Scottish Government

Background Analysis to the Framework for Economic Development in Scotland

7. The Dynamic Competitiveness of Enterprises

The promotion of dynamic competitiveness within the Scottish economy is one of the most critical elements of the devolved Scottish government's strategic approach to economic development. Establishing sustainable economic growth will only be possible if we succeed in developing enterprises that continually strive for competitive advantage in global markets: that is, they are dynamic in addressing the challenge of competitiveness.

Within individual enterprises, this process typically involves combining a concern for operational efficiency with the strategic positioning of the enterprise's outputs. The Framework is aimed at providing the economic environment that attracts new corporate headquarters to and retains existing ones in Scotland. Their presence is beneficial to the Scottish economy: they create high-quality employment and generate a strong demand for business services. While the ultimate decisions on where to locate corporate headquarters, and on takeovers and mergers, will lie with individual private companies, the Framework aims at widening opportunities for business and giving the right incentives for creating employment and entrepreneurship in Scotland. The Executive recognises the importance of retaining international business headquarters for reinforcing Scotland's reputation as an outward-looking and dynamic economy.

The importance of the continual and dynamic nature of the process is for the simple reason that a static approach to competitiveness will not suffice. It is not enough to be operationally efficient or launch a new product every month. Neither will ensure that competitive advantage persists the next month when other enterprises may develop new production and organisational techniques and when competitors can launch new and slightly differentiated versions of the previous month's new products. Part of the solution, therefore, is to adopt a process of continually evaluating the enterprise's competitiveness.

Part of the solution can also be to develop a sustainable and differentiated strategic position that makes the enterprise's products less vulnerable to competition through time. This differentiation may come from, for example, developing a reputation for superior quality, after-sales service or another attribute that leads to customer loyalty. Defending this strategic position will mean that the enterprise will once again need to continually innovate to maintain its advantage.

There is a further economy-wide dimension to dynamic competitiveness that arises from the development of a healthy entrepreneurial culture. Approximately half of the aggregate productivity gains in the UK as a whole can be attributed to the churn associated with new establishments with higher productivity being set up while older establishments with lower productivity close. ³¹ The benefits to the economy are probably higher than this if a proportion of the new starts go on to become high-growth businesses. A healthy entrepreneurial culture is likely to have a wider impact upon economic development in terms of, for example, the skills, creativity and attitudes.

7.1 The Key Strategic Approach and Priorities

Raising the competitiveness of Scottish-based businesses is a key aim. Establishing sustainable economy growth will only be possible if we have enterprises that continually strive for competitive advantage in global markets. The encouragement of new businesses and of the growth of existing enterprise is therefore central.

• The global context. The economic environment in which enterprise development takes place is crucially important to the nature of the Executive's economic strategy. As the openness of the world economy has grown and the volume of international trade and capital flows has risen sharply - despite the impact of recent cycles and specific short-lived events - the prospects for the Scottish economy have become intimately tied to the development of the global economy and our ability to compete in both domestic and international markets. The realities of the global economy need to be understood and taken into account:
• Scotland will not be able to compete on the basis of low labour costs. While costs in Scotland may be lower than those in some advanced economies, there are very wide disparities with many developing economies. Indeed, Scotland would not wish to compete as a low-wage economy;
• Scotland's ability to remain competitive rests on the exploitation of the knowledge and skills of our people and of the knowledge to which we have access. Developing products and means of production that are superior to our competitors in the knowledge and research that they embody lies at the heart of our future prosperity. A culture of continual business innovation and risk-taking is critical to the sustainability of Scottish economic development;
• even with an emphasis on knowledge-intensive products, Scotland will face strong competition from both advanced and developing economies. Both have very significant pools of highly skilled people with easy access to the pool of global knowledge - and the latter also have access to very cheap labour for decades to come. Scottish enterprises will therefore need to display great agility and skill in the identification of products and markets where our specific knowledge and skills can provide the competitive edge that is crucial;
• with the greater mobility of enterprises and of the production of components for both goods and services, enterprises will often benefit from operating their production across several countries. We can not expect enterprises to restrict their operations to Scotland if significant advantage will accrue from exploiting the economic conditions in other economies. The strength of the operations in Scotland, however, will be greatly enhanced if these benefits are reaped from a strong global presence in both production and in sales;
• moreover, as the complexity of production is increased, enterprises will look to gain the benefits from corporate alliances of different types across the globe - be they formal mergers, joint ventures, licensing arrangements or loose alliances that allow the sharing of knowledge and innovative ideas.

The Strategic Priorities

In the light of this global context, one key part of the Executive's economic development strategy has focussed on the enterprise sector itself and how public policy might stimulate and promote dynamic competitiveness at this level. The basic elements of this were set out in the first Framework for Economic Development in 2000, and reflected in the more detailed strategic direction that was provided to the Enterprise Networks - Scottish Enterprise and Highlands and Islands Enterprise - in January 2001, in the document A Smart, Successful Scotland ( SSS). ^.

FEDS focuses on building a competitive advantage for Scotland's enterprises by investment in human capital and by widespread innovation in products and processes - against a background that Scotland cannot rely on inward investment attracted by lower labour costs as other countries have a greater advantage in that approach.

