Enhanced Innovation Support for Creative Industries

Transcription

1 Enhanced Innovation Support for Creative Industries Final Report for Scottish Funding Council October 2017 EKOS Limited, St. George s Studios, St. George s Road, Glasgow, G3 6JA Reg Telephone: Web:

2 Direct enquiries regarding this report should be submitted to: Brian McLaren, Managing Director, EKOS Tel: P As part of our green office policy all EKOS reports are printed double sided on 100% sustainable paper

3 Contents 1. Introduction Research Questions Research Method Report Structure Issues and Constraints 4 2. Innovation and the Creative Industries Introduction Creative Industries Innovation Innovation and the Creative Industries How Innovative are the Creative Industries? Demand for Innovation Support Business Inputs The Role of Higher and Further Education Introduction People and Talent Research Knowledge Exchange Consultation Inputs Introduction Views on the Nature of Innovation in the CI 90

4 4.3 The Role of FE and HE Demand Side Issues Impacts of HE/ FE/ CI Collaboration Future Support Discussion Introduction Main Findings Towards a Strategic Framework Final Comments 109

5 1. Introduction The Creative Industries (CI) are rightly regarded as an important driver of future economic success and are, in many respects, pioneering sectors of the economy. Driven by the development and exploitation of new ideas and intellectual property, they are one of the original knowledge-based industries and continue to introduce disruptive technologies and business models in fast moving, complex and highly competitive markets. As a result, the CI rely heavily on a steady supply of creative and highly skilled workers, new ideas, and technological and creative innovation to stay ahead of the pack. The Further and Higher Education (FE/HE) sectors have an obvious and critical role to play in this, however, the innovation support landscape for the CI remains challenging. Demand for innovation support is uneven, and the diversity of the sector mitigates against one size fits all approaches. Perhaps more fundamentally, and as discussed below, the very nature of the innovation process in many CI does not fit with established thinking about innovation and how it should be supported. These challenges have been recognised by the Scottish Funding Council (SFC) and its partners, and this report is intended to provide knowledge and insights that can help inform a new approach to innovation in the CI based on effective collaboration with the FE and HE sectors. 1.1 Research Questions The research had two broad aims: 1. To review the range of activity between colleges, universities and industry to support innovation in the CI, identifying outcomes and the criteria for success, as well as assessing the comparative effectiveness and value for money of different approaches. 2. To produce clear proposals for sector-specific interventions that will stimulate creative innovation through collaborations across industry and the FE and HE sectors. 1

6 This report is one of three work packages developed as part of a new action plan for innovation support in the CI. As such, it links to and informs the other work packages, and a Summary Report draws together the key findings from across all three studies. 1.2 Research Method The study method was undertaken in five main stages, as illustrated below. Figure 1.1: Study Method Desk-Based Research Stakeholder Consultations (47) CI Business Tel. Survey (25) Stakeholder Workshop (1) Draft and Final Reporting The research gathered data and information from a number of sources, as follows: secondary data sources: o o o o data relating to FE and HE activities published by the Higher Education Statistics Agency (HESA) and Infact official economic data on the CI sector published by the Scottish Government (Growth Sector Statistics) data on innovation performance provided by the UK Community Innovation Survey data on the uptake of innovation support by the CI as provided by the Enterprise Agencies and Interface 2

7 o o existing research literature relating to innovation in the CI and evaluations of past innovation support projects input and data provided by FE and HE institutions in Scotland; and primary research: o o a telephone survey of CI businesses and organisations that have engaged in collaborative innovation projects with FE or HE institutions; input via a series of semi-structured face-to-face and telephone interviews with a wide range of stakeholders in Scotland; and 1.3 Report Structure o a Stakeholder Workshop held in Edinburgh on 22 nd August The report is structured into three main sections. In the first we discuss the CI themselves, and review what is known about the process of innovation in the creative sector, and the nature and extent of the demand for innovation support. The second section deals with the roles of FE and HE in supporting innovation in the CI, drawing both from published data and input from the primary research and consultation work, as well as previous evaluation work. The final section offers some broad conclusions and identifies areas of opportunity for further development. 3

8 1.4 Issues and Constraints It is worth highlighting some broad constraints acting on the research process and the available evidence base. Firstly, while there are numerous sources of data on HE, and to a lesser extent on FE activities, none directly address the central research question. As a result, a fully comprehensive overview of activity between colleges, universities and industry to support innovation in the CI is not available. Secondly, universities and colleges themselves do not collect detailed information on their interactions with creative businesses, and to do so would be impractical. Therefore, our attempts to gather this data met with little success. Finally, innovation in the CI is generally an under-researched and poorly understood field, and the research literature (including previous evaluation work on specific CI innovation support projects) is patchy and inconsistent. The reasons for these constraints are expanded throughout the report, but together they mitigate against the development of a comprehensive and robust evidence base against which to assess the value of collaborative activities between HE and FE and industry to support innovation in the CI. We offer further detailed comment on the implications of this in the report. 4

