Executive summary

Innovation, as it is often framed, focuses on high-technology (high-tech) sectors and processes within firms that are typically concentrated in knowledge-intensive services and high-tech manufacturing. However, often, this overlooks broader notions of innovation that reflect the absorption of existing innovations in products and processes in other sectors and new markets, as well as in new firms.

Innovation, through new firm formation and absorption, is critical for rural areas. Despite facing additional challenges in accessing government services, finance and skills as compared to urban areas, Scotland’s rural areas are engines of growth and have demonstrated remarkable resilience to the recent COVID-19 crisis. However, more can be done in rural areas to boost innovation in rural areas, including by improving the enabling environment for entrepreneurship.

Home to a third of firms and about 15% of labour, rural areas of Scotland accounted for most of the firm-level productivity growth in Scotland from 2010 to 2018, prior to the large shock of the COVID-19 pandemic. Remote areas alone accounted for 81.6% of total productivity growth, whereas accessible rural areas contributed 25%. In contrast, urban areas in Scotland made a net negative contribution (-6.6%).

Aggregate labour productivity grew by an annual average of 1.7% in Scottish regions (TL3s) between 2002-20, above the United Kingdom average of regions 1.4%. Growth was even higher in Scottish non-metropolitan regions (1.83%), which also outpaced non-metropolitan OECD TL3 regions (1.39%). Non- metropolitan close to metropolitan regions in Scotland recorded faster growth rates (2.2%) than non-metropolitan remote (1.62%) regions.

In 2018, the top 10% of firms in urban areas and accessible rural areas of Scotland had 35 and 37 times the labour productivity of the bottom 10% of firms. In remote rural areas, the top 10% of firms had 30 times the labour productivity of the bottom 10%, significantly higher than the comparable figure in 2010 (10 times more productive).

The COVID-19 crisis had a profound impact in Scottish rural areas but not all types of rural areas faced the same challenges. Although there was an aggregate decrease of firms and labour in accessible and remote rural areas between 2018 to 2022, the decline was not as substantial as in other areas, especially urban areas and accessible small towns. In particular, the agricultural and fisheries sectors were robust to falls in employment, where it continued to hold on to jobs, particularly in accessible rural areas, despite aggregate falls in all other sectors from 2018 to 2022. In rural remote areas, there was neither a loss nor a gain in employment in the agricultural and fisheries sector, which, in comparison to other sectors such as trade and service, is a positive outcome.

In line with OECD trends, non-metropolitan regions in Scotland and the United Kingdom are losing their population shares and are ageing faster as compared to metropolitan regions. However, within different types of non-metropolitan areas, Scotland is unique. The share of the population in accessible rural areas grew by 0.84 percentage points from 10.56% of the total population in 2010 to 11.40% of the total population in 2020, against a decline in remote rural areas (-0.18 percentage points). Scotland, with an already larger share of older working-age individuals as compared to the OECD average, is continuing to experience ageing pressures in non-metropolitan regions. Between 2010 and 2020, Scotland observed a 1 percentage point increase in the share of older working-age individuals, 50 to 64 years old (22% in 2020 as compared to 21% in 2010), and a 1 percentage point decrease in the share of younger working-age individuals between 15 and 29 years (16% in 2020 as compared to 17% in 2010). In comparison, on average in the OECD over the same period, there was a 2.9 percentage point increase in the share of older working-age individuals (16.2% in 2010 to 19.13% in 2020) and a 0.2 percentage point decrease in younger working-age individuals (18.7% in 2010 to 18.5% in 2020).

These demographic trends have important implications for policies and programmes focused on innovation and well-being. Without specific consideration for rural demographics, policies risk missing out on intergenerational opportunities for community-building and economic growth. Policies to reinforce access to a skilled labour force for innovation need to take into consideration an older average age of workers in rural areas and the silver economy and focus on building partnerships with public entities to deliver entrepreneurial skills training from an early age (for example, secondary school). In rural areas, delivery of skills or training should prioritise models that focus on high-quality distributed learning, such as those administered by the University of the Highlands and Islands system, or incentives for employers and public entities to deliver aggregated skills training models in low-density areas.

Importantly, Scotland has made substantial progress in promoting the inclusion of women in the labour force. In Scotland, women are as engaged in the rural labour force as men, outperforming the gender equality ratio in the United Kingdom and the OECD average. However, the rate of women’s entrepreneurship is still lagging behind the rate of men. Indeed, programmes and practices for encouraging entrepreneurship may not be well suited for the challenges women face in establishing firms and retaining work-life balance, and further research should be undertaken to better understand women’s risk-taking behaviours, challenges in upscaling and strategies for networking. In addition, in rural areas, with limited access to social support and government services for family and healthcare, social innovators are a particularly important recourse to encouraging women to remain active in the labour market and further encouraging more female entrepreneurship.

