1. Assessment and recommendations

Through its 19 universities, 7 national innovation centres, government programmes for entrepreneurs, such as Business Gateway and Interface, and sector-specific innovation programmes, Scotland provides a robust support system for innovators based on creating opportunities for growth, in many cases, through collaboration. In addition to traditional innovation support channels, there is also a strong commitment from three regional economic development agencies in Scotland – Highlands and Islands Enterprise, South of Scotland Enterprise and Scottish Enterprise – to provide support to entrepreneurs and companies looking to innovate across rural regions of Scotland.

With European Union (EU) structural funds for innovation no longer available since the United Kingdom’s departure from the union, and with limited fiscal space for governments in the wake of recent economic shocks and slow economic growth, identifying approaches to untap the full potential of rural innovation, in particular, to drive and manage key transitions, has never been more important.

Rural areas are critical for the future of Scotland. In addition to the valuable heritage that they offer, they provide an important economic contribution to Scotland. In the two decades leading up to the COVID-19 crisis, productivity in rural Scotland grew faster than in Scotland as a whole. Furthermore, rural areas of Scotland have had remarkable achievements over the past decade, both in terms of economic growth, social innovation and progress in climate mitigation. For example, some rural areas in Scotland, in particular those that are accessible,1 are still growing in terms of population, despite the fact that many rural areas in OECD countries on average are currently going through demographic decline and ageing. Second, women are highly active in the labour force as compared to men in non-metropolitan areas and experienced substantial gains in all areas of Scotland over the past decade. Even though further engagement of women in the labour force, such as through entrepreneurship, can be further supported, progress for women in Scotland has outpaced many OECD countries.

National productivity growth was driven by rural areas of Scotland in the last decade prior to COVID-19, in particular because of a higher innovation absorption capacity of rural firms. Nevertheless, barriers to growth of rural firms continue to exist and increasing innovation will require supporting entrepreneurs to create and scale up new businesses and products.

While the innovation environment for Scotland is supported by initiatives to link firms with research institutes and universities, support for innovation and addressing new challenges in rural and non-metropolitan communities could be further re-enforced. Finally, social innovation – that is innovation that goes beyond the logic of profit to provide societal benefits – is a strong tool that can be used to address some of the challenges of rural areas, in particular when it comes to delivering basic and community services where market failures and public service provision are more difficult to ensure in practice.

Employment in rural Scotland is relatively high as compared to OECD countries. In 2020, the average employment rate2 was 73% in Scotland, as compared to 68% in OECD countries. Based on the OECD classification of small administrative regions (Territorial Level 3, TL3) 3, in remote rural regions of Scotland, the employment rate is even higher, at 78%, and remains 10 percentage points higher than remote rural regions of OECD countries (68%). In addition, employment rates in rural areas of Scotland were higher than those in metropolitan regions of Scotland (73%).

In Scotland, 36% of the population live in non-metropolitan regions, above the equivalent average in OECD countries (30%). Rural areas in Scotland host about a third of firms but employ only 15% of labour, suggesting that some shares of rural residents are likely to work in non-rural areas, despite high employment rates overall. In addition to creating new opportunities in rural areas, activating older workers in rural areas to participate in the labour force through reskilling and upskilling programmes is an important part of a holistic approach to the revitalisation of rural areas.

From 2010 to 2020, the share of the population in non-metropolitan regions of Scotland fell slightly from 36.1% to 35.7% (0.4 percentage points), less than the average fall in OECD countries (31.2% to 30.3%, or 0.9 percentage points).

However, this masks significant differences across types of rural areas. For example, from 2010 to 2020, the share of the population in accessible rural areas grew by 0.84 percentage points, compared to a fall in remote rural areas (-0.18 percentage points). The growth in accessible rural areas was higher even than growth in large urban areas (0.54 percentage points).

The population decline in remote rural areas can bring challenges to the way public services are delivered and firms operate in rural areas. This will necessitate targeting interventions at the right scale to deliver services in places with low density including jointly with nearby communities, making use of digital solutions and increased flexibility for how firms, social partners and non-governmental organisations deliver services to the community.

In Scotland, there are lower shares of young working-age and higher shares of older working-age individuals in non-metropolitan regions. In these regions in 2020, the share of young working-age individuals (15-29 years of age) in the total working-age population stood at 16%, substantially lower than the share of older working-age (50-64 years of age) individuals, which stood at 22%. In contrast, in OECD countries, the share of young working-age individuals in non-metropolitan regions is higher than in Scotland (18.5% in OECD countries versus 16% in Scotland) and the share of older working-age individuals is lower than in Scotland (19% in OECD countries versus 22% in Scotland).

