European and External Relations Committee, 26 Sep 2006

Meeting date: Tuesday, September 26, 2006

Official Report 250KB pdf

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European Commission Growth and Jobs Strategy Inquiry

This will be our first evidence session as part of our inquiry into the European Commission's strategy for growth and jobs. I know that Mr Gallie is particularly interested in and excited by the inquiry; I am sure that he is looking forward to it.

When we agreed the timetable for the inquiry, we agreed that we would use our first evidence session to hear from Scottish Enterprise because it has such a key role in the implementation of the Scottish Executive's policies that relate to the Lisbon strategy. This is an opportunity for us to get an overview of Scottish Enterprise's role and the various ways in which the Executive is working to meet the obligations set by the strategy.

I welcome from Scottish Enterprise someone who is a regular, if not frequent, visitor to the committee—Charlie Woods, who is chief economist and senior director for strategy. I also welcome Janet Brown, who is managing director for industries.

We have written evidence from Scottish Enterprise, so we can go straight to questions, if Charlie Woods is happy with that.

I am happy with that, if that would suit the committee better.

We have a couple of reports to agree in private later this afternoon, so it would be helpful to go straight to questions. Mr Gallie, I am sure that you are desperate to get in on this one.

Fair enough, convener—I will jump right in.

Scottish Enterprise commented on global connections in its written evidence. How does Scottish Enterprise encourage companies to achieve global connections? What direction does Scottish Enterprise give on the areas of activity on which companies should concentrate? What financial support—or support that pushes towards that—can Scottish Enterprise give to help the achievement of the global connections that it has in mind?

I will start, although Janet Brown might want to supplement what I say. A key part of our work in pursuing the activities and objectives in the Lisbon strategy is to help to internationalise the Scottish economy more. We do that partly by helping to attract investment into Scotland. Increasing focus is being put on activities with a higher research and development capacity to try to address the gap that exists between Scotland and other countries in the level of business research and development. Our international work to attract investment focuses increasingly on that.

On the point on which Phil Gallie focused, we also help Scottish companies to internationalise by getting them into new export markets and identifying joint venture partners or other forms of internationalisation that companies can develop. The primary way in which we do that is through our account-managed system, through which we work closely with companies in Scotland with the potential to grow and sell outside Scotland. We give such companies advice on the market opportunities that exist, particularly in the industries that are a priority for Scotland, and use our network of offices throughout the world to help companies to set up bases and win orders overseas. Through the global companies programme, we work directly with companies to help them to bring in specialist advice to address particular markets or product areas for which they are aiming.

We are involved in a wide range of activities. One important overriding factor is that, through schemes such as the account-managed programme, in which we get to know companies and understand better their needs and opportunities, we can bring to bear all our various activities, not just to help companies to develop in international markets, but to help them more generally.

Phil Gallie highlighted the market opportunities that exist and the issue of how companies can understand those markets and tailor their activities to have a better impact in them. For the priority industries, we are pulling together networks of companies in particular market areas to make them aware of the opportunities and where they are and to give them the tools to access the markets, by helping them with new product development and R and D, when appropriate. We help them to link not only with companies outside Scotland, but with companies in Scotland that may be a lead for them into new markets. Many big companies work with smaller ones and take them along as they go out into the bigger marketplace. We are taking a variety of measures, at the market level as well as the individual company level, to raise awareness of opportunities and give companies the tools to take them.

One specific measure that I should have mentioned is the global Scot network, which is made up of Scots throughout the world who have an interest in developing Scotland and helping Scottish companies. Companies can use that network for advice and support. This week, there is a big gathering of the global Scots in Edinburgh, to bring the network together and to bring people who operate internationally to discuss with Scottish firms some of the issues that they face in doing business overseas.

That sounds encouraging—I am aware of the network.

You emphasised your account managers. One point that is certain about the global market is that the present rate of change is phenomenal. How do you keep your account managers abreast of that change?

That is part of the intelligence process. One reason for focusing on specific industries is so that we understand some of the trends and developments that take place in them. We do that through the global Scot network, which we use as an intelligence network, and through accessing specialist reports on particular markets. Our premier adviser training programme, which aims to give our business advisers the skills to provide advice, must be updated regularly, too.

We constantly try to make the most of the networks, the knowledge and the intelligence that exist in Scotland for updating people on where opportunities exist. As has rightly been pointed out, they are changing very rapidly.

Thank you for coming to give evidence and for your useful paper.