9 2. Innovation and the Creative Industries 2.1 Introduction This section sets the broad context for the research, and discusses what we mean by innovation both generally and within the CI, and provides an overview of the structure and characteristics of the CI sector in Scotland. 2.2 Creative Industries What are the Creative Industries? According to the Scottish Government, the CI are those which have their origin in individual creativity, skill and talent. They also include industries which have the potential to create wealth and jobs through the development, production or exploitation of intellectual property. The sector comprises 16 sub-sectors within seven cultural domains, Table 2.1. Table 2.1: Creative Industries - Domains and Sub-Sectors Cultural Domains Sub-Sectors Visual Art Advertising Architecture Crafts and Antiques Design Fashion and Textiles Visual Arts Performance Performing arts Audio-Visual Computer games Film and video Music Photography Radio and TV Books and Press Writing and publishing Heritage Libraries and archives Digital Industries Software and electronic publishing Cultural Education Cultural education Source: Scottish Government 5

10 2.2.2 Economic Performance of Scotland s Creative Industries This section provides an overview of the CI sector in Scotland, and examines how the sector has been changing over the last five years. Key points to note include 1 : there has been strong growth in the number of businesses in the CI sector, increasing 34% between 2011 and 2016, driven by a large increase in the number of micro businesses (less than 10 employees); CI employment increased 3% between 2010 and 2015, although this disguises much more varied sub-sectoral changes. Half of the 16 subsectors underwent a decline in employment over this time. However, this was offset by large increases in those employed in the design, advertising and software/electronic publishing sub-sectors, explaining the overall increase; turnover (+33%), Gross Value Added (GVA) (+35%) and GVA per head of employment (+40%) all increased between 2009 and 2014, largely attributable to strong performance in the software/electronic publishing subsector, which accounts for more than two-fifths of both GVA and turnover; and Gross Domestic Product (GDP) output from the CI sector has now returned to close to its pre-recession level, after a steep decline between 2007 and Small and Micro Businesses Dominate The majority of the recent growth in the number of creative businesses in Scotland has been amongst sole traders and micro businesses which together make up 93% of the CI sector. 1 Scottish Government Growth Sector Statistics Database. 6

11 Table 2.2: Registered Enterprises by Number of Employees, Number of Employees Change % Change Zero employees 6,605 9,120 2,515 38% 1-4 employees 3,310 4,435 1,125 34% 5-9 employees % employees % employees % employees % 250+ employees % Total 11,490 15,420 3,930 34% Source: Scottish Government Growth Sector Statistics Database Virtually all CI businesses in Scotland are owned in the UK and registered in Scotland (98%), with 1% registered in the rest of the UK and 1% owned abroad. However, this does not reflect the employment breakdown around one-fifth of employment in the CI sector in Scotland is with foreign owned businesses, with a further 8% in businesses registered in the rest of the UK. Figure 2.1: Ownership (2016) 100% 98% 80% 72% 60% 40% 20% 0% Owned in UK - registered in Scotland 8% 1% 1% Owned in UK - registered in RUK 20% Owned abroad Number of businesses Employment Source: Scottish Government Growth Sector Statistics Database The proportion of employment with foreign owned businesses has grown in recent years, up from 16% in

12 Please note, figures in this section do not represent a complete picture of business activity, as only businesses that are registered for VAT and/or operate a PAYE scheme are included in the Growth Sector figures. This therefore excludes around half of all firms excluded unregistered firms contribute an estimated 2% of economic activity in Scotland. 2 Employment Overall, employment in the CI sector in Scotland increased by 3% between 2010 and 2015 (Table 2.3) far lower than the growth in the number of businesses, suggesting fragmentation. Table 2.3: Employment Change by Sub-Sector, Sub-Sector % Total Employment (2015) Change % Change Advertising 3,500 5,200 7% 1,700 49% Architecture 6,200 6,000 8% % Visual Art 1,200 1,200 2% 0 0% Crafts and Antiques 1,900 2,100 3% % Fashion and Textiles 2,500 2,300 3% % Design 4,500 5,800 8% 1,300 29% Performing Arts 4,800 4,900 7% 100 2% Music % % Photography % % Film and Video 3,300 2,800 4% % Computer Games 200* 1,100 1% % Radio and TV 3,600 3,000 4% % Writing and Publishing 15,300 9,500 13% -5,800-38% Libraries and Archives 4,500 3,500 5% -1,000-22% Software/Electronic Publishing 18,700 24,900 34% 6,200 33% Cultural Education % 0 0% Total 71,900 73, % 1,800 3% *Although the computer games sector has undergone rapid growth, this figure is recognised as an underestimate, meaning the scale of the increase will not be as large as shown. Source: Scottish Government Growth Sector Statistics Database. The CI sector is highly concentrated in certain areas of Scotland, with almost half of all jobs in the two largest cities: 28% in Glasgow (20,400 jobs) and 21% in Edinburgh (15,200). The next largest share is Aberdeen with 6% (4,500 jobs). 2 Scottish Government: Growth Sector Statistics Database User Note, via link. 8

