Letter and memorandum from Dr George Mathewson
CBE, Group Chief Executive, The Royal Bank of Scotland Group plc
(8.6.98)
ENQUIRY INTO
INWARD AND
OUTWARD INVESTMENT
I am writing to submit evidence to the Committee
in response to your letter of 3 April.
Detailed answers to the questions you ask are
enclosed.
I have a number of points which I wish to emphasise:
(1) The key issue is the extent to which
inward investment increases the pay packets of Scottish residents,
thereby adding to economic value in Scotland and the UK. It is
my contention and that of the Royal Bank that inward investment
makes a significant contribution in this area.
(2) It is vital that inward investment is
arranged at the Scottish level. Increasingly competition is between
regions of the EU with a distinctive international identity. Within
the UK, it is sensible, therefore, for organisational arrangements
to be made at the Scottish level, rather than more locally, or
more centrally.
(3) Devolution is not a significant issue
for the inward investment customer, who is more concerned with
geopolitical and macroeconomic risk (for example, foreign exchange),
and with the absolute necessity of Scotland remaining within the
EU. It would be wrong to encourage devolution to become an issue
either by different parts of the UK bidding against each other,
or by complex bureaucracy in support of an ill-conceived attempt
to ensure fairness for all parts of the UK, which might result
in customers' requirements for a speedy response being ignored.
It is important that the new Scotland is not ham-strung, and it
would be perverse to increase centralisation at a time of devolution.
(4) Successful delivery of inward investment
in Scotland has been greatly enhanced by Locate in Scotland, a
dedicated resource, depending on the commitment both of government
and of an arms-length agency.
(5) Inward investment has rightly received
specific attention, but it is equally important to reinforce efforts
to encourage indigenous investment. The Scottish Office and Scottish
Enterprise could combine to facilitate the expansion not just
of SMEs but of other companies in Scotland which, on occasion,
need the appropriate development package, addressing issues such
as planning and labour, and, making available regional selective
assistance to increase the return on investment, and help implement
decisions in favour of quicker, bigger, projects in Scotland.
I am very happy to submit the enclosed written
evidence which, you will appreciate, is based on extensive public
and private sector experience; in the public sector as an inward
investment practitioner as Chief Executive of the SDA; and in
the private sector as Chief Executive of a major financial institution
in Scotland. We believe that it is the responsibility of the public
sector to provide quantified economic and statistical information.
DETAILED QUESTIONS OF REFERENCE
Q1. Should public money be spent on inward
investment, rather than indigenous companies?
A. We do not accept that providing support
for inward investment and for indigenous investment are alternatives.
Neither Scotland nor the UK can afford to ignore business opportunity
from any quarter, at home or overseas. The key issue is to ensure
that resources are used widely and that support for indigenous
and foreign firms represents value for money.
Q2. What is the ecomonic significance of
inward investment to the Scottish economy? What is the value to
the Scottish economy in terms of subsequent exports?
A. Inward investment in Scotland has had
major sectoral effects; For example, without foreign electronics
companies there would be no Silicon Glen, and foreign ownership
is also important in whisky, oil and gas.
Inward investment has had a major effect on
jobs, and on area regeneration. It is well established that inward
investors in manufacturing have higher levels of value added,
and investment per employee, than indigenous firms. In addition
inward investment has made a contribution to Scotland by introducing
new technologies, management styles and working practices.
The foreign owned sector has exported substantially.
The prime motive for overseas companies locating in Scotland is
to establish a presence in the EU from which to address the European
market. The majority of the electronic sector is externally owned
and it accounts for a third of manufacturing exports. But a precise
measure would focus on net exports once imports from overseas
suppliers had been netted off.
Q3. How is Scotland faring compared to its
competitors in attracting inward investment? How can its competitive
position in inward investment be maintained?
A. In the past Scotland has fared well,
because it capitalised on its distinctive capability as a highly
networked region with short lines of communication to decision
makers. Competitors now comprise regions such as Catalonia and
the German Lander, in addition to Ireland, other countries in
Europe and further afield. It would be easy to erode Scotland's
competitive position by dismantling current arrangements to attract
inward investment.
Scotland's continued success in inward investment
depends on:
— the UK's continuing membership of
the EU. Any sign that the UK is becoming even "semi-detached"
will have a negative effect on inward investment prospects for
the UK and Scotland;
— continuation of recent and current
macro and micro-economic policies which provide inward investors
with stability, certainty and a welcoming positive environment;
— maintaining and developing Locate
in Scotland.
Q4. Does the amount of public money spent
on inward investment in relation to the benefits represent value
for money?
