Inward Investment in Wales

Written evidence submitted by David Blackaby, Stephen Drinkwater, Philip Murphy and Catherine Robinson

Introduction

1. Foreign direct investment is thought to bring with it a number of advantages. Firstly, by attracting foreign owned firms, regions increase capacity – in this sense they are additional to domestic firms. Secondly, they are thought to bring with them better products and processes; their production systems are more likely to be at the frontier of technology in order to be able to overcome the additional costs associated with entering foreign markets and mean they are more productive than domestic plants (raising the batting average). Thirdly, there are thought to be positive spillovers to domestic plants that are located near (either geographically or sectorally) to foreign plants. From the labour market perspective, foreign firms are thought to pay higher wages and tend to be located in sectors with high growth rates, export, capital and R&D intensities when compared to domestic firms. All of these factors suggest that FDI is beneficial to an economy, and indeed industrial policy has in the past been directed at attracting foreign investment into regions such as Wales as a means of increasing and safeguarding employment.

2. Reasons why FDI may not contribute as much to local economies as is theoretically suggested include the idea that they are technology seeking foreign firms; firms looking to learn from foreign markets. Alternatively, location may be more based on a branch plant model of investment and be more transient, with firms tending to relocate quickly to the most favourable locations when economic circumstances change. This is particularly likely if government assistance has attracted the inward investment and the location decision was based on the advantage of being able to circumvent trade tariffs. Under these conditions foreign owned firms may not bring with them the new technology or high value added production to an area. This is likely to minimise the growth impact on the region. These factors do not however suggest that from an employment perspective, FDI is anything other than beneficial to regions such as Wales, where unemployment is above the national average and earnings are below the national average.

FDI into Wales

3. Few can now doubt that the key to the revival of Welsh business fortunes in the mid 1980s was the gradual shift that took place in Wales away from the traditional smoke-stack industries of coal and steel towards light engineering industries such as component assembly and electronics. The industrial regeneration that this restructuring caused owed much to the steady flow of new (inward) investment into Wales from a number of foreign companies: mostly from the USA, Germany and Japan. Nurtured and encouraged by Welsh Office and WDA initiatives, foreign inward investment into Wales accounted for a disproportionate share of the UK total – over 14 per cent between 1979 and 1991 despite having less than 5% of the UK population. Wales also accounted for almost 5% of total foreign investment in the EU between 1982 and 1994 despite having only approximately 0.5% of the EU population. This resulted in a significant increase in the number of employees in Wales employed by foreign-owned companies. By 1992 their number in manufacturing stood over 70,000 or just under 30 per cent of all employees in the sector at that time.

4. With most of the jobs in manufacturing in foreign-owned companies based in ‘high growth fast track’ industries like electronics, vehicle components and chemicals, there was a marked improvement in the performance of Welsh industry during the mid-1980s recovery. Jobs in engineering in Wales grew by nearly 15% between 1983 and 1990, compared to a fall in all other regions; the Welsh unemployment rate converged steadily on the UK rate; and real GDP growth in Wales was among the highest of all regions in the UK: averaging 4.5 per cent per annum in 1986-90 compared to a UK average of 3.1 per cent. Manufacturing productivity growth between 1981-92 was the highest of any UK region.

5. However much of the new employment created by direct foreign investment in Wales was concentrated in relatively ‘low skilled’ jobs. Inward investment into Wales was quick to exploit the low labour costs and ready supply of workers. The growth in low-skilled jobs in assembly and the decline in relatively high-paid manual jobs in steel and coal, however, have meant that earnings in Wales have continued to lag behind those in the rest of the UK despite research showing that inward investors usually pay at or above the domestic wage rate.

6. In addition regional growth inequalities in Wales look to have been amplified by the effects produced by the new investment. The north-east of Wales with its good communications links with the North-West of England and those areas bordering the M4 corridor in the south with good road and rail links to the South-East and Midlands have been most successful in attracting this new investment. One possible criticism of the WDA is that it should have done more to try and attract inward investment projects outside of the A55 and M4 corridors.

7. A significant proportion of foreign inward investment into Wales during the 1980s from countries like the USA and Japan, was undertaken in order to avoid the EU common external tariff barrier. Wales not only provided a tariff-free base to foreign-owned companies from which they could exploit the EU market, but also offered the financial incentives of low unit labour costs and capital subsidies which were tied to either the Assisted Area programme or to WDA sponsored initiatives.

