Scottish business needs billions of pounds worth of new investment to keep up with international competitors, according to a group of MSPs.
MSPs called for investment in technology and nanotechnology
The warning comes in a report from the enterprise and culture committee, which has been studying how to boost growth.
It has spent a year looking at why Scotland lags behind other areas of the UK and its European neighbours.
MSPs concluded that an additional £8.5bn was needed per year, split between the public and private sectors.
Committee chairman Alex Neil said: "Our competitors invest 20% of their national income every year in investment in new technologies and new industries.
"We only invest 10% - to reach that level we need to double that over the next 10 years.
Mr Neil wants to see more public sector investment in education and physical infrastructure such as transport and water, along with greater private sector spending on research and development.
He said the role of the public sector should be to facilitate the growth of the private sector, and he pointed to the experience of a small scale scheme.
"We have a research and development plus programme and so far it has invested, since it was created about 18 months ago, £15m of public money and that has leveraged £120m of private money," he said.
"We just need to repeat that on a much bigger scale."
He added that both sectors needed to concentrate on target industries such as life sciences, engineering, food, tourism and nanotechnology.
Liz Cameron, director of the Scottish Chambers of Commerce, told BBC Radio's Good Morning Scotland programme that members of her organisation said funding was the most important factor to promote economic growth.
"This is certainly a key issue that's coming up time and time again," she said.
"We found that it's very easy for successful businesses to access funds, but companies who are at a stage where they want to take the next step on the ladder are finding it more and more difficult to access investment funding."
Peter Hughes of the industry body Scottish Engineering said that increasing productivity was the key.
"One of the things we have to be is leaner and meaner than ever before, but we've also got to spend more money on research and development, on capital expenditure and in training."
Why does Scotland lag behind other areas of the UK and European neighbours on business growth? What do you think can be done to make Scottish business more competitive? You sent us your views.
The Scottish Executive could improve this situation immensely by using its huge purchasing power much more intelligently. I'm reminded of the business event recently where successful Scottish entrepreneurs criticised The executive's policy of ignoring Scottish suppliers in favour of bigger, more expensive and often less suitable alternatives (multinationals). McConnell's response was to call them "idiots" - what kind of message are Scotland's businesspeople to take from that?
There is only one answer to Scotland's depressed economic state - independence. Being a part of the United Kingdom is draining Scotland of her national wealth - both natural and human resources. The nation's economic wealth flows south and so do our best leaders. The "we are too small to survive" mindset is a product of a people who have no confidence and no future. We as Scots would be wise to take a look at one of our closest neighbours - Ireland. The decade-long economic boom there has transformed the country into the "Celtic Tiger". Our economy is an international joke - a private loan machine for the Westminster government to fund America's wars. Keep voting Labour, Tory & Lib Dem if you like Scotland's place as the "Sick man of Europe". There is an alternative..
The simple fact is this: western countries that are smaller have much more responsive economies that provide sustainable growth and ultimately wealth. Only when Scotland is independent or gains financial autonomy can it set its own business rates and motivate substantial investment. Our current economy is geared toward a south-east England market which doesn't reflect Scotland's needs. In addition, let's not forget Gordon Brown's shameful stealth taxes which have stagnated further investment on North Sea oil and alternative energy sources.
Geoff Aberdein, Aberdeen
Richard ... 3. The committee recognises that banks fundamentally lend money and that they do not provide risk capital. Actually the BoS does.. It has a deal with one of the Angel groups. The question is why don't the others? There is nothing to prevent them providing risk capital other than their own determination not to. Banks in part of Scandinavia have contributed to venture funds so why should the Scottish banks be considered above this. We need to break that habit. Anyway - banks themselves take risks. Look at their investments in China and in other companies such as hotel groups.
I have to agree with the comments made already. There are an awful lot of people who work for the government and council in Edinburgh. The Scottish government seems to be stuck in the dark ages as far as fostering competition and encouraging investment is concerned. The best way to encourage investment is to completely free up markets and also lower taxes for businesses. While that would lower their income in the short term it would hopefully reap rewards in the long term. Or they could charge more than the £2,000 a year I already have to pay for council tax on my two bedroom flat. I'm still not sure what that pays for.
One of the key problems with the Scottish economy is the lack of opportunities for those of us with skills. In my case the state invested large amounts in my university education (BSc to PhD), however there were no job opportunities in Scotland. I also investigated starting my own business, however the assistance offered was so restrictive and full of paper work that it was pointless. This combined with a banking sector which makes vast profits yet refuses to support any businesses means that the country has a lot of catching up to do. I am not suggesting they 'lend' on a charitable basis, but it seems easier in almost every other EU country.
