APPENDIX 6
Memorandum from the CBI Wales
BALANCE IN PUBLIC-SECTOR INVESTMENT INITIATIVES BETWEEN
STIMULATING INWARD INVESTMENT AND ENCOURAGING THE GROWTH OF
INDIGENOUS ENTERPRISES
INTRODUCTION
Wales has been highly successful in attracting
inward investment, helped by infrastructural improvements, high
labour productivity and regional assistance. The typical inward
investing manufacturer in any sector employs more staff than indigenous
firms, has higher productivity, invests more per employee and
pays higher wages.
The promotion of inward investment has been
a long-standing component of UK regional policy. Its main aim
was to alleviate the severe unemployment problems in the UK's
peripheral regions such as Wales.
In the 1980s inward investment policy also became
a major plank of national industrial policy with wider objectives
such as technology transfer, local sourcing and improving the
competitiveness of indigenous industry by providing examples of
good practice.
However, several major questions have been posed
about its role:
— Does inward investment have the favourable
impacts on regional economies suggested?
— Is inward investment a cost-effective
method for regional economic development?
— Would other policies, such as more
support for indigenous companies, prove more effective?
This submission to the Welsh Affairs Committee,
by CBI Wales, examines these issues in a Welsh context and covers:
— The Welsh economic context
— The CBI vision for the Welsh economy
— Benefits of inward investment
— Strategies to embed inward investors
into the Welsh economy
— Synergy between inward investors
and indigenous firms
— Why inward investment is not enough
on its own for successful development
— The need for transparency in decision
making, information and the grant process
WELSH ECONOMIC
CONTEXT
The Welsh economy has outperformed the UK average
against selected economic measures, although it has underperformed
against others.
Its main success story has been in manufacturing.
Between 1986 and 1996, total real GDP rose by 23.5 per cent in
Wales compared to the UK's 22.6 per cent, while in manufacturing
the Welsh increase was 38.6 per cent compared to 18.9 per cent
in the UK. During the period Wales also experienced higher employment
growth, both in total and in manufacturing than the UK as a whole.
Manufacturing now accounts for over 28 per cent
of total GDP in Wales compared with 22 per cent in the UK. In
addition the manufacturing sector is more competitive within Wales.
In 1983, Welsh manufacturing unit labour costs were 8.5 per cent
above the national average. In 1995 they were an estimated 8.5
per cent below. Welsh productivity in manufacturing has been above
the UK average since 1983, primarily because of extremely high
levels of investment, particularly by inward investors and the
steel industry.
The successful performance of the manufacturing
sector within Wales in the last two decades should not hide the
fundamental point that Welsh GDP per head has consistently been
below the UK average: 16.7 per cent below the UK average in 1995.
Growth of 0.5 per cent more than the UK average
would have to persist for 20-25 years to raise Welsh GDP per capita
to the UK average.
The reasons for this prosperity gap are many
and complex but can be grouped into the following main areas:
— Service sector—Wales
has a smaller concentration in the service sector, in particular
producer services such as banking and finance and computer services,
with productivity in the Welsh service sector an estimated 8.7
per cent below the Great Britain average in 1995.
— Small and Medium Sized Enterprise
(SME) formation—Wales has a small proportion of SMEs
relative to the UK average in key sectors such as manufacturing
and finance. There has also been a declining trend in the number
of VAT registered companies in Wales (e.g. only 6 per cent of
Welsh manufacturing firms are VAT registered) in contrast to an
increase in the UK.
— Autonomy and control—Wales
suffers from a low level of local decision making. There are only
13 stock market registered firms based in Wales and few headquarters
functions among subsidiaries in Wales. This is compounded by the
`glass ceiling', whereby Welsh based companies tend to
be taken over or sold by their founders to outsiders and control
leaves Wales. Wales has the lowest registered office quotient
(population:head office) in the UK: just 0.25.
— Geographical differences within
Wales—There are regional variations in Wales in terms
of GDP per head, economic activity rates, unemployment and inward
investment performance.
