as a potential source of innovation support. Some consultees also suggested that sometimes the challenges faced by industry might not seem academic enough to be of interest to universities. As one consultee explained: I think there might sometimes be a perception of ivory towers that can put businesses off approaching academia. A feeling that these people are all really clever and might not want to speak to me. 4.4 Complexity and Effectiveness of Support Mechanisms A common perception among the businesses that participated in this study was that the overall innovation support landscape in Scotland is overly complex. Several businesses expressed confusion about the range of support available and frustration about a perceived lack of coordination between the various agencies responsible for delivery. There s a real need to declutter the business support landscape. At the moment it feels like everyone s trying to do the same thing. However, there was little to suggest that this complexity formed a barrier to innovation. For the most part businesses appeared to regard (non-financial) public sector support as a bonus rather than a pre-condition for innovation. As one consultee put it: if you don t want to help me then get out of my way! This is not to say that the public sector does not have a role to play in providing innovation support. While it may be true that companies such as the one quoted above would innovate regardless of the availability of public sector support, not all businesses will be like this one. Appropriate support may help others to innovate more effectively. There was a strong consensus amongst those consulted that the public sector could do more to support business innovation in Scotland. 4.5 Location of Company Headquarters A common view within the innovation support community, and even some businesses, is that the location of company headquarters is an important factor in determining the nature and extent of innovation activity. According to this argument, relatively few large companies are headquartered in Scotland. As R&D tends to be an HQ function, companies invest less in R&D in Scotland than they might otherwise.

25 25 Although it is certainly true that relatively few large companies are headquartered in Scotland, this study has found no evidence to suggest that this has an important influence on overall levels of R&D and, because R&D is at type of innovation, on overall levels of innovation. The consultation programme included several individuals from multinational corporations. Although most of these companies main R&D capacity was located overseas, it was found that all decisions about where to invest R&D budgets were driven by the availability of relevant research rather than by geography. As one consultee explained: We have a list of business-critical research areas and people in the research centres [which are based overseas] seek out academics with appropriate skills and approach them regardless of where they are. Geography isn t a factor. We just work with whoever has the relevant expertise. It was also apparent, even for companies where decision-making authority was based overseas, that staff based in Scotland had considerable scope to influence the research agenda. In some companies the process for doing this involved senior staff from the Scottish-based operation participating in an annual competitive bidding process to secure a share of a central R&D budget. According to the business consultees who commented on these issues, this means that securing this type of R&D investment depends more on the strength of the business case surrounding a particular research proposal than on the location of the university that might help deliver it. 4.6 Relationships with Universities Another factor that did not appear to be important in determining the level of innovation within a particular business was the extent of its engagement with academia. Although many of the businesses that participated in the study did have established relationships with academia, many others did not. Indeed, virtually all of the consultees who participated in the study were able to give examples of innovative activity that their business had been involved with, even though around a third of them did not have active relations with universities. The reasons why businesses with no link to universities were able to engage in innovation vary from business to business. Some businesses felt that they had sufficient expertise in-house and did not require academic support (e.g. food and drink companies developing new product lines) while others accessed the necessary expertise through suppliers or commercial consultants. 4.7 Ownership of Intellectual Property Another issue that is often highlighted in discussions about how to support innovation is the treatment of intellectual property (IP). The outputs from the consultation programme suggest that this focus may not be entirely justified. This finding is supported by survey evidence reported by Hughes and Kitson 6, which suggests that problems concerning intellectual property are not a prominent constraint on knowledge transfer. 6 Hughes and Kitson (September 2012), Pathways to impact and the strategic role of universities, Centre for Business Research, University of Cambridge Working Paper no. 435.