Your SlideShare is downloading. ×
Fdi in tradable_services___8211__final_report
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Fdi in tradable_services___8211__final_report

179
views

Published on

Published in: Travel, Education

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
179
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
8
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. FDI Research Project – Final Report Department of Enterprise, Trade & Investment February 2008
  • 2. For and on behalf of Experian Approved by: Clare Reid Position: Director of Economics, Strategy and Research Date: 6th February 2008
  • 3. FDI Research Project – Final Report 6th February 2008 Contents Introduction................................................................................................................................................ 1 Background .............................................................................................................................................. 1 Objectives................................................................................................................................................. 1 Format ...................................................................................................................................................... 2 1 Context................................................................................................................................................ 3 1.1 Defining FDI ................................................................................................................................ 3 1.2 Type of FDI Project...................................................................................................................... 3 1.2.1 Greenfield ............................................................................................................................... 3 1.2.2 Mergers & Acquisitions ........................................................................................................... 4 1.2.3 Invest Northern Ireland’s Policy on FDI................................................................................... 4 1.3 Defining Tradable Services ......................................................................................................... 4 2 Literature review ................................................................................................................................ 6 2.1 Benefits of FDI............................................................................................................................. 6 2.2 global and uk trends in FDI.......................................................................................................... 7 2.2.1 Global geographic pattern....................................................................................................... 7 2.2.2 Likely future trends.................................................................................................................. 8 2.2.3 Global sectoral pattern ............................................................................................................ 9 2.2.4 UK trends .............................................................................................................................. 10 2.3 Exportable service trends .......................................................................................................... 12 2.4 Labour market implications of an FDI strategy .......................................................................... 15 2.5 Benefits to Tier One companies ................................................................................................ 17 2.6 Impact of Corporation Tax ......................................................................................................... 17 2.7 Reasons given for not investing ................................................................................................ 19 3 Investment inflows into Northern Ireland....................................................................................... 20 3.1 Northern Ireland in a UK context ............................................................................................... 20 3.2 total inflows 2002-2006.............................................................................................................. 21 3.3 Key investors............................................................................................................................. 21 3.4 Performance by Northern Ireland sub-region ............................................................................ 23 3.5 Performance by industry............................................................................................................ 23 3.6 Nation of ownership................................................................................................................... 24 3.7 Quality of job ............................................................................................................................. 25 4 Comparator Research...................................................................................................................... 26 4.1 Republic of Ireland..................................................................................................................... 27 4.1.1 Role of government............................................................................................................... 28 4.1.2 Performance.......................................................................................................................... 29 4.1.3 Critical success factors - benefits.......................................................................................... 31 4.1.4 Applicable lessons ................................................................................................................ 35 4.2 Sweden ..................................................................................................................................... 37 4.2.1 Role of government............................................................................................................... 37 4.2.2 Performance.......................................................................................................................... 37 4.2.3 Critical success factors - benefits.......................................................................................... 40 4.2.4 Threats.................................................................................................................................. 40 4.2.5 Applicable lessons ................................................................................................................ 41 4.3 Poland ....................................................................................................................................... 41 4.3.1 Role of Government .............................................................................................................. 41 4.3.2 Performance.......................................................................................................................... 42 4.3.3 Critical success factors - benefits.......................................................................................... 44 4.3.4 Threats.................................................................................................................................. 45 4.3.5 Applicable Lessons ............................................................................................................... 46
  • 4. 5 Workshops and business consultations........................................................................................ 47 5.1 Workshop .................................................................................................................................. 47 5.1.1 SWOT analysis ..................................................................................................................... 47 5.1.2 Developing opportunities and mitigating threats.................................................................... 49 6 Survey Findings ............................................................................................................................... 50 6.1.1 FDI Survey ............................................................................................................................ 50 6.1.2 Tier 1 Indigenous Suppliers Survey ...................................................................................... 51 6.2 FDI Survey Results.................................................................................................................... 51 6.2.1 Supply chain linkage ............................................................................................................. 51 6.2.2 International competitiveness................................................................................................ 53 6.2.3 New products and services ................................................................................................... 54 6.2.4 Increased skills...................................................................................................................... 55 6.2.5 Networking ............................................................................................................................ 56 6.2.6 Knowledge and Technology transfer..................................................................................... 57 6.2.7 Perceptions of Northern Ireland ............................................................................................ 58 6.2.8 Impact of FDI......................................................................................................................... 58 6.2.9 Summary............................................................................................................................... 58 6.3 Tier one Survey ......................................................................................................................... 58 7 Quantitative Analysis....................................................................................................................... 60 7.1 Methodological approach .......................................................................................................... 60 7.1.1 Input data .............................................................................................................................. 60 7.1.2 GVA impact calculation ......................................................................................................... 60 7.1.3 Employment impact calculation............................................................................................. 61 7.1.4 Fiscal impact calculation ....................................................................................................... 61 7.2 GVA Impact ............................................................................................................................... 61 7.2.1 Benefits ................................................................................................................................. 61 7.2.2 Net Overall Impact ................................................................................................................ 62 7.3 Employment impact ................................................................................................................... 62 7.3.1 Benefits ................................................................................................................................. 62 7.3.2 Net Overall Impact ................................................................................................................ 62 7.4 Fiscal benefits ........................................................................................................................... 63 8 Future trends in inward investment................................................................................................ 64 8.1 Investment outlook: overview .................................................................................................... 64 8.1.1 UK prospects......................................................................................................................... 64 8.1.2 Prospects for Northern Ireland .............................................................................................. 65 8.1.3 FDI opportunities for Northern Ireland in selected sectors .................................................... 66 9 Key Findings & Recommendations ................................................................................................ 70 9.1 Range of Benefits Tradable Services FDI Can Generate .......................................................... 70 9.1.1 Output benefits...................................................................................................................... 70 9.1.2 Employment benefits............................................................................................................. 70 9.2 Benefits at the Sub Sectoral Level ............................................................................................ 70 9.3 Fiscal Benefits of Service Sector FDI ........................................................................................ 71 9.4 Locational Factors ..................................................................................................................... 72 9.5 Forecast Trends ........................................................................................................................ 72 9.6 Market Failures.......................................................................................................................... 73 9.6.1 Identifying competitors .......................................................................................................... 74 9.7 International Examples .............................................................................................................. 74 9.8 Recommendations..................................................................................................................... 77 9.8.1 Focus .................................................................................................................................... 77 9.8.2 Corporation Tax .................................................................................................................... 77 9.8.3 Skills in high-tech industries.................................................................................................. 78 9.8.4 Measuring the impact of the Tradable Services sector. ........................................................ 78 Appendix A: Crowding out effects of FDI investment on Northern Ireland businesses Appendix B: Model to generate economic impact calculation Appendix C: Methodological note on Experian’s regional forecast
  • 5. FDI Research – Final Report Introduction BACKGROUND In June 2006, the Department for Enterprise, Trade and Investment in Northern Ireland (DETI) appointed Experian’s Business Strategies Division to provide a robust evidence base of trends in and the value of Foreign Direct Investment (FDI) in Northern Ireland, to improve its understanding of the benefits that FDI projects can bring to the local economy and by examining likely trends in FDI, identify the key sectors and markets which Invest NI should target. As well as DETI, other organisations included in the Client Steering Group for the research are Invest NI and DEL. The definition that this report will use for the tradable service sector will be the same as that used in DETI’s Exporting Northern Ireland Services study (see section 1.3). In order to develop a broader view of service sector exports in the UK in Northern Ireland, the report will use the term ‘exportable services’ to describe those services that export at least five per cent of their produce. OBJECTIVES The objectives of this study were to: • Explore the range of benefits over and above direct employment impacts that FDI in the tradable service sector can generate; • Explore these benefits at a sub-sectoral level, including wider supply chain benefits accruing to indigenous companies and knock-on effects in terms of the skills base; • Estimate the fiscal benefits of service sector FDI; • Identify any regional/ locational factors causing sub-sectoral variation; • Forecast key trends in service sector FDI; • Highlight areas where a competitive advantage can be developed and market failures where government can respond; • Explore international examples of the development of successful tradable services subsectors; • Identify the policy implications of the evidence gathered. • • Propose a series of actions that need to be taken to improve Northern Ireland’s competitive advantage and also ensure that benefits from inward locating projects are maximised. This will provide the rationale for all agencies and organisations with a stake in FDI; and Develop a series of recommendations that set out exactly what type of investment you should or could attract and the most effective means of doing this. 1
  • 6. FDI Research – Final Report FORMAT The remainder of this document is structured as follows: • • • Section one sets out the context for the later analysis, by defining what is meant by the terms ‘FDI’, ‘type of investment’ and ‘tradable services’; Section two sets out the findings of the literature review, and includes an analysis of trends in FDI and total investment in the UK and global economies, and an analysis of the implications that FDI growth can have on economies and labour markets. Section three discusses trends in total FDI, and tradable services FDI in Northern Ireland by year, by sector, by geographic area of investment and by nation of ownership. • Section four discusses the comparator research on Ireland, Sweden and Poland; • Section five summarises the views of stakeholders in the Northern Ireland economy during the consultation and workshop stages; • Section six summarises the main results of the Survey elements of the research; • Section seven provides an analysis of the impact of FDI in Northern Ireland; • Section eight examines future trends in investment inflows into Northern Ireland against a favourable global context; and • Section nine provides a summary of the key findings from the research and recommendations for the policy interventions that should follow from this work. 2
  • 7. FDI Research – Final Report 1 Context International trade and investment flows provide a strong stimulus to global economic growth and to expansion in individual countries. Regions within national economies share the benefits, particularly if they have a strong exporting capacity or are direct recipients of FDI. This section provides a context for the rest of the report, defining ‘FDI’, type of FDI project, and ‘tradable services’ for the purposes of the research. 1.1 DEFINING FDI According to international institutions such as the International Monetary Fund (IMF) and the United Nations, FDI is defined as an investment made to acquire a lasting interest in an enterprise operating outside of the economy of the investor1. Investment may be in incorporated or unincorporated enterprises, branches or subsidiaries. The investor’s purpose is to gain an effective voice in the management of the enterprise. Some degree of equity ownership is almost always associated with acquiring an ‘effective voice’ and international institutions’ guidelines suggest a threshold of 10 per cent. FDI is also more likely to result in the importation of new technology and management skills, and is less likely to displace existing operations. The above definition involves cross-border flows. A broader concept of direct investment can be considered, to include inflows from other parts of the same nation-state. Such flows are much harder to identify, but if the data are available, they provide information that is of great interest in analysing the economic impact of direct investment. Information on total direct investment (‘cross border’ plus ‘investment from elsewhere in the UK’) is indeed available for Northern Ireland at the broad tradable services level, but not for the narrower definition used in this report. 1.2 TYPE OF FDI PROJECT Although all FDI should generate economic benefits to some degree, the extent of the benefits will, in reality, vary substantially depending upon whether the FDI is a greenfield investment or a merger/acquisition. 1.2.1 Greenfield A greenfield investment establishing a new operation or expanding existing facilities is likely to be of greatest benefit, providing new capacity, additional jobs, possibly new technology and management techniques, training for staff and potential linkages to the global marketplace. The increase in employment will provide additional spill over benefits to the local economy via increased effective demand. There may be an additional boost where the new operation stimulates expansion in up/down stream businesses in the area. But this form of FDI carries potential downsides. Existing industry in the area might be ‘crowded out’ as the incoming producer draws on local resources of labour and intermediate goods. In addition there is a risk that profits do not wholly feed back into the local economy but are repatriated to the investor’s home economy. 1 Balance of Payments Manual Fifth Edition: (BPM5) Washington DC IMF 1993 3
  • 8. FDI Research – Final Report 1.2.2 Mergers & Acquisitions Mergers and/or acquisitions (M & As) account for the bulk of FDI but their initial impact is less powerful than a greenfield investment since they normally involve merely a change of ownership of existing assets. New technology and management skills may be introduced and linkages to the global market may be enhanced. But if the merger/acquisition leads to an expansion of capacity, the outcome would be similar to that following a greenfield investment. Because the benefits of greenfield investments are significantly greater than those associated with mergers and acquisitions, this research is concerned with the former type of investment. 1.2.3 Invest Northern Ireland’s Policy on FDI Invest Northern Ireland’s policy towards FDI states that funding will only be provided to support investments in export-oriented businesses. Invest NI therefore does not assist HQ operations, sales and marketing operations and logistic and distribution sectors. Nor does Invest NI assist mergers and acquisitions unless they lead to subsequent development projects. 1.3 DEFINING TRADABLE SERVICES The term ‘tradable services’ generally refers to any services that are capable of being imported and exported, i.e. services that are not necessarily purchased at the point of production, such as software design and consultancy. However, in some instances, the term can be broadened to include services such as transportation and hospitality that are purchased locally, but which generate foreign exchange revenues. Although, for analysis purposes, it is necessary to form a view as to which industries should, and should not be classified as ‘tradable services’, it is important to recognise that the Standard Industrial Classification (SIC) makes no distinction between tradable and nontradable activities. This means that, in many cases, SIC codes will include a mixture of tradable and non-tradable activities2. DETI’s Exporting Northern Ireland Services Study3 (ENIS) recommended that a definition be based upon those sectors that have the highest potential to trade services internationally. The sectors chosen by this study were: • • • • • • • • Computer and Related Activities (SIC 72); Research and Development (SIC 73); Market Research (SIC 74.13); Business and Management Consultancy (SIC 74.14); Architectural and Engineering (SIC 74.2) Technical Testing and Analysis (SIC 74.3); Advertising (SIC 74.4); and Creative Entertainment (SIC 92.1-92.3). This study will also adopt this ENIS definition for the tradable service sector, however, in order to develop a broader view of service sector exports in the UK in Northern Ireland, the 2 For example, the SIC classification system does not make any distinction between high street banks and telephone banking providers; between universities that provide distance learning qualification and those that do not provide such qualifications or between manufacturing companies who only sell processed outputs and those who also offer design services. 3 Exporting Northern Ireland Services Study, DETI, March 2007, http://www.detini.gov.uk/cgibin/downdoc?id=2844 4
  • 9. FDI Research – Final Report report will also use the term ‘exportable services’ to describe those services that export at least five per cent of their produce. 5
