Inward Investment in Wales

Written evidence submitted by Scottish Development International on behalf of joint venture partners: Scottish Government, Scottish Enterprise and Highlands and Islands Enterprise

Introduction

Further to your request for information we are pleased to submit the following evidence to the Committee. We hope this provides useful context for your inquiry.

Scottish development International (SDI)

SDI is a joint venture between the Scottish Government, Scottish Enterprise (SE) and Highlands and Islands Enterprise (HIE). It is the trade and investment arm of the joint venture partners.

SDI provides services to support inward investment and international trade for the whole of Scotland. SDI’s main objectives are to enable Scottish companies to increase their internationalisation either through increasing export sales or other international activities (e.g. joint ventures or overseas acquisitions), and to encourage overseas-based companies to set up and expand within Scotland. We have provided an overview of the rationale and our approach in Annex 1 and have, in particular, tried to draw out our inward investment approach.

Scotland’s Trade and Investment Strategy 2011-15

In the last year (2010) there was significant discussion in Scotland regarding the importance of international trade and investment for Scotland. This has:

o been of central importance to the Scottish Government’s Economic Recovery Plan

o been the focus of an inquiry by the Economy, Energy and Tourism Committee of the Scottish Parliament which led to a parliamentary debate; the topic of the National Economic Forum in May 2010 and a topic at the Business in Parliament event in Nov. 2010, and

o received greater priority in the plans of SE, HIE and a key range of business organisations and partners.

There is overall a broad consensus of the direction of travel and the priorities needed to support greater trade and investment in Scotland. Scotland’s Trade and Investment Strategy was subsequently published in March 2011.

The strategy can be found at Scotland's International Trade and Investment Strategy.

(hard copies can be provided).

Evidence to the Scottish Parliament (2010)

In 2010 the Economy, Energy and Tourism Committee of the Scottish Parliament carried out its own inquiry into Scotland’s trade and investment performance. It covers similar areas as your own inquiry (and also included the role of international trade). The findings from the Committee may also be of interest and can be found at: EET Committee report on International Trade and Investment.

Independent Evaluation of Scottish Development International (2010)

The evaluation aimed to assess the impact of SDI activities, focusing on the international activities of Scottish-based businesses, and investment in Scotland by foreign-owned companies.

A summary of the inward investment element of the evaluation is provided in Annex 2. The full report can be accessed at SDI Evaluation.

Relationship with Welsh Assembly Government

We have regular dialogue with out trade and investment colleagues in the Welsh Government alongside dialogue with the other devolved administration. The most recent dialogue was on the 20 June 2011 at the International Business Development Forum organised by UKTI.

Annex 1

SCOTTISH DEVELOPMENT INTERNATIONAL

Contents

1. Introduction

2. Global Context

3. Economic Rationale and Global Trends

4. Developing SDI’s Strategic Direction

5. Support Provided by SDI

6. Deployment of Resources

7. Balance between Trade and Investment

8. Joined up working across the public sector

9. Resources

10. Benchmarking

11. Market Research

1. INTRODUCTION

To win investment Scotland faces intense international competition to demonstrate it is the best location to invest. SDI’s core competence is in the delivery of world class sales and marketing to both attract investment to Scotland and to encourage and support Scottish businesses to increase their international trade.

Critical to future success in attracting investment and increasing trade will be effective partnership working both at a Scottish and UK level, including:

· alignment across the public and private sector to enhance the global competitiveness of the business environment in Scotland including: skills, research, transport, infrastructure, regulatory and fiscal environment.

· harnessing the full potential of international networks and influencers and working with partners to actively co-ordinate the wider promotion of Scotland globally.

Both exports and inward investment are vital in supporting Scottish economic growth. For example, in 2008 Scotland exported £20.7bn of goods to overseas markets [1] , the ratio of overseas exports to total turnover in Scotland is around 10%. Exports to the rest of the UK were estimated to be £42.3bn. While the 1,825 foreign HQd enterprises in Scotland employed over 263,000 people (15% of total) with combined turnover in excess of £61 billion (28% of Scottish total). If companies owned elsewhere in UK are included there are 4,595 enterprises employing 628,000 people (35% of total private sector employment in Scotland) with turnover of £115billion (52% of Scottish total) [2] .

In our key sectors Scotland is/or has the potential to be globally competitive in both attracting overseas investment and talent and in Scottish businesses gaining market share overseas. For example, Scotland has both natural, technical and research assets which give us significant international opportunities to be a world leader in developing a low carbon economy. SDI and our partner agencies can play a vitally important role in attracting investment to grow our renewable energy sector and in supporting the indigenous supply chain to maximise the global economic opportunities from clean technologies.

To do this, we must focus our efforts on helping Scottish businesses to become more globally competitive; and effectively communicating the benefits of investing in Scotland to companies around the world in an increasingly challenging environment. We remain responsive to the needs of our customers and continue to help them respond to the short term challenges they face in the current economic climate as well as supporting longer term growth.

A key priority is to work with SE, HIE and other partner organisations to encourage businesses to consider their international aspirations and look beyond Scotland for opportunities to grow their business.

