A d v ic e Pa p er (10 -12)

S E P T E M BE R 2 0 1 0

SCOTLANDS ENTERPRISE NETWORK: a response to

the Scottish Parliaments Economy, Energy and Tourism Committee

Summary
The agenda for an enterprise agency needs to be clearly embedded within the framework of the Scottish Government economic strategy.This core responsibility should not be farmed out to an enterprise agency. The agency should deal with those activities that cannot be undertaken effectively by government or the private sector, as a facilitator as much as an initiator, and as a nimbler, swifter enabler. Scottish Enterprise (SE) should concentrate on strategic enterprise initiatives in those areas of Scottish comparative advantage, and especially with growth companies, in areas where Scotland has a comparative advantage. At the same time, Government should make strategic sectoral choices and help to create long term market signals that give investors confidence that Scotland is a good target for investment in these areas. SE still carries out a diverse range of activities, many of which are not directly concerned with strategic enterprise. Its ethos must be ruthlessly focussed on benefit to Scotland rather being that of a private company concerned with its own growth. SE could benefit by being less complex and more focussed, ensuring that its staff have varied business experience, and with mutual mobility with business to ensure continuous refreshment of its ideas, whilst maintaining continuity of purpose. The current complexity of SE processes and the proliferation of its objectives too frequently results in sign-off processes that are too slow and overly complicated. Even excellent schemes have been limited in their potential by a relatively inflexible approach. SE has been overly concerned with avoidance of risk rather than its management. It needs proper assessment and management of risk, and a willingness to take calculated risks. SE needs to be independent, flexible and with the capacity for decisive action. It must not be required by Government to meet unrealistically challenging short-term objectives, or be required to take on extraneous activities. For example, we recommend that budgetary responsibility for creative industry sectors that is retained in Scottish Enterprise should be transferred to Creative Scotland to avoid yet more cluttering of the SE portfolio and to ensure accountability and efficiency. Some initiatives will take a decade or more to reach fruition. SE must be given license to support developments that will be the long term core of strong and sustainable economic activity. It is essential to have long-term policy stability, consistent overall objectives and policy without frequent rule changes or special inducements. There are good examples in which SE has stimulated such enterprise; and programmes that have been an important source of finance and support for growing businesses. Attempts should be made to integrate economic development in large urban areas where negotiations with many local authorities are required.These must be led by Government or SE, either of which is able to take a national, as well as a regional view. There are substantial benefits to communities in rural Scotland beyond the Highlands and Islands if the HIE model, with economic, enterprise and also community development responsibilities, were emulated. There are many other organisations that interact with the Enterprise Agencies in stimulating economic activity. Ways of improving coordination and streamlining of effort between them need to be developed. In generating a greater focus on skills, it was correct to move skills, training and careers guidance to Skills Development Scotland (SDS). SDS is promoted as Scotlands national skills agency but has as yet, made little progress in developing a one door service for employers. It needs to establish a clear leadership role as a locus of expertise and intelligence in skills policy and strategy. The Scottish Government should define the respective and collective roles of SE/HIE, SDS and SFC (and therefore universities and colleges) for leadership in skills policy and strategy, and for workforce development.
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Background
1 The Royal Society of Edinburgh (RSE), Scotlands National Academy, is pleased to respond to the Scottish Parliament Economy, Energy andTourism Committees invitation to submit views to the Inquiry into the current structure of, and activities carried out by, Scotlands enterprise network.The RSE is well placed to respond because of the multi-disciplinary breadth of its Fellowship which has permitted it to draw upon advice from experts from the fields of public policy, public sector management and administration, business, enterprise, economics, education and skills. We believe that it would be useful for us to concentrate on the fundamental, underlying principles, which have been identified by the Committee rather than addressing the specific questions posed by the call for evidence.We would be pleased to discuss further any of the issues raised in this paper with members of the Economy, Energy and Tourism Committee. The Committee should also be aware that the RSE delivers the Scottish Enterprise (SE) funded Enterprise Fellowships programme.This has given us direct experience of working with Scottish Enterprise for over ten years but it should be noted that the RSE is an entirely independent body. The aims of the programme are to increase the commercialisation of the Scottish academic research base, raise understanding of commercialisation throughout Scottish universities and research institutes, and to create sustainable companies with high-value jobs.The Enterprise Fellowship scheme provides top academics committed to creating a spin-out company with a year's salary, business training, development fund and access to a network of mentors, experts and advisors.An independent Ernst &Young review1 has demonstrated the success of the Enterprise Fellowships scheme.We do not believe that this relationship compromises our capacity to respond to the Committees request in an objective manner. Although Scotland has a high level skill and knowledge base generated through internationally competitive research in its universities and research institutes, it has been unable to build a strong industrial base, to replace the traditional industries that were lost from the 1960s onwards.According to OECD figures2, Scotland is in the 4th quartile for GDP growth; the 2nd quartile for employment; and in the 4th quartile for exports. From 2001-2010, Scotlands economy grew by an average of 1.3% per quarter overall, compared to 1.6% per quarter overall for the UK as a whole3.There are few large companies that are headquartered in Scotland and few large companies with research capability or that operate at the high-value, knowledge-intensive end of the business spectrum.There is a particular paucity of companies with turnovers in excess of 100m. 5 If Scotland is to create strong, sustainable economic growth, it needs to capitalise on its human resources, encourage and incentivise entrepreneurs, maintain and target investment in skills, stimulate research and development, increase the appetite for innovation, and in so far as it is possible for Government to do so, improve the environment in Scotland for business investment, whether home-grown or otherwise. An integrated strategy for economic development and its regional components to address these issues needs to be embedded within a framework set by the Scottish Government, as this is where the political mechanisms and sources of strategic funding exist. It is important that this core responsibility is not farmed out to an economic development body, so that the latter can focus on effective delivery.

