The clever money

Despite the success they can point to, the universities are still seen as inward-looking and commercially naive by the private sector.

"It's a Scottish disease not to celebrate success," says Derek Waddell, head of research at Edinburgh University. "Universities have moved on substantially in terms of their outlook and performance, but I don't think the market realises that."

On the contrary, our higher education institutions produce 1% of the world's research from just 0.01% of its population, according to Universities Scotland. Scottish academics are cited in more peer review journals per capita than anywhere else, which indicates that their work is also of the highest quality.

Robin McAlpine, head of corporate affairs at Universities Scotland, says that higher education is one of only two world-class sectors in the country, along with financial services.

"Five of the Scottish universities are in the top 200 in the world Edinburgh, Glasgow, St Andrews, Dundee and Aberdeen, while there are 25 from England. What other sector can you say that about?" he asks.

Universities have been under pressure to become more commercial since the days of Margaret Thatcher. Back in the late 1990s, the then Scottish Executive funded university commercialisation departments and set up schemes such as Scottish Enterprise's Proof of Concept programme and the Higher Education Funding Council's Knowledge Transfer Grants, which financed promising research.

In 2003 this was bolstered by the launch of Scottish Enterprise's three Intermediary Technology Institutes (ITIs) for energy, life sciences and digital media, which spot possible gaps in the market and commission research and development (R&D) to capitalise on them. More recently the government funded Interface, an information service that aims to bring businesses and universities together.

The Scottish government spends in the region of £70 million each year on these efforts, and has fine-tuned its policies at the same time. The emphasis has broadened from spin-outs to include patents, licences and strategic alliances with businesses, and a joint task force of the government and Universities Scotland has spent the first half of this year considering more improvements.

The net result has been a sea-change in universities' outlook over the years. Eleanor Taylor, who runs Proof of Concept, says that when her programme held its second annual awards in 2000, the entrepreneurs were gearing up for a networking session. But no sooner had the awards been handed out than the academics got their coats and went home. "We have moved on a long way since then," she says.

But having made such a success of commercialisation, there are still many who wonder whether it is worth the effort. The cracks start to show when you discover that those universities that are most successful with their research get only about 3% of their revenues from it. To get their research through the more expensive late stages, they usually have to sell large stakes in their intellectual property, which means they get only a small share of the final reward.

Worse than that, their R&D does not produce a return on investment. The Edinburgh University research shows that every $1m (£510,000) of royalties costs the top eight Scottish universities $40.2m. This is the one measure in which the American universities are ahead, but their $27.9m cost is nothing to shout about either. For this reason, universities like Stanford in California and the Massachusetts Institute of Technology have started giving away much of their research for nothing.

The other side of the coin is that Scotland does have a big R&D problem, but it is not in the universities. According to Universities Scotland's Prosperity Scotland report last year, Scottish industry's spend on R&D amounts to just 0.58% of GDP, well below the 1.14% EU average and the 1.16% UK level. The only European countries that spent less per capita on corporate R&D are Italy, Spain and Poland.

As one university source said: "The truth is that industry in Scotland is not particularly good. When is somebody going to stand up and say this? A lot of the problems blamed on the government and the public sector are a function of industry."

This means that while the universities are producing excellent work, the corporate sector is not taking it to the next level. Since much corporate R&D tends to be outsourced back to universities, it also means that businesses are not taking enough advantage of universities' strengths.

It is not quite clear why, although the suspects people variously point to include cautious Scottish managers; too many small to medium-sized companies in sectors that are not big on R&D; ignorance about universities' strengths; and too many companies with foreign headquarters, since companies tend to spend on R&D close to where they are based. It is being left to the venture capitalists to engage with the universities, and they were already becoming more risk-averse even before the credit crunch.

Low corporate spending on R&D is thought to be linked to Scotland's UK-trailing growth rate. Studies have shown a correlation between high-growth economies and high corporate spending on R&D. The problem is also one of the main reasons why the government has made the reorganised Scottish Enterprise focus heavily on innovation.

In R&D circles, there has been much debate about what needs to change to fix the problem. But instead of discussing changing corporate culture, the focus has been on government intervention.

Most people now agree that there needs to be more emphasis on the demand side, meaning that instead of programmes that help the universities with earlier-stage research, we need to encourage demand from the private sector. Not only will this get them more involved in R&D, it will help universities to focus on actual market problems, which should lead to more commercially viable inventions.

As Melfort Campbell, chairman and chief executive of Aberdeen-based oil services company Imes Group and chairman of the board of governors at Robert Gordon University, says: "The trouble is the universities are not very good at finding the market applications for innovations and technologies. It's down to us, the market-facing companies, to build that bridge".

Chris Masters, who chaired the Scottish Higher Education Funding Council (since renamed the Scottish Funding Council) until 2005 and sits on the boards of Wood Group and Alliance Trust, would change the current system to make this possible.