  • 10. FDI Research – Final Report 2 Literature review From a review of a range of literature sources, this section describes the benefits that FDI can bring to an economy, assesses recent global and UK trends in FDI, and examines the impact of increased FDI on economic growth and skills demand. 2.1 BENEFITS OF FDI As well as the direct impact on employment and GVA4, the DETI Corporate Plan identifies wider economic benefits of FDI as follows: • • • • The introduction of new products and processes; Improved management practices; New technology and skills development; and Improved job quality. In acknowledging these benefits, the 2005 Economic Vision for Northern Ireland sets out a policy to “adopt a targeted approach to FDI, which provides wider economic benefits to the economy and puts structures in place to encourage investment across all of Northern Ireland so that all areas benefit from sustainable economic growth and high value added employment”. Although an increase in the level of FDI investment does have potential to deliver clear benefits to the Northern Ireland economy, there is a risk that the incoming businesses could crowd out activity in, and displace labour from, the indigenous business base. As part of our research we have carried out an examination of literature on the crowding out issue, and have concluded that although 100 per cent crowding out is unlikely to occur, some allowance for crowding out should nonetheless be made. A more detailed commentary on the crowding out issue is provided in Appendix A. In addition to the economic benefits of FDI, there are also societal benefits of improved job quality. The evidence of whether these benefits have been experienced within Northern Ireland is mixed. A recent study by Invest Northern Ireland5 found that 56 per cent of full time jobs promoted by first time inward investments, had weekly salaries above the Northern Ireland average for full time private sector employees. However, an analysis of more recent figures provided by Invest Northern Ireland showed that 69 per cent of full time workers in FDI companies earned more than the Northern Ireland average, and that 49 per cent of full time workers in tradable services FDI companies did so. This job quality issue will be explored in further detail in section 3.7. A further job quality benefit arises as a result of the improvements that FDI companies can bring to their host country’s skills base. In a recent study of the benefits of FDI to the Australian economy6, Invest Australia argued that recipient economies can benefit from “a cross-pollination and sharing of ideas”, and that the skills of the local workforce can be enhanced through: 4 This will be examined in greater detail in the discussion on crowding out that follows. Performance Report 2003/2004 – 2004-2005, Invest Northern Ireland, http://www.investni.com/performance_report_02-05.pdf 6 Benefits of Foreign Direct Investment to Australia, Invest Australia, 2004 5 6
  • 11. FDI Research – Final Report • • • • • 2.2 Staff relocating to the country from other parts of the multi-national’s operation; Staff being provided with global exposure as a result of their interaction with the investor’s overseas operations; The introduction of new and innovative working practices; Knowledge transfer between the investor and their local supplier and linked companies; and Knowledge transfer as a result of employees moving from the investing organisation to indigenous employers. GLOBAL AND UK TRENDS IN FDI Data on trends in total FDI (including non-tradable activities) are available in terms of annual flows (from the perspective of both the originating countries and recipients) and stocks, which reflect the accumulation of flows in a country over a period of time. We use both approaches to illustrate trends in the evolution of FDI. FDI flows reached a peak at the turn of the century (Table 2.1) as the global economy expanded vigorously, investment in technology surged and mergers and acquisition activity was especially strong. The economic slowdown of the early years of this decade and the terrorist attacks on the US led to a marked deceleration in FDI, but the pace of flows has picked up strongly in recent years in line with the buoyancy of the global economy. 2.2.1 Global geographic pattern Developed economies have traditionally been the dominant source of FDI. In 1970, they accounted for virtually all such flows, and even in 1980 the level of FDI from developing countries was small. But the past quarter of century has seen important changes. While developed economies still account for the bulk of FDI outflows, their share has decreased as developing economies – notably in Asia – have expanded rapidly and in the cases of China and India, participate more actively in the international economy through their steady liberalisation of trade policies. The growing importance of developing economies as a source of FDI is highlighted in Table 2.1. In 2004, such countries provided 12.7 per cent of global FDI. The table also shows that while the overall developed country share of world FDI flows is on a steadily declining path, the share of individual regions within the total flows can be very volatile. Table 2.1 - FDI outflows (% of total unless otherwise noted) 1970 Developed economies 99.7 North America 58 Europe 36 Developing economies 0.3 World ($ million) 14,157 Source: UNCTAD (http://stats.unctad.org/FDI) 1980 93.8 43.4 45 6.2 53,743 1990 94.6 15.2 58.2 5.4 238,681 2000 88.1 15.1 69.9 11.9 1,239,149 2004 87.3 37.9 42.4 12.7 730,257 The pattern among recipients of FDI is similar to that shown in Table 2.1. The rise of the developing economies has been strong, although from a much higher base than in the case of outflows, as the attractions of lower production costs have long been an incentive for transnational companies to locate operations in such countries. In 1980 developing countries received almost 16 per cent of total flows, and increased their share to 41 per cent by 2004. The rise of Asia as an investment location has been dramatic, with FDI flows increasing from $442 million in 1980 to $147.5 billion in 2004. In Latin America, the increase in flows over the period was from $7.5 billion to $67.5 billion. 7
  • 12. FDI Research – Final Report Table 2.2 - FDI inflows (% of total) 1980 Developed economies 84.5 Developing economies 15.5 Asia 1 Latin America 14 S E Europe/CIS 0.5 Source: UNCTAD (http://stats.unctad.org/FDI) 2004 59 41 23 10 5 A useful way of considering the importance of individual countries in the global picture of FDI is to investigate their stock of inward investment. The United Nations Conference on Trade and Development (UNCTAD) annual investment report7 contains a wealth of information on this and allied topics. The following table highlights the importance of the UK in this context, second only to the US in terms of the value of investments, and shows the rapid emergence of China as a major recipient. Table 2.3 - FDI stock and greenfield projects ($ billion unless otherwise noted) 1990 Top developed countries* US UK France Top developing countries* China (ex Hong Kong) Mexico Brazil Source : UNCTAD World Investment Report *In terms of FDI stock 2004 % growth Number of greenfield projects 2002-04 395 203 86 1,474 771 535 273 280 522 1,580 1,222 482 21 22 37 245 182 151 1,066 727 344 3,409 451 720 Table 2.3 also indicates that as a destination for greenfield projects the UK does very well. At 1,222 projects in the period 2002-04, the figure is not far short of the US number and well above that seen in France, although in overall percentage growth terms France has increased its FDI more rapidly than the UK. China’s record in this context is extremely impressive, well ahead of the US. India, with 1,392 projects is in third place and Russia has also attracted over 1,000 projects. But the stock of FDI in both these countries is still comparatively small. It should be noted that since these figures were produced, the US share of FDI is likely to have declined as a consequence of the country’s introduction of a one-off corporation tax amnesty for repatriated profits in 20057. However, this is only likely to be a short-term trend. 2.2.2 Likely future trends Over the long term, patterns in FDI flows are likely to be closely correlated with future trends in output growth, with companies in the world’s emerging economies taking on a new global presence in international markets. This means that Eastern European nations such as Bulgaria, the Czech Republic and Poland may begin to emerge as new sources of FDI, while existing sources such as China and India will take on even greater importance.. 7 7 UNCTAD World Investment Report 2005, Statistical Annex, UN 2005 Economy loses €18bn after US tax repatriation, p1, The Irish Times, 17th October 2006 8
  • 13. FDI Research – Final Report Figure 2.1 shows forecasts for average annual FDI per head of population (in US$) and FDI as a percentage of GDP from 2006 to 2010 for a selection of countries. It shows that the Republic of Ireland will have the third highest FDI per capita figure of the 82 countries assessed, at $4,750 per year, while the UK ranks 11th on the same indicator, attracting $1,480. Figure 2.1 - Forecast FDI as a proportion of population and GDP $6,000 18% 16.5% 16% 15.0% $4,776 $5,000 $4,750 14% $5,037 $4,000 12% $3,258 10% $3,053 $3,000 $2,459 8% 7.9% $2,000 6% 6.7% $1,480 $1,144 5.1% $1,000 3.6% 4% $984 2.2% $479 2.9% $224 2.0% 1.2% Source: The Economist Intelligence Unit, 2006 2.2.3 an y U S 0% er m G Fr an ce U K Sw ed en nd s m N et he rla Be lg iu la nd Ire Ko ng H on g Si ng ap or e $0 2% Po la nd 7.9% FDI inflows per head ($US) FDI inflows as % of GDP Global sectoral pattern The rapid expansion of the service sector has boosted the share of FDI in service industries. This is true of developed and developing countries. In China for example, while manufacturing (led by computers and other electronic equipment and textiles) dominates the picture, sectors such as distribution and financial services have recently seen significant inflows. The trend towards services is seen in the following table. Table 2.4 - World FDI stock by sector % shares of total inward FDI Primary (agriculture and mining) Manufacturing Construction and electricity, gas water 1990 9.5 41.6 1.7 2003 6.9 33.3 3.2 Services 47.2 56.6 Trade 12 10.7 Hotels and restaurants 1.3 1 Finance 19.7 18 Business activities 6.8 14.9 Transport & communications 1.5 5.2 Source: UNCTAD World Investment Report 2005, Statistical Annex 9
  • 14. FDI Research – Final Report 2.2.4 UK trends New FDI investment into the UK grew steadily from 1988 to 1997, before undergoing four years of rapid growth between 1997 and 2000. Investment that fell rapidly in the wake of the September 11th attacks of 2001 but is now showing signs of returning to its 2000 peak. Figure 2.2 – Inward investment flows into the UK, 1988-2004 90 Billions of Pounds 80 78.5 70 54.4 60 44.9 50 42.8 40 36.6 20.3 30 12.4 20 11.6 17.4 15.7 12.7 17.2 8.4 10 8.8 9.9 16.0 6.0 0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: United Nations Conference on Trade and Development (UNCTAD),2007 This investment into the UK has had a positive impact on employment levels, and UK Trade & Investment (UKTI) estimate that nearly 90,000 jobs were created or safeguarded in 2005/06 as the UK recorded its highest ever number of inward investment projects.8 Of the 1,220 projects, 508 were ‘new’, 337 ‘expansions’ and the remainder, 375 (30 per cent) M & A transactions. Investment in the tradable service sector represented over 55 per cent of the total number of projects, with a strong representation in knowledge-intensive sectors. IT, software, internet and e-commerce represented 284 projects. Survey evidence supports the view that the UK remains a top attraction for investment. The annual survey by Ernst & Young revealed that in 2005, of 3,066 FDI projects in Europe, 559 went to the UK, 538 to France and 181 to Germany in third place. An interesting feature of the survey was that 29 per cent of FDI projects in France were in manufacturing against 19 per cent in the UK. The annual IBM survey also showed the UK in the lead, with France close behind, in terms of the number of new projects. Approximately half (51 per cent) of all FDI inflows into the UK originates from within Europe, with Germany investing the most out of any European nation, followed by France and the Netherlands. The US is the biggest single investor in the UK, accounting for 33 per cent of all investment, while 8 per cent of investment comes from Asia, and the remaining 10 per cent is spread across the rest of the world (Table 2.5). 8 UK Inward Investment 2005/6, UK Trade & Investment,www.ukinvest.gov.uk 10
  • 15. FDI Research – Final Report Table 2.5 - Gross foreign direct investment in the UK by nation of origin, 2003 Percentage of total investments Germany France Netherlands Other Europe USA Other America Asia Rest of the World Source: National Statistics (Pink Book), 2006 13 11 13 14 33 5 8 5 The financial services industry is the biggest net source of foreign direct investment, contributing to approximately one third of all investment. Other major recipients of FDI in the UK include the transport & communications, retail & wholesale, utilities, business service and chemicals & plastics sectors (Table 2.6). Most heavy industries, including the metals and mechanicals products and office equipment sectors reported negative levels of net FDI, meaning that more money was invested in these sectors by UK companies overseas, than by foreign companies in the UK. Table 2.6 - Net foreign direct investment in the UK by industry, 2004 Industry Share of FDI Financial services 32% Transport and communications 23% Retail / wholesale trade and repairs 14% Electricity, gas and water 13% Real estate and business services 9% Chemical, plasic and fuel products 6% Other services 2% Textile and wood, printing and publishing 1% Food products 1% Agriculture, forestry and fishing 0.1% Source: National Statistics Business Monitor, 2006 Figure 2.3 provides a ranking of factors influencing location decisions based on the 2006 Ernst & Young Global Attractiveness Monitor. It shows that transport & logistics infrastructure and labour costs are considered to be the most important influencers, both being described as ‘very important’ by a majority of respondents. Corporate tax rates, a key differentiator between the Northern Ireland and Republic of Ireland offer, are also considered important, being mentioned by 46 per cent of respondents. Membership of the Eurozone, another key differentiator in the context of Ireland is, however, considered less important, and is considered to be of little or no importance by 36 per cent of respondents. 11
  • 16. FDI Research – Final Report Figure 2.3 - Ranking of the selection criteria for an investment location Transport & logistics infrastructures 54 35 Labour costs 52 39 3 7 7 2 Potential productivity increase 48 38 Telecommunications infrastructures 48 40 Transparency & stability of polit., leg. & reg. env. 47 39 9 3 Corporate taxation 46 40 9 3 Local labour skills levels 45 42 9 3 The country or region's domestic market 44 39 12 4 Flexability or labour legislation 41 42 13 3 Social climate and environment stability 40 8 3 8 4 9 48 2 The country or area's specific skills 33 Avail. of sites, cost of land & regulations 31 R&D availability and quality 29 Local language, culture and values 29 Specific treatment of expat. execs/corp HQs 27 Aid, subsidy & support from public authorities 24 41 24 8 Membership of the Euro zone 23 40 26 10 Quality of life 23 Access to local financial investors 22 0 Very important Of some importance 42 19 42 36 24 42 6 7 23 18 23 30 Of little importance 11 22 34 40 6 19 42 20 4 31 60 16 80 100 Not at all important Source: Ernst & Young, 2006 2.3 EXPORTABLE SERVICE TRENDS ‘Exportable’ services can be identified as service sector industries within which a significant proportion of total output is exported overseas. An analysis of the Office of National Statistics (ONS) 2004 Input-Output tables identifies 16 industries within which over 5 per cent of industrial output is exported. These are shown in Table 2.7. 12
  • 17. FDI Research – Final Report Table 2.7 - Export share of UK service sector industries Industry Percentage of output exported Exportable services Water transport Auxiliary financial services Research & development Other business services Air transport Computer services Architectural activities & technical consultancy Recreational services Banking & finance Advertising Legal activities Accountancy services Insurance & pension funds Hotels, catering, pubs etc. Telecommunications Market research & management consultancy 60.8 53.9 43.9 22.5 18.9 12.1 11.7 9.9 9.8 8.9 8.4 8.2 7.6 7.2 7.2 4.8 Other services Other land transport Ancillary transport services Railway transport Postal & courier services Education Other service activities Renting of machinery etc. Public administration & defence Motor vehicle distribution & repair, automotive fuel retail Retail distribution Letting of dwellings Private households with employed persons Sewage & sanitary services Owning & dealing in real estate Health & veterinary services Estate agent activities Social work activities Source: ONS Input-Output Statistics, 2004 4.3 3.8 3.7 2.6 2.0 1.2 1.2 1.0 0.4 0.3 0.3 0.2 0.2 0.2 0.2 0.0 0.0 Figure 2.4 shows the long-term trend in export sales in the 16 selected exportable service industries, and across the economy as a whole. It shows that the proportion of UK exportable services outputs that are exported has increased from under 15 per cent in 1992 to over 17 per cent in 2004. In contrast, the proportion of output exported across UK industries as a whole has remained fairly static at close to 11 per cent. 13
  • 18. FDI Research – Final Report Figure 2.42 Proportion of UK output exported by industry grouping, 1992 - 2004 18 17 16 15 All Industries Exportable services 14 13 12 11 10 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: Experian 2006, based on ONS 2004 Input-Output data Figure 2.5 shows the percentage change in export share in selected exportable service industries between 1992 and 2004. The table shows that over this period, the UK has managed to establish itself as a leading exporter of research and development, and has enjoyed a substantial increase in banking and financial services exports. Although total output in the air transport sector has increased substantially over this 12 year period, the majority of this increase originated from sales to UK based customers, and as a consequence, the export share in this sector has fallen sharply. Figure 2.5 Percentage point change in export share 1992 - 2004 for selected industries Research & development Water transport Auxiliary financial services Insurance & pension funds Accountancy services Banking & finance Computer services Legal activities Advertising Telecommunications Architectural & tech consult Wholesale distribution Motor vehicle distribution & repair Market res & managem't cons Hotels, catering, pubs etc. Recreational services Other business services Air transport -15 -10 -5 0 5 10 15 20 25 30 35 ONS 2004 Input-Output data 14
  • 19. FDI Research – Final Report 2.4 LABOUR MARKET IMPLICATIONS OF AN FDI STRATEGY Northern Ireland currently has one of the smallest private services sectors of any developed economy. However, a recent study by Regional Forecasts Ltd forecasts a large increase in service sector jobs over the coming decade, as shown in Table 2.8. A successful strategy to attract tradable services FDI into the Northern Ireland economy would boost the sector, accompanied by an increase in the demand for skilled workers. The table highlights the occupations in Northern Ireland that are likely to require the largest numbers of new workers over the next ten years. It shows that, over the period, 43,950 new jobs will be created, while 698,940 further vacancies will arise as a result of people moving between occupations, people becoming unemployed or inactive, people retiring or people migrating away from Northern Ireland. Most of the new jobs created will be in occupations that are in heavy demand by the service sector, while predominantly manufacturing occupations, such as skilled trades, and process, plant and machine operatives, look likely to experience a continuing fall in new employment demand. It should be noted that these figures represent a baseline forecast for the Northern Ireland economy over the eleven year period, and that any future FDI strategy could, potentially, lead to employment demand levels that are higher than the figures shown below. Table 2.8 - Forecast new employment and replacement demand in Northern Ireland by occupation, 2005-2015 inclusive* New employment demand Replacement employment demand Total employment demand Managers and Senior Officials 10,800 66,220 77,020 Professional occupations 15,500 58,300 73,800 Associate professional and technical occupations 6,100 66,880 72,980 Administrative and secretarial occupations 4,500 98,560 103,060 Skilled trades occupations -8,200 79,750 71,550 Personal service occupations 11,800 62,480 74,280 Sales and customer service occupations 4,900 92,840 97,740 Process, plant and machine operatives -4,200 58,850 54,650 Elementary occupations 2,800 115,060 117,860 Total 43,950 698,940 742,890 Source: Regional Forecasts Ltd, 2006 * The replacement demand figure was calculated by multiplying the reported annual average figure for the 2005-2015 period by 11 If present trends continue, future FDI investment will be disproportionately concentrated in and around Belfast and Derry, with Belfast, Derry, Craigavon, Newtownabbey, Limavady, Strabane, Larne and Carrickfergus all receiving a share of FDI that is above their share of total employment (see Table 2.9). 15
  • 20. FDI Research – Final Report Table 2.9 – Share of FDI and employment by district Percentage of FDI Percentage of total Index workforce employment Belfast 33.4 32.4 103 Derry 13.8 6.9 200 Craigavon 6.7 6.2 109 Lisburn 6.3 6.5 97 Newtownabbey 6.3 5.1 123 Newry & Mourne 4.8 5.2 91 Limavady 3.9 1.5 253 Strabane 3.4 1.5 227 Ballymena 3.2 4.9 64 Antrim 3.1 4.0 77 Coleraine 2.7 3.8 70 Larne 2.1 1.4 151 Castlereagh 1.9 4.2 45 Fermanagh 1.9 3.4 55 Carrickfergus 1.7 1.4 127 Northdown 1.5 3.7 42 Dungannon 1.4 3.3 43 Cookstown 1.0 1.8 58 Ards 1.0 2.9 35 Ballymoney 0.8 1.2 68 Down 0.6 2.9 20 Omagh 0.4 3.0 12 Moyle 0.2 0.6 39 Banbridge 0.1 1.9 8 Armagh 0.04 3.0 1 Magherafelt 0.02 2.4 1 Source: Invest Northern Ireland, Northern Ireland Census of Employment District In addition to the benefit of increased labour demand described above, Driffield8 suggests that FDI can potentially deliver further benefits to the Northern Ireland labour market by increasing the allocative efficiency, and therefore the productivity of the workforce. In other words, because more employment opportunities are made available to individuals working in Northern Ireland, it will be easier for individuals to identify working opportunities that are well suited to their skills and experience. However, Driffield also suggests that, as a consequence of the increased demand for labour brought about by FDI investment, and the resulting increase in industry wages, some indigenous businesses may attempt to reduce costs by substituting labour for capital. The extent of such substitution will vary according to the degree of FDI investment in the industry in question, and the technical feasibility of substituting capital for labour in that industry. However, overall this substitution effect is expected to lead to the loss of one indigenous job for every five FDI jobs created. The 2004 Northern Ireland Skills Strategy responds to this expected demand by focusing on three different types of skills, namely: • Essential skills of literacy and numeracy and, increasingly, information and communications technology (ICT); 8 Indirect employment effects of foreign direct investment to the UK, Nigel Driffield, Bulletin of Economic Research, 51:3, 1999 16