13 Recovery from Recession On virtually all measures, the CI in Scotland appear to be recovering from the impacts of the financial crisis around Business numbers and employment have grown and GVA in the CI sector increased by more than one-third (35%) between 2009 and GVA per employee has also increased suggesting greater productivity in the sector, exports have risen and so have average earnings. While design has shown strong growth, the majority of the increase in performance can be attributed to growth in software and electronic publishing, while areas such as traditional publishing continue to decline. Therefore, the CI remains a diverse sector of mixed fortunes. It is also important to note the strong growth in the number of sole traders and micro businesses, reinforcing the well-established pattern in the sector. 2.3 Innovation What is Innovation? In recent years, thinking on innovation has broadened from previously dominant linear models of science commercialisation and research and development (R&D), to a more nuanced understanding of how innovation takes place across the economy. There is now a wider recognition of the different inputs to innovation, and of its outputs. Innovation is no longer considered to be solely focussed on technology development, but now encompasses business models, new services, different means of engaging with customers and novel organisational practices, to name but a few. Consider, for example, the following from Nesta 3 : Innovation is not the same as invention, creativity or entrepreneurship, though it overlaps with these. Broadly speaking, innovation is the process by which new ideas turn into practical value in the world: new products, services, or ways of doing things. It is not just about new technologies or about scientific R&D. Nesta s innovation index shows that R&D represents only 11% of what businesses invest in innovation. Budget air travel is just as much an innovation as a new aircraft. Apple 3 Plan 1: The case for innovation-led growth, Nesta, 2012 (Page 19). 9

14 is a very innovative company, but spends relatively little on R&D. Its strength is in design, and the integration and adaptation of others inventions. The retail sector can be very innovative, but does almost no R&D. Most technological innovations depend on complementary non-technological innovations to achieve commercial success, as anyone who owned an early, pre ipod MP3 player, with a clunky interface, limited ability to buy music and unattractive design can verify. Previous models considered the primary inputs to innovation to be some form of scientific or technological knowledge (however early in its development), often from the public research base. However, evidence from business surveys such as the UK Innovation Survey suggests that firms are more likely to seek new ideas and insights from customers, peers, suppliers and end users than they are from universities and the scientific research base. This is a more open model of innovation, and one that recognises innovation in the application of knowledge as well as its creation. One of the persistent challenges here is that many of the primary measures of innovation (for example, Business Expenditure on Research and Development - BERD) fail to capture this broader range of innovation activity. Worse still, over reliance on these measures perpetuates this somewhat narrower view of what constitutes innovation, and continues to influence policy. Increasing BERD is thus taken as a proxy for increasing innovation when in fact it is only increasing one input to innovation. This changing thinking, while hardly new 4, is clearly reflected in the recent literature and policy discourse in Scotland (e.g. Scotland Can Do 5 ), suggesting a broadening of policy thinking around innovation and how it might be encouraged Scotland s Innovation Challenge Scotland s challenges in improving its innovation performance are well documented. Put simply, not enough Scottish businesses innovate and those that do spend too little on innovation activity (at least as measured by BERD). It is also worth noting 4 See for example The Scottish Innovation System: Actors, Roles and Actions, Roper et al, Scotland Can Do Report, Scottish Government,

15 that a significant proportion of the BERD that does take place in Scotland is attributable to non-scottish owned companies 6. However, Scotland has acknowledged strength in its HE research base. Technopolis EU benchmarking report (2015) 7 notes that Scotland s level of HE R&D spend (HERD) - 0.8% compared to 0.5% EU average - contrasts with its weak share of sales from new to market or new to firm innovations (42% compared to 52% EU). The science base is strong, but industry capacity to innovate is not. Monitoring of knowledge exchange (KE) income to universities (a government indicator for improving knowledge transfer from university research) shows that there has been a slight improvement over the last decade, but the pattern is quite volatile 8. The reasons for this largely reflect the industrial structure in Scotland, and include the following barriers to increased innovation identified by Technopolis 9 in a report commissioned by Scottish Enterprise into Scotland s innovation proposition: weak absorptive capacity in firms; low share of employment in high tech/science and technology sectors; low entrepreneurial propensity; lack of large private investors for venture capital; lack of managerial and sales skills in (high tech) firms; and weak networks. As well as a lack of commercial skills in high tech (particularly in university spin-outs) noted above and elsewhere e.g. Brown and Mason (2012), Coad and Reid (2012) 10 suggest that wider workforce skills are also an important factor: The evidence suggests that the barriers to innovation in smaller Scottish firms are more due to in-house capabilities to undertake R&D and innovation (non- 6 In 2015, 41.1% of BERD expenditure was undertaken by Scottish-owned businesses. Scottish-owned businesses account for a larger share of R&D employment in Scotland at 52.1%. Source: BERD Scotland, National statistics publication for Scotland, Scotland's Innovation Proposition, Technopolis, Scottish Funding Council's Knowledge Transfer Metrics Return, Scotland s innovation proposition, Technopolis, The role of technology and technology-based firms in economic development, Coad and Reid, Technopolis,