Requirement for an Enterprise Agency in Scotland

7 An Enterprise Agency should deal with those activities that cannot be undertaken effectively by Government or the private sector and it should be a facilitator as much as an initiator.The Economy, Energy and Tourism Committee should consider economic development models in other countries and determine whether there are aspects that can be drawn upon in Scotland. Larger companies are, in most cases, capable themselves of stimulating enterprise, although the sophistication and abilities that exist within the private sector are not always recognised. If an Enterprise Agency in Scotland is to function successfully, it should concentrate on strategic enterprise initiatives especially with growth companies in areas where Scotland has a comparative advantage.This is particularly true for high-tech areas where Scotland is blessed with an excellent research base, especially in informatics and computing, life sciences and engineering. Exploiting Scotlands research on the world stage must be a major objective for an Enterprise Agency.At the same time, Government should make strategic sectoral choices and help to create long term market signals that give investors confidence that Scotland is a good target for investment in these areas.

Problems of the Scottish Economy

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1 Review of the Scottish Enterprise and RSE Fellowship Programme; March 2007 http://www.rse.org.uk/research_fellowships/se_rse_forms/Scottish_Enterprise_Independent_Review.pdf 2 Economic performance indicators - June 2009 update, Scottish Enterprise. http://www.scottish-enterprise.com/about-us/research-publications/economicresearch.aspx 3 Gross Domestic Product - GDP: UK Comparison http://www.scotland.gov.uk/Topics/Statistics/Browse/Economy/TrendLongerGDP