If we are to maximise the impact we have in supporting Scotland to become a more globally competitive economy, then we need to nurture our existing partnerships and develop new alliances with both the public and private sector. We need all our partners to get behind the common purpose of internationalisation with everyone playing to their respective strengths so together we can deliver more for Scotland. SE, HIE and Business Gateway provide a seamless provision of customer focussed business support to companies while SDI focuses on specialist international business development support. SDI continues to be both an integral part of SE and HIE while aligning with other public and private sector partners to strengthen Scotland’s competitiveness and create a globally competitive business environment.

2. GLOBAL CONTEXT

The IMF forecast [3] in January that most growth this year is likely to come from emerging economies including China (10%), India (8%) and the Middle East (5%) with developed nations showing slower growth e.g. US (3%), Eurozone and UK (1%) and Japan (2%).

The devaluation of Sterling, (which is 23% lower against the $ compared to June 2008, 12% against the Euro and 34% against the Yen) gives an advantage to Scottish exporters albeit against the backdrop of weak demand in most market sectors.

An increased level of uncertainty in the world and increased sophistication from competitor countries means Scotland and SDI need to further increase flexibility and agility to respond to international opportunities. All this sets out a tough and fragile global and domestic environment within which Scotland needs to compete to attract investment and support Scottish companies to internationalise.

Scotland, in a global context, is a very small market and tends to closely track UK performance [4] which has slow growth forecast in the medium term [5] . Therefore overseas markets become even more critical in accelerating recovery through both increasing international trade and attracting further investment into Scotland.

3. ECONOMIC RATIONALE AND GLOBAL TRENDS

Overview

There is a considerable body of evidence highlighting the market failures and barriers to international trade and investment that amply justify public sector intervention, particularly in positively addressing information gaps, developing international networks and internationalisation skills [6] . The key findings are summarised below:

The key barriers which impede internationalisation are:

· in general companies over estimate the risks involved in exporting and entry into new markets and as a consequence become risk averse

· for businesses wishing to trade overseas there are irreversible sunk costs involved with entry and exit being costly undertakings. This has a scale element. In particular smaller companies, lacking diversified management structures, do not have specialist resources (e.g. a marketing manager) which enable them to begin exporting. Such investment may be beyond many in the short term without public support

· in many cases businesses become locked into markets and courses of action and don’t consider exporting. An outside stimulus (e.g. attendance at a course or an event) can make a company change its direction and consider new markets.

The key barriers to attracting investment in Scotland are:

· potential investors are unaware of the benefits of locating in Scotland in terms of such things as skills, research base, infrastructure etc.

· the private sector alone cannot maintain adequate institutions and networks that support international linkages and knowledge flows

Governments also play a key role in providing access to contacts and key decision makers, and to some types of information, which private sector service providers cannot. Government reputation, in particular for impartiality and trust, is also an important aspect.

It should also be noted that the attraction of foreign investment is highly competitive and therefore Scotland needs to focus efforts on where it has a globally competitive proposition.

The role of government:

Governments and their agencies are well placed to address the barriers highlighted above. There is strong evidence that companies engaged in internationalisation or inward investment activity on average generate higher levels of labour productivity, pay higher wages and employ more people than their competitors who are not internationally active. Even more compelling is that companies who do enter new overseas markets further increase productivity as they are exposed to new ideas which they then adopt.

The information, contacts and financial support made available through government and its agencies helps encourage greater investment and reduces the perceived risks to businesses. While the multiplier effect (e.g. inward investors will source a proportion of its products/services locally) means the benefits are spread wider through the supply chain.

Global International Investment Flows

Research by the OECD [7] suggest that international investment flows dramatically reduced in 2009 by 50% with some sectors particularly affected e.g. automotive. This is forecast to stabilise in 2010 however further declines cannot be excluded. Overall the policy emphasis by countries has been to ensure free trade is not restricted. However there is a general concern that policies may be implemented in a way which supports ‘smart’ protectionism, this includes policies to support indigenous companies e.g. bailouts.

There has been a significant increase in Foreign Direct Investment (FDI) flows in emerging economies. In 2000 emerging economies in the G20 accounted for only 1% of G20 FDI outflows while in 2008 this had increased to 12%.

Trends in Trade

The WTO report for 2008 [8] shows that with the onset of the recession there was a weakening of demand for goods and services, and imports and exports quickly dropped. Trade has also been adversely affected by the lack of credit to finance imports and exports. As we can see from chart below, exports and imports began to fall sharply across the OECD economies during the third quarter of 2007 and throughout the remainder of the year, deteriorating markedly during the third and fourth quarters of 2008. This rapid contraction closely mirrored the reduction in GDP experienced across OECD economies during the final two quarters of 2008.

As we can see from Figure below, global exports rose sharply across the world during the early part of 2009 as the global economy emerged from recession. In fact, there has been a dramatic rebound in world trade.

World Export Volumes [9]

Having fallen by as much as 40 percent during the second half of 2008, by the middle of 2009 growth in world exports had resumed. Some observers attribute this growth particularly to the demand for imports across Asia, especially the huge growth in China’s imports. In fact, China doubled its imports from $50bn to $100bn during 2009 which has obviously been a huge boast to the global trading system [10] .

