Section 2: Our Framework and Priorities
The Scottish Government's purpose is to create a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth.
Our Economic Strategy brings focus on two main pillars to achieving this objective; increasing competitiveness and tackling inequality.
In order that everyone in Scotland can enjoy the opportunities that economic growth provides, it is vital to boost the competitiveness of the Scottish economy. Over the long term, increased levels of productivity are essential to support the economic growth needed to ensure rising living standards.
As outlined in Section 1 the growing international evidence is clear. Promoting competitiveness and addressing inequality are important interdependent ambitions; reducing inequality in itself is beneficial for economic growth. It is also a moral imperative in its own right which sits at the heart of Scotland's commitment to social justice and international responsibilities on human rights.
Growth in inequality - both in income and wealth - has become an increasing feature of many advanced economies. Part of this trend has been driven by global forces, changes in technology and the global regulatory environment. However, the choices and operation of domestic economic and social policy have also had a crucial bearing on the resilience and cohesiveness of our economy and society.
The framework underpinning our Economic Strategy is summarised in Figure 2.1.
As the framework makes clear, our approach to delivering sustainable economic growth is characterised by four key priorities:
- An economy where growth is underpinned by long-term sustainable investment in people, infrastructure and assets;
- An economy where growth is based on innovation, change and openness to new ways of doing things;
- A society that promotes inclusive growth and creates opportunity through a fair and inclusive jobs market and regional cohesion to provide economic opportunities across all of Scotland; and
- A country with an international outlook and focus, open to trade, migration and new ideas.
In the sections that follow we describe each priority in more detail and the key measures being taken in Scotland under each priority, as summarised in Figure 2.2.
Figure 2.2: Four Priorities
1. Investing in our people, infrastructure and assets in a sustainable way
This strategy sets out how we will:
- Invest in Scotland's people at all stages of life to ensure that we have a well-skilled, healthy and resilient population and an innovative, engaged and productive workforce;
- Provide the physical and digital connectivity needed to ensure that all of Scotland is open to the national and global economy and is able to access high quality public services;
- Invest in Scotland's infrastructure to help Scottish businesses to grow, innovate, and create good quality employment opportunities;
- Prioritise our investment to ensure that Scotland protects and nurtures its natural resources and captures the opportunities offered by the transition to a more resource efficient, lower carbon economy; and
- Invest in strengthening the success and resilience of local communities.
Investment - whether in our people, infrastructure or businesses - is key to driving long-term improvements in competitiveness and in creating opportunities for everyone in society to benefit from these improvements.
Investment in education and training ensures that we have a strong and productive labour force, which has the skills to maximise our country's economic potential. It is also a key avenue for tackling a range of issues from poverty and income inequality to health and life expectancy.
Investment in our infrastructure is vital for delivering high-valued public services, boosting connectivity and enabling businesses, households and communities to take advantage of the digital age.
Similarly, the structure of the economy and its business base are key determinants of economic performance.
A diverse business base - by firm size, industry, geography and ownership - can improve the long-term resilience of an economy. It complements a targeted strategy to excel in a number of niche sectors where we have a comparative advantage.
Investment must also be sustainable, not only in terms of tackling emissions, enhancing our natural capital and supporting the transition to a low carbon economy, but also through ensuring the sustainability of our communities.
Education, skills and health
An individual's health and skill level has a direct impact on their wellbeing and prospects for employment and income. At an economy-wide level, education and skills play an important role in enabling our companies to grow and be successful.
The Scottish Government, and the wider public sector, undertake significant investments in education and skills through our schools, colleges and universities, including our Modern Apprenticeships and other training programmes delivered by Skills Development Scotland.
Going forward, our investment in the human capital - the education, skills and health - of the people of Scotland will be a central focus of our actions to deliver Scotland's Economic Strategy.
In this regard, we can build on the significant progress made in recent years.
The Curriculum for Excellence (CfE) is designed to raise ambition and attainment for all our children and young people, and will make learning and teaching more relevant, engaging and inspiring.
We are also implementing substantial changes to the structure, governance and focus of Post-16 education in Scotland.
Colleges play a key role in delivering educational opportunities that support individuals into the workplace and on to higher learning. Through our Post-16 reforms, we are ensuring that every college in Scotland is in a strong position to meet the needs of learners and employers in their region.
The Commission for Developing Scotland's Young Workforce's final report was published in June 2014. The Scottish Government is now embarking on a seven- year national programme to implement its recommendations.
These measures include working jointly with local government to ensure school pupils access learning which is directly relevant to getting a job, improving and extending careers advice and work experience, and ensuring that learning is shaped and supported by employers. All young people, regardless of any barriers they face, will have fair access to these opportunities.
There are a range of challenging targets for the programme, for example:
- To reduce youth unemployment by 40% by 2021;
- To increase the percentage of employers recruiting young people directly from education to 35% by 2018; and
- To reduce to 60% the percentage of Modern Apprenticeship frameworks where the gender balance is 75:25 or worse by 2021.
We are committed to excellence in higher and further education. Our investment has helped to ensure that our universities are amongst the best in the world. Scotland now has four universities in the world's top 200 - more per head of population than any other country except Switzerland, and achieves world-renowned research.
Moreover, a key part of our strategy for long-term economic growth that boosts competitiveness and addresses inequalities, will be our commitment to free tuition, ensuring that access to university is based upon ability to learn and not ability to pay.
Our investment in education has a focus on preparing young people for employment. We are therefore widening access to higher education, and to extending a wide range of high quality learning through the implementation of Developing Scotland's Young Workforce (see Box 2.1).
We will also continue to make a significant investment in the health of Scotland's population. A sustained effort on increasing healthy life expectancy, providing physical and mental health benefits for those in work, and helping to increase participation.
Our commitment to health and social care integration, a system-wide and sustained focus on prevention and further legislation on alcohol and tobacco control are also important contributions to improving the economic opportunities for everyone in Scotland and tackling inequalities.
Infrastructure and digital
Infrastructure investment attracts business investment, stimulates economic activity and deepens access to the labour market. Physical and digital infrastructure improves connectivity, helping our cities, towns and regions to drive growth and compete internationally.
A central feature therefore of our Economic Strategy will be our approach to supporting investment.
We will take a strategic and long-term approach.  Our programme of improvements includes a number of major projects such as:
- The Queensferry Crossing: the new Aberdeen Western Peripheral Route; investment to dual the A9; and a number of rail improvements including the Borders Railway and Edinburgh-Glasgow Improvement Programme.
- In the future, High Speed Rail will generate prosperity and has the potential to rebalance the British economy, but Scotland must be included in HS2 plans if it is not to be economically disadvantaged.
- Our investments in infrastructure go beyond one-off, large-scale projects - smaller scale, local interventions to improve our infrastructure networks can, together, make a nationally significant contribution to supporting economic growth and tackling inequalities.
An adequate and affordable supply of housing is essential for growth and in supporting local communities tackle inequalities. We are making significant investment through the Affordable Housing Supply Programme and our planning frameworks highlight the strategic importance of up-to-date development plans in delivering Scotland's future housing requirements.
Digital technologies are increasingly critical in the day-to-day operations of businesses and households across Scotland, and in improving access to public services across Scotland's more remote regions. A key part of our Economic Strategy will be delivery of a future-proofed infrastructure that will establish world-class digital connectivity across the whole of Scotland by 2020. 
The availability of Next Generation Broadband in Scotland has increased significantly since 2011, from 41% of premises to 63% in 2014, however, there is a need for further improvements in coverage  and also uptake within these areas .
The Scottish Government and its partners are investing in the Digital Scotland Superfast Broadband ( DSSB) programme to extend superfast broadband infrastructure into areas which are not being reached by the market alone, such as parts of rural Scotland. As a result of this investment, at least 95% of premises across Scotland will be able to access fibre broadband by the end of 2017.
A key part of our Economic Strategy, and focus on investment, is not just about prioritising resources, but in maximising opportunities to secure new funds and additionality.
