Business Growth Inquiry
Agenda item 2 is the inquiry into business growth. I welcome Frank Blin and Bruce Cartwright from PricewaterhouseCoopers. We have just received from them additional information on the world competitiveness scoreboard and their curriculum vitae. Obviously, we have not had enough time to read the documents—we can be forgiven for not having done so.
We have focused on business growth and looked at the horizon over the next 10 years, from 2005 to 2015, and we appreciate both witnesses coming to the meeting to discuss the issues with us. The procedure will be iterative. I invite both witnesses to say some introductory words.
Frank Blin (PricewaterhouseCoopers):
I am not sure that this debate is as exciting as that on Scottish football—perhaps it is. We might talk about Scottish football if we have enough time at the end of the discussion.
I will take the CVs as read, give an introduction and context and go through the pages of the document that members have before them. Bruce Cartwright will then cover business failure, as his expertise is in preventing business failure. Members can then ask questions.
The areas of focus that I thought that I would touch on—innovation, finance, international links, and building competitiveness and preventing business failure—are shown in diagrammatic form on page 3 of our submission. The pyramid reflects how Scotland's top-tier, mid-tier and smaller companies and small to medium-sized enterprises, make up our corporate landscape. I will refer to the economic impact of our larger corporates in a moment. I know that you have covered the headings and bullet points underneath the diagram in previous meetings and I am happy to take questions on them; however, we will not dwell on those in our presentation.
Page 4 shows in pretty stark terms the impact that the top 24 companies in Scotland make in terms of employment and profitability, which must have a subsequent economic impact. The shape of the companies that are coming through and the pace at which companies are coming through to that top tier is not a particularly rosy story in Scotland. It is something that we need to put on a faster track, because the impact of one Royal Bank of Scotland is significantly greater than that of 100 SMEs in terms of economic growth.
Does the number of companies refer to the number that are incorporated, or does it include partnerships and sole traders?
It includes only companies that are incorporated. We cannot capture the others through publicly available information.
Page 5 is on Scotland's public companies. Although there is some concern about the absolute number of public companies in Scotland, in comparison to other regions of the UK, Scotland fares reasonably well. You may ask whether it matters that Scotland has a good share of public companies. The fact that the public markets have an interest in Scotland is part of our brand, internationally and globally; it is part of the attraction of doing business here; and it gives an implication of the richness and scale of our operations. It is a not bad story.
As you can see from page 6, I thought that in the context of the football discussion we could talk about playing the game better. As you are well aware, there is a statement that the Scottish venture capital and private equity players are increasing the size and scale of the deals that they are looking for. That is accompanied by an increasing form of debt, financing smaller Scottish corporates. The consequence of that has been an increased presence of business angels and the syndicates that they form as a way of financing start-up companies, companies that are in their second or third phase of development and greenfield research. The larger private equity players have less interest in and less appetite for that space.
Schemes such as the co-investment scheme—which I chair as a board member of Scottish Enterprise—and the business start-up schemes have helped, but they have not closed the gap sufficiently. It has been identified—and I agree—that there is an equity gap at the lower end. The creation of a new £1 million to £5 million equity fund is something that would be welcomed. That could come from public sector sources on the basis that it might flush out a matching of private sector money.
As you would expect me to say, there is a strong advisory and intermediary community in Scotland, but it is a vulnerable one. If you want a strong Scotland with strong institutions, you need strong intermediaries to go with it. There is, undoubtedly, concern that there will be a talent drain and that Scotland will not be able to attract the best of the talent or retain those people. It is a vicious circle: if such people do not have the best quality corporate and public sector to work with, they will move to other opportunities.
Finally, on page 6 there are some propositions and areas for consideration for improvement. The access to grant and financial assistance schemes is still over-confused and over-complex. There needs to be greater simplification and codification to help people who are trying to find their way through the maze of offerings in those areas.
Perhaps there could be a simplification and standardisation of taxation treatment. There is complexity, particularly at the smaller end, for sole traders, partnerships and limited companies. I question whether some of the criteria for regional selective assistance, as a form of subsidy in today's climate, are relevant for a knowledge economy. For example, money might be spent on plant, equipment and creating jobs as opposed to research and development, innovation and more intangible areas.
Page 7 is on innovation. As Professor MacRae said:
"Scotland's expenditure on business R and D … is quite low. … evidence … demonstrates that high-growth economies have a higher level of R and D spend".—[Official Report, Enterprise and Culture Committee, 12 April 2005; c 1721.]