For Scotland the Global Connections Survey [11] shows that estimated export sales from Scotland have steadily increased from £17.8bn in 2004 to £20.7bn in 2008 despite the onset of the worldwide recession. Scotland continued to grow its exports in all manufacturing and service areas but export growth slowed in areas such as electronics and instrument engineering, mining and agriculture. Scotland has managed to increase exports to European and North American economies during this period. The biggest reduction in exports was to Asia. Future export trends are difficult to assess, the present fragile state of the global economy means total demand is less while the relative low value of sterling presently makes Scotland more competitive.

Trends in Investment

The UN [12] reported that overall FDI falling by 39% from $1,700bn to $1,000bn in 2009, with decreases across all major groups of economies. After severe declines in 2008, FDI flows in developed countries dropped by a further 41%, while transition and developing nations fared little better, with a slump of 39%. The US, the UK, France, Sweden and Spain all saw sharp dips.

In June 2009 Ernst & Young [13] reported that inward investment into Europe was flat in 2008, demonstrating the global recession’s toll on investment projects into the region. The report, which examines figures for international investments into Europe, new projects or expansions, revealed that in 2008 Europe secured over 3,700 investment announcements, the same as in 2007. The number of projects remained steady but the impact of the impending recession on new employment was severe. The number of jobs created fell 16% to 148,000, accelerating a downward trend underway since 2004.

4. DEVELOPING SDI’S STRATEGIC DIRECTION

SDI working closely with SG, SE and HIE has just refreshed its Strategic Direction and Priorities for the next three years (2010-13). This has been developed taking into account: (1) SG, SE and HIE priorities e.g. key sectors (2) evaluation evidence; (3) customer demand; (4) changing global opportunities [14] .

Flowing from this strategic direction, SDI’s objectives are to:

· attract investment and talent which builds on Scotland’s globally competitive sectors

· raise the aspirations and capabilities of more Scottish businesses to think, compete and trade globally

· actively work with others to increase the global competitiveness of the business environment in Scotland and to align the wider promotion of Scotland internationally

The main changes in emphasis in the strategic direction include:

· responding to the specific demands of each key sector with recognition of the growing opportunities particular sectors such as renewables given Scotland’s natural assets and technical competencies

· raising the aspiration of more Scottish companies to internationalise by working with others

· even deeper engagement with globally competitive companies who can add the most value to the economy.

· greater emphasis to be placed on exploiting emerging sectoral opportunities in growth markets particularly fast developing economies

Customer feedback and evaluation evidence demonstrate that the current products and services provided by SDI deliver real, tangible benefits and offer a balance of practical support, access to information, expertise and business networks. In particular SDI staff bring, specialist expertise across all key sectors, provide international market access through our overseas field operations, and remain close to customers through staff located in all parts of Scotland.

Just as importantly to support the efforts of Scottish companies to grow revenues from international markets is that SE, HIE and Business Gateway deliver a suite of other complementary interventions to increase the competitiveness of Scottish businesses. For example, innovation and leadership support are critical in raising competitiveness and enabling companies to exploit international opportunities. [15]

An example of this complementary support includes the Scottish Manufacturing Advisory Service (SMAS) delivered by SE. SMAS specialise in providing manufacturing firms of all sizes throughout Scotland with expert advice, one-to-one support, training and events including lean manufacturing and driving productivity improvements.

Scotland also has key strengths in advanced manufacturing e.g. photonics, imaging systems, sensors. The company base has extensive experience at providing end to end supply chain capability from research and design through to fulfillment and aftercare. This has been built up in Scotland over the last 60 years through the Electronics industry. The highly skilled workforce, world class university research base and support like SMAS make Scotland a very attractive location which SDI can sell to potential investors.

The Scottish Economic Recovery Plan: Accelerating Recovery

The role of internationalisation in accelerating recovery is one of the central priorities in the Government’s Recovery Plan. The Plan recognises that ‘we are likely to see a repositioning of individual economies in the global economy and restructuring of industrial sectors within these economies, Financial and trade flows will alter bringing new opportunities for Scotland to exploit its comparative advantage’

Within the Plan there is a firm commitment to scale up support for exports and emphasis on the central importance of internationalisation with a renewed strategy to target inward investment opportunities where Scotland has a strong global position.

Recent initiatives include:

· International Strategy support – helping companies deal with a changed economic environment;

· Export credit finance workshops – alerting the Department of Business, innovation and Skills (BIS) and UKTI on instances where access to credit insurance is cited as a constraint;

· Trade missions – offering practical support for internationalisation including an enhanced programme of trade missions, with the aim of supporting participating companies to generate in excess of £250 million in international revenue;

· Exhibitions and Missions programme – 490 companies received support to attend overseas exhibitions in the year to December 2009, helping to secure additional overseas business;

· Overseas Market Support – 554 companies in the year to December 2009 benefiting from market research and/or in-market support for their business development.

There has been a changing balance of inward investment activity recently to safeguard existing jobs while taking the opportunity to attract new investment where possible e.g. the success with Tesco PF in attracting 800 new jobs shows that opportunities do arise and a quick, co-ordinated response can result in positive outcomes.