He has long argued for a system that enables companies to invest in university R&D through vouchers, which would be used for commissions and could be redeemed by universities through the Scottish Funding Council. He argues that since nine in 10 start-ups collapse, inventions developed in successful companies are much more likely to succeed than spin-outs. If it came down to one scheme or the other, he would "probably" pay for his one by scrapping the ITIs.

"When I floated this two years ago, ministers said it was very interesting but totally impractical because of EC anti-competition rules. But I discovered that in Holland they introduced an almost identical scheme in 2004. It has encouraged companies who would never normally have anything to do with R&D. If Holland can do it, why couldn't Scotland?" he says.

Melfort Campbell takes a less radical approach. He argues that companies that buy in services must be encouraged to tell their providers what innovations would benefit them. The providers should then collaborate with the universities to come up with answers.

He explains that his company started in the mid-1980s when Shell challenged his group of engineers to come up with a means of testing offshore cranes that did not involve steel weights, since they had recently caused an accident that cost the company hundreds of millions of pounds.

They proposed using water bags, after conversations with materials technologists who had been working with the bags for completely different purposes.

"They had the science but not the application. We had the application but not the science," he says.

Although he is against removing the existing programmes, he says Scotland badly needs something like the US Small Business Innovations Research (SBIR) scheme. The SBIR puts large amounts of money into companies prepared to try to develop technologies that it considers would be beneficial. This is different from Scotland's ITIs, which are less well funded and commission one company or university to research each gap they identify in the market.

"We have absolutely nothing equivalent in the public sector," says Campbell, adding that the SBIR helped bring about Silicon Valley and the US's technology corridors in places like Boston and Philadelphia.

He also suggests that the government could make it a condition for foreign companies that they had to communicate innovation gaps for other companies to fill before they could get licences to set up in Scotland.

On the university side, there are those who warn not to get too hung up on this distinction between supply and demand. Professor Anton Muscatelli, principal of Heriot- Watt University, agrees with much of what Campbell and Masters say, but believes that the relationship between university and business needs to be conceived more subtly if it is to be productive.

"We have got a lot of strategic alliances, such as with oil and gas explorer Cairn Energy and medical devices group Renishaw. Rather than just focusing on one project, they create vehicles where the industry can come and say, We have got a problem, can you help us solve it?' It also means we can learn from the industry and ask more interesting questions," he says.

The next opportunity to take the temperature will be in June or July, when the government/Universities Scotland industry taskforce comes up with its preliminary findings about how things should proceed. It is not clear how much detail there will be at that stage, but it is certainly mulling a scheme along the lines of Chris Masters's one. There is also likely to be more emphasis on seeing research as an export in cases when Scottish companies lack the scale to take it forward.

The SNP enthusiasm for innovation might meanwhile be a hint that they are amenable to further changes. Whatever happens next, it seems clear that few are satisfied simply with our world-beating universities. Until they are part of a wider success story, this debate seems set to run. SPINNING OUT FOR SCOTLAND

Name: MTEM University: Edinburgh MTEM was spun out on the back of a technology that can determine whether underground reservoirs contain hydrocarbons, without the need for drilling. MTEM's multitransient electromagnetic technology was seen as a major improvement on the old 3D seismic technology technique, and the company was sold to Norway's Petroleum Geo-Services for £138 million last June.

Name: D3 Technologies University: Strathclyde D3, a graduate of Scottish Enterprise's Proof of Concept programme, carries out DNA-based diagnostic tests that detect diseases or genetic predisposition to disease much more quickly than existing tests. It spun out from the Strathclyde chemistry department last year after medical devices group Renishaw bought 75% of it for £5 million.

Name: Gas 2 University: Robert Gordon University, Aberdeen Gas 2 has developed a variety of new ways in which to convert natural gas into liquid, which makes it easier for transportation. Last month, it picked up £10 million in second-round funding from private equity firm Lime Rock and various other investors.

Name: Lumicure University: St Andrews Lumicure, a collaboration between the St Andrews physics department and Dundee's Ninewells hospital, provides a skin cancer treatment using light-emitting sticking plasters powered by pocket batteries. The devices reduce pain and make it possible to treat patients in their homes or local clinic rather than a hospital. It spun out from the university in 2006 and received £2.5 million backing for development from a consortium led by Longbow Capital in January.

Name: Rimcazole/Modern Biosciences deal University: Dundee The university last year did a deal with Modern Biosciences plc that will see it develop rimcazole in-house as a cure for cancers like breast, lung and prostate. In a unique arrangement, MB will get an exclusive worldwide licence to distribute the drug in exchange for funding its development, and it will then share the revenues with Dundee.

The drug started phase 1a human trials last month.