16 technological) and that this may be linked to an overemphasis on higher as opposed to vocational education". They further suggest that problems translating university research into economic performance relates to a schism between the share of highly skilled workers and intermediate skilled workers, due, it is suggested, to underinvestment in schooling of the broader population and opportunities for lifelong learning at lower skill levels. The Employer Skills Survey has also shown that Scotland s skills challenges are impacting on business productivity and growth, and limiting innovation capacity (e.g. inability of staff to solve complex problems) 11. There are, however, some encouraging signs. The latest available UK Innovation Survey data shows some growth in the number of innovation active businesses in Scotland, although performance continues to lag behind the UK as a whole 12. Table 2.4: Strengths and weaknesses in Scotland s innovation performance Strengths 50.4% of enterprises are innovation active in Scotland, this is an increase of 7.1 percentage points from the 2013 survey. The share of innovation active enterprises in Scotland has increased by 18.8 percentage points since the 2011 survey compared to a 17.6 percentage point increase for the UK. Enterprises in the 'manufacturing of food, clothing, wood, paper, publish & print' sector are most likely to be innovation active. Businesses based in remote rural areas are more likely to be innovation active. 42.4% of broader innovators reported having co-operation arrangements. This is an increase of 11.4 percentage points since the 2013 survey. Source: UK Innovation Survey 2015, Scotland analysis Weaknesses The percentage of innovation active enterprises in Scotland is 2.6 percentage points lower than the UK average of 53.0 per cent. This is an increase from a gap of 1.1% in the 2013 survey and represents further widening. Enterprises in accessible rural areas are least likely to be innovation active. The Growing Value Scotland Task Force report (first phase of research) 13 showed that businesses were more innovation active than official data suggests, because innovation covers a wider set of actions than picked up through, for example R&D tax credits that are used to compile data. 11 Employer Skills Survey 2015, Scotland Slide Pack UKCES, Progress on SE s Innovation Response: SE Board Discussion Paper, Growing the value of R&D in Scotland, Harris, R

17 Furthermore, it was argued the highly service based structure of the Scottish economy also tends to underplay innovation, where businesses tend not to recognise (and report) traditional definitions of (technology-based) innovation Innovation and the Creative Industries While general theories of innovation have developed in recent years and there is now much wider recognition of innovation as more than technological invention, innovation in the CI remains under-researched and poorly understood. This is a function of both the often complex ways in which innovation processes operate in the sector, and of the challenges in measuring these kinds of innovation using existing methods and metrics. It is also a reflection of the diversity of the CI and the difficulty in identifying universally applicable models. Innovation and creativity are often confused, but are not the same (as highlighted in the Nesta quote above). While creativity is the process through which something new is developed, innovation is dependent on the realisation or application of new ideas. Moreover, just because something is developed through a creative process (e.g. a new design, film or performance) does not mean that it is innovative The Nature of Innovation in the Creative Industries Our review suggests that there are three broad types of innovation important to the CI: 1. Technology Innovation 2. Business Model Innovation 3. Creative ( Aesthetic or Soft ) Innovation These are not mutually exclusive categories, and successful innovation in the sector typically involves all three areas. Indeed, it is the interaction between these types of innovation that partly defines the CI, and this multi-disciplinary focus is the primary driver of innovation in the sector. 14 Growing Value Scotland, Phase 2 Report, Biggar Economics,

18 Technology Technology based innovation in the CI is both widespread and complex. Technology is both a driver of and a focus for, innovation activity in the CI. Consider, for example, the computer games sector. Successive innovations in console technology have driven demand for ever more sophisticated games content, and the roll out of broadband has helped to create a mass market in online gaming, demanding in turn new creative responses to imagine evolving games worlds and new business models to generate revenue. Similarly, the rapid adoption of smartphones developed a new gaming market, again with new creative and commercial demands. Many games developers are also involved in innovation related to the development of tools and technologies that support and enhance the content development process. In some cases, this can constitute significant innovation in the development process, creating games development engines and tools with wider commercial potential through, for example, licensing. As game technology matures and becomes more user-friendly, the application of games has also broadened in scope, and technologies developed are now being used for serious games, visualization, training, medical and military simulation applications. Importantly, this example illustrates that innovation is rarely about technology alone. User engagement is critical and new technologies often only take-off when they become part of wider industry or social practice (Leadbetter, 2008). In other parts of the CI, technology innovation is less about the development of new technologies and more about their adoption or application, often in novel ways. Major technological advances such as the Internet of Things, and augmented and virtual reality are of considerable interest to digital and creative producers seeking new market opportunities. In advertising, new digital technologies allow targeted and highly tailored messages to specific customer segments across a range of platforms and channels (social media in particular) and the performing and visual arts are increasingly involved in experimenting with digitisation of content and with digital distribution (e.g. the NT Live Project). In these examples, technology is being adopted rather than created, but is combined with creative processes to constitute innovation. 14