— Jobs-based GDP in Welsh unitary
authorities in 1995 ranged from £410 million in Anglesey
to £4,120 million in Cardiff
— Population-based GDP in Wales
in 1995 ranged from £7,133 per head in Conwy to £10,576
in Cardiff
— GDP per full time equivalent
job varied from £23,370 in Conwy to £27,150 in Anglesey,
reflecting differences in productivity and employment by sector
— Manufacturing provided just 8.4
per cent of total jobs-based GDP in Conwy and 52.8 per cent in
Blaenau Gwent in 1995
— Jobs-based GDP in Pembroke grew
by 13.6 per cent in real terms 1982-1995, compared to real growth
of 78.2 per cent in Torfaen over the same period
Source: Local Prosperity in Wales,
by Welsh Economy Research Unit: August 1997.
— R&D—Wales has a
low ranking in terms of research and development (R&D) with
the lowest level of expenditure in Britain on business R&D
as a percentage of GDP, and below average R&D spending in
the government and higher education sectors.
— Skill levels—Wales lags
behind the rest of the UK and Europe in training, core skills,
and education levels. Also, Wales has not solved the problem of
retaining highly skilled workers when plants shut or communicating
the career opportunities available in industry. Skill shortages
are already evident in IT, management, engineering and construction.
CBI VISION FOR
THE WELSH
ECONOMY
In 1996, CBI Wales (in its Business Agenda
for Wales) recommended developing a coherent economic development
strategy which:
— Resolved the mismatch between available
skills and available employment, with the aim of producing a more
balanced labour market
— Encouraged the expansion of existing
indigenous and foreign industry in Wales by ensuring provision
of a comprehensive business infrastructure
— Maximised the multiplier effect of
leading Original Equipment Manufacturers (OEMs) already in Wales
by developing clusters of component manufacturers and manufacturing
services around them
— Recognised the multiplier effect
of capital intensive investment—particularly in terms of
employment, supply sources, service requirements and pay levels.
Cardiff Business School estimated the multiplier factors of steel
in Wales as 3.2 (employees), 2.6 (wages) and output (1.6)
— Encouraged investment with high value
added employment, which would be a source of quality jobs required
to replace those lost from the coal and steel industries and others
in past recessions
— Assisted the expansion of SMEs.
As outlined in the Business Agenda for Wales,
the two key areas for future competitiveness are skills and
the business infrastructure. Economic development in Wales
must focus more on improving competitiveness and less on simple
job creation.
Innovation—"the successful exploitation
of new ideas" - can have a major impact on Welsh competitiveness,
and is of more value in painting a true economic picture than
a pure R&D measure. For this reason the Wales Regional
Technology Plan must be strongly supported by the Welsh Office
and the Assembly, as it is by CBI Wales and the WDA. We must all
publicise the practical, company value-added results it achieves,
e.g. through the Technology Implementation Programme.
In order to monitor and evaluate the success
of any proposed economic development strategy it is necessary
to benchmark the Wales position against other regions in the UK
and Europe, for example, Scotland, North East England and Netherlands,
as well as the UK and European Union averages.
BENEFITS OF
INWARD INVESTMENT
Inward investment benefits the Welsh economy
in a variety of ways:
— Typically, inward investors enjoy
competitive advantage over domestic firms and directly contribute
to higher levels of domestic productivity (e.g. via high levels
of capital investment)
— Inward investors create competitive
pressure on other domestic producers (e.g. on quality)
— It benefits the UK balance of payments.
In 10 years, the percentage of cars produced in Britain for export
has increased from 25 per cent to over 60 per cent; the UK now
has trade surpluses in colour televisions and computers, and has
increased the surplus in items such as microwaves and semiconductors.
Wales is a net exporting region because of inward investment,
and a large proportion of companies in Wales are involved in these
market sectors
— Inward investment has proved that
leading-edge productivity can be achieved with Welsh labour and
mainly Welsh inputs
— Higher capital spending
— Higher employment, generally higher
wages, and general spending in the local economy by the inward
investor's workforce (retail, leisure, etc.).
— Inward investors can support a number
of other jobs in the supplier chain (spending on components, raw
materials, services, etc.): the multiplier effect.
