Memorandum submitted by the Bank
of Scotland (12.5.98)
SCOTTISH AFFAIRS COMMITTEE—INWARD AND
OUTWARD INVESTMENT IN RESPECT OF SCOTLAND
Should public money be spent on inward investment
rather than indigenous companies?
There should be a balance between the amount
spent on both inward investment and indigenous companies. Whilst
public money should be provided if the inward investment is going
to make a worthwhile contribution, the major practical problem
lies in the inflexibility of the manner in which this is provided.
Too much is provided by way of out and out grant and very much
more could be done by means of loan on soft terms or tapering
revenue subsidy. However, one has to recognise the competitive
nature of the market and the style by which competitor countries,
eg Ireland, are tailoring their packages. Hence greater, rather
than less, flexibility may be regarded as the style by which the
support is provided.
Indigenous companies play an important role
in persuading companies to come to Scotland and the value of that
support should not be underestimated. Greater attention should
be given to identifying opportunities where inward investment
can be used to support indigenous companies. At times there does
appear to be an unlevel playing field in terms of support to indigenous
companies. A means by which expanding and job creating Scottish
companies are given incentives to expand on comparable terms to
inward investment should be considered.
What is the economic significance of inward investment
to the Scottish economy? What is the value to the Scottish economy
in terms of subsequent exports?
In general terms, very great. Statistics are
available from the Scottish Office, Scottish Enterprise, Fraser
of Allander Institute but it is likely that they may fail to capture
the full value of import substitution and the domestic benefits
of invisible earnings, eg financial services, etc.
How is Scotland faring compared to its competitors
in attracting inward investment?
Decreasingly well—the Republic of Ireland
in relative terms to population seems to be doing better. There
appears to be a lot of "unfair" competition in terms
of tax incentives, quantum, etc, which seem to contradict European
guidelines.
How can its competitive position in inward investment
be maintained?
This could be achieved by ensuring that the
approach by/towards inward investors is very simple, ie one stop
shopping for funds, planning etc. Taxation is an issue here, both
at the personal and corporate levels and a rethink by government
is required to maintain levels of investment. Human resource costs
and employment laws are also important.
Retaining an independent inward investment agency
to promote the identifiable Scottish brand will assist in maintaining
Scotland's competitive position.
Financial incentives and other inducements can
be effective in persuading international companies to locate in
Scotland, particularly when their internal decision-making processes
are driven by short/medium term financial investment appraisal
processes. It might be helpful for the Scottish Office to consider
taking specific advice from Scottish corporate bankers who have
experience of advising inward investors or from Scottish business
people who have relevant international experience at the formative
stage of the bid so that the repertoire of investment incentives
can be tailored to meet the typical investment appraisal processes
of international companies.
In the long run, Scotland's attraction for business
investors will lie in combinations of factors such as: incentives,
stable and predictable financial and economic conditions, continued
access to UK and European markets and underpinning the quality
of educational and technological resources within Scotland.
Taking the longer view, significant resources
should be applied to equipping and financially supporting those
University departments that are best placed to educate and train
technical and managerial talent, which will be sought by international
business. Our major differentiation for the future will be the
quality of our people offerings which must/will move Scotland
away from the screwdriver type new entrant to the long-term research
and development entity with production line spin off.
Does the amount of public money spent on inward
investment in relation to the benefits represent value for money?
Yes, but not always. There have obviously been
one or two large and highly visible perceived failures eg HCI,
Hyundai. HCI was with hindsight perhaps under-researched. To a
lesser extent, Hyundai suffered from the economic difficulties
in Asia and Korea specifically.
What are the prospects for inward investment in
Scotland if a more centralised system for attracting inward investment
is adopted in the UK?
This would have a substantially adverse effect
on Scotland which would be provided with only a certain percentage
of total inward investment opportunities. There is already excessive
"noise" in the system in the need for many Scottish
Enterprise "deals" to be approved by Scottish Office
and many of those then approved by Treasury with very large cases
needing final sign-off by Brussels. The existing internal competition
within Scotland among local authorities and local enterprise companies
can be disruptive although LECs are now effectively controlled
by Scottish Enterprise.
It is questionable whether or not a central
office based in London would place adequate emphasis on, or sufficiently
understand, the key selling points of Scotland. By dint of its
history and culture, Scotland has a clear identity and covers
a clearly definable region. Local knowledge is important and a
local agency is likely to have a far more important role to play
in delivering added value to clients. Critical mass has gradually
evolved within narrow physical and sectoral areas in Scotland
ie Silicon Glen. Scattering inward investment throughout the UK
as would inevitably happen if directed from a central, politically
persuasive body. There are insufficient inward investment opportunities
available to achieve critical mass throughout the UK and hence
the UK initiatives must be focused into a small number of areas
with the greatest economic and social needs and with internal
strengths such as University graduates to create a differentiated
offering to the market.
Are inward investors given disproportionate assistance
compared to indigenous enterprises? Is the balance correct?
Probably so, but it may be hugely dangerous
to tamper overmuch with a winning formula. That is not to say
that expanding and job creating indigenous companies should not
be given greater incentives. A way should be found to promote
greater assistance.
