Inward Investment in Wales

Written evidence submitted by CBI Wales

Summary

This submission deals principally with the fifth issue highlighted in the Committee’s Call for evidence: the conditions necessary to attract foreign investors to Wales. We cover the following points:

· The continued importance of FDI to Wales and why this is not an either/or choice between FDI and indigenous company growth

· The key issues considered by businesses when making investment decisions

· How the business perception of the UK, compared to its competitors, is changing for key factors

· Government enablers/blockers to increased business investment and how government in Wales might be able to influence some of these

· Once an attractive business environment is understood, the importance of an effective process for seeking and delivering inward investment projects

Foreign Direct Investment (FDI)

1. We welcome the decision by the Committee to examine the conditions for inward investment into Wales and recent performance. FDI remains of critical importance to the Welsh economy, for the potential for further investment and job creation, but especially given the important installed base of inward investment companies in Wales, and the importance of ensuring their long-term commitment.

2. The debate about FDI in Wales has a tendency to get simplified, wrongly, into a policy choice between attracting inward investment and supporting indigenous Welsh businesses. This is not helpful and the CBI does not recognise this as a choice that needs to be made. We need to accept that as a result of previous FDI success non-Welsh headquartered companies underpin the economies of many of our towns and cities, and encouraging these companies to re-invest will be critical. The CBI’s SME members regard these externally owned businesses as key customers, and as important to the economic health of communities across Wales.

3. But this is not to advocate an economic policy solely based on attracting FDI. It is clear that we also need to encourage the development and success of Welsh headquartered businesses as they will tend to be more strongly anchored into the Welsh economy. The good news is that a focus on an intrinsically attractive business environment will support both categories of companies. This needs to be the starting point for governments, whether at a European, UK, Welsh or local level. Interventionist economic development tools can then be deployed selectively to supplement this supportive business environment, and these may well be different for FDI and indigenous enterprises.

4. The retention of existing inward investors faces the challenge of existing factories and premises becoming slowly obsolete. The golden age of inward investment in Wales was 20-25 years ago and the average lifespan of a production unit might be 30-40 years. A number of our earlier inward investors may therefore be facing significant investment requirements to refurbish/re-provision their facilities in the coming years, and we need to be aware of the potential for this to become a catalyst for closure.

Key issues for businesses in making investment decisions

5. Four key questions dominate business thinking when making investment decisions:

· Is there a market?

· Do we have enough certainty to make an investment and secure a return?

· Is the cost right?

· Do we have the capability?

6. However, discussions on investment are always more granular than this so that, for example, "cost" is considered in its widest sense, including in terms of accessing finance and skills, the amount of tax to pay, grants and other incentives available etc; "certainty" relates not just to certainty about the potential for sales of a new innovation resulting from an investment, but certainty in the wider political and business environment around policy and regulatory changes, long-term planning and whether changes can be predicted. "Capability" is often considered in terms of R&D, skills, supply chain networks and links into the innovation landscape. For many businesses, the UK is recognised as only a small "market" compared to the potential offered by China, India and others – although there is much the UK can do to position itself more effectively with a strategic vision for the future and coherent activity to make progress in realizing the vision with business.

7. Policy changes having a positive impact on these four key factors are likely to be the most influential on future business investment decisions.

Key factors for attracting investment

8. Given the need to increase business investment generally, as one of the few drivers of economic growth available to us in the short to medium term, the CBI has over the past six months engaged in a widespread dialogue with its members across the UK on the factors that will promote investment by them in this country. We will produce a report in early April on the results, but this section highlights some of the key findings.

9. The World Economic Forum ranks the UK highly in its global competitiveness ranking – currently 12th out of 138 countries assessed. Their index covers a range of factors including innovation and business sophistication, efficiency enhancers (eg labour market efficiency, financial markets, higher education and technological readiness) and more basic requirements (eg macroeconomics, infrastructure, and primary education). This relatively high ranking, coupled with time zone and language advantages, helps to explain why UNCTAD has consistently placed the UK in the top 10 for inward flows of FDI over the last decade and in the top 5 since 2004.

