House of Commons - Northern Ireland Affairs

Select Committee on Northern Ireland Affairs Fifth Report

VII. DOES THE PRESENT INWARD INVESTMENT STRATEGY WORK?

66. Government policy is predicated on the assumption that Northern Ireland represents a commercially attractive potential location for an inward investor. But is it? Dr Bradley considered that the present policy thrust of the IDB is based essentially on "a marketing strategy to win inward investment, where the crucial assumption is made that the Northern Ireland economy is already quite an attractive and competitive place within which to produce for export. It is as if all that is required is continued "peace" and the ability to catch the attention of potential investors in the crowded market place."[148] He had doubts about the underlying competitiveness of the Northern Ireland economy, which he considered faced a number of major challenges.[149] He also considered that the present incentive system tended to attract labour and capital intensive industries which are relatively unprofitable,[150] and disproportionately vulnerable to economic shocks.[151]

67. Northern Ireland Chamber of Commerce and Industry reported[152] on a 1996 survey of a representative sample of inward investors in all parts of the United Kingdom, and also in the Republic of Ireland. This showed that Northern Ireland came out very well on the basis of a number of indicators: cost of operations against anticipated cost; overall operating costs; and infrastructure. Many investors also discovered advantages not recognised before the investment was made. Also, Northern Ireland had the highest level of future planned investment by existing inward investors. Overall, the survey concluded that Northern Ireland was the best performing and most attractive region in the UK and was only marginally beaten by the Republic of Ireland.

68. John Simpson summarised Government policy as "aimed at the encouragement of inward investment which might not otherwise locate in Northern Ireland.". He also pointed out that there was a potential tension between the two principal means of doing so; making investors aware of what the Government perceived as the underlying commercial benefits of a Northern Ireland location and offering assistance, financial or otherwise, to make the investment more attractive. He considered that too high a level of overall financial assistance could damage the credibility of claims relating to the strength of the economic fundamentals.[153] Furthermore, the intention was to attract projects with a viable long-term future, from which wider benefits might be drawn, rather than projects whose viability is dependent on the financial assistance. Dr Bradley also emphasised the potential contribution to economic development from long-term inward investors.[154]

69. Sir Reg Empey, amongst other witnesses, cautioned against over-estimating the extent to which Government could influence companies both as to locations visited and sites ultimately chosen. He commented:[155]

"... we have to recognise ... that there is a limit to the role that any Government Department or agency can play. I do not think we should over-exaggerate our ability to influence commercial decisions. The market will drive itself .... at the end of the day .... a company will visit an area which it considers appropriate for its business. We cannot put somebody off — nor should we."

Mr Ingram also pointed out that IDB could not be prescriptive about where potential inward

investors visited.[156]

70. As we have pointed out earlier, one of the key objectives of the inward investment strategy is to focus the job creation efforts to a substantial extent on more deprived areas. Accordingly, IDB's targets include:

75 per cent of all first-time locational visits from inward investors to be to TSN areas; and
75 per cent of all first-time inward investment projects to be located in or adjacent to TSN areas.[157]

Over the period April 1995 to March 1999, 37 new inward investment projects located in TSN areas.[158] IDB told us that, taken over that period, 68.5 per cent of projects, and 87 per cent of associated job promotions, were located in TSN areas,[159] a significantly better performance than NIAO had reported over the period 1988-89 to 1996-97.[160] In 1998-99, 62 per cent of new inward investment projects (but 84 per cent of the associated job promotions) were in TSN areas, and 73 per cent of first time visits by potential investors were to such areas.[161] IDB now specifically monitors the annual level of job creation in TSN areas arising from projects it supports.[162]

71. The present strategy is, however, patchy in that not all TSN areas benefit from inward investment. Over the nine years to March 1997, two such areas failed to attract any projects.[163] NIEC was not unduly surprised at this and drew attention to a range of reasons why this might be expected to happen. It reiterated its view that this demonstrated a need for improving access to jobs.[164]

72. The concentration on physical location of new inward investment in, or adjacent to, TSN areas did not command universal support. Investment Belfast argued for letting the investment go where commercial realities dictated, and ensuring that people have the right skills for the jobs, the opportunity to apply and the means of transport from where they live to where the jobs are.[165] Derry Investment Initiative expressed similar sentiments and agreed that "businesses do not want to locate in deprived regions."[166] CORE commented that a decreasing level of inward investment in non TSN-areas in the north east of the Province over the period 1994-98 had not been reflected in an enhanced amount of such investment in TSN areas in the region.[167] It also pointed out that siting jobs in or near a TSN area did not mean per se that people from these areas were the ones employed: recent research had shown that, in two particular cases studied, local people picked up only 50 per cent of the jobs.[168] The West Belfast Economic Forum have also concluded, on the basis of experience in West Belfast, that many of the jobs created there go to populations outside the local area.[169] CORE stated that there was some evidence that residents of TSN areas tended disproportionately to get the less skilled jobs,[170] and that the total amount of the jobs they obtained was approximately 30 per cent of the total. ICTU stressed the importance of providing adequate training to enable local people to take full advantage of jobs created in, or adjacent to, TSN areas.[171] This could also have social benefits — as Mr McKee put it:[172]

"...it might be tempting to see TSN solely in the context of social restructuring but, whilst it is that, it is much more than that. In the long-term, if there is sensible investment in TSN then the community as a whole becomes a much more stable entity and in the long-run it is more likely to continue to attract inward investment. If you do not cope with TSN, you will end up with social unrest, the community as a whole can become quite unstable and, in the long-run, can become less attractive. So there is a return on it, it is not just a philanthropic concept by any means."