Despite the very challenging global trading conditions, SDI has delivered many new projects to bring and retain jobs from overseas investors. Between 1 April 2009 and 28 Feb Jan 2010 SDI has secured 3,627 planned jobs through inward investment (of which 1,789 are planned high value jobs).

As a result of the highly developed approach to customer support and inward investor aftercare there is a high level of insight into the challenges facing businesses. By maintaining strong working relationships with company representatives we are able, in the vast majority of cases, to provide early warning of potential re-structures or closures and to work with the company and key stakeholders to ensure all avenues are explored before decisions are made e.g. Vestas/Skykon, Goldfish.

The internationalisation response going forward is fully reflected in SDI’s strategic direction articulated at the beginning of this question. As the economic situation evolves we remain committed to continually reviewing our activity and directing resources to areas of greatest opportunity.

5. SUPPORT PROVIDED BY SCOTTISH DEVELOPMENT INTERNATIONAL

SDI support to attract investment and talent

SDI has developed a world-class sales and marketing approach focussed on promoting the competitive advantage that Scotland’s globally competitive sectors can offer to existing and prospective investors. We promote Scotland as a place for businesses to invest, including the capabilities of Scottish based businesses and our research organisations as trade or investment partners. We also promote Scotland to globally mobile talent as a great place to further their career. .

We ensure the sales and marketing approaches we choose to reach our customers are the most effective and represent good value for money. The power of face-to-face communication cannot be underestimated. Recognising the value of personal recommendation, we use Globalscots and other networks as advisors to Scottish business and as sources of new opportunities.

Scotland has a very positive image, although its business reputation is not always well understood. In a world where competition for investment is ever more intense, we, with partners, need to manage this reputation more effectively by increasing use of new channels (e.g. online) to both retain and improve our position and increase the return on investment.

In 2008/09, when global FDI was significantly down, SDI still managed to secure over 1,807 high value jobs of these:

· 90% were in key sectors, and

· 49% were R&D related (rising from just 12.5% in 2002).

In focussing on our key strengths we need to attract the type of investment which is sustainable and will make a long term difference e.g. Scotland has secured 22% of R&D inward investment projects [16] into the UK in the last 3 years (up from to 17% in 2004) with over 35 projects including PPD, Doosan Babcock and Chevron.

As well as new investment we need to ensure we continue to support and develop existing investors through effective aftercare. Last year, more than 80% of the high value jobs that were secured came from existing investors; demonstrating both their commitment to Scotland and the globally competitive offering Scotland has.

SDI has built up its sales and marketing competencies over many years. This has been externally acknowledged through a number of awards won, including:

· Ranked 6th out of over 210 Inward Investment Agencies by the World Bank in 2009 (and top in UK).

· This year voted 8th top region in Europe out of 142 by the Financial Times in their fDi awards (with Edinburgh being voted ‘Best Small City of the Future’ for the 2nd time in a row and Glasgow being voted 2nd for ‘FDI Strategy for Large Cities’).

This capacity needs to be continually developed for SDI to maintain its world class standing and comparative advantage over other trade and investment agencies.

6. DEPLOYMENT OF RESOURCES

Detailed below is a summary of the key activities carried out by SDI both in Scotland and in overseas markets. It should be noted that resources are used flexibly between trade and investment activities e.g. overseas staff have sector expertise which they will fully utilise to both work with potential investors to Scotland while also supporting Scottish businesses to find new markets overseas.

Direct Customer Support Activity includes:

· Overseas offices in 22 countries

· Co-location of customer facing staff with SE/HIE staff in local offices

· Overseas sales force targeting strategic inward investment opportunities and securing further investment for Scotland;

· Specific work for individual trade and investment customers, ranging from market research to reaching senior decision-makers;

· Networking, contact-building and opening doors for business – up to and including the highest levels of business and key government contacts;

· Building links to Scotland’s science and education base;

· Creating and providing platforms to showcase Scottish excellence and enhancing Scotland’s reputation globally through events

· Attraction of talent to Scotland through Talentscotland

· Influencing in Europe and supporting Scotland access EU funding though Scotland Europa

· Planned annual investment of £17.5m and 215 customer facing and delivery staff

Marketing and selling of Scotland’s strengths, online services and support:

· Focused on demand stimulation, developing an efficient ‘engine room’ to support the business and delivering and managing products to address the needs of Scottish businesses to grow internationally.

· Demand stimulation is driven by sector marketing strategies, focusing investment on key subsectors within key markets. Direct activity, including internet marketing, will continue to dominate SDI’s activity. There will also be significant demand stimulation activity for key products such as strategy & preparedness support;

· Development of a world class website and extranet that will enable a smarter engagement with customers, prospects, partners and staff. We will continue to develop smarter and more focused propositions based on were Scotland has a competitive advantage.

· SDI’s product offering will be further enhanced through the development and delivery of solutions which address the needs for more strategy support, preparedness, sales and marketing and Internet marketing. There will be new web based solutions which will give all businesses access to support in these areas.

· Support functions including: performance management, ministerial briefing team, CEO’s office

· Planned annual investment of £5.9m and 36 staff.