I want to pick up on some issues around R and D, including business R and D. Your paper mentions Scotland's 2.5 per cent business R and D target for 2014. I am trying to relate that to the Lisbon agenda target of 3 per cent for all R and D by 2010 and to make sense of how those two targets can fit together. If we are to have a 2.5 per cent business R and D target by 2014, what is our overall target for 2014? Knowing that would give us some measure of how well we were doing compared with the European target for all R and D for 2010. It would be useful if you could give us some perspective on that.

What can you tell us now about the actual level of business R and D at this stage? The figures from the minister tell us that R and D accounts for 1.53 per cent of gross domestic product in Scotland overall. However, we do not know what the business R and D level is within that figure, and we do not know where we stand in comparison with the rest of the UK as far as business R and D is concerned. Have I explained that point well enough?

I think so, yes—let me have a go at answering it. The current level of business R and D in Scotland expressed as a percentage of GDP is 0.58 per cent. The overall figure for R and D in Scotland is 1.53 per cent, as you said. The UK figure for business R and D is 1.23 per cent, and the EU figure is 1.17 per cent. The level of business R and D in Scotland has gone up over the past 10 years or so as a proportion of the UK figure. However, as the figures suggest, there is still a significant gap to make up. That is partly to do with the nature of the sectors that are carrying out research and development and with the industrial structure of Scotland. Nevertheless, the issue has been identified. It is one of the reasons why, through programmes such as the intermediary technology institutes, we are putting things in place that will impact directly on the level of research and development.

I would make the wider point that, although the figure identified in the Lisbon strategy is an extremely important benchmark, it is also, in a way, a means to an end—the end being more innovative companies that do more business, win more orders and so on. Business R and D does not capture all the innovation that is going on—various surveys pick up on that. The point is often made that much of the innovation in financial services is not captured in business research and development figures because it does not fit the Organisation for Economic Co-operation and Development definitions that are used. I say that not to downplay the significance of the gap that we have to make up, but because I wanted to put it into context.

The same conversation is going on for the UK as a whole. The UK views the 3 per cent Lisbon target as very stretching, especially for certain areas of industry. The south-east of the UK might be heavily R and D intensive, but the rest of the country faces significant challenges. The figure for Scotland looks terrible compared with the UK average, but the level is patchy across the rest of the UK.

The nature of the business base in Scotland is an issue. The vast majority of companies with the capacity to do R and D tend to be the bigger ones, and Scotland has a large number of very small companies. One of our challenges is to provide the support that allows small companies to take that step and do some R and D. Programmes such as the teaching company scheme and the knowledge transfer partnerships, as they are now known, help companies to understand the value of R and D, which is necessary. R and D is not valuable in itself; it is valuable only if it is going to provide a product that will make money for a company. That is a big challenge. The figures are not good for Scotland, but the companies that do R and D in Scotland are very effective at doing it.

The university research figures are good for Scotland, so it is not as though we have nothing to build on; in fact, we have a lot to build on. A lot of the work that we do in collaboration with partners in further and higher education is about trying to get the quality and extent of research in the university base into the commercial world through mechanisms such as the proof of concept programme and the ITIs.

The figure is better for the universities but—if I am right—R and D accounts for only 1 per cent of GDP now, and we are trying to get to a figure of 3 per cent by 2010.

Overall, the figure is 1.88 per cent in the UK and 1.53 per cent in Scotland.

That is overall.

Yes.

Does the 1.53 per cent figure include business R and D?

Yes.

The figure is 1.3 per cent for the university sector in Scotland, so the 2010 target is a very big ask.

It is a very big challenge.

Yes, but I am glad that we are challenged in that way.

Bruce Crawford has asked many of the questions that I was going to ask about business R and D. We seem to have been aware of the issue for a long time. Charlie Woods is right to say that the figure seems to have crept up. Do you agree that progress has not been dramatic despite the fact that a range of measures has been taken?

Yes.

You mentioned the ITIs. Part of their strength and attractiveness is that their budgets are fairly substantial. Can you assure us that the budgets that are in place are as originally agreed? I think that the figure was £150 million for each over a period of 10 years.

I will go back to the previous question and give some context. Since 1995, business R and D in Scotland has gone up from £269 million to £521 million and from 2.9 per cent of the UK's total business R and D to 3.8 per cent. As you say, the figure has improved a bit but there is still a significant gap to make up.

Janet Brown will comment on the ITI budgets.

We always said that the ITIs would ramp. The £150 million is still on track. They have ramped faster than we thought that they would, which is very good news. A lot of inward investment research jobs have come to Scotland, which is positive. Both small and large companies have worked with the ITIs to take on research programmes to develop new products. Those have started faster than we thought that they would, which has created an earlier bubble than we expected, but we anticipate putting in the level of funding that we agreed in the past.

That is encouraging.