8. Future foreign direct inward investment is as in the past, likely to gravitate towards areas which have low labour costs, a skilled and flexible labour force in areas with good communications and industrial support environment. Unfortunately Wales’ position on these counts may not be as strong as it once was and figure 1 shows that Wales is attracting a lower and declining share of UK inward investment. However, in 2009/2010 Wales still attracted 6% of the jobs associated with UK inward investment which placed it fourth behind the East of England, London and the North West, still well above its population share but substantially below the percentage attracted in the "golden age" in the 1980s.

Support Environment

9. Partly in response to the decline in the share of inward investment projects the WDA was abolished in 2006 and its activities incorporated into the administration structures of the Welsh Assembly Government. Its brand identity, which was widely recognised around the world and associated with attracting billions of pounds of FDI and creating thousands of jobs, was not maintained. In the short run the reorganisation and loss of brand identity may have had a detrimental effect on attempts to attract further FDI into Wales.

10. However, since the 1990s there appears to have been a shift of emphasis in Welsh industrial policy away from the inward investment model and towards an emphasis on supporting indigenous growth and infrastructure. The evaluation of the WDA in 2001 examined the extent to which the WDA had concentrated its attention on FDI at the expense of supporting indigenous firms. The strategy document Wales: A Vibrant Economy (2005) also tended to emphases the importance of indigenous firms and perhaps play down the importance of FDI. This theme continued in the latest economic strategy document Economic Renewal: A new Direction (2010). The strategy does emphasize the importance of a high quality infrastructure, including broadening and deepening the skills base and targeting business support. Attracting FDI is considered integral to a more sectoral approach to business support with its focus on six sectors. There is a danger with a "picking winners" strategy, especially if the same high value added sectors are targeted by other countries. Projects such as Amazon (creating up to 1200 new jobs) may no longer be targeted, however in an economy with relatively low employment, high inactivity rates and many low skilled workers, such investments will provide employment (albeit relatively low paid). At the very least, it may provide a foot into the labour market which may prove to be a stepping stone for further career enhancement.

Labour Costs

11. Despite its lowly position in the UK’s earnings league table, Wales has increasingly faced competition for inward investment from EU countries in southern and eastern Europe, where labour costs are amongst the lowest in Europe. EU expansion has also increased the number of these countries with tariff free access to this expanded European market. Countries in Asia have also seen high levels of inward investment boosted by relatively low labour costs, abundant labour forces and rapidly expanding internal and external markets.

Communications

12. Communication networks within, to and from Wales are falling behind other areas. The rail journey time between London and Swansea is still 3 hours and has not fallen over the last 30 years. Infrastructure investment and electrification of the railway lines have seen travel times fall dramatically between London and cities linked by the east and west coast railway lines in England and Scotland and further improvements are planned. Research has shown that the connectivity of cities (particularly to London) is an important driver of economic development within the UK. The recent announcement of the planned electrification of the railway line from London only as far as Cardiff has the potential to further reduce the attractiveness of locations west of Cardiff. Wales, Albania and Moldova appear the only countries in Europe which do not have electrification of part of their railway systems. The recent decline in passenger numbers at Cardiff airport and the observation that it appears to be losing out to other regional, airports is another major concern given the important given to the role of airports in attracting FDI. Robert Reich former US Secretary of Labor emphasised the importance of the quality of infrastructure particularly a world class university and an airport in attracting investment, "brains and quick access to the rest of the world".

Labour Force Skills

13. It is recognised that in a world where the same equipment is available to all, it is the skills and the resourcefulness of those operating that equipment which determines economic success. The need for additional skills and better training is seen as essential to improving the long term performance of Welsh business and the Welsh economy. The Leitch Review (2006) notes that "there is a direct correlation between skills, productivity and employment "and that whilst "skills were once a key lever for prosperity and fairness. Skills are now increasingly the key lever". The economic gains from raising skill levels are potentially very large. The Department for Business Innovation and Skills (2009) report, Skills For Growth: The National Skills Strategy, quotes research that shows that a "one percentage point increase in the proportion of employees trained is associated with an increase in productivity of 0.6 percentage points, which in turn is worth around £6 billion a year to the UK economy" Leitch found that the skills of the UK workforce as a whole were not world class and lag behind many of OECD countries. Leitch found that the UK did not appear in the top quartile out of 30 OECD countries. The position of Wales as shown in Table 1 was particularly weak with regard to ‘low’ skills and ‘higher’ skills.

