Business Growth
Item 3 is our business growth inquiry. As members know, we have completed our two study tours. Three MSPs went to Hamburg and Bremen in Germany, and three MSPs went to Finland and Sweden. While the tours are fresh in everybody's minds, I want to go round the table and pick up the threads of what people think are the main lessons to be learned about business growth from those experiences. We have a detailed record of the meetings, so what we are looking for is the thrust of what was learned from each visit.
We shall start with Christine May, who was the group leader for the Scandinavian visit.
It was a very interesting and intensive visit—I do not know whether the other group found that, too. The contacts that had been made on our behalf by the adviser were at a high level and the meetings that had been arranged were with the people who were responsible either for policy or for making decisions.
If I were to pick out the key elements of what we found, I would say that they were about building a consensus on what needed to be done. It was evident both in Finland and in Sweden that that had been done and that time had been taken to do so across all sectors.
Putting in place what business referred to as a long-term stable environment and identifying the areas that would get intensive investment were positives. The negative was that there were in both countries elements of the economy that were not getting that intensive investment. Those elements were in decline and causing problems. In both countries there were problems—such as we have—with entrepreneurship, the levels of business start-up and people's ambitions to work anywhere other than in a large company or the public sector.
In Sweden, and in Finland in particular, a large group of people were economically inactive because of changes that had happened in industry as the industrial climate changed. I got no feel of anything being done to get those people back into employment.
I am sure that colleagues will pick up on the bits that I have missed. However, I reiterate: the agreement on the major economic drivers among academia, industry, Government and the trade unions was clear and overt.
What about the innovation agencies?
It was clear that their remit was to support innovation, but the money, coming as it did largely from Government, was targeted either at blue-sky academic research in institutions or at supporting partnerships between business and universities and academic institutions. There was a big drive in Sweden to have evidence of such work before Government money was given.
Although we did not get as much evidence on this as I would have liked, it was evident to me that where defence expenditure had reduced in Sweden—and expenditure in that area had been very high—the amount of money saved that transferred into the private sector must have been considerable. However, as I say, I did not get a feel for the amount involved, and I would like to get back to the Swedes on that.
What was the scale of the investment by the innovation agencies?
My impression was that although the scale was large on a national basis, it was very focused on key centres. In Sweden we heard that there was no area of innovation that received support that did not have a university at its heart. Universities specialise in biosciences or in other single areas of excellence, for example. In some respects, the Swedes were building centres of excellence.
Although levels of investment were higher than ours, more important than the levels of investment were consensus and stability. One of the lessons that we might draw from the Swedish experience is that there is a connection between levels of investment and growth. We need to do better. Building consensus is something for political groups, industry and trade unions to do. We need to be in it for the long haul.
How do we in Scotland build the crisis mentality, which was the main driver for change in Finland and Sweden, without the crisis? We do not want to precipitate an economic crisis, but that is what forced change in Finland and Sweden.
Christine May has covered many of the major points. Having gone there, I became aware that the Swedes and Finns are well ahead of us in investment in research and development. One of the things that struck me was that there is no special formula for arriving at that solution other than through having businesses that have to invest heavily in research and development to compete in the global market. That was particularly true of Nokia and Ericsson. Most of the funding that goes into research and development in both countries is largely through the private rather than the public sector.
It was interesting that, in Finland in particular, although the innovation agencies are focused on developing the partnership between industry, academia and the Government, the Government's input is much more about trying to identify winners that will provide added value. In Sweden, on the other hand, I got the impression that Government investment is more broad brush—there is a readiness to go for blue-sky thinking and an acknowledgement that there will be some losers. In other words, Sweden has a much more holistic approach to how it invests in R and D work.
I was also struck by the apparent focus in Finland on developing clusters of small and medium-sized enterprises, larger businesses and academia in areas in which the country is strong and on getting them to work collectively. With Nokia, it is clear that Finland has a leading international company, the development of which has involved academia and Government. Clusters have developed around that and, when there have been spin-offs, further clusters have sprung up. Finland has invested in areas in which it is strong and has a leading edge, and has tried to bring all the different parties together.
Sweden goes more for what it calls the triple helix approach to investment, which involves industry, Government and academia. As Christine May said, an R and D project must already have received investment from higher education and industry before the Government will invest in it. From what we heard, that model seems to work well in building up relationships and partnerships. Like Finland, Sweden works on a cluster model. Where it has strengths, they are brought together so that people in similar areas can work together.