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Scottish Enterprise
9 The budget for SE continues to be reduced and, given the pressure on public sector spending, it may face further significant reductions.This would make it essential that SEs activities and mode of operation are comprehensively reviewed by the Committee, particularly to ensure the key roles it plays in stimulating the economy are not compromised. SE needs to focus on those areas of comparative advantage where it can make a difference. It is an opportunity that must not be missed.We realise that SE has undergone major changes in the recent past with functions departing, many input programmes eliminated and the core task being refocused on outcomes, with substantially fewer staff. Under normal circumstances this should be allowed to settle and prove itself over a period of five years. But despite SE having changed its activities, scope, size and method of operating in recent years, it still carries out a diverse range of activities, many of which are not directly concerned with strategic enterprise. It is imperative that SE focuses and prioritises its activities to become enabling, nimbler and swifter. Its ethos must be ruthlessly focussed on benefit to Scotland rather than being that of a private company concerned with its own growth. 12 SE has, in the past, been overly concerned with avoidance of risk rather than its management. It should publicise risk analyses associated with initiatives so that when difficulties arise or specific failures occur it can be demonstrated that they were statistically not unexpected.Although failure is to be expected in a proportion of novel enterprises, the lessons learned can be an important route to future success. Proper assessment and management of risk, and a willingness to take calculated risks is important if SE is to continue as an essential delivery agency. Recycling the benefits of unsuccessful ventures among entrepreneurs is one of the reasons for the success of SiliconValley. 13 These are tough challenges. If they are to be vigorously addressed, SE needs to be independent, flexible and have the capacity for decisive action in adapting to changing economic circumstances. Although, as we have stressed, the large scale frame for its activities must be set by a Government economic strategy. 14 Government needs to restrain itself in its interventions. SE must not be required by Government to meet challenging but unrealistic short term objectives, especially those that tend to be set because of a four-year parliamentary political cycle, and Government should not perennially require it to take on further extraneous activities.As an example of this, budgetary responsibility for several of the 13 creative industry sectors (as defined by the Department of Culture, Media and Sport) is retained in Scottish Enterprise.We recommend that in order to achieve greater efficiency and accountability, and to avoid yet more cluttering of the SE portfolio, these budgets should be transferred to Creative Scotland. 15 At the same time, it must be recognised that some initiatives and programmes that will have long term benefits for Scotland will take a decade or more to reach fruition. SE must be given license to support developments that will be the core of strong and sustainable economic activity.There are many examples that demonstrate the importance of a long term vision and the freedom to pursue it: from wind turbines in Denmark, to mobile communications in Taiwan to silicon technology in the USA, and, nearer home, in the long maturation process of Wolfson Microelectronics.The short-termism that characterised the approach to the Intermediary Technology Institutes (ITIs) gave a poor signal, both inside Scotland and beyond, about long term commitment. Lessons should be learned from this.

10 In this latter spirit, SE could benefit by being less complex and more focussed, relying less on external consultants, ensuring that its senior staff have considerable and varied business experience, including entrepreneurs and veterans of spin-outs. It should encourage mobility of senior staff between itself and business to ensure continuous refreshment of its ideas, whilst maintaining continuity of purpose. Its middle-ranking and junior staff should have recent business experience and should be encouraged to move to and from industry, with wider use of short term contracts.This approach would reduce the focus on internal career progression, lead to a more realistic assessment of risk and enhance the capacity to take decisive and swift action to exploit opportunities as they arise.A significant cultural change in approach is required to ensure that SE is in a position to attract a staff cohort with the skills and experience commensurate with its areas of strategic focus. 11 The current complexity of SE processes and the proliferation of its objectives too frequently results in sign-off processes that are too slow and overly complicated, with an over-reliance on lawyers and other advisers.These issues must be addressed if SE is to recover the dynamism and focus that is required. The problems associated with the establishment and operation of the Kelvin Institute and Scottish Microelectronics Centre highlight the challenges it faces.

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16 There are good examples in which SE has stimulated such enterprises with a long term horizon, for example in the case of some of its strategic infrastructure developments such as the Alba Centre and the Edinburgh BioQuarter.The focus SE places on environment and economic integration is important given the Scottish Governments core purpose of increasing sustainable economic growth. SE also administers a number of programmes and schemes which have been successful in stimulating business formation and technological development. These include the Proof of Concept Programme, SMART: SCOTLAND and the Enterprise Fellowships. Furthermore, the Scottish Co-Investment Fund,Venture and other Business Pipeline support initiatives, have been important in supporting entrepreneurial risk in Scotland. Even these excellent schemes have, however, been, limited in their potential by a relatively inflexible and sometimes excessively bureaucratic approach. In other areas, such as in attracting substantialVenture Capital to Scotland and in developing a coherent enterprise strategy for alternative and cleaner energy, SE has been less successful. It is essential that there is long-term stability.There must be a consistent overall objective without frequent rule changes, special inducements, and no confusion over who-provides-what. investment to the city. Short of reorganising Scotlands thirty-two local authorities into more coherent economic units, attempts should be made to integrate economic development in these large regional areas. This must be led by Government or SE, either of which is able to take a national, as well as a regional view.Without this, economic development in these regions will continue to be sub-optimal.

