Examination of Witnesses (Questions 360
- 379)
WEDNESDAY 24 MARCH 2004
PROFESSOR JOHN
TOMANEY, DR
COLIN WREN
AND MR
DAVID NEWLANDS
Q360 Chairman: What is the experience
of Scotland then, Mr Newlands?
Mr Newlands: It is broadly consistent
with that. The manufacturing sector in Scotland is increasingly
dominated by foreign owned businesses with something of a blip
in very recent years—I think it can be seen just as a temporary
downturn—such that a majority of certainly manufactured
exports in Scotland are attributable to foreign owned manufacturing
companies. In that sense, these are leading firms that are essentially
setting the growth and competitiveness agenda within Scottish
manufacturing. On the other hand, they are vulnerable, obviously,
to changes in the global strategic decision-making within the
overall company framework globally, with the consequence that
levels of income and employment in Scotland at times have down-turned.
We have witnessed a graphic example of that just in the last couple
of years in Scotland.
Q361 Chairman: Apparently there is
policy shift away from large projects, or trying to attract large
projects. Do you think that that policy will stand up when it
is tested against political pressure for job creation projects?
Mr Newlands: No. I am almost explicit
in that in the submission. There is, indeed, a stated downshift
in priority, not away from large projects as such, but away from
low value-added projects, some of which in the recent past have
been large projects, and a shift in priorities towards supporting
home grown businesses and towards trying to attract more
R&D elements within FDI; and there has been some success in
that. Scotland attracts a disproportionate share of FDI, but I
think when the test comes of the opportunity to attract the first
round of FDI that offers substantial employment, fresh employment,
then, even if it is of low value, even if it does not come with
an R&D element, even if it does not come with transfers of
corporate new management functions, then I think there would still
be an enormous amount pressure to grab hold of it.
Q362 Chairman: In your submission,
Professor Tomaney and Dr Wren, there is a difference between survival
rates for plants that start from acquisition compared to those
that are Greenfield starts, with the latter surviving at a higher
rate, which is interesting. Does this support the notion of the
multinational as a predator, buying up those plants, stripping
out the good ideas and processes and then leaving us with the
spoils?
Dr Wren: Yes, I mean, there is
some evidence to support that. There is other evidence which goes
the other way. I think the main study was by Patrick McCloughan
and Ian Stone in the North East region. They looked at that from
1970 to 1993. What they found was that the probability of failure
of acquisitions was much greater than it was for Greenfield or
start-up type projects. One interpretation of that is that foreign
investors come in, take over firms and close them down. But more
recent research—we have done some research looking from
the mid-eighties up until the turn of the century, and we could
find no significant difference between the acquisition and start-up
projects. They both have, on average, a lifetime of about 14 years.
In the study by McCloughan and Stone, they found that the medium
survival of start-up plants was again about 14 years but the acquisition
plant was only about 8 years; so it had a very much shorter life-expectancy
on average. How the difference arises, I do not know, because
we are looking at the same area. They just looked at manufacturing,
whereas we looked at manufacturing and also some plants in the
service sector as well, but it may be that potentially there was
a difference in time periods. They were looking through the seventies
and early eighties, whereas we were looking at the mid 1980s onwards.
Q363 Chairman: The stereotypical
view that multi-national companies coming from outside and essentially
asset-stripping is not—
Dr Wren: As I say, we do not find
it in our study . . . Looking at the more recent period from the
mid 1980s, they do find a shorter life duration of plants coming
in from the early 1970s to 1977. Maybe it is not that significant,
but the evidence points in two different ways.
Q364 Mr Edwards: What evidence do
you have of local suppliers to big FDI plants facing declining
prices year on year or having to adopt stringent quality controls
which are perhaps of only marginal benefit in improving productivity
and competitiveness?
Professor Tomaney: There is no
systematic analysis of this problem at all in the regional economy.