The difference in the structure of age groups across regions also implies that a different focus may be needed for upskilling programmes. For example, engaging youth at an earlier stage to hone potential entrepreneurs is critical in rural areas because of the importance of creating new opportunities for giving young workers incentives to invest in their communities. On the other hand, upskilling and continuous education programmes need to be better targeted to work with older working-age individuals whether they are employed or self-employed. For older workers, the critical role of employers as potential actors through which individuals gain and refresh skills is particularly important, making a skills strategy that is in line with local opportunities and skillsets critical for rural innovation.

From 2012 to 2020, some indicators of progress for gender equality in Scotland outperformed progress in OECD countries. In 2020, the ratio of women to men in the active labour force in Scotland was 0.97, or close to parity. It was above the average for the United Kingdom as a whole (0.91) and the OECD average (0.82). Although women’s employment rate in non-metropolitan regions in Scotland (71%) was lower than men’s employment rate (75%) in 2020, the gap was smaller than the OECD average in non-metropolitan regions (63% for women compared to 73% for men).

Despite these positive figures, challenges remain to fully activate the female potential in rural economic activities in rural Scotland. Only a fifth of Scottish firms in rural areas are led by women. This share is similar to those present in metropolitan regions. However, within rural regions, the share of women-led firms in accessible rural areas stood at 24%, which was lower than the share of firms run by women in small remote small towns (34%). In terms of the wage gap, over a third of Scottish firms across all areas of Scotland consider that implementing transparency in gender wage gaps is an important factor in increasing inclusiveness for women in the workforce, although this share is highest in urban areas (36%) and smaller in accessible rural (34%) and in remote rural areas (34%). In some cases, challenges for women are due to social norms and access to family services and, in other cases, to financial barriers, strengths and weaknesses of business models of female-led firms and practices in networking.

Productivity, strongly linked to innovation, has grown in Scotland over the past two decades. Labour productivity, defined as the ratio of gross domestic product (GDP) per employee, grew by 1.7% per annum on average in small Scottish (TL3) regions, above the United Kingdom average of small (TL3) regions of 1.4% between 2002-20. The rate of growth was even higher in Scottish non-metropolitan regions (1.83%). When compared internationally, non-metropolitan regions in Scotland also grew faster than TL3 regions across the OECD (1.34%) and in non-metropolitan OECD TL3 regions (1.39%). Within the sub-type of non-metropolitan regions, non-metropolitan close to metropolitan regions in Scotland recorded faster growth rates (2.2%) than non-metropolitan remote (1.62%) regions.

Despite these positive trends, labour productivity gains in rural Scotland occurred in parallel to employment losses. Indeed, employment on average in non-metropolitan small (TL3) regions of Scotland contracted by 0.23% annually on average against a gain of 0.39% in metropolitan regions. In fact, only 3 non-metropolitan regions from Scotland recorded positive employment growth rates over 2002-20, these concern notably 2 non-metropolitan regions close to medium-sized cities, Perth and Kinross, and Stirling (0.21%), East Ayrshire and North Ayrshire mainland (0.06%) and 1 region in a non-metropolitan remote rural area, that includes Caithness and Sutherland, and Ross and Cromarty (0.41%).

During the pre-COVID-19 period, almost all change in Scottish productivity growth from 2010 to 2018 was driven by accessible and remote rural areas. Using data from the UK Business Register matched with data from the UK Innovation Survey, the report finds that remote regions accounted for 81.6% of the increase in productivity, with accessible rural regions contributing 25%. Urban areas, on the other hand, made, on average, a negative contribution (-6.6%).

Much of the growth in productivity was due to the upgrading of resources in remote rural areas, suggesting that the “catching-up” effect was a strong factor of productivity growth in the region. Over the 2010-18 period, two-thirds of productivity growth in Scotland was due to more efficient use of resources within rural remote areas, associated with higher innovation absorption.

Despite the progress, there are still differences (inequality) between firms that make large gains in productivity and those that make fewer gains in productivity in rural areas. The Gini indicator of productivity in remote rural firms grew from 0.54 to 0.70 from 2010 to 2018 and became more unequally skewed at the tail ends of the productivity distribution. Although inequalities between firms’ levels of productivity in remote rural areas were still lower in 2018 than in accessible rural areas (0.81) and urban areas in the rest of Scotland (0.86), they still grew. Unlike in remote rural areas, differences (inequalities) in firm-level productivity fell in other areas (from 0.82 in accessible rural areas and 0.89 in urban areas in 2010).