Those are a few of the points that struck me. I found the way in which Finland and Sweden have gone about matters extremely interesting. As Christine May said, the biggest catalyst for change was the economic difficulties that the two countries experienced in the early 1990s. I do not know whether the way in which we should address our economic crisis is to create a further crisis on top of it; I suspect not. Although there was no single solution, Finland and Sweden have created networks and clusters that work together very closely.
I will add a few things to what has been said, although I assume that, as Douglas Thornton and Ross Burnside made notes faithfully at the end of each day, their input will be important, to say the least.
I echo what has been said about R and D. In my view, support for R and D is more structured in Finland, in that there is a definite zeroing in on the academic sector and industry. It was interesting that, in Finland and, to a degree, in Sweden, if a big company, such as Nokia, needed cash to work with a university, such as the University of Helsinki, it was important for the company to demonstrate SME involvement.
It was interesting, too, that the futures committee of the Swedish Parliament was a bit disappointing in what it told us about back-bench political involvement in the process. The committee's members may simply not have had a good day, but we did not learn as much as we had expected to.
You are referring to the Parliament of Finland's Committee for the Future.
You are absolutely right; thank you.
Nokia in Finland and the Stockholm Chamber of Commerce both had a lot to say on the taxation regimes—on income tax, rather than corporation tax—in their countries. Nokia's criticism was that income tax was so high that it might consider employing two people to do research outside Finland for the same price that it would cost to employ one person in Finland. As well as commenting on the tax situation, the Stockholm Chamber of Commerce said that the generous benefits regime was underpinning the large rump of permanently unemployed people. As Wolfgang Michalski pointed out to us, the gentleman to whom we spoke had worked for a Conservative Administration in the past, so it is possible that he had an agenda.
Sandy Cummings and I were particularly taken by the level of investment in R and D and the much better interface between academia and industry. We still need to attain that level of integration in Scotland.
As other people went with us on the visits—Sandy Cummings from Highlands and Islands Enterprise, Alan Wilson from the Scottish Council for Development and Industry, Susan Love from the Federation of Small Businesses Scotland and Mike Cannon from Scottish Enterprise—it would be useful if we got their feedback through the clerks. I am sure that they saw matters that the rest of us did not pick up. Are there any questions to the Scandinavian delegation?
I thank members for their sympathetic text messages when we were in Helsinki airport.
We were snowed in.
We were keen to bolster your spirits, although we heard that your spirits had already been bolstered.
I apologise for being a wee bit late. I might have missed discussion of this, but was there any reference to skills development? Members talked a lot about R and D, but I am interested in the attitude to investment in schoolchildren, particularly in Finland. I realise that that was not part of the remit, but did the group get the feeling that more is achieved before children reach the university or further education stage?
Yes. In both countries, we found evidence across the board that the investment in education that began about the time of the economic crisis has been crucial. The result of the investment in early years education and throughout the school system is appreciated. I see my colleagues nodding.
We have not touched on some of the other interesting issues that arose, such as how Sweden is forcing peripheral areas, by ignoring them to an extent, to work for themselves. We heard about one of Sweden's most northerly towns, which had been the worst performer in terms of business friendliness in a survey by a business organisation—for example, it took about two years to get permission for a food outlet there. People got together in the town to tackle the issue and Ikea is now about to set up a store there, which will be accessed by people from Finland and Russia, as well as from the north of Sweden. That is evidence that not doing things for people spurs them on to do things for themselves.
That was in Sweden.
That is what I said. If the Official Report says that I said Finland, that is wrong.
We will have the clerk's notes in the next two or three days.
I will try and get the facts right, too. One interesting point is that we heard that primary education is fantastic and that secondary education is dashed good. However, in Finland—I think—we were told that tertiary education, including universities and so on, is just okay. We were not sold it so strongly.
Yes, that is right.
I was struck by that.
Another issue in Finland is about getting people to graduate. The system is generous and education is free, so students study for years or they take a year out and go back and get more funding, which leads to a problem with getting some students—the eternal students—to graduate. People can do their undergraduate and postgraduate courses and their doctorate all funded by the Government. Incidentally, for any Scottish individuals who read the Official Report, I point out that it is open to all European Union citizens to participate in the Finnish education system free of charge. Getting graduates to move on is an issue. However, the situation probably aids the relationship between industry and academia on R and D, as people can stay on at university for several years to pursue research.
I am going to do a PhD in Stockholm if I lose my seat.
The week before the group was in Sweden and Finland, two colleagues from the Education Committee—Adam Ingram and Frank McAveety—were there to consider early years education. We will ask them for a copy of their notes, to find out whether they inform our work. That would be useful.
That covers Scandinavia, so we will now move to Germany. I defer to my colleague Susan Deacon, to open up on the Germany visit.
