Select Committee on Northern Ireland Affairs Minutes of Evidence

Memorandum submitted by the Northern Ireland Economic Council


  This Memorandum presents the views of the Northern Ireland Economic Council (hereafter referred to as the Council) on inward investment policy in Northern Ireland. The Council note the wide remit of the Northern Ireland Affairs Committee's inquiry into inward investment policy in Northern Ireland and wish to assist its deliberations by highlighting issues which have arisen from research undertaken by the Council relevant to this topic. Before discussing these issues the next section presents a brief summary of the role and remit of the Council.


  The Northern Ireland Economic Council is an independent advisory body, set up by the Secretary of State for Northern Ireland in 1977. The Council has a wide remit to provide independent advice to the Secretary of State on the development of economic policy for Northern Ireland. The future role and arrangements for the Council are matters for the devolved administration.

  The Council carries out its role through four series of publications. Reports generally make specific policy recommendations endorsed by the Council. Occasional papers are intended to promote discussion on topical issues while commissioned research monographs are published under the author's name. Finally, Council responses to consultation documents are included in an advice and comment series.

  The Council also publishes an Annual Report and the text of the annual Sir Charles Carter Lecture, which the Council sponsors in honour of its first chairman. It also holds seminars and conferences designed to promote debate and their proceedings may from time to time be published.

  The Council is composed of 15 members. There are five independent members, one of whom is usually the Chairman. Five members represent trade union interests and are nominated by the Northern Ireland Committee of the Irish Congress of Trade Unions. Five members represent industrial and commercial interests and are nominated jointly by the Confederation of British Industry for Northern Ireland and the Northern Ireland Chamber of Commerce and Industry. Members serve four year terms, which may be renewed.

  The Council has a small staff, including the Director, economists and administration support staff. Council publications are normally prepared by the economists but outside consultants are also engaged for particular projects. All publications go before the Council for comment prior to publication. It is the Council which bears final responsibility for their publication but not necessarily for the content or recommendations of commissioned research monographs.



  In the regional economics literature the idea that the process of cumulative causation, in which firms entering an area make it a more attractive location to further firms and to existing firms, is well known and widely accepted. The model, which has its roots in the older traditions of development economics (Hirschmann, 1958; Myrdal, 1957) and could perhaps even be traced to Alfred Marshall (1919) and his famous industrial districts model, has resurfaced with more credibility in the analytical work of new economic geographers such as Paul Krugman (1998) and of industrial economists such as Michael Porter (1990).

  A keystone upon which this theory is built is the presence of direct linkages and beneficial externalities or spillovers—both pecuniary and technological—between multinational and local firms. Porter has popularised the term "cluster" to encapsulate this process. Porter's model does not explicitly recognise a role for foreign direct investment (FDI) in the process, his theory being that firms derive competitive advantage from characteristics of their national environment (O'Donnell, 1998). Nevertheless, many countries, for example the Republic of Ireland (RoI) and some in East Asia, have improved their relative economic performance by capturing new technology-based production plants (Di Giovanni, 1996; Clancy et al, 1998). Such inward investment is particularly important for small regions where the range of specialisations will be of necessity limited, as it enables them to draw on expertise developed elsewhere. In this way inward investment provides an important connection to the global economy and a conduit for knowledge transfer.


  Empirical research on the first phase of inward investment in the 1960's and 1970's on the consequences of external ownership for the host region pointed to a sector characterised by a concentration of employment in low skilled, low technology industries, a low level of linkages with the local economy, a low degree of managerial autonomy and a concentration on low cost production of mature products. A considerable amount of evidence was accumulated suggesting that a high degree of external ownership was detrimental to long term regional economic development.

  The late 1980's and the 1990's, however witnessed a perceptible change in the nature of FDI to the extent that there now exists a considerable body of evidence that multinational firms have contributed to the geographical diffusion of technology and technology management skills to the benefit of the host region (Blomstro­m, 1991). Many econometric studies have found evidence that the presence of a FDI project has a positive effect on domestic firms' total factor productivity and on their propensity to export[1]. Case study evidence has also shown how multinationals can provide the initial impetus for industrialisation through creating demand for local suppliers and driving up quality, productivity and product diversity[2]. Hobday (1995) cites evidence in East Asia of sufficiently intense competition being created among the local industry to eventually displace the initial wave of FDI projects.

  A report commissioned by the Council on learning from the experience of successful European regions concluded that "changes in the character of multinational investments policies also open up opportunities for more `embedded' branch plant investment, involving higher value-added activities and greater linkages with the regional economy . . . [which] could become the basis of new `clusters' . . . " (Dunford and Hudson, 1996,p189). In an attempt to develop an analytical framework which assesses the effects of an FDI proejct on the local or host economy, Markusen and Venables (1997, p15) have shown that a necessary and indeed sufficient condition for welfare gain is that "the ratio of multinationals demand for intermediates to their impact on domestic supply should exceed this ratio for domestic firms". The formation of backward linkages is, therefore, critical and the development of them should be a key policy objective.