Firm inequality in terms of productivity is driven by the high share of aggregate productivity captured by the most productive firms. This is particularly strong in accessible rural areas and urban areas. In 2018, the top 10% of firms in urban areas of Scotland were 35 times more productive than the bottom 10% of firms. In remote rural areas, the top 10% of firms were 30 times more productive than those in the bottom 10% of the productivity distribution, which is significantly higher than the comparable figure in 2010 (10 times more productive). In accessible rural areas, the top 10% of firms were 37 times more productive than the bottom 10% in 2018.

Whilst geography can create challenges for overall levels of innovation in rural areas, a large part of this is reflected in differences in the structure of firms (sector, size, age and other firm characteristics) and place-based challenges to entrepreneurship and growth (including, for example, access to finance, skills, knowledge, networks and markets). Once we account for these facts, firms in Scottish rural areas report being innovative as often as firms in Scottish metropolitan areas. Unlocking higher innovation in Scottish rural areas, therefore, requires policies to overcome barriers to new firm formation and scaling up.

Indeed, large firms and young firms tend to innovate more, regardless of whether they are located in a rural or urban area. The oldest firms (30 or more years) are least likely to innovate4 whereas large firms (250 or more employees) have the highest probability to innovate. With the exception of Edinburgh,5 location does not appear to play a strong role in determining whether a firm participates in formal innovation.

Accessible rural and remote rural regions tend to have a higher share of old firms than those in urban areas. Old firms (30 or more years) represent 20-25% of all firms in rural areas, whereas they only account for 5-8% of urban areas in 2018.

Likewise, accessible rural and remote rural areas have the lowest shares of new firms, between 0 to 1 years of age (7%). In urban areas in the rest of Scotland, the share of new firms is 14%. Urban areas also tend to have higher shares of young firms (2-5 years of operation) than rural areas (37% versus 21%).

In the OECD, the average share of firms with less than 10 workers was 98.5% between 2000 and 2018. On average across OECD countries, shares in metropolitan and non-metropolitan regions were similar. However, 15 out of 23 OECD countries (with available data) had higher shares of firms with fewer than 10 workers in non-metropolitan areas.

In Scotland, most firms in rural areas are also small. Small firms with 1-10 employees (i.e. excluding sole-proprietary firms) were the most common type of firm in Scotland in 2022, accounting for 85% of all employer firms in Scotland. In rural areas, firms with fewer than 10 employees accounted for a larger share of firms than those in urban areas. For example, in rural remote areas, 91% of firms had fewer than 10 employees, while in accessible areas, 90% of firms had fewer than 10 employees. In comparison, only 82% of firms had fewer than 10 employees in urban areas.

The challenge of the different structures of rural firms is a double-edged sword when it comes to employment opportunities. As such, policies to support rural innovations should consider how to support smaller firms to scale up, encourage new entrepreneurs to undertake risks related to starting a new firm and support owners of older firms to go through a transition.

Older firms in rural areas account for disproportionately smaller shares of workers than in urban areas. For example, in accessible rural areas, firms that are more than 30 years old account for 20% of all firms and 38% of all workers, employing 11 workers per firm on average, while those in remote and very remote rural areas account for close to a quarter of all firms and around a third of all workers, employing 7 workers per firm on average. In comparison, older firms in urban areas accounting for only 5-8% of the economy employ between 38% and 28% of the labour force respectively. They employ, on average, 71 employees per firm.

Likewise, while smaller firms are the most common form of firms in the rural economy, they tend to employ only 45% of workers in rural remote areas and 27% in accessible rural areas. In comparison, firms with less than 10 employees employ a lower share of the labour force in urban areas where they account for 15% of total labour in large urban areas and 18% of total labour in other urban areas.

Creating linkages to other countries can be an important source of growth, both for attracting investment from foreign sources and for attaining linkages to foreign export markets. Firms that have foreign owners, or who can access export markets, are more likely to employ more individuals than those that are owned only by national entrepreneurs. This can be a particular challenge for the large share of relatively smaller and older firms that may be either family-run or operate in traditional methods.

In 2018, foreign firms (non-UK) had a small share of the Scottish economy yet tended to employ more workers per firm. In urban areas, they accounted for approximately 7% of firms in 2018. In non-urban areas, they seldom account for more than 5% of firms. Foreign firms in urban areas employed 2 to 5 times more workers than foreign firms in rural areas in 2018.6 Furthermore, in urban areas of Scotland, foreign firms employ 18 times more workers per firm than national firms, whereas they employ only 10 times more workers than national firms in rural areas of Scotland.