We do not have the equivalent of the bi-annual service of expenditures
by multinational companies which the Irish are taking—we
do not have anything of that quality in terms of data—and
much of the work and the impact of FDI indigenous manufacturing
in the North East was undertaken in the 80s and 90s, so we do
not have any up-to-date evidence on all of this. A lot of that
work was of a fairly critical kind. It did suggest that there
was a limited value-added . . . Let me rephrase that. The anecdotal
evidence suggests that FDI plants, however, do transmit these
cost pressures to their local suppliers. For example, during the
period when Nissan was changing its model to the Micra at the
Sunderland plant, it did seek substantial cost reductions of 30%
from its supply base. So there was a transmission of very intense
profit pressures onto this quite extensive supply base in the
local economy. These are anecdotal examples, and we do not have
the general picture of what is happening across the broader economy.
Dr Wren: Yes; that is in terms
of suppliers. Some other evidence—this is a study undertaken
at the industry level—is that when the plants come in, then
they can push up wages within the industry, and this can actually
force out some local competitors. So there is some evidence that
it does displace domestic plants through the wage effect. So it
is not going up the supply chain, it is going across.
Q365 Mr Edwards: You mentioned evidence
from Ireland. What survey work is done in Ireland that is not
done in this country? Who does it and would you recommend that
similar work be done in this country?
Professor Tomaney: Over the years
the IDA (the Industrial Development Association) in Ireland has
taken regular surveys of the local, of the Irish expenditures
of foreign owned companies. So they are measuring the impact of
expenditures by foreign owned companies on the economy in a fairly
systematic way. They have been doing that for a number of years,
since the end of the 1980s. Nothing like that happens within the
regions of England, nothing of a similar type or on a similar
scale. There have been one-off surveys from time to time looking
at the impact on local firms of supply linkages, but nothing that
provides a timed sequence of data.
Dr Wren: The data which has been
collected in Ireland has been used fairly extensively to examine
various issues, such as displacement. That kind of data is not
available in Britain to analyse those kinds of issues, it is done
substantially by economic researchers under government contract.
Q366 Chairman: Would Mr Newlands
like to come in on that question? You looked poised to speak?
Mr Newlands: It is no better in
Scotland either. Again, there are occasional surveys that have
been conducted by Scottish Enterprise, and I have seen similar
types of evidence as just quoted for the North East suggesting
such squeezes on the supply of prices, but, if I summarise correctly,
generally situations of changes in contract as opposed to recontracting
with existing suppliers, so that, you know, occasionally an opportunity
is taken to try and drive prices when taking up with new suppliers,
setting suppliers in competition with each other, rather than
using the sort of developing power of a big plant to say to its
suppliers, "We are just going to cut your rates." But,
again, this is occasional survey data. I am fairly sure I am correct
in saying there is no long run of consistently collected survey
evidence.
Q367 Mr Evans: Looking at grants,
it seems as if the larger firms coming in tend to fail more often
than the smaller firms. Do you think that is because when the
grants are finally used up they lose their competitive advantage
and then fail, or is there another reason for this?
Dr Wren: Again this comes out
of our work out Newcastle. If we look at the survival rates of
different sized foreign investors, it is quite a strange pattern,
because normally we imagine with the larger the plant at the time
of start-up the greater are going to be the survival prospects.
That holds true for a fair part of the size distribution, but
when we get to the very large firms it tails down. We cannot necessarily
say that those firms have all had Regional Selective Assistance
or not unless they say in advance. If we look at the circumstances
of the North East region, there might be particular peculiarities
regarding why some of these large firms have closed. I am thinking
of receiving plants. I suppose this is very much related to affordable
prices in the electrical sector. If I can just recap, I think
we have done some analysis of survival, including a Regional Selective
Assistance term, and I think there might be some evidence, some
limited evidence, that firms in receipt of assistance may be slightly
more likely to close.
Q368 Mr Evans: If they are in receipt
of RSA?
Dr Wren: If they are in receipt
of that, yes.
Q369 Mr Evans: You mean, as soon
as it dries up, that is it?
Dr Wren: I am not saying as soon
as it dries up. These are firms receiving RSA when they actually
arrive in their initial investment, when they have just arrived.