A. Inward investment probably does represent
value for money, given its scale in Scotland, and its contribution
to employment, area regeneration, technological innovation, and
return to the exchequer. The evidence cannot be conclusive.
Q5. What are the prospects for inward investment
in Scotland if a more centralised system for attracting inward
investment is adopted in the UK?
A. It is likely that inward investment would
be reduced if arrangements for attracting companies from overseas
were centralised. While it is important to avoid one area of the
UK bidding up against another (any area on the wrong end of the
competition would agree in an individual case), the focus must
remain on the customer. If a response to a company which requires
an indicative offer is slow, it will be unacceptable. Similarly,
the customer requires to negotiate with decision makers within
regions with distinctive political and international identity
(a major element in the competition, in addition to nation states).
Across Europe and beyond the competition for
foreign direct investment (FDI) is often conducted at the regional
level. National governments and the EU may set broad rules for
competition, without becoming the active agents. Moreover, in
the Scottish case, with the advent of devolution, the prospect
of inward investors having to deal with two levels of government
would be damaging.
There is, after all, already a degree of centralisation
which works well. First, there is centralisation at the European
level which controls the levels of regional assistance; second,
that level is reduced by ceilings established by the UK government;
third, all parts of the UK operate the same guidelines for regional
selective assistance; fourth, all offers of assistance above a
certain level require Treasury approval.
Q6. Are inward investors given disproportionate
assistance compared to indigenous enterprises? Is the balance
correct?
A. See answer to question 1. Assistance
should be proportionate to the benefits provided. There should
be one pot for business development and industrial expansion,
not a set proportion awarded to inward investors with the balance
going to indigenous enterprises (or the other way round).
Assistance comprises more than financial support.
It may be the case that the public sector should afford indigenous
companies (whether large or small) in Scotland more attention
to help meet their developmental needs. There appear to be no
specific organisational arrangements or systematic effort to achieve
this objective. By contrast, inward investors enjoy the services
of Locate in Scotland. It is largely a question of attitude. The
rules for inward investors and indigenous companies (for financial
assistance) are the same but interpretation of the additionality
criterion often wrongly discriminates against indigenous companies.
It is often said (wrongly) that assistance is only provided if
it is necessary to make a project proceed. In fact if extra assistance
makes a difference by achieving a quicker, bigger, better project
it can be provided. Increased promotion to indigenous companies
could help achieve this objective.
Q7. Are enough resources devoted to re-investment?
A. The fact that re-investment accounts
for half of all inward investments suggests that attention is
being devoted to expansions. There may be scope for extra effort
from the contributing organisations to Locate in Scotland, the
Scottish Office and Scottish Enterprise. Re-investment requires
aftercare which in turn requires a professional organisation with
knowledge of circumstances on the ground. Locate in Scotland has
the ability to provide this service which a central organisation
covering the whole of the UK would find difficult.
Q8. In changing international economic circumstances,
are the costs of attracting inward investment increasing? Are
the risks of subsequent disinvestment increasing?
A. Perhaps the costs increase as global
competition increases. The track record of inward investors in
sustaining employment has traditionally been greater than that
of indigenous companies. Establishing plants overseas requires
a major commitment which is not undertaken lightly; most inward
investment is not footloose.
Q9. What aftercare services are provided?
A. See answers to questions above. Locate
in Scotland, supported by its contributing organisations, the
Scottish Office and Scottish Enterprise, is capable of providing
a range of aftercare services covering issues such as planning,
training requirements, export support and further assistance for
expansion. These services should be provided to any company, foreign
owned or Scottish headquartered, with the potential to expand.
Q10. What are the prospects for creating
"Developmental Subsidiaries" (ie not screwdriver plants)?
A. The debate about inward investment is
bedevilled by false antitheses between foreign companies and indigenous
companies, between manufacturing and service companies, and between
"screwdriver" plants and those with more autonomous
functions. Employees and potential employees in assembly plants
will not thank officialdom for a contemptuous attitude to projects
which provide gainful employment.
While screwdriver plants should not be despised,
there is obvious advantage in attracting companies with research,
product origination and development, and marketing functions.
There has been some success in this field, notably Hewlett Packard
in the past, and Cadence more recently. An organisation which
operates at the Scottish level (such as Locate in Scotland) is
better able to adopt a strategic approach; to seek to attract
clusters of companies and related industries; to strengthen links
between manufacturing and service industry, and with the academic
infrastructure which is strong in Scotland; and therefore to increase
the likelihood of attracting "developmental subsidiaries",
but, as is the case for attracting headquarter operations, it
is easy to talk about and difficult to do.