Companies that innovate successfully tend to be more profitable. We have recently undertaken a survey of about 400 corporates. That indicated that there are higher sales from new products and that markets are more profitable for those that innovate. In general, companies that spend significantly on R and D will generate higher profit margins.
The intermediary technology institutes are conceptually sound, but need time to mature and prove themselves. I would question whether the ITIs and industry currently have strong enough links. Such links need to be improved. Greater connectivity of university R and D to corporate needs is required. A big challenge is whether universities will allow influence over their purist and academic view of where research should be placed, whether it has a business application and whether that is right or wrong in respect of developing thinking. Increased and more focused incentives are also required. For example, could bigger and simpler tax allowances be created for R and D investment?
On page 8 I comment on international linkages. As members all know, the global market is a reality. I am just back from Beijing. I was gobsmacked by some of the statistics that I heard there. I mention one that reflects the scale of China's operation, which is not the fact that China will create 100 world-class universities within five years, but that there will be more English speakers in China than in the United States of America by 2008. That competitive market is one to reflect on.
Our leading companies are aware of growing internationalisation. The public sector has done well through developments such as the international advisory board, the global Scot and other such networks, but we must do more. For example, offshoring and outsourcing are propositions, but there are different propositions in different parts of Scotland. We would perhaps benefit from having a national offshoring proposition for a country of this size. We have some unique talents and skill sets that would allow us to compete—it is not all about cost.
We should make better use of the Scottish diaspora. We should encourage overseas entrepreneurs to bring companies into Scotland using our network. There should be mentoring and coaching by international executives. Non-executives from international companies should be used for some of our smaller companies in Scotland. We should, in particular, build our international sales skills. Many corporates do not know how to break into international markets. That becomes a barrier to their ambition and prevents them from taking their companies to the next stage.
Page 9 is on competitiveness, which is a difficult issue, but it is about focusing on high-growth industries and companies. That means perhaps not focusing on others and making decisions about where we will put the focus. There is perhaps also a role for the public sector in creating meaningful and authoritative benchmarks. Statistics and data about performance by industry and by individual businesses are produced ad nauseum but often lack credibility.
I ask Bruce Cartwright to touch on competitiveness.
Bruce Cartwright (PricewaterhouseCoopers):
I would say competitiveness rather than business failure, because although I specialise in business failure we probably turn around one company for every one that we formally handle in insolvency. The issue is to keep the businesses that we already have and sustain them rather than lose them. There is no point in scoring three goals if you give away four. Scotland is well served with people in the market such as accountants, solicitors and people in banking. People have very strong connections and understanding of the turnaround market. What we try and focus on—I will say this until I am blue in the face—is picking up the early-warning signs and dealing with the issue before it goes too far.
We and everyone else are often called in too late. As time goes on, the options diminish. I have observed more recently that stakeholders often see the difficulties before management sees them, perhaps because management is in denial or is so close to the problem, living with it every day, that it does not notice it increasing incrementally. Most management teams assume that they can fix problems themselves, but we would say that they are dealing with situational crises that they have not faced before. We are not saying that they do not understand the business that they are in, but simply that they have not been in such situations before.
I said that sometimes stakeholders are the first to pick up difficulties. In more modern industries, such as technology, which are run on the basis of cash up front and investments coming in, and which have no bank borrowings, companies simply disappear at the end of the cash burn. We have seen that happen to some games companies. When the banks are involved, they manage the problem and work with the company. If they are not there in the first place, the situation can slide away and the new technology can disappear. I have just sold some software to the US for £100,000. It is now being fully developed in California. We must align stakeholders and management, but the real issue is early intervention.
Page 11 depicts a corporate life cycle. I do not want to talk about the stages of going public and maturity, because not all businesses go through those. The key is that all businesses ultimately reach maturity. The secret is to take the arrow at the top of the diagram and to turn it upwards on an S-curve—I call it a curved step that keeps going up. The problem is that if companies do not take steps at some point they will go down the demise curve. In some businesses that we see, one could take a right exit at the point labelled "rapid growth", because following initial investment they do not get off the ground. That is partly the result of the equity funding gap to which Frank Blin alluded. Banks will not take the risk of supporting companies with small amounts of equity when difficulties come or plans do not work out.