Table 1: Skill Rank, 30 OECD Countries

UK

Wales

‘low skills’

17

22

‘intermediate skills’

18

18

‘higher skills’

12

17

Source: UKCES 2009

14. The Welsh Assembly Government in its strategy document, Skills That Work for Wales also worryingly noted that "the skills of the Welsh workforce lag behind more prosperous regions of the UK and compare poorly to the world’s leading advanced countries. Economic inactivity – strongly related to a lack of skills – remains stubbornly higher than the UK average".

15. Research presented in the Report reveals that whilst Wales has a relatively high rate of adult participation in lifelong learning, it has a relatively high proportion of young adults classed as not in employment, education or training (NEET). Just over a third of the population obtain, at most, the ‘low’ qualification levels. Whilst a high proportion of 25-34 year olds in Wales have completed upper secondary education compared to 45-54 year olds, the gap in achievement between the two cohorts in Wales is one of the smallest in the OECD. Wales does have a higher proportion of its working age population without qualifications and a lower proportion with degrees when compared to the UK.

16. The recent decline in FDI is probably related to greater competition from low wage countries in Eastern Europe and Asia and a relative real reduction in resources available to attract FDI than the skills base. Rapid growth in Ireland (before the recent economic downturn) was helped by high levels of FDI particularly from North America. This FDI appears to have been attracted partly as a result of relatively low levels of corporation tax, a policy option not available in Wales. However, the trend of inward investment moving away from manufacturing to services and to smaller, more knowledge intensive units may be worrying given recent evidence that skills and qualifications produced by the education system in Wales may be falling behind other parts of the UK.

17. The future capabilities of the workforce will be partially determined by the achievement of the current cohort of students in the education system. It is of concern that recent evidence suggests a gap has opened between students in England and Wales in the percentages of students achieving GCSE grades A*-C. Burgess, Wilson and Worth (2010), when researching this issue, suggest that abolishing school league tables (in 2002) led to a relative fall in GCSE results when compared to schools in England. The fall was relatively large and equivalent to 1.92 GCSE grades per student per year. The key published performance measure, the percentage of students achieving at least five good GCSE passes, falls by 3.4 percentage points per school. The significant differences across schools, "with the effect concentrated on schools in the lower 75% of the distribution of ability and poverty. Schools in the top quartile of the league tables show no effect". They note these falls are sizeable and are equivalent to what might be achieved by reducing class sizes by around 30%.

18. The latest findings of the PISA survey (2009) – the Programme for International Student Assessment of pupils aged 15 – also show Wales falling down the international and domestic league tables since 2006. Out of 67 countries included in the survey, Wales was ranked 38th in reading, 40th in maths and 30th in science and below England, Scotland and Northern Ireland in all three academic areas.

19. Research has suggested that policies designed to bring the skills base up to that of the rest of the UK will help in increasing relative prosperity. However, parity is unlikely to be achieved without an increase in the relative demand for labour within Wales and FDI can help achieve this.

20. Not only is it important to raise the skill base of the workforce, but also the demand for skills by employers. By improving skills and moving up the value chain firms can become more competitive and productive by producing higher quality goods and services. A problem facing the UK and Welsh economy is that it has tried to compete with many developing countries for relatively low value added products. Research has also shown management skills are relatively poor in many organisations when compared to other developed countries and has contributed to reduced productivity and inhibited economic performance. Management practices have been found to account for up to a third of the differences in productivity between firms and between countries. Wales, and the UK generally, has a relatively low proportion of managers with a degree and this has been shown to reduce the probability of introducing new higher quality products and less likely to survive periods of adversity. A long-tail of relatively poorly managed firms and poorly skilled individuals is likely to reduce the long term growth potential of the Welsh economy and further FDI if not offset by other positive factors.

Moving Forward

21. An important issue for education planners and policy makers going forward, is taking account of structural changes which are likely to take place with the Welsh economy. Forecasts suggest we will continue to see a decline in the proportion of the workforce employed in manufacturing and an increase in those working in business and other services.