Productivity is often strongly associated with innovation. Scotland is a country with strong innovation practices and a leader in innovation associated with climate change, encouraging collaborations in scientific publications, in particular, with small and medium-sized enterprises (SMEs). It has 19 universities, some of which are able to reach different remote areas and islands through remote learning techniques and facilitate links between firm research and university research centres. Because of the natural resource opportunities and political support for renewables, it is not surprising that Scotland has become one of the leaders in renewable energy solutions. Nevertheless, increasing population patterns and the recent COVID-19 pandemic bring new challenges and opportunities to enable and facilitate innovation in firms, the public sector and among social actors.

Innovation occurs across all geographies of Scotland. It is not because firms are in rural areas that determines whether or not they innovate but rather their firm characteristics associated with different levels of innovation. For instance, in rural areas, firms tend to be smaller and often have fewer linkages to international markets. Second, older firms may experience challenges in transformational and disruptive innovation and might need to consider more modern succession practices; in rural areas, the share of older firms is larger than in urban areas in Scotland. Third, in many rural places in Scotland, the highest share of firms tends to operate in the service and agricultural sectors. These firms are more likely to innovate either through changes in service delivery adopted for the rural economy or through hybrid sectoral processes (e.g. the mixing of agricultural and manufacturing sectors). Last, it is widely known that much of the standard innovation literature associates science and technological innovation with the manufacturing sector. While the manufacturing sector is increasingly gaining ground in rural areas, it is not the largest sector of activity in rural areas of Scotland. Services and agriculture are both critical sectors in rural economies.

In addition to firm-based innovation, social innovation and innovation that occurs beyond the logic of profit maximisation play an important role in Scottish rural areas, where they thrive with a long history and a thick fabric of community actors. In part, enabling these actors to provide goods and services is particularly important because remote rural areas tend to have more limited access to public services including healthcare and social services. Such innovators actively contribute to raising well-being standards in rural areas.

The lack of public services is particularly disadvantageous for activating women and older workers in the labour market and in driving well-being. Scotland displays one of the strongest systems of support for social entrepreneurs among OECD countries. As such, the challenge of bringing public services to rural areas is in part addressed by local social innovators and entrepreneurs. This could, in part, explain why there has been so much progress for women in non-metropolitan areas of Scotland. Nevertheless, challenges remain for encouraging more social entrepreneurship and innovation, in particular, in accessible rural areas.

The (new) innovation strategy released in June 2023 promises to deliver a strategy for innovation tailored to the needs of the Scottish economy. While it suggests that place plays a role and specifically identifies access to finance and skills as a challenge that needs to be understood from a place perspective, it still focuses on high-tech innovation activities. This overlooks other forms of innovation in rural economies in the broader strategy (outside the cluster and smart specialisation angles) such as the programme of action on innovation prioritising science and technology sectors that focus on the energy transition, health and life sciences, data and digital technologies, and advanced manufacturing. While it also identifies opportunities in the blue economy, there is significant potential to boost growth, productivity and innovation in a broader range of services and agricultural activities that still account for a significant share of activity in rural areas, in particular through the development of enabling environments for entrepreneurship.

  • Going beyond the science, technology and innovation (STI)-focused support for rural innovation is a critical element of supporting innovations in rural areas. This could include expanding programmes that:

    • Support entrepreneurial ecosystems which prioritise rural well-being through new services, engage with rural stakeholders such as social innovators, build local partnerships with secondary schools and increase support for women entrepreneurs.

    • Improve access to skills for innovation focusing on vocational education and training systems and retraining older workers, providing joint apprenticeship opportunities, creating opportunities for early entrepreneurial training for youth, encouraging high quality distributed learning models and engaging with local stakeholders for regular consultations.

  • Promoting innovation and experimentation in the delivery of support services can support rural areas’ transition.

  • Strengthening new firm formation, support for social entrepreneurs and competitiveness of SMEs can improve delivery of innovation programmes. This could include assessing the user-friendliness of the pre-existing one-stop shops for rural businesses, tailoring policies to the types of firms in rural areas, and increasing and tailoring how formal research funds are targeted and applicable to rural firms.

  • Supporting rural entrepreneurs through vertical and horizontal co-ordination is critical to a wholistic approach. This could include adding similar co-ordination initiatives such as the National Strategy for Economic Transformation (NSET) Team Scotland initiative and Civtech Scotland; further co-ordinating specific needs of rural firms in the implementation of innovation and export strategies; and encouraging programmes that directly improve rural access to finance and supporting access to physical and digital markets.

  • Overcoming low economies of scale for firms in rural areas could be achieved by better utilising cluster development strategies, considering the further use of regional brokers to build partnerships for development in functional areas and adopting actions to improve rural entrepreneurs’ engagement with international trade partners.

  • Promoting social innovation is particularly important for rural communities. This can be facilitated through a variety of mechanisms, such as regulatory sandboxes, encouraging experimentation with social entrepreneurs and prioritising the use of social innovation as a complementary approach to enhance public service delivery.

  • Supporting the continued contribution of social entrepreneurs to rural areas is critical to supporting rural communities. This could be facilitated by increasing awareness and information sharing of successful examples of social innovation in rural areas, implementing a monitoring system of social capital, establishing a commonly agreed definition of social innovation, increasing the engagement of a broad array of actors and supporting diversification of revenue streams without reducing the focus of grants for vulnerable communities.

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