19 Business Models In an increasingly digital environment, the development of commercially successful business models is a major focus for innovation. Previously established business models are breaking down. Online news has significantly damaged newspaper sales, and channel fragmentation is exerting growing pressure on advertising revenues in broadcasting. Everyone is looking for new business models, with a focus on three main areas: new channels; new markets; and rights and new revenue streams. The proliferation of media channels and the rise of the internet create opportunities for new forms of distribution and exploitation of creative content. This includes the very rapid rise of streaming video on demand (SVOD) services like Netflix and Amazon Prime, and subscription music services like Spotify. In the broadcasting environment, there are many examples of cross-platform content, from Big Brother to the BBC s globally respected online provision. Within the supply sector, this has meant that previously traditional television producers have had to develop new competencies in digital production to provide cross-media content. The CI have also been active in exploring new opportunities in diverse market segments from health and education to security and transport. The diversification of games from its traditional territory in entertainment into learning is a good example of this. There is also increasing use of 3D visualisation technologies to enhance the visitor experience in heritage and tourism, as well as in healthcare and defence settings. Broader trends are also evident, including: the collection and use of rich data and big data to inform content development and business models, and creative techniques for data visualisation; 15

20 outsourcing and off-shoring, particularly in games development where aspects of the development process can be outsourced to specialist providers in lower cost locations such as Eastern Europe and Asia; online distribution models offering opportunities to dis-intermediate the supply chain, allowing producers to self-publish content thereby retaining a larger share of revenues; collaborative production, particularly in film and television, where financial models demand mixed funding solutions; and advertising content finding its way into new forms of media (e.g. ad-funded programmes, advertising content in computer games, social media), creating opportunities for innovative business models. Some of these new business models depend on the ownership, protection and exploitation of intellectual property (IP) rights typically in the form of copyright rather than patents - meaning both that companies are seeking to structure new kinds of deals on and to develop the kinds of content with the potential for ongoing exploitation. Organisational structures are also a feature as companies move away from more traditional employee based arrangements, towards more fluid networks of freelancers as a means of managing costs and extending the range of skills and expertise available. Creative Innovation Innovation is typically conceived as functional, scientific or technological, resulting in a new or improved product (or process). As we have argued, innovation in the CI is also increasingly about business models, new channels and diversification. However, a third and crucial element of innovation must also be considered that of creative, or aesthetic or soft innovation. In a report for Nesta, Professor Paul Stoneman examined soft innovation within and beyond the CI. Stoneman defined soft innovation as that which reflects changes of an aesthetic nature. This would include new books, recorded music and video games but also a new clothing line or brand for a food product Stoneman, P. (2009) Soft Innovation: Towards a more complete picture of innovative change, NESTA. 16

21 This is very much the territory of the CI. Indeed, creative or soft innovation is at the very heart of the sector, and Stoneman s study, unsurprisingly, found very high rates of soft innovation within the creative sector. Such innovations are considered significant only if they are of economic importance a hit film, for example, or a successful new brand. However, for parts of the creative economy, economic importance will not always be immediately apparent and indeed will not always be the primary driver. Practicebased research in the performing and visual arts, for example, can and does lead to new understanding about both the creative process and new forms of expression. Few in the sector would consider these important only if they led directly to an increase in sales, but their value will be in the knowledge that is created and subsequently disseminated, even if it is not codified. Much of the debate around innovation is framed in economic terms which assumes an economic motivation for innovation activity. This is not always the case in the CI in which the creation of social and cultural value are also drivers. This is recognised in Creative Scotland s Creative Industries Strategy which promotes the notion of a triple bottom line for the industries in which cultural and social value are also acknowledged drivers alongside economic value. This raises the issue of how to measure innovation in the creative sector. Certainly, traditional measures of R&D and innovation fail to capture adequately soft innovation. R&D and patent measures focus on science and technology innovation, and do not take account of aesthetic innovation. One implication of this may be that innovation in the creative sector may be under-estimated and under-reported The Process of Innovation in the Creative Industries In order to better understand the role of FE and HE in supporting innovation in the creative economy, it is important also to consider the processes through which creative, technological and business model innovation takes place. The research literature suggests three key characteristics of the innovation process in the CI: 1. Open 17