Your submission mentions the new innovation intervention framework. I offer you the opportunity to comment on that and say how you think it will contribute to our Lisbon targets.

That goes back to the account-managed and client-managed companies. As well as providing innovation support online and through business gateway services to all companies throughout Scotland, the framework is about trying to get companies to think creatively about how they take their businesses forward and to put associated tools alongside that. Depending on what stage a business is at in its ability to innovate, the aim is to give it the tools that it needs to be able to get to that next stage.

Some of the tools are about market interventions and some are about understanding how companies can undertake new product development and, as Charlie Woods said, get involved in joint ventures with other partners. They focus specifically on how to get support to a company in order to help it to innovate across the piece. Some of that work includes R and D; some of it does not.

The last point that Janet Brown made is an important one that emphasises something that we have said before. This is not about R and D for its own sake but about R and D as part of the process of innovation.

Both the Deputy First Minister's submission and Scottish Enterprise's submission refer to "A Smart, Successful Scotland" as part of the framework for trying to pursue our Lisbon objectives. "A Smart, Successful Scotland" refers to the importance of closing the opportunity gap and bringing into employment people who are currently not in employment. Given the reservoir of potential that exists, what is Scottish Enterprise's current thinking on how to address that issue?

Looking across the whole measurement framework and at the specific things that were focused on in Lisbon, one can see that one area in which Scotland scores relatively well, in comparison with how we score on business R and D, is employment. Employment rates are now getting on for 75 per cent, but within that figure, as you have rightly identified, there are individuals in some areas who are not in employment. They represent not only a social cost but a wasted resource and a wasted opportunity for the country. As the population ages, making the most of that resource will be absolutely imperative, and that is obviously an area in which working with our other partners is particularly important. We have a role to play in helping people to realise their full potential—particularly those people who can make use of the right help and support to approach the labour market and to make the transition into work. We can play a specific role in that area, but that must be done alongside the important work that others are doing as well.

Your paper refers to the fact that a low unemployment rate is a key identifier of a thriving economy. You also note that the employment rate for graduates in Scotland between 2001 and 2003 was 89 per cent, which is quite a high rate. When Commissioner Hübner visited the Parliament last week, she commented on the Lisbon agenda and said that she was impressed by some of the work that was being done in Scotland on employment rates. However, I note that your figures relate to the period from 2001 to 2003. Do you have any more up-to-date figures? Is the trend holding?

The latest employment rates are up at more than 70 per cent. Somewhere in the huge pile of paper before me I actually have the numbers, but I can tell you that the employment rate for all people is around 74.9 per cent, and the employment rate for women is around 70 per cent. The Lisbon agenda also focuses on older workers, and the employment rate for older workers in Scotland is around 68 per cent. That rate has gone up quite significantly over the past 10 years, which is important in the context of our aging population. All those figures are from the early part of 2006. I would need to get back to you on the specific graduate figure that you asked about; I do not have that to hand.

I do not know whether we have the up-to-date figures, but it would be quite helpful if you could provide them to the committee, as they would help us in our deliberations.

Annex 1 of your written submission contains a table of international comparisons using various indicators. As you have said, we seem to be doing better than many other countries in terms of the overall employment rate, but there seems to be a need for a huge improvement in reducing the proportion of 16 to 19-year-olds who are not in education, employment or training. What is Scottish Enterprise doing to tackle that problem? Are you constrained in any way by limitations on the budget for training opportunities, particularly for young people?

You are right to identify that area, in which there is a gap that needs to be made up, although our overall employment rate is good. The sort of things that we would do include programmes such as modern apprenticeships, skillseekers and the get ready for work programme, which is aimed specifically at younger people. In the context of planning all our work, we have to look at the balance of our activities across all that we do, and we use the data on current performance to guide us in balancing our budgets.

However, we have to work within our budgets. We endeavour to do that and to achieve a balanced package of measures—from supporting business research and development to supporting companies to internationalise and helping the young people in Scotland who are not in employment, education or training to realise their potential. It is crucial to make the most of our resources, as well as the resources that others contribute.

Despite the expenditure constraints, are you confident that we can reduce the proportion of 16 to 19-year-olds who are not in employment, education or training?

Because our work goes alongside work that is being done in the education sector and other sectors, we must be confident that we can do that.

We are increasingly looking for opportunities in sectors that are growing, so that we can target modern apprenticeships in areas in which people will be able to get jobs at the end of their apprenticeships. We are increasingly working with industry to try to understand where we need to target our work, to ensure that the right people are being focused on.

As members have no more questions, I thank the witnesses for coming to the committee. As I say, it would be helpful if they could submit more up-to-date information so that we can take it into account.