  An assessment of the wider effects of FDI in manufacturing in the UK concluded that "direct trading with inward investors resulted in significant improvements in the business performance of suppliers in areas such as quality, costs, product development, production organisation/technology and delivery which resulted in increased sales and employment and improvements to investment behaviour, productivity[3] and profitability" (PA Cambridge Economic Consultants (PACEC), 1995, p154). This study also identified improvements to:

    —  the local labour supply and skills base;

    —  the technological base through investment expertise and training;

    —  the provision of training facilities and services;

    —  the local infrastructure, transport and premises, communication and the environment;

    —  the supplier chains and networks; and,

    —  the number and quality of jobs arising directly through the presence of the inward investors and indirectly via local linkages (PACEC, 1995, pp153-154).

  Much of the thrust of the UK Government's recent White Paper on competitiveness and the knowledge driven economy is concerned with the realisation of several of these improvements (Department of Trade and Industry (DTI), 1998).

  The general consensus from economic research on the effects of FDI on the host country is that it is likely to be beneficial if the FDI involves process innovations and therefore helps to enhance the skills and knowledge of the indigenous workforce (Barrell and Pain, 1997).


  The ability of inward investors to "unlock" higher levels of productivity in domestic industry is leading regions and nations increasingly to compete with one another to attract foreign investment. More specifically, the question is to what extent should governments provide financial inducements to inward investors to attract them to peripheral locations which might not otherwise receive consideration? This issue is particularly germane to Northern Ireland, as foreign investment is consistently identified in Government policy statements as one means of improving the competitiveness of the economic clusters in the region.

  From a purely economic perspective, such inducements may be unnecessary since, should a location have the right competitive conditions to attract investment, it would be attracted without inducements and, if it didn't, the costs of securing the investment would be likely to outweigh the benefits[5]. Particularly within a large economy like the US, it can be argued that inducements merely shift jobs from one region to another, while leaving the total employment situation unchanged, except that a price is paid in terms of reduced tax receipts in the recipient state[6].

  However, the attraction of FDI is increasingly a competitive game and other regions may offer fiscally-distorting inducements which "tip the balance" in their favour. While this is inconsistent with the contentions of neo-classical theory (which regards such subsidies as "corporate welfare"), intellectual support may be found in the new trade theory which stresses economies of scale and agglomeration, duopoly and first-mover advantages, all of which may be exploited through government intervention to attract investment to their own location, yielding long-term competitive advantage[7].

  Concerns will remain, therefore, that, if FDI is not attracted by "fundamentals" but by inducements, the kind of investment attracted to a peripheral location is likely to be quite "shallow". In other words, it will not integrate into the local community and create the sort of industrial clusters that the Porter model is concerned with. The term "fundamentals" according to Dunning refers to the determinants of competitiveness within an economy assuming that productivity lies ultimately at the heart of competitiveness. Two broadly similar views on the key determinants of competitiveness are outlined in Table 1.

Table 1


View of Economists Advisory Group Ltd (EAG)
View of Organisation for Economic Co-operation
and Development (OECD)
R&D expenditureR&D infrastructure
Educational structuresEducational profile of the labour force
EntrepreneurshipCorporate governance environment
Business infrastructureEmployment regulations
Technology managementLabour costs
Attitude of the workforceCorporate taxation
Corporate performanceEnergy costs
Telecommunications infrastructure
Sources: EAG (1993); OECD (1997).

  In 1991 the Council, in recognition of such dangers, concluded that while it supported efforts to attract inward investment to Northern Ireland, it did not believe that such a policy by itself could secure the rate of growth which an economic strategy should seek to achieve (NIEC, 1991). It cautioned against offers of assistance for assembly or branch plant type operations and argued for a more selective approach to the attraction of inward investment. The priority, the Council said, should be to attract to Northern Ireland those projects which will introduce new products and technology and will offer scope for developing higher order corporate functions (NIEC, 1991). The prospect of durable peace and political stability should assist in realising that priority.

  Membership of the European Union (EU) and access to the EU market is another important inducement (Barrell and Pain, 1997). As more standards are adopted across the EU it becomes increasingly attractive for inward investors to be located inside rather than outside the zone. The initial changes brought about by the Internal Market programme caused some foreign investment to be diverted away from such countries such as Sweden and Austria (Baldwin et al, 1995), with investment recovering only when it was clear that they would become full members of the EU. With European Monetary Union (EMU) and the arrival of a single currency, the pace of integration is continuing unabated. If the UK remains outside the EMU zone, foreign investors whose main markets are in Europe could have an incentive to locate there rather than in the UK since it minimises foreign exchange risks. Furthermore, abstention from monetary union may also make it more difficult for non-participants to shape or even be part of further moves towards integration and this may act as a further disincentive to potential inward investors in countries outside the EMU zone (Barrell and Pain, 1997).