This is reflected in SSS, which highlights the key elements that are required for enterprises to secure a strong and sustainable place in the global economy. These priorities are grouped into three organising themes:

• Growing Businesses - supporting innovation and entrepreneurship, supporting new enterprises and helping existing enterprises to develop further;
• Global Connections - encouraging Scottish companies to increase their involvement in global markets, and encouraging people to live and work in Scotland; and
• Skills and Learning- helping people into jobs and ensuring that business has access to the skills and expertise it needs to be productive.

The remainder of this chapter highlights the crucial areas of enterprise strategy upon which the Executive will focus over the coming years:

• Research & development and innovation
• Entrepreneurship
• Managerial and employee skills
• The regulatory framework
• Global connections
• The EU strategy
• The strategy for Green Jobs

7.2 Research & Development and Innovation

The Executive regards innovation as a key determinant of technical change and productivity within the Scottish economy, and therefore as a critical driver of sustainable economic growth. Indeed, technical progress - embodying the full range of advances in knowledge and technology - has been recognised as the main determinant of sustainable growth in advanced economies.

What has happened since 1999 with respect to policy development?

The Executive's strategy set out in the first FEDS has increasingly focussed attention on stimulating and enhancing innovation and productivity. The programmes that have been taken forward by the Executive and the Enterprise Networks have, moreover, been complemented by the programmes in this area that have been developed and implemented by the UK Government.

Research and Development. The Executive has recognised the importance of R&D expenditure as a driver of productivity by increasing the knowledge base within a region and as a source of potential benefit to other firms through knowledge transfers and spillovers. Studies into the magnitude of R&D spillovers report that social benefits exceed private benefits by a considerable degree ³³. Businesses that undertake R&D are also likely to be more innovative generally.

The Executive is committed to supporting R&D activity by business in order to close the significant R&D gap that exists between Scotland and the rest if the UK and other developed economies. It administers several programmes intended to encourage greater business expenditure on R&D by SMEs. These include:

• SMART, a competition that provides funding of up to 75 per cent of eligible costs for a technical and commercial feasibility study lasting between 6 and 18 months. The maximum award is 50,000.
• SPUR, a scheme that covers 35 per cent of eligible costs for projects of over 75,000 lasting between 6 months and 3 years. The maximum award is 150,000.
• SPUR+, a scheme that covers 35 per cent of eligible costs for projects of over 1 million lasting between 6 months and 3 years. The maximum award is 500,000, and the scheme is only open to SMEs involved in markets that demand expensive leading-edge technology.

Evaluation evidence from both SMART and SPUR, at the UK level, has shown that both schemes not only offer value for money but have been successful in encouraging nationally significant technological innovation and in developing new products and processes.

In addition, significant steps have been taken by the UK Government to support the Executive's approach in this key area, notably the policy of extending tax credits. Prior to April 2000, tax relief was offered on virtually all costs incurred by businesses on research and development (R&D). Since 2000, additional R&D tax credits have been introduced at UK level. These are:

• the R&D tax credit for Small and Medium-sized Enterprises (SMEs), introduced in April 2000, which allows firms to claim an extra deduction of 50 per cent on qualifying current R&D expenditure on top of the 100 per cent relief already available;
• the R&D tax credit for large companies, introduced in April 2002, which allows companies to claim an extra deduction of 25 per cent on qualifying current R&D expenditure on top of the 100 per cent relief already available;
• the Vaccines Research Relief tax credit, scheduled to become available when State aid issues have been resolved, which allows companies to claim an extra 50 per cent of their revenue spending when calculating their pre-tax profits. This credit can be claimed on top of the 100 per cent relief already available and in addition to R&D tax credits for SMEs or large companies.

In the Pre-Budget Report of December 2003, changes were made to the definition of R&D and qualifying costs were expanded. These moves are intended to make tax credits easier to claim.

The Science Base . The Executive also recognises the importance of making more of the science base in Scotland and the strong relative position of research in Scotland by government and higher education institutions. The Executive published its Science Strategy for Scotland in August 2001, and in the 2002 Spending Review, provided an additional 20 per cent funding in real terms for university research over the following three years, in order to enhance the knowledge economy within Scotland. This reinforced the Executive's commitment to:

• maintain a strong science base,
• increase the effective exploitation of research,
• ensure enough people study science to meet the country's future needs,
• promote an awareness, appreciation and understanding of science across society; and
• ensure the effective use of scientific evidence in policy formulation and resource allocation by government.

The DTI launched a UK-wide Micro & Nanotechnology Initiative in July 2003. This initiative is designed to help industry harness the commercial opportunities offered by nanotechnology. The funding will be spent on collaborative research and a new network of micro and nanotechnology facilities. A steering group made up of Regional Development Agencies including Scottish Enterprise is currently working on the specifics of the collaborative research projects. A steering group made up from Devolved Administrations, DTI officials and others has also been set up to discuss areas of common interest.

Scotland's nanotechnology strengths, at present, are firmly based in academia, with most research programmes aligned with the academic disciplines of chemistry and chemical engineering, physics, materials science, and microelectronics, although multidisciplinary collaborations are increasing.