Scotland should play to its strengths which
include the availability of labour, with appropriate skills at
a number of levels, competitively priced.
Q11. What are the success rates?
(a) in attracting inward investment initially?
(b) in ensuring that the promises by inward
investors are kept?
(c) in developing diversified economic sectors
on the back of inward investment projects?
A. Locate in Scotland's success in attracting
inward investment initially is well attested. Inward investors
have typically sought to keep promises, but there will always
be occasions when adverse economic circumstances put paid to the
best prepared commercial strategies. A highly attuned aftercare
service is perhaps the likeliest way to influence inward investors'
plans. Where appropraite sensitive use should be made of provisions
in the Regional Selective Assistance guidelines to reschedule
or repay grant instalments.
Locate in Scotland, covering Scotland as a whole,
is much better able than a more local organisation (a local authority
or a local enterprise company, for example) to develop a strategy
aimed at attracting a cluster of companies and industries. In
the 1980s, Locate in Scotland was successful in attracting companies
comprising a silicon chain beginning with the truck delivering
sand and finishing with the original equipment manufacturer exporting
the finished product.
Q12. The effect of international organisations
on inward investment and policy making?
A. The intention and sometimes the effect
of the involvement of international organisations is to level
the playing field of inward investment attraction and therefore
reduce price competition. If the important of price is reduced
the importance of professionalism is increased. That is why the
continuation of an organisation such as Locate in Scotland with
its marketing drive and and ability to put together an overall
development package is vital.
If the intervention of international organisations
is to be effective and not just well-intentioned, then it is important
that a regime is established which is governed by clarity and
stability.
Q13. The influence of wider events and determinants
such as globalisation and the Far East economic crisis?
A. The effect of increased globalisation
is to increase competition for foreign direct investment. Increased
competition would require inward investment organisations to increase
their focus. But inward investment is itself part of the globalisation
process.
Q14. Whether the model for inward investment,
dating from 1981, is still appropriate?
A. The model has clearly worked in Scotland;
it has demonstrated the advantages of a one-stop shop; a dedicated,
professional team; and a Scottish brand which is stronger than
local, different from the national UK effort, and based on a distinctive
region of international significance. It is at that level that
Scotland competes with, for example, Catalonia, and the German
Lander, in addition to nation states.
Q15. What support is available for Scottish
Business to assist it to achieve success abroad and in exports?
A. Public sector support for export has
predominantly been provided to indigenous companies rather than
inward investors. Scottish Trade International combines the export
assistance instruments of the UK government (DTI and The Scottish
Office), and Scottish Enterprise. There are schemes available
to explore and exploit markets overseas (the Export Market Research
Scheme, the Market Information Enquiry Service, and the Scottish
Exports Assistance Scheme).
Otherwise, funds for export are provided by
the private sector, and particularly the international divisions
of the clearing banks. The Royal Bank of Scotland, for example,
is currently supporting the National Export Campaign, led by Scottish
Trade International.
Q16. Is enough attention paid to the financial
sector?
It is sometimes thought, wrongly, that the financial
sector in Scotland is hostile to inward investment. Previous efforts
to attract companies have included successes such as Bankers Trust,
and Crusader Insurance, but overall have not produced a great
return. There is some potential in the area of Call Centres (but
the potential of existing UK companies may not have been exhausted
in this area). The financial sector is different from, for example,
the micro electronics industries, since it operates in mature
markets which are highly regulated, and it experiences considerable
pull from London as the major international financial centre in
Europe. As a result foreign presence in Scotland is usually representational
(City Corp, and Chase for example). There is already some ownership
of financial institutions (for example NAB's ownership of the
Clydesdale Bank, and UAM's ownership of Murray Johnstone. Overall
therefore, from both government and independent market forces,
it may be that enough attention is paid to the financial sector
in attracting overseas investment.
Q17. How will devolution affect inward investment?
The effect of devolution is probably going to
be neutral. Multi national companies are used to far more significant
geopolitical and economic risk (including exchange rate risk for
example). Devolution might have a positive effect if it draws
attention to distinctive, and concerted, efforts to attract inward
investment; and exploits short lines of communication to provide
effective delivery. Devolution might also improve the accountability
of inward investment policies given increased parliamentary scrutiny.
On the other hand, if concordat arrangements put in place alongside
devolution befuddle inward investment with bureaucracy, the effect
will be negative.
The precise nature of any impact on inward investment
flows and on existing stock will depend on policies pursued by
the Scottish Parliament and Executive, and the extent to which
they are supportive of business.
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