Highlands and Islands Enterprise

19 There is no single body charged with responsibility for the implementation of policy and action for the rural areas of Scotland. For the Highlands and Islands, Highlands and Islands Enterprise (HIE) has a wide ranging remit, including community development, alongside its economic and enterprise responsibilities. The RSEs Committee of Inquiry into The Future of Scotlands Hills and Islands found very strong support for this broader remit.The social dimension, embracing population demography, cultural and other key aspects of community welfare, has proved an important added benefit in the Highlands and Islands. It has allowed HIE to work in a more comprehensive manner with small communities, rather than concentrating on partial enterprise issues alone.These powers and responsibilities are essential if economic development opportunities are to be implemented in a meaningful way in rural areas, and especially in the remoter areas and on the Islands. We are very concerned that HIE will be hampered in its ability to continue to fulfil its broader remit given that its grant-in-aid has reduced by 43% since 2007/08. 20 We would emphatically disagree with any proposal that HIEs role and remit should be brought into line with that of SE, perhaps with a view to an eventual merger.The purpose and priorities of the two agencies are very different and should remain so. A merger would be very damaging as it would have a detrimental impact on the remoter rural areas. 21 HIE is still being hampered, however, by planning policies which prevent much needed new and affordable housing.There are also the issues of land availability and the cost of providing water and other services, and the lack of provision of local social and entertainment facilities. It is wrong that economic development in the Hills and Islands of Scotland should be constrained by a lack of affordable housing.

The Abolition of the Local Enterprise Companies

17 In some respects the abolition of the Local Enterprise Companies (LECs) will have resulted in the loss of experience, skills and expertise as several of the LECs had built-up specialist support in, for example, life sciences and major infrastructure. Local Authorities are not large enough to have these specialisms themselves, unless they cooperate in regional groups.

Regional Development
18 One major problem results from the fact that much economic development takes place in large, multi-authority regional areas, around the cities of Edinburgh, Glasgow,Aberdeen and Dundee. In the Edinburgh economic region, for example, SE has to interact with up to five local authorities (City of Edinburgh Council, East, Mid, and West Lothian Councils, and Fife Council).This causes difficulties for a holistic approach that attempts to integrate economic development with social and community strengthening. In planning the Edinburgh BioQuarter, where only one local authority was involved, key decisions were made quickly and brought substantial benefits in research activity and

Other Rural Areas

22 Rural Scotland has a great deal to offer in terms of economic development beyond the traditional sectors of agriculture and tourism. Population increase has been substantial in many areas and not just in those that provide dormitory accommodation for comparatively nearby cities. Continuing and overlapping developments in broadband and digital communications, together with high environmental attractiveness and the growth of home-working, open up a diverse range of opportunities for rural Scotland. 23 It is notable that nothing analogous to HIE exists in the rest of rural Scotland.The RSEs Committee of Inquiry into The Future of Scotlands Hills and Islands were told in these areas, that the narrower powers and responsibilities of SE were too limited, such that they were unable to catalyse local social and economic vitality as has occurred in the HIE area.There was a marked preference for the HIE style of operation. We see substantial benefits to communities in rural Scotland from the integration of components of Government support beyond that related to enterprise and business development if the HIE model could be applied in other areas. 24 The Economy, Energy andTourism Committee should consider how the HIE model could be implemented in other parts of rural Scotland outside the Highlands and Islands. Options for consideration include creating a new Rural Development Agency twinned with HIE, or a Rural Division within SE itself, with the remit to interact closely with HIE on developing common approaches and sharing experience.We do not believe that there should be an extension of HIE to other parts of Scotland as the issues faced in the Highlands and Islands are different from those faced by areas such as Dumfries and Galloway and the Borders.We consider that there is a strong case, however, for more integrated delivery of social and economic development for the rest of rural Scotland outside the Highlands and Islands.