You could take that as a bad signal, because these firms are more
likely to close than other firms which are non-assisted. The alternative
view is that it may be a good signal because it means that RSA,
which is directed at the more marginal projects, is actually benefiting
those more marginal projects, which is the objective of RSA. So
you can look at it in two ways.
Q370 Mr Evans: But if you compare
it with the smaller firms, is the smaller firm's survival rate
better?
Dr Wren: With the smaller firms
there is no difference between those receiving the grant when
they started and those that have not received the grant. To go
back to one other category, there may be certain special circumstances
in the North East region, in particular where there is relatively
few of these very large firms, most foreign investors there are
actually quite small plants, then two-thirds of start-up plants
in the North East region, going back to the 1980s actually employ
less 50. Very large plants are the exception rather than the norm.
Q371 Mr Evans: What do you term a
"very large plant"?
Dr Wren: I am talking about a
plant that is promising may be 500 jobs or more. In fact, I think
plants promising missing 500 or more jobs, would be less than
10% of start-up plants.
Q372 Mr Evans: I am wondering, in
that case, how effective do you think RSA is to have a coherent
manufacturing strategy? Do you think it is the right tool to use,
or something else?
Dr Wren: Again, you have to be
careful what the objectives of RSA are. You could argue that what
RSA is doing is causing these plants to locate in the UK rather
than elsewhere. So effectively it is a location decision. They
may not necessarily be having any impact on the productivity or
subsequent performance of the plant. There are two roles of RSA:
one is to attempt to change the location, which is what RSA is
about; the other effect you are looking to is that it may be having
an effect on the firm's productivity, and I do not think RSA would
claim to do that in the case of foreign investors.
Q373 Mr Evans: But it attracts it
to the UK and it attracts it to certain regions within the UK
to areas that meet the size?
Dr Wren: Yes. Primarily when you
are looking at Regional Selective Assistance, although it is just
available in the regions, you can actually argue it is a national
grant scheme. Under European State Aid Rules, the designated assisted
areas are the only tools by which the UK can compete internationally
for these projects. It is best looked at as an international scheme.
What it is primarily trying to do is to get the plants located
in the UK rather than elsewhere, but that is one view. What one
is seeking to do, therefore, is change the location decision and
not necessarily impact on the firm's performance. If I can go
back a step, in this last study what we find is that in the larger
plants, plants in receipt of RSA when they arrived, seemed slightly
more likely to close, but that would be about a good signal, or
a bad signal. Of course, as we know, it is a bad signal.
Q374 Hywel Williams: I would like
to ask some questions about indigenous industry. There has been
a large growth in employment as a result of foreign direct investment
since 1963. To what extent is the North East dependent on FDI?
If there is a decline in FDI employments how able is local industry
and the indigenous industry in the North East able to take the
slack up?
Professor Tomaney: The region
has become very dependent on RDI over this period. It complies
with a large proportion of the manufacturing sector and also an
increasing part of the service sector in areas like call centres,
and so on. If there is a sharp decline in the stock of foreign
owned companies that would have a major impact on the regional
economies. There is absolutely no doubt about that, but the nub
of your question really begs another question, which is why we
attract that investment in the first place. We attract that investment
in the first place because of the weakness, the underlying weakness,
of the indigenous sector. So we are trying to break out of a situation
where our indigenous sector has performed poorly, not just in
recent times, but over a couple of decades over the last century
in fact. The future of the region probably does require us to
build a much healthier indigenous sector, and the fact that overall
levels of foreign investment are beginning to tail off may mean
we have to concentrate on building more overall industry from
that point of view, but it is a large task because of the underlying
weaknesses in product, commercial . . . We have very few locally
headquartered PLCs; we have a very weak indigenous, well, virtually
non-existent indigenous venture capital industry. All the ingredients
we need to create that indigenous sector, which is self-sustaining,
would still need to be built.
Dr Wren: I do not disagree with
that. I think what has happened over the 1990s is that there has
probably been an unprecedented boom in FDI in historical terms.