  The Organisation for Economic Co-operation and Development (OECD) has identified three waves of regional policy (OECD, 1993). In the first wave the focus was almost exclusively on attracting inward investment.This was the case in Northern Ireland and led the Quigley Review Team of 1976 to conclude "the aim has been to secure as many projects as possible employing males rather than females in view of the particular severity of male unemployment . . . The Department of Commerce has not evolved . . . any particular theory of beneficial "linkages" (Quigley, 1976, p18). In the 1980s, however, largely as a result of widespread branch plant closures, there was a shift towards the promotion of indigenous resources which the OECD identifies as the second wave of regional policy. This shift in international opinion was mirrored in Northern Ireland. The "Pathfinder Process", for example, in the late 1980s, concentrated on finding ways to harness the indigenous potential to promote regional regeneration and focused on encouraging entrepreneurship (DED, 1987).

  Now, according to the OECD, there is a third wave of regional policy in which the emphasis is on harnessing local or indigenous potential while at the same time exploiting the opportunities which arise from external sources. In terms of inward investment most regional authorities are now trying to "embed" mobile capital and ensure that its contribution to economic upgrading moves beyond simple job creation to the formation and development of mutually reinforcing linkages with the local economy. As the development and exploitation of knowledge becomes more important in all economic activities, the spotlight falls on the qualitative aspects of factor flows and it is this emphasis which distinguishes "third generation" regional policy (Begg, 1998).

  Again this shift can be witnessed in Northern Ireland. In the Government's Growing Competitively.A Review of Economic Development Policy in Northern Ireland there is clear recognition that "such investment brings world class production techniques, technical innovation and managerial skills which can be transferred to local companies" (DED, 1995, p19) and there has been an increased emphasis on supplier development programmes which build linkages. In the Industrial Development Board's (IDB) latest Corporate Plan, Competing Globally Sustainable Growth in a World Economy, covering the period April 1998 to March 2001, a new emphasis on supplier development is clearly discernible. For example, the fifth performance target in the new corporate plan has the twofold aim of encouraging:

    (a)  externally-owned companies to increase their local sourcing of components and services; and,

    (b)  locally-owned companies to ensure they have the capabilities to meet these requirements. (IDB, 1998a, p10)


The Troubles

  Any discussion of FDI in Northern Ireland must be prefaced with a reference to the "troubles" of the past 30 years. Political stability is an important factor in the investment decision-making process and its absence in Northern Ireland is likely to have reduced the region's attractiveness as a business location. The Council have estimated (using the Republic of Ireland as a comparator) that if Northern Ireland had been able to attract foreign direct investment against a background of peace and political stability, then it could have expected to have promoted four times as many jobs as it actually did (52,400 rather than 13,100) (NIEC,1995). Certainly "the inability of the North [of Ireland] to attract inward investment to anything like the extent of the South [of Ireland] can probably be blamed partially on the uncertainty and disruption of the troubles" (Bradley, 1996, p38).


  As outlined above the attraction of foreign direct investment has been a central plank of industrial development policy in Northern Ireland since 1945 when selective financial assistance was first introduced under the Industries Development Act (NI), 1945 (NIEC, 1992). The policy has traditionally been predicated upon the view that inward investment has an important role to play in Northern Ireland's economic development, particularly in terms of direct job creation. More recently, however, there has been a recognition that the quality of an inward investment project, in terms of its benefit to the host economy, can extend this role beyond simple job creation to more intangible knowledge-based variables, providing the basis for investments firmly embedded in the local economy. (See, for example, DED, 1995.) This is important because foreign capital is inherently mobile, a factor which can result in large and quick fluctuations in employment.

Performance 1970 to 1990

  As pointed out above, a common criticism of FDI is that, since it involves the establishment of plants with products which are often nearing the end of their product life cycles and because it lacks important corporate functions such as R&D, the investment is short term[8]. Certainly, in Northern Ireland the performance of the externally-owned sector has been a cause of some concern. For example, the Northern Ireland Economic Research Centre (NIERC) estimated that the externally-owned[9] manufacturing sector contracted from 92,000 jobs in 1972 to 42,000 in 1986 and concluded that "the principal cause of Northern Ireland's poor record in job generation is the performance of the externally-owned sector" (NIERC, 1989, p34). Further research by the Council—which focused specifically on inward investment projects—confirmed the findings from the earlier research by NIERC. The Council found that between 1973 and 1990 the number of externally-owned plants declined by 41 per cent, with employment falling by 46,000 or 53 per cent[10].