On page 11 I refer to management being "in trouble, not aware" and "in trouble but in control". I use the same phrases on page 12, which illustrates the need for education in the importance of taking earlier advice. "In trouble, not aware" is equivalent to "ignorance is bliss". "In trouble, but in control" is the stage at which we as advisers work, as we have more options. When we reach the stages of "lost control" and "lost the business", I am put in control and act as receiver, liquidator or administrator. In that situation, the only way in which control can be regained is for me to have it. That is fine to some degree, but I would much rather give advice in the top half of the page.
Page 11 refers to "M/A activity". I know that all members would like to know what you mean by that.
"M/A" stands for merger and acquisition. It refers to the growth stage. At a certain point, a business looks for more than organic growth. It is acquired or merged into another company, or takes over other businesses.
Page 13 lists some warning signs. I will not dwell on those. Earlier I made the point that we look for early warning signs and ask management to look for them. Those are signs that we see time and again. If the warning signs are picked up, we provide situational expertise, which is what is required. That is very much about bringing businesses back through the back door. I appreciate that I have been dealing with issues on a micro level. Frank Blin will highlight some macro issues.
We used to say that a fountain in reception was a warning sign of business failure. Scotland had perhaps the ultimate example of that. A few years ago, we had a company whose requirements included a nuclear bomb shelter. Perhaps that was over the top.
On page 14 of the presentation, there is a statement by Gordon Hewitt, a member of Scottish Enterprise's international advisory board and a distinguished professor of international business and corporate strategy at Michigan University. In order to stimulate some thought, I have highlighted a number of questions. Page 15 asks whether we truly have a level of ambition, by which I mean a national vision that is shared across our key stakeholders—the public sector, major influencers, the key corporates and so on. For example, I do not know whether our economic growth objective in Scotland is clear. Is our aim to catch up with the rest of the UK, or could we reach the growth levels of some of the fastest-growing economies? I am not saying that we will achieve 8 per cent or 9 per cent growth like China, India or Singapore, but I question whether we are happy at 2 per cent. Could we get to 4 per cent or 5 per cent? I am not sure that we have that clarity of ambition.
On page 16 I say that that is about placing bigger bets. If I were sitting in your shoes that would be difficult because it would mean saying no to some things. A country of this size and scale has natural interdependencies, not only with other countries in the UK but internationally and globally. The world competitiveness score board I have here shows some of what countries such as Finland have done. It is interesting to note that Denmark and Iceland—relatively remote nations geographically—are in the top six. There are exciting developments in south Sweden and Queensland. A couple of lessons could be learned from those countries, one of which is greater alignment of public sector and private investment. In Finland, the chair of the innovation organising model is the head of Finland's Parliament, in other words its Prime Minister. It spends about €400 million on research and development, which is about 3.4 per cent of its gross domestic product. The country steeps its people in the idea that the country is about innovation and creativity. That is not just Nokia.
Dubai has focused on tourism, and has said, "We are going to compete worldwide and we are going to win that competition." Does Scotland focus on its natural USPs—unique selling points—such as golf, beautiful countryside and a heritage in the way that Dubai has? Dubai has taken on Spain and it is winning. There are Canada's experiences of the commercialisation of research in western Ontario, there are Queensland's SMEs and there are many other examples. I would be happy to provide the addresses of websites where you might find some research in those areas. My question is whether we can place bets on our distinctive assets, which I suggest might include finance, energy or tourism.
I am a consultant, so I go on to ask whether you have any methodologies. Is there a forum to deliver a shared vision and ambition? I do not think that it is enough that it is the Parliament that is carrying out this inquiry. Our stakeholder group has to be wider than that. Is there governance and a framework to prioritise and focus? Do we have delivery mechanisms to ensure joined-up working? An observation I would make from the private sector is that we seem to have so many talking shops and so many people who have a voice—but maybe that is democracy and I ought to be smacked for saying that. Finally, we need benchmarks and measures to see how we compare internationally. It goes back to my question about whether we have clarity about where our performance is. Too many people have got too much vested interest in saying that we are succeeding, and sometimes I challenge whether we have that clarity.
Excellent. That was very interesting. I will start with Jamie Stone and Susan Deacon, who were squeezed into the end of the previous session.