  • 21. FDI Research – Final Report • • Employability skills, including the key skills of team working, problem solving and flexibility; and Work based skills, specific to a particular occupation or sector. The 2006 Programme of Implementation for this strategy outlines how these types of skills will be developed, citing, for example, work to increase the presence of UK wide Sector Skills Councils in Northern Ireland as a method of developing the final skill type. 2.5 BENEFITS TO TIER ONE COMPANIES In addition to the labour market and export benefits associated with FDI, an investment also yields additional benefits for the indigenous companies who supply them (referred to in this study as ‘tier one companies’) and other Northern Ireland businesses. These include, for example, the profits made by local companies as a result of sales to FDI investors, profits made as a result of spending by the employees of FDI investors, profits gained as a result of knowledge shared with investors, and agglomeration benefits (benefits of being located in close proximity to one another such as labour mobility, and reduced transportation cost). The extent to which these benefits are likely to be experienced by the wider business base varies according to the characteristics of the FDI investor. For example, Turok9 argues that inward investors can be categorised into two broad types10: • • Investors with developmental linkages to indigenous businesses – Investors that establish long-term collaborative partnerships with local businesses; have decentralised management structures; procure bespoke good and services from knowledge-intensive local industries; and employ a diverse range of local staff; Investors with dependent linkages to indigenous businesses – Investors that procure basic goods and services at a minimal price from local companies, who employ low skilled staff in elementary activities on temporary or casual contracts, with highly centralised organisational structures. Turok argues that while the former companies are likely to contribute to self-sustaining growth in a local economy, the latter group are likely to leave the economy vulnerable to market conditions elsewhere in the global economy, with a risk of large-scale low skills employment loss should the company close its operations11. An estimate of the output and employment benefits received by tier one companies in Northern Ireland will be provided in Section seven of this report. 2.6 IMPACT OF CORPORATION TAX In recent years, there has been a regular debate in both the British and Irish media on the role that the corporation tax differential between the Republic of Ireland (which has a 12.5 per cent rate on trading income in most areas, although a lower 10 per cent rate applies for companies based in Shannon and for certain companies in the International Financial Services 9 See Inward investment and local linkages – how deeply embedded is “Silicon Glen”?, I Turok, 1993 These two types are used for illustrative purposes. In reality, most companies would lie within a spectrum between these two extremes. 11 It should however be acknowledged that attracting companies with dependent linkages may prove desirable from an equity perspective as these employers are more likely to offer employment opportunities in areas of high economic inactivity. 10 17
  • 22. FDI Research – Final Report Centre and in the manufacturing sector) and Northern Ireland (which, in line with other parts of the UK, has a 30 per cent main rate)12. The most obvious issue associated with such corporation tax differentials is that they may cause firms to choose to locate in low tax countries such as the Republic of Ireland, rather than in Northern Ireland, in order to reduce the amount of tax they are required to pay. A second issue is that they may encourage the branches of multinational corporations in high tax locations, such as Northern Ireland, to sell goods and services to branches in low tax locations, (such as the Republic of Ireland) in order to reduce the company’s overall tax burden. This practice, known as transfer pricing, would reduce the total tax yield generated in the high tax country13. In a recent report entitled Assessing the case for a differential rate of corporation tax in Northern Ireland (, November 2006), the Economic Research Institute of Northern Ireland estimate the impact that is likely to occur, should Northern Ireland reduce its corporation tax rate to Republic of Ireland levels. The calculation accounts for: • • • • • • • The additional corporation tax that will be paid by the newly attracted FDI investors; The reduction in the amount of corporation tax paid by existing companies in Northern Ireland; The additional taxation paid as a result of induced domestic demand; The additional taxation paid as a consequence of ‘knock on’ jobs in the Northern Ireland economy; The reduction in unemployment and incapacity benefit costs caused by these ‘knock on’ jobs; Additional payments of other taxes, such as income tax and VAT; Additional public expenditure costs incurred in order to serve the new businesses. The report finds that the immediate effect of any reduction in the rate of corporation tax would be negative, as it would immediately reduce the tax payments of existing businesses. However, over time, the change will lead to growth in the business base, and balances should become positive from 2013 onwards, with the positive balance rising to almost £2.5 billion by 2030. However, as the report does not account for the likely benefits that will occur as a result of UK companies relocating profits to capitalise on ‘transfer pricing’, it may understate the true likely benefit of such a change (Figure 2.6). 12 Recent articles include DUP and Sinn Féin back corporate tax cut, Financial Times, 13th November 2006 and NI pledged €79bn to underpin St Andrews Agreement, Irish Times, 2nd November 2006 13 Likewise, if Northern Ireland’s corporation tax rate were to be reduced to below the UK average, Northern Ireland could benefit as a result of UK based companies operating in Northern Ireland reassigning profits to their Northern Ireland offices. 18
  • 23. FDI Research – Final Report Figure 2.6 – Benefit to UK fiscal balances of a reduction of Northern Ireland corporation tax rates to 12 per cent 2500 £ million 2000 1500 1000 500 0 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 15 20 16 20 17 20 18 20 19 20 20 20 21 20 22 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 -500 Source: Regional Forecast Ltd, Economic Research Institute of Northern Ireland (2016 to 2029 figures Experian based on ERINI) 2.7 REASONS GIVEN FOR NOT INVESTING In 2000, the House of Commons Northern Ireland Affairs Committee14 provided a list of reasons why unsuccessful FDI investment leads had taken the decision not to locate in Northern Ireland. These included: • • • • An unfavourable tax regime; A small critical mass in comparison to other regions (in terms of the number of people available); Distance from customer; and Concern regarding security and political stability. This report was based on research carried out only a short time after the signing of the Good Friday Agreement, at a time when political stability concerns were more pertinent than they are currently. However, the three other concerns are all likely to remain of importance to foreign direct investors. Inappropriate skills, absence from the Eurozone and infrastructure issues were not cited as barriers by any of the leads questioned, However, it is possible that these and other issues may have impacted on the decisions made by other investors. 14 Northern Ireland Affairs Committee's Fifth Report 1999-2000, Public expenditure in Northern Ireland: Inward Investment 19
  • 24. FDI Research – Final Report 3 Investment inflows into Northern Ireland This section discusses the performance of Northern Ireland in attracting inward investment, and its performance by location and sector. 3.1 NORTHERN IRELAND IN A UK CONTEXT In 2004/5, National Statistics reported that there were 36 ‘project successes’ in Northern Ireland, equating to 21 successes per million people. In other words, on 36 occasions, an overseas company specified an interest in, and successfully completed an investment in, Northern Ireland. Of these companies, 14 were manufacturers (eight per million people) and 22 were non-manufacturers (13 per million people). During this year, Northern Ireland had the UK’s joint third highest success rate in terms of population share, behind only London and the North East (Figure 3.1). Figure 3.1 – FDI project successes per million population, 2004/5 40 35 Manufacturing 36.7 1.3 Non-manufacturing 30 25 22.6 20 21.7 20.6 19.0 4.3 35.4 10.5 15.7 8.0 15 14.4 8.5 6.9 10 13.3 4.4 3.9 12.8 5.4 12.0 2.3 2.4 17.4 12.6 12.1 5 10.5 10.7 7.5 2.2 8.8 9.0 9.4 7.4 9.7 8.3 5.3 0 London North East South East Northern Ireland Wales East Midlands North West Scotland West Midlands East Yorkshire & Humber South West Source: National Statistics 2006 Between 2000/1 and 2004/5, the number of project successes in Northern Ireland rose from 22 to 36, equivalent to a 64 per cent increase. This represents the fourth highest increase in the UK over the period, behind only the East Midlands, North West and North East. As in most other regions, non-manufacturing FDI grew more rapidly than manufacturing FDI (Figure 3.2). 20
  • 25. FDI Research – Final Report Figure 3.2 – Percentage change in number of FDI projects 233% East Midlands North West 121% 136% 69% 72% 71% North East 27% Northern Ireland Yorkshire & Humber 64% Scotland South East West Midlands -100% 200% 64% -4% 138% 44% -29% 31% 27% 117% 8% 20% East South West 100% -37% Wales London 375% 300% 173% -31% 0% -38% 20% -6% Manufacturing 46% -14% -7% -38% -29% -33% -50% 23% Non-manufacturing Total 0% 50% 100% 150% 200% 250% 300% 350% 400% Source: National Statistics 2006 3.2 TOTAL INFLOWS 2002-2006 Table 3.1 shows the trend in FDI into Northern Ireland over the past five years. The figure shows that the Northern Ireland economy has generally experienced a steady increase in FDI investment, although it did experience two exceptionally strong years of investment in 2004 and again in 2006. In both these years, the exceptional performance was mostly attributable to major investments by Northbrook Technology and Citigroup, which together contributed 635 jobs in 2004 and 585 jobs in 2006. Table 3.1 - Trends in Northern Ireland FDI Tradable service Projects Jobs created 2002 4 163 2003 5 185 2004 11 1,188 2005 11 255 2006 11 1,073 Source: Locomonitor, 2007 3.3 All industries Capital investment (US$m) Projects Jobs created Capital investment (US$m) 41 102 6.5 39.97 176.69 12 16 27 39 32 583 880 1,862 1,407 4,263 151 385 224.4 492.84 440.88 KEY INVESTORS Since January 2002, FDI in Northern Ireland has been dominated by the IT and business and financial services sectors, with six of the ten biggest investors in job creation terms operating in these sectors. The most significant investor over this period was ICICI, the Indian contact centre operator, which created 1,600 jobs in Belfast and Derry. Northbrook Technology and Citigroup were the only two tradable service companies to appear in the list of the ten most significant investors. 21
  • 26. FDI Research – Final Report Table 3.2 - Northern Ireland’s largest foreign direct investors, January 2002 to March 2007 Investing company ICICI OneSource Northbrook Technology HCL BPO Citigroup Asda Teleperformance IKEA Quinn Direct Insurance Image Communications Group Seagate Technology Source: Locomonitor, 2007 Country of origin India USA India USA USA France Sweden Ireland Ireland USA Destination city Belfast, Derry Belfast, Strabane, Derry Belfast, Armagh Belfast Antrim, Enniskillen Newry Belfast Enniskillen Armagh Derry Jobs created 1,600 1,060 825 560 475 450 400 350 304 300 Capital invested (US$m) 0 42 2 0 86 13 0 13 0 241 Sector Key business function Business Services IT and Software Business Services Financial Services Food and Drink Business Services Consumer Products Financial Services Telecom Services Business Equipment Customer Support Centre Research and Development Customer Support Centre Research and Development Retail Customer Support Centre Retail Customer Support Centre Customer Support Centre Manufacturing, R&D Table 3.3 - Northern Ireland’s largest tradable services foreign direct investors, January 2002 to March 2007 Investing company Northbrook Technology Citigroup Allen Systems Group Polaris Software FG Wilson Avalanche Technology CEM Solutions Gambro BCT HCL BPO Liberty Information Technology Source: Locomonitor, 2007 Country of origin USA USA USA India USA USA USA Sweden India USA Destination city Belfast, Derry, Strabane Belfast Belfast Belfast Larne Belfast Belfast Larne Belfast Belfast Jobs created 1,060 560 168 158 155 130 100 86 75 51 Capital invested (US$m) 42 0 6 0 87 13 32 13 0 8 Sector Key business function IT and Software Financial Services IT and Software IT and Software Machinery & industrial goods IT and Software Machinery & industrial goods Healthcare Business Services IT and Software Research and Development Research and Development Research and Development Research and Development Research and Development Business Services Research and Development Research and Development Customer Support Centre Research and Development 22
  • 27. FDI Research – Final Report 3.4 PERFORMANCE BY NORTHERN IRELAND SUB-REGION Belfast is by far the most popular location for FDI investors into Northern Ireland, with 30 tradable service investors, and a further 29 non-tradable service investors choosing to locate there since January 2002, creating an additional 4,239 jobs. Derry is also a popular location, attracting three tradable, and eight non-tradable investments, and creating 1,766 additional jobs. However, outside of these two cities, only Larne, Strabane, Bangor and Downpatrick have succeeded in generating employment opportunities through tradable service investments15. Table 3.4 - Geographic breakdown of Northern Ireland FDI investments, January 2002 to March 2007 Tradable service Projects Belfast 30 Derry 3 Larne 3 Strabane 1 Bangor 1 Downpatrick 1 Armagh 1 Newry 0 Antrim 0 Enniskillen 0 Kilkeel 0 Carrickfergus 0 Source: Locomonitor, 2007 3.5 All industries Jobs created Capital invest (US$m) Projects Jobs created Capital invest (US$m) 2,151 360 270 100 18 15 0 0 0 0 0 0 113 111 110 0 0 1 27 0 0 0 0 0 59 11 5 1 4 2 3 3 2 3 2 4 4,239 1,766 321 100 218 85 704 450 425 436 264 176 243 375 110 0 0.5 5 27 13 45 61 25 216 PERFORMANCE BY INDUSTRY Since January 2002, the Northern Ireland IT and software industry has attracted more FDI investments than any other industry, and has helped to create 1,842 jobs. However, the largest share of jobs created has occurred in the business services sector, where 3,118 jobs have been created. Other sectors that attract significant levels of FDI in the region include the financial services sector and food and drink. The vast majority of tradable service sector investments have occurred within the IT and software sector, though the business services sector has also received investments. All of the tradable investments outside these two sectors relate to the establishment of research and development facilities, and include Citigroup’s Technology Centre of Excellence and Assystem’s Aerospace Design Innovation Centre (both in Belfast). 15 Tradable service investments did occur in Cookstown, Limavady and Newtownards, however these investments did not lead to job creation 23
  • 28. FDI Research – Final Report Table 3.5 - Industry breakdown of Northern Ireland FDI investments, January 2002 to March 2007 Tradable service All industries Projects Business services IT and software Financial services Food and drink Machinery & industrial goods Consumer products Aerospace Telecom services Business equipment Consumer electronics Real estate Pharmaceuticals Healthcare Aerospace Electronic components Source: Locomonitor, 2007 3.6 Jobs created Capital inv (US$m) Projects Jobs created Capital inv (US$m) 2 30 2 1 3 0 0 0 2 0 0 0 1 1 1 75 1,842 560 0 284 0 50 0 0 0 0 0 86 50 17 0 128 0 0 129 0 2 0 96 0 0 0 13 2 0 13 30 9 9 7 2 5 3 3 2 2 1 1 1 1 3,118 1,842 1,378 941 415 415 314 309 300 220 150 100 86 50 17 16 128 61 350 130 0 88 1 241 44 0 5 13 2 0 NATION OF OWNERSHIP The USA are by a significant margin the largest FDI investor in the Northern Ireland economy, making investments in 30 tradable services, and a further 62 non-tradable investments since January 2002, and generating 4,057 additional jobs. India are also a major investor, and their two tradable service sector investments (HCL and Polaris Software), have together created 233 jobs in Belfast. Although FDI investment from the Republic of Ireland has created a significant number of jobs across the Northern Ireland economy as a whole, and in the finance, telecoms and food and drinks sectors in particular, their involvement in the tradable services sector has been more limited. Table 3.6 - Northern Ireland FDI investments by nation of ownership, January 2002 to March 2007 16 All industries Tradable service Projects USA 30 India 2 Sweden 1 France 2 Germany 3 Turkey 1 Ireland 2 Spain 0 Taiwan 0 Japan 0 South Korea 0 Belgium 0 Source: Locomonitor, 2007 Jobs created Capital invest (US$m) Projects Jobs created Capital invest (US$m) 2,443 233 86 80 55 17 0 0 0 0 0 0 309 0 13 13 6 0 27 0 0 0 0 0 62 8 6 11 6 1 20 1 1 3 1 2 4,057 2,583 561 906 295 17 1,004 180 150 116 70 6 1,140 3 57 100 8 0 147 0 40 28 4 0 16 Further investment were made from Bermuda and Austria based companies, however these did not lead to the creation of any additional jobs 24
  • 29. FDI Research – Final Report 3.7 QUALITY OF JOB Table 3.7 provides an illustration of the quality of job offer associated with recent FDI investments both in Northern Ireland’s tradable service sector, the manufacturing sector and across the business base as a whole. It shows that, although FDI has helped to safeguard a number of high wage jobs, many of the newer jobs that have been created are lower value added, with this being particularly true in the tradable services sector.17 Table 3.7 – Assessment of job quality of Invest NI FDI Investments Percentage of jobs paying above Northern Ireland Private Sector Median salary Tradable Manufacturing All industries services New jobs 47 72 54 Safeguarded jobs 100 84 84 All jobs 49 81 69 Source: Invest NI, NI Annual Survey of Hours and Earnings Figure 3.3 provides a comparison of average wages in Northern Ireland’s tradable service FDI businesses, against those across all FDI businesses in Northern Ireland, and against average weekly wages in the UK and Northern Ireland labour force, and the Northern Ireland private sector labour force. The figures appears to present an opposing view to the table above, showing that the average weekly wage offered by FDI firms is above that of the Northern Ireland economy as a whole. This is likely to be because, although investors tend to employ a large number of low paid staff, this is often offset by a minority of employees who are paid substantially more than the national average. Figure 3.3 – Comparison of average weekly wages by area and sector £380 £374.52 £367.70 £370 £364.10 £363.90 All Employment, UK All Private Sector Employment, Northern Ireland £360 £350 £340 £330 £324.70 £320 £310 £300 £290 New and safeguarded FDI, NI Tradable Services New and safeguarded FDI, All industries All Employment, Northern Ireland Source: Northern Ireland Annual Survey of Hours and Earnings, and Experian, based on Invest Northern Ireland, 2007 17 This analysis refers to the 2002/03 - 2005/06 period. At the point at which this report was produced, figures for 2007 were nearing completion, but were yet to become available. 25
  • 30. FDI Research – Final Report 4 Comparator Research This section provides comparator analysis for three countries, Ireland, Sweden and Poland. The focus of the case studies is on the main tradable service sectors in which the three countries have been successful in attracting FDI. The purpose of the case study analysis is to consider lessons applicable to Northern Ireland or ideas that can be replicated. The three case studies were selected working with the Client Steering Group: Ireland – Focusing on the International Finance Services Centre (IFSC) in Dublin; Sweden – Focusing on Electronics and ICT; Poland – Focusing on Telecoms and Financial Services. • • • The figure below shows FDI inflows for our three case study countries. Figure 4.1 FDI Inflows per annum 70,000 Ireland FDI inflows 60,000 Sweden FDI inflows Poland FDI inflows Dollars Millions 50,000 40,000 30,000 20,000 10,000 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 19 90 0 Source: Eurostat There is a general upward trend for Ireland and Poland in particular although each country has seen volatility in FDI inflows. Sweden has seen the largest fluctuations with FDI increasing steadily over most of the 1990s; recording an exceptional, one-off peak in 1999, following the £22 billion takeover of Astra by Zenica, a UK firm18; and declining in recent years. FDI inflow growth in Poland has been the most gradual but consistent. The figure below shows FDI outflows for the three case study countries. 18 http://news.bbc.co.uk/1/hi/business/576197.stm 26
  • 31. FDI Research – Final Report Figure 4.2 FDI outflows per annum 120,000 Ireland FDI outflows Sweden FDI outflows 100,000 Dollars Millions Poland FDI outflows 80,000 60,000 40,000 20,000 20 04 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19 95 19 94 19 93 19 92 19 91 19 19 90 0 Source: Eurostat The table shows that outflows from Sweden have generally been more volatile than those in Poland and Ireland. Ireland has seen significant increases in FDI outflow in recent years, while levels of FDI outflow from Poland has remained consistently insignificant. UNCTAD gives rankings for FDI performance, the table below shows reported performance for the three countries. Table 4.1 - FDI Actual Performance by Rank 1990 Ireland Inward FDI Rank Poland Inward FDI Rank Sweden Inward FDI Rank Ireland Outward FDI Rank Poland Outward FDI Rank Sweden Outward FDI Rank Source: UNCTAD 2000 52 100 53 12 63 2 2003 4 47 8 13 84 7 2004 5 72 54 10 86 7 5 75 93 26 62 8 The table demonstrates the strong performance of Ireland in actually attracting FDI although the UNCTAD rated Sweden above Ireland in its Inward FDI potential index ranking between 1990 (6th) and 2003 (8th). The remainder of this section focuses on the three case studies. 4.1 REPUBLIC OF IRELAND In 1986 gross domestic product (GDP) per capita in Ireland was 64 percent of the EU average. There were also high levels of unemployment with unemployment rates 18 percent higher than the EU average. Furthermore national debt levels were 120 percent of gross national product. 19 19 U.S. Foreign Direct Investment in Ireland, Making the Most of Other People’s Money, Berry R 27
  • 32. FDI Research – Final Report In 1987, Dublin's IFSC, was set up by the Irish Government as a location for internationally traded financial services. The initial designated site of the IFSC was 11 hectares of land in the Custom House Docks area of Dublin City Centre. The Customs House Docks Development Authority was established to redevelop the area and construction started in late 1988, with the first building completed and occupied by 1990. In May 1997, the Custom House Docks Development Authority was dissolved. At this stage, the IFSC had 114,000 sq m of office accommodation, as well as 333 apartments, a hotel, multi-storey car park and retail space, including a pub, restaurants and the Dublin Exchange Facility. The regeneration continued following this period and the Dublin Docklands Development Authority was established in 1997 to develop and deliver IFSC phase II20. Williams and Redmond21 report that Dublin’s economy has developed in three phases. Phase 1 – Production of foods, textiles and beverages for local and export consumption; Phase 2 – Industry developed mainly through FDI from the US (manufacturing and services); Phase 3- Economy continues to develop as a “knowledge economy” building on innovation and R&D. They also note that a main reason for success has been focusing on growth sectors which matched the labour force skills. Moving to the third phase of development meant developing the educational base in line with the need to increase R&D. There was also a need to create an environment where innovation was encouraged and suitable supply chains were developed. 4.1.1 Role of government The Irish Government took a decision to set up the IFSC in 1987. The Government also agreed a corporate tax rate of 10 per cent with the EU Commission. Furthermore, local development incentives for Docks area were implemented, supported by an open and responsive business environment and welcomed all types of inward investment22. To supplement these incentives a marketing team was put in place to engage directly with global institutions. There was also an important role in positively engaging local banks to promote the centre. Part of this was the development of a social partnership between Government, employers and unions. The Industrial Development Agency of Ireland (IDA) and Enterprise Ireland were the main public sector organisations involved with the development of the IFSC. The role of the IDA is to attract FDI to Ireland focusing on high value-added investments using favorable corporation tax rates as one marketing tool. Enterprise Ireland promotes joint ventures and strategic alliances between indigenous and foreign companies, facilitating export activity of indigenous firms, which may involve work with FDI projects. All businesses seeking to be part of the IFSC have to gain a licence through contact with the IDA. The Central Bank then undertakes regulation of member organisations activities. This also ensured that ‘brass plate’ organisations would not be based in the IFSC and also meant that any employment benefits were likely to be more enduring and significant. Due to the fact 20 IFSC Website Ideopolis: Knowledge City Region, Dublin Case Study, Dr Brendan Williams and Dr Declan Redmond 22 ECB, FDI Task Force Report, 2004 21 28