In this regard, Scotland is at the forefront of developing innovative financial mechanisms to support infrastructure investment. This work is being led by Scottish Futures Trust ( SFT), which aims to improve the efficiency and effectiveness of infrastructure investment in Scotland. Recent approaches to financing investment include:
- The National Housing Trust, which leverages private sector funding and council borrowing to support the delivery of homes for intermediate rent. Together with other innovative financing approaches, around 2,000 new affordable homes are now being delivered in communities across Scotland.
- The Tax Incremental Financing pilot programme, under which councils fund infrastructure by borrowing against future business rate income, has already resulted in two projects worth almost £150 million entering construction, Glasgow City Council's Buchanan Quarter project and Falkirk Council's Grangemouth project.
- The Growth Accelerator Model is a new financial model that combines public and private sector investment in local infrastructure and public space. The model unlocked an £850 million investment in the St James Quarter in Edinburgh by bringing together the Scottish Government, City of Edinburgh Council and private sector developers.
- Hub, which reflects a creative approach in the delivery of community-based infrastructure and facilities, will deliver an estimated £2 billion of community infrastructure over 10 years.
- The Non Profit Distributing financing model is delivering a £3.5 billion programme of investment. Currently, two health projects are operational and 16 projects worth around £1.6 billion are under construction.
As this strategy makes clear, the future success of Scotland's economy depends upon the growth and competitiveness of Scotland's businesses. Scotland's Economic Strategy will therefore ensure that this Government delivers a business environment that supports business growth.
We will continue to target our interventions at sectors and companies where we have a distinct comparative advantage. Scotland has strengths in a diverse range of sectors including Food and Drink, Financial and Business Services, Life Sciences, Energy, Tourism and Creative Industries. We will continue our focus on these key sectors.
Scotland also has a global reputation for manufacturing excellence, and innovative new technology sectors. We will not only take advantage of such strengths but also consider how we can stimulate innovation and performance in more locally-traded sectors, such as retail and care sectors, which are important in both employment terms and in supporting local economic activity across Scotland.
We will also provide support for Scotland's entrepreneurs and businesses more generally. Our strategy will ensure that we will create an enabling business environment which allows them to thrive, ensuring that services are integrated, and offering more targeted assistance in areas where the market fails to step in.
Central to this is our strong performance in regulation, planning, procurement and skills. Box 2.3 provides examples of our initiatives on better regulation and planning designed to minimise costs on businesses.
In addition, we have a focused approach in particular areas, including through the Scottish National Marine Plan which sets out strategic policies for the sustainable development of Scotland's marine resources.
Well-designed regulation and planning help provide a supportive environment for businesses to invest and grow. The Scottish Government's approach to Better Regulation focuses on encouraging a risk-based enabling approach, and adopting the five key principles of regulation which includes addressing inconsistencies in regulatory systems. Alongside this, we have a focus on effective development planning, and more efficient decision making including seeking solutions where development has stalled.
Two examples of our initiatives in regulation and planning are summarised below:
- The Regulatory Reform (Scotland) Act 2014 provides a proportionate and risk-based approach to regulation, and environmental protection in particular. The Act enables the creation of an integrated authorisation framework, reducing the unnecessarily complex landscape of individual pieces of environmental legislation and allows businesses to benefit from clearer guidance, simpler processes and reduced administration.
- The Town Centre Planning Pilots programme includes a project
to establish Scotland's first Simplified Planning Zone (
SPZ) for a
town centre in Renfrew.
SPZs are areas where the need to apply for planning permission for certain types of development is removed. It removes the need for repetitive planning applications, covering the same range of planning issues, and offers certainty on the type of developments that would be permitted.
We are also taking a range of measures to support growth in the business base in Scotland. For example:
- Since its introduction in 2008-09, the Small Business Bonus Scheme ( SBBS) has been significantly extended and now reduces or removes business rates taxation for almost 100,000 business premises.
- Local Authorities, as part of their economic development activity, are responsible for the Business Gateway which provides businesses support to start up and grow. This is important for supporting our SME base across Scotland.
- Through Scotland CAN DO  we support a number of initiatives towards becoming a world-leading entrepreneurial and innovative nation. A particular focus is placed on ensuring all of Scotland's people view enterprising activity as a valid and viable option; as such we have co-developed the Women In Enterprise Framework  (the only of its kind in the EU) to tackle the gender-gap and are working with numerous third sector partners to mainstream entrepreneurial mind-sets in our schools in the 'Enterprising Schools' programme. A notable success to date has been the Scottish EDGE Fund;  a funding competition supported across all sectors that is enabling Scotland's top, early-stage and high-growth potential entrepreneurs towards reaching their potential.
Moreover, our Enterprise Bodies - Scottish Enterprise and Highlands and Islands Enterprise - will play an important role in assisting businesses in Scotland and in delivering this strategy. Their business support activities include development of leadership capacity, stimulating innovation and exporting advice.
A properly functioning market for lending is particularly important for the success of all businesses in Scotland. In addition to advisory support provided through Business Gateway, Scottish Enterprise and Highlands and Islands Enterprise continue to engage and work actively in partnership with the banks, at both operational and strategic level, to improve access to finance.
The Scottish Investment Bank ( SIB) delivers early-stage equity schemes, investing risk capital in Scotland's new and growing technology companies alongside private sector partners. SIB also has a mezzanine loan fund aimed at growth, and exporting companies. Annually, the SIB equity schemes have invested over £30 million in some 100 companies, leveraging over £60 million from private sector partners.
Building on the work of the SIB, we are establishing a Scottish Business Development Bank, to work directly with small and medium-sized enterprises and the financial markets to support businesses with high growth potential in Scotland. Scotland has a lower proportion of medium-sized enterprises than other European countries such as Germany, Austria, Finland and Sweden. The Scottish Business Development Bank will therefore, in particular, help to build more medium-sized enterprises, and is an important addition to the institutional landscape in Scotland.
Through our Enterprise Agencies we provide a substantial package of business support which can help businesses to become more productive; grow, innovate and export. We will continue to offer targeted support and advice as part our commitment to the Scottish Business Pledge (see Box 2.11).
Natural capital, resource efficiency and low carbon
Communities across Scotland benefit from the goods and services that our natural environment provides, including food, renewable energy, water purification, flood mitigation and places for recreation, education and inspiration.
Protecting and enhancing this stock of natural capital, which includes our air, land, water, soil and biodiversity and geological resources is fundamental to a healthy and resilient economy. It also supports sectors such as agriculture, forestry, fisheries, tourism and renewables.
Sustainable economic growth also rests on a requirement to make the transition to a more resource efficient, lower carbon economy. Our ambition is to reduce emissions of greenhouse gases by 80% from 1990 levels by 2050. This represents a fundamental transition of all sectors of the economy and a long-term strategy for economic growth: reducing the cost to the Scottish economy of climate change, while maximising opportunities to export our technology innovations and knowledge as other economies make their own low carbon transition. Key to this transition is ensuring that we manage our natural resources and secondary materials sustainably.
By improving resource efficiency we can reduce energy demand and overall greenhouse emissions. Resource-efficient homes are less likely to face fuel poverty; resource-efficient businesses are more productive.
It is therefore a key aspect of our Economic Strategy.
Through Resource Efficient Scotland, we are supporting businesses, third sector and public sector organisations to boost productivity by using energy, materials and water more efficiently.
With our partners, such as Zero Waste Scotland and the Enterprise Agencies, we are creating conditions for a more circular economy that helps companies embrace new business models and manufacturing processes, and which transforms used products into assets that support industries like remanufacturing, reuse, product disassembly and reprocessing.
Remanufacturing is transforming how parts and products are produced. In doing so, it helps industries minimise their use of raw materials, while reducing energy and water use. Sectors as diverse as aerospace, energy, automotive, IT and medical equipment industries are already benefiting from this transformation. We are helping to stimulate remanufacturing networks and supply chains by funding the Scottish Institute of Remanufacture - one of only four international centres of excellence for remanufacturing, joining others in Singapore, New York and Beijing.