I think a lot of that nationally has been affected by increased
mergers and acquisitions. If we look at the Greenfield start-up
projects, I think what has happened in recent years is that a
number of projects have been held up. It has declined slightly,
but what we are not getting is the very large plants, which is
what we were getting in the mid 1990s. There may be reasons why
the flow has dried up, why there was this move: internationalisation
of markets, privatisation and technological change. Also, in the
case of the UK I think the single European market was quite important,
first of all in attracting Far East investment, and then also,
I think, subsequent to that, the merger of acquisitions at European
level. I think there has been quite an important drive there.
Whether the regions are going to continue to attract the same
level of investment, I doubt. You could broadcast it as a one-off
response to particular circumstances which arrived at the end
of the late 1980 to do with the internationalisation of the markets;
also globalisation, reduced transport costs, increased communications,
is a definite factor.
Q375 Hywel Williams: Can I ask Mr
Newlands if you have any comments on the Scottish experience in
this respect?
Mr Newlands: In some ways, I think,
it goes further still in Scotland, in the sense that over 2002-03
Scotland was technically in recession for six months, there were
falls in Scottish GDP for two successive quarters, and this was
almost completely attributable to electronics due, in turn, to
the drying up of FDI in that sector. So that is symptomatic of
some of the risks and considerable pains of Scottish investment!
As for the prospects of indigenous business taking up the slack,
as you put it, I am not terribly optimistic. There are a few indicators
in certain areas of Scotland. Competition for particular types
of skilled labour has lessened as a result of the downturn of
certain foreign-driven sectors of Scottish manufacturing. An example
is that instrument engineers who had been working in the electronics
sector are either losing their jobs or facing less favourable
career prospects and are shooting into the chemical sector. There
are other instances of transferral of skills. So there is an example
of the direct benefits of other sectors taking the slack, but
those types of beneficial impacts are probably outweighed by instances
where you have got adverse knock-on effects of a downturn in electronics
sectors where local suppliers, many of them being indigenous businesses,
are finding that the demand for their goods and services is also
declining. So the downturn in electronics and a few other sectors
is setting back the ability of indigenous business to take up
the slack.
Dr Wren: Can I make one point
and come back on that? Again an important feature of investment
is concentration as well within a relatively small number of activities.
This is certainly the case in the North East and is the case in
other regions as well. In the North East, certainly well over
half and may be two-thirds of the bulk of investment is in a few
core-activities: communications, vehicles, chemicals and machinery.
It is heavily concentrated.
Q376 Hywel Williams: Can I ask all
three gentlemen, what is the main obstacle to expanding the indigenous
sector outside the South East? Could you confine yourselves to
the main obstacle? Anybody?
Mr Newlands: Where do you want
to start? Globalisation, historic shifts in comparison advantage,
worldwide—
Professor Tomaney: This is a massive
question, obviously, and if we knew the answer, dot, dot, dot,
we would very much benefit. But, I think, clearly we have a situation
in the UK as a whole, with the possible exception of one or two
sectors in Scotland like finance, where we have this heavy concentration
of economic activity and power, in effect, in the South East of
England which has accumulated over a very long period now, and
the indigenous base of regions like the North East of England
around traditional industry has vanished in a reasonably quick
time. Constructing an indigenous base when the infrastructure
which supported the indigenous development there has been stripped
out is extremely difficult, and it requires local sources of finance,
local institutions, development agencies, which are only just
being established in the English regions, and, in my view, a degree
of legal clout for these regions which is currently absent. That
is a very broad brush answer to a question which requires a lot
of detailed answers, but it probably requires, above all, a concerted
political programme to tackle the issue, which is something which
has not really been present in these regions for most of the last
century. We had a situation in the post-war period where the emphasis
was very much on bringing in large foreign investors as a solution
to the employment problem. We had a period during the 1980s when
free markets were seen as providing conditions for indigenous
entrepreneurship. We know that that is insufficient, at the very
least, to achieve this. So we need a solution, which probably
involves building on the institutional capacity in these regions,
which will help the development of the indigenous industry. There
are plenty of examples around the world where success has been
achieved adopting new strategies, but it requires probably a degree
of political will which has been absent up until now. That would
be my view.