Commercialisation of intellectual property. The Executive also recognises the importance of increased commercialisation of intellectual property by Scottish education institutions. Through the use of patents, which addresses the market failure by which other firms can exploit research without committing resources, licensing agreements and spin out companies the Executive is keen to ensure that Scotland accrues the full economic benefits from the science and research undertaken in Scotland.

Commercialisation of research is supported by a variety of publicly funded initiatives. The devolved Scottish government's policy is to provide support at every stage along the commercialisation path to ensure full market exploitation of the research. These include the funding of Enterprise Fellowship posts by Scottish Enterprise/Royal Society of Edinburgh, the Proof of Concept Fund (delivered through Scottish Enterprise), and the Executive's SMART and SPUR schemes, the Scottish Co-Investment Fund, and the Scottish Executive's sponsorship of the UK-wide Knowledge Transfer Partnerships. The Scottish Higher Education Funding Council (SHEFC) also promotes commercialisation and has set up a Knowledge Transfer Grant scheme to ensure effective dissemination and technology transfer, which will also be rolled out across the college sector.

University- business collaboration. The Executive is also in the process of launching two additional pilot programmes (SCoRE and SEEKIT) to encourage greater collaboration between university and business R&D and to encourage dissemination of applied science to business in Scotland. Through Scottish Enterprise, the Executive has also committed 450 million over the next ten years to help establish three Intermediary Technology Institutes (ITIs). These will focus on market-based, pre-competitive research in areas of high potential. One institute will concentrate on technology and digital media, the second will focus on energy and the third institute will concentrate on life sciences. Each Institute will reflect a partnership between key global market drivers, local companies and researchers, and will commission pre-competitive research in their areas. This research, and the resulting intellectual property, will be bundled together to help build new high growth, market-focused, sustainable technology companies.

What is our principal strategic approach to Innovation and Productivity?

Executive strategy focuses primarily in two areas:

• support for the science base and
• extending opportunities for innovation.

Both of these areas are important influences on an economy's rate of growth. There are a large number of factors that have been identified as having an impact on technical progress.

Innovation and R&D are both particularly important factors, and can generate significant benefits for an economy. New knowledge, products, materials or services can speed up or simplify economic processes, which could increase productivity. Productivity can also be increased by new work practices and dissemination of existing knowledge into the wider economy. Increased productivity in turn increases output, wages, income and investment, which can in turn yield further increases in productivity. This puts the economy onto a higher growth path, which raises the quality of life for those participating in it.

As with the other key drivers of economic development, the Framework focuses on facilitating and stimulating innovation and R&D activity which would not otherwise take place. Generally, this underperformance results from identifiable failures in the market system that inhibit the behaviour of enterprises and result in systematic underinvestment in the avidities. Box 7.3 illustrates some of the key failures that Executive strategy has sought to address.

7.3 Entrepreneurship

The importance of small firms to the Scottish economy is demonstrated by the fact that of the 252,100 private-sector enterprises with establishments in Scotland in 2002, some 99 per cent were small and medium-sized enterprises (SMEs), accounting for 51 per cent of employment and 45 per cent of turnover (excluding central and local government). Moreover, between 1999 and 2002, of the 559,000 jobs created in Scotland, over 307,000 or 55 per cent were in SMEs, split roughly half in half between growing and new firms

The Framework, therefore, places the development of new firms as one of the prime drivers of growth in the Scottish economy. High rates of new firm formation are found in dynamic economies and are increasingly associated with high rates of economic growth. Entrepreneurship is the ability to seize new business opportunities. One way of exploiting new market opportunities is to start new enterprises. Data on start-ups and closures can give a good indication of the capacity of the economy in exploiting new market conditions. High entry rates demonstrate the entrepreneurial dynamism of the economy as a whole and its capacity to transform and adjust itself to new market opportunities. High exit numbers should, in principle, improve resource allocation, as resources are quickly re-allocated to those most able to exploit them.

What is our principal strategic approach?

There has been a historic problem with small business start-ups in Scotland and much research over the past decades on why this is so. Evidence points to risk aversion and a fear of failure and to difficulties in obtaining informal finance. In the past, there has also been an image problem with entrepreneurs.

Recent evidence, however, suggests that these problems are slowly improving. The Household Survey of Entrepreneurship 2003³⁴ gathered data on public perceptions of entrepreneurs, the motivations for starting a business, the main reasons people do not consider starting a business, the key influences, and current levels of enterprise activity. It also touched on related matters such as confidence and attitude to risk. The results do not provide evidence of any significant differences between the Scottish and English public with regard to attitudes towards entrepreneurship. More Scots are concerned about the fear of getting into debt and business failure, but the results indicated no differences between Scotland and England over confidence or attitudes to risk. There are some differences in current levels of enterprise activity but these probably reflect structural differences between the two economies rather than stemming from other issues such as confidence, attitudes towards risk, or access to finance.

Similarly, in the Global Entrepreneurship Monitor Scotland (GEM) 2003³⁵, a new set of attitudinal measures towards entrepreneurship was introduced. The results show little difference between Scotland and either the UK or other small modern nations, suggesting that Scotland in 2003 did not have a relatively anti-enterprise culture.