10. However, as part of our project we asked CBI members how the attractiveness of the UK for business investment has changed relative to other countries, compared to 10 years ago. Members told us that the UK has improved its relative attractiveness in respect of labour relations and the flexibility of work practices, has remained broadly stable for access to markets and quality of life, but has declined in many other areas:

In increasing order of relative decline

Availability of trained/skilled workforce

Infrastructure

Political and economic stability

Exchange rate risk

Ability to attract internationally mobile key staff

Availability of land, planning restrictions

Availability of grants/loans

Business taxation levels

Nature/level of regulation

Personal taxation levels

11. Of particular concern here is that the UK is seen as declining in relative attractiveness in both business and personal taxation, which have a relatively high importance rating for investment decisions (business taxation 7.5/10, personal taxation 6.5/10).

12. From its work the CBI has been able to assess company views on the issues that matter for investment in the UK, and separate them into those that could deliver a step change in investment, those that currently actively dissuade investment, less important factors that nonetheless could act as drivers, and lastly those that currently work in our favour and which we need to maintain.

Summary of business investment blockers and drivers

Attracting FDI to Wales

13. The above factors are those that we believe will be critical to encouraging FDI to the UK, indeed to encouraging UK headquartered companies to increase investment in this country, rather than settling for lower growth or investing overseas. It follows that these will be the same factors that will inform potential investors on Wales’ attractiveness as an investment location, and if these factors differ in Wales, either due to their being inherently local (eg skills base) or due to their being the result of government policy in devolved fields (eg planning, certain aspects of regulation, infrastructure) then Wales outperforming or underperforming other UK locations will go some way to explaining differing FDI performance levels.

14. And if we relate these policy factors to the questions posed in paragraph 5 of this paper, then it becomes clear how government in Wales can influence decisions.

· Is there a market? FDI into Wales will never take place only to serve a Welsh market, so ease of access to the wider UK, European and other markets will be critical. This highlights transport and communications infrastructure

· Do we have enough certainty to make an investment and secure a return? Is there a track record of consistency in policy making, and how will devolution affect the regulatory and legislative environment in which a company will have to operate its investment? Can local government assistance, eg with planning, reduce the uncertainty involved in implementing an investment? Is the mood music right – do we give out the message that government wants FDI, values its international companies, and wants to work in partnership to mutual benefit?

· Is the cost right? Can the costs of establishing the investment be influenced by government decisions around policy, construction, support, incentives? Can government in Wales lower ongoing operational costs?

· Do we have the capability? Can government influence the supply chain dynamics, the R&D and innovation landscape to make Wales a more attractive option?

15. Having put in place the appropriate business environment, the activity of seeking and winning FDI then needs to be considered. In the past this has been a Welsh strength but recent reports (eg Massey 2009) have questioned whether the WAG approach is as effective as it could be. I hear frequent reports from existing FDI companies in Wales which confirm that they receive excellent assistance from WAG officials. But others active in the promotion of inward investment into Wales (accountancy firms, property agents) comment on a reduced focus in this area. This is a complex picture where disentangling the effects of UK/Welsh policy environment, political emphasis on differing economic development priorities, and operational delivery, is extremely difficult.

Conclusion

16. When framed in this way it seems clear that there is much that the UK government, and governments in Wales (WAG and local authorities) can do to influence future flows of FDI, both from new companies and those already present in Wales. However, the world is much more complex than it was when Wales led the UK in FDI performance. A ready supply of low cost labour, premises and incentives is no longer sufficient.

17. Government needs to consider those factors which form necessary conditions to business investment, both by indigenous companies and inward investors, and put them in place (remove the policy blockers). It can then seek to differentiate itself by addressing the enablers to outperform. And it needs to focus on delivery and outcomes, which in the past has been a Welsh strength.

March 2011