I have three questions, all of which are relatively short. I recently rejoined the committee, so I am sorry if this is a bit of a daft-laddie question. We can see from your table that Scotland lags behind the UK. What in your opinion is the drag-anchor sector of the Scottish economy that is holding us back?
I would love to be able to give you a smart answer to that, but I am not so arrogant as to believe that I have the answer. However, I think that it is something to do with our way of working. We are too fragmented and we do not seem to be able to move with agility. I recently listened to an Indian strategy professor at an American university who said that there are two reasons why Europe will never compete. One was its inability to absorb other cultures; the other was its inability to achieve step change at pace. I identify with those points.
You said that the grant system is a little confusing. I will go into dangerous territory here, but, given that economic development is primarily the responsibility of the local enterprise network and that Scottish local authorities have a non-statutory semi-function, is it time to tidy up the system?
Yes.
Will you elaborate?
It would be too trite to give a methodology. However, we must achieve clarity about who is responsible for what. Scotland is a small nation and we could have greater speed and acceleration on certain matters, such as tourism, if we had clearer accountability for grants and support.
You talked about the not-terribly-clever links between business, tertiary education and R and D in universities. All members accept that some people in academia are not terribly good at communicating with people whom they perceive as getting their hands dirty. Do you have any ideas about how we might get all those people together, even just across the table to start talking?
Some engagement has taken place. For example, two years ago, I witnessed all the university principals in a room with the international advisory board, which was a great achievement. I am not sure that the dialogue was rich, but at least they were in one room. It would be wrong of me not to acknowledge the fantastic achievements of Scottish universities or to acknowledge that Scottish universities are a fantastic export mechanism for learning around the world and that they achieve a hell of a lot. However, if we accept that we should have a pull and a push, there are challenges. By that I mean that a global corporation should be allowed to say, "We need research in the following areas and we want you guys to provide it. We wish to have a commercial relationship and we want you to focus your resources on that area." The question whether we can get those who hold the purse strings to encourage institutions to do that gets us into the issue of whether that would be right for our seats of learning, which is well beyond my ken. However, from a commercial and hard-headed business perspective, that is what I would like to happen.
Do you agree that graduates who are successful businesspeople are rarely asked to come back to their institution to lecture the first-year economics class or whatever?
Yes.
Thank you for your helpful and thought-provoking presentation. I will go straight to the end of it, when you dipped your toe in the water of politics and the democratic process. I am glad that you did that, because in our deliberations we must confront the issue of the contribution that politicians and institutions can make, not only by taking the right decisions, but by creating a climate that is consistent with our aspirations for business growth. It struck me that your quote from Gordon Hewitt that
"Traditional assumptions and strategy keep you in the game: the challenge is to change the game"
could apply equally to the business of politics and political parties.
If you feel able to do so, will you say a little more about how we could reshape the game of politics, and perhaps the terms of reference in some of our debates, so that we do a bit more of what we try to do in committees, which is to create a bit of space for grown-up discussion about the challenges and opportunities that we face? I am not convinced that we do that more widely in many other forums. You will be pleased to know that I have a second question that is much more specific, but feel free to comment as openly as you can on that point.
I would like to avoid the question, partly because I do not have sufficient knowledge on the issue. To a degree, the solutions must come from politicians working through the issues, but I do not know whether you have the appropriate frameworks or methodologies or perhaps even sufficient time to do that.
I come back to my simplistic view of the world, which says that the more that I travel, the more that I look at Scotland as a small nation with a small number of key stakeholders and key influencers who can make a difference. To me, that is the fantastic power of Scotland. It is a bit like getting a snowball to the top of the hill: when it starts to roll down, it will gain unbeatable momentum. However, I do not think that there is a shared clarity of thought. If you talk to 10 different people, you will get 10 different answers about where Scotland's priorities should be. The more alignment that we could get around that, the better it would be. That does not answer your question.
On methodologies, I am of the view that you have to decide who is doing what and what you are not going to do. Strategy is all about choices, and it is as much about saying where you are not going to focus your time and effort as it is about saying where you are going to focus your time and effort. As to what you should do, I am happy to take a workshop away and we will work it up. I do not think that I can go much further than that. I am sorry to be a bit wimpish.
That workshop would be at no charge, of course.
Facilitators work themselves out of a job.