Table 2: Changes in the industrial composition of employment - Wales

%

1984

1994

2004

2007

2007-2017 (000s)

2007-17 (%) change

Primary sector & utilities

9.8

4.4

2.7

2.7

-6

-16

Manufacturing

19.0

18.9

14.9

12.1

-26

-15.3

Construction

7.6

6.7

6.8

7.9

8

7.2

Distribution transport etc

27.1

27.5

27.5

26.9

29

7.7

Business & other services

14.7

16.4

19.2

21.3

40

13.4

Non-marketed services

21.8

26.1

28.8

28.7

27

6.7

All Sectors

1117

1214

1271

1404

73

5.2

Source: UKCES, 2009

22. Have we planned for this and has our education system responded? For example, does our schooling system provide sufficient business and economic skills to its pupils? The concern that the educational system may not be delivering necessary skills required by the labour market is longstanding. Back as far as 1776 Adam Smith in the Wealth of Nations wrote, "the greater part of what is taught in school and universities...does not seem to be a proper preparation for that of business".

23. The education literature suggests that what we teach in our curriculum matters for future labour market success and the returns to different investment can be substantial. For example, research finds dramatic differences in the economic returns to different degrees subjects taken at university. For those having undertaken a 3 year degree at university, those who followed an economics programme are found at the top or very close to the top in terms of salaries achieved in the labour market. Yet this subject is not taught in many schools or just as an option at 16. As well as leading to higher salaries an economics education can provide important life skills, which enable individuals to better understand and control their domestic finances.

24. For Our Future: The 21st Century Higher Education Strategy and Plan for Wales (2009) does not appear to emphasise the importance of Business and Economics skills rather, "in common with other countries, higher education in Wales faces fundamental challenges, which cannot be ignored, including: the importance for the Welsh economy of developing stronger high-level skills and leading edge research in science, technology, engineering and mathematics (STEM)" Higher Ambitions: The Future of Universities in a Knowledge Economy BIS 2009 also noted the importance of enhanced support for STEM subjects but also, "other skills that underwrite this countries competitive advantage". Clearly business and economic skills and training would be factors improving a countries competitive advantage.

25. An area in which the WAG can currently determine policy and hence have an extremely important influence on welfare and the economy is in the area of education and skills. Given structural change taking place within the economy and the movement away from employment in manufacturing to services and particularly business services (a trend also coming through in recent FDI projects) a greater emphasis should be placed on business and economics teaching in both our schools and universities, leading to benefits to both individuals and the economy, which would also increase the attraction of Wales as a location for FDI. Clearly universities in Wales have a wider role to play given the evidence that higher educational institutions have played in attracting ‘footloose ‘ corporations world wide.

26. The debate about the trade off between inward investment and support to local business is clearly important. Also it is very unlikely that Wales can achieve the share of inward investment it gained in the 1980s when Wales saw its rate of increase in GVA and manufacturing productivity outstrip the rest of the UK, achieved partly by dramatic increases in FDI. The recent decline in relative GVA in Wales is obviously of great importance and of great concern.

27. Measures of economic welfare have long been the subject of controversy but despite its many weaknesses GDP or GVA remain the principal yardstick and starting point in assessing the level of economic activity and welfare in a social. Regional data shows a substantial gap in the level of prosperity in Wales when compared to the rest of the UK and other regions with little signs the gap is closing, indeed the position has significantly declined in the last 20 years. In 2009, GVA per head was only 74% of the UK average and the lowest of any region in the UK. In the early 1990s, during the last recession, it was 83% of the UK average and well above that of Northern Ireland. Wales was the region with the lowest growth rate of GVA over the period 1989-2009. In 2008 Wales had 3 (Isle of Anglesey, Gwent Valleys and Central Valleys) of the 5 NUTS3 areas with the lowest GVA in the UK (133 in total). Reflecting its relatively low levels of prosperity, West Wales and the Valleys qualified for EU Objective 1 funding in 2000.

28. Despite a further round of European funding, GVA in West Wales and the Valleys has continued to fall relative to the UK and stood at 62.6% of the UK average in 2008. Despite the decline in the numbers employed in manufacturing in Wales in recent years and the closure of a number of high profile FDI plants resulting in large job losses, the percentage of manufacturing employment in foreign hands increased between 1998 and 2008 from 36% to 43% suggesting that foreign owned plants are long lived when compared to domestic plants (see Appendix) and increase stability of employment in Wales.