  • 33. FDI Research – Final Report that tax levels have now resumed to a more ‘standard’;level, and conditions for relocating are less onerous the Central Bank now undertakes screening instead of the IDA23. 4.1.2 Performance The IFSC makes up a significant amount of total FDI in Ireland and this is shown in the figure below. Figure 4.3 – FDI inflows Source: Trade and Investment Report 2005, Forfas The chart demonstrates the significance of IFSC FDI inflows as a percentage of total FDI inflows in Ireland. The chart below shows the significant FDI outflows including outflows from the IFSC. Figure 4.4 - FDI outflows Source: Trade and Investment Report 2005, Forfas The chart shows that IFSC outflows have been small in recent years, with the exception of 2002, creating significant net inward FDI from the IFSC. The benefits of the IFSC are not confined to inward investment and in 2002 the Irish Exchequer collected more than €700 million in corporation tax from IFSC companies. According to the Central Bank, the net asset value for collective investment schemes for regulated funds was just under €424 billion at the end of August 2004. The chart below highlights that the IFSC also has a significant role in the Irish services market. 23 The Role of Dublin’s International Financial Services Centre in Irish Regional Development, White M, CISC, 2003 29
  • 34. FDI Research – Final Report Figure 4.5 - Services Exports IFSC Imports/Exports in Euro Billions 20.0 40.0% 18.0 35.0% 16.0 30.0% 14.0 IFSC services exports 12.0 25.0% 10.0 20.0% 8.0 15.0% 6.0 IFSC services imports IFSC exports as % of total service exports 10.0% 4.0 5.0% 2.0 0.0 0.0% 1999 2000 2001 2002 2003 2004 2005 2006 Q1 Source: International Trade and Investment Report 2005 - Forfas The international financial services industry has a major economic contribution to make. Approximately 11,000 people are directly employed by the sector in a range of institutions providing products and services to a global customer base. The international financial services industry made a net contribution of €2.5 billion to Ireland’s balance of payments from both services and investment in 2000. The balance of payments statistics show that the sector generated a surplus of €735 million on international trade in services and €1,763 million in investment income.24 In addition to this direct contribution, the financial services industry also contributes indirectly to the Irish economy by helping local businesses to secure funding. A recent study by Patrick Honohan of Trinity College Dublin25 identified a clear relationship between the depth (defined as the level of private credit available to businesses as a proportion of GDP) of a country’s financial services sector, and the country’s economic growth rate. This is shown in Figure 4.6. 24 FSIA Annual Report 2001 Honohan. P, To what extent has finance been a driver of Ireland’s economic success?, Quarterly Economic Commentary, Winter 2006, pp59-72 25 30
  • 35. FDI Research – Final Report Figure 4.6 – Relationship between financial sector depth and GDP growth Source: Honohan, 2006 The continued success of the IFSC and its importance to the economy is emphasised by the net trade surplus of €4.9 billion in IFSC activities in 2004. The growth in IFSC exports, comprising mainly insurance, financial services and business services exports, has been 234 per cent since 1999. 4.1.3 Critical success factors - benefits 4.1.3.1 Taxation The role of low tax levels as an incentive was significant to the success of the IFSC. However, from the end of 2002, the 10 percent corporation tax rate ceased to apply to financial services companies, except for those operations that set up before July 1998, which could avail of this rate until the end of 2005. All other operations are now subject to the standard corporation tax rate of 12.5 percent on trading income. Nevertheless, the average tax rate in OECD countries reported in the most recent tax report (2005) is just over 30 per cent, and Dublin retains this competitive advantage. FDI Magazine26 reported that Dublin is highlighted as an exemplar of dockland regeneration alongside London, Bilbao, Shenzhen and Shanghai. The report found the three most important elements involved in the regeneration of Dublin’s docks have been a low tax environment, a healthy labour market and clear political support during the 15 years of recent development. In addition to this Corporation Tax benefit, businesses start ups in the area have benefited from the Business Expansion Scheme, a government initiative to provide tax support to start up businesses, which has helped to generate increased levels of exports and R&D investments across the country’s base of start-up businesses. 26 FDI Magazine, Feb 2004, Urban Renaissance 31
  • 36. FDI Research – Final Report 4.1.3.2 Labour Market Conditions An additional factor in the investment decision to locate in Dublin was the attractiveness of the labour market which was well educated, young, relatively cost effective and English speaking. The Dublin population remains younger than the population within many competitor locations and in 2010 and 2015 will have an average age of 36.9 years and 37.9 years respectively. Ireland is also expected to have the largest under 25 year old population share in Western Europe. (Ireland Vital Statistics, IDA). 4.1.3.3 US effect Economic growth was underpinned by significant FDI from a number of countries but particularly from the US. This continues to be the case and it is reported that US investment flow into Ireland in 2004 was $10.4 billion, roughly one-tenth the US total for the EU27 while over 40 per cent of all US foreign software investment is in Ireland28, one-third of all manufacturing inward investment in Ireland comes from the US and 300 US entities have been licensed to trade in the IFSC. This level of investment can be explained by some of factors above but also are testimony to the cultural links between the US and Ireland and the marketing efforts that the Irish Government have made to target CEOs of leading US companies. Time zone comparability and lack of language barriers for US businesses seeking to manage cash in Europe and within the Eurozone are also important29. 4.1.3.4 Other factors While the IFSC was considered to be an undoubted success Ireland did benefit in other areas such as the EU Common Agricultural Policy. It is widely accepted that Ireland has received more support through CAP than other countries, receiving subsidies twice as large as their share of EU agricultural output in 200430. The effective use of this support assisted the overall development of Ireland’s economy. 4.1.3.5 Other benefits The main benefits of IFSC activity to date are: • • • the regeneration impacts; employment benefits; and associated fiscal tax income benefits. However, our research has also found anecdotal evidence of other benefits including indirect employment and supply chain development benefits, particularly in the business services sector - legal firms, auditors and tax experts; and the corresponding knowledge transfer within the cluster. 4.1.3.6 Possible threats In spite of the advantages previously identified, there is a risk that, if left unchecked, an overheating of the Irish economy could limit the future growth potential of the IFSC. 27 American Chamber of Commerce Ireland Address by Mr Brian Cowen, To the American Chamber of Commerce Ireland November 2005 29 Offshore Treasury Centers: Rethinking Outsourcing Based on Tax-Advantaged Structures, June 2005 By George Cassidy (International Finance & Treasury) 30 BBC News, 2 December 2005 28 32
  • 37. FDI Research – Final Report An example of this is the strong house price growth that has occurred in Ireland, and in Dublin in particular in recent years, with house prices growing by 42 per cent in Dublin and by 36 per cent nationally in the three years to September 2006. Figure 4.7 – Average house prices in Dublin and Republic of Ireland €450,000 Dublin Rest of RoI €419,800 €400,000 €356,200 €350,000 €330,600 €296,500 €300,000 €266,300 €250,000 €231,400 €222,100 €195,400 €200,000 €150,000 €100,000 €50,000 €0 2003 2004 2005 2006 Source: Permanent TSB House Price Index, 2006q3 A second example of how the Republic of Ireland economy is overheating is the rapid tightening of the labour market that has taken place, with unemployment falling from 4.7 per cent to 4.3 per cent over the past three years, with the decline expected to continue over the medium term (Figure 4.8). Figure 4.8 – ILO unemployment rates for the Republic of Ireland, 2003-2010 4.8 4.7 4.6 4.5 4.4 4.3 4.3 4.2 4.0 4.0 3.8 3.7 3.6 3.6 3.5 3.4 3.2 3.0 2003 2004 2005 2006 2007 2008 2009 2010 Source: Experian, 2006 33
  • 38. FDI Research – Final Report Finally, price levels are on a strongly upward trend in Ireland, with consumer prices increasing by 23 per cent since 2000 and commercial property prices increasing by 3 per cent in 2005 alone31. This has put cost pressures on investors seeking to procure locally (Figure 4.9) Figure 4.9 – Harmonised Index of Consumer Prices for the Republic of Ireland, 20002010 (2000=100) 140 137 133 135 130 130 126 123 125 118 120 116 113 115 109 110 104 105 100 100 95 90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Experian, 2006 In addition to this economic tightening, the future of the Republic of Ireland FDI market may also be at risk from the diminishing importance of the US, Ireland’s biggest supplier of FDI, in the European market. This is illustrated below. 31 http://www.shelteroffshore.com/index.php/property/more/commercial_property_ireland/ 34
  • 39. FDI Research – Final Report Figure 4.10 – US FDI investment projects in Europe as a percentage of all FDI projects 50 45 41.7 43.8 39.0 40 35.5 36.8 35 32.5 29.6 30 27.0 26.45 25 20 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Ernst & Young European Investment Monitor, 2006 4.1.4 Applicable lessons The development of the IFSC in Dublin has contributed to economic growth in the Republic of Ireland, and raised the prominence of the sector in the national economy. In 2006, the financial services sector accounted for 4.7 per cent of employment and 9.7 per cent of output, substantially higher than the figures of 4.2 per cent and 6.7 per cent reported six years previously. However, in spite of this upward trend, the sector’s employment and output shares are expected to remain broadly unchanged over the next four years (Figure 4.11). 35
  • 40. FDI Research – Final Report Figure 4.11 – Employment and output in Republic of Ireland financial services sector as a percentage of the national total 12% 10% 9.5% 9.9% 10.0% 10.1% 9.7% 10.3% 4.7% 4.8% 4.9% 4.9% 5.0% 8.8% 8.4% 7.3% 8% 7.1% 6.7% 6% 4.2% 4.2% 4.1% 4.3% 4.6% 4.6% 4% 2% FTE employment Output 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Experian, 2006 However, due to the large movements of capital involved in financial services FDI, there is a risk that assessing the impact of the sector purely in gross investment terms may cause the sector’s impact on the economy to be overstated. Indeed Forfas reports that the financial services sector creates fewer jobs per unit of investment than many other industries. This is partly due to the fact that businesses operating in the financial services sector in Dublin are engaged in large movements of capital by parent companies to their fund management and other IFSC financial subsidiaries, which are then reinvested in overseas assets. In this sense, flows of direct investment into IFSC companies are roughly matched by outward flows of portfolio investment. The sector also has issues with the low levels of internal supply chain activities which it attracts. The main factors contributing to the success of the IFSC in Dublin can be summarised as: • • • • • • • • • • the international business culture in Dublin; modern IT infrastructure; regulatory environment; strong domestic political support; competitive cost base, assisted through low tax and ‘urban renewal incentives’; air access to the rest of the world; availability of well trained employees; youthful labour market; cultural relationship with US; and proximity to other financial centres. The Central Bank of Ireland32 report that the risk to Ireland from the strongly growing central and eastern European countries is relatively limited as Ireland has focused on different sectors. This is underpinned by the fact that Ireland has a head start on these countries. In effect it has a first mover advantage which it is sustaining by continually improving its offer. 32 Quarterly Bulletin 1 2006, Central Bank and Financial Services Authority of Ireland 36
  • 41. FDI Research – Final Report While limitations may exist due to the labour market and inflationary pressures that growth causes, the IFSC is a relatively sustainable model due to: • • • • • 4.2 first mover advantage; a culture of knowledge and innovation; continuous improvement ahead of competitors; network creation amongst firms; and employees who are willing to remain in the area. SWEDEN Until the mid-1980s FDI in Sweden was restrictive and governed by a complex system of laws and regulations. Since entry into the EU in 1995, Sweden has improved the investment climate to attract FDI through a number of interventions including reductions in income and corporation tax, deregulation of foreign ownership and loans to foreign investors. Although FDI has increased in Sweden in recent times, there are obvious year on year fluctuations. 4.2.1 Role of government The following bodies govern and influence FDI in Sweden: • • • • Swedish Institute for Growth Policy (ITPS); analyses policies, growth studies and various areas of government statistics; Swedish Business Development Agency (known as Swedish National Board for Industrial and Technological Development (NUTEK) prior to 2001); Invest in Sweden Agency (ISA); Position Skane – the agency for investment and tourism in Southern Sweden. ISA offers assistance in key sectors including IT, electronics and biological sciences: • • • • • 4.2.2 comprehensive information on business opportunities in Sweden; tailor-made information and practical advice; introductions to relevant contacts; assistance in finding and arranging visiting programs; and supporting the development of the Fibre Optic Valley cluster.33 Performance FDI in Sweden has increased significantly since 1989 helping GDP to grow by 73 per cent between 1991 and 2005.34 FDI inflows in Sweden peaked at over £3.8 million in 1999, and increased by 73 per cent in the ten year period 1990 to 1999. Since 1999 FDI inflows in Sweden have decreased each year, reaching -£202 million in 200435. Figure 5.9 demonstrates the volatility of FDI in Sweden. 33 Invest in Sweden Agency http://www.isa.se/templates/Normal____2040.aspx OECD.stat http://stats.oecd.org/wbos/default.aspx 35 A negative outflow could indicate a disinvestment (e.g. where capital or earnings are repatriated to the country of origin) 34 37
  • 42. FDI Research – Final Report Although foreign ownership increased, this was mainly due to acquisitions of domestic firms rather than greenfield operations36. The value of mergers and acquisitions between 1990 and 2000 increased in Sweden by 192 per cent.37 Looking across sectors (Table 4.2), we see that FDI in Sweden has traditionally been dominated by the manufacturing sector, which has seen higher levels of inward investment than tradable services in nine out of the past eleven years. Figure 4.12 FDI in Sweden - Manufacturing, Services and Tradable Services, 1991 to 2002 £ Million 35,000 30,000 SECONDARY SECTOR TERTIARY SECTOR 25,000 Tradable Services* 20,000 15,000 10,000 5,000 0 1991 -5,000 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: Central Bank of Sweden * Note: Tradable Services includes transport and storage In recent years, tradable service FDI has been largely dominated by the transport, storage and communications sector, and the ICT cluster in particular, although there has also been significant investment in finance and business services. 36 The determinants of FDI Flows: Evidence from Swedish manufacturing and service sector, Karpaty and Paldah, 2006 37 UNCTAD, http://stats.unctad.org/FDI/ReportFolders/ReportFolders.aspx 38
  • 43. FDI Research – Final Report Table 4.2 - FDI Inflows in Sweden by sector 1991-2002 Sector 1991 TOTAL 3,601 PRIMARY SECTOR 0 Agriculture, hunting forestry and fishing Mining, quarrying and petroleum 0 SECONDARY SECTOR 2,498 Food, beverages and tobacco 42 Textiles, leather and clothing 38 Wood and wood products 12 Manufacture of wood products Paper and paper products 11 Coke, petroleum and nuclear fuel 69 Chemicals and chemical products Rubber and plastic products Non-metallic mineral products 12 Metal and Metal products Basic metal and metal products 144 Fabricated metal products Machinery and equipment 2,181 Other manufacturing 0 TERTIARY SECTOR 969 Electricity, gas and water 182 Construction 22 Trade 151 Hotels and restaurants Transport, storage and communications 39 Finance 338 Financial intermediation 8 Insurance and pension funding 330 Business activities 239 Community, social and personal service -2 Unspecified 114 Reinvested earnings 20 Source: Central Bank of Sweden, Balance of Payments 1992 -23 1 1 -295 0 7 -6 -9 194 11 458 -961 2 706 146 7 187 44 117 -76 193 155 50 110 -546 1993 2,559 6 6 1,188 245 2 149 146 313 96 50 333 0 639 58 80 244 105 6 170 -165 126 21 63 664 1994 4,150 0 0 2,180 23 14 591 305 1,486 74 127 -136 0 996 1 16 629 141 102 100 2 103 4 10 964 1995 9,150 306 0 306 6,572 807 8 -55 -86 5,197 3 57 503 53 743 133 48 304 140 -40 -41 1 148 10 7 1,522 1996 3,482 8 8 802 33 -1 179 178 263 105 -78 301 0 2,268 1,538 5 182 306 25 13 12 192 19 405 364 1997 6,695 -9 -1 -8 2,559 289 -2 102 96 414 -42 134 1,661 4 2,887 841 9 858 368 244 243 1 506 62 384 873 1998 11,965 -41 2 -43 3,841 38 -8 2,200 2,279 217 178 147 1,030 39 5,966 -50 -31 70 614 5,280 5,200 80 37 46 696 1,502 1999 37,642 301 120 181 30,715 57 -2 198 123 24,805 1,477 274 3,900 6 3,050 181 -6 504 878 349 229 120 1,132 11 1,123 2,452 2000 15,355 95 3 92 6,151 -8 27 266 225 1,066 -524 36 4,971 316 4,952 1,238 28 1,128 765 989 542 447 870 -67 2,084 2,074 2001 8,264 -252 1 -253 4,294 813 25 1,523 3 1,520 -759 29 818 1,867 -21 2,879 1,045 43 -399 700 895 894 2 547 48 1,716 -373 £ millions 2002 7,841 39 1 38 414 -128 28 -154 131 -284 506 6 892 -882 145 6,797 966 2 1,043 2,003 1,281 178 1,103 1,528 -24 720 -129 39
  • 44. FDI Research – Final Report 4.2.3 Critical success factors - benefits The growth in FDI in Sweden is due to a number of institutional changes that took place during the late 1980s, including liberalisation of cross-border capital transactions and the deregulation on foreign ownership. The tax reform launched in the early 1990s resulted in a decrease in corporation tax, attracting further foreign investment Sweden has a number of competitive advantages that attract foreign investors: • • It has an exceptional telecommunications network, a stable political environment, advanced technology and a well-educated labour force (highly skilled in modern technology) owing to the expansion of higher education in Sweden; Deregulation of industries; in particular the electricity, postal service, air transportation, railroads and telecommunication markets, has resulted in more efficient sectors and lower prices. Sweden has implemented a range of incentives to encourage FDI inflows, these include: • • • • • • Dividends paid by foreign subsidiaries in Sweden to their parent company are no longer subject to Swedish taxation; Loans are available to foreign investors from the Swedish Business Development Agency and the regional development funds; Support programmes include location and employment grants; low-rent industrial parks; economic free zones; A range of incentives exists for research and development programs by the Swedish government; Deduction on key foreign personnel’s income tax. The development of the ‘Fibre-Optic Valley’ ICT cluster, centred around the Hudiksvall municipal area, on the Gulf of Bothnia, 300km north of Stockholm. For example, as part of Sweden’s reform to its higher-than-average income tax system, and to encourage foreign key personnel to Sweden, there was a reduction in income tax charges for key foreign personnel. This change meant that from January 2001 onwards, individuals classified as ‘key expert personnel’ within foreign direct investment firms were only required to pay tax on 75 per cent of their income. While foreign companies have complained about bureaucratic difficulties and the sometimes arbitrary nature of obtaining expert status38, we found no evidence that this has impacted upon decisions to invest in Sweden. 4.2.4 Threats Although Sweden has recently enjoyed great success in attracting FDI, there are a number of factors which, if left unchecked, are likely to deter investors in the future. One such deterrent is likely to be the high cost of labour in the country, which can cause investors profit margins to be squeezed. This is illustrated overleaf. 38 2006 Investment Climate Statement – Sweden, US department of State 40
  • 45. FDI Research – Final Report Figure 4.13 – Average monthly labour costs in selected European economies, 2003 €5,000 € 4,313 €4,500 € 4,101 € 3,997 € 3,895 €4,000 € 3,726 € 3,716 € 3,643 € 3,487 €3,500 € 3,355 € 3,017 €3,000 €2,500 €2,000 €1,500 €1,000 €500 la nd Po la nd Fi n R ep ub l ic of I re la nd UK la nd s N et he r m an y G er iu m Be lg an ce Fr ar k en m D Sw ed en €0 Source: Eurostat, 2006, CSO Census of Industrial Production, Polish Central Statistical Office, Experian In addition to these high labour costs, high price levels in general in the country may diminish investors’ purchasing power, and act as a deterrent to future investment39. Furthermore, the country’s high tax, and especially income tax levels, may reduce the country’s attractiveness to investors. 4.2.5 Applicable lessons The Swedish example has shown that, through a combination of heavy investment in infrastructure, capital and skills; outward looking trade policy; cluster development; and a discriminatory taxation system, it is possible for a country that was once largely overlooked as a location for overseas investment to position itself as a desirable location of knowledge intensive business. However, such success comes at a price, contributing to high housing and labour costs, and high levels of personal taxation; factors which, in the long term, could act as a deterrent to future investors if policies aren’t implemented to address them. 4.3 POLAND Poland has undergone significant political and economic transitions in the past 20 years. In 1989 it became the first country out of the former Soviet block to re-establish democracy and launch an economic and social move to a market economy. Following financial liberalisation and reforms including a new currency in 1995, FDI increased in Poland. The country joined the EU in 2004, and after the announcement in 2003, FDI in Poland was boosted appreciably. 4.3.1 Role of Government FDI is monitored by three institutions in Poland: 39 A recent study by The Economist suggested that prices in Sweden were 53 per cent overvalued in relation to the US$, see http://www.oanda.com/products/bigmac/bigmac.shtml 41
  • 46. FDI Research – Final Report National Bank of Poland (NBP); Polish Agency for Foreign Investment (PAIZ); Central Statistical Office (GUS). • • • The Polish Agency for Foreign Investment (PAIZ) was established in 1992 with the objective of promoting Poland’s investment opportunities. PAIZ offers foreign companies its knowhow and helps them establish contacts with governmental bodies and the business community.40 The National Bank of Poland and the Ministry of Finance are responsible of licensing and regulating banking activities. They record and publish data on FDI activity in Poland. Foreign exchange permits are issued by the NBP. 4.3.2 Performance Figure 4.14 shows FDI inflows and outflows between 1991 and 2004. Figure 4.14 Foreign Direct Investment in Poland 1990-2004 10,000 8,000 inflows Millions of dollars outflows 6,000 4,000 2,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 -2,000 Source: UNCTAD, http://stats.unctad.org/FDI/ReportFolders/ReportFolders.aspx Over the period 1990 to 2000, FDI inflows in Poland increased every year. Flows decreased by 56 per cent between 2000 and 2003; however following the announcement that Poland would join the EU,they recovered. Growth in FDI outflows has been less volatile. Table 5.3 below gives a breakdown of FDI inflows in Poland by industry sector. 40 UNCTAD WID Country Profile: POLAND 42
