II The balance between inward
investment and indigenous industry
5. One area in which Wales has been markedly more
successful than other parts of the UK over the last twenty years
has been in attracting investment in manufacturing from overseas.
While Wales's share of inward investment into the UK has fallen
since 1991 (from 19% to 11%), it is still far higher than its
share of the population (5%). However there has been growing concern
about the costs to the public sector of securing inward investment
projects and a perception that inward investment has been pursued
at the expense of indigenous industry.
6. Doubts about the cost-effectiveness of promoting
growth by attracting inward investment were brought to a head
by the announcement of the vast LG project in 1996. The South
Korean company LG agreed to build two plants outside Newport,
one an integrated monitor plant and one a wafer fabrication facility,
together expected to cost £1,663 million and to create 6,100
jobs. Public sector support for this project totals some £248
million.[8]
On a pounds per job basis this amounts to over £40,000 a
job and looks expensive to say the least. In contrast, we were
told that the Sole Trader Initiative in North Wales had created
342 jobs at a cost of less than £400 a job[9].
Even when taking into account the potential multiplier effect
of such a large enterprise, the value of the public investment
in LG must at best be unproven. There has been widespread concern
in Wales, outside the Newport area at least, that public sector
resources intended to stimulate indigenous industry have been
redirected to fund LG.
7. To begin by clarifying definitions, what is usually
thought of as "inward investment" is investment from
overseas, or Foreign Direct Investment.[10]
However, the term as used by the WDA strictly means investment
from anywhere outside Wales, including other parts of the UK.
Further investment by an enterprise that was originally created
by inward investment is also regarded as inward investment by
the WDA, however long that enterprise has been established in
Wales[11].
Investment is considered to be "inward" if the head
office of that company is based outside Wales. So expansion by
a company such as British Steel would technically be classed as
inward investment. Similarly, if, as often happens, a successful
Welsh company is taken over by a larger UK company, or simply
expands into England and decides to base its head office there,
any expansion by that company in Wales would strictly amount to
inward investment. The archetypal inward investment project
is a large manufacturing plant developed by an overseas company
or multinational, but there are many small inward investment projects
in many sectors. The division between inward investment and indigenous
industry is not as clear-cut as is commonly thought.
8. There is little doubt that attracting inward
investment has been an effective way of creating large numbers
of jobs quickly to replace those lost in the coal and steel industries
in the 1970s and 1980s. The WDA and its partners in "Team
Wales" (Government, local authorities and all agencies working
for economic development in Wales, acting in partnership) have
been conspicuously successful in competing with other regions
of the UK and with countries overseas at winning inward investment
projects for Wales. The WDA states that since 1983 some 1,860
projects have been secured, creating or safeguarding more than
160,000 jobs and representing over £11 billion in capital
investment.[12]
Some witnesses have expressed scepticism about these figures,
suggesting that the WDA's statistics are based on the announcements
made at the beginning of projects, rather than on careful follow-up,
and that they take no account of displacement effects on jobs
elsewhere.[13]
Nevertheless, there is no doubt that the achievement has been
considerable. The wider benefits to the Welsh economy of this
inward investment may be even greater, but are harder to quantify.
By bringing jobs to an area, an inward investment project contributes
to the prosperity of an area: earnings are spent, in part, to
the benefit of other businesses in the area. Where the inward
investor itself buys from, or sub-contracts to, local businesses,
the benefits to the local economy multiply. It was suggested to
us in Ireland that for every job created in an inward investment
project there would be at least another created in a company that
supplies it.
9. The extent to which inward investment benefits
indigenous industry in Wales is the subject of considerable dispute.[14]
The WDA suggests that "inward investment and indigenous industry
are mutually complementary".[15]
Local businesses can benefit directly from supplying inward investors
and indirectly from their investment in training the local workforce.[16]
Suppliers can benefit from technology transfer, from the greater
competitiveness that inward investors require and from their wider
management experience. Others paint a different picture, suggesting
that inward investors distort the local economy, contribute little
to economic growth, poach the best employees from local firms
and damage the local environment.[17]
In our view, more needs to be done to monitor and evaluate
the effects of inward investment projects on the local economy,
and thus the cost-effectiveness of public sector support for such
projects.
10. Much depends on the extent to which inward investors
are "embedded" in the local economy: in other words,
the extent to which they buy from local suppliers. The WDA claims
considerable success in encouraging local sourcing or "linkage".
The WDA's Source Wales programme produced deals worth £14.5
million in 1997-98, at a cost of £2 million.[18]
However, we feel there is more that could be done. Source Wales
has been effective in working with larger suppliers, but has not
as yet done enough to create links with smaller companies and
develop them so that they can meet the exacting quality standards
demanded by the big multinationals.[19]
The strength of the indigenous business sector is a crucial
ingredient in the package on offer to potential inward investors.