Firms that can reach export markets have increased access to customers, supply chains and ideas for innovation. As a result of the increase in the effective size of the market, such firms also have accrued pressures to innovate and compete. In 2018, small and medium-sized enterprise (SME) exporters were twice as likely as SME non-exporters to have innovated in the previous three years. While 59% of international exports are accounted for by large companies (more than 250 employees), small (less than 50) and medium (50-249) companies held 20% and 21% respectively. Even though there are some support mechanisms to support inward investment and access to export markets, a recent evaluation noted that firms from rural areas found it more costly and difficult to engage with Scottish Development International advisers and participate in export promotion events.

Among European countries and regions, Scotland is in the top 20% and classified as a strong innovator according to the European Innovation Scoreboard. Scotland’s innovation performance is fostered by its strengths in skills, scientific publications and collaborations with SMEs. It benefits from the national programme supporting linkages between firms (and in particular SMEs) to researchers through a programme called Interface. It also benefits from a dedicated one-stop shop for supporting entrepreneurs in the life cycle of the firm as well as conducting research and development (R&D) (Findmybusiness.com). Furthermore, rural innovators are supported by the three enterprise agencies that provide guidance in attaining national programmes and deliver more tailored regional services, in co-ordination with Skills Development Scotland and the Scottish Funding Council.

Despite this strong performance in firm-led innovation, they still face challenges in business product and process innovation, design and trademark applications as well as bringing the sale of innovative products to markets. Nonetheless, Scotland’s offer of support for bringing SMEs in contact with universities is exemplary and an important contributor to the advantages of Scottish firms.

Scotland is not only strong in firm or company-led innovation but also in other forms of innovation, such as social innovation. Social innovation is a prominent form of innovation in Scotland. It takes place, especially in its rural areas, where social innovators and entrepreneurs have long benefitted from a legal status and where there is a dense fabric of social entrepreneurs and actors working in traditional and non-traditional sectors. One example of how social innovators have led the path of innovation is through land use. The 2003 Land Reform Scotland Act created a statutory framework of public access rights to most land and provided the enabling legislation for community land purchases. This legislative reform promoted experimentation of land use, encouraged community development-led opportunities, enabled the provision of land for social housing and supported the development of community-owned renewable energy solutions. The reform has also allowed communities to benefit from the financial contributions that renewable energy projects, such as wind turbines, brought them, especially since 2011 under the Community and Renewable Energy Scheme.

Scotland is an early and rapid adopter of innovations linked to renewable energy solutions. Scotland only narrowly missed its 100% renewable energies target, with 98.8% of gross electricity consumption produced by renewable energy sources in 2020. Furthermore, Scotland is also a leader in reducing production-based greenhouse gas (GHG) emissions. It has consistently reduced its production-based GHG emissions, faster than the average across OECD regions. Since 2000, total GHG emissions have fallen relatively consistently, from 97.513 metric tons of CO2 (MtCO2e) equivalent emissions to 71.009 in 2018, or 27%. In comparison, GHG emissions in OECD countries only fell by only 6%.

Progress in the reduction of production-based emissions is slower in non-metropolitan regions of Scotland. In 2018, the national share of emissions in non-metropolitan areas of Scotland was almost double that of metropolitan areas, with 38% from metropolitan regions and 62% from non-metropolitan regions (44.22 MtCO2e in non-metropolitan regions, and 26.79 MtCO2e in metropolitan regions) and that share has increased by 4 percentage points since 2010. Contrary to Scotland, on average across OECD countries and in the United Kingdom, the majority of emissions tend to come from metropolitan regions, rather than non-metropolitan regions, with close to two-thirds of GHG emissions from metropolitan areas and one-third from non-metropolitan areas. Over the same period, the share of overall emissions in non-metropolitan areas of OECD countries grew by 1%. In Scotland, much of this challenge in GHG emissions is due to relatively higher GHG emissions in non-metropolitan areas from the transport, industry (manufacturing) and agricultural sectors, which are similar drivers of high emissions in other OECD countries.

Rural accessible areas and those that are more remote have a different set of societal and economic challenges that are tied to unequal growth within geographies and unequal access to government services. As such, a specific lens for understanding challenges and opportunities for accessible rural and remote rural areas is critical in ensuring that direct resources (government services for innovation and entrepreneurship) or indirect resources (access to markets, digital infrastructure, etc.) can adequately support innovation and entrepreneurship in these areas.