  A study which looked at the reasons behind the decline of the externally-owned sector in Northern Ireland in the 1980s found that branches in Northern Ireland were selected for closure mainly because of the role they played within the parent organisation (Fothergill and Guy, 1990)[11]. In too many cases branch plants in Northern Ireland were relatively small, production-only units, making products that were nearing the end of their life-cycle" (Fothergill and Guy, 1990, p18). Moreover, Northern Ireland factories did not have the on-site product development capability which would have enhanced their chances of success.

Performance Post 1990

  Despite an improvement in performance of this sector in the 1990s—the number of externally-owned plants has increased from 207 in 1990 to 232 in 1998 with employment increasing from 41,085 to 53,363—figures in Table 2 would seem to indicate that Northern Ireland still lags well behind other United Kingdom (UK) regions as a destination for direct inward investment. Even after making an adjustment to take account of the size of the regions, Northern Ireland still performs poorly relative to other peripheral regions such as Wales, Scotland and the North East. However, Northern Ireland still achieved a share of the total number of projects at 4 per cent in excess of its population share of approximately 2.75 per cent.

Table 2

Number of
Projects per
Million Population
Rank by Projects per Million Population
Scotland35469.4 3
West Midlands34665.2 4
Wales28497.9 1
South East24716.5 10
North West24434.9 6
North East22787.3 2
Yorkshire & Humberside165 32.47
East Midlands11427.1 8
Northern Ireland99 58.25
South West9920.2 9
East6211.5 11
Source: Office for National Statistics (ONS) (1998, Table 3.1, p39 and Table 13.7, p158).

  There are, however, a number of limitations to the data in Table 2. First, the figures include expansions, acquisitions and new greenfield inward investment. Regional performance will therefore be substantially influenced by the stock of inward investors in a region. Thus regions like Northern Ireland, with a bias towards industries in declining sectors, such as textiles (see Figure 2), are likely to generate a lesser number of expansions than regions in which the predominance is towards faster growing sectors, such as information and communication technologies. Concentrating on new greenfield inward investment only would largely remove this bias. Second, it would be helpful to broaden the comparison to other European countries including the Republic of Ireland. Third, it would be useful to know if Northern Ireland's ability to attract new inward investment has been improving or declining over the 1990s. Fourth, it would be interesting to know the sectoral content of inward investment in Northern Ireland and particularly to ascertain if there has been any noticeable shift in new inward investment towards more high technology or modern sectors.

  Table 3 focuses on new greenfield inward investment and also broadens the comparator base to other European countries. Between 1991 and 1995 Northern Ireland with only 0.4 per cent of the population attracted 2 per cent of total new inward investment projects into Europe. Thus, although Northern Ireland still lags behind the performance of other UK regions and the Republic of Ireland, in European terms this represents quite a healthy performance. Table 3 also points to a significant improvement in Northern Ireland's share of projects in 1995 compared with 1991. Other data would indicate that this improvement has continued.

  Figure 1, for example, shows that Northern Ireland's share of new greenfield inward investment into the United Kingdom and the Republic of Ireland amounted to 8 per cent in 1998. In the period 1991 to 1995 for each year the comparable figures for Northern Ireland were 1, 4, 5, 5 and 7 per cent respectively.

Table 3

1991 Projects (%) 1995 Projects (%)1991-95 Projects %
Northern Ireland0.5 3.52.0
England18.715.5 16.8
Scotland4.76.3 5.7
Wales3.62.8 3.4
Belgium7.35.6 7.5
Czech Republic0.55.6 2.1
France18.116.9 18.8
Germany11.90.7 6.7
Hungary0.52.8 2.1
Rep of Ireland10.421.1 13.6
Italy3.10.0 1.5
Luxembourg2.10.0 1.1
Netherlands8.32.1 6.0
Poland1.612.7 5.1
Portugal4.11.4 3.0
Spain4.72.8 4.6
Source: Data supplied by IDB from a database compiled by Ernst & Young.

  As pointed out above the stock of externally-owned companies in Northern Ireland is biased towards mature, low technology sectors. Figure 2 shows the proportion of employment in externally-owned companies in Northern Ireland by industrial sector in 1994 (the earliest year for which official figures are available) and 1999. In 1994 nearly 41 per cent of employment in externally-owned companies in Northern Ireland was in two mature sectors—food and textiles. However, by 1999 this had declined to 34 per cent largely as a result of a burgeoning tradeable services sector which has increased its share from 5 to 10 per cent and a large fall in the textiles sector. New greenfield investment has undoubtedly contributed to the positive shift in structure.

  Figures for 1998 show that in the following knowledge based growth sectors Northern Ireland achieved:

    —  9 per cent of total sector foreign direct investment into the UK and the Republic of Ireland in electronics and telecoms;

    —  39 per cent in software;

    —  5 per cent in network services; and

    —  4 per cent in health technologies (data supplied by IDB from an Ernst and Young database).

  In 1998-99 of the 21 projects supported nine were in software, four in network services, one in health technologies and four in telecoms and electronics underscoring Northern Ireland's attractiveness for the newer industries (IDB, 1999a, Figure 1, p2).

