House of Commons - Scottish Affairs

Select Committee on Scottish Affairs First Report

INWARD/OUTWARD INVESTMENT IN SCOTLAND

THE BENEFITS AND COSTS OF INWARD INVESTMENT

59. The first thing to be said is that no witness queried the value of continued efforts to attract inward investment, although there were different views as to how much emphasis should be put on it.

60. Inward investment is argued to deliver a number of benefits to Scotland. These are:

new jobs to replace losses in traditional industries;
higher wages and salaries;
better training;
diversification of Scotland's economic base;
increased capital investment;
increased exports;
creation of trading opportunities for companies already located in Scotland;
the introduction of new business, management and manufacturing practices;
learning effects for indigenous companies.

Not all projects deliver these expected results in equal measure, and we received complaints from indigenous companies that inward investment caused them problems.

61. The original drive behind the pursuit of inward investment was the stark necessity of finding jobs to replace those lost in traditional industries like heavy engineering and mining, steel and shipbuilding, and this is the most obvious and direct impact. We have already referred (paragraph 17) to the number and proportion of jobs accounted for by overseas-owned companies. Nor is the gain only in terms of direct jobs. According to the Scottish Office, as far as electronics at least is concerned, 'for every 1000 direct jobs a further 730 jobs may follow indirectly in supply industries with another 580 jobs as a result of increased consumption by workers brought into employment'.[94]

62. The Scottish Office explained how inward investment had played a major role in helping 'to restructure Scotland's economy ... into the newer, lighter manufacturing activities based on modern technology and scientific developments. One of the most important sectors of Scotland's new economy and one in which inward investors are strongly represented is electronics. That Scotland has become a world-ranked assembly and manufacturing base in the electronics industry is easily illustrated by a few statistics. Scotland now produces 13 per cent of Europe's semiconductors, 36 per cent of Europe's branded PCs, 65 per cent of Europe's automatic teller machines and nearly 80 per cent of Europe's work-stations... Other key sectors in the Scottish economy in which inward investment plays a significant role ...include oil and gas, software development, healthcare, biotechnology and engineering'.[95] It may be that this analysis is over-optimistic, although The Scottish Office feel that electronics is now so embedded in other technologies that the risks posed by a down-turn in the sector were less than they had been.[96] We were told in Renfrewshire (where 50 per cent of employment is in foreign-owned concerns) that the dominance of the electronics sector has left the local economy dangerously exposed.[97] Further, despite all efforts to internationalise and diversify over the last 20 years, electronics and whisky still account for two-thirds of Scottish exports.[98]

63. According to The Scottish Office, overseas-owned concerns invest substantial sums in creating manufacturing capacity in Scotland. They told us that 'in 1995 net capital expenditure within the manufacturing sector in Scotland was approximately £1.6 billion around 10 per cent of the UK total. Almost half of this expenditure was undertaken by overseas-owned companies, with net capital expenditure per head in overseas-owned companies being almost four times that in UK-owned companies'.

64. For the contribution of inward investment to Scotland's exports, see paragraphs 82 to 88.

65. Although opportunities for local companies feature largely in the argument for inward investment, the reality has not been as successful as had been hoped. While Scottish Enterprise are aware of the need to encourage inward investors to source as much as possible locally, including high-value, low-volume supplies, to the maximum extent from Scottish companies, there are a number of constraints which make this difficult, ranging from inability of local companies to meet the necessary standards to head-quarters policy on suppliers.[99] Locate in Scotland, Scottish Enterprise and the LECs devote a lot of effort to helping Scottish companies to realise their potential for filling gaps in the supply chain and Scottish Enterprise told us that 'Scotland is sourcing over 20 per cent of what is available from original equipment manufacturers but there is something else going on here that is very important and that is often missed, which is that the big electronic companies have global procurement strategies. Unless you are able to sell into them globally, you are not going to succeed locally,[100] [our italics]. There is evidence that this is beginning to happen. This rather echoes something we heard in Ireland which was that because the Irish home market was so small, businesses had to trade internationally from their inception if they were to survive. Despite the optimism of Scottish Enterprise, the complaint is still heard that inward investors bring their own suppliers with them and even that they have been encouraged to do so.[101] Clearly there is great scope for improving the competitiveness of Scottish companies as suppliers to inward investors.

66. The Scottish Office told us that 'inward investment also creates valuable opportunities to transfer new management practices and techniques and new technologies from large inward investing companies to smaller indigenous firms. In areas such as quality control, for example, most inward investors take a positive stance towards transferring their practices to suppliers. They actively encourage suppliers to introduce and improve quality management and delivery systems in combination with improvements to production processes and cost control methods. This has positive benefits both for the OEM, [original equipment manufacturer] whose requirements are met quickly and to the right standard, and also for the supplier company whose efficiency is quickly improved.'[102] Renfrewshire Enterprise also mention that 'inward investors bring not just the jobs and the investment, but they bring perhaps a different set of management skills ... and those management skills are extremely important from the point of view of us being able to latch on to them and learn them.[103] The effect of this is hard to quantify but must be beneficial to Scotland.