73. Mr Donnelly, of CORE, pointed out that simply being a TSN area (and consequently having access to higher rates of grant) did not of itself necessarily mean that the area benefited from a higher level of investment.[173] He commented:[174]

"... you tend to find the TSN areas are areas with low educational achievement, poor housing quality, low infrastructure, and therefore that is not compatible with attracting inward investment. Investors are looking where there is good quality education, they are looking for good infrastructures that can move their goods, they are looking for quality environments where their employees can live. These are the types of factors which influence the decision."

He supported the targeting of adjacent areas, which were more attractive to inward investors, but could still impact on employment in TSN areas.[175] Sir Reg Empey agreed there was a real danger of the local labour force not benefiting from inward investment in these circumstances.[176] Dr Bradley did not consider inward investment as an effective means of addressing social exclusion or social need. He added[177] "Targeting social need with inward investment is a very blunt instrument and I cannot conceive of how an American firm which is in the business of making profits for its shareholders will react to an appeal to come to a region to help solve their social problems."

74. Several local authorities argued that TSN areas, as currently defined, were too blunt an instrument for encouraging inward investors towards deprived areas. This approach overlooked the fact that, within many other areas, there were pockets of deprivation as severe or more severe than that in many TSN areas. They considered that greater attention should be given to such areas.[178]

75. There has been some criticism of the fact that the conversion rate of jobs promised to jobs actually created is, in the case of inward investment, only about 70 per cent,[179] although it is higher for expansion projects. Indeed, following a special exercise, PAC was informed by IDB that, for the 330 inward investment projects assisted between April 1993 and March 1997, the peak level of jobs created, as a percentage of jobs promoted, was 60 per cent for new inward investment and 86 per cent for expansions, with an overall average of 76 per cent.[180] Mr Ingram considered such criticism misplaced. He emphasised that other development agencies had similar experience, but admitted that there may have been a degree of overselling.[181] He stressed, though, that payments of financial incentives were strictly linked to performance, not promises.

76. We understand Mr Ingram's wish to emphasise the positive news about inward investment in Northern Ireland, given the background of the political climate in the Province over the last 30 years or so, and consequently to take a view of likely job promotions which veers towards the optimistic end of the spectrum of likely out-turns. However, we can see two risks. First, the failure of jobs promoted actually to materialise causes doubts to be raised about the robustness of the assessment process on which any grant offer was based. Second, such failure can cause acute disappointment amongst those who might aspire to take those jobs. So, while we do not disagree with Mr Ingram's assessment that "realism would be the order of the day but ambition would sit alongside that",[182] we would encourage also a due measure of proper caution when making claims about the likely employment benefits of an inward investment project.

77. There has also been comment that the average life of each job actually created is, according to IDB, about eight years.[183] ICTU were critical of what was perceived to be the short duration of many IDB and LEDU sponsored jobs and in their view 'best value' had not been obtained for the substantial public investment involved.[184]

78. NIEC pointed out that Northern Ireland's performance in attracting inward investment was good in international terms, although in the early part of the 1990s its performance relative to other peripheral regions of the United Kingdom had not been strong.[185] One explanation for this might be the dependence in Northern Ireland on declining industrial sectors. NIEC also noted that the share of projects has increased in the latter part of the decade,[186] although the sector remains biassed towards what NIEC describes as "mature, low technology sectors",[187] despite a doubling of the share attributable to the tradeable services sector. NIEC commented that "new greenfield investment has undoubtedly contributed to the positive shift in structure."[188] Overall, it considered[189] that the Province "has done reasonably well within a country which is doing very well."

79. As to the targeting of sectors, Derry Investment Initiative concurred "very strongly" with IDB's focus on the information and communications technology sector as the best target for inward investment in the city.[190] Its relatively scattered population and peripheral location had led it to target this sector as peripherality was not an issue with this industry.[191] Whereas Derry Investment Initiative had set out to attract the information and communications technology sector, Investment Belfast has sought to capitalise on its competitive advantage in attracting headquarters buildings and call centres.[192] It also has an advantage in that the Greater Belfast area has a population of about one million, thus providing a substantial and concentrated pool of labour, something particularly attractive to larger projects.

80. One of the issues we discussed was the risk that the Northern Ireland economy could become over-dependent on inward investment. Mr Ingram thought that reaching this point would be "a tremendous achievement".[193] IDB commented that, historically, the economy had not generated enough jobs in its own right to meet its needs and that this had been the rationale for inward investment.[194] It also stressed the importance of the parallel policy of stimulating locally-owned industry, and argued that both types of investment have a part to play in producing economic activity.[195] Investment Belfast saw no risk of over-dependence on inward investment, given the current dominance of the Northern Ireland economy by the public sector.[196] Mr Doherty, of Into the West, considered that there might be an optimal level, but it had not yet been reached.[197] ICTU[198] did not think the level of inward investment sufficient to create dependence.