Simon from Bristol is spot on. Excessive public spending in Scotland (and Northern England) crowds out private enterprise, reduces incentives to work hard and innovate. Look at the Irish model for the correct approach - lower taxes lead to faster economic growth. As soon as Equity backers see growth potential, they will invest. Lower tax => more growth => more investment => higher standard of living. It really is that simple.
I'm glad to hear that the business community in Scotland, the public and increasingly its politicians recognise that the public sector in Scotland is too big, too bloated and inefficient. However for Scotland to grow its businesses and be competitive it needs full control over its fiscal and economic affairs. Scotland's government has an embarrassing lack of policy levers in this area. This would not only teach the public sector to be less profligate with public money, it would provide an incentive structure to attract business and wealth creation.
I am an Aberdonian with business experience in Scotland, England and the USA. I have to say part of the problem with Scottish business is the very attitude shown by Mr Neil. Scotland needs less public sector spending, not more. Scotland has an ingrained culture of state dependency, with a ridiculously large percentage of those who do work already in the public sector. Council tax has become so astronomical there is little incentive for me to go back and work there. Rather than accept change people just want more hand-outs. It's time Scotland grew up!
Whilst Scotland is home to some extremely powerful and very profitable financial institutions the extremely poor availability of risk equity capital would indicate that there is now an almost complete disconnect between the financial services sector and the rest of the economy. It seems entirely bizarre that whilst the banks alone are making profits totalling around £15bn, the amount invested in start-ups is less than £200m.
Dick , Aberdeenshire
I have read very rapidly through the summary / recommendations of the report. Four topics require comment: 1. The committee comments on the multiplicity of aid schemes and the resulting confusion. There is absolutely no doubt that too many people administer these while having insufficient commercial knowledge / experience. Without serious overhaul, these schemes will continue to under-deliver. 2. The Scottish Financial Sector is huge and successful. However, over the last 20 years approx 75% by number of the local institutions that had investment-making authority to support emerging Scottish companies have disappeared. Examples include Scottish Amicable, General Accident and Ivory & Sime. They have not been replaced. 3. The committee recognises that banks fundamentally lend money and that they do not provide risk capital. Business Angel groups have increasingly been the providers of earlier stage capital. Without them, the local position would be very poor. 4. The failure is and will remain that of financial / management assistance to high growth start-up companies. Virtually all governmental financial schemes require the founding entrepreneur to provide "matched funding". That ability is uncommon thus barring a very large number of high growth opportunities from ever starting. I have no doubt that this remains the Achilles heel of "Smart Successful Scotland" and I suspect that this report will do little to improve matters as the executive has put its trust in multiple "initiatives and schemes" but has little interest in changing.
Richard Simpson, Stirling
Scotland has the potential to become one of the most vibrant economies in Europe however our governmental institutions conspire against us to allow that. For example, we have some excellent world class large companies and many small businesses, but what about the middle-sized companies, where many innovations can be developed. We do not have that many medium-sized businesses because the tax structure precludes the growth of small business to medium size because 50% tax is put on any profits made from that growth, but only 10% if an entrepreneur sells it; an incentive to sell not to grow. There is also a lack of internal competition, e.g. why is it that you can only use one estate agent to sell a house in Scotland, why not multiples like they do in England; Recruitment Agencies work this way in Scotland, why not estate agents.
David Currie, East Kilbride
The newspaper recruitment pages say it all. You can count hundreds of jobs funded by the taxpayer, with hardly any jobs that will actually create wealth. Jack McConnell boasts that his government has given us low unemployment - no wonder, the government is employing everyone! I'm sure the current government are happy with this situation because it makes Scotland appear dependent, and therefore incapable of being independent. A new government is required that believes in Scotland earning her keep.
As the Director of a recently failed Scottish company, I can say from bitter experience that Scotland is no place to do business - help from Scottish Enterprise is grudging and disjointed, unless you know "the right people". Few people realise how anti-business the government is until they experience it first hand.
Perhaps if we had not propped up the rest of the UK with oil revenues for 30 years, we might not be is this state. It is also a bit much that we are represented by some 129 MSPs (in addition to 60+ MPs) sitting in a building costing £453m. Imagine the start that could have been made if that sum had been used to promote/develop Scottish business. It's not just about investment, we need to consider the culture business operates in. When I was in Ireland last year, the lead news story on television was Entrepreneur of the Year. Could a cultural shift of that proportion take place here? I hope so.