SDI - Return on Investment

The return on investment compares favourably against other business support evaluations and very favourably against Regional Development Agency evaluations of inward investment [1] . The main factors considered in order to maximise ROI are:

Factor	Example
Government Economic Strategy	sectors with greatest potential (the identification of key sectors)
SE & HIE Board strategic direction	the focus on supporting companies to exploit their global competitive advantage (globally competitive companies)
Sector/Industry plans	helping to identify the nature of specific growth opportunities
Economic analysis	relatively longer term opportunities that have led us to invest more in China and shorter term opportunities such as trying to exploit changes in market conditions (e.g. opportunity to increase Scottish salmon exports)
Competitor analysis	the ability of Scotland to successfully compete against international competitors and understanding of the unique strengths of the Scottish proposition
Economic circumstances	the introduction of the sell now, pay later campaign, in quick response to the, then emerging recession
Current operations	understanding the relative relationships between investment made in different geographic markets and the return achieved in relation to the overall global sectoral opportunity. staff capabilities e.g. we have a small team covering a global geography and must maximise contribution each individual can make
Evaluation evidence	we learn both from the analysis of others (e.g. UKTI) and our own past activity

SDI working with Scottish partners to deliver seamless support

If Scotland’s international ambitions are going to be achieved then there needs to be close collaboration of effort across the different public and private sector players to deliver this.

As referenced earlier, SDI and its partners provide a number of international products and services to support Scottish businesses and potential investors to achieve their international aspirations. These include training, R&D support as well as more direct financial assistance through RSA and other grants. Support will most often be delivered through a package of interventions to assist companies with their growth plans over a period of time.

SDI works closely with both public and private sector partners to realise international opportunities. We also work with pan-UK agencies, and UKTI in particular, to good effect and this is described in more detail in the Q7 response.

7. BALANCE BETWEEN TRADE AND INVESTMENT

The activities of SDI are both demand and opportunity driven. Business customers look for assistance based on their own growth aspirations and the international opportunities which they can capture, while the key sectors in Scotland articulate the key strategic gaps where they can both expand overseas trade and attract new investment to fill gaps in the sector in Scotland.

Both inward investment and international trade are critical contributors to Scotland’s economic growth. The relative importance, and therefore resources that should be devoted to each, varies over time and across sectors. Inward investment and internationalisation are not mutually exclusive, for example inward investors are major exporters from Scotland (in many cases Scotland looks to attract the European base for both American and Asian corporates).

The challenge was described in the Fraser of Allander [2] Economic Commentary Report from June last year:

‘The expansion in Scotland’s export base necessary to secure the desired increase in growth is unlikely to be achieved without significant successes in attracting inward investment. There are obvious difficulties in the attraction and retention of high quality foreign direct investment. But Scotland won’t make the transition from recovery to a higher growth path without it, given that Scotland’s domestic business birth rate remains stubbornly low and business R&D is amongst the lowest in the western world. The issue of how we can attract the required high value, inward investment to rapidly boost our export base should be a key topic of public debate in Scotland over the next few years.’

Summary of Opportunity (Demand) in Key Sectors

Detailed below is a summary of the specific demands placed on SDI by the key sectors for both trade and inward investment. Flexibility and the ability to respond quickly to new opportunities are critical given the dynamic global economic environment. Where the opportunity balance of activity is significantly skewed to one area of activity (e.g. trade rather than FDI) then this is indicated by a (those not marked indicate that balance of activity is broadly the same).

Sector	Trade	Foreign Direct Investment
Energy
- Renewables	enable supply chain to capture more UK, European and Global business including: Offshore Wind and Marine	target new opportunities and supply chain development including Offshore wind, Bioenergy, Hydrogen & Fuel Cells, promote Saltire Prize, attraction of technical talent
- Thermal, Carbon capture & storage	Work intensely to promote Scottish capability and expertise in CCS technologies worldwide	Targeted inward investment to support development of the sector in Scotland.
- Oil & Gas	increase value of international activity from Scotland supply chain by £5bn by 2012 (baseline of £5.6bn in 2007)	targeted R&D centres, Enhance Scotland as a key centre in oil & gas subsea, attraction of technical talent
CI & ET
- Creative Industries	increase levels of international collaboration, encourage start up companies to be 'born global', exploit IT	focus on activity which supplements present strengths e.g. R&D in ICT, major games company, attraction of creative talent
- Enabling Technologies	assist companies in key product markets e.g. sensors, modelling & simulation, informatics to access global markets	utilise international networks to increase the potential for job creation via specific inward investment, attract talent
Life Sciences	support the international growth aspirations of organisations located in Scotland including stem cells, regenerative medicine, clinical and translational medicine, drug discovery and medtech.	stem cells and translational medicine a priority, attract anchor tenant for Edinburgh Bioquarter, attraction of senior management talent. Explore emerging potential for telehealthcare and natural products in Highlands & Islands.
Financial Services	Focus on key sub-sectors e.g. helping asset managers to access markets where government support is important to make high level connections, for example China & Japan	protect Scottish based operations, exploit expansion opportunities, maintain and grow high value FS & BS operations in Scotland, homeworking opportunities in rural areas, attraction of talent
Food & Drink	Working with Scotland Food & Drink exploit premium growth market opportunities building on the industry's role as a premium player, promote opportunities & embed international action planning into companies	functional food/nutritional health offers good medium to long term potential. String focus on supporting existing investors.
Tourism	working in collaboration with VisitScotland and limited AM companies particularly for markets not covered by VisitScotland network	deliver higher value new developments within Scotland e.g. 5 star city centre hotels and golf resorts
Universities	international business development support for the universities (and colleges), key markets are India, China and the Middle East with a focus on new business	attract business investment which compliments the research being developed in universities

