The Fraser of Allander Institute has launched a new initiative to spark national debate around entrepreneurship and innovation in Scotland, with its flagship report warning that the country is in danger of lagging behind other UK nations in supporting fledgling businesses.

Bringing together the Fraser of Allander Institute with the Hunter Centre for Entrepreneurship, both based at Strathclyde University, the Scottish Entrepreneurship and Innovation Observatory (EIO) will look to inform policy and best practice, with a mission to help businesses across Scotland thrive.

The Observatory aims to become a hub for ideas and collaboration, with its work underpinned by a comprehensive data bank and interactive dashboard, offering accessible information for policymakers, businesses and researchers.

“The Observatory is about starting a conversation on how Scotland can strengthen its entrepreneurial ecosystem,” said Professor Niall G. MacKenzie, head of the Hunter Centre.

“By providing robust analysis, we can understand what works, what doesn’t, and how to turn research and ideas into real-world impact.”

Kicking that off, the Observatory’s first State of the Nation report examines the health of Scottish entrepreneurship, warning that start-up rates have stalled compared to other parts of the UK, while scaling businesses remains a challenge. 

The paper found that in recent years, Scotland has fallen behind both England and Wales in new business registrations per 10,000 people, with previous growth unwinding over the last decade, a worrying trend given the emphasis Scottish politicians have placed on the importance of entrepreneurship to the Scottish economy.

Scotland’s start‑up slowdown is partly linked to higher levels of deprivation compared with England in general. According to a new discussion paper (also published by the FAI), higher deprivation means fewer start‑ups, and fewer start‑ups mean lower university attendance – creating a vicious circle of disadvantage.

Meanwhile, at a higher level, the study found that while there has been moderate, if volatile, growth for mid-sized enterprises, but larger Scottish firms, the national drivers of growth and job creation, have seen little expansion, with numbers stagnating since the end of the pandemic.

“Our data and analysis point to what looks like a significant restructuring of Scotland’s economy over the last ten years or so toward solo entrepreneurship and away from traditional employer-employee relationships,” said the report.

“The weak performance of medium and large enterprises suggests the oft-discussed challenges in scaling businesses are very real.”

The FAI’s concerns echo those of the recent Scaling Scotland report, authored by ex-Skyscanner exec Shane Corstorphine alongside a panel of business leaders, which warned of the slow erosion of the country’s ‘headquarters-economy’ over the last thirty years and the narrowing of its scale-up pipeline.

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However, amongst the challenges, there are a few bright spots. For example, the Observatory’s report shows Scotland emerging as one of the UK’s most innovation‑driven nations, with nearly a third (32.4%) of firms actively innovating, ahead of Wales (30.9%) and Northern Ireland (32.1%), and not too far behind England (37.1%).

Scotland boasts one of the UK’s most mature angel investment markets, with more than £765 million channelled into early‑stage Scottish companies. Most of this funding (85%) has flowed into areas like tech, professional services, and manufacturing, with Edinburgh being the primary hub.

“Our State of the Nation Report provides a clear picture of where we stand today: start-up rates have stalled compared to other parts of the UK, and scaling businesses remain a challenge,” said Professor Mairi Spowage, director of the Fraser of Allander Institute.

“At the same time, solo entrepreneurship is growing, and Scotland’s universities continue to lead in research and development. We’re also seeing encouraging signs in the angel investment market, with over £765 million invested in early-stage Scottish companies in recent years.

“The challenge – and opportunity – is to ensure that this investment reaches more parts of Scotland and helps create inclusive growth across all communities.”