For example, the LG project is expected to create
6,100 direct jobs. In addition, it is estimated by the Cardiff
Business School that a further 6,000 will be employed through
supplying LG with raw materials, components and services. When
additional effects are taken into account than the total job creation
potential of the project could be as high as 18,000. It is likely
that the majority of the multiplier effects will be taken by people
living within a 25 mile radius of Newport. These estimates are
high because local supplier concentration in electronics is extensive
and includes glass manufacture, plastic mouldings, packaging,
printing, metal pressings and precision engineering as well as
electronic components.
Potentially the Welsh economy also gains from
spillovers in technology from new production techniques, training
opportunities for the workforce and management ideas brought into
the economy. These spillover effects on the economy, unlike the
boosts to output and employment, will persist into the longer
term and act as multipliers.
The mechanisms for the transfer of knowledge
of best practice to indigenous firms include the natural movement
of personnel between inward investors and local firms, and inward
investors' impact on their supply chains. The WDA, through a variety
of leading-edge programmes such as Source Wales and Technology
Transfer seeks to maximise those returns, unlike a lot of other
regions in the UK.
Whether the domestic economy benefits from inward
investment by more than the value-added less the remitted profits
earned by foreign firms depends on the impact of technology spillovers
on the rest of the economy. These spillovers provide the economic
case for inward investment incentives and demonstrate whether
there are indeed wider returns to the economy from the location
of foreign plants in Wales than simply the cumulative sum of employment
they provide.
In practice it is very difficult to measure
these wider benefits to the local economy and an assessment of
the benefits is more a matter of qualitative judgment than hard,
quantitative evidence. In addition displacement effects need to
be assessed—do jobs created by inward investors displace
jobs elsewhere in the economy if inward investors compete with
indigenous firms in the same markets, and also raise wage levels
and create skill shortages elsewhere in the local economy?
McKinsey, a leading firm of management consultants,
have undertaken research on the impact of trade and inward investment
on productivity in Germany, Japan and the United States which
shows that Foreign Direct Investment (FDI)—transplant factories—play
the pivotal role in moving innovations around the world. McKinsey
believe that FDI has been far more powerful than trade as a force
for improving productivity, especially in Germany and the US.
The results are likely to hold true for the UK.
WELSH EVIDENCE
Mundy, Morris and Wilkinson (1995) found the
following benefits and costs of Japanese inward investment to
Wales in a survey in 1992:
| Benefits and Costs of Japanese Inward Investment to Wales
| |
| |
| Benefits | Costs |
| |
| Added substantially to manufacturing employment (17,000 jobs).
| Limited pure research but development and design work to modify products for local markets. Graduate employment is low (indicator of R&D propensity).
|
| |
| Stability of employment, few redundancies in the 1990s.
| Majority of work semi-skilled, emphasis on training but on-the-job and low skilled based.
|
| |
| Diversity of products and capital sources to Wales.
| |
| |
| No evidence of low wage levels compared to similar industrial segments.
| |
| |
| Sub-contracting complexes developed to cater for Japanese needs, evidence of significant transfer of good practice to local suppliers and joint technical co-operation and problem solving.
| Sourcing of high value components within Wales is low, local purchases are limited to low technology, bulky items, for example, plastic mouldings, pressings and metal goods.
|
| |
| Plants undertake a mixture of manufacture, assembly and design and development, little assembly of imported kits.
| Low plant autonomy for minor decisions and little freedom for capital investment and strategy decisions.
|
They conclude that the evidence is mixed. There has been
a recent significant improvement in investment quality (e.g. Calsonic,
Sony, Toyota), but the question of the embeddedness of Japanese
companies in the Welsh economy remains an area of concern, as
the degree of autonomy for local decision-making often remains
low.
Rees and Thomas (1992) found important changes taking place,
increasing Welsh engineering skills. For example, there
was a 20 per cent increase in technician and a 324 per cent increase
in engineer employment (albeit from a low base) in the 1980s.
They believe there is a strong likelihood that inward investors
have been instrumental in the changes (since the engineer
increase was mainly related to consumer electronics), but the
exact relationships have yet to be established definitely.
Hill and Roberts (1993) found evidence of significant multiplier
effects of inward investment in Wales. Every direct job created
in electrical and electronic engineering could be linked to another
0.7 indirect jobs created by purchases from a local supplier.