I must say that the convener deferring to me does not happen often. I was sure that he wanted to take the lead on this item, but I am happy to share some of my thoughts.
The visit was very valuable, if intensive. Given all the presentations, the principle of diminishing returns began to apply towards the end, by which time we were ready to spend a little longer talking to people instead of being fed yet more information. That is just some feedback on the design of programmes; the visit was, without question, incredibly useful.
My observations are very broad brush and do not highlight anything that has not already been well documented elsewhere. However, it was interesting to go to Germany and get a sense of some key similarities and differences between the two nations. We should not underestimate the very different macroeconomic conditions in Germany, whose economy is not as healthy as the British economy for a host of reasons that I will not be sidetracked into explaining.
However, one simple figure that the convener and I picked up on at the time and have discussed since is the level of unemployment in some areas. For example, unemployment in parts of Bremen is as high as 19 per cent. Although the economic and labour market conditions are clearly different, I was interested to find that the Germans are also trying to deal with skills shortages by importing certain skills. Although the circumstances are different, we return to the issue of countries competing for and trying to attract talented and skilled people, which is becoming more and more important in knowledge economies.
We were also shown some very interesting examples of good innovation and collaboration. However, I found the issue of scale and the fact that Scotland is relatively small compared with many nations competing on the global stage screaming out at us time and time again. That reinforced the fact that we need to collaborate on research in different geographical areas and so on. In our informal conversations and formal discussions, we kept returning to the question of how we establish critical mass to ensure that we can compete effectively on a global scale.
That said, we should acknowledge some of our real strengths. For example, I was struck by the fact that, when we got off the plane at Edinburgh airport, one of the first things that hit us was a big wall sign for the Edinburgh technology triangle—I think that that is its correct title—that displayed various aspects of work involving a range of research organisations such as the centre for biomedical research. People from other countries can see examples of best practice on our own doorstep. We should give credit where it is due to such examples of tremendous technological innovation and collaboration in Scotland; however, our visit to Germany showed that we needed to do more in that respect.
I have two other observations that we should develop in our inquiry. First, not a day goes by that some forum or other is not debating changes in the global economy and China's economic development. Again, that was reinforced in some quite symbolic ways—and I know that the convener is aware of the example that I am about to refer to. On a boat trip around Hamburg harbour, which I believe is the second-largest port in Europe—
It is, after Rotterdam.
So the harbour is a serious operation. Indeed, one thing that we registered—and then discussed—was the sheer size of the Chinese container ships that were docked there. I understand that many recognisable examples of German engineering have increasingly been outsourced to China and other parts of southern Asia. Therefore, although the design and the quality control are still very much German in nature, the production is not. We saw some big-ticket global issues at first hand.
Secondly, I come to an issue that we can deal with in the inquiry. I was struck by the political process in Hamburg and Bremen. I have always said that, in the business growth inquiry, we have to be prepared to hold up a mirror and ask whether we who are involved in the political process in Scotland could work differently or do more to facilitate business growth. I think that the political system in Hamburg and Bremen involved a more strategic and consensual approach than we have here. In Hamburg, that was evident in the fact that, although the Christian Democratic Union recently won power for the first time in decades from the Social Democratic Party of Germany, it had explicitly signed up to the same big strategic and overarching economic and regeneration objectives. That was highlighted to us by a number of people outside the political process as being key to giving them the continuity that they needed to take forward those big strategic objectives. In Bremen, a coalition between the SDP and the CDU had been in place for a decade. Again, that was widely cited as being the basis that enabled people to move forward better and faster than they might have been able to do in the absence of that political agreement. There are various ways in which that political consensus can be achieved but we cannot afford to let that observation slip from our minds as we move through our inquiry, even though it is hard to see what specific recommendations we could make—and to whom we could make them—on how to achieve it. However, the importance of the issue was something that screamed out at me.
The value of having Wolfgang Michalski as an adviser was clear, in relation to not only his presence but the itinerary that he arranged for us. We are getting real value for money out of him, to say the least. Although the law of diminishing returns kicked in on the last day, that was only because we were absorbing so much information.
I would like to make a general point about these committee visits. In addition to being extremely helpful for our inquiry, I think that the visits helped us to build relationships with other politicians in Europe. Hamburg and Bremen are interesting from our point of view in that they are Länder in their own right. In fact, the state of Hamburg has a population of just more than 4 million and is not dissimilar to Scotland, although it is smaller. Bremen had a lot of similarities with Scotland as well.
