Targeted approach to improving Scottish exports could prove catalyst

Scotland has been a global trading nation for hundreds of years. Today, across our economy, we have businesses competing at the highest level on the international stage with key strengths in food and drink, advanced manufacturing, energy and financial services.

Picture: NASA

For a small, open economy like Scotland, trade provides an opportunity to develop into much larger markets, and the need to grow our export base was highlighted in our report, Scotland in 2050: Realising Our Global Potential, which seeks to help best position the Scottish economy for the future in a rapidly evolving global marketplace.

The report, commissioned by the law firm Shepherd and Wedderburn to coincide with its 250th anniversary, was informed by the views of more than 100 business leaders, industry bodies and representatives of public and third sector organisations. [A copy of Scotland in 2050 can be downloaded from shepwedd.com/2050.]

Of course, it is not just exporters that benefit from export growth. International trade and investment creates spill-over effects which ripple across supply chains. In total, more than 950,000 jobs in Scotland are supported by demand outside of the country.

At the same time, wider evidence shows that firms that export – and/or are part of an international supply chain – tend to become more productive, innovative and competitive. Countries with a strong export base can often be more resilient and have more balanced growth trajectories.

But, as a country, we export much less than many of our key competitors, including the UK as a whole.

A number of factors lie behind this. The decline of the country’s manufacturing base has led our economy to focus on ‘local’ services and the rest of the UK for demand than in the past.

In addition, our export base is concentrated in a relatively small number of sectors and firms. For all our strengths, just five sectors account for more than half of all Scottish international exports, with whisky accounting for a significant proportion of that total.

Opportunities

A challenge appears to be encouraging Scottish businesses to seize opportunities overseas. In 2017, just under 15 per cent of small to medium-sized enterprises in Scotland reported that they had sold goods or services outside the UK in the previous 12 months. This compares to 20 per cent in the UK as a whole.

We’re also heavily dependent upon a small number of markets. We still trade more with Luxembourg – a market of 600,000 people – than we do with India with its market of 1.3 billion people.

It is not unusual for small countries to have their export potential consolidated in a small number of firms, sectors or markets that are near to hand. But it does seem to be a particular issue for Scotland.

With our undoubted economic strengths, there is clearly an opportunity to do better. And it is vital that we do so.

Like many countries, Scotland’s economy has been through a challenging decade, with growth lagging behind trend. While employment is at a near record high – and unemployment at anhistoric low – productivity growth remains fragile with knock-on implications for Scottish household incomes.

Weak economic growth has acted as a brake on efforts to tackle poverty and inequality. Almost one in four children in Scotland still lives in relative poverty.

It also has crucial implications for public services. The new Smith Commission powers have changed the funding process for Holyrood’s budget, placing a much greater reliance upon revenues generated in Scotland.

But, in a more uncertain world – with Brexit and the threats of a trade war developing between the US and China – closing Scotland’s export gap will not be straightforward.

This has been the focus of both Scotland in 2050: Realising Our Global Potential, and Scotland: A Trading Nation, the Scottish Government’s new export action plan.

In the past, the government’s approach could be characterised – perhaps a little unfairly – as i) set high-level targets,ii) announce a range of initiatives across all firms, all sectors and all markets, andiii) hope for an improvement.

Not this time.

It is refreshing that the government is now much more upfront about the difficult choices that will have to be made toprioritise support for certain sectors, identify which businesses to focus upon and the markets we need to target if we are truly to have a step-change in Scotland’s export performance.

Overall, it is an impressive piece of work and a welcome indication of the evidence-based approach of Scotland’s Minister for Trade, Investment and Innovation, Ivan McKee.

Of course, translating this approach into delivery is the big test, but this clarity of purpose should help.

The key conclusions of the government’s action plan mirrored many of those from our own Scotland in 2050 report, in which we set out a series of global trends that we believe will shape the country’s future and examined how well placed we are to respond.

Improvements

But an academic exercise can only take you so far. So we spoke to more than 100 businesses from right across Scotland to find out from them their hopes and concerns for the future.

While all were universally positive about Scotland’s economic strengths, and upbeat about future opportunities, there was also a refreshing frankness about where Scotland needs to improve.

Firstly, greater action is required to encourage existing exporters to scale up, both in areas where Scotland already has had success and in emerging markets. This has implications across a wide range of areas, from export promotion, access to finance and the degree of co-ordination between UK and Scottish government initiatives.

Secondly, there needs to be a more intense export culture across Scotland’s business base. Citing a “lack of ambition” and doing nothing about it is not a credible response. Instead, there needs to be a much greater focus upon providing leadership and mentoring to growing firms to help them move into international markets. The onus here is just as much on the business community as government. The public support system needs to be decluttered, with a greater focus on understanding what works, as opposed to announcing new initiative after new initiative.

Finally, the importance of collaboration was stressed repeatedly – across the business base, academics and policymakers. Scotland’s size provides significant opportunities to get ahead and to work in partnership to grow market opportunities at scale.

Whatever happens with Brexit, Scotland needs to continue to engage proactively in international markets and remain an open and welcoming place for global investment and talent.

Professor Graeme Roy is director of the Fraser of Allander Institute at the University of Strathclyde.