STRATEGY TO
EMBED INWARD
INVESTORS INTO
WELSH ECONOMY
A vital part of a successful inward investment and economic
development strategy is to embed inward investors into the Welsh
economy to develop the local linkages that enhance competitive
advantage for all firms, and maximise the impact of inward investment
and spillovers between multinational enterprises (MNEs) and local
firms.
Policies, which CBI Wales endorses, to maximise the spin-offs
of inward investment and embed MNEs into the Welsh economy include:
— Investing in the Welsh physical, communications
and human infrastructure
— Targeting quality inward investment in activities
such as R&D, management functions, new management practices
and skills training in new technologies
— Encouraging the formation of joint ventures, mergers
and licensing agreements between indigenous firms and inward investors
to promote technology transfer
— Forming supplier associations focused on large
inward investors that can transfer knowledge on best practice
techniques along the supply chain. Source Wales, the WDA's supplier
development programme, enhances local sourcing by encouraging
local suppliers to meet the exacting quality standards of MNEs.
Twenty supplier associations have been formed in Wales. As a result
of these initiatives, the recent increase in inward investment
has been accompanied by growth in the number of SMEs and an
increase in their share of economic activity (Morgan 1997).
— Aftercare support from the WDA and other economic
development intermediaries to help Welsh MNE managers to win new
resources and responsibilities for their plants. Sony and Ford
have now reinvested seven or eight times each in Wales. The example
of the Sony TV plant in South Wales, which has taken 20 years
to develop a significant R&D presence and local sourcing of
components (90 per cent), shows how long it takes to upgrade a
plant and the long term nature of the strategy of embedding
MNEs into the Welsh economy.
SYNERGY BETWEEN
INWARD INVESTMENT
AND INDIGENOUS
INDUSTRY
It is important to appreciate that inward investors and indigenous
industry help each other to grow and develop. They should not
be seen as competitive approaches to economic development but
complementary to each other.
Synergy shows itself in a number of ways:
— Both inward investment and expansion by indigenous
business requires the right business support infrastructure
to be available not merely grant incentives. For example the recent
expansion of Toyota in North Wales was undertaken with no grant
assistance.
— In addition to transport and skills infrastructure,
the right power and property infrastructure needs to be available.
For instance manufacturing industry is unlikely to be attracted
to Pembrokeshire, now that the National Grid is closing all supergrid
feeders bar one; and there is a serious shortage of medium to
large industrial properties (25,000 feet and above) which prevents
existing business expanding in Wales and deters potential new
investors.
— Many of the business support programmes run by
development agencies such as Source Wales and Technology Transfer
serve both inward investors and indigenous firms making the distinction
between inward investors and indigenous firms irrelevant.
— Inward investors help to grow indigenous firms
through their impact on the supply chain, and a competitive supply
chain makes it easier to attract more inward investment. In relocating
to Wales, inward investors are attracted by the extensive supplier
network of indigenous firms. The presence of the extensive cluster
of consumer electronics suppliers along the M4 corridor and the
Valleys was important in securing the LG project for Wales. In
turn, inward investors prove to be a good potential market for
local suppliers, growing the SME base in Wales.
— For example, the first major supplier contracts
awarded by LG Electronics went to four South Wales based companies,
worth a total of £4.6m, for the first year of production
alone, for plastic mouldings, polystyrene packaging, card board
boxes and printing manuals.
However there are two important considerations that need
to be addressed with the supply chain and inward investors.
— First, it is important that more value-added
supplies are sourced by inward investors from Welsh SMEs and
not just low value-added, bulky items which has been the case
until now. Low value, bulky items are more likely to be sourced
close to the plant since transport costs represent a disproportionate
percentage of their value. High value-added items can more easily
be imported from around the world, but sourcing them locally improves
the technology base and GDP.
— Second, if supply gaps are identified in supplying
inward investors and others, the WDA should assist Welsh SMEs
to achieve the required standards to fulfil demand before targeting
overseas firms. It is recognised that Source Wales already
tries to do this; in many cases Welsh suppliers are not in a position
to meet demand for a variety of legitimate reasons: for example,
the need to service world markets to make a project viable (size),
lack of proprietary technology, etc. If a gap cannot by filled
by local supplier development, a carefully targeted approach to
inward investment should be adopted, based on key product deficiencies
in the supply chain for tier one producers, rather than a scattergun
approach.