The energy used to heat our homes and businesses and drive our industrial processes accounts for over half of Scotland's total energy use with an estimated £2.6 billion a year spent on heating by households and the non-domestic sector. This represents a significant opportunity which will be pursued through the continued development of our strategic approach to encourage wider investment in low carbon and renewable heat technologies.
We have implemented a number of programmes to improve domestic energy efficiency, such as the Home Energy Efficiency Programmes for Scotland ( HEEPS) and Green Homes Cash Back which at the same time as improving our resource efficiency, are tackling inequality by lifting families and households out of fuel poverty. Energy efficiency measures have been installed in nearly 1 in 3 Scottish homes since 2008.
Scotland's immense natural resources are already delivering clean, reliable energy. The equivalent of 44% of Scotland's demand for electricity is now generated from renewables.
Strategic investments in infrastructure can further help to unlock the potential of Scotland's islands and remote communities. Renewable resources from wind, wave and tidal on or around the Western Isles, Orkney and Shetland are considerable, and renewable generation on Scotland's islands could make a significant contribution to renewables targets security of supply, as well as playing an important role in longer-term decarbonisation.
Our Community Energy Policy Statement sets the challenge to encourage Scotland's communities to grasp the opportunities of a whole system approach to community energy. Low carbon energy systems can involve a range of innovative technologies: renewable energy generation, energy storage, the use of waste heat and community heat systems, smart grids and demand reduction measures, improvements to energy efficiency. Central to this is the idea that these new assets can be locally owned - empowering communities to lower fuel bills and earning a financial return on investments.
The Scottish Government has launched a programme to support Community Energy Empowerment, which will put communities at the heart of decisions about local energy systems, and give them the confidence to take an economic stake in commercial projects.
Currently, there are approximately 285 MW of energy in community and local ownership. However, only 43 MW is directly owned by community groups. The Scottish Government's objective is to ensure 500 MW of community and locally-owned renewables by 2020.
The programme will introduce a new Local Energy Investment Fund as well as continuing to offer communities access to technical advice and capital through existing initiatives, such as the Community Renewable Energy Scheme and the Renewable Energy Investment Fund. In 2015-16, £10 million will be available through the Local Energy Investment Fund to invest on behalf of communities in commercial renewables schemes.
Communities, local assets and housing
Working with the people and communities of Scotland to deliver the best possible outcomes is at the heart of how we will invest in, and support, local areas as part of this Economic Strategy. Building the resilience and capabilities of individuals, families and communities, and enabling people to actively shape and assist with the design and delivery of services they use, are two fundamental principles.
We are acting to catalyse local level investment including regeneration in our most disadvantaged communities, bringing empty town centre properties back into use as affordable housing, with investments in housing and communities to improve local amenities and build strong and sustainable communities.
Community Planning Partnerships are in place in all local authorities for public agencies to work in coordination with local communities to plan and deliver better services and work towards the priorities set out in Single Outcome Agreements.
Scotland's third sector is a significant employer and contributor to the Scottish economy. It also provides key services and vital support to communities at grass-roots level.
There is a vibrant and diverse range of community-led initiatives, including managing renewable energy projects, running childcare services, preserving the local heritage, and managing forestry enterprises. The work of these groups is having an impact from our islands and remotest rural villages to the hearts of our cities and towns.
We want to ensure that more of the money we spend is directed by communities themselves - by the individuals and organisations who know best how to tackle poverty and inequality and harness the energy of local people.
When people feel they can influence what happens in their community, and can contribute to delivering change, there can be many benefits, and our aim is to support approaches that can contribute to a growing sense of democratic renewal and change.
In support of community regeneration, the People and Communities Fund has already supported 156 projects since its launch in 2012 and will build on its support of a wide range of initiatives including training, volunteering, promoting local economic development, tackling health inequalities and supporting vulnerable people as well as funding for community facilities.
The Community Empowerment Bill will give communities more opportunities to make a difference on their own terms, by creating new rights for community bodies, placing new duties on public authorities, making it easier for communities to take on public sector land and buildings, and extending the community 'Right to Buy' to the whole of Scotland.
The Smith Commission recommended devolution of the management of and revenues from the Crown Estate in Scotland, including the seabed surrounding Scotland's coasts. The Scottish Government will use these new powers to ensure that communities enjoy greater benefits from their local assets.
We have committed to giving island and coastal communities 100% of the net revenues from Crown Estate assets in the waters adjacent to their coast and we will work with local authorities and other stakeholders to develop a framework for greater local involvement in the management of these assets.
Our Prospectus for the Islands, Empowering Scotland's Island Communities,  is the most comprehensive package for empowering Scotland's island communities put forward by any government. We have also reconvened the Islands Area Ministerial Working Group and are committed to implementing as many of the recommendations from the Prospectus as we can, including consulting on an Islands Bill.
Using our land as effectively as possible - and for the widest benefits - is central to the Scottish Government's Land Reform Agenda. In Scotland, rural land ownership is often concentrated in the hands of a small number of landowners which can have a detrimental impact on the sustainable growth of communities. The land reform agenda is actively being taken forward with a commitment to make land ownership transparent by building a land register within 10 years, a target of transferring 1 million acres to community ownership by 2020 and other step-change proposals such as forming a Land Commission which we are currently consulting on.
Our Enterprise Agencies and local authorities are also supporting locally-focused and community-based approaches (see Box 2.5).
Highlands and Islands Enterprise is working with around 50 communities in some of its most rural areas to help develop and implement plans for local growth.
Working in partnership with local authorities and other public agencies, the community account management initiative has identified and engaged with selected communities that are keen to lead their own development. Local Development Officers ( LDOs) assist with community consultation and planning, taking forward projects.
Some projects include aspirations to develop sustainable community-controlled income streams, and Crofting Community Development.
Recognising the persistent economic challenges in North Ayrshire, Scottish Enterprise has worked with the council and other partners, as part of Team North Ayrshire, to boost support to local businesses.
Around 150 companies have been supported to grow their
businesses and create much-needed employment in the area. This has
involved building up the account management team at the council,
supported by the sharing of best practice from Scottish
Re-designing our approaches to procurement can also help better secure benefits for communities. The Scottish Government's promotion of Community Benefits in public procurement has enabled a range of public bodies to maximise social and environmental benefits from public spending, including providing local training and employment opportunities and sub-contracting opportunities for small businesses and the third sector.
The Scottish Government is committed to using public contracts to deliver Community Benefits (see Box 2.6), and is encouraging its further use.
Community Benefit Clauses are contractual clauses which can be used to build a range of economic, social or environmental conditions into the delivery of public contracts. Such conditions can include:
- Employment and training opportunities;
- Creating opportunities for SMEs and third sector organisations to deliver public services;
- Support for community initiatives; and
- Environmental benefits.
Community Benefit Clauses have been adopted in a range of major projects including:
- The Glasgow City Council Commonwealth Games contracts which created 500 new entrant trainees.
- Greater Glasgow and Clyde Health Board contract for Southern General Hospital including 113 apprenticeships, 202 work placements, and 504 training opportunities. 
- The Scottish Government's contract for the Energy Assistance Package which included 26 apprenticeships, 31 work placements, and 454 training opportunities. 
It is expected that Community Benefit Clauses will be more routinely used with the commencement of the Procurement Reform (Scotland) Act 2014.
As we deliver our Economic Strategy we will bring an increased focus on local communities and consider how they connect into supply chains to ensure that local communities have the best possible opportunity to benefit. We will also look at how communities across Scotland can benefit from a community-based approach to economic development.
The aim is to look at particular areas of the Scottish economy where supply chain linkages could be strengthened and explore options to better exploit these linkages and ensure that local businesses benefit.
Consistent with our commitment to community empowerment, local communities will have the opportunity to take an active engagement in shaping their local economy.