There is a key point in the business model. Right at the top is Singapore, which brings us back to Mr Stone's question. Singapore is a very focused nation without resource; therefore, it is focused on technology and intellect, which is the real resource that it has. To come back to the drag factor, what Singapore does not suffer from is some aging and old industries that cannot compete any more. We cannot get away from the fact that, although we have a very good legacy, the paper mills that were built 100-odd years ago are just not competitive with those that are being established in the far east now. To some degree, that is part of the drag factor. I wonder what the Singapore Parliament talks about when it talks about business.
Indeed. It would be interesting to find out. If we take you up on your offer of having a wee workshop outside the public gaze, that might be useful. It might be helpful to us, as politicians, to have that opportunity.
On the world competitiveness scoreboard that you have given us, some of the places to which it has been suggested that we should make fact-finding visits have a political context and a tenor of political discussion that are very different from what we have here. That is a criterion that we should consider; however, I will not press you to say anything further on the public record just now.
I have a detailed question for Frank Blin. I could not help noticing, in looking at your CV, that you have had a particularly broad range of experiences with a variety of business schools and places. Last week, when the enterprise agencies appeared before us, we explored the area of leadership development and management education. I know that that goes much wider than what goes on in our business schools; however, my question is specifically about our business schools. You have sat on the advisory board of Strathclyde business school. What are your observations and thoughts about how our business schools can best contribute to Scotland and our strategy for growth?
They cannot be optimal, otherwise why would Fred Goodwin seek to create his own business school at the Royal Bank of Scotland? That world-class excellence should be provided in Scotland; not only should be—it is a must. Scotland's education heritage has been a source of great pride and respect throughout the world. That should go from elementary right through to the top end of business school. The harsh reality is that it does not.
There are areas in which we are unclear about how we are going to compete, focus and be the best. It is about learning and education to develop quality of leadership and leadership skills. If you asked most of the top corporates that I have worked with in Scotland where their people went for their big personal development, you would find that it was not Scotland. There is an absence of equipping ourselves to be the best. I am not saying that the talent is not necessarily here or that there are not Scottish individuals around the world—such as Gordon Hewitt—who are world-class in themselves; however, they do not practice here.
Good afternoon, gentlemen. I apologise for missing the beginning of your presentation, but I was at a meeting with the European Commissioner for Science and Research, who was most complimentary about various aspects of what Scotland does.
I go back to the question on page 17 of your submission:
"Is there a … Forum to deliver a shared vision and ambition"?
Your throwaway comment was it that should not just be the Parliament.
Susan Deacon and Jamie Stone talked about recognising when sectors are past their sell-by date and deciding on which areas we should focus. Page 6 of your submission states:
"Change the rules on RSA – make them more appropriate to a knowledge economy".
What other talking shop would you want to address those points, if not the Scottish Parliament? You said that not many people are the key influencers. You seem to be saying that we should not have more talking shops, but by the way we need to create another one to do the high-level stuff. Can you sort out that problem for me?
I am saying that we should rationalise the number. There should be an audit so that there are one or two such bodies that are focused and accountable.
Are there particular Scottish decision makers who are not involved?
In my personal opinion, the Parliament has shown itself to be tremendous at reaching out and listening. It is fantastic from the point of view of a democratic process that there has been so much effort to connect to so many parts of Scotland. However, there comes a point where action has to follow. I do not know that the exclusion of certain stakeholders or groups has taken place—indeed, quite the opposite. The Parliament has gone overboard in hearing from all manner in all quarters, which, as I said, is tremendous. However, I do not know that the process has been taken to the next stage.
Do ministers collectively do enough thinking and discussing?
That is really leading with the chin.
If we are going to make recommendations, we need to know what the business community and folk such as you think.
Convener, he is retiring shortly, so he can say what he wants.
Am I?
No, I meant the minister.
To be fair, I do not just mean the Minister for Enterprise and Lifelong Learning; I mean ministers across the board.
We have to move from the superficial and from ambition statements to hard-edged, businesslike conversations, such as, "We will invest £X to get that return in Y sector or industry to achieve Z growth."
I have a question for Bruce Cartwright. From your CV, you are clearly one of the great experts on business failure in Scotland, which is how you were introduced. Why do businesses fail? From your presentation, your answer seems to be that 90 per cent fail because of management failures and mistakes. Is that the case? Furthermore, do you agree with one of our advisers, who suggested that business failures are a good thing and that it is healthy to weed out businesses, particularly less effective businesses in certain sectors?