11. During our visit to Dublin we were briefed by
Forbairt on the Irish National Linkage Programme. We were impressed
by their commitment to building local supply networks even in
advance of agreeing inward investment projects. They appear to
be much more proactive than the WDA. We were told, for example,
that they keep in contact with Irish managers working in companies
abroad and, when an opportunity arises to supply a potential inward
investment project, they entice them back home to set up their
own companies with offers of start-up funding. Of course, the
Irish have a much larger, and more cohesive, expatriate population
than the Welsh.
12. Inward investment into Wales has been principally
in manufacturing. Wales has been particularly successful at attracting
firms manufacturing automotive components, consumer and office
electronics, semiconductors and aerospace products. Some of these
have "clustered" in particular areas. Critics of inward
investment suggest that inward investors create only production
or final assembly facilities - sometimes described as "screwdriver"
operations - while retaining research and development and higher
value work at home.[20]
While this is not universally true (Sony, for example, has its
European R&D centre in Wales, and there are a number of state-of-the-art
production facilities), more does need to be done to encourage
inward investors to carry out R&D and high value work in Wales.
CBI Wales suggested that inward investors should be given grant
incentives to invest in R&D in Wales.[21]
We believe that high value inward investors should be given
priority when grants are allocated, and we return to this
below.
13. Many of our witnesses urged that more be done
to encourage inward investment from sectors other than manufacturing.
The WDA acknowledges that Wales has underperformed in the financial
services, transport and storage, and communications sectors and
recognises the need to put this right.[22]
It has been suggested that more should be done to attract investment
in software development, design, and international telephone call
centres, for example. We can all think of sectors in which
we would like Wales to attract inward investment. The difficulty,
of course, is to transform the wish list into reality. We are
unlikely to be successful at competing for investment in sectors
in which other countries are already well established.
14. Pathway to Prosperity appears to reject
a sectoral approach, stating that the Government "have concluded
that policy should not concentrate on the promotion of particular
sectors".[23]
However, the Minister told us that he "did not want to indulge
in just a shopping list of sectors but rather to focus our energies
.... in those areas of maximum international competitive strength"[24]
—which seems to us rather like a sectoral approach. It is
clearly important not to concentrate on old sectors and ignore
new and perhaps unexpected developments.
15. The Irish approach is highly sectoral, identifying
growth areas and carving out a specialist niche encouraging local
clusters to develop. With growing competition from other countries
and regions, they believe that it will be particularly important
to specialise. We were impressed in Ireland by the commitment
of resources by the IDA to anticipate the next generation of growth
areas. Scotland too appears to commit considerable resources to
research. During the 1990s Scottish Enterprise has developed three
long-term strategic programmes in the areas of indigenous firm
growth, commercialisation of university research and accessing
the global economy. The WDA told us that there had been "some
sectoral emphasis", but that only around half of the jobs
created in the past year were in the "focused sectors".[25]
The WDA must adopt a more strategic approach to attracting
inward investment and dedicate sufficient resources to identifying
potential international growth markets, perhaps ten years ahead.
Targeting key sectors must be part of that approach.
16. One of the most serious criticisms made against
inward investors is that they have no long-term commitment to
the local economy and when times get bad (or just better elsewhere)
they close down and leave. There is as yet little evidence of
this in Wales, but recent closures in Wales and in other parts
of the UK are alarming. Of course, even the most embedded projects
are not safeguarded against recession. It remains to be seen how
inward investment projects in Wales survive the current economic
downturn. Embedding inward investors in the local economy is
vital, not only to maximise the local economic benefits but to
make it more costly or less profitable for the inward investor
to relocate away from its established supply chains.
17. Of some 380 overseas companies investing in Wales,
182 are European, 143 from North America and 60 from Asia and
the Far East. Naturally, successful projects encourage other companies
to follow, and the WDA has developed valuable expertise and contact
networks in these markets. The WDA's International Division has
27 people based overseas, with offices in Australia, Belgium,
Canada, Hong Kong, Italy, Japan, Korea, Taiwan and the USA (Boston,
Chicago and San Francisco). Maintaining overseas offices is expensive,
but it is regarded by the WDA as a key element in its competitiveness.
Indeed the WDA's witnesses suggested that their overseas resources
were "at danger level", pointing out that the Irish
Industrial Development Agency (IDA) has 54 people based overseas.[26]
Others, however, suggest that the overseas offices have not proven
their worth, that most contracts come from contacts developed
in the UK, and that the greatest potential source of inward investment
is reinvestment by companies which are already in Wales.[27]
We would urge the National Assembly to look carefully at the
WDA's overseas offices to ensure that they provide good value
for money. As we discuss below, there may be scope for
using the resources currently allocated to attracting inward investment
more efficiently by linking them with export promotion.
18. While Wales's success in attracting investment
from Asia and the Far East is very welcome, this has left the
Welsh economy badly exposed to the effects of recession in that
area. While it is to be hoped that projects already located in
Wales will survive the current financial crisis in Asia, it must
have had considerable impact on the opportunities for future investment.