— One way to spread the burden of achieving this
might be to provide every grant-assisted investor with a local
non-executive director (NED) as a prerequisite of the grant.
The role of the NED would be to act as the link between company
and supply chain (via schemes such as Source Wales) to increase
the volume and quality sourced locally. By the same token, a potential
supplier could be provided with a financial package to achieve
the standards required, and also required to take on a NED, providing
them with expertise.
— Inward investors can help indigenous firms especially
SMEs to export using their existing networks and contacts overseas.
The support structure for promoting inward investment can be
used to promote exports as well. For example, the WDA offices
overseas, visits by inward investors to Wales and missions abroad
can have a dual purpose. Better co-ordination is required between
Welsh export promotion and inward investment promotion to maximise
the potential synergy.
— In Scotland, export promotion is the responsibility
of Scottish Enterprise through its arm, Scottish Trade International,
and the Northern Development Company (NDC) in North East England
undertakes trade promotion as well as inward investment.
— In Wales the Economic Powerhouse should take
over responsibility from the Welsh Office for export promotion,
to have both inward and trade promotion under one roof for better
co-ordination and use of resources.
WHY INWARD
INVESTMENT IS
NOT ENOUGH
There are a number of factors that mean that Wales cannot
rely solely on a strategy devoted to targeting mobile inward investment,
despite the many benefits, and must look to place more emphasis
on the development of indigenous industry.
These factors focus on two aspects: the nature of the inward
investment market and the weaknesses identified earlier in the
Welsh economic context section.
— The inward investment market is cyclical, so concentration
solely on inward investment means that for at least some of the
time valuable economic development resources will be tied up for
no benefit. In contrast, developing indigenous industry is always
a good short, medium and long term strategy - and may require
less capital outlay, since often what is required is expertise
as well as finance.
— In the medium and long term, Wales and the UK
will almost certainly obtain a reduced amount of inward investment,
so more needs to be done to develop indigenous industry in Wales
due to:
Increased competition from Eastern Europe—over
1,000 inward investment agencies according to Ernst & Young
Increased competition from new English Regional Development
Agencies
The grant map is likely to be revised with many areas
of Wales losing grant status or their status being down graded
Non participation in EMU may weaken the attractiveness
of the UK
Expansion eastwards of the EU makes UK and Wales
more peripheral and therefore less attractive to some industries.
— The main grant vehicle, Regional Selective Assistance
(RSA), for attracting inward investment is unsuitable for attracting
high technology led, high capital intensive projects because of
its simplistic focus on job-related criteria for grant eligibility,
and needs to be revised. Capital intensive projects are generally
high quality, provide higher skill jobs and have a major impact
on the surrounding service structure (e.g. contracting out toolmaking).
In addition, it is more expensive for a company to close a capital
intensive plant than a job intensive "shed".
— In the short term, problems in South East Asia
will probably reduce inward investment from there in the next
few years. For example, a recent estimate by the National Economic
and Social Research Institute forecast a 25 per cent fall in inward
investment in 1998. This is particularly important for Wales,
which has achieved great success recently in the Far East markets
for greenfield investment.
— Much mobile investment to Wales has been concentrated
in a limited number of product lines such as TVs and related products,
computer display monitors and automotive components. This is good
for sectoral concentration and cluster building but not if it
is overdone. A diverse sectoral base brought about by indigenous
growth is required not to repeat the problems of steel and coal
closures.
— The low level of research institutes and high
value-added service operations (and a parallel shortage of relevant
skills) makes it difficult for Wales to attract R&D and value-added
service projects. Indigenous industry must be developed to compensate,
and the universities can help in this. An English company has
recently entered into an agreement with a Welsh university to
give the company access to the best graduates in return for practical
contributions to the college's teaching capacity: this practice
should be encouraged.
— Traditional inward investment projects such as
assembly manufacturing will not readily move to more remote areas
such as Pembrokeshire and Anglesey in sufficient volume due to
skill and infrastructure issues and the relative sparseness of
the population.
— Inward investment does not address but exacerbates
the problem of a lack of autonomy and control in economic decision-making
in Wales. Strong, locally controlled indigenous firms are a major
requirement: profits are generally remitted to the parent company
locality, and high value-added aspects of the business (design,
R&D) based there.