  Another aspect of inward investment policy touched upon was the importance of embedding the project in the local economic milieu in a manner which generated externalities or spillovers in terms of technology demonstration effects and knowledge transfers. As indicated above it is generally perceived that multinational enterprises possess a technological superiority over companies which do not trade internationally and that linkages through the supply chain are the main route by which this knowledge can be transferred to indigenous companies in the host region. [12]A study carried out by the Council on linkages between large externally-owned companies in Northern Ireland and indigenous suppliers concluded, however, that Northern Ireland was failing to maximise the opportunities provided by such links (NIEC, 1999a). In fact, the Council found that the extent of such links as measured by the proportion of expenditure on material inputs sourced in Northern Ireland had declined from 26 per cent in 1986 to just below 20 per cent in 1996. We will return to this issue in the final section.

  In conclusion this brief overview of inward investment in Northern Ireland points to a sector undergoing major and unavoidable structural upheaval but there are good indications that Northern Ireland can attract investment in the new fast growing sectors to alleviate the pains of readjustment.

Public expenditure implications

  In 1990 in its outline of economic development strategy for the next decade—Competing in the 1990s, the Department of Economic Development (DED) stated that "Government will increasingly target its support on areas such as training, R&D, quality and design rather than on capital investment" (DED, 1990 p17). The policy direction set in 1990 was reaffirmed five years later in a mid-term review—Growing Competitively (DED, 1995). While Competing in the 1990s and Growing Competitively proposed a major change in the relationship between local business and government, no such dramatic change was advocated with respect to the attraction of internationally mobile projects. In Competing in the 1990s, for example, DED stated,

    . . . the attraction of inward investment projects may be impeded by inaccurate perceptions both of the impact of political violence and of the costs of operating in Northern Ireland; and there is intense international competition for mobile investment. It is, therefore, appropriate for the Government to continue to offer financial inducements to counter this competition . . . (p20).

  In other words, there is an international market for mobile investment projects and for Northern Ireland to participate in that market it must pay the going market rate, plus a premium reflecting the circumstances that Northern Ireland found itself in the late 1980s and early 1990s. Once an externally-owned firm has located in Northern Ireland then the rationale for premium grant rate no longer exists since the "inaccurate perceptions" would be reduced.

  A matrix of the possible categories of investment projects is presented in Table 4. Industrial policy in Northern Ireland makes a broad distinction between category 1 on the one hand and categories 3, 4, 5 and 6 on the other.

Table 4

Degree of Mobility
Mobile Immobile
External-Owned*New1 2
Existing3 4
Locally-Owned5 6
*  Ownership resides outside Northern Ireland.
Source: NIEC, 1999b.

  There is good reason for such an approach in that providing a higher level of assistance to an externally as opposed to a locally-owned firm—in (say) the poultry business—would be inconsistent with the UK adherence to international treaties which prohibit discriminatory treatment based on the nationality of a firm. On the other hand the approach may over simplify the situation because no consideration is paid to the mobility of the investment. We will return to this discussion in the next section.

  In the following analysis we make use of the above categorisation as far as possible given existing data, to analyse trends in the volume of IDB Selective Financial Assistance (SFA) and the IDB's contribution rate within the broad context of a policy which aimed to reduce assistance to locally-owned and existing externally-owned investment projects.

  Table 5 shows the pattern in the volume of IDB SFA to various categories of projects. There are a number of comments we can make. First, the volume of SFA for new internationally mobile investment projects shows no discernible pattern which is probably a reflection of the demand led nature of the market. Second, over the short time period for which this comparison can be made, the volume of SFA for new internationally mobile investments is consistently small compared with the volume of SFA for existing externally-owned expansions and competitiveness projects. Third, the share of SFA for new internationally mobile investment projects has declined from a peak of 43 per cent in 1992-93 and 1993-94 when one might have expected it to increase, given that the aim of policy was to reduce SFA to the other categories of projects but to maintain levels of assistance for new mobile inward investment projects. Of course a declining capital content of new mobile inward investment projects may have contributed to this decrease.

Table 5

YearNew Internationally Mobile Investments2 (1) £m3 (% of total) Externally-owned Expansions and Competitiveness Investment (3 + 4) £m3 (% of total) Locally-owned Expansions, Reinvestments and Competitiveness Investment (5 + 6) £m3 (% of total) All Expansions and Reinvestments, Irrespective of Ownership (3, 4, 5 + 6) £m3 (% of total) Total £m3
1988-8965 (41)93 (59)158
1989-9039 (30)90 (70)128
1990-914 (4)101 (96)105
1991-920 (1)77 (99)77
1992-9348 (43)63 (57)111
1993-9462 (43)82 (57)144
1994-9519 (17)55 (48) 40 (35)95 (83)114
1995-9626 (16)119 (72) 20 (12)183 (84)164
1996-9743 (26)92 (55) 32 (19)123 (74)167
1997-9811 (7)107 (67) 41 (26)148 (93)159
1998-9916 (24)25 (38) 25 (38)50 (76)66

1  Offers which have been accepted in the given year.

2  Greenfield investment plus acquisition with substantial investment. Ownership resides outside Northern Ireland.

3  Expressed in 1998-99 price levels.

Sources: IDB (1999b, Table 3.1 p38; 1998b, Table 1.1, p38; 1996, Table 1.1, p23; 1993, p57) and information supplied by IDB.