Following an evaluation ³⁶ of the Business Birth Rate Strategy that had operated since 1993, Scottish Enterprise ³⁷ introduced its New Approach to Entrepreneurship in 2002, with the key elements being:

• a new Strategic Formula for managing Scottish Enterprise Networks activities in this area, that seeks to support innovative, high-growth starts, increase the number of start-ups and increase the contribution that the education system makes to the development of entrepreneurship in Scotland;
• new targets for managing SE Network activity that provide better measures of impact and effectiveness, and a better indication of the progress that is being made;
• a new, more positive engagement with the private sector in delivering support for entrepreneurs, including a new national initiative to give thousands of new starts access to experienced entrepreneurs;
• a much stronger emphasis on supporting business start-ups by women and young people;
• a new Network-wide, high-growth start-up initiative to provide specialist support to 30 innovative, entrepreneurial start-ups;
• a higher priority to be given to entrepreneurship in careers advice in school, including new start-up support programmes targeting graduates from enterprise education programmes in universities and further education colleges.

What has happened since 1999?

Equity investment package. On 1 August 2002, the then Enterprise and Lifelong Learning Minister, Iain Gray outlined a 40m equity investment package to address the equity gap facing small businesses. The package consisted of 3 elements:

• The Sc ottish Co-Investment Fund is targeted at the current equity gap of up to 500,000 and will invest in existing and new private sector funding vehicles, over next 3-5 years. The funds will be private sector managed and driven;
• The Business Growth Fund has been redesigned as a debt and equity vehicle able to provide funds in the 20k-100k range, offering opportunities to companies to obtain investment at the lowest end of the funding range;
• The Investment Readiness Programme will provide financial support to growth businesses to assist with the costs of making their propositions investment ready - up to 50 per cent of the cost to a maximum of 10,000.

Business Gateway. In July 2003, Enterprise and Deputy First Minister, Jim Wallace launched Scottish Enterprise's Business Gateway designed to bring improved consistency and quality of support for all businesses across the Scottish Enterprise area through a range of services accessed via a single phone number and website.

The new system is a first-stop access for businesses of all sizes to all public support available both locally and nationally within the Scottish Enterprise area. The core services of business information, and advice on start-ups and business growth is backed up with targeted support including e-business, technology and innovation, skills, and finance. And there is built-in flexibility for discretionary services at a local level. The aim is to provide high quality, easily accessible services - and an end to the duplication between different public agencies.

Highlands and Islands area. The Executive has also been listening to the needs of businesses in the Highlands and Islands area. A review has been undertaken in the Highlands and Islands Enterprise network, to develop a range of actions to improve HIE products and service delivery. This will include the implementation of proposals for a single entry point (the nearest equivalent to a Business Gateway in the HIE area) to all local and national business support service through the local enterprise companies. HIE are expected to launch their new arrangements shortly.

Scottish Institute for Enterprise. The Scottish Institute for Enterprise (SIE) was established in March 2000 with pump-priming funding from the Office of Science and Technology. From August 2004, it will receive core funding plus development grant funding from the Scottish Higher Education Funding Council. Scottish Enterprise will provide project funding. SIE has a pivotal role in promoting an entrepreneurial culture in higher education. It aims to promote entrepreneurialism by providing opportunities for students and researchers to obtain necessary business and management skills and so enhance the contribution of Higher Education Institutions to growth in the economy, employment and productivity.

Enterprise in Education. There is a high-level commitment in the Partnership Agreement designed to ensure that every pupil has the opportunity to learn entrepreneurial skills at school. The Enterprise in Education Initiative was formulated by the Executive in response to the urgent need to change attitudes towards enterprise in Scotland. It is based on the premise that the best way to start making these changes is in the classroom. It is not about teaching stand-alone classes in 'enterprise skills' or expecting everyone to become an entrepreneur, but rather embedding enterprise education within the school curriculum and school life so that pupils can gain self-confidence and the ability to think creatively. Enterprise in Education will be developed to include all schools.

A detailed review was published by the Education for Work and Enterprise Review Group in Determined to Succeed - A Review of Enterprise in Education (December 2002). It contained 20 recommendations. The Executive published its response to the Report in March 2003 and invited local authorities to develop 'Enterprise in Education Plans' for their area. The plans included :

• annual enterprise activities for pupils from P1 though to S6;
• work-based vocational learning opportunities for pupils over 14; and
• hands-on experience of business and enterprise activities for pupils in every school.
• All primary, secondary and special schools were invited to develop partnership agreements with local businesses and other organisations. An initial 10 local authorities were asked to write plans for immediate implementation.

7.4 Managerial and Employee Skills

In this chapter, we consider the role of workforce skills in contributing to the performance of enterprises.

Promoting the continual enhancement of skills is a key element of FEDS. Skills are an important source of comparative advantage. ³⁸ In comparisons between the performance of manufacturing plants in the UK and in Europe, much of the explanation was attributed to skill differentials. ³⁹ Studies found that higher average levels of labour productivity in continental European plants were closely related to the greater skills and knowledge of their workforces. Lower skills levels in the UK were found to have a negative effect on labour productivity in a range of manufacturing industries, through for instance the types of machinery chosen, the ways in which machinery was modified in line with particular needs, the smoothness of machinery running or the introduction of new technology.