2. Fostering a culture of innovation
This strategy sets out how we will:
- Support the development of highly-innovative businesses across the Scottish economy;
- Encourage more of Scotland's diverse business base to engage in innovation and research and development as part of their day-to-day activities;
- Continue to support the high-impact, world-class research of Scotland's universities and improve levels of commercialisation of academic research;
- Develop, with key partners such as business organisations and trade unions, innovative approaches to developing progressive workplace practices; and
- Develop and deliver new approaches to public service reforms and make better use of our public procurement to drive innovation.
Innovation is a fundamental driver of long-term competitiveness and sustainable growth. It encompasses the development of new processes, products, services, workforce design and business models.
Innovation is a key driver of growth. New technologies have changed how we communicate, work and deliver services. Its application is key to all areas and we need a whole economy approach.
More innovative economies are also more likely to have the capacity to be more resilient to changing economic conditions and have greater ability to succeed in international markets.
Scotland has a strong base of innovation to build on. It has a tradition of commitment to research and science, a highly-skilled workforce and world-renowned universities producing high-impact research.
If we are to become more competitive we need to ensure that Scottish businesses understand the benefits of investing in innovation and research and development (R&D). This is not just limited to technology firms but applies across all sectors. For many, workforce innovation will generate real benefits. We also need to improve levels of commercialisation of academic research and stimulate innovation by the public sector.
Fostering this culture of innovation, and creating a new spirit of entrepreneurship across the country, is also vital to identifying solutions to long-term societal challenges, such as finding new and improved methods of delivering public services.
Our Economic Strategy builds on the vision and framework set out in Scotland CAN DO - which was co-created with public, private and third sector partners - for making Scotland a world-leading entrepreneurial and innovative nation.
Business innovation and entrepreneurship
Business innovation means profiting from new ideas. The development of new products, services and business models is only part of the story. What matters is how these new developments are then applied and able to make a positive and profitable economic impact. For businesses, such developments can enable them to become more competitive, grow more quickly, enter new markets and become more resilient to change. Innovation is therefore a key driver of productivity growth and internationalisation.
Improving Scotland's innovation performance is a top priority of this strategy, and a key aspect of the Business Pledge. It will mean seeking to shift business perceptions of, and ambitions for, innovation, making best use of public sector levers and funding to drive change and developing a truly collaborative approach to tackling these issues. A core element of this collaborative approach will be the creation of an Innovation Forum.
Led by the Deputy First Minister, the Forum will set challenging objectives for innovation in Scotland, develop a set of shared outcomes and scrutinise progress towards delivery. Vital to this will be the link between our higher education sector and industry. This is crucial to ensuring that the world-class research undertaken at our universities is translated into greater commercial opportunities and growth for the economy.
Our strategy will also support innovation and entrepreneurship through close collaborative working with our delivery agencies and the private and third sectors. Key activity includes: 
- Scottish Enterprise has refocused its innovation approach to increase the number of Scottish businesses that are innovation active, including promoting supply chain and customer-led innovation to encourage greater collaboration between large and smaller firms. 
- HIE's 'Innovate your Business' programme  supports company innovations with growth potential across the HIE area. Participating companies have access to signposting; assessment; innovation clinics; specialised advice; and an innovation grant scheme;
- The SMART: SCOTLAND programme, offers a range of products to businesses of all sizes to improve productivity and help with the development of new products and the adoption of new technologies; and
- Industry-specific initiatives to promote innovation such as Fisheries Innovation Scotland and the Scottish Institute for Remanufacture.
We will build on our participation in wider networks both within Europe and the UK. This includes participating in new European partnerships such as the Vanguard Initiative,  to pursue greater alignment with European innovation policy and funding, and increasing our European collaborations through, for example, the Horizon 2020 programme.
In addition, the Scottish Government will continue to work closely with UK bodies such as Innovate UK, and we will also collaborate with organisations such as the Big Innovation Centre (of which we have recently become a member), to help stimulate new ideas and thinking.
Box 2.7 - Scotland's research and development performance
Investment in R&D is a key indicator of the level of innovation in a country. It supports the development of new knowledge and enhanced products and services.
While Scotland has notable success stories, including the research and development undertaken in our higher education institutes, a challenge remains to increase research and development investment, principally in Scottish businesses.
In 2012, Scotland's Higher Education R&D expenditure ( HERD) as a percentage of GDP ranked first of the 12 countries and regions of the UK. Scotland was fourth in the OECD. However, Business Expenditure on R&D ( BERD) in Scotland remains low, equivalent to only 0.6% of GDP in 2012. Comparable countries such as Finland and Sweden spend nearly four times as much as a proportion of GDP.
Figure 2.3: International comparison of HERD and BERD as a percentage of GDP, 2012
Commercialisation of the world-class research of Scotland's universities
Scotland's universities lie at the heart of the innovation system in Scotland. They are the primary source for ground-breaking innovations and are often the key avenue through which longer-term or more speculative research can be undertaken.
Higher education research in Scotland is internationally recognised and respected for its quality and impact. The 2014 Research Excellence Framework identified 77% of Scottish university research as world leading (four star) or internationally excellent (three star) while 86% was assessed as four star or three star in terms of impact. Investing in Scotland's universities, supporting their world-class and high-impact research and helping them build links across the globe is at the heart of the Scottish Government's ambitions for Scotland.
In addition to the funding provided directly for research from the Scottish Funding Council ( SFC), Scotland's universities are successful at securing research funding from a variety of sources, including the UK Research Councils, charities, Europe, and increasingly, private sector and industrial partners. 
Scotland's universities also help develop a significant proportion of the talent that flows in and out of Scotland. In 2013-14 there were more than 48,000 students from outside the UK studying in Scotland.  This represents more than 21% of the student body and brings people from approximately 185 countries to live and study in Scotland. 
Building on this performance, and further enhancing the links between our universities and Scotland's private sector, is vital to translating the world-class research undertaken at our universities into greater commercial opportunities and growth for the economy.
As part of this we are working to improve our industry and academic networks and foster collaborations which aim to enhance knowledge exchange and promote innovation. This includes:
- Innovation Centres - Partnerships between business and academia to apply knowledge and innovation from our academic research base into business (see Box 2.8).
- The Scottish Funding Council - Plays a vital part in the Scottish Innovation ecosystem, with programmes that either support Higher Education Institutes to interact with businesses, or through commercialising new products or services developed by researchers.
- Interface - A central hub connecting businesses across Scotland, and internationally, to Scotland's higher education and research institutes.
The Scottish Funding Council is supporting a network of Innovation Centres in partnership with Scottish Enterprise and Highlands and Islands Enterprise. These Centres are collaborations between universities and businesses to enhance innovation.
There are eight Innovation Centres to date, focusing on: Stratified Medicine, Sensors and Imaging Systems, Digital Health, Industrial Biotechnology, Oil and Gas, Big Data, Construction, and Aquaculture.
We are further building on the positive work undertaken in the Innovation Centres by:
- Providing a £1 million Innovation Challenge Fund to develop collaborative projects that address major industry and societal challenges through novel multi-disciplinary approaches;
- Involving colleges, where appropriate, and enabling a broader range of innovation support to SMEs through both R&D projects and employer-led education and employee career development;
- Working in partnership with SDI, and other partners in Connected Scotland, to explore opportunities for international collaboration, trade and investment; and
- Supporting international collaboration by piloting Innovation and Investment Hubs at key global locations.
Workplace innovation and digital
In addition to research and development, transformational change in the modern economy is driven by many other types of innovation.
Exploring new approaches to business practices, workplace development, and application of new technologies are key aspects of innovation.
For example, one major driver of innovation in the workplace over the most recent two decades has been the growing application of digital technologies. The widespread reach of digital infrastructure and technologies has been central to Scotland's productivity growth over recent decades, as it has been globally, and will continue to catalyse innovation through its application across sectors.
It is therefore important that we continue to invest in digital skills to meet the needs of the modern economy. The application of digital technologies across a range of fields from robotics, to medicine, data, printing and communications also has the potential to significantly alter how the economy functions and provides an opportunity for Scotland to drive change given our strengths in this area.