It is essential that the WDA encourage investment from other areas.
The WDA told us that they were conducting an exercise exploring
the inward investment potential of small-town companies in America.[28]
As the traditional sources of inward investment shrink, it
is essential to explore new markets.
19. "Aftercare" of inward investors is
crucial. Not only are existing inward investors a potential source
of further investment, but maintaining close contact offers greater
scope for increasing local sourcing and embedding the inward investor,
as well as ensuring early warning of any risk of project failure.
Inward investors we have met in Wales have suggested that the
WDA is less good at aftercare than it is at attracting inward
investors; that, once here, they were more or less left on their
own. In Ireland we were told that considerable effort is put into
aftercare. CBI Wales suggested that grant-aided investors might
be required to accept a local non-executive director as a condition
of grant.[29]
The new WDA must plan to improve its aftercare of inward investors,
especially smaller companies.
20. Another of the criticisms levelled at inward
investment is that it has benefited only South-East and North-East
Wales. [30]
Certainly, the big manufacturing projects have been attracted
to areas of Wales in easy reach of markets in England and elsewhere.
For the past three years, the WDA has been set a target for creating
jobs outside the eastern M4 and A55 corridors, and there have
been some welcome successes in attracting inward investment further
West. Most commentators suggest that it is unrealistic to expect
heavy manufacturing businesses to locate to remoter areas: transport
costs would be too significant. There is more potential in attracting
service industries or businesses either manufacturing small, high
value products (where the demand for labour would be modest and
transport costs would be proportionately less) or products which
can be transported electronically. However, there are exceptions
to this rule. We were surprised to learn, for example, of a successful
freezer production plant at the very North of Scotland. How to
attract inward investors to remoter areas was an issue we explored
in our visits to Scotland and to Ireland. The Irish appear to
have been remarkably successful in attracting inward investment
to the West of Ireland, though this may be partly explained by
the fact that American investors regard the West as the nearest
point in Europe rather than the most remote. While we would
want the WDA to ensure that inward investors consider sites in
West and Mid Wales, and believe that the grant regime should be
weighted to encourage this, it is essential that we do not lose
for Wales high quality investors who are only interested in location
in the East.
21. Many of our witnesses suggested that the potential
for future inward investment was much reduced. The global economic
downturn, the greater effectiveness of other regional development
agencies in the UK and elsewhere in Europe, growing competition
from Eastern Europe, the likely reduction in the grants available
to entice investors, all will make it harder to attract large
scale new investors in future. The then Secretary of State for
Wales himself told us last January that he suspected that "the
era of large-scale inward investment projects is probably coming
to an end".[31]
The WDA was, however, relatively upbeat about the prospects for
future inward investment, quoting economic forecasts that the
global inward investment market was set to continue and even speaking
of a second East Asian economic miracle in the longer term.[32]
It would be a mistake to assume that inward investment is a thing
of the past. There are still considerable inward investment
opportunities to exploit, especially in re-investment by existing
investors and in new growth markets.
22. For all the attention that is given to inward
investment, it must be remembered that most businesses in Wales
are indigenous and these have played an important role in employment
growth with very little in the way of public sector support. Under
10% of the workforce in Wales work for foreign-owned companies.[33]
The great majority of firms in Wales are Small or Medium-Sized
Enterprises (SMEs). Pathway to Prosperity suggests that
52,000 out of 58,000 firms in Wales employ less than 25 employees,
and that almost half the Welsh workforce works for organisations
with less than 200 employees.[34]
It has been pointed out that if each of the SMEs in Wales took
on only one new employee, this alone would get us well on the
way to meeting the Government's target of 200,000 new jobs. There
seems to be a growing consensus that the key to future economic
growth in Wales is in developing indigenous industry.
23. Indigenous industry is particularly important
to the rural areas of Wales. In West and Mid Wales, the vast majority
of businesses are SMEs. While every inward investment opportunity
should be exploited, the potential for inward investment in the
remoter areas of Wales is severely limited. Encouraging indigenous
businesses to expand, and new businesses to start up, is the only
realistic way of creating new jobs and increasing prosperity in
rural Wales.
24. There is a widespread perception that indigenous
industry has been neglected in the past by Government, and more
particularly by the old WDA. This is in part unfair. In 1992 the
then Secretary of State for Wales took away from the WDA its powers
to support business start-ups and small businesses with less than
ten employees, and transferred responsibility for this to the
TECs. The WDA can hardly be faulted, therefore, for having done
nothing to support business start-ups, as it was not empowered
to do so. However, while the WDA retained responsibility for developing
businesses with more than ten employees, it appears to have concentrated
on larger companies. We share the view that the old WDA concentrated
on inward investment at the expense of indigenous industry. Promoting
inward investment and indigenous growth are not mutually exclusive
- indeed we accept that they can be complementary - but it is
time to shift the balance of emphasis and funding in favour of
indigenous industry.
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