Innovation, whether driven with a social purpose, through the public sector or for profit only, also plays an important role in building the appropriate framework conditions for entrepreneurs, for example by improving the provision of services. For example, while basic social services (such as access to schools and hospitals) are often prioritised, accessing specialised social care can be a different challenge in rural remote versus accessible rural areas. While there may be healthcare centres in accessible rural areas, often these centres do not offer targeted services for elderly care, childcare and, in particular, services to address challenges related to remoteness and isolation. In many rural remote areas, access to such specialised services has been a long-time challenge that social actors have anticipated and worked on addressing actively. As such, in remote areas, enabling social and public actors to innovate in new forms of delivery (either by building scale through community collaborations or using multi-purpose facilities, for example) is an important mechanism to use. In contrast, in accessible rural areas that face fewer challenges of scale but lower levels of dependency on social actors, building partnerships with the private sector for innovation in services delivery could be a more viable form of delivery of services.

Other forms of innovation, outside of the science and technology type of innovation, exist and are more likely to be tied to different opportunities in rural areas. Where delivery of public services becomes expensive or is limited due to accessibility, social innovation and public sector innovation take a larger role. The Scottish Government has made a long-term commitment to encourage social entrepreneurship and social innovation across Scotland.

Rural areas of Scotland are unique in their early recognition of social innovation as a key factor for improving well-being standards in rural areas, which is increasingly important as ageing trends create more demand for care services. Scotland enjoys a high level of civic engagement, high levels of volunteering and solidarity, as compared to other OECD countries. This is particularly true in remote rural areas, where remoteness and geography drive the development of principles of solidarity. With an active fabric of social enterprises, community, civil society, a large number of charities as well as public and private actors, it benefits from a richness of ideas and abilities to manage and implement social innovations. Specifically, in rural areas, senior citizens, charities and social enterprises tend to be very active. One particularity of Scotland is the active involvement of community development trusts as vehicles and enablers of a large range of community-led and place-based initiatives.

Scotland is well-practised in mechanisms to support rural communities through social innovation, as they work with a long history of social actors and institutions and a substantial social fabric. Amongst people living in rural areas, 71% report a feeling of belonging to their immediate neighbourhood, compared with people living in urban areas (63%). They also seem to have more personal contact and conversations with their neighbours in rural areas (82%) compared with people living in urban areas (72%). Recent research across the Highlands and Islands from 2022 has found that residents are proud of living in island (94%) and remote (92%) rural areas.

Scotland has a lively and thriving market-based system for innovation with strong support from the public sector that helps reduce barriers for entrepreneurs without stifling incentives. While the new Scottish Innovation Strategy7, released in June of 2023, identified regional differences, most policies and programmes for innovation do not take into consideration how such policies and programmes reach individuals and firms in rural areas. They can do so, however, by delivering services through partnerships, with the three enterprise agencies (Highlands and Islands Enterprise, Scottish Enterprise and South of Scotland Enterprise). The strategy is well intentioned but its implications towards rural places will need to be further evaluated. For example, the programme of action on innovation clusters prioritises science and technology sectors focusing on the energy transition, health and life sciences, data and digital technologies and advanced manufacturing. This choice of sectors excludes the relatively larger share of service and agricultural sector firms in rural areas and it still measures success using patents and R&D spending, rather than also complementing it with the rate of new companies in rural areas. Scotland’s delivery of innovation and entrepreneurial support through the three enterprise agencies that cover different regions of Scotland and its co-ordination with Skills Development Scotland and Scotland Funding Council suggests that there are already strong mechanisms in place through which programmes and policies for innovation could be regionalised and targeted to rural places.

Innovation and entrepreneurship in rural areas of Scotland are increasingly a focus of policy makers in the Scottish Government. This is evident through the policies and strategies, such as the National Strategy for Economic Transformation (NSET), used to support rural innovation. Regional development partners and national-level agencies work to deliver on these policies and strategies, with the three enterprise agencies responsible for delivering direct place-based support for entrepreneurs. For Scotland as a whole, there are other initiatives providing support through indirect mechanisms that are equally critical to rural innovation. The Scottish Government’s policy initiatives demonstrate the importance of collaborative partnerships and horizontal and vertical co-ordination efforts across different agencies, reinforcing a regionalised vision of support for entrepreneurs.

Despite the work on direct and indirect mechanisms for supporting innovators, there are still challenges in delivering ancillary services to rural areas related to access to services for the well-being of communities. These include services such as childcare and elderly care services, housing and physical and digital infrastructure, that help build well-being for rural communities that are increasingly important. In Scotland, the proliferation of social innovation and entrepreneurship is being used as a tool to address challenges for rural places that otherwise are left unserved.

Building on the findings of the report, this section outlines key recommendations that may be implemented to support further development of innovation and entrepreneurship in rural areas.

