• Ian Ritchie : Business AM

Stuck in the high-tech second division

Scotland will remain a branch factory economy until research and development is a priority

AS WE ENTER THE 21st century it is as good a time as any to take the measure of Scotland; how effectively are we actually performing in the new economy? So this is an excellent subject for the inquiry currently being conducted by the Enterprise and Lifelong Learning committee of the Scottish Parliament.

We have all heard the term ‘Silicon Glen’, and in fact there are a couple of dozen other ‘Silicon Wannabees’ dotted around the world, each claiming to be a key hotspot for new technology development. However when you look at these various competitive technology locations it is clear that Scotland is not in the Premier League, or even the First Division of such centres. We are, regrettably, stuck in the Second Division with not much hope of promotion.

It is not obvious why this should be so. We have an excellent supply of high quality technology graduates, proportionately higher than our major competitors; we have a modern, stable, open, economy; we use the English language, the language of technology business; and we have a strong indigenous financial industry with around £300Bn of funds under management. Yes, we are small, but size isn’t important as evidenced by the relative success of countries such as Finland and Taiwan. Maybe taxation and general economic policy is significant, as evidenced by the development of high-technology companies in Ireland, attracted by R&D-friendly taxes. But it is the experience of Cambridge, which enjoys the same fiscal and economic climate as Scotland, which might be the most relevant comparator.

Cambridge has seen a phenomenal growth in high-technology business. During the last decade 1,200 new technology companies have been formed, creating 35,000 direct jobs, as well as the 1,500 or so additional jobs in technology consultancies. By comparison somewhere around 500 new companies have been created in Scotland over the same period, employing 5,000 or so jobs.

Of the top 15 companies in Cambridge, 13 are high technology start-ups led by world-class players such as ARM Holdings and Autonomy. The Scottish League table is somewhat different. Of the top ten companies in Scotland, no less than seven of them are the result of privatisations in power, transportation, and telecommunications. Two banks and a brewery make up the ten. Although not supported by the Scottish electorate at the time, the Thatcher privatisations have largely been responsible for the modern Scottish economy, including internationally competitive players such as Scottish Power.

If we look at the Scottish Top Ten from another angle we discover that eight out of the ten are ‘industrial revolution’ companies (transportation, power, banks and the brewery) with only the two telecommunications companies (Thus and Atlantic) competing fully in the new economy of today. For all the talk about the young high-tech entrepreneurs such as Kevin Dorren and Chris van der Kuyl, no indigenous Scottish company has remotely approached the scale of the likes of Cambridge’s ARM Holdings, which despite its relative youth briefly overtook Scottish Power (our largest company) in market capitalisation earlier this year.

One might wonder about whether Government intervention is a significant factor but if that is the case then the Cambridge/Scotland comparison is a particularly puzzling one. For Scotland seems to have actively supported its high-tech community with a variety of schemes and programmes, and has successfully attracted major world-class technology companies such as Sun and Motorola to locate major centres here. By contrast, Cambridge Council is very cool towards its new economy, complaining about traffic problems and ‘over-heating’, and using planning restraints to frustrate the expansion ambitions of Cambridge businesses.

Maybe there is a particular lesson here, because the major instrument of Government support in Scotland over the last 20 years has been by the use of Regional Development Funds (RDF). These grants, part of a European Union programme, concentrate particularly on the amount of capital investment that is to be made, and the number of jobs, which will be created, and they are usually awarded in competition with other countries. The result of this is that much of growth of Silicon Glen has been so-called ‘screwdriver-plants’: manufacturing facilities with little local research and development responsibility. Although presumably not intended as such, these grants are not easy to obtain by indigenous Scottish companies, and discriminate against high-quality R&D where the jobs are fewer, and the capital investment lower. In contrast to this, support programmes in countries such as Singapore now discriminate against manufacturing projects and in favour of specific investment in research and corporate decision-making.

The result of two decades of RDFs is now evident. Scotland is overwhelmingly a branch factory economy, where key product development and marketing issues are often made elsewhere.

It’s time for a fresh look.

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