Increasingly, the competitive advantage of firms in the industrialised countries, such as Scotland, lies in the knowledge and skills of their workforce. These skills are both technical and "softer" skills including problem solving, communication or team work.

What has happened since 1999?

Improving information flows. The Scottish Executive with the Enterprise Networks has taken steps to improve the flow and quality of information on the labour market in Scotland. Most significant, perhaps, has been the creation of Futureskills Scotland⁴⁰, which has improved the quality and availability of labour market intelligence. The Executive has also established learndirect scotland and Careers Scotland, with the intention of improving the dissemination of information on learning opportunities and on careers. The development of the Scottish Credit and Qualification Framework should aid progression through learning and help individuals signal their abilities, and thus lead to better matching of people to jobs.

The Executive has also contributed to improvements in labour market intelligence through the development of the neighbourhood statistics projects, boosting the size of the Labour Force Survey so that, from 2004, there will be better local level information, and through commissioning a new Scottish School Leavers Survey.

Training. The primary programme to support training in industry is the Modern Apprenticeships scheme. It is aimed mainly at 16 to 19 year old employees providing training, to SVQ 3, in a wide range of occupations and is delivered through the Enterprise Networks. The number of people starting an Modern Apprenticeship rose sharply from 6,000 in 2000/1 to 16,000 in 2001/2 with the number in training in March 2003 over 27,000. Part of this expansion is associated with the scheme being extended to people aged over 25, and increasing the type of sectors being represented. This has also resulted in a greater proportion of participants being female (48 per cent in 2003 compared with 27 per cent in 1998).

In 2003, the Enterprise Networks launched four pilots of Business Learning Accounts (BLA). These pilots will test the effectiveness of support to firms with fewer than 50 employees to help them develop and implement training plans to meet the needs of the business.

As noted in chapter 6, Training for Work, which is delivered through the Enterprise Networks, is the Executive's principal employment training programme for unemployed adults. The result of the recent re-focus of the programme has been to place emphasis for funding on employer demand, with training now provided for specific job opportunities. The majority of pre-employment funding in Scotland however, comes through Jobcentre Plus' New Deal programmes. The Executive works in close partnership with Jobcentre Plus to ensure that programmes and initiatives meet employers' skills needs.

What is our principal strategic approach?

In chapter 6.4, the Executive's strategic approach to lifelong learning was set out, highlighting the rationale and strategy towards enhancing the skills of the workforce. A successful enterprise also depends on having managers who have the skills, knowledge and insights to make the decisions necessary to retain the dynamic competitiveness of their enterprises. Decisions to invest, to undertake R&D, to innovate, to recruit and to develop the skills of their employees are but some of the critical areas in which high quality management is essential. The Executive's concern is thus for both the skills of manager and their workforces.

The Executive's approach to maximising the contribution of education and training to economic development is focussed not on attempting to match supply and demand - since it can not anticipate the demands of firms - but to improve the workings of the labour market, so that it is able to bring about efficient matching. The objective is to establish a labour market where supply can respond rapidly to changes in demand, and where the labour force is flexible and capable of learning new skills and adjusting to changing demands. Creating such a labour market requires a market for training that is also responsive.

For the labour force, it is important to raise individual skills to a level at which employees and employers can build and thus learn new skills. That means having good basic and intermediate skills and the core skills such as communication, team work and problem solving. This is mostly achieved through appropriate parenting and the education system, but also through training programmes for those who leave school early or who fall out of employment.

The responsiveness of learning providers to meeting skills needs is key to achieving this strategy and the Executive will use the legislation for the merger of the FE and HE Funding Councils to ensure that the new body has a statutory role in co-ordinating supply to ensure that it responds appropriately to future skills needs.

For those who are unemployed, Jobcentre Plus and the Enterprise Networks provide relevant pre-employment training. The Welfare to Work Planning Group chaired by the Executive provides a strategic forum for partnership working between these key organisations in Scotland, as well as Careers Scotland, Inland Revenue and the Department for Work and Pensions. The Scottish Welfare to Work Task Force gives Ministers a key link with employers across a range of sectors. The group seeks to encourage the training and recruitment of those who are long-term unemployed, or otherwise disadvantaged in the labour market, such as lone parents, the disabled, ethnic minorities or ex-offenders.

A second component is to ensure that people have adequate information on which to make their decisions. Much of the work to make the labour market work efficiently and achieve a matching of workers and jobs is done through Jobcentre Plus, with which the Executive and the Enterprise Networks work closely. In addition, the Executive has a role through organisations that provide information - Futureskills Scotland, learndirect scotland, and Careers Scotland - and the qualifications infrastructure.

Management skills

The importance of managerial skills was identified above and the available evidence reinforces that concern. A report by the UK government, Managers and leaders: raising our game highlighted the part played by poor management and leadership in holding back the UK's competitiveness. Bosworth and Massini ⁴⁵ made the point that, whilst management is often considered a profession, it does not have the qualification standards of other professions. Employer Skills Survey data for England showed that 62 per cent of professionals are qualified to first degree level or better, compared to only 18 per cent of managers.

This concern is reinforced by the views of Porter and Ketels ⁴⁶ who argue that the key sources of competitive disadvantage in the UK are low investment in capital assets and innovation, competing less on unique value, and lower use of modern management techniques. They identify a range of factors driving each problem, with management weaknesses as a driver for all three.