While there are support mechanisms to support rural innovators and entrepreneurs in Scotland, it is important to understand how innovation differs in rural areas to better serve rural populations. Rural innovators in Scotland build on local resources and skills, innovate in traditional sectors and are supported by a dense fabric of social entrepreneurs. To encourage rural entrepreneurial ecosystems, it is necessary to go beyond formal innovation systems and develop policies that address the main source of innovation input, such as skills and labour in rural areas and the different challenges faced by rural remote and accessible rural areas. This includes framing programmes to support entrepreneurs and new firms that conduct innovation fit for rural areas,8 either through the elaboration of programmes to implement the new national innovation strategy or through regional development plans.

Support for innovators in rural areas must extend beyond traditional science and technology-based innovation. Whether through in the new national innovation strategy or regional development plans, recommendations to develop a more comprehensive approach to innovation in rural communities include:

  • Expanding entrepreneurial ecosystems that focus on rural well-being through the development of innovative services, in partnership with rural stakeholders and social innovators. When feasible, the initiatives should take into consideration challenges for women, as compared to men, and support the establishment of business hubs, incubators and accelerators that target specifically rural areas. To do so, the three enterprise agencies should:

    • Increase support to activities conducted by initiatives such as the Kyle of Sutherland9 Development Trust or the Beith Community Development Trust, that prioritise rural well-being through new services focused on a grouping of rural communities. This is particularly relevant in remote rural areas where initiatives should be conducted in collaboration with a group of different community actors that can help build scale.

    • Consider the scope to direct resources towards encouraging rural stakeholders, including social innovators, to develop entrepreneurial hubs, maker spaces or fab labs10 that give pre-start-up support and access to mentors to help youth develop leadership and entrepreneurial skills. An example of this can be found in Pine Bluff, Arkansas, where a public-private partnership led by community organisations encourages the development of new firms by youth. Building such initiatives in partnership with local actors managing multi-activity centres will be particularly important in remote places. In accessible rural areas, such initiatives should build on the availability of different services provided by indirect support providers, such as local businesses and schools.

    • Build more local partnerships with secondary schools to provide programmes for entrepreneurial training, including challenge-based programmes. An example of this can be found in Columbiana, Ohio, where local companies regularly work with secondary schools to provide challenge-based programmes in entrepreneurial courses, among other initiatives.

    • Increase support for women entrepreneurs, for example, the women’s entrepreneurship programmes that were newly instated in the programme of work of the South of Scotland Enterprise, or other initiatives to support access to finance, networking and understanding risk strategies of women entrepreneurs in rural areas such as the W-Power project in Shetland in the sparsely populated Northern and Arctic communities. Understanding how work-life support mechanisms may impact women differently in remote and accessible rural areas will be critical to the strategy for supporting women’s entrepreneurship.

Accessing the right skillset for innovation is a key challenge for rural entrepreneurs. Recommendations to leverage existing regional work carried out by the three enterprise development agencies, Skills Development Scotland, rural universities and vocational training centres are as follows:

  • Focus more on increasing vocational education and training systems that provide incentives and joint apprenticeship opportunities for employers of micro, small and medium-sized firms, encourage distributed learning and ensure local stakeholders are actively involved to upgrade skills for younger and older workers by:

    • Expanding incentives such as financial and in-kind contributions that take into account the type of firms and activities taking place in rural areas, such as direct subsidies or grants, criteria-based subsidies or indirect subsidies as in the case of Austria’s system that provides financial incentives for employers offering apprenticeships and training alliance model to support training in companies.

    • Providing more joint apprenticeship opportunities for training initiatives to achieve economies of scale between several different remote rural communities, such as through collective training organisations in Australia, Norway and Switzerland.

    • Encouraging distributed learning to overcome barriers of distance for apprenticeship schemes in rural and remote areas, such as the practices for delivering vocational education and training programmes as with the University of the Highlands and Islands system.

    • Ensure that local stakeholders (firms, educational and vocational training institutions) are included in regular consultation initiatives involving local and distance skills service offers. In cases where rural places are going through structural change, ensure that the skills development, enterprise agency and stakeholders are notified at an early stage to quickly address skills needs.

The vision of innovation and entrepreneurship in rural areas recognises that innovation can take many forms. Although some entrepreneurial support programmes (like cluster programmes) tend to favour high-technology innovation, they are not exclusively focused on it. Given the importance in the north and the south of rural Scotland of small firms, policies designed to support these regions should reflect the unique needs of these businesses, encouraging entrepreneurship and focusing on innovation from small, family-run and older firms. To this end, the following section outlines recommendations to support the development of innovation rural areas.