  • 47. FDI Research – Final Report Table 4.3 - FDI inflows into Poland by industry Sector 1996 TOTAL 4,498 PRIMARY SECTOR 12 Agriculture, hunting forestry and fishing 4 Mining, quarrying and petroleum 8 SECONDARY SECTOR 1,559 Food, beverages and tobacco 597 Textiles, leather and clothing 31 Wood, publishing and printing 10 Chemicals and Chemical products 130 Rubber and plastic products 131 Non-metallic mineral products -4 Basic metal and metal products 54 Machinery and equipment 81 Office machinery and computers 0 Radio, television and communication apparatus 47 Motor vehicles 342 Other transport equipment 8 Other manufacturing 389 TERTIARY SECTOR 1,573 Electricity, gas and water 5 Construction 48 Trade and repairs 612 Hotels and restaurants 3 Transport 17 Telecommunications 133 Finance 608 Monetary intermediation 502 Financial intermediation 66 Insurance and other activities 40 Real estate 50 Business activities 107 Other services -11 Unspecified 1,355 Source: National Bank of Poland, Statistics Department 1997 4,908 23 5 18 1,197 361 22 222 245 48 -1 103 23 -1 55 193 1 217 1,631 -2 20 433 -14 25 25 896 721 120 55 45 200 3 2,059 1998 6,365 26 8 18 1,882 720 16 155 185 110 0 7 79 -2 55 466 -18 406 2,139 28 89 782 6 -3 7 1,019 728 145 146 27 179 6 2,318 Millions of Dollars 1999 2000 7,270 9,342 60 37 57 11 3 26 1,412 1,770 176 407 30 4 254 283 166 176 172 127 0 13 193 93 80 64 4 28 25 85 280 280 29 20 341 506 5,453 7,220 44 350 1 157 834 749 27 84 44 237 1,789 3,185 2,342 1,972 2,194 1,130 24 522 124 321 144 284 142 160 86 44 345 316 Between 1996 and 2000, FDI in Poland increased by 108 per cent, with the tertiary sector’s (services) share increasing from 35 per cent to 77 per cent. This was mostly due to the increase of FDI in the telecommunications industry. FDI in telecommunications decreased between 1996 and 1998 due to lack of regulation in the sector. As more regulation came into force in 1999, FDI in the sector increased 247 fold between 1998 and 1999, then by a further 78 per cent in 2000. Another important sector for FDI in Poland is finance, which includes Monetary intermediation, financial intermediation and insurance and other activities. In 2000 the financial sector accounted for 21 per cent of total FDI in Poland, following privatisation of state-owned banks from 1993 to 2000. The secondary sector (manufacturing), although showing an upward trend in FDI, has suffered from some volatility. In 1996 the secondary sector accounted for 35 per cent of total FDI inflows in 1996 compared to 19 per cent in 2000. 43
  • 48. FDI Research – Final Report In 2001, Germany, France and Netherlands accounted for almost 60 per cent of Poland’s total FDI stock. The role of developing countries as a source of FDI inflows in Poland is quite small, declining largely due to the disinvestment by the Republic of Korea. Major foreign investors in Poland include: • • • Fiat Auto Poland SA (Italy) in the motor vehicles industry, the largest TNC affiliate; Makro Cash and Carry SA (Germany) in distributive trade, is the second biggest; KGHM Polska Miedz S.A. is the largest home-based TNC in Poland41 FDI in service industries has been heavily influenced by significant one-off investments in privatised government owned organisations. 4.3.3 Critical success factors - benefits Increases in FDI in Poland may be driven by the various mechanisms that are in place to encourage FDI in Poland. Foreign entrepreneurs have equal rights to Polish entrepreneurs in establishing and conducting business activity in Poland. In addition restrictions to FDI investment have become relaxed in Poland, with the following provisions being made: • • • • guarantee of unrestricted transfer of profits and investment capital; generally no restrictions of foreign ownership, although some restrictions exist in certain activities; screening mechanism for entry abolished; terms attached to the privatisation of some large state-owned entries, such as production or performance targeting may be negotiated. Both foreign and domestic investors must obtain government concessions, licenses or permits to engage in certain activities. Prior to 2001 the number of sectors that required concessions was 27, but this was reduced to nine in 2001 and again to six in 2004 (broadcasting, aviation, energy, weapons, mining, and private security services). Another factor influencing foreign investment in Poland is that the country’s population is larger and younger than in any other European country bar Turkey, creating the largest consumer market in Central Europe and a significant pool of young active labour. This is illustrated in the following chart. 41 UNCTAD, FDI in Brief: Poland 44
  • 49. FDI Research – Final Report Figure 4.15 – Proportion of the population aged between 15 and 24, 2006 20 18 16.5 15.5 16 14 12.9 12.2 12 10 8 6 4 2 Tu rk Po e y la Sl n d ov ak C ia yp ru La s tv Ire ia R land om Li ani th a ua n Ic i a el an d M a C ze Bu lta ch lg R aria ep u Sl blic ov en C ia ro Hu atia ng a F r ry an ce U Le Por K ic tug ht en al st e Fi in nl an d Sp a Au i n s Sw tria ed e N Nor n et w he ay Sw rla itz nds er G lan er d Lu m xe an m y b D our en g m ar k 0 Source: Eurostat, 2006 Furthermore, although Poland’s transport system and infrastructure are weak by Western European standards42, labour costs are low. In 2002, the typical cost of a day’s skilled labour in Poland was 13 per cent of the equivalent figure for France, and 11 per cent of the equivalent figure for Germany. Poland has been regarded as an attractive location for FDI, and has ranked consistently highly in the annual AT Kearney index of competitive destinations for FDI, raking 5th in the most recent 2005 index43. This was due to many factors including: • • • • • geographical location; political change and acquisition opportunities; a young qualified population of working age; attractiveness of working in foreign companies due to the higher rates of pay; a relatively cheap workforce. Poland has undergone major privatisation over recent years which included the opportunity for FDI through acquisitions such as the largest privatisation to date when France Telecom invested in Telekomunikacja Poland in 2000. Another, and one of the most recent is an issue of 30 per cent of shares in the largest Polish bank, PKO BP on the Polish stock market in 2004. 4.3.4 Threats As in the Swedish example, there is a risk that the country’s growing popularity as a foreign direct investment location will lead to cost push inflation, thus reducing the country’s competitive advantage as a low cost location. Indeed, evidence of this has already been seen, with the cost of labour in Poland outgrowing the EU average (Figure 4.16). Furthermore, the 42 43 FDI Impact on Polish Labour Market, Agnieszka Ziomek http://www.atkearney.com/main.taf?p=5,3,1,140,1 45
  • 50. FDI Research – Final Report recent expansion of the EU to include Romania and Bulgaria may cause Poland to lose out from low skilled FDI to cheaper competitors in future. For these reasons, Poland will be required to move further up the value chain if it wishes to retain its competitive position, which is likely to require significant investment in infrastructure. Figure 4.16 Labour Cost Index 2004 (2000 Base) 300 250 200 150 100 4.3.5 Bulgaria Romania Estonia Hungary Slovakia Latvia Slovenia Czech Republic Ireland Poland Malta United Kingdom Spain Finland Netherlands Cyprus Sweden Portugal EU (25) Denmark France Greece Italy Luxembourg Source: Eurostat Lithuania Austria Belgium 0 Germany 50 Applicable Lessons In recent years, the emergence of Poland, and the other accession nations, has meant that Northern Ireland is no longer in a position to compete on low-value added assembly and business process outsourcing opportunities, and must to seek opportunities further up the value chain. This trend is likely to continue as the Polish economy increases in sophistication, and this is likely to put further pressures on the Northern Ireland business base. However, in spite of this threat, Poland also presents Northern Ireland with an opportunity for the development of highly competitive joint FDI propositions with Polish organisations in the business and financial services sector. Such propositions would involve companies establishing operations in Northern Ireland with responsibility for management and customer service tasks, and operations in Poland to handle the processing side of the business. 46
  • 51. FDI Research – Final Report 5 Workshops and business consultations 5.1 WORKSHOP As part of our research, a workshop was held involving representatives from Invest Northern Ireland, Intertrade Ireland, DETI, and a range of recruitment companies and employers in order to: • • Form a view on the strengths, weaknesses, opportunities and threats in the Northern Ireland economy; and Gather opinions on the best ways to exploit the strengths and opportunities and to mitigate the weaknesses and threats. A summary of the views of those who attended the workshop is provided in this section. 5.1.1 SWOT analysis 5.1.1.1 Strengths The attendees felt that the province’s key strengths included: • • • • • • • • • • • • • An untapped graduate market – although attendees felt that this has been a strong strength of the region in the past, it is less so now, as an increase in high-skilled jobs has absorbed much of this excess capacity; Cultural compatibility – particularly with the US market; Infrastructure, particularly in telecoms infrastructure; Room for expansion – in comparison to more constrained competitor areas such as Dublin; A ‘Can do attitude’ – although this was disputed by some attendees; Status as an English speaking nation – seen as a comfort factor for some investors; An accent that is easily intelligible to overseas customers – this gives Northern Ireland a particular advantage over Scotland for example; A tight legislative environment particularly in the areas of security and intellectual property – giving Northern Ireland a particular advantage over India for example; Access to the profitable Republic of Ireland market; Status as a member of the European Union – helping to overcome customs issues; A strong research base –there appears to be little appetite to commercialise this although development of the NI Higher Education Innovation Fund is a move in that direction; Ease of hire and fire – especially in relation to France; Low churn levels – which encourages companies to invest more in training without fear of ‘poaching’. 5.1.1.2 Weaknesses The attendees felt that the province’s key weaknesses were: • • A large pool of workers with only basic or intermediate skills – although this was once a strength, it is now seen as preventing movement up value chain; Lack of foreign language capability; 47
  • 52. FDI Research – Final Report • • • • • • Mismatch between the nature of research and development work undertaken by universities and that required by business44; A ‘brain drain’ of graduates to mainland Britain; Higher corporation tax rates than the Republic of Ireland; Low levels of entrepreneurship - preventing supply chain opportunities of FDI from being maximised; An ‘over-sized, over-paid and over-secure’ public sector, that absorbs much of the province’s skilled people; Lack of scalability outside Belfast due to property shortage, labour shortage, demographic factors and absence of universities. 5.1.1.3 Opportunities Opportunities in the province were noted as: • • • • • • • • • • • • The ability to provide a near-shore solution for Indian businesses (e.g. HCL); An emerging brand, and a more recognised international status as a place to invest; Opportunity to market province as a cost minimisation location, as opposed to a profit maximisation one; Growing global demand for IT security; Potential to lure contact centre and back office processing businesses out of Eastern European countries, due to high levels of inflation in these countries; Initiatives to make education provision more business relevant, e.g. ECIT; Exploiting research organisations such as CUBIS; Attraction of workers returning to Northern Ireland from overseas following the peace dividend; Use of low cost labour from accession countries as a solution to demographic problem; Focus on niche opportunities – for example, rather than targeting entire sectors, focusing closely on the parts of the sectors that add value, that are expected to grow in the years ahead, and for which Northern Ireland offers distinct locational advantages. However, there was a debate about level of granularity that should be used to do this. Generating environment in which ‘winners pick us’ through, for example, lower corporation taxes; Ability to absorb back office functions for IFSC following strong economic growth and cost-push inflation in Dublin; 5.1.1.4 Threats Threats to the province were thought to include: • • • • • • 44 Saturation of the graduate market – The ‘strengths’ section identified Northern Ireland’s untapped graduate market as a recent source of strength. However, it also raised the issue of the recent absorption of much of this surplus by existing businesses. Should this trend continue, a shortage of skilled labour may emerge as an issue in the Northern Ireland labour market; Recruitment - Increasing difficulty finding people with sales skills; The emergence of India and Eastern Europe as competitive threats; Current low take up of maths and science at school level translating into a future skills shortage in the labour market; A reduction in people learning ICT skills following the ‘bursting’ of the ‘dot-com bubble’; A lack of public sector understanding of the commercial pressures businesses are under leading to the withdrawal of businesses from Northern Ireland; The HEIF or DEL’s HE and FE Collaboration Fund could help to address this 48
  • 53. FDI Research – Final Report • • • 5.1.2 A reduction in wealth creation and investment following the ending of the property boom; Increased competition from outside of Europe; A lack of vision. Developing opportunities and mitigating threats During the workshop exercise, attendees argued that45: • • • • • • • • • • The advantages of cultural compatibility can be maximised by not only targeting US companies, but also Indian companies that serve US markets. In particular, Northern Ireland should focus on offering them a near shore solution for their EU and US markets, and help in ‘leverage the virtual day’46; Northern Ireland could benefit from making more reference to security, IP and legislative advantages in their sales proposition; Government marketing should be better targeted towards niche markets; Better use should be made of opportunities for joint ventures, with places like India and Poland. A joint proposition could be made with such low-cost countries whereby they provide the scale, and Northern Ireland provides the comfort to investors in terms of legislative environment and cultural compatibility; Attempts should be made to attract outbound sales contact centres47 to areas outside Belfast and Derry as they offer a spectrum of occupations, allowing inactive people and women returners to join company in less skilled roles, and to move themselves up the value chain; Invest Northern Ireland could better exploit the opportunities presented by the Indian market by having a permanent member of staff based there – something currently under consideration; Government support for skills and education provision should be better targeted to the needs of businesses (e.g. science and maths). DETI and Invest NI have a role to play in influencing DEL’s priority skills areas. DEL have responded to this criticism by pointing out that their Skills Strategy and FE Means Business initiative are both targeted towards business needs. It has also been pointed out that DETI and Invest Northern Ireland are both involved in influencing DEL’s priority skills areas and the Skills Expert Group is currently engaged in considering the NI priority skills areas as it develops a NI Employment and Skills Action Plan. Resources should be allocated towards marketing IT as a career opportunity for women; The public sector’s wage and pension offer could be reformed to make it less of a magnet to Northern Ireland’s best talent; and Government could allocate a higher share of Northern Ireland’s public resources towards economic development. 45 It should be stressed that all of these points represent opinions made by attendees at the workshop, and do not necessarily reflect the findings of this research. 46 This refers to the opportunity to ensure that Indian and US businesses can continue to operate productively and respond to changing conditions outside of the hours of their working day, by having operations in other time zones. 47 A contact centre can be defined as ‘a centralised office used for the purposes of receiving and transmitting a large volume of requests by telephone, letter, fax or e-mail’ (http://en.wikipedia.org/wiki/Call_centre). Although all outsourcing call centre service providers fall under SIC code 74.86, most call centres operations fall under the SIC code of the company they support. For example, the Customer Contact Association represents companies in the manufacturing, utilities, public service and private service sectors. 49
  • 54. FDI Research – Final Report 6 Survey Findings In addition to the quantitative employment, output and fiscal benefits, which will be discussed in the next section, tradable services FDI is also likely to generate wider benefits to the Northern Ireland economy. For example, we would anticipate that indigenous companies will have an opportunity to sell their products to the FDI investor (upstream linkages) or they could procure more cost effectively, as a result of having a new supplier operating in close proximity (downstream linkages). It is also more likely that the Northern Ireland business base will become more internationally competitive as they gain access to a broader range of products and services. Furthermore, training and job opportunities provided by the FDI investors have the potential to help raise the skills base of the Northern Ireland labour market and the proximity of FDI investors is likely to facilitate networking, and allow the transfer of ideas between Northern Ireland companies. However, in addition to these positive factors, there is a risk that increased FDI investment may displace local activity, increase labour costs for Northern Ireland businesses and increase the problem of skills shortage. In this section we assess these wider benefits and threats through an analysis of the finding of our surveys of brownfield FDI investors, and tier one beneficiaries in order to gain an understanding of the extent to which these benefits have been experienced by companies in Northern Ireland. The analysis is based on: • • Survey of FDI Projects; Tier 1 Survey. 6.1.1 FDI Survey During October and November 2006 we undertook a telephone survey with tradable services FDI companies. In this description we included not only foreign owned companies that had chosen to locate a site within Northern Ireland but also companies headquartered elsewhere in the UK but who had chosen to make a significant investment to develop a site in Northern Ireland. The list of companies was provided to us by Invest Northern Ireland and included not just companies they had assisted but also other FDI start ups they were aware of. To carry out this survey, we were provided with contact details for 68 tradable service companies. Of these companies, 31 had ceased trading, while four numbers were invalid. Eighteen of the remaining 33 companies agreed to participate in the survey, equivalent to a response rate of 58 per cent, Although this is a good response rate, unfortunately the sample size of 18 is still too low for us to report on quantitatively48. However, the wealth of data available comes from a broad spread of different types of tradable services FDI companies so we are able to provide a useful summary of the main findings. Any figures reported relate to the number of companies choosing each particular response and therefore should be treated as indicative. 48 Looking at the confidence intervals of this dataset we see that, for example, if 50 per cent of companies state that they agree with “xyz” we are 95 per cent confident that the true proportion of companies that agree with “xyz”, had all 57 companies been interviewed, would lie between 34 and 66 per cent. 50
  • 55. FDI Research – Final Report 6.1.2 Tier 1 Indigenous Suppliers Survey During the same period we also undertook interviews with Tier 1 indigenous suppliers of FDI companies. In total we conducted interviews with 18 companies - the majority of whom were mentioned by the FDI companies as being major suppliers for their Northern Irish site(s). Once again, the sample size is still too low for us to report on quantitatively. However, the interviews were undertaken with a broad range of suppliers including accounts, utility companies, graphic designers, IT services, legal services, recruitment services and stationary suppliers and we provide a summary of the main findings below. 6.2 6.2.1 FDI SURVEY RESULTS Supply chain linkage 6.2.1.1 Upstream linkages Table 6.1 provides details of the locations from which investors purchase their factors of production. It shows that investors have a strong preference for local procurement, with 9 respondents out of 18 reporting that they procured at least 75 per cent of their materials in Northern Ireland, and a further three procuring at least 50 per cent of materials there. Table 6.1 - Proportion of purchases made from different geographic markets (number of respondents) Geographic market Northern Ireland England, Scotland and Wales Republic of Ireland Rest of EU Outside of EU Source: Experian, 2006 0 to 24 % 3 11 15 15 14 25 to 49 % 1 2 1 1 1 50 to 74 % 3 2 0 0 0 75 – 100 % 9 1 0 0 1 Table 6.2 shows the extent to which FDI investors source their goods locally has changed over time. It shows that despite the fact that the companies operate in an increasingly global market, the proportion of products procured locally has increased in the past 12 months. There are several possible explanations for this trend. For example, it may have occurred because, as the companies are now more established in the Northern Ireland economy, they have had more opportunities in the past year to establish links with local suppliers. Conversely, it may be because tier one firms would have had longer to establish a presence in Northern Ireland, in order to cater for the demands of the investor. Table 6.2 - Change in proportion of goods sourced locally in past 12 months Response Number of mentions Significant increase 0 Increase 7 No change 11 Decrease 0 Significant decrease 0 Source: Experian, 2006 Figure 6.1 shows the kinds of products and services that our responding FDI investors in Northern Ireland tend to procure locally. It shows that IT and office supplies were the most commonly procured product, being mentioned by 17 of the 18 respondents to this question. Recruitment and HR services were another commonly procured service, as were electricity and utilities, legal services and cleaning. 51
  • 56. FDI Research – Final Report Figure 6.1 - Main products and services bought locally Products and services bought locally by FDI investors in the Northern Ireland tradable services sector Number of mentions 18 17 16 14 12 10 8 8 7 7 6 6 6 4 3 3 2 2 2 1 1 1 Tr av el Te er vi le ce co s m m un ic at Pr io ns op er ty Se rv ic es IT Su pp or t Tr ai ni ng ou rie rS /C Po st al at er in g C es er vi c at er ia ls /A ud it s cy ou nt an Ac c Source: Experian, 2006 C le an in g / C le an in g IT /O ffi ce m Su pp lie R s ec ru itm en El t/H ec R tri ci ty /U til iti es Le ga l 0 6.2.1.2 Downstream linkages Although upstream linkages present important benefits to Northern Ireland’s indigenous business base, attention must also be given to further linkages, which assist downstream companies to procure more cost effectively. Table 6.3 provides a summary of the types of markets that tradable service FDI investors in Northern Ireland tend to sell to. It shows that all of the companies responding to the survey sold primarily to other businesses, with large and medium sized businesses tending to be the most significant customers. Table 6.3 - Characteristics of main customers Type of customer Small private companies (<50 employees) Medium private companies (50-250 employees) Large private companies (>250 employees/multinationals) Public sector Individuals / Consumers Small voluntary sector Large voluntary sector Source: Experian, 2006 Number of responses 0 3 15 0 0 0 0 Table 6.4 shows the locations of the markets to which responding FDI investors in Northern Ireland typically sell. It shows that the companies tend to be very internationally oriented, with half of the question’s 16 respondents reporting that they sell the majority of their produce to areas outside of the EU, and with only two of the 16 companies selling the majority of their produce to the Northern Ireland market. This means that, unlike upstream linkages, downstream linkages and benefits are likely to be minimal. 52