22 2. Collaborative 3. Iterative The rise of the importance of open innovation for businesses acknowledges the requirement for organisations to collaborate beyond their own internal organisational boundaries 16. The central idea is that companies which look outside their internal resources have better access to ideas, expertise and technology than those which rely solely on in-house support. Organisations must develop and leverage open relationships with customers, competitors and suppliers to successfully compete. An open innovation strategy deliberately brings in people from outside the organisation and from the closed circle of specialists and experts into the innovation process itself, and drawing on ideas from users, suppliers and competitors 17 (Dames et al, 2008). With open innovation increasingly seen as a crucial step in encouraging organisations to use external knowledge to accelerate internal innovation, encouraging appropriate behaviours is vital. Consequently, effective innovation policy must be, first and foremost, a skills and human resources policy. Open innovation is, arguably, a new term for a long established practice, and one that is particularly evident in the creative economy. For example, Nesta s research into hidden innovation in the CI identified a marked shift toward networked forms of working in the product design industry, along with greater use of electronic means of supporting client engagement and user-led innovation in computer games 18. The small scale of creative enterprise, the natural (creative) tendency to look for multiple perspectives, and the growing demands of fast changing technology make open models of innovation a necessary part of business processes in the CI. Models of open and collaborative innovation are pervasive across the CI through coproduction and network-based activity. Similarly, collaboration takes place across CI supply chains and beyond with co-operation with suppliers and customers becoming increasingly important. A previous econometric analysis of supply chain innovation in the CI found evidence that businesses which acquire information and knowledge 16 Chesbrough, H. (2006) Open Innovation: The New Imperative for Creating and Profiting from Technology, Boston, MA: Harvard Business School Press. 17 Dames, M., Robson, D., Smith, M. and Tumilty, T. (2008) Beyond Open Innovation: Leveraging Social Capital Proceedings of FITCE Congress, London, Sept Miles, I. and Green, L. (2008).Hidden Innovation in the Creative Industries, NESTA. 18

23 from suppliers and customers in the CI are likely to enjoy greater returns in terms of improved product range and quality 19. However, research also suggests that innovation processes are not widely recognised within the CI and, in particular, are rarely recognised as discrete activities with dedicated resources 18. Even in more technology-based sectors such as games, formal R&D is limited, and failure to account for the resources allocated to R&D work (e.g. on new tools) has in the past restricted the industry s access to R&D tax credits 20. The difficulty here is in the demarcation of innovation-related processes from core creative production activities. Innovation is more often integrated into the business of creative enterprises, and can be an ongoing feature of projects (e.g. the revision of tools throughout the development of a game or repackaging broadcast content for online or mobile platforms). This short discussion highlights some important features of innovation in the CI: technology innovation is necessary but not sufficient innovation in business models and creative practice are also crucial. This means that valuable input could come from a very wide range of disciplines from creative arts to computing science, business and social sciences; innovation is open, collaborative and iterative, working through networks and up and down supply chains in ways that are neither well-researched nor understood; and traditional definitions and measures of R&D and innovation do not capture the range and scope of these activities. The first of these points is particularly important to the current study. If academic input to the CI could come from such a wide range of disciplines, it will be very difficult to capture the totality of this activity. It is also worth noting that while the focus of the current study is on innovation within the CI, a large and growing proportion of creative workers are employed in organisations not within the CI sector as defined by the Scottish Government. 19 Bakshi, H. and McVittie, E. (2009) Creative supply-chain linkages and innovation: do the creative industries stimulate innovation in the wider economy? in Innovation: Management, Policy and Practice. 20 While many of the more established developers have started to structure their accounts in a way that allows access to R&D tax credits, there is more work to be done to ensure wider uptake. Research at present is unclear as to whether R&D tax credits are merely rewarding activity already underway i.e. Innovative Active Firms, rather than incentivising new activity. 19

24 Creative input is a key driver, and exists along the value chain in many industries, from the input of design at the product development stage through to the use of branding, media, and increasingly social media to mediate customer relationships. These are value adding functions which again underline the importance of multidisciplinary innovation: the (embedded) creative workforce is involved in addressing the interaction, translation and synthesis of knowledge between and among scientific/technical, creative/cultural and business/entrepreneurial disciplines, and also between different sub-disciplines within each the processes of knowledge transfer and synthesis for innovation require a range of high level capabilities underpinned by transdisciplinarity, social networking capability and creative entrepreneurship How Innovative are the Creative Industries? The primary indicator used as a proxy for innovation activity is BERD, which we consider to be an insufficient measure, as it captures only one of the inputs to innovation (investment). It is also based on the concept of R&D, which is typically defined within a scientific framework. For example, in providing guidance for the criteria for R&D tax relief, HMRC states: Science is the systematic study of the nature and behaviour of the physical and material universe. Work in the arts, humanities and social sciences, including economics, is not science for the purposes of these Guidelines 22. The concept of R&D (and its measurement) is therefore insufficient for assessing innovation in the CI. The other main source of information on firms innovation activities is the UK Innovation Survey (UKIS). The UKIS is conducted every two years and is part of the wider EU Community Innovation Survey (CIS). The most recent dataset is for 2015, and provides quantitative and qualitative information on innovation in private sector firms. Its coverage of innovation activities is broader than R&D, and gathers data on wider innovation processes within firms and collaborative activities. 21 Creative Work Beyond the Creative Industries: Innovation, Employment and Education, Hearn, G et al, Quoted in defining R&D for the creative industries: Policy Briefing, Nesta, March

