Dan Turner of Our Scottish Future welcomes delegates and summarises the recommendations in Innovation Nation: Good Jobs for Scotland’s Future.
Full speech transcript
Let me begin by saying what an honour it is to be speaking to you all today, to be following Gordon, Lord Sainsbury, and the Lord Provost. My name is Dan Turner, I’m a Sheffield-based economist looking at questions of how we can make sure that all of the regional economies, national economies of the UK and all the communities within them can thrive in a modern economy. And it falls to me to introduce the report that we’re launching today and that will frame some of this conference, Innovation Nation, Good Jobs for Scotland’s Future.
I’m going to talk, probably half of what I’m going to say will be around our diagnosis of what’s happening in Scotland at the moment, parts of which you’ve already heard from Gordon and Lord Sainsbury, and then I’ll set out quickly our five-point plan for how we might try to grapple with some of these policy challenges.
So to start with the bad news, I don’t know if you can quite make this out, but it’s a chart that many of you will be familiar with, you’ll have seen in newspapers, books, boardrooms over the course of the past decade or two, which is the stagnation and stalling of productivity growth in Scotland, but also, you know, this is true of the UK across the OECD and the G7, that something has happened recently such that the economy is not growing at the pace that it did before. Up to about 2010, trend growth in productivity, this measure for Scotland, it’s how much value added you create per hour worked, was growing about two percent per year and it was almost taken as a law of nature that that would be the case.
We’d seen that level of growth for decades through boom and bust, across business cycles, through the whole process of de-industrialisation, but then something happened, and there still isn’t consensus on this, but something happened in the early 2010s, here and elsewhere, that led to that trend growth rate dropping from two percent a year to about 0.4 percent a year in the case of Scotland, and this isn’t just a North Sea energy story either, it’s true if you strip that out.
So economists can do something called a decomposition where we try to dig a little bit more underneath that headline and say mechanically what’s driving that slowdown, and a reasonable rule of thumb for the UK is that about a third of that slowdown is coming from falling capital accumulation and investment, but two-thirds comes from something called total factor productivity. So on that first point about just falling capital intensity and investment, Scotland has had very low levels for decades of private investment in new forms of capital, as has the UK.
The UK has been at the bottom of the G7 league table for decades as well. Cumulatively this has really mounted up now, and just this week colleagues at the Productivity Institute in Manchester published a paper to show that a worker in the UK has about two-thirds of the capital of a worker in France, Germany, the US or the Netherlands, and with France in particular the contrast is really stark. So a worker has about half of the stuff with which to produce their outputs if they’re based in the UK than if they’re based in France.
But just tackling that problem of low investment will be nowhere near enough to reverse Scotland’s slowdown in productivity, because two-thirds of that gap comes from something called total factor productivity. Usually this is what economists attribute to ideas, innovation, both the basic ideas coming out of universities, but also how we can make more effective use of production processes, how we design, how we market our goods, basically ideas, innovation and the themes that we’re talking about today. So there is no path for a return to a high income, high productivity growth economy for Scotland without raising the rate and the level and the quality of innovation, and this is as near as we get if you can raise productivity to a panacea in economic policy, because it makes all of the other economic trade-offs that we have to grapple with harder.
If we don’t fix this it will be harder to raise standards of living, to reform public services and to create good jobs everywhere. So that’s the bad news, but fortunately, and I’m not just, this isn’t cheap flattery because we’re here at the University of Glasgow, but there’s a huge amount of positive news to share for Scotland. For me this was the revelation doing the research that it really is true to say that Scotland already in the UK could be the best place to start and begin scaling an innovative business.
I’ve got four indicative stats on the slide here. For universities, Scotland’s got three of the top 100 in the world, that means per head Scottish universities are, or Scotland’s university scene is the best in the world. It’s ahead of Switzerland, it’s ahead of Singapore, and it’s not just that the basic research and the teaching is excellent, but Scotland’s very effective at producing spin-outs and commercialising some of those ideas.
Within the UK the university spin-out rate per head in Scotland is the highest of any nation or region, and it’s not just university spin-outs, this is also true of other high-tech, high potential firms across the economy. So if you found a company in Scotland, it’s the only place in the UK that’s more likely than London to receive equity investment at early stages, aided by things like the fact that half of the UK’s most active angel investor networks are based in Scotland. So there really is something spectacular happening at an early stage level of when we think about an innovation economy in Scotland, and that is no doubt, you know, this is a relatively recent story I should be clear, it’s because of progress over the past 10-15 years by many of the people who I know are in this room and have been active in trying to improve that ecosystem.