SDI also continues to support the international opportunities in other growth sectors including: Chemicals, Textiles, Aerospace, Defence and Marine, Forest Industries, Healthcare, Education and Construction.

Prioritisation of public sector resources and interventions

SDI fully agrees with the need to prioritise resources and interventions in relation to opportunity and impact on economic growth. We have outlined in our response to earlier questions and in particular Q6. The approach that is undertaken to try to achieve the optimal balance between short term and longer term considerations. In addition we believe it is helpful to inform the Committee of the following:

Key sectors and other growth sectors

SDI will continue to work with its partners to focus efforts on key sectors and areas of opportunity (e.g. technologies) where Scotland is/can be globally competitive. A summary of opportunities for each key sector is given in Q5.

Assessment of opportunity determines geographic coverage

As the world economic map evolves, Scotland needs to re-assess global opportunities to take advantage of the shift in international economic activity towards developing markets. Work is underway to evaluate the criteria to be applied in the future identification and selection of key fast developing markets. These criteria are likely to include:

· Market match with the profile of Scotland’s globally competitive sectors

· Market size and potential for growth

· Strategic economic importance

· Strength of the scientific, technical and research base

· Performance of Scottish businesses relative to competitors

· The additional impact SDI can have in supporting firms

The results of this work will inform future demand generation activity and the SDI market awareness raising programme. Where SDI has no direct local presence then we work closely with UKTI staff to deliver for Scotland.

SDI Overseas Locations

8. JOINED UP WORKING ACROSS THE PUBLIC SECTOR

SDI’s Strategic direction includes increased emphasis on ensuring alignment of internationalisation work and supporting the wider promotion of Scotland. There is recognition of the much wider collaboration with both public and private sector partners e.g. VisitScotland, Skills Development Scotland, Scottish Funding Council, industry bodies, universities SEPA, Historic Scotland, etc., as well as collaboration with other players outwith Scotland, particularly UK agencies e.g. UKTI, FCO, BTU to support internationalisation of Scottish businesses and the attraction of investment to Scotland.

Through the Strategic Forum, SDI has been working with SG and partner agencies to strengthen overseas collaboration. Four general areas have been identified by the partners where future collaboration has the greatest potential to reap significant benefits. These are:

· Promotion of Scotland

· Innovation & Commercialisation

· Major Events

· Wider Business Engagement (e.g. industry/ private sector)

In all these areas significant collaboration already happens and the desire of partners was to assess how this could be further strengthened. Work is now ongoing to develop approaches in all four areas. For example, in the areas of science, technology and innovation several bodies contribute valuable expertise, notably Chief Scientific Officer, Scottish Funding Council, Universities and industry bodies. We need to promote and support further commercialisation from our strong knowledge-generating capacity and ensure Scotland reaps the global dividend from this asset base.

UK level co-operation

SDI works in partnership with UKTI to ensure that companies based in Scotland benefit from an integrated package of SDI and UKTI Trade and Investment services. We extend our combined resources to support success in international markets for Scottish businesses.

UKTI provide the market intelligence and, in some geographies, access to markets where SDI do not have a physical presence. UKTI staff based in UK embassies and High Commissions overseas offer SDI both economic and business insights, often with commercial implications.

Some typical examples of joint working include:

· Olympic & Commonwealth Games – joint conferences and the UKTI / BIS sponsored Compete-For web portal

· UKTI business opportunities have been incorporated into SDI’s International Business Opportunities product e.g. tailored sales leads, fiscal stimulus opportunities

· UKTI Professional Advisors Network – SDI encourages Scottish professional advisor companies to engage in the UK’s network and is establishing a Scottish Advisors Network to mirror UK approach

· Ongoing cooperation on high profile market awareness events e.g. the recent Asia Taskforce event at Murrayfield stadium

· Co-location of SDI staff in a number of Embassy/Consulate offices

SDI in partnership with UKTI also offer:

· information on local regulations

· advice on local partners, commercial services (lawyers and accountants), and on setting up joint ventures or local investments, and

· market research, ranging from simple checks on whether a market exists for a particular product through to more complex work supporting product launches or significant investments in global markets by businesses

European Co-operation

Through Scotland Europa, SDI continues to ensure Scotland’s voice is heard in Europe through networking and influencing. It increases the positive perception of Scotland as a place to do business. Scotland Europa also supports access to EU funding opportunities.

