Inward investment promotion – a tool for business growth?

Over the last decade, the UK has consistently been in the top two or three countries in the World in terms of attracting inward investment. Most regional development agencies and large municipalities have specialist staff who are responsible for attracting investment from other parts of the country and from abroad. Their aim is to persuade business people from outside to set up factories or offices in their regions and so create employment and help restructure the local economy to enable it to compete in the everchanging global marketplace. They expect the inward investing company to bring not just finance to pay for buildings, machinery and training but also, and often even more important, new skills and knowledge – new technologies and work practices and the contacts and experience needed to access regional and international markets.

In the 1980s and 1990s, in the face of strong competition from other parts of the EU, local authorities in Southern, Central and North Eastern England succeeded in persuading Honda, Toyota and Nissan to set up large car assembly plants in their areas. The result was not just the creation of some thousands of jobs in the plants themselves. The introduction of Japanese quality control procedures and just-in-time logistics forced British motor components firms, which previously had a poor reputation, to drastically improve their management practices and invest in new skills and equipment. Without the arrival of the Japanese, many of these firms would simply have disappeared.

Risks are of course involved and a hard headed approach is needed. An outside investor may, for example, buy up a local firm and then strip out the most valuable elements, such as intellectual property, senior management functions or high value-added manufacturing and export them back to their headquarters. An incoming firm may destroy potentially viable local companies before they have had an opportunity to adapt to the new challenge. Where subsidies or tax holidays are on offer, foreign firms may set up short term subsidiaries, which would not be viable without public support and will close when the benefits run out or other countries offer bigger incentives.

The best protection against such abuses is for the host authority to bargain from a position of strength, on the basis of a well thought out and realistic local development strategy and access to professional advice on a par with that available to the incoming company. Where there is strong local leadership and inward investment promotion is complemented by other economic development measures, inward investment has not resulted in de-skilling. Indeed, high levels of inward investment have generally gone with diversification, job creation and more rapid rates of economic growth.

A great deal of research has been carried out into what factors are important in attracting inward investment. Most crucial of all is for the host authority to have a good understanding of the strengths and weaknesses or its own area and to be realistic in terms of the kind of businesses that it wants to attract. Semiconductor manufacture, medical equipment and computer software production need lots of young high quality graduates. If your area is dominated by heavy manufacturing and only has a small technical institute there is no point in courting this kind of firm. Likewise, companies which produce bulky or short-life products will not consider remote locations, whatever incentives are on offer.

Time and time again, good transport links, good schools, a skilled workforce, transparent regulatory procedures and a welcoming local authority have proved to be more important than cheap land or buildings or financial subsidies.

Where real potential exists and opportunities are pursued energetically, the benefits can be dramatic. Ireland’s rapid economic growth from about 2000, was largely fuelled by an influx of American investment into the computer and software industries. Telford in the English Midlands shows what is possible at the local level. It was here, in 1709, that Abraham Darby first produced iron using coke, making the town the birthplace of the industrial revolution. By 1800 it was a powerhouse of manufacturing, exporting mass produced goods around the world. But competition grew and decline set in and by 1960 Telford was a wrecked community, with an environment polluted and scarred, high unemployment and social deprivation.

Then the Government stepped in and created an agency with the task of persuading outside firms to invest in the town. They knew that with their workforce, glamorous high tech industries were beyond their reach, so they concentrated on persuading well-run German, US and Japanese engineering firms to set up assembly operations in the town. Offering cheap labour and excellent transport links, the team did everything possible to make life easier for the incoming companies. They cleared sites, built factories, sent delegations abroad, set up business services and even created a Japanese Saturday school and a shop selling Japanese food, books and videos. In 1984, Maxell announced that it was setting up a factory in the town – and then the floodgates opened. Within a few years, 22 Japanese manufacturers had set up subsidiaries – the largest concentration of Japanese manufacturing plants in Europe. Telford was back in business.

What can we learn from these examples of successful inward investment promotion? At first sight, Russia’s Closed Nuclear Cities and the NIS nuclear institutes, with their strict security regimes and often remote locations, seem far from ideal for inward investment – but that is exactly why active policies are needed! The first lesson must be the importance of being realistic. Attempting to attract foreign companies to Closed Cities which foreigners can only visit after lengthy vetting procedures and where joint ventures with foreign partners are almost impossible is a waste of time and money. Better by far to concentrate on persuading experienced Russian investors of the attractions on offer, such as skilled labour, a secure environment, and ready access to markets otherwise out of reach for Moscow or St Petersburgbased plants. Perhaps the Closed Cities should develop a common brand and pool resources to sell their attractions to businesses from other parts of Russia?

For the nuclear institutes in the other NIS Republics, access is not such a problem and fewer potential high tech partners are available nationally, so concentrating on foreign partners makes better sense. CNCP’s technology commercialisation seminars on energy saving and radioisotopes have shown that the potential exists, but we need now to explore these issues much more deeply. One thing is clear: promoting inward investment is not an alternative to succouring home grown commercialisation initiatives. Understanding and addressing the needs of inward investors is also the best way of creating an environment favourable for locally rooted business development. In that sense inward investment promotion is a real win-win policy.

Patrick Gray
CNCP Programme Leader

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