So it leaves us with a paradox, I’m going to have to explain this because it’s really small on this slide. If Scotland is so good at producing world-leading ideas, world-leading businesses at that early stage, why is that not translating into high levels of investment productivity and an economy-wide effect? What this chart shows, and it’s in the report so you can get into all of the numbers there if you want to see it in detail, is that Scotland has the second highest rate in the OECD of public sector spending on R&D. So about one in every pound in Scotland, one in every hundred pounds in Scotland is spent on higher education, research and development, second only to Denmark for the whole of the OECD, the rich industrialisedeconomies.
But Scotland’s mid-table at best when it comes to business R&D, and the ratio between the two, which is the bang for the buck that you get for every pound that we spend subsidising innovation through the public sector and higher education, how much private activity do we get for that? Scotland is almost at the bottom of the OECD league table, it’s only ahead of the Latin American economies and I think Latvia and Lithuania from memory. So every pound spent in Scotland generates I think £1.46 of private sector research and development, that’s about half the rate of the UK as a whole, about a third the rate of the OECD as a whole and the EU, and less than one-fifth of the return that you get for public investment in R&D compared to the US. So there’s this gap in private innovation in Scotland, and what that looks like in practise I think is, you know, what we observe are highly innovative firms, companies like Excientia, who are an AI-driven drug discovery company out of the University of Dundee, now a unicorn, but in order to realise that deal they relocated to the University of Oxford’s science campus.
So you face a choice as a Scottish company typically in this sector, once you reach a level of maturity, if you want to go further and not just sell up your IP, do you move to elsewhere in the UK, to the US, to another market, because we struggle to get those cluster dynamics that Lord Sainsbury described, working in Scotland to make it attractive to invest here. And we don’t have to look very far away to see what a better model would look like, because the UK as a whole, the rest of the UK already has twice that level of bang for buck. So it looks like around the innovation economy of Cambridge and life sciences, where you have AstraZeneca as a major anchor, and then this supply chain of smaller firms introducing dynamism, introducing new ideas around them, it looks like Rolls-Royce and its role anchoring advanced manufacturing in these Midlands, so we can see that it’s possible within the UK to create these innovation clusters, and we just need to do the work in Scotland to get there.
So on policy, I think bear these three goals in mind. One thing we haven’t discussed yet is that there is a job right now to just protect what Scotland has, even though I’m saying it’s all rosy in those early stages, we have to recognise that there are very significant threats, not least to the higher education sector at the moment, in its financing, in its access to students, global networks, exposure to global capital markets, there’s a whole host of challenges to what’s working well in Scotland already, and at the very least we have to maintain the current position. This isn’t saying let’s swing the pendulum away, it’s how do we build up parts of the system that are missing.
So second, we also need to keep that progress and momentum, even though there are really good stories to tell about early stage equity finance and investment in Scotland, we’re still receiving less bang for our buck, so Scotland does have the most university spin-outs per head of any national region in the UK, but if it was producing at the same rate for the R&D funding it receives, there’d be about 50% more university spin-outs than there are now, so good progress but more progress to come. And then finally, most importantly and most innovatively from a policy point of view, how do we reorientate Scotland’s environment so that more of those firms can then plant and take root in Scotland and scale. So our five-point plan, I’ll try and rattle through this fairly quickly because I think it’s very complementary to what Lord Sainsbury’s already said actually.
Our first recommendation is that we need a single strategy for Scotland, a single joined-up vision that’s co-owned, co-designed by the UK government, the Scottish government and local government. The reason we say that is because there’s a pragmatic argument that there’s no silver bullet for innovation policy, that we need to be coordinating across skills, trade and investment, infrastructure, planning, you name it, almost all of these ingredients are relevant to creating a successful and thriving innovation-led economy and those skills are, sorry, those powers are distributed at the moment. Some are retained in Westminster, some are held at Holyrood level, some are held at a local level and the absence of coordination, absence of a shared set of goals over the past few decades has led to this proliferation in Scotland of different agencies, strategies, documents, which is not necessarily wrong in and of itself but in practice what we hear from the business community in Scotland is it’s created a bit of a spaghetti junction that people struggle to navigate and negotiate when it comes to accessing public support and it leads to a lot of people writing strategies and giving talks like this rather than being out there rolling up their sleeves and actually doing the work of attracting the investment and as a result Scotland is smaller than the sum of its parts I think, so there’s an opportunity to consolidate, to coordinate and start to deliver some of that value for money that’s lacking.