29. Finally given the importance of broadening and deepening the skills base in Wales as emphasised in recent policy documents, including the EU money spent on training through the Objective One and Convergence Programme, it is debatable as to whether we currently have a robust and comprehensive mechanism for analysis trends, matching supply to demand and providing top class labour market intelligence in Wales. Leitch emphasised the fact that Labour Market Information (LMI) is vital in ensuring that economically relevant skills are provided. A report by the Expert Group on New Skills for New Jobs prepared for the European Commission (2010) notes "that we need to better anticipate future skills needs, through improved labour market information (and) developing early-warning systems". The Report states "wider availability of appropriate LMI would also benefit employers (in their recruitment and human resource development function); education and training providers (in their strategic and business planning): as well as Government and public agencies (in their policy development and priority setting"). The Report notes the importance of having top class labour market intelligence, currently in Wales we are some way off from achieving this..

March 2011

Appendix

FDI and skills utilisation in Wales: Evidence WERS2004

A1. In this appendix we consider in greater detail the advantages and disadvantages to FDI in Wales. We focus specifically on the nature of foreign firms in Wales using the WERS2004 data, linking enterprises to employees. In this way we are able to explore in more detail the sort of role that labour plays in foreign firms, and whether indeed foreign firms pay more or indeed invest more in training needs of their workers…gearing these employees up for a more fruitful employment experience in the longer run.

Skills utilisation amongst foreign owned firms in the UK Regions

A2. Ideally, we would like to test the extent to which foreign owned firms do employ more skilled labour or pay more for the labour they employ, and to draw out any differences between inward investment experiences in Wales to the UK as a whole. For this we require linked employer-employee data. The UK has data of this sort are only available from the Workplace Employment Relations Survey 2004 (WERS2004) [1] . WERS2004 is the fifth survey of its kind, with previous vintages of comparable data running from 1980. Its principal objective is to provide detailed information to central government (and other organisations, such as ACAS) on the nature of employment relations in the UK in establishments with 10 or more employees. It is based on the government’s Inter Departmental Business Register (IDBR) sampling frame which contains the full list of enterprises operating in the UK, compiled from VAT and PAYE registers. The sample, whilst small (given the very detailed surveys asked of employers, employees and employee groups), can be regarded as broadly representative of the national population and may be weighted accordingly.

A3. In this section, we present some general evidence on workers in foreign firms in Wales compared with the rest of the UK. Sample sizes are relatively small (around 1,100 workers in Wales in total, domestic and foreign employers combined and around 22,000 workers in the rest of the UK), so we wish to provide some background in order for the reader to judge how representative our selective sample is. We then compare the skills of workers in domestic and foreign owned enterprises and a variety of other characteristics which might help us to understand better the nature of employment and pay in foreign owned firms in Wales.

A4. We match data on the enterprise with data on the individual employees to identify firms that are foreign owned. We are then able to look at the characteristics of the firm (which sector, what size band) as well as characteristics of the individuals (what qualifications). Table A1 provides an overview of the data in WERS2004 for Wales and the rest of the UK separately. Assuming that ‘not applicable’ is most likely to be domestically owned enterprises, we see that in total, around 84 per cent of workers are wholly or predominantly owned domestically in the rest of the UK, slightly higher than Wales. The real difference between Wales and the rest of the UK stems from a higher proportion of foreign owned firms in Wales, and less jointly owned enterprises, compared with the rest of the UK. Thus, we see that predominantly foreign owned firms account for around 17 per cent of the workers in WERS in Wales, compared to 13 per cent in the rest of the UK.

Table A1: Percentage of workers in foreign owned enterprises, WERS2004

Rest of the UK

Wales

Not applicable

30.9

44.8

UK owned/controlled

47.8

34.2

Predominantly UK owned (51% or more)

5.2

3.5

UK and foreign owned

3.2

0.2

Predominantly foreign owned (51% or more)

2.8

3.5

Foreign owned/controlled

10.1

13.7

100.00

100.00

Notes: refusals and don’t know responses excluded. Data unweighted. Shares that are based on less than 5 observations are italicised.

A5. Table A2 provides a broad breakdown of sectors in which employees of foreign enterprises are located. It seems to be relatively concentrated. There is a clear dominance of manufacturing, much of which is relatively low technology (food and drink; pulp and paper). Services account for less than 10 per cent of workers. Comparing to the rest of the UK is difficult because of the differences in sample sizes, however, sectors 50-92 (services, including health and education) account for around 53 per cent of the total number of workers in foreign owned enterprises, demonstrating a much stronger role for services in the UK.