  DED's economic development strategy argued for declining rates of SFA for expansions and reinvestments irrespective of ownership, but for reasons mentioned above, higher rates for internationally mobile projects could expect to continue. The evidence in Table 6 suggests that contribution rates towards all expansions and reinvestment remained fairly constant in the early 1990s peaking in 1995-96 before beginning to decline. If 1990-91 is compared with 1998-99, the contribution rate declined from 26 per cent to 21 per cent. In contrast, with respect to new internationally mobile projects, there has been an increase over the same period, from 25 per cent to 48 per cent. However, in both cases there were considerable fluctuations rather than a steady decline or increase, so it is difficult to draw inferences with respect to trends, but not differences in levels. The increase in the rate of assistance for new internationally mobile investments to 48 per cent in 1998-99 reflects, according to IDB, the changing nature of the projects supported—fewer capital intensive manufacturing projects and more tradeable services projects (IDB, 1999b). The start-up costs for the latter are lower and knowledge embedded in human rather than physical capital is the most important productive resource so despite an increase in the rate of assistance the average cost per job promoted has fallen from £25,277 in 1996-97 to £5,774 in 1998-99 (IDB, 1999b). Expansions, reinvestments and competitiveness projects have similar contribution rates irrespective of ownership, in line with policy.

Table 6

YearNew Internationally Mobile Investments2 % Externally-owned Expansions and Competitiveness Investment (3 + 4) % Locally-owned Expansions, Reinvestments and Competitiveness Investment (5 + 6) % All Expansions and Reinvestments, Irrespective of Ownership (3, 4, 5 + 6) % Total %
1995-963829 262930
1996-973323 212325
1997-984121 222122
1998-994822 212125
1  Offers which have been accepted in the given year.

2  Greenfield investment plus acquisition with substantial investments. Ownership resides outside Northern Ireland.

Sources: IDB (1999b, Table 3.1, p38; 1998b, Table 1.1, p38; 1996 Table 1.1, p23; 1993, p57) and information supplied by IDB.



  Financial inducements will remain necessary given the international market for mobile investment, however, the importance of "fundamentals" such as skilled labour and the local R&D infrastructure as incentives to potential inward investors are increasing, particularly for the fast growing industries. A survey by Coopers and Lybrand showed that the top three factors influencing a company's decision to come to Northern Ireland were first, availability of labour, second, skills and third grants. [13]The availability of a skilled labour force is therefore probably the most important regional capability. There are indications also that such industries are less capital intensive than the more traditional manufacturing industries. As a consequence the volume of SFA for new internationally mobile investment in 1997-98 and 1998-99 was substantially lower than the previous two years but the rate of grant assistance has increased starkly. The IDB argue that cost per job is a better measure of cost effectiveness than the grant contribution rate given the changing nature of the projects and this has indeed fallen from £25,277 in 1996-97 to £5,774 in 1998-99. However, if we argue that the new faster growing industries are attracted more by "fundamentals" or regional capabilities it is somehow counter intuitive that contribution rates should rise. One explanation may be the competitive market between regions for such projects, another may be that Northern Ireland has to compensate for deficiencies in regional capabilities by offering higher rates of assistance. Further research is required but with the Concordat on Financial Assistance to Industry agreed by the various regions of the UK likely, over time, to standardise the financial packages on offer, the importance of fundamental economic and social attractions will only increase (Lord Chancellor, 1999).

Regional Capabilities

  The increased emphasis on regional capabilities in areas such as skilled labour, R&D etc has some important implications for the future direction of policy.

The Role of the IDB

  IDB cannot bear the sole responsibility for attracting new inward investment. Its role will become increasingly confined to marketing (although the Council would like to see an expansion of its efforts to maximise the links between the externally-owned and indigenous sectors) within the context of an overall economic development strategy which focuses on upgrading regional capabilities, particularly in the area of education and training.