Enterprise Europe Scotland (EES), delivered by SE, also plays a key role for Scottish business, supporting Europe’s largest technology and business network, connecting knowledge know-how and people across Europe. The Enterprise Europe Network spans more than 40 countries, has over 600 partner organisations, 4,000 advisors and thousands of companies interested in doing business in Europe. [3]

Wider industry and private sector engagement

The role of Industry Advisory Boards is critical in articulating the demands of industry and the international elements of this to allow SDI and other partners to prioritise and respond to this demand.

SDI works closely with partners involved in each key sector to ensure the international opportunities are fully exploited. An example of this approach in the attraction of investment to Scotland is given below:

Translational Medicine Research Collaboration (TMRC), and the Scottish Academic Health Sciences Collaboration (SAHSC) It was recognised that Scotland had a competitive global advantage in Translational Medincine as a result of expertise and systems in the NHS in Scotland and in Scotland’s major universities. SDI and SE worked with these organisations and developed a very compelling proposition which was presented to global top 10 pharmaceutical company, Wyeth. This resulted in 2006 in the establishment of a major multi-centre collaboration with Wyeth in Scotland. To take the intiatiative forward the Translational Medicine Research Collaboration was formed. The TMRC involves 4 of Scotland's universities, NHS Scotland and SE. SDI's specific role was in helping facilitate a coherent plan with the pan-Scotland ‘team’, facilitating the front end selling of our proposition to the company . In terms of drug development timescales it is still comparatively early days, but to date 68 research projects have been initiated and Wyeth (subsequently acquired by Pfizer) have invested approx £33m in the initiative. Wyeth themselves made clear that if there hadn't been the genuine depth of collaboration between the various public sector organisations they wouldn't have come to Scotland, and the opportunity for significant economic and health benefits would have been lost. To capitalise further on Scotland's expertise in this area, the Scottish Academic Health Sciences Collaboration was established in 2009. The SAHSC created a world leading platform for patient oriented research that will contribute significantly to Scotland's reputation as a centre of excellence in Translational Medicine. This new initiative built on the close existing collaboration between SDI, SE, NHS Scotland and academic partnerships already existing in Aberdeen, Dundee, Edinburgh and Glasgow, and through these to other Scottish Health Boards and Universities. SDI and SAHSC are currently undertaking joint international marketing to major global pharmaceutical and med tech companies to attract further investment to Scotland.

9. RESOURCES

The resources for SDI are prioritised as part of SE, HIE and SG planning process. It is an objective led approach that looks at the value trade and investment can deliver to the sustainable economic growth of Scotland and how this complements other strategic priorities e.g. innovation, business growth, and investment.

It is a dynamic process, if opportunities arise during the year e.g. a major inward investment opportunity, then SDI work with partners to try and secure the investment. Where resources are a potential constraint then this is discussed with Government as needed.

It should be noted that significant resources for supporting the attraction of investment come from partners e.g. RSA delivered through SE, vocational training delivered through Skills Development Scotland. SDI work closely with partners to provide a package of support which meets the investors needs and delivers economic impact for Scotland.

A key factor in our success will be enhancing the business environment. Our overseas market intelligence can give us a key insight into how our sectoral strengths are viewed across the globe and were we should focus more or less.

For inward investors some of the key issues overall when considering locations include:

· Quality and availability of labour and skills (e.g. graduates)

· Tax, government incentives and political risk

· Costs (e.g. labour, energy, real estate)

· Communications infrastructure

Other issues mentioned are quality of government/regulations, direct travel links and quality of inward investment support. Government needs to continue to prioritise these assets to ensure Scotland strengthens it globally competitive position. SDI can then support the marketing of these to attract new investment to Scotland.

Efficiency

SDI will continue to challenge how costs can be further reduced, while the effectiveness of our work can be increased and have a greater impact on the Scottish economy.

The support service model of SE is essential to enable SDI to drive down internal costs (e.g. HR, IT, finance, procurement, facilities, and research). This also ensures we have the competencies to draw on when we need them e.g. the present evaluation has used both the SG,SE and HIE economics and research expertise.

SDI’s approach to FDI is a blend of public and private sector resources. For example, RSA grants are fully dependent on agreed levels of investment by the companies concerned.

Skills and Expertise

SDI already has a strong skills and knowledge base both at a geographical and a sector level. Over 75% of SDI staff have relevant direct private sector business to business sales and marketing experience while around 80% of staff employed in overseas locations are local nationals with relevant experience and qualifications in business development.

Through SE’s Learning & Development team we have focussed on competency based training for many years and provided professional development based on the present and future needs of the business. Recognising the increasingly competitive global environment for FDI and supporting Scottish companies to internationalise we have recently taken steps with the support of SE Learning & Development Team to put in place the SDI Academy which focuses on enhancing consultative selling competencies of SDI staff and ensure SDI staff maintain the specialist skills necessary to support the business development efforts of Scottish companies (e.g. Institute of Export level qualifications).

Many of the skills required to internationalise can be provided by the private sector. SDI work to strengthen existing relationships with private sector bodies (e.g. trade associations, international legal firms, accountants, specialist employment agencies and others) to help ensure these skills are matched with the businesses which could benefit from them.