A d v ic e Pa p er (10-12) Scottish Development International

26 Inward investment is different from enterprise stimulation, as it often requires Government to build and capitalise on relationships and provide funding.We consider that Scottish Development International (SDI) is carrying out a successful activity and should be coordinated with the two Enterprise Agencies and Scottish Government.

Delivery of the Skills Agenda

27 In order to generate a change in priority, focus and momentum, we believe it was the correct decision to move skills, training and careers guidance to a dedicated organisation (Skills Development Scotland), as this activity was not, understandably, well served in SE. A new strategic approach to skills was essential to underpin the single goal of sustainable economic growth. 28 There remains a lack of clarity about where responsibility lies. Skills Development Scotland (SDS) now has responsibility for stimulating and informing demand for post-school skills and learning through Careers Scotland and LearnDirect Scotland. For employers, the picture is less clear. SDS is promoted as Scotlands national skills agency but it has, as yet, made little progress in developing a one door service for employers. 29 The establishment of the joint Skills Committee between the Scottish Funding Council (SFC) and SDS represents a step forward in taking a more holistic view of expenditure on post-school learning and skills. 30 SDS has had a difficult first two years. Firstly, the complications of bringing together staff from three different agencies were underestimated and have consumed a considerable amount of time and effort. Secondly, as a consequence of the recession, the Scottish Government has initiated a raft of new measures under the banner of Scot Action ranging from redundancy support to additional apprenticeship places and has expected SDS to implement these at short notice, which it has done with considerable aplomb. SDSs successes in delivering these and other services masks the fact that it has not yet established a clear leadership role as a locus of expertise and intelligence in skills policy and strategy. SDS's role remains to be clarified. 31 The Scottish Government should define the respective and collective roles of SE/HIE, SDS and SFC (and therefore universities and colleges) for leadership in skills policy and strategy, and in particular for workforce development.The Enterprise Networks must surely retain, and properly deliver, an essential role in integrating skills perspectives into aspects of economic development. 5

Other Organisations
25 There are many other organisations that interact with the Enterprise Agencies in stimulating economic activity.These range from local authorities and Creative Scotland to Historic Scotland,Visit Scotland, Scottish Natural Heritage, Scottish Environmental Protection Agency and ScottishWater. The complexities of this landscape of responsibility can at times severely inhibit the exploitation of economic opportunity. Ways in which greatly improved coordination and streamlining of effort between them in areas related to economic development need to be developed, including an analysis of where their structures inhibit collaboration and integration of effort.

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Additional Information and References
Advice Papers are produced on behalf of RSE Council by an appropriately diverse working group in whose expertise and judgement the Council has confidence.This Advice Paper has been signed off by the General Secretary. In responding to this call for evidence the Society would like to draw attention to the following Royal Society of Edinburgh publication which is relevant to this subject:

The Royal Society of Edinburghs Report, The Future of Scotlands Hills and Islands (September 2008)

Any enquiries about this submission and others should be addressed to the RSEs Consultations Officer, Mr William Hardie (Email: evidenceadvice@royalsoced.org.uk) Responses are published on the RSE website (www.royalsoced.org.uk).
Advice Paper (Royal Society of Edinburgh) ISSN 2040-2694

The Royal Society of Edinburgh (RSE) is Scotlands National Academy. It is an independent body with a multidisciplinary fellowship of men and women of international standing which makes it uniquely placed to offer informed, independent comment on matters of national interest. The Royal Society of Edinburgh, Scotland's National Academy, is Scottish Charity No. SC000470