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Time to solve the Scottish problem

Scottish football fanA lack of innovation is starting to put Scotland’s economic prosperity – in or out of the union – at risk. Professor Paul Tracey argues it’s time for entrepreneurs to step up to the plate.

Professor Paul Tracey

Professor Paul Tracey

They are the “vital six per cent”: high growth firms, both new entrepreneurial ventures and established companies, which play a critical role in successful economies. These are the firms that drive gains in productivity, national competitiveness, and ultimately living standards.

But Scotland just doesn’t have enough of them. The country has a long history of innovation and a proud tradition of making and building things – it was at the forefront of science, engineering and commerce during the Industrial Revolution after all – but in recent years, Scotland’s innovation performance has been less distinguished.

Not enough of its companies are truly global in scale and its “business base” – the number of firms per head of population – is relatively small. Moreover, survey data indicate that Scottish entrepreneurs tend to be less internationally oriented, and their ambitions for growth are markedly below the average of entrepreneurs in the UK as a whole. The upshot, as noted in a recent report by MIT’s Regional Entrepreneurship Acceleration Program, is that Scotland “is not meeting its potential in delivering high-growth businesses“.

The role of government

Scotland’s future economic prosperity, inside or outside of the union, depends on its ability to address this problem: it needs to nurture more high growth ventures if the country is to close the gap in income and living standards with the most economically successful nations. But what effect would separation have on entrepreneurship and innovation in Scotland?

There is increasing recognition that Scotland’s, and indeed the UK’s, tepid innovation performance is rooted in part in successive UK governments’ misunderstanding of the role of the state in driving entrepreneurship and high growth firms. In years gone by, the UK had an “industrial policy” in which government played a key role in shaping national economic priorities.

Such an approach to managing the economy has become decidedly unfashionable, intimately associated in the minds of many with the apparent waste and under-performance of the post war period. Indeed, since the 1980s the UK government has played a limited role by international standards in shaping innovation outcomes. This is evidenced, for example, by its anaemic investment in research and development – 18th in the world on a per capita basis.

The folly of such an approach is articulated powerfully in Mariana Mazzucato’s recent book on The Entrepreneurial State. Through detailed analysis of a range of technologies and industries she shows how bold investments by governments drive entrepreneurship in many of the most important economic sectors. This is particularly apparent in the USA, the most innovative country in the world, where the state “has been engaged on a massive scale in entrepreneurial risk taking to spur innovation”.

Meanwhile, UK policy makers continue to adhere slavishly to the dogma that innovation is most effective when private sector led, and that intervention by the state retards rather than supports wealth creation. A radical change of direction in UK innovation policy seems unlikely, certainly under the present coalition: current attempts to build an innovation strategy, and to “re-balance” economic activity away from London and the South East, are unconvincing and the resources allocated simply inadequate.

The impact of independence

So might an independent Scotland build a more interventionist policy infrastructure that promotes entrepreneurship and supports innovative firms? The rhetoric of the Scottish government, which advocates a “growth sectors approach” to economic development, certainly suggests so. It claims “Independence would provide much greater opportunities to promote business growth and to shape the long-term development of Scotland’s business base in a manner which delivers greater stability and supports re-industrialisation.”

Yet, as far as I can tell, there are no concrete policy proposals or overarching vision for fulfilling this aspiration. Indeed, the Scottish government’s recent policy document – Scotland Can Do: Becoming a World Leading Entrepreneurial and Innovative Nation – is essentially without content: a series of superficial case studies and cherry picked claims about entrepreneurship in Scotland. It inspires little confidence that a future SNP-led administration would be able to be able to deliver on its economic objectives post independence.

Like so many of the key issues at the heart of the independence debate, then, the prospects for entrepreneurship and innovation in a separate Scotland are uncertain. On the one hand, there is lingering dissatisfaction with the status quo among many Scots and a sense that their country is falling short of its economic potential within the union. On the other hand, nationalists offer a utopian economic vision for Scotland post-independence, but no intellectually coherent strategy or policy architecture for how this can be achieved.

With such paucity of ambition on both sides, it is little wonder many Scots are struggling to make up their minds about how to vote in the impending referendum.