10. BENCHMARKING

SDI is always looking to benchmark itself against other competitor investment bodies around the globe and there are certainly lessons to be learned. We monitor Scotland’s competitor agencies and as appropriate use this knowledge to develop or enhance products and services. A recent review by The World Bank ranked SDI sixth in the world among investment bodies for its ability to bring new investment to a region and boost a local economy. The review compared over 210 international development bodies to assess their performance in attracting inward investors - and rated SDI above all other UK agencies.

‘SDI has proven to be very effective in facilitating foreign investment projects, further building on Scotland's reputation as a successful global investment location’ World Bank quote

SDI, in particular, was recognised for its work in the areas of customer care and follow-up, as well as attracting inward investment and knowledge to Scotland. This benchmarking exercise helps us identify where we can improve the way we operate. For example in the 2007 report our website scored 76% (just in the top quartile), from this we focused on developing the site based on both customer feedback and learning from ‘best in class’ organisations. Subsequently the website scored 86% in 2008. After the latest report we have focussed particularly on improving our enquiry handling processes.

11. MARKET RESEARCH

Global Market research

We have good data on how the Scottish proposition in key sectors is perceived in comparison to competitors, but we need to keep this constantly up to date by refreshing our market data through access to secondary research e.g. Financial Times FDI competitiveness database, and through listening and acting on customer feedback. We will conduct fresh market research, for example, in under-research sectors.

We know the characteristics of the overseas businesses we want to attract as investors and the characteristics of those Scottish businesses where targeted trade support can most benefit the economy. We have good market intelligence on what these potential investment and trade partners are looking for, though more work remains to be done on the priorities for particular sectors (and sub-sectors) in particular geographical markets.

UK and Scottish level research

The Global Connections Survey provides a useful snapshot of Scotland’s export activity and is particularly useful in understanding the barriers to trade experienced by Scottish businesses, this is used to help design future interventions. It collects detailed information about export values and destinations of goods and services across the economy as a whole (not just manufactured goods). It also includes exports to the rest of the UK - used as a Scotland Performs indicator. It is, however, a sample survey and completing it is not a mandatory requirement for companies.

The index of manufacturing exports provides a useful more up-to-date picture, although this is limited to manufacturing and to overseas sales volumes and provides less detailed information than the Global Connections Survey.

SDI (SE and HIE) research

SDI continues to build its evidence base to help better understand the impact of its activities. This includes working with both SE and SG colleagues to ensure a good fit with the Government’s performance framework and the SE performance measurement systems.

SDI with the joint venture partners is just completing one of the most comprehensive evaluations trade and investment activities and the impact these activities have had on the Scottish economy. The research included secondary research to learn from the present academic literature, this was then used to support the design of the primary research. Key findings from this are given in Q1 and Q3. More detailed work is being conducted to ensure we fully gain the learning from this and apply this going forward. This work has been used to inform our strategic direction and will help us in both the prioritisation and design of future interventions to ensure they deliver more economic benefit for Scotland.

SE conducts regular surveys of the companies they work with and the results are analysed monthly. This information gives up to date information on their present and forecast growth and whether they expect exports to increase/ decrease. This helps us indentify where we should focus efforts.

SDI Overseas Offices collect market intelligence on a continual basis and feed this back to help inform decision making Scotland.

Annex 2

Independent Evaluation of Scottish Development International (2010)

INWARD INVESTMENT SQW Evaluation 2010

The analysis of SDI’s inward investment activities covers the period 2001/02 to 2007/08. SDI data reports 440 assists to 328 companies. Between 46 and 65 companies were assisted each year over that period.

As a result of SDI activities, the following outcomes were found:

· SDI assisted businesses had higher employment (than comparable unassisted plants) of around 10%

· SDI assisted businesses paid higher real wages (around 15%) when compared to non-assisted plants

· 73% of assisted businesses consider SDI to have been fairly or very important in ensuring their continuing presence in Scotland

· 56% reported employment/activit y safeguarded as a result of SDI support

· 53% had increased their investment at an existing site, 44% had increased training,

38% had improved their access to Scottish universities, 25% had increased R&D

activity and 25% had increased their use of Scottish suppliers.

· 30% consider their presence has had a positive effect on suppliers ’ use of technology and productivity levels

· Half of the businesses interviewed had grown since arriving in Scotland while only 7% had contracted

Between 2001 and 2008, inward investment by SDI averaged £6 million a year, with RSA and other public sources providing an annual average investment of £29 million per annum; a total of £35 million a year.

Businesses were asked to estimate the number of jobs that they would attribute to the package* of SDI support that they received (i.e. how many more jobs are there than would have been the case without SDI involvement).

· net additional employment to date is 18,000

· net cost per job to date £14,000

· the ratio of GVA per £ invested is 11:1

· Estimate of annual GVA generated by employment over the period is £300 million

Data from SDI Policy Evaluation by SQW Consulting, May 2010. The results were obtained through :

1) An econometric analysis of inward investment carried out by Professor Richard Harris, Department of Economics, Glasgow University.

2) Interviews with businesses conducted by IBP Strategy and Research as a subcontractor to SQW for this assignment.

* including but by no means exclusively financial support

June 2011