There were a number of underlying lessons to be learned. We spent most of the first day in and around the port authority in Hamburg. It was obvious that Hamburg had taken a natural resource—the port—and maximised the economic opportunities that resulted from it. Susan Deacon quite rightly mentioned the Chinese link. Hamburg clearly has a strategic objective of building itself up as China's main route into Europe, the Baltic states and beyond—so much so that more than 400 Chinese companies are located in Hamburg alone. The key to all of that was continuing high levels of investment and reinvestment. Hamburg is not standing still. It is reinvesting in leading-edge computer equipment, and much of the container movement is now controlled by robotics and so on. Hamburg is continually looking at new opportunities, even to the point of demolishing building after building and clearing the land to build something new because that is what the market requires. There were two underlying lessons in that regard: the first is that we should use natural resources to match the needs of the global economy; the second relates to the high quality and scale of investment that is required if we are to achieve the first.
From a strategic point of view, the clusters and sectors that are targeted in Bremen, Hamburg and—I suspect from what was said—most other parts of Germany, are by and large the same sectors that we target. Life sciences are a good example. As a result, it will not be enough simply for us to have a life sciences strategy—we will have to consider six or seven major subsectors and decide which should be focused on. We will fail if we try to cover all aspects of life sciences because we will not get the critical mass, which, as Susan Deacon said, is vital to success.
It was noticeable that there are areas on which Bremen and Hamburg do not concentrate—for example, people did not mention energy as a target area because those places have no natural advantages in energy, which Scotland has. It is worth bearing it in mind that there are clearly lessons to be learned about where we might gain competitive advantages that others would find it difficult to gain.
So far, our inquiry has identified access to capital as the important barrier to growth. Bremen has a state bank that acts as a filter for getting private sector funding into SMEs in particular. In projects' early years, there are less-than-commercial terms and conditions to pump-prime investment. We will obtain more information about that. The bank was mentioned in an extremely interesting presentation on the final day. We have asked for substantially more detailed information about it because that could be a model that is worth considering when we discuss access to capital. The way in which the bank was set up means that it is not caught up in public sector borrowing requirement issues.
Like Susan Deacon, I think that the visit was extremely worth while—I think that Murdo Fraser would agree with us if he was here. The visit was successful and valuable in relation to what we learned and the links that we established, and we will receive follow-up information that will inform our report and our recommendations. That information will be supplemented by additional information from the clerks and from the other people who participated. The people who went on the Scandinavian trip found it valuable to have other people on the trip who were not from the Parliament and who looked at things in a different way.
We had to go through a fairly complicated security procedure before Airbus representatives agreed to a meeting. Airbus has set a target of a 5 per cent increase in productivity year on year. Recommending such a target to Tom McCabe for his efficient government exercise would be useful—it would be interesting to see how well he could do with that. That is an astounding target for such a huge company to set, but it is achieved—that is how the company remains competitive.
For how many years has it met that target? When was the target introduced?
I think that the company has had such a target almost from time immemorial, and it is met.
So the target is not only an aspiration—it is met.
Yes. The company invests in its people and its buildings. We saw where the previous Airbuses were built and where the new Airbuses are built, for example. One place looked as if it was from the 20th century and the other looked as if it was from the 21st century. There is a very high level of investment; indeed, the word "investment" was used all the time. People mentioned the investment that there has been in the port authority, containers, Airbuses, small and medium-sized enterprises and so on.
We heard that business and enterprise investment represents the bulk of investment in Finland and Sweden. Is that also true in Germany? Perhaps the investment is pump-primed by Government money, but is it mainly private sector money?
Absolutely. The role of the life sciences agency, which is not a huge investor, is to work with the private sector and academia. Public sector money is used to pump-prime, incentivise and act as a catalyst for increasing private sector funding.
When you talk about private sector funding, do you mean venture capitalist-type funding or companies investing in themselves?
I mean companies investing. Until last year, the port at Hamburg was run by civil servants in three Government departments. It was decided to transform the port into an independent port authority, which is set up as an independent trust: it is profit making but not profiteering, if I can put it that way. The port authority is set up in such a way that it can go bust. Apparently, according to the European definition, that is the key issue in deciding whether a public sector organisation is included in the public sector borrowing requirement. I was told that if the organisation can go bust, it is, in theory, not part of the PSBR; if it cannot go bust, it is part of the PSBR.
The captain who is in charge of the Hamburg port authority has a very clear idea of where he wants to take it. The port authority is already the second largest in Europe, and Bremen port—in Bremerhaven, which is a sister town to Bremen—is the fourth largest after Antwerp. The list is Rotterdam, Hamburg, Antwerp and Bremerhaven.