Strong performance on workplace innovation is also important across all sectors and businesses of the Scottish economy and is an important driver of improvements in business performance.
Workplace innovation has the clear potential to benefit businesses, organisations and society, creating a focus on better use of organisational resources in ways that support the delivery of strategic and operational business objectives, improve the quality of work for employees and deliver better social outcomes in terms of health, participation and equality.
There is a growing evidence base on the importance of the organisation of the workplace as one of the determinants of productivity through skills utilisation, job design and inclusion.
For example, recent research  has found that workplace innovation can substantially improve efficiency, such as worker productivity, as well as quality, such as quality of goods and services, and financial performance.
With a strong, renewed focus through the Fair Work Convention (see Fair Work section), we will look to build on the ambitions set out in the Working Together Review  and align them with similar work led by others, such as the Workplace Innovation Consortium, to find innovative ways to draw together all of the resources and expertise at our disposal and work together to achieve innovative workplaces and outcomes.
Our transformative programme of public service reform is a key part of the Scottish Government's approach to innovation. It is outcome-focused and has a decisive shift towards placing prevention at the centre of public service delivery. Preventing problems by intervening earlier will help to tackle persistent inequalities in Scotland and ensure the sustainability of our public services.
For example, in shifting the balance of public services away from crisis intervention and focusing instead on tackling the causes of complex problems, we recognise that very often the solutions lie within local communities and the third sector organisations that work with them to nurture flexible and innovative approaches to achieving better outcomes.
We will continue to deliver support and investment directly to communities so that they can take early action that is responsive to local people and helps tackle inequality. Early action builds people's capacity to deal with setbacks and seize opportunities. This helps to create the conditions for people to control their own destinies by giving them the confidence to influence decisions that affect them and have a stake in developing innovative approaches to service delivery, enabling them to play an active part in their community and encourage others to do the same.
The Building Safer Communities programme's vision is of a flourishing, optimistic Scotland in which resilient communities, families and individuals live safe from crime, disorder and harm. 
The programme aims to reduce the number of victims of crime in Scotland by 250,000 by 2017-18 and prevent harm caused by unintentional injuries.
The programme has already delivered an in-depth review of the evidence of what works to reduce crime and is helping to create the conditions for change by ensuring critical strategies are informed by this evidence.
Our approach is to put a premium on co-production, where services are designed and delivered with service users, building on the strengths, assets and resilience of individuals, families and communities.
To help encourage a decisive shift to prevention, the programme is supporting the delivery of holistic place-based approaches in seven places in Scotland. The focus in these places is on wellbeing rather than on any single policy and we are working closely with colleagues across the public sector in education, health and regeneration, amongst others.
Many of the places already have well-established community-led approaches. We intend to encourage further innovation in these places and capture and spread the learning.
A multi-agency national team has been established to support and help coordinate the work and each member of the Programme Board has taken on a 'champion' role for one of the seven places we are working with or one of our four priority themes: Prevention, People, Partnership and Performance.
The public sector is a major employer, investor and producer of services in the Scottish economy.
Innovation can improve how efficiently we provide public services. For example, the recent reform of the police and fire and rescue services has created new single services with the Scottish Fire and Rescue Service and Police Scotland. Providing a more cost effective and better service to the public, this innovation has protected and improved local services by reducing duplication and enhancing access to specialist equipment and expertise.
The public sector also has an important role in driving innovation in areas such as health.
NHS Research Scotland ensures Scotland provides the best environment to support clinical research and innovation in health care. This is achieved by applying best practice and processes to support efficient working, as well as providing the infrastructure required to support all research undertaken in the NHS for patient benefit.
As well as directly encouraging innovation, the public sector approach to procurement can shape innovation in the wider economy.
The Procurement Reform (Scotland) Act 2014 introduces a Sustainable Procurement Duty on public bodies to consider how, through their procurement activities, they can promote innovation. We will issue guidance in support of that duty, which will encourage public bodies to undertake comprehensive market engagement prior to defining their requirements and launching competitions, wherever it is possible, that the market may be able to offer innovative solutions. The guidance will also emphasise the need for specifications to be as open as possible which should encourage innovation, with variant bids permitted wherever possible.
3. Promoting inclusive growth
This strategy sets out how we will:
- Promote Fair Work and build a labour market that provides sustainable and well-paid jobs;
- Address long-standing barriers in the labour market so that everyone has the opportunity to fulfil their potential;
- Tackle cross-generational inequality through, for example, improved child care, boosting attainment and early years interventions that give every child a fair start in life; and
- Realise opportunities across Scotland's cities, towns and rural areas, capitalising upon local knowledge and resources to deliver more equal growth across the country.
As this strategy makes clear, a more cohesive economy that improves the opportunities, life chances and wellbeing of every citizen in our country not only improves outcomes for individuals and households but is a critical driver of economic performance over the long term.
How our economy grows and develops and the extent of opportunities for all our people is, in turn, key for the development of our communities and the wellbeing of individuals.
Scotland, like many advanced economies, experiences inequalities in the distribution of income, regional performance, and in opportunity.
Addressing such inequalities is a long-term challenge.
However, as highlighted in Section 1, the benefits from a move towards a more equal society are considerable, with the potential to strengthen long-term economic performance by improving productivity, providing more sustainable growth, maximising the potential of the workforce, and helping to address a range of wider social impacts.
To promote inclusive growth and provide opportunities for all, we need to encourage a fair and inclusive jobs market and promote regional cohesion. We also need to remove key long standing barriers to people being able to fulfil their economic potential such as boosting educational attainment.
The legacy of the global economic downturn has been to exacerbate a number of labour market challenges which existed prior to the recession - including youth unemployment, underemployment, and job security.
In addition, household incomes have been under pressure, with real earnings still below pre-recession levels and reductions in welfare budgets as a result of the austerity programme pursued by the UK Government.
As outlined in Section 1, reducing inequality, as well as being a key objective in itself, can also have a positive impact on an economy's wider performance. Establishing the conditions required to help reduce inequalities and increase opportunities is therefore key to achieving our purpose of increasing sustainable economic growth.
The Scottish Government believes that a labour market that is fair and inclusive, and that provides sustainable and well-paid jobs, is key to tackling income inequality and addressing wider issues within the economy.
For example, the relationships between health, work and the economy are well established. There are benefits to the economy of a healthy population, as well as physical and mental health benefits for those in meaningful work. A good job gives us a sense of purpose, a place in society, and a chance to develop ourselves.
We also recognise that while there can be both physical and mental health benefits from work, these are not inevitable. They are dependent on the quality of the job, income levels, work security, levels of autonomy and control.
A central part of Scotland's Economic Strategy is our Fair Work agenda, encompassing job security, fair reward, and opportunities for personal and workplace development. We recognise many features of the labour market are driven by the existing UK regulatory framework and the interaction with UK welfare policy. We will continue to press for such powers to be transferred to Scotland, but even within our limited current responsibilities there is substantial scope to take a different approach in Scotland. This will boost competitiveness and help tackle inequalities.
As part of this we will continue to take specific action to address the barriers that many people face accessing and progressing in the labour market and other spheres of public and economic life. This includes challenges facing women, the young workforce, disabled people, and ethnic minority groups. Our aim is to enable equal access to an increased range of opportunities while challenging bias and systemic institutional barriers.
Box 2.10 - Long-term wage levels in Scotland and the UK
Across the UK, the proportion of national income that is accounted for by wages has declined in recent decades.  This means that as the UK economy has grown, a declining share of this growth has been retained by employees through higher wages.
The declining share of GDP accounted for by earnings has been accompanied by a growing concentration in income at the very top of the income distribution. The highest earners have also seen the largest increases in income between 1997-98 and 2010-11. By 2010-11, the richest 1% of the income tax-paying population earned 8% of total pre-tax incomes. 
The number of people in Scotland on low pay also remains significant. In 2012 it is estimated that 18% of employees (or around 418,000) earned less than the Living Wage. 