The current process favours eye-catching projects
creating large numbers of jobs regardless of the quality of those
jobs. Much more attention, particularly for second or third time
applicants, needs to be given to added value, quality of jobs
and the likelihood of further investment (in an added value sense)
emerging in the future. In the long term, high value indigenous
job creation could be more valuable than screwdriver jobs from
some inward investment.
Are enough resources devoted to re-investment
(given that this accounts for half of all inward investment)?
Possibly not.
In changing international economic circumstances
are the costs of attracting inward investment increasing? Are
the risks of subsequent disinvestment increasing?
Yes, costs are increasing due to more competition.
Disinvestment is also increasing, although not significantly so,
possibly due to rapid change as with Hyundai and with Mitsubishi
at Haddington. Global companies increasingly seek differential
economic advantage and having committed significant investment
to secure this, tend not to be blown off course. They will usually
take out excessive capacity at a remote location rather than their
Head Office base. The importance of seeing Scottish screwdriver
type plants raising their professional skill base and lowering
their vulnerability is highlighted by recent global movements.
What aftercare services are provided?
The enterprise network, in all its forms, provides
aftercare to the companies in various forms such as training for
the workforce and access to other government and EC assistance
in the financial sense. Given the basis on which assistance is
usually provided to offset market imperfection, which should by
definition be on only a temporary phase, only limited aftercare
is needed.
The added value offered should be as a result
of understanding business needs and tailoring support, whether
financial, training advisory, cultural to the actual business
dynamics.
LIS is reviewing the kind of aftercare provided
to help it maintain its leadership of this field in inward investment.
The role is likely to change from one of information gathering
and facilitation to a business advisor, focusing on operational
issues with the actual delivery and implementation of business
objectives in Scotland.
What are the prospects for creating "developmental
subsidiaries" (ie not screwdriver plants)?
Developmental subsidiaries have already been
formed by numerous inward investors, so if history can be relied
upon, there seems to be scope for this to continue with new investors.
This can be good if properly done eg HP, IBM. The need is to sell
expertise rather than cheap money, therefore aid should be tied
to the quality of jobs rather than the quantity. The "Cadence"
project is very exciting and demonstrates the potential for Scotland
to exploit its intellectual capital in a directly effective economic
way. Similarly a number of biotechnical inward investors have
been attracted by the clusters of technical know-how and academic
research available in the major cities. This confirms the need
for local management to achieve visibility and influence within
the corporate structure of the inward investor.
What are the success rates
(a) in attracting inward investment initially?
Excellent. Statistics from the Scottish Office
will indicate this.
(b) in ensuring that the promises made by
inward investors are kept?
Difficult to assess without available comparative
data. Should clawback of support not be mandatory if targets are
not met?
(c) in developing diversified economic sectors
on the back of inward investment projects?
Poor.
The influence of wider events and determinants
such as globalisation and its Far Eastern economic crisis
This is having an increasing influence. More
indigenous Scottish companies are seeking to be increasing global
and inward investors are mainly doing the same. The Far East crisis
has hit Scotland hard eg Hyundai, etc.
Changes within the EU and/or the UK will influence
the decision of potential investors eg our long term position
regarding the UKs entry date to the EMU, National Insurance rates,
the attractive incentive schemes and labour rates in Eastern Europe,
and the opening of China will all have a material impact on the
way forward.
Whether the model for inward investment, dating
from 1981, is still appropriate
Probably not but the present model has not been
unsuccessful. Refinement rather than reinvention may be required
in clearly defined areas eg Universities where we must ensure
that the planned "product" for these bodies matches/complements
the planned/forecast targeted sector needs.
What support is available for Scottish business
to assist it to achieve success abroad and on exports?
Support includes trade missions, export partnerships
locally, support of the enterprise network and the banks, business
to business services operated publicly and privately. Scottish
Trade International, an off-shoot of Scottish Enterprise, seems
to have made a positive start.
Stronger emphasis by way of grant support should
be placed on assisting Scottish companies who are looking to develop
their international network.
Is enough attention paid to the financial sector?
No. The reasons are perhaps threefold:
— The centre is seen as prosperous
and able to look after itself.
— Those managing financial businesses
do not respond positively to "outsiders" attempts to
help.
— It is very difficult to do so.
How will devolution affect inward investment?
There is a danger that it will have an adverse
affect. There is unlikely to be a level playing field where, for
example, personal taxation is concerned and there may be a lack
of confidence regarding long-term policies in any new administration
by potential investors. The risk could be that a Scottish Parliament
will interfere in various ways including the efforts of Scottish
Enterprise/LIS; tolerating indiscipline among competing local
authorities; fussing around any potential inward investor or even
creating differentially disadvantageous costs such as business
rates and staff remuneration, and by interfering in the provision
of transport, education and health services.
However, taking a more positive view, the potential
advantages that could be delivered include demonstration of a
political and social consensus committed to creating a benign
business environment. Additionally, a Parliament would be able
to manoeuvre without interfering in Westminster "reserved"
functions of economic development, to achieve the delivery, locally,
of attractive and sophisticated packages of total support whch
would beat competition from elsewhere in Europe, perhaps particularly
Eire.
In short, the political tone set by the new
body has the power to influence inward investment negatively or
positively. It is not devolution itself which will be the influencer
but rather the phases and events beyond the first step.
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