The changing structure of rural firms requires understanding how to deliver more targeted programmes and initiatives for rural areas. This can be done by promoting new ways of delivering public services and encouraging experimentation among entrepreneurs, for example through pilots and encouraging experimentation in the private sector. The three enterprise agencies and other supporting entities and actors should:

  • Promote innovative ways of delivering public services, including more bottom-up approaches, providing the space to create new ideas and opportunities to address challenges for rural entrepreneurs. One example is the Rural Leaders programme which sought to overcome the challenges of networking. Another is the IMPACT30 programme designed to develop young (under 35) business leaders of the future in the Highlands and Islands. And a third example includes bottom-up initiatives as seen in the case of the Regional Innovation System (RIS) in Switzerland.

  • Encourage experimentation among entrepreneurs through dedicated programmes, such as Innosuisse’s Innovation Booster programme. Such initiatives could include the exploration of innovation sandboxes, which intend to ensure overarching regulatory objectives, in co-ordination with the UK government, increasing allowances for living labs and encouraging challenge-based innovation competitions with a strong local buy-in.

Rural areas have a larger share of SMEs and social entrepreneurs than urban areas. To better target support for such firms, more focus should be placed on the user-friendliness of one-stop shops, tailoring policies for the type of firms in rural areas and increasing specific funding for formal research in rural areas. The three enterprise agencies and other supporting entities and actors should:

  • Initiate a process of assessment to improve the user-friendliness of the one-stop shop for rural business resources to support the formation of new firms, export strategies, SMEs and social entrepreneurs, through co-ordination with Business Gateway, Skills Development Scotland and Scottish Development International.

  • Ensure that policies to support rural firms explicitly tailor policies to the type of firms in rural areas and new firm formation, considering the size and age of the firm. For example, Scottish Enterprise, as well as the other two enterprise agencies, could further strengthen their support to rural micro-firms and smaller firms, social entrepreneurs and older firms that need succession planning.

  • Increase and tailor how specific funding for formal research is targeted to rural firms such as through R&D subsidies or tax incentives for innovation, and university or research centre collaboration for innovation, for example by re-enforcing incentives among universities or research centres to work with rural firms and by improving rural entrepreneurs’ access resources from Interface.

The responsibility of supporting innovation in rural areas is not only a function of the mandate of a single institution or group of agencies but a more holistic approach requires looking at how indirect support mechanisms can impact the framework conditions for rural innovations. As such, thinking about vertical and horizontal co-ordination as well as the dimension of scale when delivering policies and programmes to rural areas will be critical for its success.

The following summary provides guidance for action that the Scottish Government and institutional actors such as Scottish Enterprise, Highlands and Islands Enterprise and South of Scotland Enterprise and its close partners can address. The Scottish Government should:

  • Build on vertical and horizontal co-ordination between different government agencies, such as by:

    • Adding other initiatives, like the NSET Team Scotland co-ordination approach, that streamlines delivery across governments and agencies, or like Civtech Scotland,11 that encourages a wider service offering and focuses on bringing people from the public, private and third sectors to collaborate on bolstering rural regions and communities.

    • Further co-ordinating specific needs of rural regions within innovation initiatives such as the new Scotland Innovation Strategy, UK Research and Innovation strategy and Scotland export strategies that largely underserve rural regions in Scotland.

    • Further encouraging initiatives to improve access to finance with a rural and SME lens, such as with “pitch” roundtables to help entrepreneurs understand what public and private financing schemes may be suitable for them.

    • Supporting access to physical and digital markets, where connectivity is low, for example by ensuring that current initiatives such as the R100 programme and the Gigabit Broadband Voucher Scheme are not hindered by local regulations such as municipal planning and, to the furthest extent, are futureproofed so that places do not get left behind if older technologies are rolled out.

Best practice in rural policies for entrepreneurship and innovation often takes the form of a better understanding of how challenges of distance and scale are relevant for rural areas. This can include better utilisation of cluster development strategies, the use of regional brokers and further engagement with international trade partners. The three enterprise agencies and other supporting entities and actors should:

  • Better utilise existing cluster development strategies by increasing focus on local areas of strength and competitive advantage, encouraging bottom-up participation and wider consultation with local stakeholders, building on local assets and bringing small communities the critical mass needed for building an innovation ecosystem. For example, in response to the decommissioning of the nuclear sector and reduction of the offshore oil industry in the Highlands and Islands regions, re-training and re-orientation for many highly skilled and manual workers, in new areas of competitive advantage.