TRANSPARENCY
Economic Decision making
The Welsh Office and later the Assembly will need to ensure
that a coherent all-Wales, economic development strategy framework
is "bought into" by all the economic players
including the role, resources and priorities to be devoted
to inward investment and indigenous industry. The Assembly
should publish objectives annually on a five year rolling basis,
justifying its choice of targets and evaluating Wales' success
in achieving them.
The Economic Fora established in the regions of Wales
and involving the leading regional economic development players
including the CBI, should have a key role in deciding allocation
of resources and priorities with regard to inward investment and
indigenous industry support as well as other economic policy matters.
For example, South East Wales and North East Wales may put
a premium on value-added projects and reject grant support of
assembly plants and use the resources instead on developing indigenous
industry.
CBI Wales, in its submission to the Welsh Affairs Select
Committee on the Welsh Assembly's impact on economic development,
recommended that business representatives be co-opted onto
the relevant subject committees and representatives of the Economic
Fora be co-opted to the Assembly regional committees.
CBI Wales supports the view that there should not be bidding
up of projects by UK regions and fully supports the proposed concordat
between the regions.
CBI Wales thinks that abolition of Welsh autonomy on inward
investment decisions would have an adverse effect on potential
investment and slow decisions on projects, possibly leading to
potential investors choosing a location outside the UK—many
of which provide far larger and more comprehensive packages.
Information
It is difficult to make decisions on whether the balance
of indigenous and inward investment support is correct when the
statistics for spending on each are not published in a transparent
manner by the DTI and Welsh Office. The Welsh Office follows DTI
guidelines in the publication of RSA assistance.
Any grant of above £75,000 is published in due course,
once the first payment is made, in Labour Market Trends,
a monthly publication of the Office for National Statistics. A
press notice may be issued at the time of the announcement of
a project by the Welsh Office but the details of the grant are
only released if the company wishes to do so.
Details of those cases called by in the European Commission
are published in the Official Journal: this was how the
figure for the amount of support given to the LG project became
public. Some large and visible grants are commented in the Annual
1982 Industrial Act Report with aggregate figures.
Uniquely, the Industrial Development Board in Northern Ireland
publishes details of all grants over £50,000 in its annual
report, without evident disadvantage. The Welsh Office Annual
Report provides details at an aggregate level of RSA grants.
But nowhere is the overall value and composition of aid packages
including site infrastructure, property assistance and training
grants published in the UK (in most cases, these are more substantial
than the RSA element).
In line with the recommendations of the DTI Committee Report
on the Co-ordination of Inward Investment, CBI Wales believes
that broad indicative figures should be published on the commitment
of public funds to projects in this category in the annual report
of the Economic Powerhouse. In the same report, estimates for
spending on assisting indigenous industry should be made. All
disclosures will need to take account of commercial confidentiality,
the need to avoid previous deals being used as a benchmark for
bidding up future deals by companies, and the need to preserve
competitive advantage over other nations and regions.
CBI Wales recommends the various Economic Fora in Wales,
as well as the relevant committees in the Welsh Assembly, should
have access on a confidential basis to Welsh offers of packages
over a certain value identifying separately the various elements
which make up the package.
Grants and Perceived Lack of Support to Indigenous Industry
Fragmentation of business support services with a plethora
of overlapping initiatives, not all of which have been successful,
has meant that indigenous business support is not perceived by
firms to be considered a high priority.
The Economic Powerhouse should be given overall responsibility
for business support in Wales to rectify this situation and
retain primary responsibility for inward investment projects in
Wales.
The account management of existing medium to large companies
already located in Wales (both inward investors and indigenous
businesses) must have a high priority with a view to encouraging
further expansions and developing supply clusters. Customer care
for inward investors is fairly standard practice; for indigenous
firms it is less so. Account management would encourage local
companies to develop local supplier networks. It would also reduce
the perception indigenous business of the unfair advantage inward
investors have.
For example, planning decisions is an area where indigenous
business feels frustrated. Few inward investment proposals have
planning difficulties, largely because public sector "account
managers" smooth their path.
