Memorandum submitted by the Northern Ireland
Economic Council
INTRODUCTION
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 ECONOMIC
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.
INWARD INVESTMENT—ROLE
AND RATIONALE
Theory
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.
Evidence
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).
Inducements[4]
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
DETERMINANTS OF COMPETITIVENESS, TWO VIEWS
View of Economists Advisory Group Ltd (EAG)
| View of Organisation for Economic Co-operation
and Development (OECD)
|
| R&D expenditure | R&D infrastructure
|
| Educational structures | Educational profile of the labour force
|
| Entrepreneurship | Corporate governance environment
|
| Business infrastructure | Employment regulations
|
| Technology management | Labour costs
|
| Attitude of the workforce | Corporate taxation
|
| Corporate performance | Energy 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).
POLICY SHIFTS
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)
FOREIGN DIRECT
INVESTMENT (FDI) IN
NORTHERN IRELAND
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).
Policy
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
DIRECT MANUFACTURING INWARD INVESTMENT PROJECTS, BY UK
REGION, 1991-92 TO 1996-97
| Number of
Projects
| Projects per
Million Population
| Rank by Projects per Million Population
|
| Scotland | 354 | 69.4
| 3 |
| West Midlands | 346 | 65.2
| 4 |
| Wales | 284 | 97.9
| 1 |
| South East | 247 | 16.5
| 10 |
| North West | 244 | 34.9
| 6 |
| North East | 227 | 87.3
| 2 |
| Yorkshire & Humberside | 165
| 32.4 | 7 |
| East Midlands | 114 | 27.1
| 8 |
| Northern Ireland | 99
| 58.2 | 5 |
| South West | 99 | 20.2
| 9 |
| East | 62 | 11.5
| 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
DESTINATION OF NEW INWARD INVESTMENT PROJECTS INTO EUROPE,
1991-95
| 1991 Projects (%)
| 1995 Projects (%) | 1991-95 Projects %
|
| Northern Ireland | 0.5
| 3.5 | 2.0 |
| England | 18.7 | 15.5
| 16.8 |
| Scotland | 4.7 | 6.3
| 5.7 |
| Wales | 3.6 | 2.8
| 3.4 |
| Belgium | 7.3 | 5.6
| 7.5 |
| Czech Republic | 0.5 | 5.6
| 2.1 |
| France | 18.1 | 16.9
| 18.8 |
| Germany | 11.9 | 0.7
| 6.7 |
| Hungary | 0.5 | 2.8
| 2.1 |
| Rep of Ireland | 10.4 | 21.1
| 13.6 |
| Italy | 3.1 | 0.0
| 1.5 |
| Luxembourg | 2.1 | 0.0
| 1.1 |
| Netherlands | 8.3 | 2.1
| 6.0 |
| Poland | 1.6 | 12.7
| 5.1 |
| Portugal | 4.1 | 1.4
| 3.0 |
| Spain | 4.7 | 2.8
| 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
MOBILITY, EXTERNALLY AND LOCALLY-OWNED INVESTMENT PROJECTS:
A CLASSIFICATION
| | Degree of Mobility
|
| |
|
| | Mobile
| | Immobile |
| |
|
| | |
Category | |
| | |
| |
| External-Owned* | New | 1
| | 2 |
| Existing | 3
| | 4 |
| Locally-Owned | | 5
| | 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
IDB SFA1, BY OWNERSHIP CHARACTERISTICS, 1988-89 TO 1998-99
| Year | New 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 |
| 1988-89 | 65 (41) | —
| — | 93 (59) | 158
|
| 1989-90 | 39 (30) | —
| — | 90 (70) | 128
|
| 1990-91 | 4 (4) | —
| — | 101 (96) | 105
|
| 1991-92 | 0 (1) | —
| — | 77 (99) | 77
|
| 1992-93 | 48 (43) | —
| — | 63 (57) | 111
|
| 1993-94 | 62 (43) | —
| — | 82 (57) | 144
|
| 1994-95 | 19 (17) | 55 (48)
| 40 (35) | 95 (83) | 114
|
| 1995-96 | 26 (16) | 119 (72)
| 20 (12) | 183 (84) | 164
|
| 1996-97 | 43 (26) | 92 (55)
| 32 (19) | 123 (74) | 167
|
| 1997-98 | 11 (7) | 107 (67)
| 41 (26) | 148 (93) | 159
|
| 1998-99 | 16 (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
IDB RATES OF SFA1, BY OWNERSHIP CHARACTERISTICS, 1998-89
TO 1998-99
| Year | New 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 % |
| 1988-89 | 41 | —
| — | 21 | 27
|
| 1989-90 | 24 | —
| — | 20 | 21
|
| 1990-91 | 30 | —
| — | 26 | 26
|
| 1991-92 | 25 | —
| — | 27 | 27
|
| 1992-93 | 31 | —
| — | 25 | 28
|
| 1993-94 | 24 | —
| — | 26 | 25
|
| 1994-95 | 31 | —
| — | 25 | 26
|
| 1995-96 | 38 | 29
| 26 | 29 | 30 |
| 1996-97 | 33 | 23
| 21 | 23 | 25 |
| 1997-98 | 41 | 21
| 22 | 21 | 22 |
| 1998-99 | 48 | 22
| 21 | 21 | 25 |
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.
|
FUTURE DIRECTION
ATTRACTIONS
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.
Linkages
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).
Monitoring
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.
SUMMARY AND
CONCLUSIONS
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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