  Although the development of regional capabilities is a multi departmental responsibility, the IDB will continue to have an important contribution to make not only in attracting knowledge intensive industries but also in maximising the transfer of knowledge from such industries to the local economy. As outlined earlier, the Council concluded that there exists a long-term strategic development potential to increase the level of local sourcing considerably with the ultimate objective of increasing the size of the channel for new knowledge into the region. By failing to take advantage of such opportunities Northern Ireland is not maximising the potential contribution to the local economy of inward investment. The Council's report drew attention to programmes in Wales and in the Republic of Ireland, the Source Wales Initiative and the National Linkages Programme respectively, which focused on this issue and recommended that the IDB establishes a Regional Linkages Initiative which will draw together the disparate range of linkage activities which are currently taking place. The Regional Linkages Initiative should focus on developing local supplier manufacturing capabilities. It should be proactive and have a clear objective against which success can be measured.

Research and Development

  The R&D infrastructure is generally recognised as an important regional capability. The Council in January 2000 published a detailed assessment of the publicly funded R&D effort in Northern Ireland (NIEC, 1999c). It found that notwithstanding some excellent public and private capabilities in the economy:

    —  R&D in Northern Ireland, both public and private, is too low, both in absolute terms and relative to major economic competitors;

    —  There is a lack of co-ordinated and complementary attention by Government in Northern Ireland to both public and private R&D in Government, industry, and the universities; and,

    —  Public R&D capabilities are not being exploited to their maximum economic potential.

  The Council takes the view that Northern Ireland requires an R&D strategy that is a co-ordinated public-private partnership, directed by a dedicated unit of Government, with balanced and strategic attention to industry, Government and university R&D, channelled through a regional innovation strategy, and mainstreamed into a knowledge-driven economic development strategy and made a number of recommendations which could help bring this about (NIEC, 1999c).


  Another important implication of the shift towards "fundamentals" or regional capabilities is a need for the performance measurement techniques employed by the IDB and indeed by all the agencies charged with industrial development to keep pace. In its report on Industrial Policy and Performance Measurement—The Case of the IDB (NIEC, 1997) the Council recommended that in general, the full range of factors that get to the core of competitiveness needs to be taken into account in policy assessment and performance measurement if a more complete understanding of industrial dynamics is to be achieved.

  Such factors would include the extent of the embeddedness of firms, especially inward investment, into Northern Ireland's economic base in terms of, for example, the quality of the local labour content and the existence of R&D capacity and managerial expertise; forward and backward linkages identified through input-output analysis; employment multipliers; profitability; export propensity and performance; and wider issues such as the application of new production and organisational techniques based on collaboration and co-operation between firms in the region (Best, 1995). It is important that company competitiveness is seen in a European, if not international, context.

  More recently in its report on linkages the Council recommended that a new Regional Linkages Initiative should set a target of increasing the level of local sourcing (non-food) to 15 per cent by 2010. This target should be backed up with a range of impact measures such as the value of new orders achieved and new jobs created as a direct result of participating in the programmes. Various micro or firm based measures of efficiency improvements such as cost reduction, lead-time reduction, inventory reduction, and quality and productivity improvements achieved by the firm as a result of participating in the programme should also be assessed (NIEC, 1999a).

  On the issue of performance measurement it is also worth highlighting that the policy distinction for grant rate purposes between new inward investment and expansions and reinvestment is perhaps overly simplistic and could be made more sophisticated by another category which takes account of the mobility of the proposed project (see Table 3). Thus, it could be argued that grant rates for expansions or reinvestments which are not mobile should receive lower rates of assistance than those which are.

Targeting Social Need (TSN) [14]

  In terms of TSN policy the emphasis on fundamentals or regional capabilities means that the location of a new project in a TSN area will not necessarily guarantee jobs for people from that area. The policy imperative must be to provide people from such areas with the means and skills necessary to apply for such jobs irrespective of location. The development of the public transport infrastructure and the further education sector, perhaps along the lines of the Regional Technology Centres in the Republic of Ireland, have important roles to play in this regard; while the prospect of peace and political stability will certainly facilitate the process.

Mergers and Acquisitions

  The future direction of policy will also have to take into account the increasing importance of merger and acquisition activity in the foreign direct investment market (Stone and Peck, 1996). The take-overs of FG Wilson, Moy Park and the Boxmore group suggest that Northern Ireland will not escape this trend. M&A activity can contribute to upgrading the standards in industry, but it does not generate much new employment, at least in the short run. Over a longer time frame however, it is hoped that a transfer of technology and management know-how will occur, which will, in turn, lead to a growth in the competitiveness of the target firm and associated industries.

Corporation Tax

  A final issue that future policy will have to consider is the proposal within Strategy 2010 to reduce Corporation Tax for new inward investment, albeit only for a five year period. Obviously, other things remaining equal, a general welcome could be given to lower rates of Corporation Tax for new inward investment. Certainly in a straight comparison with capital grants a lower rate of Corporation Tax is likely to be more attractive to companies in modern fast growth sectors where capital is a less important productive resource. It is also a powerful and straightforward marketing weapon.