I will start with why businesses fail. It is difficult to make a generic point. Some businesses fail simply because the market moves on. I will return to a specific example, but, in the majority of cases, business failure tends to be blamed on management, because management are responsible for controlling the business and making decisions. In one case, I was told that, because the euro was at a particular rate and pulp was coming in from the United States at a certain price, there was absolutely nothing that management could do. If that is the case, management might as well resign. That is like saying that you do not know where the ship is going when you are being paid to drive it.
I want to pick up on an issue to which Frank Blin alluded. About 18 months ago, I was really bothered by a case involving a Scottish legal entity that was a division of an American parent company. The entity was in the market for supplying packaging for computer equipment and the metal frameworks around computer hardware. As sales became tougher in the US, the US company withdrew its sales team to the States and gave the Scottish division six months to develop its own. There was no salesman in the entire entity. It is not uncommon for foreign businesses to take advantage of short-term opportunities to develop in Europe but not to have a sales force here, because the issue is not sales but cheap delivery. When a downturn comes, it is easy to cut off such an entity. In this case, the parent company cut off divisions in Scotland and Mexico. I do not blame it—that was a good business decision. However, the Scottish business was able to stand alone for only six months. It could not create sales, because it had never had to do that before.
You asked whether business failure is a good thing. Some business failure should be a good thing, because it is a case of survival of the fittest. At the corporate live end, we see about 70 receivership administrations a year. A hundred legal entities are probably affected, but some are part of groups. There are probably 600 liquidations. The Enterprise Act 2002 helps, because where there is failure we can normally salvage the best bits of the business, which can re-emerge in a new entity. We can do that if we are involved early enough.
Business failure need not be a bad event. A couple of years ago, we dealt with the failure of James Thin Booksellers, of which there were branches up the road. The name has gone, but the academic side of the business was taken up strongly by Blackwell's and the retail side went with Ottakar's. Both are still very much in existence and most of the jobs were preserved. We closed one or two stores in England, which were high street shops past their sell-by date, but the best bits of James Thin still exist and can be seen on George Street.
I want to move on to an entirely separate question. On page 4 of your presentation, there is a table showing the shape of Scotland's corporate base. From the notes, I am not sure what the table shows. The profits that it shows are not available for the sector with the smallest turnover, which probably has the largest number of employees. For all sectors, the number of employees includes employees in the rest of the UK and overseas, so the table does not give a clear sign of where Scottish jobs are located. It also does not give a clear overview of where profits are located. How much of the £15 billion in profits earned by the largest companies stays in Scotland? What does the table really show?
I wholly accept your challenges. It would take me an hour to provide a detailed analysis of economic value added. The table is endeavouring to show a trend line and to indicate where the focus is. From experience, I believe that there are arguments to support the claim that, proportionately, larger corporates have significantly greater impact on gross domestic product and employment and generate significantly greater profit than smaller entities do.
You raised the issue of whether profit is retained. Profit is not retained in any geographic ownership. Let me turn the matter around. Let us suppose that Fred Goodwin at the Royal Bank of Scotland retires, that Larry Fish, who is based in the US, becomes chief executive officer, that the board becomes 80 per cent United States and 20 per cent United Kingdom and that the company seeks to invest its profits in China and to develop in other parts of Asia. Would we see a significant economic impact on Scotland? I argue that we would. That is another complexity around the issue of scale and size that would not be apparent from ownership and direction.
The purpose of the table was simply to say that there is a stark concentration of numbers. We could pick holes in the accuracy of each of the segments, but the trend line shows the importance of large corporates and of having them in the family of Scottish businesses.
Would it also be possible to argue that it shows that the large corporates make more profit out of each of their employees than the smaller organisations do? We do not know whether those profits stay in Scotland, get invested abroad, get reinvested in the business or go to shareholders. All we know from those figures is that the biggest profit per employee is made by a large corporate.
That is true, but quality investment, which has greater economic impact, usually stays closer to head office and usually covers areas such as research and development and investment in new products—for example, new manufacturing processes. All those decisions tend to be taken closer to home as a matter of course and so have an impact in the locale in which the ownership of the company remains.
The new management at VisitScotland has set a target of 50 per cent growth in the tourism industry in Scotland between now and 2015. Do we need a similar target for overall economic growth that gives the nation a purpose à la Singapore?
Yes.