Cultural activity

The economic benefits of culture are highly significant and the Scottish Executive's policy is to promote participation in the widest possible range of top quality cultural provision. Young people's exposure to cultural activity helps develop a range of important skills, equipping them for life and the world of work, such as self confidence, creativity and social skills. Scotland's business community is clear that those who emerge from formal education so equipped contribute to company development, growth and competitiveness. Employment in the cultural industries is another factor: the creative industries' sector has a turnover of about 5bn and contributes 4 per cent of GDP and 100,000 jobs to the economy ⁴⁷. Consumption of culture and cultural products makes a substantial contribution to the economy; the economic impact of high quality cultural infrastructure is considerable and makes Scotland an attractive place in which to live and work.

7.5 The Global Connections Strategy

Besides being embedded in the UK macro-economic framework, Scotland has important connections to the wider world through the EU, and international trade and investment flows. The Executive manages and cultivates these connections through many channels.

Scottish Development International (SDI) is a joint venture between the Scottish Executive and Scottish Enterprise, created to take the lead on delivering Scotland's international economic development effort. Key priorities include the attraction of high-value economic activity to Scotland, the internationalisation of Scottish companies and the exchange of skills, ideas, intellectual capital and networks of people.

Acknowledging the inappropriateness of competing for inward investment on costs alone, SDI seeks to attract companies that want to invest in higher value, skilled projects and in research and development. This strategy reflects a shift from focussing on traditional manufacturing-based inward investment and exporting to a new range of business partnerships built on the transfer of knowledge, technology, ideas, skills and people. This Global Connections Strategy therefore envisages these transfers working in both directions.

• Knowledge out: Taking Scottish knowledge, skills and ideas to the rest of the world - leading to more Scottish companies, organisations and academic institutes becoming active in the global economy through alliances, strategic partnerships, buying and selling technology, trading links and investment overseas.
• Knowledge in: Bringing global knowledge, skills and ideas into Scotland - leading to more research, design and development-rich inward investment that provides higher value added activities such as research, design and development, new technology partnerships and a greater involvement of international venture capital in the financing of Scottish technology company growth.
• People: Promoting Scotland as a place where people choose to pursue their careers. Networking people around the world who are committed to Scotland. Central to our efforts is Globalscot - a network of international Scots who are currently working in top positions overseas to use their expertise to help Scottish businesses grow.

An important component in the analytical base to support these activities is a knowledge of existing trade connections. The Executive published the results of Scotland's Global Connections Survey in February 2004. This was conducted on behalf of Scottish Development International and represents the most comprehensive study of Scottish exports and trading connections to date. Table 7.1 and Graph 7.1 below summarise the principal findings.

Total Scottish exports do not include any exports of oil and gas extracted from the UK continental shelf. This is consistent with the approach taken in all Scottish economic statistics in that, following European System of Accounts (ESA 95) conventions, the National Accounts determine that these cannot be allocated to any one region of the UK. When analysing this data, it is also necessary to recognise that the most significant export market for goods and services produced in Scotland - the rest of the UK - is excluded.

Table 7.1 Total Exports by Broad Industry Sector & Destination, 2002, (million)

Source: Scottish Executive, Global Connections Survey.

Graph 7.1 Scottish Exports by Industry, 2002

Source: Scottish Executive, Global Connections Survey.

7.6 The Executive's EU Strategy

The Executive Partnership for a Better Scotland (2003) underpins Ministers' strategic objectives for EU policy throughout the current Parliament. The Executive's EU Strategy was published in January 2004 and it highlights the contribution that the EU can make to the Executive's economic objectives. The main priority on which the Executive will engage is to maximise the economic benefit from Scotland's engagement with the EU. This is central to the Executive's goal of creating dynamic, enterprising and sustainable opportunities for all, and securing the long-term viability and prosperity of our rural communities. The EU's Lisbon Agenda of economic and social reform - focusing on boosting growth in the EU, creating a more effective economic area, with more and better jobs, modernising the social welfare model and fostering a knowledge-based economy - will be a crucial determining factor in delivering increased economic prosperity, trade and investment. It is critically important that the focus and range of activities of Scottish Enterprise and Scottish Development International reflect Ministers' strategic European priorities, including securing economic benefits for Scotland from EU enlargement. Equally, any Executive activity in promoting Scotland in the EU with a view to economic spin-offs should be consistent with the Global Connections Strategy which aims to achieve maximum economic benefit from Scotland's links with the rest of the world by fostering two-way flows of knowledge and investment, focusing on industry sectors where Scotland has international strengths. The long-term success of the UK Government's economic policies and the Executive's Framework for Economic Development in Scotland and Smart Successful Scotland strategies are also critical.

7.7 The Strategy for Green Jobs

The Executive is developing a Green Jobs Strategy to help Scotland benefit from the significant economic opportunities in the developing environmental industries - in particularly in the three "big wins" of renewable energy (wind, wave and tidal), recycling and resource efficiency. Scottish businesses are well placed to lead the world in grasping many of these opportunities by developing the new products and services to meet increasing international demand, and by developing businesses that make better use of resources, that reduce waste and make productive use of by-products thereby reducing production costs, increasing productivity and becoming more competitive in the market place. It is important that Scotland has the right skills within the workforce and adequate support for companies wishing to set up or expand into this area.