RSA and Regional Enterprise Grants (REG) are available not
only to inward investors but also to indigenous firms. However
the grant schemes have been poorly promoted to indigenous business
despite recent Welsh Office roadshows and are in practice difficult
to understand and to obtain by indigenous SMEs.
The main problem is that the most important criterion for
receiving RSA is the international mobility of the project which
indigenous firms have the greatest problem in proving.
The CBI recommends that the following changes to the grant
system would provide a better balance between indigenous firms
and inward investors:
— RSA and REG need to be better promoted to indigenous
firms and steps taken to convince them that the funds available
are not primarily directed towards inward investors.
— Decisions on applications must be speeded up.
Time is often more critical on a grant application for investment
by an existing business (whether inward investor or indigenous)
than for a newcomer.
— RSA criteria should be weighted much towards commercial
viability and be less rigidly applied for more indigenous firms
to apply. RSA should be considered on a fairly parochial basis
for indigenous companies and a qualitative assessment of the attraction
of the project to the particular locality should be made. For
example, a 20- job project in Pembrokeshire or west Gwynedd could
be more important than a similar or larger project in Cardiff
or Wrexham. Grants on such investments should not be assessed
solely by cost per job but by the quality and importance of the
investment to the locality. A de minimis principle could
also be applied to small grants.
— SMEs need assistance in terms of advice, implementation
and access to appropriate public and private sector finance
— Disadvantaged parts of Wales should have access
to European grants and RSA based on low GDP criteria as well as
the level of unemployment.
— Under EU rules, grant aid can be made available
for capital investment but not for working capital; a better regime
would look at the total project cost.
— Reinvestment projects are extremely important
for embedding companies and increasing value-added. However, automatic
expectation of further grant can be dangerous, removing the focus
on quality. Differential thresholds should be applied to large
and small companies: for instance, the justification of financial
constraint should be disallowed for large companies, as it can
lead to unscrupulous firms bleeding a local site dry, secure in
the conviction that further public funding will be available.
CONCLUSIONS
Inward investment was a very effective instrument in helping
the Wales economy overcome the massive lost of jobs in coal, steel
and other sectors in the 1970s and 1980s. At that stage of Wales'
economic development, speedy and visible action was required which
created many jobs and capital investment. However, at that time
foreign companies believed that to penetrate Fortress Europe
they needed manufacturing plants in Europe. Moreover, there were
substantial grants available, and companies knew that Regional
Development Grant (RDG) was statutory and could be topped up with
RSA. These were important factors for the Welsh success story
in the 1970s-80s.
The ground rules have now changed, and it is difficult for
a company to evaluate the total support available, as this may
be provided through the Welsh Office, WDA, TECs or local authorities.
The Economic Powerhouse should streamline procedures for both
indigenous industry and inward investors.
However, inward investment on its own will not solve all
Wales current economic problems such as weak innovation/R&D,
little exporting by SMEs, lack of control and autonomy by plants
in Wales, and weak service sector, etc.
In addition the inward investment market is uncertain and
in the long term, Wales is likely to receive a smaller share of
it.
Steps to refocus inward investing into high value-added activities
such as R&D, headquarters functions, technology-led manufacturing,
and better marketing of the geographically remoter parts of Wales
need to be strengthened, while the long-term nature of embedding
an inward investor into the Welsh economy must be recognised.
In the current economic climate, the stage of economic development
in Wales and the problems the Welsh economy faces, indigenous
industry needs to be put higher on the economic agenda.
But it must be realised that inward investment and indigenous
industry strategies need to be seen as complementary approaches
to economic development, as part of a holistic strategy. In many
ways, inward investment versus indigenous industry is a false
dichotomy and there are many synergies and technology spillovers
between them as examined earlier in this submission.
What is urgently needed is transparency in information,
economic decision making and the grant process to allow economic
decision-making to be made with full access to information. This
is particularly important because many of the decisions are a
matter of judgment rather than hard evidence and precise calculations
on cost per job; for example, measuring the extent of technology
spillovers and multiplier effects.
Inward investment should continue to be seen as an important
part of a successful economy, but should not be viewed as the
cornerstone or sole platform of Welsh economic regeneration.
Dr Elizabeth Haywood
Director, Wales
16 February 1998
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