  • 57. FDI Research – Final Report Table 6.4 - Proportion of sales made to different geographic markets Geographic market Northern Ireland England, Scotland and Wales Republic of Ireland Rest of EU Outside of EU Source: Experian, 2006 6.2.2 0 to 24 % 14 12 15 11 3 25 to 49 % 0 2 0 4 3 50 to 74 % 1 2 1 1 3 75 – 100 % 1 0 0 0 7 International competitiveness Table 6.5 shows the anticipated growth markets for Northern Ireland’s tradable services FDI companies over the next 12 months. These figures support the argument that the companies tend to be outward looking, with only a small number of respondents anticipating growth opportunities in Northern Ireland, and with companies seeing potential opportunities in a wide range of global markets. This means that the companies are likely to make a contribution to the international presence of the Northern Ireland economy for as long as they continue to have their operations their. It also means that the displacement of local activity is likely to be low. Table 6.5 - Anticipated growth markets in next 12 months Anticipated growth area Sales to UK and RoI Northern Ireland market Markets in the rest of the UK Markets in the Republic of Ireland International Sales Other EU markets USA Asia Eastern Europe Global growth Source: Experian, 2006 Number of responses 2 2 0 6 3 2 1 2 Figure 6.2 shows the trends in turnover, selling price, exports, employment, profitability and investment over the past year, and how these are expected to change over the year ahead. It shows that: • • • • In spite of a reduction in selling prices, caused by intense low cost competition from overseas, most respondents are reporting an increase in turnover, much of which has come from increased exports; As a consequence of this turnover and export growth, employment and profitability have both increased; Companies have responded to this growth by investing more heavily in new buildings and in plant and machinery; and All of these trends are forecast to continue into the next year. 53
  • 58. FDI Research – Final Report Figure 6.249 Current and forecast trends in tradable services FDI activity Net balance of respondents 20 This year 18 Next Year 16 15 15 15 14 12 12 11 10 10 10 6 6 5 0 -2 -2 -5 Turnover/Revenue Selling prices Exports Employment Profitability Investment in new Investment in plant buildings and machinery Source: Experian, 2006 6.2.3 New products and services When FDI companies increase the range of products and services that they offer, the economy benefits in two ways. Firstly, the investor’s local consumer and business customers gain access to a broader range of products and services, and secondly, the company’s employees and suppliers benefit from the resulting expansion. Table 6.6 shows the responses made by survey respondents when asked whether the range of services that they provide had changed since they moved to Northern Ireland. It shows that 10 of the 18 respondents reported an increased diversification, and that eight respondents reported no overall change. No decreases were reported. Table 6.6 - Change in range of services since moving to Northern Ireland Response Number of respondents Increase Decease Remain unchanged Source: Experian, 2006 10 0 8 Of the 10 respondents who reported an increase, most reported that this was due to a corporate decision to move into new areas, while other factors reported included: • • • • Improved technical capacity; Developing markets - new clients, with new demands; The increased access to an increasingly global market; and A corporate takeover by a larger firm. 49 The net balance of respondents is equal to the number of respondent reporting an increase minus the number of respondents reporting a decrease. 54
  • 59. FDI Research – Final Report This increase in product and service offering has been of notable benefit to the Northern Ireland economy, with eight of the 14 respondents increasing their investment in the Northern Ireland economy as a result of the expansion. Although only a small number of these investors were prepared to provide details of the sums they invested, the evidence appears to indicate that the impacts can vary widely, with investments ranging from six figure sums to eight figure sums. The median investment was £5.4 million. 6.2.4 Increased skills FDI can be of particular benefit to the Northern Ireland economy if they generate an investment in skills that can be utilised by other companies in the business base. However, a shortage of skills can have an impact on an investor’s long term willingness to remain in Northern Ireland. Table 6.7 shows that, at present, skills gaps50 only pose a limited threat to FDI investors in Northern Ireland, affecting only six of the 18 firms surveyed. Assuming no sampling error, this would equate to a figure of 33 per cent, a significantly higher figure than the 9 per cent reported for the Northern Ireland business base in The Northern Ireland Skills Monitoring Survey 2005. The most commonly reported skills gap in the Northern Ireland labour force were technical and business specific skills, and these were mentioned by three respondents. Problems were also reported with numeracy, IT, sales and customer service skills, as was a lack of entrepreneurial spirit and a poor consulting culture. Table 6.7 - Companies experiencing skills gaps Response Number of respondents Have skills gaps Do not have skills gaps Source: Experian, 2006 6 12 As part of the survey, the six FDI investors who reported skills gaps were each asked to report the impact that skills gaps is having on their businesses, with 1 representing ‘no effect’ and 100 representing ‘company closure’. Although most respondents did report some impact on their businesses performance, only one respondent gave a response in excess of 60, indicating that the effects of the gaps are limited. Table 6.8 - Effect of skills gaps on company performance Response Little or no effect (responses of 0-20) Small impact on performance (responses of 21-40) Quite high impact on performance (responses of 41-60) Very high impact on performance (responses of 61-80) Risk of company closure (responses of 81-100) Source: Experian, 2006 Number of respondents 1 2 2 1 0 An alternative means of assessing the impact of labour supply difficulties on FDI investors in Northern Ireland is to assess the extent to which companies have experienced ‘hard to fill’ 50 A skills gap can be defined as “a gap between the types of skills that their current employees had, and those that the organisation needed to meet their business objectives” (Source: Northern Ireland Skills Monitoring Survey 2005), 55
  • 60. FDI Research – Final Report (htf) vacancies51. Nine of the 18 respondents to the survey reported that they had experienced hard to fill vacancies in their organisations during the preceding 12 months. These included seven IT/software business, an electronics company and a financial services company. Comparisons cannot be drawn between these finding and the findings of the Northern Ireland Skills Monitoring Survey, as the survey contains questions relating to hard-to-fill vacancies at a particular point in time, rather than over the course of a year. Table 6.9 - Presence of hard to fill (htf) vacancies Response Experienced htf vacancies Have not experienced htf vacancies Don’t know / Did not recruit Source: Experian, 2006 6.2.5 Number of respondents 9 6 3 Networking Economists such as Michael Porter have argued that, by working in close proximity to and by networking and sharing ideas with successful large scale multinational companies52, indigenous companies will be able to benefit from the exchange of ideas and best practice. Table 6.10 provides details of the involvement of FDI companies in business networks and support organisations in the Northern Ireland economy. It shows that approximately half of all respondents are members of such organisations. Table 6.10 - Membership of industrial networks or business support organisations Response Number of respondents Am a member Am not a member Don’t know Source: Experian, 2006 9 8 1 Momentum, Northern Ireland’s ICT trade association, was the most cited example of an organisation through which networking takes place, gaining four mentions. Invest NI, Northern Ireland’s economic development agency also gained two mentions as an organisation that supported business networking links. Other organisation mentioned by survey respondents included: • • • • • • • • Centre for Competitiveness; Call Centre Forum; IT Industry Chief Executive Forum; Prince; ITIL; ECIT; CSPT; and Centre for Software Process Technology. 51 An htf vacancy is a position in a company which employers struggle to fill, either as a result of too few potential employees having the necessary skills to undertake the post, or as a result of too few qualified employees being willing to undertake the post, given the wage or salary on offer. 52 See Porter, M. (1980) Competitive Strategy, Free Press, New York, 1980 for a discussion of this theory. 56
  • 61. FDI Research – Final Report As well as being of significant benefit to indigenous firms, evidence from the survey appears to indicate that these links are also beneficial to the investors themselves, with seven of the nine respondents reporting they generated opportunities for their business. Table 6.11 - Knowledge sharing opportunities generated through networks Response Networks have generated opportunities Networks have not generated opportunities Source: Experian, 2006 6.2.6 Number of respondents 7 2 Knowledge and Technology transfer In addition to these links with other businesses, links between FDI investors and universities can also be mutually beneficial, allowing the two organisations to share in knowledge and research findings. Furthermore, these shared finding will be disseminated to other Northern Ireland businesses, both through the use of business networks, and through links between universities and indigenous companies. Our survey showed that the majority of FDI companies in Northern Ireland had links with local universities (Table 6.12). Table 6.12 - Linkages between companies and universities Response Number of respondents Linkages exist Linkages do not exist Source: Experian, 2006 14 4 However, although most respondents had links with the University sector, the majority only used these links for graduate recruitment purposes, with only three respondents using their links principally for either research and development or knowledge transfer purposes (Table 6.13)53. Table 6.13 - Purposes of links with universities Response Graduate recruitment Training Research & Development Knowledge Transfer Other Source: Experian, 2006 Number of respondents 8 1 2 1 2 Although knowledge transfer does not appear to be the principal purpose of investoracademic links in Northern Ireland, the links do nonetheless appear to have an impact in this area, with six respondents reporting t knowledge-sharing opportunities generated as a result of the links (Table 6.14). Table 6.14 - Knowledge sharing opportunities generated through university links Response Links have generated opportunities Links have not generated opportunities Source: Experian, 2006 Number of respondents 6 8 53 Again this is being responded to by way of interventions such as the HEIF and/ or HE-FE Collaboration Fund. 57
  • 62. FDI Research – Final Report Furthermore, FDI projects can also benefit from links to the FE sector, and particularly in response to companies’ training needs for planned workforce. Invest NI has engaged in brokering such links in the IT and Financial Services Sector. 6.2.7 Perceptions of Northern Ireland The FDI investors who participated in the survey had positive perceptions of Northern Ireland as an investment location, with the majority of respondents either ‘agreeing’ or ‘strongly agreeing’ with the statement that ‘Northern Ireland is a good place for businesses to invest in the future’, and with a majority of respondents reporting that the province had either met or exceeded their expectations. These supportive conditions led businesses to make further expansions following their initial investment, and to broaden the range of products and services that they offer from their Northern Ireland site. 6.2.8 Impact of FDI All 18 of the surveyed foreign direct investors in Northern Ireland’s tradable services sector either ‘agree’ or ‘strongly agree’ with the statement that ‘FDI is good for the economy of Northern Ireland’, citing supply chain purchases, training provision, and knowledge transfer benefits as evidence of a positive impact. However, it was noted that investors do not do as much as they could to help Northern Ireland companies make sales in other countries, and there is a view that there could be more done by the public sector to help indigenous suppliers work with FDI companies, particularly in developing the skills base. 6.2.9 Summary In summary, the main findings of this analysis are that: • • • Tradable service FDI investors have a tendency to procure a significant share of their factors of production in Northern Ireland, with suppliers of recruitment services and IT / office equipment enjoying particular benefits; There is little evidence of any significant downstream benefits resulting from FDI investment; Tradable service FDI companies in Northern Ireland are highly export-oriented, and make a significant contribution to the presence of Northern Ireland in international markets; • Tradable service FDI investors are continuing to contribute to Northern Ireland’s economic expansion in spite of low cost competition from overseas; • Following on from their initial investment, there is evidence to suggest that companies continue to invest in and develop their business; • Although investors in Northern Ireland undoubtedly face skills issues, these do not appear to be sufficient to threaten their operations; and • Most tradable service FDI investors have established mutually beneficial links with local businesses and universities, although there is scope to further develop these. 6.3 TIER ONE SURVEY Although the tier one survey involved interviews with the same number of individuals as the FDI investors survey, it accounted for a much smaller proportion of the total pool of companies operating in the Northern Ireland economy. For this reason, it is difficult to draw 58
  • 63. FDI Research – Final Report any firm, quantifiable conclusions from this work. However, respondents to the survey did express some interesting views on the impacts of FDI on their businesses, and these are summarised below. • • • • • • • • • The FDI suppliers we consulted spoke favourably of Northern Ireland as a business location, with all of the respondents agreeing that it was a good place to invest, and with most expressing the view that Northern Ireland will become more competitive as a business location in the years ahead; The strength of Northern Ireland as a business location was partly attributed to high levels of workforce skills and a plentiful supply of business premises, and partly to their proximity to other companies, whom they could sell their products and services to, and collaborate with. In particular, the presence of FDI companies in Northern Ireland was considered important, with these companies accounting for approximately one in ten sales made by supplier companies; When asked about the impact that an increase in FDI would have on their business, the majority of respondents felt that it would lead to an increase in company sales and that it would encourage new businesses to set up in Northern Ireland. However, there was also a view that an increase in FDI could lead to an increase in pay demands on their business. Respondents also felt that an increase in FDI would have little impact on the size of the labour pool, workforce skills or staff retention; Although all of the companies that we contacted had had some success in selling to larger FDI investors, none have secured any major contracts as a result of their relationship during the past five years; The majority of FDI suppliers do not have links with universities, and those that do tend only to use them for graduate recruitment or training. They are therefore unlikely to receive any of the knowledge transfer benefits resulting from relations between FDI investors and the academic sector. However, a third of the FDI suppliers interviewed belong to specialist industrial networks or business support networking organisations that assist their businesses to innovate. Of these suppliers, two-thirds of them stated links with these networks offered them opportunities to share knowledge or network with tradable services FDI investors in Northern Ireland. As a result, the majority of suppliers agree that FDI companies will improve technology transfer between Northern Ireland companies. Most FDI suppliers we talked to believe that in the past five years the volume of foreign direct investment in their local geographic area has increased. FDI suppliers feel quite positive about Foreign Direct Investment and ‘strongly agree’ or ‘agree’ that it is good for the economy of Northern Ireland. Almost all suppliers agree that FDI in Northern Ireland is good for their businesses. However, most felt that there could be more done by the public sector to help indigenous suppliers work with FDI companies, for example, by helping local suppliers to identify suitable contacts in investing companies, and by raising awareness of what indigenous businesses had to offer investing firms. There is little evidence from our limited survey at least to suggest that FDI has helped indigenous companies to access new export markets, or that indigenous companies have made changes to the quality of their product/service offer in order to meet the demands of the FDI investors. 59
  • 64. FDI Research – Final Report 7 Quantitative Analysis 7.1 METHODOLOGICAL APPROACH 7.1.1 Input data In addition to the analysis of survey data, we designed an employment, output and fiscal impact model to estimate both the direct employment and output benefits of tradable services FDI in Northern Ireland, and the wider indirect and induced benefits. Wherever possible, the model inputs were based on the responses given by survey respondents regarding their direct employment, turnover, and product destinations. However, due to the limited number of survey respondents, we supplemented these figures with detailed company data provided to us by DETI’s statistics research division, whose assistance in this analysis was of significant benefit to our study. 7.1.2 GVA impact calculation In order to arrive at a gross GVA impact estimate for each company, we multiplied the reported direct employment impact for each company by £24,286, a figure which represents average total value added per employed person in the Northern Ireland IT and Business Services Sector based on data from Experian’s Autumn 2006 Regional Planning Service. In order to convert this figure into a net impact, the following adjustments were made: • • • We applied a 22 per cent displacement adjustment to account for the amount of output and employment that the FDI investors displace from other companies within Northern Ireland. We then applied an indirect impact multiplier of 1.075 in Northern Ireland, and 1.35 in the UK, to the proportion of sales made locally, in order to account for the additional benefits generated through the business spending of FDI investors and their local suppliers. As little additionality guidance is available at a Northern Ireland level, we used English Partnerships Additionality Guidance to generate these figures54. Finally, we applied an induced impact multiplier of 1.05 in Northern Ireland, and 1.25 in the UK, to total sales, in order to account for additional benefits generated by company employee spend, and by spend by employees of those firms serving the employees of the FDI investor. These figures were also based on English Partnership guidance55. 54 As the figure is only being applied to the proportion of purchases made locally, we have adopted the recommended multipliers for companies with strong local linkages here. 55 Recommended multipliers for areas with ‘average’ local linkages. 60
  • 65. FDI Research – Final Report 7.1.3 Employment impact calculation As all of the companies in this study are foreign-owned, brownfield investors, we have assumed that the gross employment impact of the intervention is equivalent to the company’s total employment on site. We then applied the same assumptions on displacement and on indirect and induced multipliers as in the GVA calculation, in order to reach a net employment figure. 7.1.4 Fiscal impact calculation We used the 2004 Annual Business Inquiry to calculate for twenty industry divisions: • • • The ratio of employment cost to GVA contribution; The ratio of goods, materials and services expenditure to GVA contribution; and The ratio of capital spend to GVA contribution. For each company, we then applied their reported turnover figure to the relevant three ratios, in order to derive an estimate of gross expenditure on employment; goods, materials and services; and capital. These gross figures were converted into net figures by applying the same displacement and indirect and induced multiplier assumptions as in the GVA and employment calculations. Once these net impacts were generated, we calculated this fiscal impact by applying effective tax rates of 3.8 per cent on goods and capital spend, 23.4 per cent on employment cost, and 11 per cent on company profit56. These figures represent typical effective tax rates for UK businesses, based on an analysis of 2004 UK Input-Output tables. Effective tax rates in Northern Ireland may be very marginally lower than this. This is because businesses, on average, tend to be slightly smaller in scale, meaning that a higher proportion of income will be taxed at a lower rate. However, due to the risk of sampling error when calculating rates based on Northern Ireland ABI returns, a view was taken that UK data would, nonetheless, be more reliable. The figures do not account for the impact of transfer pricing. This is because, given the difficulties surrounding the access of transparent data on company reallocation of profits, we do not believe that this can be accounted for accurately. For this reason, the fiscal impacts quoted within this analysis should be regarded as ‘high estimates’. All of the calculations underlying the calculation are shown in Appendix B. 7.2 7.2.1 • GVA IMPACT Benefits Northern Ireland’s tradable service FDI firms directly contribute £751 million per annum worth of output to the Northern Ireland economy equivalent to 2.9 per cent of GVA. However, once a displacement factor has been accounted for, this figure is reduced by £165 million57, to £586 million. 56 Operating Surplus/Mixed Income (equivalent to GVA contribution less employment costs) was used as a proxi for profit. 57 The study has assumed that all displacement takes place at the Northern Ireland level. 61
  • 66. FDI Research – Final Report • • 7.2.2 In addition, purchases made by the firms, and related purchases further up the supply chain (indirect benefits) are worth £132 million to the Northern Ireland economy and £309 million to the UK economy. A further benefit of £29 million in Northern Ireland and of £146 million in the UK occurs as a result of purchases made by the employees of FDI firms, and by the employees of the companies who serve these customers (induced benefits). Net Overall Impact When all of these factors are accounted for, the overall impact of FDI in tradable services on GVA equates to £747 million per annum in Northern Ireland. This equates to 2.9 per cent of total GVA and £1,041 million across the UK (0.01 per cent of total GVA) (Table 7.1).58 Table 7.1 - Impact of tradable services FDI on output in the Northern Ireland and UK economies (£ million per annum) Northern Ireland Direct impact Displacement Indirect benefits Induced benefits Net overall impact UK 751 - 165 132 29 747 751 - 165 309 146 1,041 Source: Experian, based on data from Experian, English Partnerships, ONS and DETI 7.3 7.3.1 • EMPLOYMENT IMPACT Benefits Using survey response data, and data provided to us by DETI’s Statistics Research team, we have generated an estimate of total employment in the Northern Ireland tradable services sector. We have found that the sector employs 30,905 staff, equivalent to 3.8 per cent of the total workforce. These include: o o 17,360 in computer and related activities; and 13,545 in other business services (including R&D); • Once displacement is accounted for, this figure falls by 6,799 to 24,106. • In addition, the companies that produce the goods and services used by FDI firms employ 5,441 people in Northern Ireland and 12,713 in the UK. • 7.3.2 A further benefit of 1,205 in Northern Ireland and of 6,026 jobs in the UK were also associated with the purchases made by the employees of the FDI firms and their supplier companies. Net Overall Impact When all of these factors are accounted for, the overall impact of FDI on employment equates to 30,752 jobs at the Northern Ireland level. This equates to 3.8 per cent of all jobs. It also accounts for 42,845 jobs at the UK level 0.2 per cent of the total. The fact that FDI accounts for a higher proportion of employment than output reflects the tendency for employment 58 Model workings provided in Appendix C 62