The way in which the Executive transacts its business can also have a significant impact on mainstreaming sustainable development principles into national economic development and the Executive aims to lead by example, and use its role as a major customer of Scottish industry to help stimulate demand for 'green' products and services.

The strategy will set out how the Executive intends to make the most of new opportunities in the developing environmental sectors, creating profits and jobs while making economic growth more sustainable. Indicators will be developed to measure the overall economic impact of this strategy and to determine how successful Scotland is in taking advantage of the opportunities in 'green' sectors.

Why are Green Jobs important to economic development in Scotland?

The first FEDS publication established an overall vision and strategy to raise the quality of life for all people in Scotland by increasing economic opportunities in both a socially and environmentally sustainable basis. The challenge is to continue to increase levels of output and employment with minimum impact on natural resources, the environment and ecosystems by using cleaner technologies.

The Green Jobs Strategy will examine in detail how we can exploit the business opportunities arising from the commitment to sustainable development. The overriding aim is to encourage the creation of jobs through the promotion of sustainable growth. The goal will be to develop new sectors of the Scottish economy which capture for Scotland a leading, global role. We want to ensure that Scotland can:

• develop cleaner technologies, products and services and market these successfully within and outside Scotland; and
• improve productivity throughout Scottish business by improving their environmental performance and resource use.

Supporting the creation of new businesses and skilled jobs helps stimulate the economy while the encouragement of businesses to adopt greener working practices also helps them to become more resource efficient and productive thereby increasing competitiveness while simultaneously helping to minimise the impact of economic activity on the environment of this country and others around the world.

What is our principal strategic approach to Green Jobs?

The Executive's strategic approach in the Green Jobs Strategy is underpinned by the recognition that market failures exist. Market imperfections, particularly externalities, weaken the ability of a market to achieve sustainable outcomes. These imperfections create incentives that can interfere in important ways with the goal of sustainable development.

When externalities occur, market prices do not reflect the full social costs of production and consumption. In these examples, Government intervention to deal with market failures is justified provided that the costs of correcting imperfections do not exceed the potential welfare benefits to be gained. The key market failures are summarised in the box below.

From the example given above, relating to the coal or gas plant, the policy of removing the externality would need to shift the private benefits towards the social costs. Taxes ( e.g. the Climate Change Levy) or subsidies could be used to change the costs of the activity to account for the negative externality. Alternative solutions may take the form of tradeable pollution permits (e.g. EU Emissions Trading Scheme) or the provision of clearly defined property rights (e.g. giving individuals ownership rights on the air). The UK government uses a range of policy instruments including taxes. However, there are limits to the use of taxes as they have potentially regressive effects. Therefore governments look for alternative ways to affect choices. The Scottish Executive does not have the power to use taxes but can change relative costs through giving support to certain activities.

What has happened since 1999?

Securing a Renewable Future was launched in March 2003. This confirmed the Executive's intention that 40 per cent of Scotland's electricity should be generated from renewable sources by 2020. Key measures announced to achieve the target included the establishment of the Forum for Renewable Energy Development Scotland (FREDS) to build a partnership between industry, academia and Government and consider how the barriers to renewable energy development in Scotland might be overcome.

The commitment to the Green Jobs Strategy in Scotland was made in A Partnership for a Better Scotland. Previous to this announcement, sustainable development has been pursued by the Scottish Executive's Scottish Energy Efficiency Office (SEEO) which is the main provider of energy efficiency and environmental advice to Scotland's business and public sectors. In addition, Sustainable Action Grants have been made available as part of a 6 million three-year Research and Sustainable Action programme which is aimed at supporting sustainable development at both a national and regional level.

The Enterprise Networks have recognised their role in cementing sustainable development within their wider economic development agenda. Scottish Enterprise has established a network of sustainable development champions, covering all areas of their operation, who work together to disseminate good practice examples across the Network. Highlands and Islands Enterprise (HIE) has identified a 'ten point plan' to help achieve its contribution to sustainable development (details can be found at http://www.hie.co.uk/sustainability-plan.htm). Through its Community Energy Unit, HIE provides support for locally based projects across the area ranging from a wind-powered community centre in Orkney to a community recycling centre on Bute.

7.8 The Regulatory Framework

The Framework recognises that regulations can have implications for the competitiveness of businesses and the economy and it supports the principle of minimising the regulatory burden where feasible. The Executive recognises that small firms often face difficulties with the cumulative burden of legislation. They can be required to spend significant time and effort ensuring compliance with regulations, for which they have little resource, which takes them away from running their businesses - a cost that they can ill afford. It is widely argued that regulation raises firms' labour costs and adds to their administrative burden. These issues may affect small firms particularly acutely given their limited administrative resources and their economic vulnerability.

What has happened since 1999?

Immediately post-devolution, the Executive made clear its commitment to maintain and develop the longstanding commitment in Scotland to this work under the banner of Improving Regulation. Parallel activities in the rest of the UK are carried out under the Better Regulation title. The Improving Regulation in Scotland unit was set up in the Executive in November 1999 to minimise the regulatory burden on businesses and particularly on small firms.