You mentioned some options. It would be fair to say that we all regard the countries that are achieving 8 per cent or 9 per cent growth as coming from an underdeveloped base, but the average Organisation for Economic Co-operation and Development growth rate for a modern developed economy in recent years is about 4 per cent. You hint that about 4 per cent is the right target for Scotland.
An accountant speaking to an economist should be a little careful in responding to what the right benchmark would be, but my guess is that 4 per cent or 5 per cent would be a pretty big stretch from where we are today.
My next question is about how we can achieve that rate. One of the most fundamental statistics relates to the lack of private spend in Scotland on research and development. On the public side, we get more than our fair share of UK research councils funding as a result of the quality of our universities and their research, but we fall down on the overall spend on R and D. The latest estimate, from two years ago, was that as a country we spent about £600 million on private sector R and D, which is less than Nokia spends on its R and D in any one year. The Scottish Executive's estimate is that to get to the OECD average—let alone the targets for 2014—we would need to spend an additional £750 million.
You are a member of the board of Scottish Enterprise, which has a budget this year of roughly £530 million. Should we not—again, à la Singapore—say, "Look, instead of Scottish Enterprise trying to spread the jam right across the board on start-ups, and on little innovations here and food parks there, should we not get the eye on the ball a lot more and focus in?" We know that every pound that Scottish Enterprise puts into R and D generates £3 of private spend on R and D. If we are agreed that R and D is important, is it not time that we focused much more on it and cut out a lot of the peripheral stuff?
I will not get into saying what Scottish Enterprise should or should not do, but I agree with you about focus. I return to the example of Finland: Tekes, which is a public sector organisation, stimulates R and D focus in all sectors of the economy in Finland. It spends €400 million on R and D alone.
Does that generate about three times as much private investment?
I do not know what the multiple is, but I think that it might even be more than that.
I suggested to a previous enterprise minister that, given that six agencies—including the funding councils, Scottish Enterprise, Highlands and Islands Enterprise and the then Scottish Tourist Board—spent 85 per cent of his budget, he should bring the chairmen and chief executives of those agencies together and form an economic cabinet to provide the kind of leadership about which you are talking. He lost his seat at the previous election and was no longer the minister, which was unfortunate, as we need that kind of focus.
My final point concerns offshoring. I think that you are saying that we could turn the tables and make Scotland a location for offshoring. What would be required for us to do that? Is an Irish level of corporation tax a necessity to achieve it? Could we achieve it with the devolved powers that we have?
I think that we could. Companies are going through different learning experiences with outsourcing and offshoring. We have all been at the end of a telephone with somebody in some far-off land struggling to engage with us—notwithstanding the speed at which others are trying to teach them to understand the language, dialects and local nuances—and a number of major entities that want to spend money on outsourcing are committing more to keeping their offshoring or outsourcing operations closer to home.
Scotland has some experience in that sector and a semi-skilled workforce for it. In addition, the great thing about bringing more women into work is having flexibility—as sources of work, offshoring and outsourcing offer that flexibility. We need to have greater centres of excellence and agree what our differentiating elements are, rather than have different parts of Scotland—such as the Highlands and Islands and parts of the central belt—competing with one another to create different centres of offshoring operation.
One of the issues that you mentioned is the availability of skills, which is a prerequisite to success. You also mentioned the re-engineering of RSA to reflect modern reality. An attempt was made to do that two or three years ago, but perhaps it was not enough. What else do we need to do to exploit the offshoring opportunity?
Infrastructure and technology are aspects of it. I do not know whether I would go as far as to say that a tax incentive is needed. It might be fantastic for competing with Ireland if tax were dropped by 3p in the pound.
That is a good hint.
Your presentation was excellent. It contained many issues that we want to pursue. We will have some workshops later in the inquiry and I hope that you will both be able to participate in one or two of them, because your presentation provided a lot of meat for the committee to consider. In a public meeting such as this, it is not always possible to explore some of the issues as deeply as we would like, but we might be able to explore them in more depth in the workshops without having to worry about being reported.
I suspect that I have already got all my partners into trouble or got myself into trouble with them.
Can you supply us with some additional information on the Finnish innovation agency? That would be extremely helpful.
Sure.
Thank you very much indeed. That was a very worthwhile evidence-taking session.
I suspend the meeting for five minutes before we go into private for item 3.
Meeting suspended until 16:38 and thereafter continued in private until 17:01.