Table A2: Industry distribution of workers employed by foreign enterprises in Wales, WERS2004

2-digit SIC classification

Description

% workers

15

Food and drink

28.65

21

Pulp and paper production

8.65

24

Chemicals and chemical products

10.27

29

Machinery NEC

18.92

31

Manufacture of electrical machinery and apparatus

1.62

32

Manufacture of radio, television and communication equipment and apparatus

17.30

34

Manufacture of motor vehicles, trailers and semi trailers

1.08

40

Electricity

5.41

52

Retail trade

0.54

63

Supporting and auxiliary transport activities

4.86

71

Renting of machinery and equipment

2.70

Notes: Shares that are based on less than 5 observations are italicised.

A6. As stated above, foreign owned firms are generally regarded to be of a much larger scale than the average domestic plant (in part, the ability to benefit from scale economies accounts for their ability to enter foreign markets). Employment size of the enterprises is banded in WERS2004. Table A3 reveals the relative size of foreign owned compared to domestically owned enterprises in Wales and the rest of the UK. From table 3 it appears that there is a critical mass to being foreign owned since they do not have a large proportion of enterprises that are SMEs, but the very largest firms appear not to be foreign owned either. In the case of Wales, there is a greater proportion of small large companies (250 employees+), and those between the size of 2,000 and 9,999 – over 28 per cent of foreign owned firms fall into this category in Wales, compared with 37 per cent in the rest of the UK. Thus there is a suggestion that foreign owned enterprises in Wales are smaller than their counterparts in the rest of the UK.

Table A3: Percentage of workers by enterprise size, Wales and the Rest of the UK, domestic and foreign owned, WERS2004

Rest of the UK

Wales

Domestic

Foreign

Domestic

Foreign

don't know

5.3

6.5

11.8

13.0

not applicable

22.0

14.5

11.0

9.2

less than 50

2.4

0.9

2.4

-

50-99

1.4

0.0

4.8

6.5

100-149

0.8

0.5

2.1

-

150-249

2.2

1.6

1.4

7.0

250-499

4.1

7.0

1.5

14.6

500-999

6.4

3.6

4.7

7.6

1,000-1,999

6.5

8.6

4.5

9.2

2,000-4,999

10.4

20.3

15.5

15.7

5,000-9,999

10.1

17.0

17.7

12.4

10,000-49,999

14.8

14.8

12.2

4.9

50,000-99,999

5.2

1.0

6.5

-

100,000 or more

8.3

3.8

3.8

-

Note: refusal responses excluded. Shares that are based on less than 5 observations are italicised.

Pay of workers

A7. In this subsection, we consider the relative pay of workers in foreign owned enterprises compared with workers in domestic enterprises, for Wales and the rest of the UK. Research has shown that foreign owned firms pay at or above the average wage rate in an area. This has been linked to the skill levels of the workers they employ, the fact that they have a more capital intensive production set up compared to their domestic counterparts, and also linked to the fact that because they have less knowledge about local labour markets and education systems, a wage premium can help filter applications. In table A4 we consider the extent to which there is evidence to support this position in Wales and the subsequent section looks at worker characteristics that might help to explain our findings.

A8. Table A4 shows banded wage data for employees in WERS2004, split between Wales and the rest of the UK and foreign and domestic employers within these regions. Figure A1 presents this evidence graphically. It appears as though there is a stronger tendency for domestic enterprises to pay lower wages, the turning point is at around £311-£360 per week, at which point, as a share of workers, foreign owned begins to exceed domestic shares. This is true for the UK as a whole, but is marked for Wales, particularly at around £541-£680 per week rates, where foreign owned workers are most clearly concentrated. Thus, it appears as though foreign enterprises do pay their workers more than domestic counterparts, although we are mindful of small sample sizes, in the case of Wales based firms, particularly.

Table A4: Banded Pay before taxation by type of enterprise and location, WERS2004

Rest of the UK

Wales

Domestic

Foreign

Domestic

Foreign

not answered

1.9

1.3

1.6

2.2

£50 or less per week £2600 or less per

3.1

1.0

4.3

-

£51-£80 per week £2601-£4160 per year

3.4

1.9

4.5

0.6

£81-£110 per week £4161-£5720 per year

4.1

2.6

3.7

1.1

£111-£140 per week £5721-£7280 per year

4.9

2.7

4.3

1.7

£141-£180 per week £7281-£9360 per year

6.0

3.6

5.2

5.0

£181-£220 per week £9361-£11440 per year

8.0

5.6

7.7

7.2

£221-£260 per week £11441-£13520 per year

9.6

7.4

9.2

7.2

£261-£310 per week £13521-£16120 per year

11.0

11.6

12.2

11.1

£311-£360 per week £16121-£18720 per year

9.1

11.2

7.7

14.4

£361-£430 per week £18721-£22360 per year

10.8

13.2

12.0

8.3

£431-£540 per week £22361-£28080 per year

10.8

12.8

12.5

9.4

£541-£680 per week £28081-£35360 per year

8.6

9.8

9.3

22.8

£681-£870 per week £35361-£45240 per year

4.7

6.0

3.7

6.7

£871 or more a week £45241 or more per year

4.0

9.2

2.1

2.2

Note: Shares that are based on less than 5 observations are italicised.