25 UK Innovation Survey Previous analyses of UKIS data suggest that the CI are innovative relative to the wider economy 18. Our own analysis of the most recent data confirms this broad conclusion, albeit with some caveats. The sampling sectors include only some areas of the CI (as defined by the Scottish and UK Governments), and we do not have access to the raw datasets. As the sectoral definitions are not in-line with those as defined by the Scottish Government, a best fit with the CI was used. Just over half of businesses (54%) in the UK in 2015 are described as Broader Innovators (up 15% from 2012), which are defined as businesses engaged in at least one of the following: the introduction of a new or significantly improved product (good or service) or process; engagement in innovation projects not yet complete or abandoned; new and significantly improved forms of organisation, business structures or practices, and marketing concepts or strategies; and/or activities in areas such as internal research and development, training, acquisition of external knowledge or machinery and equipment linked to innovation activities. On this measure, the full range of Scottish businesses are slightly less likely to be innovative than their UK counterparts, while (UK) creative businesses are more likely to be innovative and have seen a larger increase since 2012, despite starting from a higher base, Table

26 Table 2.5: Proportion of Businesses which are Broader Innovators Change All UK Businesses 39% 54% +15% Scottish Businesses 35% 51% +16% Creative Businesses 45% 65% +20% Source: UKIS Of these broader innovators, 41% in 2012 and 40% in 2015 reported having cooperation arrangements with other parties (suggesting external models), however, there is no regional or sectoral breakdown of this. Therefore, we do not know the percentage of Broader Innovators that have co-operative arrangements either for Scotland or for UK creative businesses. Of the Broader Innovators that do have co-operative arrangements, Scottish firms are less likely to engage with universities than UK firms, due to a decline of 3% since Creative firms are much more likely to engage with universities than other businesses, and this has increased since 2012, Table 2.6. Table 2.6: Broader Innovators, Collaborative Firms Only Engaging with HEIs Change All UK Businesses 20% 21% +1% Scottish Businesses 20% 17% -3% Creative Businesses 29% 33% +4% Source: UKIS Despite the limitations in the data, the UKIS information does suggest that creative businesses are more likely to be involved in broader innovation activities than the average for the economy as a whole. It does not, however, tell us whether or not this holds true in Scotland. BERD The issues with the utility of BERD notwithstanding, some data is available for the CI in Scotland. Businesses in the CI sector in Scotland spent a total of 139m on enterprise R&D in 2015, which accounts for 16% of all Scottish spending on enterprise R&D. This is higher than the sector s percentage share of employment or GVA, suggesting a higher than average level of BERD. CI BERD spending has been on an upwards trend over the last five years. 22

27 Figure 2.2: Business Enterprise Research and Development Spending, Millions % 16% 14% 12% 10% 8% 6% 4% 2% 0% CI R&D Spend % All Scottish R&D spend Source: Scottish Government Growth Sector Statistics Database Taken as a less than satisfactory proxy measure, the BERD data also suggest higher than average levels of innovation within the CI in Scotland. What this does not tell us is what parts of the CI are the largest BERD spenders. In light of the R&D definition, it is likely that the BERD spend will be concentrated in the high technology areas, in particular in digital industries (e.g. software and games). 2.6 Demand for Innovation Support In order to examine the level of demand for innovation support from the CI in Scotland, we sought data from three main providers of support, namely Interface, Scottish Enterprise (SE), and Highlands and Islands Enterprise (HIE). Scottish Enterprise SE provided data relating to their support for, and spending within, the CIs for the financial years 2011/12 to 2016/17, and this is broken down under the following categories/funding streams: Company Spend - comprises SE's spend on general company growth within the CI (e.g. general business support cost and any grants provided to a CI company); 23

28 Project Spend - spending on specific projects aimed at supporting the CI, (e.g. spending on consultant research, marketing and events, and is not broken down by sub-sector); Innovation - covers spend specifically focused on innovation projects; Regional Selective Assistance (RSA) - a discretionary grant available for businesses who want to develop a project in Scotland that will create/safeguard jobs and contribute to the country s economy; Scottish Investment Bank - the investment arm of SE, working in partnership with HIE. The SIB provides co-investment for Scottish SMEs with high growth potential, using a shared risk model alongside private sector investors. Investments start from 10,000, with total deal sizes of up to 10 million; and SMART: SCOTLAND - provides grants to SMEs based in Scotland for technical feasibility studies and R&D projects that have a commercial goal. Figure 2.3: SE Creative Industries Spend (2011/ /17) Millions Company spend Innovation Project spend RSA SIB SMART At a sub-sector level, SE support for the CI has been dominated by digital media (in line with their agreed priorities), followed by games. Together, these represent 54% of all spend. 24

29 2.3m 1.1m 0.9m 0.9m 0.7m 0.6m 0.2m 35k 27k Figure 2.4: Spending by CI Sub-Sector (2011/ /17) m m Millions m 4.2m 0 Company spend Innovation Project spend RSA SIB SMART NB: Contractors: hired contractors that deliver business development support Key points to note regarding SE spend on CI include: digital media represents 85% ( 4.3m) of all SMART funding; digital media ( 10.2m, 50%) and games ( 6m, 30%) dominate SIB investments; and outwith digital media and games, innovation support spending is comparatively low. This is unsurprising, given that SE has an explicit priority on supporting digital media within the wider CI. It is also consistent with the view that CI-related BERD is likely driven by the digital industries. Highlands and Islands Enterprise HIE provides innovation support to companies in the region through a number of schemes covering support to develop initial innovative ideas, through to R&D support and advice on IP management and commercialisation. 25