  • 67. FDI Research – Final Report productivity within the tradable service sector to be below that in more capital intensive manufacturing industries. Table 7.2 - Impact of tradable services FDI on employment in the Northern Ireland and UK economies (total jobs) Northern Ireland UK 30,905 6,799 5,441 1,205 30,752 Direct impact Displacement Indirect benefits Induced benefits Net overall impact 30,905 6,799 12,713 6,026 42,845 Source: Experian, based on data from Experian, English Partnerships, ONS and DETI 7.4 FISCAL BENEFITS Once issues relating to displacement and the multiplier effect have been accounted for, Northern Ireland’s tradable service FDI companies are responsible for an estimated £174 million in Government tax receipts in Northern Ireland, including £33 million per annum in taxes on goods and capital spend, £105 million in taxes on employment, and £36 million in taxes on company profits. Across the UK, the companies are responsible for an estimated £311 million in Government tax receipts. These include £50 million in taxes on goods and capital spend, £147 million in taxes on employment, and £114 million in taxes on company profits. Table 7.3 - Fiscal benefits associated with tradable services FDI in Northern Ireland and the UK (£ million per annum) Company profit Northern Ireland UK Employment Good and capital spend Total fiscal revenue 33 114 105 147 36 50 174 311 Source: Experian, based on data from Experian, English Partnerships, ONS and DETI 63
  • 68. FDI Research – Final Report 8 Future trends in inward investment The research on future investment trends will focus on the industries identified by DETI as having outstanding potential for exports. 8.1 INVESTMENT OUTLOOK: OVERVIEW International investment will remain a key driving force in the global economy. Cross border flows are stimulated by the following factors: • • • • • • an increasingly integrated world market; a favourable outlook for the business environment; growing inter-nationalisation of services; the continuing expansion of foreign markets as an export base; technological developments that enable international businesses to be run in an integrated manner; strong competitive pressures forcing multinationals to seek new locations for production; Against these stimuli to FDI, a number of potential constraints must be considered. Geopolitical uncertainties are a permanent feature of international operations and their impact on international investment has been heightened by concerns connected with terrorist attacks in recent years. Other factors that dampen FDI include sharp exchange rate fluctuations driven partly by volatile commodity prices, a reaction in some countries against foreign participation in key sectors, and ‘outsourcing fatigue’ among Western companies. While these factors will constrain growth to below its potential, the expansion of FDI is expected to remain robust. A recent forecast by the Economist Intelligence Unit59 has FDI growth averaging almost 5 per cent a year in the period 2007-10 on the central scenario. We consider this to be a realistic forecast. Growth in international trade and investment has exceeded global GDP growth in recent decades, and this pattern should continue. The report also concludes that the bulk of the increase in FDI flows in the period 2007-10 will be to developed countries. Boosted by strong EU/US investment links, annual growth in FDI flows to these countries is forecast to average 7 per cent. The volume of FDI inflows into the US, attracted by the wealth of opportunities, an entrepreneurial culture and a strong infrastructure, is a major contributor to the strong growth projected for investment into this group of countries. Despite buoyancy in the overall level of flows to developing countries and further strong inflows into China, growth averaging only 1 per cent a year is forecast. The diminishing effect of privatisations in many leading emerging markets is likely to constrain the increase in inflows to rates below those seen in recent years. 8.1.1 UK prospects As noted in Section 3, the UK remains the top attraction in Europe for inward investment, despite the success of France and Eastern Europe in attracting investment in recent years. France benefits from its geographical proximity to Germany and arguably has an edge over the UK in terms of attracting European investment given its membership of the Eurozone. Eastern Europe has become Europe’s main destination of manufacturing investment, including some relocation of FDI projects from the UK. 59 World Investment Prospects to 2010, Economist Intelligence Unit 64
  • 69. FDI Research – Final Report These trends are expected to continue. Intra-Eurozone investment and good, relatively inexpensive labour supply in Eastern Europe will continue to provide a competitive environment. Nevertheless, close transatlantic links are expected to benefit FDI growth in the UK. The Economist Intelligence Unit report forecasts that the UK will be in second place behind the US in terms of the value of inflows arriving in the period 2007-10. But since the main driver of these flows is Mergers & Acquisitions rather than greenfield investment, the potential boost to the UK’s output capacity and employment is limited. 8.1.2 Prospects for Northern Ireland A striking feature of investment into Northern Ireland is that the bulk of FDI over the past decade has been in manufacturing, which accounted for over 80 per cent of the total. The share of manufacturing in terms of the number of projects (around two-thirds) and new jobs created (around half) was much smaller than its share of financial flows. But this does not seriously weaken the argument that in the face of intense global competition and a generally bleak time for UK industry, Northern Ireland was remarkably successful in attracting investment into its manufacturing sector in the ten years to 2005. It is likely that in future it will be difficult to repeat this success, and that attention will need to focus increasingly on exportable services if Northern Ireland is to continue to benefit from new investment. A number of factors support this view: • • • International trends – the share of manufacturing in FDI is steadily declining, see table 2.4 which shows the composition of the global stock in 2003 compared with the early 1990s. Flows are still buoyant, but are directed chiefly to Eastern Europe, the Commonwealth of Independent States and developing Asia. The re-location of labourintensive manufacturing to emerging markets will continue. UK trends – the fate of high profile investments such as Motorola in Scotland and LG in Wales highlights the problems inherent even in the high-tech sector of manufacturing. In traditional industries, textiles, footwear & clothing, transport equipment, paper, printing & publishing and rubber & plastics, opportunities for FDI into the UK are modest. These are areas of UK manufacturing where we forecast continued output decline or meagre growth over the long term. The exportable service sector has seen an upturn in project numbers and investment flows since the mid-1990s and job creation in most years has been significant. This trend reflects the comparative advantage that Northern Ireland possesses in some areas of exportable services, exemplified by its success in attracting investment in software development in the face of strong competition from other locations. 8.1.2.1 Moving up the value chain The Annual Survey of Hours & Earnings (ASHE) enables high-value-added services to be identified through the wage rates paid in various sectors. The rates for the key exportable services sectors in the UK are shown in the following table. The results underpin the view that jobs created or safeguarded in computer & related activities and R&D, make a strong contribution to moving the economy up the value chain. Investments in these sectors are high quality, featuring profitable, high-tech companies paying wages above the national average. 65
  • 70. FDI Research – Final Report Table 8.1 - Hourly earnings in UK exportable services Post & telecommunications Number of jobs (000) 519 Median hourly gross pay (£) 10.2 Banking 679 11.7 Insurance & pensions 208 13.2 Auxiliary to financial intermediation 252 16.7 Computer and related services 433 16.7 Research and development 142 15.7 2083 9.8 517 7.9 23,606 9.6 Other business activities Recreational, cultural and sporting All employees Source: Annual Survey of Hours & Earnings 8.1.2.2 Geographical dimension-where will the investment come from? Northern Ireland will benefit from the UK’s overall attractiveness as a destination for foreign investment - openness to FDI, a flexible labour market with good labour relations, centres of scientific excellence with a strong skills base in science-based research, membership of the EU and use of English. Some of these are particularly relevant to investment in the sectors under consideration. These strengths will continue to attract companies world-wide. It has been argued that non-participation in the euro project has led to a decline in the UK’s share of total FDI from the EU since the start of the EMU. In the absence of counterfactual data, it is difficult to confirm this or to gauge the impact of the UK’s non-participation in the euro. But it remains the case that that the large Eurozone countries are prominent sources of FDI at the UK level. However section 3 showed that this was not the case in Northern Ireland. North America has dominated the picture of FDI into the sectors under review over the past decade. Looking ahead, investment flows from outside UK will continue to be dominated by North America, mainly the US, many of whose companies perceive the UK as the best base for their European operations. Ireland’s proximity makes it a natural investor into the province, however the scale will inevitably be smaller than from the huge US market, and their presence in exportable sectors is currently limited. India has become a prominent recipient of FDI in information and communication technology, and has demonstrated a growing propensity to invest abroad. 8.1.3 FDI opportunities for Northern Ireland in selected sectors Within the exportable services sector, Table 8.2 indicates sub-sectors with growth prospects and high value added opportunities, to 2016 are shown in table. 60: 60 These are based on forecasts from Experian’s regional forecasts. A methodological explanation of how they are derived is provided in Appendix C 66
  • 71. FDI Research – Final Report Table 8.2 - Growth in output in Northern Ireland key sub-sectors selected by DETI Real growth per annum (%) Computer & related activities (SIC 72) Research & development (SIC 73) * Market research (SIC 74.13) Business management & consultancy (SIC 74.14) Architectural & engineering (SIC 74.2) Technical testing & analysis (SIC 74.3) Advertising (SIC 74.4) Creative entertainment (SIC 92.1-92.3) Source: Experian estimates and forecasts 2000-05 13.5 -3.7 6.4 6.4 6.4 6.4 6.4 8.7 2006-16 8.0 3.5 5.5 7.0 6.5 6.4 6.0 7.0 *this is a small and volatile sector – latest data show a large fall in output compared with the early 2000s This group of industries has demonstrated strong expansion over the past decade. Table 8.2 shows that robust growth in output is expected to continue in the medium term, albeit at a less hectic pace in the case of the star performer – computer & related services. This sector posted exceptional growth in the first half of this decade as it expanded from a relatively small base, but progress at this pace is unsustainable as the industry matures. We expect growth over the next decade to moderate to a still impressive 8 per cent per annum. 8.1.3.1 Computer & related activities The computer & related activities sector was investigated in detail in a report by OCO Consultants (Northern Ireland ICT sector review) completed in December 2006. The study emphasised the importance of the sector in the FDI pattern of Northern Ireland and highlighted the fact that Northern Ireland has been the leading region in Europe in terms of the number of software development centres attracted from foreign investors. The data presented in Section 3 confirms the impressive number of FDI projects in this sub-sector and highlights the fact that it dominates the picture among the eight areas selected by DETI. The OCO report also noted that Belfast is a highly competitive location, with operating costs at 74 per cent of the average of all locations. This means the investor can save one-quarter of their costs by locating in Belfast compared to other leading software locations. Belfast also performs reasonably in terms of skills and labour force and well in terms of R&D capabilities. The most promising FDI growth areas identified by the report within the computer & related sector were: • • • • • financial services software applications; R & D in information software; information technology outsourcing (ITO); IT technical support centres (TSC); wireless and mobile, driven by increasing demand and a continuous stream of innovation Solid expansion prospects in software development internationally should provide a sound platform for further significant investment inflows into Northern Ireland in this area. Growth prospects to 2016 for the industry are the strongest among the sectors featuring in this sector. Taking account of size (see table 8.3), past trends in attracting FDI and growth prospects, computer & related services emerges as the clear leader among the eight sectors under consideration for future FDI into Northern Ireland. 67
  • 72. FDI Research – Final Report Table 8.3: Numbers employed in selected tradable service sectors (2005) Computer & related activities (SIC 72) Research & development (SIC 73) Market research (SIC 74.13) Business management & consultancy (SIC 74.14) Architectural & engineering (SIC 74.2) Technical testing & analysis (SIC 74.3) Advertising (SIC 74.4) Creative entertainment (SIC 92.1-92.3) Source: Northern Ireland Census of Employment Number employed % of total employed 6,371 0.9 1,652 0.2 456 0.07 1,795 0.3 5,247 0.8 150 0.02 674 0.1 3,120 0.5 8.1.3.2 The other seven sectors The amount of FDI the other seven areas of activity can reasonably attract is relatively modest. Although they display excellent output and growth prospects both domestically and internationally, the volume of foreign investment they have attracted to Northern Ireland in the past is small as shown in Section 3, and their potential is constrained by: • • limited incentive for overseas companies to establish significant overseas presence to provide services where there are few barriers to international operations conducted from the home location; and highly specialised labour requirements in key roles which might pose recruitment problems. The above highlights the fact that strong potential in international trade for a sector does not necessarily indicate similar potential for FDI. For example, market research or architectural firms in Northern Ireland might be well-placed to sell their services in the fast-growing international market and boost invisible exports. But the scope for Northern Ireland to attract overseas firms to establish operations in the province is limited as the work can be carried out without significant barriers from existing locations. The absence of any identified FDI projects in the sub-sectors in the past five years, as shown in Section 3, confirms this. It is not automatically appropriate for service sectors that show strong potential for trade to be prioritised for FDI. The relationship between export growth and FDI inflows is not as close as in manufacturing. The, research & development (R & D) sector seems to offer good potential for expansion. Northern Ireland can offer research bases to support new products, linked if required to manufacturing facilities. While it is possible that some of the FDI inflows classified in table 3.5 as computer & related activities should more properly be considered as R & D, the data suggest that FDI in R & D was not substantial in the first half of this decade. Moreover, analysis of the sector’s performance in Northern Ireland is hampered by uncertain data. Recent output trends (see table 8.1) are hard to explain. In contrast to the exceptional growth posted at the UK level (15 per cent per annum between 2000 and 2005) the sector actually contracted in Northern Ireland according to both Annual Business Inquiry 2 data and DETI Census of Employment statistics. The latter show that in 2001, the industry employed 1,829 people, but this number had fallen to 1,652 by 2005. This is reflected in the output contraction shown in table 8.1. These employment and output data confirm that Northern Ireland has not received substantial job-creating FDI inflows in the recent past. Looking ahead, we expect the decline in output/employment to be reversed over the decade ahead, stimulated by steady demand growth. FDI should be boosted as Northern Ireland capitalises on its ability to provide research bases linked to manufacturing facilities in the way that the rest of the UK has done over the past few years, and we expect some improvement on the modest experience of the first half of the decade. 68
  • 73. FDI Research – Final Report The architectural & engineering sector, dominated by architecture and engineering consulting and design, has not attracted significant amounts of FDI in recent years. While output growth prospects are positive and the sector is quite sizeable, we do not expect strong FDI flows over the next decade. Demand for business management & consultancy services should continue to grow at near 7 per cent a year, and exports will flourish against a buoyant global backdrop. But we expect FDI flows to be small, given the nature of the industry. With consultants generally sent from the company’s home base to clients’ premises, there is no real need to establish overseas operations except in the largest markets. Increasing leisure, ageing populations and technological advances underpin further expansion in creative entertainment. Particularly strong growth in the music, games and screen-based industries is expected. Scope for export of films and other productions is considerable, but foreign investment in radio and TV activities, dance halls, arts facilities and other such activities is likely to be minimal. Motion picture production might attract FDI, but not in large volumes. The remaining sectors, market research, technical testing & analysis and advertising are very small and even if foreign investment is attracted, it will be small scale. 69
  • 74. FDI Research – Final Report 9 Key Findings & Recommendations The first part of this section provides the key findings from the research and are reported according to the original research specification. 9.1 9.1.1 • • • • 9.1.2 • • • • 9.2 RANGE OF BENEFITS TRADABLE SERVICES FDI CAN GENERATE Output benefits Foreign direct investors in Northern Ireland’s tradable services sector directly contribute £751 million to output in the Northern Ireland and UK economies, equivalent to 2.9 per cent of Northern Ireland GVA. However, once displacement is accounted for, this figure falls by £165 million to £586 million; In addition, supply chain linkages between investors and indigenous firms contribute a further £132 million to output at a Northern Ireland level, and a further £309 million at a UK level; Expenditure by employees of FDI investors, and by employees of the companies who serve them contributes a further £29 million to output at a Northern Ireland level, and to a further £146 million at a UK level; As a consequence, the overall impact of tradable service FDI is equal to £747 million at a Northern Ireland level (equivalent to 2.9 per cent of total GVA), and to £1,041 million at a UK level (equivalent to 0.01 per cent of total GVA). Employment benefits Foreign direct investors in Northern Ireland’s tradable services sector contribute towards 30,905 jobs in the Northern Ireland and UK economies. However, once displacement is accounted for, this figure falls by 6,799; In addition, supply chain linkages between investors and indigenous firms contribute to a further 5,441 jobs in Northern Ireland, and to a further 12,713 jobs nationally; Expenditure by employees of FDI investors, and by employees of the companies who serve them contributes a further 1,205 jobs at a Northern Ireland level, and to a further 6,026 jobs nationally; As a consequence, the overall impact of tradable service FDI is equal to 30,752 jobs at a Northern Ireland level (equivalent to 3.8 per cent of total employment), and to 42,845 jobs at a UK level (equivalent to 0.2 per cent of total employment). BENEFITS AT THE SUB SECTORAL LEVEL Our literature review found evidence of a clear link between levels of FDI investment and the quality of jobs on offer at the UK level, with the development of the FDI base leading to improvements in earning potential. However analysis of Invest Northern Ireland data shows that the evidence is inconclusive at the Northern Ireland level. 70
  • 75. FDI Research – Final Report The research has also found evidence linking increases in FDI levels in Northern Ireland, to an expansion in the less-developed private services sector. Our survey, albeit on a limited sample, indicated the highest levels of purchases being made by tradable services investors in Northern Ireland are in business services in particular recruitment, IT, legal, accounting, training, and cleaning services. As well as giving indigenous companies the opportunity to sell their products to FDI investors (‘upstream benefits’, accounted for in the ‘indirect benefit’ calculation), the research found some evidence of indigenous companies experiencing efficiency gains as a consequence of being able to procure certain services more cost effectively, although the generally exportoriented nature of FDI investors mean that this benefit has been somewhat limited. Given the export-oriented nature of the FDI investors, it is likely that the investment has had a positive impact on the international profile of Northern Ireland, increasing export share, and improving the balance of payments although the link between tradable services FDI and exports is not consistent across all tradable services sectors. The research found evidence that FDI investors are very willing to train and invest in the skills of their staff, and this has helped to improve the quality of the Northern Ireland labour force. However, the extent to which this investment ‘crowds out’ training that would have been otherwise provided elsewhere is unclear from the available evidence. In many countries, there is evidence to suggest that FDI can increase the range of services on offer to both consumers and businesses and, as in the case of the Republic of Ireland, there is evidence to suggest that it can help bring about an increase in the sophistication of an economy’s financial services and technological offer. There is also evidence in academic literature to suggest that the presence of FDI investors in business networks can boost the level of knowledge transfer between businesses, and that these links can increase innovation and improve product quality. The literature also suggests that FDI companies in Northern Ireland participate enthusiastically in such networks. However, the extent to which it is possible to capitalise on these benefits depends on whether FDI investors have positive ‘developmental’ linkages with their local economy, or neutral/negative ‘dependent’ links. From the evidence gathered in this research, it would appear that both types of linkages exist within the Northern Ireland FDI business base, although businesses in Belfast, and those in the ICT and business services sectors tend to be more developmental. The extent to which these spillover benefits will be experienced is likely to depend upon the quality of the jobs generated by the FDI investor. One useful methodology for assessing this is to define a ‘quality job’ as one which pays more than Northern Ireland’s average earnings level61. However, although Invest Northern Ireland do hold statistics on the total number of jobs created above and below mean average earnings, figures on the number of jobs earning in excess of an agreed threshold above average earnings are not available. 9.3 FISCAL BENEFITS OF SERVICE SECTOR FDI There is strong anecdotal evidence to suggest that many multinational corporations use sophisticated accounting practices to repatriate profits for tax evasive purposes (a process known as transfer pricing). Such practices are likely to impact adversely on the UK exchequer 61 See also one measurement by Scottish Development International (SDI) of its performance, being the number of fte jobs created paying 20 percent above average Scottish salaries. IDA Ireland assesses performance against the value of job. For example, a benchmark of €40,000 is used, 20 percent above average Irish salaries. Also proportion of graduate jobs created is important for all sectors. 71
