Select Committee on Northern Ireland Affairs Minutes of Evidence


Memorandum from the Confederation of British Industry (CBI) Northern Ireland

INTRODUCTION

  1.  CBI Northern Ireland is pleased to respond to the request from the Committee to provide a written submission on inward investment. The CBI's mission is "to help create and sustain the conditions in which businesses in the UK can compete and prosper". In pursuit of this mission the CBI aims to influence public policy to ensure that it creates the conditions in which businesses can best flourish and in which growth and employment are maximised. Whilst the CBI has no direct responsibility in attracting inward investment we do develop and encourage policies which will help to attract international investment to Northern Ireland—many of our corporate members are more actively engaged in attracting inward investment.

THE ROLE OF INWARD INVESTMENT

  2.  Inward investment can have a significant impact on a regional economy, with much more benefit than the direct employment creation with which it is frequently associated. In addition to bringing direct employment there is usually a positive impact on indirect job creation through the provision of support services and in some cases by the development of sub-supply opportunities.

  3.  But inward investment should bring much broader gains which may only be recognised over longer time frames. The introduction of new management practices, new training and development methods, the use of new technologies in manufacturing processes, the use of world class quality standards and practices and perhaps the introduction of new research and development facilities can all help to stimulate a regional economy. Individuals can gain valuable work experience and training operating for international organisations—the benefits often lasting much longer than the investments.

  4.  The creation of a world class sub-supply base which can eventually expand beyond the original inward investor is a desirable feature. There is also potential from some sectors, especially the hightech sector, to secure opportunities for spin-off companies and to develop valuable links with the universities. Indeed we believe that with the shift to knowledge based companies the potential of spin-offs will increase dramatically.

  5.  Recent research by the Northern Ireland Economic Research Centre highlights the fact that multinational (MNE) plants have a much higher level of use of best practice than indigenous plants—see Table 1. The Northern Ireland Economic Council has also produced a recent report (NIEC Report 30 June 1999—Let's Get Together. Linkages and Inward Investment in Northern Ireland) highlighting the importance of linkages, particularly with respect to local sourcing and the impact these can have on regional development.

  6.  Overall inward investment can bring a wide range of benefits but this will vary according to the quality and sector involved. Higher productivity levels reflected in higher wage levels also act to improve standards of living.

Table 1

USE OF BEST PRACTICE TECHNIQUES BY MNE PLANTS AND OTHER NI PLANTS
Best Practice Technique Large MNELocally Owned Plants
Up to 200 Over 200 employees
Computer Aided Design63.6 39.555.9
Computer Aided Manufacturing81.3 40.158.5
Computer Integrated Manufacturing43.8 23.636.2
Just-in-Time Sourcing60.6 21.927.9
ISO 9000 Quality Certification81.8 54.488.7
Total Quality Management78.8 32.835.3


  Source: NIERC No 46 1999 Local Learning from Multinational Plants: Knowledge transfers in the supply chain.

  7.  CBI Northern Ireland is keen to see new skilled jobs being created from inward investment. However, there are issues to be taken into consideration in selecting both projects and identifying suitable locations from which the investor can select the most appropriate to meet their needs. New investment attracts individuals from existing employment. Recent research from the T&EA (Labour Market Bulletin No 13) indicates that in two assembly type operations (with over 75 per cent of staff defined as Plant and Machine Operatives) located in TSN areas of high unemployment, about 25 per cent of staff were recruited from existing employment. It is therefore important to ensure that inappropriate siting of plants is avoided and that the scale and skill needs of potential investors will not distort local labour markets and lead to excess "poaching" of staff. This can become a problem for small companies who may find it difficult to offer competitive wage levels and other benefits—a major concern when key technical staff move. However, anecdotal evidence does suggest that in some smaller companies this staff turnover can create a useful dynamic within the organisation. These concerns are particularly emphasised when inward investors are enticed with large upfront grants which smaller firms believe enable higher wage rates to be offered. However, we understand that potential displacement is assessed in project evaluation and that there is good liaison between IDB and T&EA on labour market supply matters.

INWARD INVESTMENT EXPERIENCE

  8.  In the 25 years to 1995 inward investment in Northern Ireland was adversely affected by the "troubles" and the region failed to gain an appreciable share of the overall market. Some economists have noted that the Province has had to accept more risky projects because, in many instances, Northern Ireland has not been seen as an attractive location for investment. During the 1970's and 1980's an average of 500 jobs per year were created from inward investment—figures since 1995 show a much higher level of job creation with the recent figures from the IDB indicating that since 1993 some 800 jobs per year are being created and with existing trends this is likely to continue to increase.

  9.  Up to the early 1990's much of this investment has provided a short-term boost to employment based largely, but not exclusively, on assembly plants for multinationals with limited, if any, research facilities or marketing functions. Since 1994 the quality of projects and numbers of jobs, as well as cost per job, have been moving in favourable directions. The prospects of peace and political stability through the implementation of the Good Friday Agreement provides a real opportunity to create an important dynamic in the economy and to embed and deepen inward investment, creating linkages with indigenous suppliers, and bring in higher order functions which make it much more likely that operations will not close at the first sign of an economic downturn. This should also apply to existing international investors.