These trends have contributed to an increase in in-work poverty. Among working age adults in poverty in Scotland, 52% live in households with at least one adult in employment. Fifty-nine per cent of Scottish children who live in poverty are living in these households. 
In-work poverty has an economic cost to society in addition to the human costs that it imposes. It increases payments of tax credits and other in-work benefits that top up low incomes, and decreases tax revenues.
Creating better workplaces, enhancing employee engagement, and fully utilising the skills of our workforce will be key to driving greater levels of productivity, bringing about benefits for businesses and the economy.
A 2013 study from Harvard Business Review  shows the clear Impact of Employee Engagement on Performance in business. A survey of 568 senior executives from international organisations showed that 71% saw employee engagement as being very important to achieving organisational success.
Such improvements will not come from investment focused on short-term returns, but from increased promotion of corporate structures, ownership models and values that drive long-term innovation and engagement.
Our Economic Strategy depends upon coherent economic, industrial and social policies that help all people to realise their potential.
The Scottish Government will continue to lead by example in areas such as advancing greater gender equality, and by ensuring all staff covered by our own pay policy receive the Living Wage.
We are also funding the Poverty Alliance to promote take up of the Living Wage Accreditation Scheme across the wider economy. We have set the target of increasing the number of accredited employers in Scotland to at least 150 by the end of 2015 and are on track to achieve this target.
Progress towards Fair Work will, however, require a much wider group of partners - employers, employees and trade unions - to share, encourage and adopt best practice in workplaces across the country.
As part of the delivery of our Economic Strategy we will establish a Fair Work Convention to draw on best practice and facilitate a joint approach with our partners. The Convention will be to consider the best thinking and research on matters relating to Fair Work, including innovative and productive workplaces, industrial relations, and the Living Wage. It will promote a new type of dialogue between employers, employees and trade unions, public bodies and the Scottish Government. It will be a visible symbol of our commitment that will help to drive thinking forward, particularly where we have no powers to legislate, so we must rely on persuasion and influence.
We are also developing a Scottish Business Pledge to encourage and recognise good business practice (see Box 2.11).
Scotland's businesses drive growth and create jobs. The Scottish Government has announced its intention to develop the Scottish Business Pledge, which aims to develop a partnership between the Scottish Government and businesses by supporting businesses in return for a private-sector commitment to a range of business and social policies:
- Paying the Living Wage;
- Committing to an innovation programme;
- Not using zero-hours contracts;
- Agreeing to pursue international business opportunities;
- Making progress on gender balance, for example by committing to the 'Partnership for Change';
- Supporting Invest in Youth;
- Supporting workforce engagement and development, and other progressive workplace policies; and
- Playing an active role in the community, for example by working with local recruitment agencies and job centres.
Through our Enterprise Agencies we provide a substantial package of business support which can help businesses to become more productive, grow, innovate and export. We will offer targeted support and advice as part of our commitment to the Scottish Business Pledge.
Promoting equality and tackling inequality
The ambition for a socially just, and more equal, Scotland, has been a central objective of this Government since 2007. 
In working to make that ambition a reality, we realise that everyone has a right to participate fully in society. Promoting equality and reflecting and understanding the diverse needs and characteristics of our people is key to fully unlocking their potential. Both promoting equality and reducing inequality are inter-linked and we are committed to delivering improvements in both. Addressing both will require tailored and targeted interventions.
We recognise the duty we have to improve equality outcomes across key areas, such as maximising opportunities for women (see Box 2.12).
Maximising economic opportunities for women to participate fully in the economy, and recognising the wider social role they provide, is key to improving economic performance and tackling inequality.
In 2013 the Strategic Group on Women and Work was formed to advise Ministers on areas where action is required to address women's employment issues. Action is underway to support this outcome, including:
- Increasing the level of funded early learning and childcare from 475 hours to 600 hours per year - for 3 and 4 year olds, and the most vulnerable 2 year olds, as part of a major investment in our social infrastructure;
- Implementation of the equality recommendations of the Developing Scotland's Young Workforce Commission which include key performance indicators on addressing gender imbalance in vocational learning, including modern apprenticeships;
- The development and implementation of the Scottish Government's Women in Enterprise Action Framework; and
- Continued funding for a range of organisations to tackle the pay gap, address occupational segregation in science, technology, engineering and mathematics ( STEM) areas and to work with employers to promote and support flexible working.
In delivering the Economic Strategy in the future, we will accelerate our interventions in this area. Alongside these current actions we have set out an ambition to almost double the number of free hours of childcare to 30 hours per week by the end of the next Parliament. This will benefit all parents, but will have a particular benefit for mothers. We have also set a voluntary target for all organisations to achieve gender parity on their boards by 2020, with a commitment to legislate on this issue as soon as we have the powers to do so.
We recognise there are a number of dimensions of inequality that remain a challenge for Scotland.
For example, differences in life expectancy and healthy life expectancy between the most and least affluent in Scotland are long term and persistent. Factors such as early life experiences, poverty, income and interactions with public services are all important drivers of health inequality.
A sustained effort on increasing healthy life expectancy, and reducing health inequalities, is essential to increasing competitiveness and tackling inequality. Our commitment to Health and Social Care integration, a system-wide and sustained focus on prevention and further legislation on alcohol and tobacco control will be important contributions to improving Scotland's health.
We are also taking action to support carers, who make an important contribution to Scotland's society and wellbeing (see Box 2.13).
The contribution of carers in looking after family or friends including some of the most vulnerable in society is widely recognised. Caring can affect carers' physical and mental health, resilience, finances, employment opportunities and the ability to strike a good balance between caring and participating in activities unrelated to the caring role.
In response to this, the Scottish Government, with COSLA, is implementing Caring Together and Getting it Right for Young Carers, the Carers Strategy for Scotland 2010-2015. Together, these strategies set out a range of actions to improve support to carers and young carers through better identification, assessment, information and advice, carer support, participation and partnership working. Alongside this, the Scottish Government has developed the Carer Positive kitemark, an award scheme which recognises employers in Scotland who have a working environment where carers are valued and supported. In addition, the Scottish Government is investing nearly £114 million between 2007 and 2016 in a wide range of initiatives to support carers and young carers.
While considerable progress has been made, it is recognised that more could be done to support the estimated 759,000 carers aged 16+ and 29,000 young carers in Scotland. The Scottish Government plans to introduce carers' legislation which aims to ensure that carers are better supported to enable them to continue to care, if they so wish, in good health and to have a life alongside caring.
An individual's socioeconomic background can also have a significant impact on their education prospects. From as early as age 3, children from the poorest income group are more likely to show lower development progress as those from the wealthiest group and the gap in attainment at school is well documented. 
Giving all children the best possible start in life is crucial to improved health, social, educational and economic outcomes in later life. This is why the Scottish Government is committed to early years investments and has introduced the Healthy Start programme which aims to improve maternal and infant nutrition from the earliest years.
Our strategy is to support teachers, parents and schools - especially schools with significant intakes from more deprived communities. For example, the introduction of free school meals for all Primary 1-3 children in January 2015 is an investment which will benefit children's health, education and wellbeing.
The benefits from closing the attainment gap when children are young, will continue into secondary school and beyond. That is why our strategy is focused on addressing inequalities in educational attainment. The Scottish Attainment Challenge will improve educational outcomes with a specific focus on improving literacy, numeracy, health and wellbeing in primary schools in Scotland's most disadvantaged communities. It will be supported by a newly established Attainment Scotland Fund (see Box 2.14).
The Scottish Attainment Challenge was launched in February 2015 and provides a new impetus and focus to our actions on closing the attainment gap.
The Challenge is supported by an Attainment Scotland Fund of more than £100 million over four years to drive forward improvements on educational outcomes in Scotland's most disadvantaged communities.
The Fund will initially target local authorities with the biggest concentrations of primary-age children living in deprived areas. It will focus on improving literacy, numeracy, health and wellbeing in primary schools in these areas, with the clear objective of giving all primary school-age pupils - regardless of background - the best start in life.