67. Inward investors typically pay higher wages than indigenous companies, which benefits not only individuals but also the wider local economy. This is not universally welcomed; we were told during our visit to The Borders that existing firms were likely to lose skilled staff to incoming concerns in a position to pay higher wages ('poaching') and that the situation was worse when nearby areas were eligible for RSA. The movement of new industry into the country does lead to some staff movement at first, but the ultimate effect is likely to be beneficial as new skills are learned and transferred between incoming and indigenous concerns.[104]

68. There is another and more direct way in which inward investment helps to improve the skills base in Scotland. The skills requirements of incoming firms encourages LECs and others to invest in training programmes both as part of the package offered to encourage them to locate in the area and to ensure that local people are equipped to benefit from the opportunities. The most publicised example of this is of course Project Alba where an entire university course has been developed to supply the needs of Cadence (see paragraph 104). There is also evidence of inward investors taking an active role in ensuring that the skills they need are available locally; IBM have 'sponsored a significant new investment at Paisley University where they are actually providing people with IT skills'.[105]

69. Specific criticisms made of the emphasis on inward investment included:

the creation of a branch-factory economy;
displacement of indigenous firms;
danger of disinvestment;
the lack of clarity of total aid packages offered;
the accuracy of the claims for success;
ill-effects more generally on indigenous firms.

We consider most of these in the following paragraphs, and return to the problems of indigenous firms in paragraphs 89 to 95.

70. The 1980 Report commented on the stress laid by witnesses on 'the necessity to encourage the creation of research and development facilities rather than branch production plants only' and the criticism that too much inward investment continues to concentrate too heavily on such plants continues to be heard. Although The Scottish Office felt that the term 'screwdriver plants' was 'a pejorative phrase which is much-used and is very unfair in relation to most of the electronics business in Scotland',[106] other witnesses disagreed. Professors Hood and Young referred to the 'evidence of a limited number of "developmental subsidiaries" and pointed out that 'low supplier and other linkages are partly a function of the branch plant character of much of the existing inward investment stock'.[107] The Scottish TUC, who maintained a degree of their earlier scepticism about inward investment, referred to 'the concern that we had then and has continued of the extent to which some of the inward investments were not particularly high-skilled operations. It is a cliché, but the screwdriver assembly operation, in which people are involved in assembling components that are largely manufactured elsewhere, has been a concern'.[108]

71. Another criticism is that inward investment can displace indigenous firms. In practice we were given little evidence that this does happen, though the case of Lite-on was cited.[109] The Scottish Office admitted that there was an element of displacement when enumerating the jobs created: 'it should be noted that these are gross estimates which do not take account of any crowding out or displacement elsewhere in the labour market'.[110] The CBI Scotland also cautioned that the possibility of displacement should be taken into account when the benefits of inward investment were being enumerated.[111]

72. The charge, is sometimes heard that inward investors are less committed to the local economy than indigenous firms. In recent months a number of inward investors, across a range of industrial sectors, have announced significant levels of disinvestment from Scotland. The closure of the two Viasystems plants in The Borders has caused significant local distress, as has the planned closure of the Volvo bus and truck plant at Irvine and Kvaerner's decision to sell its Govan shipyard and John Brown turbine plant, both on the Upper Clyde. In addition National Semiconductor is moving out of wafer fabrication in Greenock and Seagate has halted specialist wafer production at Livingston. Wrangler has closed its jeans plant in Falkirk, Lite-On has withdrawn from a two-year old monitor assembly operation at Mossend and Mitsubishi has terminated television and video recorder assembly at Haddington and Livingston respectively.

73. These decisions reflect a variety of pressures affecting the companies concerned. Some, like Kvaerner, are engaged in a global rationalisation, caused by falling corporate profitability. Some, like National Semiconductor, are responding to particular technological and margin pressures in their sectors. Others, like Lite-On, have found it impossible to meet investment targets. But, while these closures have been taking place, other inward investors have been actively adding to their existing investment in their Scottish operations. Shin-Etsu has expanded its silicon production and NEC has added significantly to its wafer fabrication, both in Livingston. Production at Motorola's Bathgate mobile telecoms plant has continued to grow and IBM has diversified its Greenock operations, including a multi-lingual support call centre.

74. It would be wrong to conclude from the disinvestments listed above that inward investors are uniquely responsible for cutting back on investment and jobs or relocating key functions during periods of economic retrenchment. In the recent past a number of indigenous Scottish companies have surrendered their independence, in mergers or agreed takeovers which usually result in some headquarter functions being relocated outside Scotland. Thus the hotels, casinos and leisure group Stakis has been acquired by Ladbroke; General Accident has merged with Commercial Union to form CGU; and high technology start-ups like the Vision Group and Spider Systems have been acquired by new foreign owners. Even Scotland's largest retail bank, the Royal Bank of Scotland, makes no secret of its ambition to find a suitable merger partner.