Q377 Mrs Williams: You mentioned
a good example. Could you mention a few of those?
Professor Tomaney: Well, there
are many examples, whether they represent a trend or whether we
can draw generic political policy lessons from them, I am not
saying, but I am saying that there are examples. I can give you
an example of some of the Scandinavian regions which have gone
through summary transformations. They have lost their traditional
industries, but, as a result of a combination of factors, they
have managed to place those traditional industries with, to use
the currently fashionable jargon, "clusters" of activities
in new high technology sectors. Very impressive examples in places
like North Jutland, where the ship-building industry has all but
disappeared, but they have produced an indigenously rooted group
of companies in mobile telephony based around universities, similarly
in Southern Sweden, a strategy that has led to the creation of
a medical technology cluster. All regions are claiming that they
are building clusters, but there is still evidence that there
is a real basis for these claims in these types of regions; and
I think those are interesting places to look at because, like
the North East and like Wales, they have gone through similar
transformations where they have lost their traditional industrial
base, and arguably they have been more successful at recreating
some kind of indigenous route, which includes a particular degree
of foreign investment as well, but there are successful stories
that are worth looking at.
Q378 Julie Morgan: Good afternoon.
I wanted to ask you about regional development agencies and whether
the development of regional development agencies in England may
result in greater competition between the RDAs and how do you
think this would impact on Scottish enterprise and on the WDA
in Wales?
Professor Tomaney: I will have
a bash at that one. It would be wrong to suggest that there has
not been inter-regional competition in the past. If you read the
newspapers in the North East of England over the years you will
find many examples of investments which have been stolen by Scotland,
stolen by Wales, which have been given a great deal of publicity.
The notion that the English regions have been ill-equipped for
the existing level of inter-regional competition verses the Welsh
environment and Scottish Enterprise, I think, is a widely held
view in the English regions. I am not suggesting that it is true
or false, I am saying it is a widely held view. Of course, a degree
of regional competition is inevitable, especially if you are building
up institutions, such as RDAs, around very clear regional boundaries.
I think the fact that we have a coherent set, or an emerging set
of coherent regional institutions in the English regions is probably
a good thing; but as well as that leading to competition there
is also evidence that it is leading to co-operation, certainly
between the three northern regions, around proposals for major
transport infrastructure developments proposed by the Government
to create a northern wave programme of integrated planning for
growth in the North is probably a good development. It would require
cooperation if there was competition between these major institutions.
Inconceivably in the future, you could have a situation where
those northern regions may be start to cooperate around certain
maybe transport pioneering issues with the Scottish Executive.
So competition, increased competition, is one possible outcome
from all of this, but also there is evidence that it is leading
to a degree of cooperation between the regions which has not existed
in the past and which probably is a useful step forward.
Q379 Mrs Williams: Do you think that
co-operation will be within the Scottish Enterprise and the DWA
as well?
Professor Tomaney: Potentially,
in the case of the North East of England, you are looking north
to an economy in Edinburgh, for instance, in Lothian, which has
been a full employment economy over recent times based around
financial services and so on, and potentially a regional development
agency might look at ways in which the North East of England could
link into some of the developments which are occurring in that
part of the world, perhaps to improve transport links, and so
on. So there is potential there for co-operation. Wales is a long
way from the North East of England: a fact of geography which
may have something to do with the degree of co-operation, I suppose.
Mr Newlands: I do not dispute
John's statement that there is the potential for greater co-operation.
I think I am less relaxed, if you like, about the balance between
cooperation and competition. Certainly in many quarters between
the Scottish Executive and within the Scottish Enterprise the
sort of trigonalisation(?) of England is viewed primarily as a
threat, and certainly there is not ambiguous evidence, but all
the evidence, including some of the lines in the tables in John
Collins' submission suggested the disproportionate success within
Scotland and Wales in the past in attracting FDI is consistent
with the presence in those countries of devolved institutions,
one-stop shops, centered upon the development agencies but drawing
also upon the devolved powers of the Scottish Office and the Welsh
Office.
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