INWARD/OUTWARD INVESTMENT IN SCOTLAND
THE TOOLS
49. Firms locate in a country for many reasons, of
which the offer of financial incentives is not the only or even
the main one.
50. A number of tools or attractions can be used
to encourage foreign direct investment to locate to Scotland.
They can also be used to encourage location to particular areas
of Scotland. Ultimately, however, it must be remembered that companies
are free agents and that attempts to be too dictatorial about
where exactly a company goes can be counter-productive—as,
according to Scottish Enterprise, the Republic of Ireland is beginning
to find out.[80]
Scottish Enterprise's strategy is to pull, not to push.[81]
Attractions usually include the availability of a skilled staff
and adaptable workforce, and may also include the tax regime,
grants, good physical and tele-communications, closeness to markets,
clusters of interrelated activities (see paragraphs 99 to 107)
and suppliers, flexible labour laws, abundant fresh water and
less tangible factors such as an attractive environment and quality
of life. The relative importance of each varies with the product
or service concerned.
51. As The Scottish Office reminded us, 'In some
of these, Scotland is well-positioned, for example in the excellence
of its telecommunications in general, (though see paragraph 10),
'whilst in others the situation is more worrying, as in international
air links'.[82]
Although the Scottish educational system is world-renowned, skill
shortages are beginning to develop, particularly in linguistics
and software production, and it will be increasingly important
in future for the best possible use to be made of Scotland's intellectual
resources (see paragraphs 112 to 118).
52. In some respects, following devolution Scotland
will be more in control of its own destiny (subject of course
to the availability of finance); it will, for instance, be in
a strong position to provide the educational facilities which
will produce the skilled workers needed and to improve the infrastructure.
In other respects it will remain subject to an overriding UK policy;
it remains to be seen how far Scotland will be able to recast,
for instance, the system of financial assistance to industry to
suit its own needs (see paragraph 57).
53. Regional Selective Assistance (RSA) is the main
financial tool used to attract inward investors, and, when payable,
frequently outweighs several times expenditure by Scottish Enterprise.[83]
It is payable only in assisted areas and in specified circumstances
and was widely criticised by our witnesses. None, however, wished
to see it abolished with no replacement; even Robert Crawford
of Ernst & Young, a severe critic, commented that 'it had
been a good servant of economic growth in the past'[84]
and Scottish Enterprise claimed that in the past it has been a
valuable tool, attracting other investment in a ratio of 1:9.[85]
This presentation is not, however, the whole story as not all
the remaining investment will have been private money.
54. One criticism of RSA was that since it is available
only in certain areas it distorts the market, and companies and
authorities in areas which do not receive it complain. Crawford
Beveridge of Scottish Enterprise attributed the decline in the
economic status of The Borders in some degree to 'the withdrawal
of assisted area status',[86]
and admitted that 'the assisted areas map ... does tend to discriminate
against rural areas', although he felt that 'the ... issue would
probably only be at the margin, other factors being more influential'.[87]
55. The other main criticism is that, by focusing
on the number of jobs created rather than the quality, RSA does
nothing to encourage the creation of high quality jobs. As Robert
Crawford explained 'a paradoxical outcome of the regime is that
the more I am going to spend on capital, the more competitive
I am going to become, the less likely it is that I am going to
get grant. My fundamental complaint about it is that it is increasingly
irrelevant in an economy which is less dependent on jobs creation
as a means of developing competitiveness than has been the case
historically.'[88]
CBI Scotland also wanted RSA to 'be weighted more towards commercial
viability and high value added investment'.[89]
This point was re-inforced by IBM who told us that European rules
as they currently exist are rather 'back to front' in terms of
service industries; many prestige jobs have very little capital
requirement.
56. To their credit, Scottish Enterprise are aware
of the shortcomings of RSA as it currently exists in prevailing
circumstances. Mrs Macfarlane told us on 21 April 'I think we
all recognise that using RSA as a tool to attract inward investment
is going to be less and less effective and we really do have to
move on and find other ways of attracting inward investment'.[90]
It might be asked if there were ever problems reclaiming grant
in the event that the company moved away before the specified
length of time; Scottish Enterprise did not draw our attention
to this as a possible problem, but Robert Crawford, in his earlier
capacity as head of Locate in Scotland had some experience of
it.[91]
57. Under the devolution settlement RSA will be administered
by the Scottish Executive but just how free that will be to alter
the system to suit Scotland's needs will depend on the concordat.
It is clear that the system of financial assistance to industry
should be reorganised to put more emphasis on attracting projects
of high value and we recommend accordingly. This would have
the added advantage that the incentives would no longer be tied
to a map which remains the responsibility of Westminster.
58. In one particular respect Scotland, and indeed
the UK as a whole, is at a disadvantage compared to other areas
seeking to attract inward investment. This is the matter of tax
concessions. The Republic of Ireland in particular, a competitor
country which offers very similar advantages to Scotland has enjoyed
a derogation from EU rules that has allowed it to have a 10 per
cent corporation tax for certain sectors; the overall rate will
eventually be harmonised at 12½ per cent, which still competes
very favourably with the UK rate. Locate in Scotland told us in
the USA that when projects were lost it was 'almost always' because
of the tax structure. Among other near-by competitors the Netherlands
also have a more attractive tax regime (facilitated by their Inland
Revenue counterparts)[92]
and are, according to Robert Crawford, 'super' at using it,[93]
and some Far Eastern countries also allow tax breaks.
80 Q 1319. Back
81 Q
1310. Back
82 Evidence,
p 302. Back
83 Q
317. Back
84 Q
1028. Back
85 Q
1334. Back
86 Q
353. Back
87 Q
358. Back
88 Q
1028. Back
89 Evidence,
p 137. Back
90 Q
1303. Back
91 Q
1028. Back
92 Q
1011. Back
93 Q
1010. Back
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