Figure A1: Worker earnings by location (Wales and rest of the UK) and nationality of ownership, 2004

Quality of workers

A9. Having looked at the size, shape and location of the enterprises in which workers in foreign owned firms are based, and the pay that workers on average receive, we now look at the characteristics of the workers compared to domestic enterprises. We focus on qualifications, training, job tenure and full time/part-time prevalence. Given that there are a higher proportion of workers in foreign owned enterprises that are paid higher weekly wages, we would expect this to be reflected in the quality of the labour force, either through qualifications of training. Table A5 contains information on formal educational qualifications, and we note that surprisingly, the proportion of workers in foreign owned Welsh based firms with no qualifications is substantially higher than either domestic firms or foreign firms located elsewhere in the UK. Whilst this might in part be driven by our relatively small sample size, taking low level qualifications together (no quals and below D in GCSEs), these make up around 40 per cent of workers in foreign owned enterprises, compared with only 30 per cent in domestic welsh based enterprises and around 25 per cent in enterprises in the Rest of the UK (slightly higher amongst domestic than foreign owned plants).

Table A5: Qualifications of workers by type of enterprise and location, WERS2004

Rest of the UK

Wales

Domestic

Foreign

Domestic

Foreign

No qualifications

16.2

15.1

12.6

26.7

below D in GCSE

9.0

9.5

8.9

13.6

GCSE grade C and above

25.9

26.9

29.0

22.7

A levels

14.9

14.3

12.6

10.2

First degree

20.2

22.9

21.8

19.9

higher degree

7.2

5.5

7.0

1.1

Other qualifications

6.6

5.8

8.1

5.7

Note: Shares that are based on less than 5 observations are italicised.

A10. Table A5 also shows at the other end of the educational spectrum, in the rest of the UK there is very little difference between the employment of graduates between domestic and foreign owned firms, particularly if we take first and higher degrees together. In the case of Wales, however, there is almost 8 percentage points difference. This is evidence for formal education suggests that workers in foreign firms are not more traditionally educated, so perhaps it is more related to the training they receive in post. We therefore consider training received in the past 12 months (2003-2004) provided by the employer. These shares are presented in table 6.

Table A6: Length of training received in the last year (excluding health and safety)

Rest of the UK

Wales

Domestic

Foreign

Domestic

Foreign

none

33.8

37.6

26.9

42.8

less than 1 day

9.2

10.4

6.4

7.8

1 to less than 2 days

15.3

14.5

13.1

10.6

2 to less than 5 days

22.2

18.7

27.2

19.4

5 to less than 10 days

10.2

10.1

11.9

10.6

10 days or more

8.5

8.1

13.8

8.9

Note: Excludes those who did not answer. Shares that are based on less than 5 observations are italicised.

A11. In table A6, the proportion of training undertaken by workers in foreign enterprises is, if anything, lower than that received in domestic enterprises. In Wales we see that nearly half employees have one day or less of training in the previous 12 months. Interestingly, training levels in domestic enterprises in Wales seem noticeably higher than in the rest of the UK. It appears therefore that workers in foreign firms do not receive any more training than workers in domestically owned plants.

A12. Table A7 presents shares of workers by the age group to which they belong. We note that workers in foreign owned enterprises are concentrated in the 30 to 59 age bracket for Wales; although there is some greater spread in the rest of the UK this finding holds.

Table A7

AGE

Rest of the UK

Wales

Domestic

Foreign

Domestic

Foreign

16-17

1.1

0.9

0.7

0.6

18-19

2.2

2.3

1.8

-

20-21

2.7

2.5

2.5

1.1

22-29

15.2

17.5

13.8

10.6

30-39

24.4

28.1

25.9

27.8

40-49

26.8

24.8

27.8

34.4

50-59

22.4

19.5

20.9

21.7

60-64

3.9

3.3

4.0

3.9

65 or more

0.8

0.6

2.0

-

Note: Excludes those who did not answer. Shares that are based on less than 5 observations are italicised.