  • Increase the use of regional brokers to create scale and attract investment, skills, international export partners and tourism, for example, as is done through the Galloway Glens12 initiative. In Scotland, the role of current regional brokers can be strengthened to also include the attraction of skills and investment in the region or other initiatives, such as those involved in nature-based tourism.

  • Adopt actions to improve rural entrepreneurs’ engagement with international trade partners, such as by facilitating rural entrepreneurs’ links to national and regional export facilitation programmes.

Scotland has a conducive environment for social innovation but simplifying access to resources and co-ordinating government services for social entrepreneurs remains a challenge.

To achieve a more systemic impact from social innovation, there is a need to reconfigure public services and partners with a large array of social innovators. Examples of such reconfiguration include the recent land reform agenda that enables experimentation in land use for social entrepreneurs. Rural areas rely heavily on social economy and civil society with the aim to address the market failure and asymmetries of development. By tapping into the social economy potential, national governments and regions could reinforce regional development while also supporting the expansion of the social economy. To further enable the role of social innovators and entrepreneurs in rural areas, the three enterprise agencies and other supporting entities and actors should:

  • Create mechanisms to discuss potential regulatory sandboxes or promote experimentation, for example in land use regulation, that may support rural social entrepreneurs, while remaining within the rural public’s interest.

  • Implement a monitoring system of social capital which has been decreasing since 2017. This is needed to further understand the impacts with a specific focus on understanding the reasons for this trend.

  • Establish a commonly agreed definition of social innovation to be used by public authorities, to facilitate policies and programme setting. The definition of social innovation provided by the OECD Recommendation on the Social and Solidarity Economy and Social Innovation13 could be considered for inspiration or adoption.

  • Increase the engagement of a broad array of actors in the elaboration of policies and programmes in rural areas, such as through multi-stakeholder, regulation consultation and partnerships with rural social innovators as community anchors. This builds long-term capacity and buy-in from rural communities.

  • Prioritise the use of social innovation as a complementary approach to enhance public service delivery, rather than viewing it as a substitute. This can lead to more efficient and effective delivery of services. This is particularly important in remote rural Scottish areas where budget cuts and ageing have led to reduced service availability prompting socially innovative solutions to emerge from necessity.

  • Implement measures to support the diversification of revenue streams without reducing the focus grants for vulnerable communities. Focusing too much on revenue diversification may cause social innovation actors to overlook the needs of the most vulnerable groups without access to funds. Grants remain important in ensuring that everyone has access to support, especially in remote rural areas where opportunities for support are limited.

  • Develop campaigns or consider establishing an entity with a dedicated mandate, to increase awareness and information sharing about successful examples of social innovations in rural areas, so to encourage further application of these innovations in rural communities.


← 1. An accessible rural area is defined as an area within a 30-minute drive of a settlement with a population of 10 000 inhabitants or more based on the Scottish Government Urban Rural Classification 2020.

← 2. This refers to the percentage of people employed as a share of the total population from 15 to 64 years of age.

← 3. The classification of regions is based on the five-tier classification of small administrative units based on density and distance to functional urban areas as further described in Chapter 1.

← 4. For clarity, the oldest firms (30 or more years of age) are have a -0.05 lower propensity to innovate as compared to the youngest firms (0-1 years of age), as estimated using propensity regressions on innovation. Large firms (250 or more employees) have a 0.077 higher probability to innovate.

← 5. Firms in Edinburgh are more likely (0.09) to report formal innovation than in other places in Scotland.

← 6. For example, in large urban areas, foreign firms employ on average over 100 individuals per firm, while in accessible and remote rural areas, the average employment per foreign firm is between 20 to 45 employees.

← 7.  For more information on the Scottish Innovation Strategy: https://www.gov.scot/binaries/content/documents/govscot/publications/strategy-plan/2023/06/scotlands-national-innovation-strategy/documents/scotlands-national-innovation-strategy/scotlands-national-innovation-strategy/govscot%3Adocument/scotlands-national-innovation-strategy.pdf.

← 8. Innovation fit for rural areas refers to innovation that takes into account the structure of the rural economy and labour force as well as the local relative (and unique) advantages of different rural areas.

← 9. For further information on the Kyle of Sutherland: https://updated.kosdt.com/.

← 10. Maker spaces or fab labs refer to local centres, often with access to machinery and/or software materials, where individuals with or without companies may experiment on product and service design at low to no costs.

← 11. For more information: https://www.civtech.scot/.

← 12. For more information on Galloway Glens: https://gallowayglens.org/.

← 13.  For more information on OECD Legal Instruments on the Social and Solidarity Economy: https://legalinstruments.oecd.org/en/instruments/OECD-LEGAL-0472.

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