75. Witnesses generally accepted that inward investors were not less stable than indigenous firms. Scottish Enterprise told us that 'there is just no evidence that there is any problem of stability of the inward investors compared with our indigenous group'.[112] While there may be cases where sentiment plays a part in a company's decision in general all companies, whether indigenous or not, must be guided mainly by their best financial advantage. The Scottish TUC commented that although they thought that indigenous companies were more committed 'for a variety of reasons, one is that they have been there longer, they have developed networks both of suppliers and also social networks...once a company gets past a certain size then our assessment would be that it is much more the bottom line in the balance sheet that makes the decision'.[113]

76. Scottish Enterprise, Locate in Scotland and LECs are well aware of the need to embed inward investors in the local economy and a great deal of aftercare is devoted to this end. It is particularly important in attracting the re-investment which is now responsible for some two-thirds of all foreign direct investment.[114]

77. There is a variety of financial incentives available for the attraction of foreign direct investment into Scotland: RSA, assistance for infrastructure, LEC funding for training and Locate in Scotland expenditure on promotion. It is not entirely easy to arrive at the true total cost. Figures relating to offers made to prospective inward investors are not published except in the case of Northern Ireland, although the amount paid in RSA is published after each tranche—payable as jobs are created—has been drawn down. Nor is the maximum allowable cost per job publicly known; the arguments for this are that it enables Locate in Scotland to bargain, to have different rates according to how desirable the jobs are and to prevent the maximum becoming the norm. The actual cost per job for 'a modern, major inward investment project in the electronics sector ... taking account of regional selective assistance and other expenditure that Scottish Enterprise might incur' might be in the range of £15,000 to £30,000.[115] As an example of the total costs which may be incurred, we were told that Scottish Enterprise had spent just over £14 million on levelling and servicing the site of the abortive Hyundai project, plus £5.5 million on related work in the area and that this was exclusive of any RSA which might have been offered.[116] LECs, water authorities and local authorities also spend money as part of packages designed to attract foreign direct investment, though sums spent by the last are typically very small.[117]

78. Several witnesses argued for more transparency in the figures. PricewaterhouseCoopers wrote 'Information to help objectively manage foreign direct investment attraction and retention activity—as against any support for indigenous development— is extremely difficult to find. Partly this is because of definitional issues and partly under and over-reporting by agencies, but also because real 'input' figures are not fully known or attributable. By way of example, the full economic cost per job could range between £2,000 and £50,000, of which typically the portion attributable to Locate in Scotland marketing and operations would be about £1,000.'[118] The Scottish CBI also wanted more openness, saying 'In terms of honesty, in terms of integrity, why not make that more transparent in a public sense, that this is available and this is the package ... it may not necessarily take place before the event; it would probably be sensible to take place after the event'.[119] Scottish Enterprise Tayside remarked that the announcement of large inward investment projects was accompanied by 'speculation' about the level of grant assistance made available; this worsens the sense of grievance felt by Scottish businesses.[120] We believe that transparency informs public policy making and recommend that the concordats should ensure that the figures for the total assistance used to attract each project are subsequently published.

79. Another concern was the accuracy of the statistics relating to jobs created or safeguarded. While there is no reason to believe that the Scottish statistics are any less reliable than those of other UK agencies, we were somewhat concerned that such figures might be over-optimistic. When a project is announced it is indicated that a certain number of jobs will be 'created or safeguarded' but often not all of them are eventually forthcoming. In passing we note that the whole concept of 'safeguarding' jobs is somewhat nebulous. Monitoring is easiest in respect of projects receiving Regional Selective Assistance because payment is made in blocks as targets are reached.

80. We were concerned that the claims for jobs created might be exaggerated and were interested to learn from Lord Macdonald of Tradeston that he shared our concern and intended to improve the system of evaluation. He undertook to examine the figures more closely and submitted a further Memorandum.[121] We were perhaps surprised, but all the more pleased, to see that the proportion of jobs created to jobs forecast was actually higher than the Department had thought, being nearer three-quarters than two-thirds, with a further proviso that some projects exceed their targets in a way that does not show up in the figures.

81. PricewaterhouseCoopers complained that 'existing "output" measures normally centre on planned jobs but do not distinguish in quality or other softer areas like technology, impact on local suppliers, skills enhancement or contribution to cluster critical mass or diversification'.[122] The use of job numbers to measure success (encouraged by the system of Regional Development Assistance) (see paragraph 55) was criticised by a number of witnesses who felt that more importance should be given to the value of the jobs created and the contribution towards moving Scotland 'up the value chain'.[123] We see no reason why additional measures should not be developed; one that springs immediately to mind is that jobs might be evaluated according to the proportions paying salaries in certain bands. We were glad to learn that Scottish Enterprise are already working on more helpful ways of measuring the success of assisted projects and we recommend that this continue.[124]

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