The Scottish Attainment Challenge will draw on international evidence of what works including the London Challenge which helped transform school performance in the city.
The first tranche of funding will see £20 million made available in 2015-16 to support children and young people in a number of Scotland's most disadvantaged communities to achieve their potential.
The Challenge will add to the other steps we have taken - for example our national numeracy and literacy drive 'Read, Write, Count', providing an attainment adviser for every local authority, and our Raising Attainment for All programme.
We also firmly believe in access to higher education based on the ability to learn and not the ability to pay. We maintain this commitment through the provision of free tuition for eligible full-time undergraduate Scottish students. With this investment, the number of Scottish-domiciled students accepted through UCAS into Scottish institutions in 2014-15 reached record levels.
However, there is still more to be done. Presently, students from the most deprived fifth of our communities only account for one-seventh of our university undergraduates. That is why we have set out a clear ambition that a child born today should have, not just a better chance, but an equal chance of attending university such that, in time, 20% of university entrants would come from the most deprived 20% of society. 
In line with that ambition, we intend to introduce a target for participation in higher education to drive further and faster progress. We are also establishing a Commission on Widening Access to advise on meaningful milestones, targets and actions required to ensure more students from disadvantaged backgrounds can access higher education and attain the qualifications they need to help them develop a successful career and fulfil their potential.
Place and regional cohesion
Ensuring all parts of Scotland benefit from sustainable economic growth and contribute to it is essential to Scotland's prosperity and cohesion. Our approach in this Economic Strategy to regional growth considers the dynamic of Scotland's cities, wider regions, and rural areas, to encourage success and opportunity shared across the whole of Scotland.
To assess progress we will, as part of the updating of the National Performance Framework, develop new measures and processes to capture performance at a regional and local level.
There are Single Outcome Agreements in place across all 32 local authorities consistent with our national economic development priorities. Our National Planning Framework will continue to help create high quality, diverse and sustainable places that promote wellbeing and attract investment.
Scotland's cities and their regions are home to two-thirds of the Scottish economy and over half of Scotland's population, and have a disproportionate impact on the national economy.
The size and scale of Scotland's cities drives the agglomeration of business and creates a dynamic environment for knowledge sharing and innovation.
The Scottish Cities Alliance has been established to build on these opportunities. It is a collaborative partnership between Scotland's seven cities and the Scottish Government. The primary role of the Alliance is to facilitate cities and their regions to develop and deliver large-scale strategic investment propositions that support inclusive growth.
It is also important for cities and their surrounding areas to work together as functional economic areas. Maximising the contribution of Scotland's cities, improving connectivity between them, and to their surrounding regions, is essential.
The Glasgow and Clyde Valley City Deal demonstrates both the use of innovative financing, and our approach to delivering more powers to local communities. The agreement between the Scottish and UK Governments and the eight local authorities that comprise the Glasgow and Clyde Valley region will lead to a 20-year investment programme allied to labour market and private sector growth interventions.
Beyond our cities and their wider regions, the people, resources and features of rural Scotland are also vital to the nation's heritage, identity and economy. Our rural areas support a million people and are an important part of the Scottish economy, with significant amounts of economic activity in sectors such as tourism, farming, fishing, food, drink and renewables. Indeed some of the fastest growing sectors of the Scottish economy in recent years, such as the food and drink sector, have a significant presence in rural areas.
The rural economy is heavily interlinked with our cities, providing vital natural resources and skilled people which help other sectors of the economy to flourish.
However, it is important to recognise the diverse nature of the rural economy, with areas subject to a number of challenges relating to their geography. There are a number of fragile communities which we have supported over a number of years and will continue to do so going forward.
Scotland's new £1.3 billion Rural Development Programme ( SRDP) over the 2014-20 period will support actions that benefit Scotland's natural heritage and in doing so, provide a basis for the growth in areas such as tourism and hospitality. The SRDP will also foster networking and innovation in land-based businesses, promote growth of the Food and Drink sector and strengthen local economies.
Policies to remove bridge tolls, expand the rail network and improve accessibility of ferries and airports are particularly important for rural parts of Scotland.
We are also taking steps to improve digital connectivity.
Our Digital Scotland Superfast Broadband ( DSSB) programme is rolling out superfast broadband to rural communities and businesses; whilst Community Broadband Scotland  has been established to support innovative community-led solutions in the hardest to reach areas not covered by our DSSB programme.
We are also taking steps to make sure that the funding available from the EU is targeted in the most effective way. This will benefit rural businesses in all sectors but is particularly important for industries such as farming and fishing, where businesses with long histories are often at the heart of rural communities.
This strategy sets out how we will:
- Support Scotland's exporters to grow into new markets and expand their presence in key traditional markets such as the EU and North America;
- Encourage a more export-orientated focus across all businesses and sectors in Scotland, and in particular amongst our small and medium sized enterprises;
- Create the underlying conditions which will continue to make Scotland a major destination for investment;
- Use Scotland's influence in Europe and, more widely, to support our international ambitions and continue to make the case for Scotland to remain a member of the EU;
- Promote Scotland's international brand, and showcase both Scotland and Scottish goods and services internationally and secure major international cultural and sporting events; and
- Publish an International Framework, which will set the context for how the Government, its Agencies and Public Bodies engage externally to promote Scotland - its economy and broader interests - and influence the world around us.
Scotland's economic success will be increasingly realised through strengthening our links with the global economy and the opportunities this brings for increasing trade; attracting investment; for sharing skills; expertise; and for collaborating with others to support innovation and sustainable economic growth.
To support this activity, the Scottish Government has an internationalisation agenda that is twofold:
- To create an environment within Scotland that supports a better understanding of international opportunities and a greater appetite and ability to seize them; and
- To influence the world around us on the issues that matter most in helping Scotland flourish.
Our updated International Framework will set four strategic objectives that seek to: enhance our global outlook to set the domestic conditions for success; strengthen our external relationships, roles and networks; build our reputation and international attractiveness, boosting our trade and investment; and encourage engagement in the European Union.
The forthcoming framework update will cover the full range of our international ambitions. At its heart will be its links to this Economic Strategy and how Scotland's approach to internationalisation supports boosting competitiveness and tackling inequalities.
International markets - both traditional markets, such as the EU, and new emerging markets - offer enormous potential for Scottish companies to grow their exports.
Moreover, as businesses become increasingly international, evidence shows that they themselves become more productive as they benefit from new ideas, new technologies, and a more outward focus. Additionally, attracting skilled workers to Scotland is key to boosting our skills base and tackling the challenges of demographic change.
Securing inward investment is also important both in terms of generating local employment and in creating positive spill-over benefits to the wider economy - for example, by leading to knowledge and innovation transfers and supporting growth in local supply chains.
Scotland already has an established network of global connections and a strong international reputation; a number of our firms and sectors compete in international markets and we have a strong record in attracting investment. Scotland, however, cannot afford to become complacent, we must continue to develop domestic capability and promote Scotland internationally to ensure Scotland is viewed as an attractive partner, exporter and location to invest and do business in.
Trade and investment
Ensuring that Scotland is an attractive location for investment and that Scottish-based companies are able to expand into international markets is integral to boosting Scotland's economic performance.
Scotland has a strong international reputation and was ranked 17 of 50 nations on the Anholt-GfK Roper Nation Brands Index in 2014. 
Scotland also has a strong track record of attracting inward investment. In 2013, foreign investment to Scotland was at its highest since 1997. Of the 11 UK countries and regions outside London, Scotland has ranked first or second every year since 2006 for attracting inward investment.
We build upon our success in this area by working to attract greater investment which strengthens our economy, boosts our innovation performance and contributes to jobs and prosperity across sectors and regions. Through Scottish Development International, we will focus on new opportunities to attract further investment, projects and jobs to Scotland, as well as encourage those investors already operating in Scotland to consolidate and expand their business.