  There are, however, a number of difficulties with the proposal. Positively discriminating in favour of new inward investors in this matter is likely to be inconsistent with the UK's international investment obligations concerning national treatment and trade obligations concerning export subsidies. Even if these difficulties could be overcome, it might be politically difficult to grant a special Corporation Tax for Northern Ireland within the confines of the Concordat on Financial Assistance. Such a concession might lead to similar demands from other parts of the UK, particularly Scotland and Wales, perhaps followed by some of the English Regional Development Agencies, particularly those that cover Objective 1 regions, a status for which Northern Ireland no longer qualifies. It has therefore the capacity to throw into confusion the macroeconomic stability policy of the UK government and is therefore an unlikely prospect.

  Despite continuing high long-term unemployment, Northern Ireland has dramatically closed the gap with the UK as a whole over the past 20 to 30 years on many indicators of need such as infant mortality, housing conditions and life expectancy (NIEC, 1998, pp23-26). In such circumstances a special Corporation Tax for Northern Ireland might be difficult to justify.

  Finally, given the discussion above on the increasing importance of regional capabilities in attracting inward investment it is by no means certain that such an inducement will achieve its aim. Since Northern Ireland is likely to have to pay the Treasury for the forgone tax revenue due to a reduced Corporation Tax, upgrading regional capabilities might be a better long-term investment.


  In this brief evaluation of inward investment policy in Northern Ireland the Council have looked at the role and rationale for such a policy, the relevance of financial documents vis a vis more fundamental economic and social inducements, policy direction in Northern Ireland and the performance of the externally-owned sector in Northern Ireland based on existing data sources.

  In Northern Ireland the manufacturing sector is overly biased towards low technology traditional sectors such as textiles and clothing. A policy aimed at attracting fast growing knowledge based industries has an important contribution to make in easing the necessary process of structural readjustment particularly if it helps to enhance the skills and knowledge of the local workforce. There is some evidence that Northern Ireland has been successful in attracting such investment in recent years although we are not in a position to comment on how much this is due to an effective policy effort from IDB and how much is due to international trends in the pattern of foreign direct investment.

  The Council also raise a number of important issues which may have a bearing on the future direction of policy. The most important of these is the increasing significance of regional capabilities particularly in areas such as skilled labour, R&D and public infrastructure development. Although a multi-departmental responsibility the IDB will continue to have an important contribution to make in the process of upgrading regional capabilities not only in attracting knowledge intensive industries but also in facilitating the transfer of knowledge from such industries to the local economy. The Council believe that more priority should be given to increasing the extent of the links between foreign-owned and indigenous firms in Northern Ireland.

  If the development of regional capabilities is to become a priority then there is a need also for monitoring procedures to be developed which keep apace with the new objectives.

  As regards TSN objectives, the move towards developing regional capabilities calls for a two-pronged attack on creating employment and enhancing employability with the emphasis on the latter.

  Finally, while acknowledging the attractions of a reduced rate of Corporation Tax for Northern Ireland for a period of five years we point out some reasons why such an option is unlikely to occur and why it may not, in any case, achieve its objectives.


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1   Blomstro­m and Kokko (1995) provide a good survey of the evidence. Back

2   See Hobday (1995) and Chung et al (1994). Back

3   Barrell and Pain (1997) also detected a significant impact from FDI into the UK on the labour productivity of manufacturing industries but found no discernible impact on non-manufacturing industries. Back

4   This section is taken largely from Dunning et al (1998). Back

5   A Northern Ireland Audit Office (NIAO) report which looked at six new inward investment cases covering the period 1988 to 1993 found that five of the six cases failed a Resource Cost Analysis test of economic efficiency indicating that the projects would be likely to produce a net loss to the UK economy. The estimated net loss for these five cases varied between £1.2 million and £14.7 million (NIAO 1998). Back

6   See Donahue (1996) on the experience of US states bidding for automobile manufacturing locations. Back

7   However, some aspects of this literature have been questioned. See Krugman (1986). Back

8   Ideally to test whether externally-owned firms behave differently to indigenous firms requires holding all market and technological factors constant and attributing the differences in behaviour to ownership. Research conducted with respect to Australia, United States and Canada suggests that the behaviour of foreign-owned firms in the face of trade liberalisation and exchange rate changes is not consistent with the criticism that foreign-owned firms shift production significantly more quickly than indigenously-owned firms (McFetridge, 1989.) Back

9   The term externally-owned refers to those companies in which the ownership lies outside Northern Ireland. See NIEC (1992) Section 2 for a fuller discussion and explanation of definitional issues. Back

10   For further details see NIEC (1992, Table 3.1, p14; Table 3.4, p15). Back

11   As such the nature of the FDI could be characterised as dependent. Back

12   Crone & Roper (1999) confirms both these perceptions hold true in Northern Ireland. Back

13   Coopers & Lybrand (1996). Back

14   See NIEC (1998) for the Council's response to the New TSN policy. Back

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