Where we think that that then needs to be directed through these consolidated strategies, consolidated funds, is into what we call growth zones, so this is our idea for the sort of physical campuses that allow universities, innovative businesses, multinational anchor businesses to sit side by side and co-locate as Lord Sainsbury recommended earlier and you know economists have shown just how quickly these benefits of co-location tail off, so if you’re on the top floor of a building compared to the bottom floor you see a reduction in the productivity of the fact that you’re in the same building. If you have to walk more for the most knowledge intensive activity than 20-25 minutes you may as well be in a different city, so physical proximity is really important. How do we build those physical spaces in Scotland I think is a real life question and more can be done in policy to support that through planning reform, through tax incentives, through direct grants to assemble land and so on and this builds on work that’s already happening in the Riverside Innovation District just down the road from here that the University of Glasgow has been leading, in the bio quarter in Edinburgh for life sciences, it’s already happening, let’s supercharge that.
In order to do that we need our third recommendation, someone who’s clearly accountable and tasked with leading that process and what we propose, what Our Scottish Future has proposed in the past is the creation of Scottish combined authorities who are capable of being accountable and coordinating that activity. This is based on something like the successful Manchester model that many of you will be familiar with and it’s not a substitute to cooperation with Holyrood and Westminster, all of that needs to go hand in hand and that’s where you need the shared strategy but it provides a single locus of someone who can go out, champion the growth zone in Greater Glasgow, broker those deals with multinational companies alongside the Trade Minister at a UK level and in the Scottish government in order to bring in that flagship investment. Then our final two recommendations, back what works, don’t give up progress for where we are at the moment, this is that protect and progress argument that I was making earlier.
Scotland already has a huge amount of innovation strength, it already is really delivering on those early stages and at a moment of straightened public finances now is not the time to reduce funding for universities or especially the funding for applied research and innovation and spin-out support that universities have been developing over the past decade. Then last but not least I think we have this in at the end on make sure innovation is inclusive and it kind of galls me because often you read these strategies where they’ll set out something about economics and then at the end they’re like oh and of course you’ve got to make sure it’s equitable and normally it’s because that’s the right thing to do and the moral thing to do, which it is, but there’s also a strong argument around that the efficiency case for making sure that innovation itself is inclusive by design. Over the past few years there’s been out of the US from the growth lab at Harvard’s economics department that helps us to put a number on this, so they find that if children from poorer families, communities that are less connected into innovation economies, so like they don’t see themselves, they don’t see their role in Glasgow shiny PhD-led research labs because their dad never went there, they don’t know anyone who’s ever been in that world, they innovate at about the quarter of the rates when they’re adults as their better connected peers.
I think that’s right, but the headline would be that once you, if you could level up to coin a phrase, bring the level of innovation across the board to the level of the best performing children, the best connected children, the rate of innovation of patenting would quadruple in the US and I think you’d find something very similar in the UK. So if that’s the barrier, the scale of the potential gain of more inclusion would probably swamp almost everything else I’ve just been discussing. So we ought to be spending as much time, energy, effort in thinking about how we connect innovation into communities as we do thinking about how we raise investment for wet labs or whatever it might be in Glasgow.
Those are our recommendations. Can I just make one final point, Jim, I know we’re running a little bit late, which is building on the idea that this can be quite dry and technocratic. I think we’ve heard the c-word quite a lot already of clusters but there’s another c-word that we haven’t really used of communities and a sense of identity and that sense of value that people get from work.
So I was struck with what people have said already about shipbuilding repeatedly in Clydeside and for me what this is all about for bringing an innovation economy to scale is to say that Scotland has led already in the past in what at the time were incredibly innovative industries that created bulk jobs, mass jobs and a sense of enduring identity and pride that people still evoke even though most of those jobs have disappeared you know decades if not centuries ago in some places. Our challenge and I think the challenge of everyone in this room is to say how do we create that claim on the future for Scotland’s communities going forward. So how is it that the grandkid of someone who works in the shipyards can say I’m going to be working in the satellite industries of Glasgow and then that inspires their grandchildren in turn to think that Scotland is the place where you can be a world-leading innovator and that can create widespread resilient prosperity.
So I’m very excited for the rest of conference when we start to delve into the mechanics of what that looks like. Thank you for humouring me this morning.
