Competition and cohesion - developing a sustainable innovation

economy

EPRC Seminar1 November 2007

Contents

• Context• Challenges for smaller countries

and regions• Scotland’s performance

– Innovation

• Responding to the challenges

Globalisation – still likely to be the major influence

The growing significance of developing countries(scale and nature)

China’s R&D expenditure now = Japan’s (OECD)

Is continued globalisation inevitable?

•Working assumption that globalisation will continue to develop, but… •…“Further progress in global economic integration should not be taken for granted” Ben Bernanke, August 2006

•Constraints on globalisation: climate change, trade protection, social/political backlash, World Bank Dec. 2006

Shell global scenarios to 2025

legalistic pragmatic

dogmatic

Climate change and economic development- constraint or stimulus?

An agenda of:•productivity improvement•product and process innovation•employee attraction•customer loyalty•risk management•investor relations

The evolving nature of business

‘Industrial Economy’• Vertical integration• Standardised• Clear value chain• Distinction between

producer and consumer• Specific content producers• Limited channels• Based on physical assets• Decreasing returns

‘Innovation Economy’• Flexible outsourcing• Customised/personalised• Blurred value chain• Consumer contribution to

production• Multiple content producers• Multiple channels• Value of intangibles • Increasing returns

Main findings:• investment double traditional measure• output 13% higher in 2004• ratio of investment to output rising not falling• productivity and capital deepening higher• intangible investment levels similar to US

“Because globalization has increased the returns to innovation…..

it has strengthened the lure that innovation

centers hold for our

planet’s best and

brightest, reinforcing

the spikiness of wealth and

economic production.”

Richard Florida, Atlantic Monthly,

October 2005

Globalisation – Flat or Spiky?

Increasing returns to scaleStrongest in high value/knowledge activities

The explosion of advanced technologies now means

that suddenly knowledge pools and

resources have connected all

over the planet,

levelling the playing field as never before,

so that each of us is

potentially an equal and

competitor of the other.

Thomas Friedman ‘The World is Flat’ 2006

Net graduate gain/loss 2003/04

-6000

-4000

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2000

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Lond

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South

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Yorks

hire

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idlan

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GVA per head (£) 1999 & 2004

0

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1999

2004

Productivity drivers - average ranking

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South East London East ofEngland

SouthWest

Scotland NorthWest

EastMidlands

WestMidlands

N Ireland Yorks-Humber

Wales North East

Private Sector Knowledge Intensity

Scotland’s closest global centre - a virtuous development cycle

Innovation, enterprise, creativity, skills, investment

‘European Pentagon’20% area

40% population50% GDP

European ConcentrationMetropolitan European growth Areas (MEGAs)

• Build as much critical mass as possible – Help develop vibrant innovation systems and globally

significant industries (niches)– Specialism plus diversification

• Better connect to global innovation centres– Markets, Ideas, Expertise, Finance, Talent etc

• Improve carbon efficiency– Greater productivity– Source of innovation

The sustainable development challenge for smaller countries and regions

Measuring Scotland’s economic progress Smart Successful Scotland – 2006 report

NB trend relative to OECD Q1 average

“A significant challenge that remains is to achieve a decisive and sustained

breakthrough in the indicators of the strength

of Scotland’s business base, through building up the stock of businesses,

raising their levels of innovation and productivity and increasing their global

competitiveness.” 2005 Report

European Innovation Scoreboard

European Innovation Scoreboard

203 ‘regions’ - ave. size 2.5mn Score range 0.9 - 0.01

0.00

0.10

0.20

0.30

0.40

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Sw eden Canada Finland Scotland Japan Germany France UK EU 25 OECD Italy USA Ireland

Higher Education R & D (% of GDP)

1999 2004

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y

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Italy

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1999 2005 (USA, Japan, OECD 2004)

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ast

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Business R & D (% of GDP)

1999 2005

-

100

200

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400

500

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ent

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

BERD in Scotland

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BERD in Scotland by sector

1996 2005

4th COMMUNITY INNOVATION SURVEY

“worse than the best, but much like the rest”

PROFILING SCOTLAND’S INNOVATION PERFORMANCEDr. Mark Freel, University of Ottawa and Prof. Richard Harrison, Queen’s University Belfast

50

60

70

80

90

% o

f firm

s ac

tive

Small Medium Large

Innovation in production industries

Scotland UK

30

40

50

60

% o

f fi

rms

Scotland UK

Innovation active firms

2001 2005

4th COMMUNITY INNOVATION SURVEY

4th COMMUNITY INNOVATION SURVEY

Four types of hidden innovation:

Type I: science and technology but excluded from traditional indicatorsType II: non-scientific and technological forms such as new forms of organisation and processType III: the novel combination of existing technologies and processesType IV: takes place ‘under the radar’ of many surveys

“We need a broad-based innovation policy that reaches beyond science and technology to embrace the ‘hidden innovation’ that occurs in all sectors of our economy and society.”

RBS R&D investment £1/3bn+

technological advance global markets/partners demanding consumers new business models climate change response pace of change

Opportunities

world class firms high potential industries

existing and emerging research base graduate output international cities + rural

environment internationally recognised

identity, heritage, culture small networks

Strengths productivity business stock

growth/global firms business R &D start ups infrastructure gaps wasted human potential market scale

Weaknesses

more intense competition new competitors population (now more +ve) global uncertainty e.g.

energy fragmentation of effort insufficient urgency

Threats

Strategic issues for Scottish economy(and other smaller countries and regions?)

SchoolsFE/HE

Sector Skills Councils

Private Investment (Individuals, Companies, Industry groups, Trades Unions, voluntary organisations etc)

Skills

Public investment

(Government, Local Government, public agencies, EU Partnerships etc)

International & Infrastructure

BusinessDevelopment

Transport, WaterPlanning

Promotion of Scotland

Responding to challenges requires genuine collaboration and alignment

Development agency - catalyst for more/better/faster investment

Company programmesResearch - K-transfer

Sustainableeconomic

development

Sustainable Development – Equal Opportunities

Two views of collaboration:

“the suppression of mutual loathing in pursuit of government funding”

or

“having people who see the broader picture, who seek to understand your business and have some empathy for you helps make alliances strong.”

•Increasingly recognised elsewhere. •A key feature of Finland’s innovation system and the Irish ‘miracle’. •Often emerges from extreme adversity.

Coherence, scale and collaboration through industry focus...

• Global growth• Significant Scottish

strength and/or potential– corporate/research– other?

• Industry leadership • Innovation system• Greater, more focussed

demand

Cities boost regions by providing:

• Critical mass of knowledge institutions

• A vibrant environment for knowledge transfer

• Strategic services • Highly paid jobs• Culture, leisure and

sport • Transport hubs • International profile

Cities rely on regions for:

• Space for major projects

• A wider skills base• A wider range of

sites and premises• A wider range of

housing options • Distinctive centres -

niche experiences• Opportunities for

countryside leisure

•Economic geography matters more - but boundaries matter less, and will vary

• Need for scale, connectivity (physical and psychological), flexibility, speed + local engagement

“A region will be successful if its cities are successful and cities will flourish if the wider region flourishes.” European Commission (2005)

…and through spatial focus

Cross border collaboration

Concluding thoughts

• Sustainable development not a zero sum game of beggar thy neighbour...

• ...focus on stimulating investment to realise potential and add value

• No ‘silver bullet’ - systemic approach• Be flexible - adapt to change and chance -

‘strategic opportunism’• Keep a broad mind

– sources of innovation– assessing value

• Focus on what unites you