A13. Table A8 provides information by gender and by full time and part time work. Full time work is classed as anything greater than 30 hours a week. Table 8 shows us that workers in foreign owned plants are predominantly male, compared to domestic plants and this is particularly marked in Wales. This probably relates to the type of sectors they have traditionally located in. If we look at the full time-part time split, we note also that compared to domestic owned enterprises, foreign owned plants are significantly more likely to employ workers on a full time basis. Thus we appear to have a very traditional workforce.

Table A8: Gender and full time/part time employment, WERS2004

Rest of the UK

Wales

Domestic

Foreign

Domestic

Foreign

Male

43.90

62.92

43.68

73.89

Female

56.10

37.08

56.32

26.11

Full time

77.47

89.07

77.16

93.41

Part time

22.53

10.93

22.84

6.59

A14. Finally, we present in table A9 the length of service within the firm. It can be seen that over two thirds of those working in foreign owned firms in Wales have been employed for more than 5 years with that firm. This compares with something approaching 50 per cent when looking at domestic firms and foreign owned firms in the rest of the UK. Thus it appears that workers who join foreign owned firms are likely to remain there.

Table A9: Duration in workplace, WERS2004

Rest of the UK

Wales

Domestic

Foreign

Domestic

Foreign

less than a year

16.1

14.6

12.0

10.6

1 to less than 2 years

13.3

10.6

9.9

4.4

2 to less than 5 years

26.9

26.2

25.3

16.7

5 to less than 10 years

18.1

19.0

24.0

23.3

10 years or more

25.1

29.1

28.5

45.0

A15. To our knowledge, there has been very little evidence presented on the skill and training levels of workers in foreign owned enterprises compared with domestically owned workplaces. Using WERS2004 we are able to look at this in some detail. That said, we acknowledge that the data are comparatively old now and that sample sizes are small. The next wave of WERS should be available towards the end of next year and it would be interesting not only to compare findings across the two waves, but also to consider more robust analysis using pooled data. In addition, this will provide us with a better understanding of how inward investment has been affected by the recent economic downturn.

A16. As things stand, we do not find evidence to suggest that foreign owned firms employ more skilled workers, nor is it evident that they are offered more training. One clear thing to note is the duration in the job is much longer in foreign owned firms, suggesting that the wave of inward investment encouraged as part of the regional selective assistance programme has been long lived. Workers that are employed by foreign enterprises are no more qualified but are secure in their employment.

References

Barrell, R. and N. Pain (1997) ‘Foreign Direct Investment, Technological Change, and Economic Growth within Europe’, Economic Journal, 107, 1770-1786.

Burgess, S., Wilson, D. and Worth, J. (2010) ‘A natural experiment in school accountability: the impact of school performance information on pupil progress and sorting’, The Centre for Market and Public Organisation, Working Paper No. 10/246.

Driffield, N. (1999) ‘Indirect employment effects of foreign direct investment into the UK’. Bulletin of Economic Research, 51 (3), 207-221.

Dunning, J.H. (1998) American Investment in British Manufacturing Industry. Revised and Updated Edition, Routledge, London.

Evans, P. Holz, R. & Roberts, A. ‘Empirical Investigation of Foreign Direct Investment in Wales’, Welsh Assembly Government, Economic Research Unit.

Harris, R. and C. Robinson, (2004) ‘Industrial Policy in Great Britain and its effect on Total Factor Productivity in Manufacturing Plants, 1990-1998’, Scottish Journal of Political Economy, 51 (4), 528-543.

Harris, R.I.D. and C. Robinson, (2004) ‘Productivity impacts and spillovers from foreign ownership in the United Kingdom’, National Institute Economic Review, 187, 58-75.

Harris, R.I.D. and C. Robinson, (2002) 'The Impact of Foreign Acquisitions on Total Factor Productivity: Plant Level Estimates from UK Manufacturing 1987-1992' Review of Economics and Statistics, 84 (3), 562-568.

Munday, M. Roberts, A. and Roche, N. ‘A review of the economic evidence on the determinants and effects of foreign direct investment’ Welsh Economy Research Unit.


[1] Other data may be constructed through matching across IDBR drawn datasets, such as ASHE and the ABS, however, these data only provide a 1 per cent sample of workers and these data contain less skills information.