What is our principal strategic approach to Regulation?

The Executive's approach to regulation is summed up in the words of the then Minister for Enterprise and Lifelong Learning, Wendy Alexander, in her opening address to the Regulatory Summit in Glasgow on 18th June 2001 when she said:

"Governments have done and will continue to regulate. It is a fundamental role of Government to protect the vulnerable and to protect our natural heritage and regulation will always have its place. However, unnecessary, ineffective and ill-designed regulation cannot and will not be tolerated…"

Regulations impose a disproportionate burden on the smallest firms and it is usually the proprietor who has to find time to comply with them. This detracts from the job of growing and managing the business. Regulations are almost always introduced for sound reasons, but government departments should look at alternatives, only resorting to regulation as the last choice. This will help balance the need to regulate with the extra burden it inevitably imposes.

The Executive is assessing the implications for small businesses in order to minimise both the administrative and economic impact to ensure that Scotland's small businesses can thrive and achieve their full potential. When there is a need to regulate, policymaking will adhere to the principles of good regulation - proportionality, transparency, accountability, targeting and consistency. Compliance requirements will be kept as simple as possible and clear guidance will be provided for small businesses to help them to comply. Small businesses need time to understand the implications of regulations before they are enforced; where significant expenditure is required they shall, wherever possible, be given extended periods of grace.

Recognising the role of particularly small firms in the Scottish economy and wishing to ensure that regulatory regimes stay as fit for purpose as possible, the Executive has tailored its guidance about regulatory development to require consideration of the particular impact of proposals on micro-businesses, the test running of any new forms before introduction and preparation of a regulatory 'MOT' within ten years. These are particular Scottish requirements in the Regulatory Impact Assessment (RIA) process that is at the heart of the Executive's efforts to limit the impact of regulations on businesses in Scotland. These RIAs show the expected compliance costs to business of alternative courses of action, set against the benefits expected to be derived from the policy proposal. These assessments must accompany all proposals as they go to Ministers for consideration and to public consultation. When final decisions are taken, Ministers are required to attest in 'signing-off' an RIA that in their view the benefits justify the costs.

Alongside efforts to strengthen and improve the effectiveness of the RIA process, the Executive has been developing ever closer contacts with the business community so as to be aware of the issues that are seen as priorities and to guide judgements needed to support its commitment to growth in the Scottish economy. From that contact it has been clear that the quality of relationships between the business community and those regulators who enforce particular policies or controls impacting on business is viewed as crucial to the prosperity and competitiveness of Scottish business. The Improving Regulation in Scotland (IRIS) unit within the Executive will continue to minimize the regulatory burden on business and especially on small firms.

The Executive has continued the commitment to improving relations and performance in this area that was entered into by the Scottish Office in 1998 when the government-wide Enforcement Concordat was launched. This document sets out the precepts of good regulation and provides guidance on how good relationships might be developed to the mutual benefit of business and regulator. In this, the Executive continues to work closely with Cosla in light of the important regulatory functions carried out by Scottish local authorities and also with the range of agencies whose responsibilities impact significantly on the activities of the business community.

In listening to the business community, the Executive has been particularly conscious of the significance of the manufacturing sectors in Scotland and responding in March 2003 to a report about circumstances affecting that sector, the Executive acknowledged that business needs to be reassured about its commitment to Improving Regulation. With that in mind, the Executive has undertaken from 2003/4 onwards to give an annual report of its performance in Improving Regulation and the recognition given to the interests of the business community across the Executive.

It is increasingly the case that individual regulations may not necessarily be an issue but that the cumulative burden is causing difficulty to Scottish business. The Executive has a role to play in directing the development of policies which lie outwith their direct responsibility, both at Westminster and Europe - the source of the majority of red tape affecting small businesses in Scotland.

The Executive fully supports the UK Government's policy on Better Regulation, working closely with the UK Government in agreeing a UK common position. The Executive's approach founds on UK level policies in the custody of Cabinet Office. Whitehall recognise our capacity for independent action on matters relating to devolved issues but welcome the close working relations that we maintain. We take the opportunity to build on their lead activity for the benefit of the Scottish business community. Improving the regulatory environment has a part to play towards improving the competitiveness of Scottish business and the administrations at Westminster and Holyrood are working closely together to secure that aim.

The evidence base: some recent research findings

Recent research has shown that the negative effects of regulation are often limited and that there can also be potential positive effects, for example, if regulations stimulate improved disciplinary procedures or a better work-life balance. ⁴⁸

Recent research also shows that the burden of regulations is not perceived as being as great a problem in Scotland as in the rest of the UK. In September 2003 the Executive published the results of the 2002 Omnibus Survey of Small Businesses in Scotland ⁴⁹, the most comprehensive survey undertaken of small business opinion in Scotland. The Survey collected information on SME characteristics, concerns and barriers to growth.

Among the main findings of the Survey were that Scottish businesses considered the greatest obstacle to the success of their business was the economic environment which was mentioned by nearly one in five of respondents whereas regulations came fourth mentioned by 15 per cent of respondents. In contrast in the UK, regulations were ranked highest, mentioned by 20 per cent of respondents.