COMPETITIVE ISSUESTHE REPUBLIC OF IRELAND (ROI)—A CONTINUING THREAT?

  10.  The ROI is Europe's fastest growing region with GDP growth exceeding 6 per cent and sustained export growth in excess of 12 per cent per annum. This export-led growth has been accelerated by the incentive of low corporation tax rates on all manufacturing companies to the year 2010 which has attracted a large amount of international investment, particularly from the United States:

    —  Between 1980 and 1993 the ROI's Industrial Development Authority promoted 115,900 jobs compared to the Industrial Development Board's 13,100 in Northern Ireland*.

  (*it is difficult to get directly comparable figures but we believe these figures are broadly correct.)

  In addition the ROI has provided attractive, targeted incentives to other key growth sectors, notably financial services and tourism. The Financial Services Centre in Dublin had over 800 companies providing over 4,000 high quality jobs in place in 1997—this success has been created by the availability of low (10 per cent) corporate tax rates through to 2005. Likewise the tourist industry, which has experienced dramatic growth, has benefited from incentives for urban renewal, seaside resorts, capital allowances and rent relief.

  11.  These incentives have helped to develop critical mass in key sectors within the economy creating a real growth dynamic—they are recognised as being a net contributor to Exchequer funds and not a cost. The advantages of the low taxation rate are utilised as a superb marketing tool by the IDA.

  12.  Furthermore, the taxation incentive also has a major impact on the quality of investment. High tech, fast growth companies in the information technology and pharmaceutical sectors have been particularly attracted to the ROI. Attracting these types of global companies has important implications for strengthening the industrial clusters within Northern Ireland. CBI Northern Ireland believes that the impact of this low tax regime is likely to increase over the next decade and beyond with the ROI Government committed to harmonising Corporation Tax rates for all businesses at 12.5 per cent by 2003. Combined with ongoing reductions in personal taxation (through lower rates and higher thresholds) this will have significant implications for Northern Ireland's competitive position. For the first time the general services sector in the ROI will have a significantly lower tax base—this may have important implications for the location of many companies in this sector, which tend to be more mobile than manufacturing operations.

  13.  At the same time the Republic of Ireland's membership of Euroland has resulted in lower interest rates and prospects of cheaper borrowing for investment. For international investors targeting the Single European Market there is also the important attraction of exchange rate stability, which is likely to stimulate investment and unleash major structural change, and the benefits, albeit to a lesser extent, of the avoidance of exchange transaction costs. The IDA is actively marketing the Republic of Ireland as the only English-speaking country in Euroland. However, against these very positive features the labour market in the ROI is now under significant pressure and infrastructure bottlenecks are clearly emerging—this may create two diverse impacts: an enhanced "brain drain" out of Northern Ireland and a useful opportunity to secure more investment for Northern Ireland. Both issues need to be addressed.

FUTURE STRATEGY

  14.  CBI Northern Ireland is keen to encourage inward investment and believes it is beneficial for the regional economy. Almost every country outside the US has used inward investment to develop their economy. Knowledge intensive inward investment activities are preferable to low cost production activities, since the benefits they bring to the economy are far greater. Such gains include skills and technology transfer, exploitation of R&D and utilisation of the skills base.

  15.  Inward investment can play a significant role in the development and strengthening of an economy. Up to the early 1990's policy appears to have been largely jobs-driven with insufficient emphasis on sustainability and the strengthening of the regional economy. Furthermore, it is unclear whether the provision of very large grants to attract inward investment projects over the last 30 years has been good value for money. Lower cost per job rates in recent years are encouraging and hopefully will reflect a continuing trend.

  16.  Although jobs are obviously an important direct benefit, as we have highlighted, there are other valuable attributes which can arise from a successful inward investment strategy. In 1997 the CBI recommended that future inward investment policy should focus on:

    —  strengthening existing sectors/clusters, particularly in the high growth sectors;

    —  the quality of jobs promoted, ensuring that new jobs will increase average earnings and provide skilled employment;

    —  introducing new technologies where linkages with the universities can be developed;

    —  attracting projects which contain high-value elements including R&D, design and marketing functions;

    —  building on Northern Ireland's competitive strengths, including the communications infrastructure.

  In broad terms, we believe that government policy has shifted very much in this direction.

  17.  A strategy to encourage more knowledge based companies may mean changes to the financial incentives necessary to attract such firms. For instance the potential employment offered by call-centre activities (which have varying levels of skills requirements) is less capital intensive than traditional manufacturing operations and thus capital support is less valuable. It also means that a closer private/public/university partnership needs to develop. It will also be important to develop in parallel a strategy for improving the capability and capacity of local supply companies. The achievement of a stronger supply base in itself will help to attract further inward investment.