30 The first of these, the Innovate Your Business (IYB) Programme, provides grants of up to 15,000 for projects that aim to turn new ideas into commercial opportunities. The IYB Programme consists of: Innovation Enquiry Service an initial call with an advisor; Advanced Support a further two days of support; Follow up - following project completion to see whether further support is required; Innovation Clinics and Workshops; Grant Advice; and Financial support of up to 15, % of IYB awards in 2016/ 2017 were to the CI the top sector, followed by food and drink and business services at 19% each. Interface Interface provides a free and impartial service that matches businesses (all sectors, including CI) to skills and academic expertise within Scotland s universities and research institutions. This is with a view to stimulating innovation and encouraging companies to consider academic support to help solve business challenges. Interface s Business Engagement team works with an individual business to better understand the organisation and its needs. It then translates the brief (identifies the challenge) and brokers the connection to the range of expertise and services within Scotland s universities and research facilities. The focus is on one-to-one collaboration between an individual business and a single academic partner. Demand for Interface Business Engagement Service A total of 399 enquiries (a project proposal) were issued to HEIs by the Business Engagement team on behalf of CI businesses in Scotland over the period August 2011 to February The CI sub-sectors (as per Interface categorisation) that made the most enquiries were: This represents 18% of all enquires issued by the Interface Business Engagement teams across all sectors. 23 This figure excludes approaches that were made to Interface that not did result in a specification being agreed and then issued to HEIs. 26

31 software and computer services, interactive leisure software (38%); and designer fashion, crafts, arts and antiques (24%). The 399 CI enquiries led to 184 collaborative projects brokered through Interface (46% conversation rate). Figure 2.5: Interface Enquiries Issued and Academic Collaborations Initiated Aug 11/ Jul 12 Aug 12/ Jul 13 Aug 13/ Jul 14 Aug 14/ Jul 15 Aug 15/ Jul16 Aug 16/ Feb 17 Enquiries Issued to HEIs Business Engagement Projects There has been wide HE engagement in Interface supported CI business-academic collaborative projects to support innovation (16 HEIs involved), albeit engagement has varied by institution. 27

32 Figure 2.6: Business Engagement Projects by HEI (2011/12 to 2016/17) Edinburgh Napier University University of Strathclyde University of Edinburgh University of West of Scotland University of Dundee Heriot Watt University University of Glasgow Abertay University Glasgow Caledonian University University of Aberdeen Glasgow School of Art University of Stirling University of St Andrews Robert Gordon University Joint - Edinburgh & Stirling University of the Highlands and Islands Queen Margaret University N=184 In line with CI business enquires to Interface, collaborative projects with Scottish HEIs largely involved software and computer services, interactive leisure software companies (46%), and designer fashion, crafts, arts and antiques companies (20%), Figure 2.7. Figure 2.7: Business Engagement Enquiries and Projects by CI Sub-sector 50% 45% 40% 38% 46% 35% 30% 25% 20% 15% 10% 24% 20% 18% 9% 15% 12% 11% 9% 5% 0% Software & Computer Services, Interactive Leisure Software Designer Fashion, Crafts, Arts and Antiques Film, TV & Radio, Performing Arts, Music Architecture & Design Advertising & Publishing & Media Enquiries Issued to HEIs Academia-Business Projects N=399 (enquiries) and 184 (projects) 28

33 Academic and CI business collaborative projects have taken a range of forms, with the most common being: Innovation Voucher or Follow On Innovation Voucher (48%) predominantly the former; student assignments, placements or work-based learning (27%); and consultancy (8%). Table 2.7 illustrates CI company profiles: 152 individual companies were involved in the 184 collaborative projects with HEIs some companies have been involved in between two and five collaborative projects; all but one is a Scottish company, and all but one is an SME (the other was a Community Interest Company); and almost half of companies are based in Edinburgh/Lothian or Glasgow (i.e. the main business and population centres). Table 2.7: Location of CI Companies Involved in Academic Collaborations Enterprise Area Number % Edinburgh and Lothian 41 27% Glasgow 33 22% Highlands and Islands 22 14% Tayside 12 8% Ayrshire 11 7% Lanarkshire 6 4% Dumfries and Galloway 6 4% Borders 5 3% Forth Valley 4 3% Fife 4 3% Renfrewshire 4 3% Aberdeenshire 3 2% UK (Outside Scotland) 1 1% Total % Innovation Vouchers and Follow on Innovation Vouchers A total of 203 SFC Innovation Vouchers and Follow On Innovation Vouchers for CI businesses have been administered by Interface, including a mix of those: 29