A key part of our Economic Strategy will be continued support to Scottish Development International, our other Enterprise bodies and our Scottish Government staff overseas, to build on existing success in attracting such investment to Scotland. We will take a particular interest in high-end investment, which both supports high-paid and productive employment and maximises opportunities.
Scotland also has many successful and growing trade links across the world, as summarised in Box 2.15. This has helped to increase Scottish exports by 20% in nominal terms between 2010 and 2013,  meaning we are on target towards boosting exports by 50% over the period 2010 to 2017.
Whilst Scotland's overall export performance has improved in recent years, opportunities for further growth remain. Exports are concentrated within a limited base of firms, with around 100 companies accounting for 60% of Scotland's exports.
Also, Scottish exports to large emerging economies such as China and India remain low relative to our exports to more established markets. For example, Scottish exports to Ireland are worth nearly five times more than exports to India.
With the rise in spending power in new markets, there will continue to be scope for Scottish companies to benefit from trade across the world. Growing and diversifying Scotland's export base by helping Scottish companies recognise and grasp international opportunities is essential to rebalancing the Scottish economy and improving long-term economic performance.
In the context of our International Framework, we will develop a Trade and Investment Strategy which sets out the Scottish Government's approach to international trade and investment and how we will work with businesses, the wider public sector and the third sector, in Scotland and internationally, and with international partners and institutions to achieve specific trade and investment goals.
Scottish exports to the rest of the UK were worth £46.2 billion in 2013, whilst export sales to the rest of the world were £27.9 billion (excluding oil and gas).
Scotland's international exports are currently heavily concentrated in Europe and North America, which together account for around 62% of Scotland's international exports in 2013. Exports to the BRICS countries - Brazil, Russia, India, China and South Africa - collectively only account for around 6% of Scottish exports, however, they have increased by 12% over the past three years.
Figure 2.5: Scotland's International exports, top 10 sectors, 2013 (£ billions)
A range of initiatives are currently in place to support companies wishing to grow their international sales and we will build on these as we deliver this Economic Strategy.
For example, the Scottish Investment Bank prioritises lending to support SMEs with international ambitions; SDI's International Manager for Hire programme provides companies with dedicated support from individuals with proven international commercial expertise; and a High Growth Market Unit has been established to support companies to access market specific advice and guidance, and accelerate export sales to emerging high opportunity markets such as China, India and the Middle East.
There have been a number of success stories across a range of sectors in Scotland where companies have expanded into international markets. For example, the Food and Drink industry has increased exports to the rest of the UK and overseas by over 50% since 2007. Our renowned Scottish food and drink exports include whisky, but we also have major players in other markets. For example, Scotland is the largest producer of farmed salmon in the EU, and the aquaculture industry as a whole makes a substantial contribution to our rural economy, with ambitious targets to grow it further.
Another example of our international reach is in the oil and gas industry (see Box 2.16).
In addition, therefore, to encouraging a greater proportion of our businesses to export, a key aspect of our strategy will be supporting particular sectors where we have an international comparative advantage.
North Sea operators rely on an extensive supply chain of companies in both Scotland and the rest of the UK. These companies make a substantial contribution to the economy, generating more than £35 billion of turnover. 
As a maturing basin, the North Sea oil and gas sector faces a range of challenges, including oil price fluctuations. An appropriate fiscal and regulatory regime for the industry is critical to ensure that the sector continues to contribute to the Scottish economy in the future. The forthcoming refresh of Scotland's Oil and Gas Strategy also aims to both reflect the challenges now facing the industry and the future opportunities, with a strong focus on the structure and capability of the domestic supply chain.
It is important that Scotland's supply chain positions itself to take advantage of the future opportunities that the sector offers both in the North Sea and internationally.
A growing market for the Scottish supply chain is the decommissioning of oil and gas platforms. Approximately £46 billion is projected to be spent on decommissioning facilities in the North Sea over the next 25 years. This presents a significant opportunity for supply chain companies in Scotland. It also provides an opportunity for Scottish-based companies to establish themselves early in the decommissioning market, providing a strong base to export their skills and expertise in the future.
Companies in the supply chain are also increasingly diversifying into international markets. International sales by the Scottish oil and gas supply chain reached £10 billion in 2012-13, accounting for over half of total oil and gas supply chain sales from Scotland.  The Scottish Government and Enterprise Agencies have an important role in supporting this work. This includes ensuring that it has access to adequate information and resources on international markets and growing its ability to compete for contracts abroad.
International connectivity plays an important role in facilitating trade, tourism and investment.
Scotland is served by direct flights to over 32 countries. As we deliver this strategy we will be committed to improving both long-haul connections to Scotland and connectivity through world hubs.
The devolution of Air Passenger Duty ( APD) to the Scottish Parliament, which has been agreed as part of the Smith Commission recommendations, will enable the Scottish Government to design a replacement tax which better supports our objective to improve connectivity. The Scottish Government has already confirmed its intention to reduce APD by 50% within the term of the next Parliament, with a view to eventually abolish the tax when public finances allow.
In addition to securing new air routes to Scotland and, as highlighted earlier, our digital connectivity work and broadband rollout will be important for improving business opportunities and connectivity between Scotland's communities and networks across the world.
The Digital Economy Business Scotland Survey (2014) found that businesses that had a high use of digital technologies were far more likely to export than other businesses. Our digital connectivity work and broadband rollout therefore plays a critical role in helping businesses internationalise.
Global outlook, influence and networks
In a globalised and interconnected society, an international outlook and understanding of the world is vital. The Scottish Government is committed to embedding internationalisation across our areas of competence to ensure that Scotland remains internationally competitive and our people have the right skills and attitudes to seize new opportunities.
The development of an international mind-set requires a holistic approach. This can be seen in our policy on increasing foreign language proficiency for school-aged children through to our commitment to improving our transport links and digital infrastructure.
It is also important that we build on our strong reputation and brand with cultural and tourism promotion.
Further strengthening our international influence, external relationships and networks will also bring benefits to Scotland's economy.
Scotland's membership of the European Union is particularly important in this regard. As a member of the European Single Market, Scotland benefits from being part of the largest free trade zone in the world.  That is why we will make the case for Scotland to remain a constructive member of the EU with access to over 500 million potential customers for Scottish products and services.
Scotland has also built a wealth of international experience and networks, with connections established through migration, trade, tourism and major events.
Scotland benefits from the extensive international presence, networks and reputation of our universities, from the collaborative Connected Scotland initiative and from the many international students who choose to study in Scotland. Organisations across Scotland also benefit from Scotland Europa's support in fostering successful European relationships and guidance on European policies and funding. Furthermore, the GlobalScot network of over 600 business leaders, entrepreneurs and executives across 51 countries with a connection to Scotland provides Scottish businesses with invaluable insights and advice on doing business in particular markets and sectors.
The Scottish Government and its agencies also undertake a broad range of international activity and provide sectoral expertise. For example:
- There are four Scottish Government overseas offices - Brussels, Beijing, Washington and Toronto;
- Scottish Development International has 29 offices in 17 countries; and
- Our agencies, including VisitScotland and Creative Scotland have a strong international outlook, supporting successful major events such as Scotland's Festivals, the 2014 Commonwealth Games, the Ryder Cup at Gleneagles and the MTV Europe Music awards in Glasgow.
These organisations will continue to work together to promote Scotland as a great place to live, learn, visit, work and invest.
Our strategy builds on these strengths, in particular through our commitment to establishing One Scotland Partnerships. These Partnerships will set clear trade and innovation goals for specific international markets and ensure that activity is co-ordinated to maximise impact and make the best use of resources.
We will also work with partners to pilot Innovation and Investment Hubs. These Hubs will play a key role in promoting the research and innovation capacity and capability of Scottish companies and universities, including our network of Innovation Centres, in attracting investment and funding, and in supporting international collaboration which delivers economic benefits and helps address societal and global challenges. The scale, scope and focus of these Hubs will vary depending on the specific opportunities in a particular country or market.
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