  18.  In relation to the use of Selective Financial Assistance, we have argued since 1992 that a more rigorous approach was needed with a review of a company's performance, including suitable benchmarking assessments, and that only companies seeking to become world-class should be supported. Again we understand that each potential project is now put through a rigorous quality assessment.

  19.  With an increasing focus on the development of a knowledge based economy this will provide significantly greater potential for spin-off companies—this should be reflected in the overall inward investment strategy and the selection of projects. Selection of projects must also take account of the relevance of current and potential technologies which will have implications for those tasked with assessing projects.

  20.  The future strategy needs to give consideration to the impact of developments in the ROI where there is potential for overspill e.g. in sub-supply and to take advantage of their emerging skills shortages particularly in the Dublin area. There is also a need to review the potential for selected fiscal incentives—but on a basis where the Treasury would not lose out and could potentially gain. Fiscal neutrality should underpin this approach with consideration given to reducing specific corporate taxes offset for example by reducing grant levels. Whilst a central agency, such as the IDB, is essential for focusing on attracting inward investment it is clear that local authorities can create links and contacts which may provide valuable leads. However, care is needed that overall efforts are not fragmented, duplication is avoided at all costs and that there is a consistent and clear message articulated.

PUBLIC EXPENDITURE

  21.  Competition for internationally mobile investment will continue to intensify. The Single European Market and its development eastwards will remain an attractive location for international investment. Northern Ireland needs to ensure it can attract a fair share of quality investment into Europe which can strengthen the economy. Northern Ireland must be able to offer a competitive package but this must be balanced against the need to secure value for money and the requirement not to distort the market place. The use of capital or employment grants is clearly not the most effective option.

  22.  The overall focus of public expenditure must be in investment in creating an attractive, world-class location based on the fundamental needs of business, rather than on capital assistance or other forms of grants. Increasing globalisation of markets and the rapid spread of new technology mean that investors will seek low cost environments, and a skilled labour pool and knowledge base will be of increasing importance. Northern Ireland needs to invest further in a number of areas including:

    —  developing a higher skill base (there are shortages in IT and electronics which are of concern) and improving educational outputs to ensure they are relevant to the needs of modern industry and commerce;

    —  investment in the strategic transport infrastructure (where we spend c40 per cent less per head of population than in GB) including public transport—accessibility to markets and customers and labour market accessibility are important requirements;

    —  encouraging more direct flights to Europe at competitive prices;

    —  increasing the quantity and relevance of research and development expenditure—building on our centres of excellence and retaining a strong core of world-class research expertise;

    —  measures to reduce the cost of energy and extend the natural gas network outside the Greater Belfast area;

    —  achieving lower costs for water and sewerage treatment; and

    —  speeding up the planning process.

  23.  But even this environment may not be enough to attract international investment which is subject to a wide range of specific financial incentives elsewhere in Europe. As the Republic of Ireland has shown, tax incentives are a major attraction with an unsurpassed record in achieving high quality investment. But Northern Ireland has a dilemma; it, as a region within the UK, is currently unable to offer a competitive package for this quality of investment. This was clearly recognised in Strategy 2010—the outcome of the Economic Strategy Review, which recommended that Northern Ireland should have a special rate of Corporation Tax for new inward investments for a period of five years. We believe that (i) a period of five years is likely to be too short to have significant impact and (ii) focusing solely on new inward investment is likely to create distortions in the local environment. It may be more appropriate to target certain sectors although clearly there will be UK and EU hurdles to overcome.

  24.  Other incentives need to be reviewed—in addition to reviewing possible fiscal incentives, these could include extending the criteria for increased capital allowances (100 per cent capital allowances currently available to SMEs only as a result of the Chancellor's package announced in May 1998) and/or securing additional incentives in the R&D field. CBI Northern Ireland favours the development of incentive packages to encourage a radical increase in R&D activity including the attraction of international investment. Other countries have successfully targeted R&D projects. Israel, for example, provides generous upfront financial support (in excess of 50 per cent) to attract multi-million pound projects. The risks of the project are shared and clauses, included in the agreement with investors, ensure that successful projects (i) lead to manufacturing within the country and (ii) the original grant-aid is paid back through royalties over the first three to five years of production. Innovative incentive packages of this nature may need to be considered.

  25.  The creation of a peace and political stability will create a significant opportunity to enhance inward investment in the years ahead. The key implications for public expenditure are:

    —  the need to ensure that sufficient investment is made in Northern Ireland's infrastructure and human capital—likely to require enhanced expenditure;

    —  the need to ensure that Northern Ireland is promoting itself in the key markets—again a likely increase in expenditure;

    —  lower grant rates to attract investors with Northern Ireland being sold on its fundamental strengths; and

    —  a higher level of activity may offset lower assistance rates and actually lead to a larger demand on public expenditure.

  However, we must also see inward investment as a potential net financial contributor to the Treasury over the medium and longer term. With IDB figures for 1998-99 producing an average annual job cost of £2,000 (and probably lower if the cost per job promoted can be maintained below the 1998-99 figure of £7,890) the Treasury will be a net gainer.

10 December 1999


 
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