I have two addendums. In the paper for today's meeting, reference is made to our being struck by the more "‘arms length' nature" of Government institutions. I would add that not only was the approach more at arm's length, but we identified that there was consistently a lighter touch in a lot of the decision making in both city states, to give them their correct title. Although infrastructure projects and so on were often held up for some considerable time in what was described as court procedures, we got the sense that—we did not drill into the detail—a lighter touch was taken in the public policy-making processes when decisions were made. Those processes were the equivalent of the different levels of our planning system.
I note that point because we kept on coming back to it. It struck me that the way in which decisions were made on vital projects, such as the new underground link to a major harbour regeneration project in Hamburg, was a wee bit different from the way in which we decide about developments such as the Edinburgh tram project. It is worth bearing in mind some of the procedural issues.
The final issue that I will raise relates to the consensus shared by the three of us who were in the delegation. We took part in a radio discussion on the matter 24 hours later when we got back. Members will recall that one of the main reasons why we chose to visit Hamburg and Bremen was to investigate city regions or—as they are increasingly being referred to in the literature and the thinking—metropolitan regions. Given our observations about scale, critical mass, collaboration and so on, and the importance—as identified in Executive policy—of city regions as drivers of economic growth, it was heartening that the day after we came back a key announcement was made about further collaborative work that is to be done between Edinburgh and Glasgow. I am not saying that that is the be-all and end-all or that the metropolitan region begins and ends at the boundaries of Edinburgh and Glasgow—we need to create even greater critical mass beyond that. However, we should welcome that announcement—I welcome any greater collaboration between those two cities. Given their scale in comparison with that of some of areas that we have examined, the 40 miles that lie between them and the population sizes of both cities, we must pull together and extend bridges—literally and metaphorically—more widely across the country.
Absolutely. The final point is that both state Parliaments meet only twice a month and the members are part time and have other jobs, but that is a matter for another day.
I am happy to give you all the encouragement that you need to seek a seat in one of those Parliaments—I would even come and campaign.
I have one other question. Susan Deacon referred to the relatively high levels of structural unemployment—the figure mentioned was 19 per cent. Did you get any feel for what was being done either to reduce the figure—particularly the figure for the long-term unemployed—or to prevent others from falling into the same trap and becoming unemployed?
Not really; specific measures were not mentioned. There was a concern about the political stalemate in Berlin and a feeling that because of the scale of the problem throughout the country, a federal rather than state Government solution will be needed.
There are many interventions, but the convener is right—we did not major on that subject although it provided the context for the matters into which we drilled in more depth. In so far as the subject was touched on, we learned that there are many programmes and interventions that we would recognise from this country about a decade ago. At city and state levels, there are targeted training programmes and so on but, as Alex Neil said, we did not spend much time on that.
We came back from Finland and Sweden feeling the same—we had no feel for what they were doing in that area.
Particularly in Finland, we heard that despite worryingly high structural unemployment, certain job categories could still not be filled. People were wondering, "Shall we use the Russians? No, not them; we'll get the Poles and people from the Baltic states." Did you experience that in Germany?
Yes. That is why I said that we must recognise the extent to which the global knowledge economy is fighting over skilled and talented people—period. That is almost irrespective of the wider macroeconomic conditions that exist.
One point that we did not touch on in our report, although I have no doubt that it will be in the copious records that the clerks kept, is the imaginative things that are being done to attract people to come and live in particular areas. In Bremen, for example, we stumbled by sheer accident on some interesting and practical work that was being done to support people relocating into the area. Competing for skilled and talented people is a headline message that we must continually address.
And we saw the benefits of being a free state.
You should clarify what you mean by that in this context.
He means within a larger union, of course.
That completes a useful debriefing.
One point has just flashed into my mind. Especially in Sweden, we were almost asked, "Where is Scotland?" which was a little disconcerting. That gave us the strong message that—by God—our marketing is nowhere. It was almost an embarrassment. Scotland did not register on the radar. They knew about tartan and bagpipes, but that was it.
Tartan, whisky and bagpipes were the things that they knew about.
That flies in the face of what I have heard from VisitScotland, which is targeting the Scandinavian countries because Scotland is seen as a cheaper destination there.
It is obviously not working.
That is a debate for another day. We have heard the feedback from the visits, which was the purpose of that agenda item.
The paper that we received also outlines briefly where we go from here with the rest of the inquiry. We will be in Thurso next week with the chief executives of the two enterprise agencies; the following week we will have the minister; and after that we will have a blue-skies session with Wolfgang Michalski, to start mapping out our report.