  • 76. FDI Research – Final Report due to the lower rates of corporation tax charged in the neighbouring Republic of Ireland. However, the practice may at some point become beneficial to the Northern Ireland economy, should a corporation tax differential emerge between the province and the British mainland. Because the techniques used by companies to repatriate profits are deliberately nontransparent, it is not possible to quantify the effect of transfer pricing on tax revenue from tradable services in Northern Ireland. However our research found that, in the absence of transfer pricing, the UK exchequer benefits from an estimated £311 million in combined VAT, income, national insurance and corporation tax receipts as a result of Northern Ireland tradable service FDI, though in reality transfer pricing means that the actual benefit may be lower than this. 9.4 LOCATIONAL FACTORS There is a view among stakeholders that, because Northern Ireland is an English speaking location, with a close cultural compatibility to the US, it is likely to be viewed as an attractive investment location for US businesses wishing to expand into Europe. There is also a view that the province’s close proximity to the Eurozone, its strong legislative environment, its physical capacity, its comparatively low labour costs in relation to other Western European locations and the large number of graduates it produces are all likely to prove attractive to investors. A significant cost for any operation is labour and with the relative labour cost advantages Northern Ireland continues, at present, to have a comparative advantage here. The quality and supply of labour is also a strong selling point, and a key means of retaining young people in the Northern Ireland economy. Docklands-style developments and modern open plan office space, combined with good accessibility by road and air to other European or global locations are strong selling points for Northern Ireland. Although there is potential for other large labour markets e.g. Lisburn/Derry to attract investment, Belfast clearly is the strongest selling point in this proposition. The continued potential for development, relative accessibility and lack of congestion make this an attractive location for investors. There is no doubt that the relative stability of the UK economic, legal and technical climate remains a strong selling point, particularly for those US investors seeking to minimise risk in choice of location. Furthermore and given the steps to date in forming a devolved administration in Northern Ireland and the political will that exists, there is evidence from the ROI and other UK locations of the impact that political support at the most senior level can have in enabling FDI investment. However, there are concerns that the large number of workers with only basic or intermediate skills is preventing Northern Ireland from moving up the value chain, a problem exacerbated by the large number of graduates leaving Northern Ireland to take up jobs either in the Republic of Ireland or on the British mainland. The over-reliance on the public sector is also perceived to be an issue for the Northern Ireland economy, as is the corporation tax differential between Northern Ireland and RoI, although this margin has been narrowed very marginally in the most recent budget. 9.5 FORECAST TRENDS The UK is a top location in Europe for inward investment and FDI into the country is again showing signs of strong growth following a post September 11th decline. Of the 1,220 projects, 508 were ‘new’, 337 ‘expansions’ and the remainder, 375 (30 per cent) M & A 72
  • 77. FDI Research – Final Report transactions. Over the last five years, FDI in the Northern Ireland economy has grown steadily, although there were two exceptionally strong performances in 2004 and 2006. The largest recent investments made into the Northern Ireland economy have tended to be in the business services and IT and software industries. ICICI and HCL have been the dominant non-tradable investors, while Northbrook Technology and Citigroup have been the dominant tradable investors. The biggest providers of tradable service FDI have been the USA and India. Republic of Ireland businesses have also provided significant levels of investment into Northern Ireland, though little of this has been in the tradable services sector. Belfast has been by far the largest recipient of tradable service investment in Northern Ireland, although Derry, Larne and Strabane have also received significant investments. Northern Ireland’s record in attracting and supporting significant tradable services investment to date provides evidence of the sustainability of the location and of the likely proximity to appropriate labour and suppliers. Looking forward, the increasing integration of the world market, a favourable business outlook, and the desire for technology and efficiency gains mean that international investment will remain a key driving force in the global economy, with a 7 per cent increase in FDI forecast in developed countries by 201062. In spite of its absence from the Eurozone, and its location on the periphery of Europe, the UK is expected to remain a popular destination for FDI investment, and is forecast to receive a greater inflow of investment than any other European economy63. This is partly due to the country’s strong transatlantic links. In recent years, Northern Ireland has been more successful in attracting manufacturing FDI than other parts of the UK. However, the continuation of strong and increasing global competition in manufacturing and the UK’s emphasis on a service economy mean that tradable services will become a more important source of investment in the years ahead. Output in the computer and related activities sector is forecast to grow by 8 per cent per annum between 2006 and 2016. Strong 7 per cent per annum output growth is also expected in the business management and consultancy sectors, while output in the rest of the tradable services industry is expected to grow by between 3.5 and 6.5 per cent per annum. These growth trends are likely to prove beneficial to the Northern Ireland economy, by helping to raise average wages, and to move the economy further up the value chain. 9.6 MARKET FAILURES The report has identified clear benefits that can be gained by the Northern Ireland economy as a result of further tradable service FDI. In a recent study on the economic benefits of public sector support for FDI,64 UKTI identifies five market failures which together provide a justification for public intervention. These are: • Under-provision of public goods – The provision of information on issues pertinent to foreign direct investors, such as information on local labour markets, site availability, the legislative environment et al is non-rivalrous in nature. In other words, a decision 62 Economic Intelligence Unit Op. cit. 64 2004 – 2005 study of the relative economic benefits of UK Trade & Investment support for trade and inward investment: Final Synthesis Report, UKTI, March 2006 63 73
  • 78. FDI Research – Final Report by one prospective investor to view the information does not prevent other prospective investors from doing so. As a result, such information tends to be purchased in suboptimal quantities in the absence of public agencies; Network and intermediation failures – The public sector has a unique role to play as a trusted intermediary, in order to promote links between businesses both domestically and internationally; • Informal barriers to market access – Agencies can provide advice and support to companies on informal barriers which prevent companies from expanding their operations into other countries. These include, for example, technical standards; • Weaknesses in internationalisation skills – Private sector companies are often unable to carry out research into international markets as a result of issues such as language barriers, and an unfamiliarity with local data sources; • Beneficial knowledge spill-overs – The presence of overseas companies in the market gives indigenous firms ‘greater exposure to new ideas, technologies and better ways of doing business. Private sector companies do not always take account of these benefits when making their investment decisions, and as a result, a sub-optimal allocation of investment may occur in the absence of public sector intervention. • 9.6.1 Identifying competitors In order to successfully attract companies from their target markets, it is important that Invest NI competes effectively against other locations with a similar marketing proposition to theirs. Such competitors may include: • • London and the South East - Areas with all of the above characteristics, albeit with slightly higher labour costs; • Northern France, Western and Southern Germany, Northern Italy and the Benelux Countries – Areas of strong economic performance and with good connectivity links to the rest of Europe. • 9.7 Scotland, Wales and Northern England – English speaking areas, with strong locational infrastructure, high skills, affordable labour costs, a stable economic climate and a desire to target high value added tradable services; Southern Italy, Spain and Eastern Europe – Areas with low labour costs and with access to the European market. INTERNATIONAL EXAMPLES The case study of Ireland has shown how the development of an international financial services cluster can help an area to increase levels of knowledge based employment, support an increase in export activity and provide improved access to financial services for local businesses. It has also shown how the provision of a low rate of Corporation Tax is important in encouraging overseas companies to invest in a country, and how differentiations in tax rates can ensure that the investments secured occur in the regions and sectors which stand to gain the most from them. The study of Sweden has shown how deregulation and investment in world class telecommunications infrastructure and educations systems can help a country to become an attractive location for inward investment. The study has also shown how the use of grants for investors, together with an income tax system that offers preferential treatment to inward investors can allow a fairly high-tax country to attract investment without significantly 74
  • 79. FDI Research – Final Report altering the overall fiscal intake. Finally, the study has shown how the development of a successful IT cluster can help a country to become a leading provider of a knowledge-based service. The study of Poland has shown that with a deregulated market, a young, low cost labour force, and unrestricted access to the European market, a previous impoverished area can become a world leader in low cost manufacturing, and how they can use this status to move further up the value chain. However, in all three cases, the studies have shown that this success can come at a price, and that a successful FDI strategy may lead to increased price levels, higher labour costs, and a reduction in land availability. Table 9.1 provides a summary of five key factors in each of the three case study areas to develop and maintain a successful tradable services sector and sub-sectors. 75
  • 80. FDI Research – Final Report Table 9.1: Maximising spillover benefits once projects locate Ireland Marketing IDA Operations split between development work to attract the company; and then operational teams to develop the project Competition intense – 200 competing organisations in Manhattan, (NY) alone. More recently agencies from Singapore and China approaching existing FDI projects in Ireland Location ‘Cool Hibernia’ contributing to attracting young qualified people to live work across Ireland Sweden Poland Less emphasis on general promotion of Sweden as a place to do business Over 90 billion Euro available for development, infrastructure and human capital Specific investment opportunities (by sector and/ or location) 14 Special Economic Zones (SEZ) and Technology Parks with incentives In terms of attractiveness of domestic markets Poland leads among the new EU member states and is fourth in Europe, after Germany, UK and France Geographic location amid other Nordic/ Baltic markets Attracts talented workers Geographic location in the hearth of Europe Excellent location for transferring non-production functions of a company, such as accounting departments, call centres or warehouses. Ireland 2003 promotion to attract 200,000 workers from overseas up to 2008. Qualified labour Availability of Baltic/ Nordic language Sectoral networks developed by IDA with Project, HE and FE Institutions. Eg Dublin City University & Financial Services, HE/ FE courses in contact centre research and CRM 20 million young, highly educated, multilingual people Education system adapted to needs of industry Skills Grants for employee training programmes Availability of a highly qualified labour force, the presence of many universities and the support of the authorities. Business-Education relationship enhanced by Project sponsorship of graduates, courses, and/ or faculties. Outwith Dublin, Cork, and the established HE sector, 65 emphasis on working with FECs, Project and FAS in developing ‘project compatible courses, qualifications Taxation Crucial element of Ireland’s success. Also easier immigration regimes make Ireland a more attractive ‘English speaking’ destination than UK. Tax breaks for ex-pat workers – 25 percent of ex-pat earnings are tax free subject to skills/ qualifications criteria being met Investors operating in the SEZ can benefit from income tax exemption – a form of regional aid Other Operations staff given targets to develop the project (eg expansions R&D projects per annum, HE/ FE links made), Seven ICT Research Units 50% of the population under 35 years old 65 Foras Áiseanna Saothair (FAS) Ireland, national training and employment authority 76
  • 81. 9.8 RECOMMENDATIONS Following submission of the amended final report in July 2007 (that reflected the revision to the original terms of reference), the Steering Group met to discuss the amendments and revised policy implications and actions. Based on these the Steering Group developed a considered response as follows: 9.8.1 Focus The original Terms of Reference required the research to “set out exactly the types of investment that Northern Ireland could or should attract and the most effective means of doing this.” FDI policy clearly has an important role in Northern Ireland’s economic development policy toolkit as it has the potential to improve average productivity by attracting innovative and skilled companies, helping to close the productivity gap with the rest of the UK. There are a number of high value added tradable services sectors that could realistically be attracted to Northern Ireland and it is recommended that future tradable services FDI policies specifically target new investments which are capable of adding value and fostering developmental links to indigenous businesses. The Experian research distinguished between different levels of opportunity and therefore potential across the tradable service sectors, The Steering Group does not make any distinction and suggests that opportunity sectors could include: • • • • • • • • • Computer and related activities (SIC 72) Research and development (SIC 73) Architectural and engineering services (SIC 74.2) Business management and consultancy (SIC 74.14) Creative entertainment (SIC 92.1, SIC 92.3) Financial Intermediation (SIC 65) Legal Activities (SIC 74.11) Accountancy (SIC 74.12) Market Research (SIC 74.13) To address these opportunities, Invest NI currently produces an annual International Sales and Marketing Plan which is the strategy for attracting FDI into Northern Ireland. The strategy analyses market trends, assesses the competition and identifies Northern Ireland’s strengths and weaknesses. It highlights NI’s competitive advantages and sets our specific target sectors/locations upon which activity and resources to attract FDI to NI will focus. The strategy is approved by the Invest NI Board but for commercial reasons the plan is not published. It is recommended that the findings of this research are incorporated into the next International Sales and Marketing Plan. It is the Steering Group’s view that whilst Northern Ireland has enjoyed considerable success in attracting FDI, a number of these projects have been contact centres which are involved in lower value added activities. These projects are likely to be at variance with the new Executives’ overarching objectives of increasing private sector productivity and supporting high value added employment and therefore the researchers and the Steering Group recommend that DETI/ Invest NI undertake a review of current strategy towards contact centres. 9.8.2 Corporation Tax The literature review detailed the findings of recent ERINI research, the Ernst & Young Global attractiveness monitor and some respondents to Experian’s stakeholder surveys found that the 77
  • 82. prevailing rate of Corporation Tax is seen as a key competitiveness issue and policy tool for attracting high value added FDI into Northern Ireland. The Steering Group recommends that the NI Executive and all interested stakeholders should continue efforts to secure a reduction in the rate of Corporation Tax that prevails in NI as it is their view that such a change would deliver significant boost to the levels of inward investment secured by NI. 9.8.3 Skills in high-tech industries The primary research undertaken as part of this study has not revealed any conclusive evidence of skills gaps or shortages that are impacting on FDI companies located in Northern Ireland. Workforce skills are an important driver of productivity growth for the economy as a whole and also for attracting and retaining FDI companies in Northern Ireland. However, whilst the research did not reveal conclusive evidence of skills gaps, the findings of the 2005 Skills Monitoring Survey (SMS) found that skills gaps were most prevalent in the financial services and health & social care sectors, and that overall 9% of employers in the survey reported skills gaps. The researchers and the Steering Group therefore recommend that DEL and InvestNI continue to work closely together to monitor the skills requirements of both existing and prospective FDI companies and work with education and training providers to ensure that the workforce has the necessary skills. 9.8.4 Measuring the impact of the Tradable Services sector. The definition of tradable services currently employed by DETI only includes the high export potential group, this limits the ability to measure FDI and also underestimates the value of tradable services exports, weakening the evidence base from which to form policy Whilst there is general agreement that these tradable services sectors are those with the highest propensity to export, it is clear that a significant number of other tradable services sectors are involved in export activity and are therefore important in economic development terms, but are outside the current definition. It is essential that economic policy decisions are informed by robust and reliable statistical surveys. This piece of research would have benefited from a wider definition which would have allowed the impact of the tradable services sector as a whole to be surveyed, analysed and reported on. At a minimum the researchers and the Steering Group recommend that the DETI definition of tradable services be widened from; • • • • • • • • Computer & Related Activities (SIC 72); Research & Development (SIC 73); Market Research (SIC 74.13); Business Management & Consultancy (SIC 74.14); Architectural & Engineering (SIC 74.2); Technical Testing & Analysis (SIC 74.3); Advertising (SIC 74.4); Creative Entertainment (SIC 92.1-92.3). To include; • Financial Intermediation (SIC 65) 78
  • 83. • • • • Legal Activities (SIC 74.11) Accountancy (SIC 74.12) Wholesale (SIC 51) Transport, Storage and Communication (SIC 60-64) 79
  • 84. Appendix A Crowding out effects of FDI investment on Northern Ireland businesses
  • 85. FDI Research – Final Report Public sector intervention and crowding out Crowding out can be said to take place when Transnational Corporations (TNCs) and their foreign investment displace domestic producers or pre-empt their investment opportunities. Where public sector financial support is involved, a more refined definition focusing on capital market effects is generally used. For example; HM Treasury’s 1997 guidance on appraisal and evaluation in central government, The Green Book, advised that any public sector investment in regional policy would cause 100 per cent ‘crowding out’ of economic benefits at a national level, as a result of public sector investment putting upward pressure on interest rates, leading to an offsetting decrease in private sector investment. However, this assumption is not contained in the latest version of the Green Book. Furthermore, this narrowly-based concept of crowding out should not be assumed to also hold for tradable service FDI investment at a Northern Ireland level for three reasons. These are: - Although the total decrease in activity may occur at a national level, some of this will leak to other areas of the UK, and therefore there will not be complete crowding out at the Northern Ireland level; - In the case of FDI, the amount of private sector investment levered in through public expenditure on areas such as marketing and provision of business infrastructure to investing companies is significantly greater than the public investment itself. - Invest Northern Ireland’s policy of only supporting export-oriented businesses, and of carrying out a displacement assessment during the appraisal process, mean that the extent to which investors displace indigenous activity will be limited. However, although 100 per cent crowding out appears unlikely, some degree of crowding out will occur if public sector intervention encourages or allows FDI which creates a position where local firms cannot learn, innovate or expand as they would have done otherwise. In the long term this can cause an economy to grow more slowly because domestic innovation and growth is frustrated. A presentation for the International Centre for Trade and Sustainable Development*, by Nagesh Kumar presented evidence of FDI in 81 countries between 1980 and 1999. This suggested that 29 of 81 countries experienced FDI crowding out of domestic investment. However, 23 countries experienced ‘crowding in’ i.e the presence of the foreign direct investment by a Transnational corporation (TNC) stimulates new downstream and upstream investments that would not have taken place in their absence A study by Koen De Backer and Leo Sleuwaegen** also found that crowding out through FDI is prominent. However, it was also found that long-term FDI can impart significant structural benefits and ‘crowding in’ through improved learning, networking and linkages between a country’s firms. An economic briefing for the Earth Summit, 2002 suggested that crowding in occurred only where restrictive regimes were used and FDI was subject to screening and incentives were provided only for certain firms. * http://www.icst.org/ministerial/cancun/tds/Documents/31/kumar.ppt ** Does Foreign Direct Investment Crown Out Domestic Entrepreneurship? K De Backer and L Sleuwaegen, 2003
  • 86. FDI Research – Final Report Based on the above research we consider there are two main areas which justify support for FDI. First, we consider it critical that FDI support is targeted in sectors where market failure exists. This market failure must be restricting domestic growth and innovation. The market failure may be locational (e.g. area of deprivation) or economic (e.g. businesses are not viable without support). Intervention which creates inward investment in these sectors will create additional economic and social benefits. For industries in Northern Ireland which already hold a competitive advantage there is a need to be more careful in terms of public sector intervention. However, encouraging FDI through non-fiscal policies can also assist domestic business if the intervention is targeted. This can occur by attracting organisations which are complementary to existing growth sectors. These non-domestic organisations may benefit supply chains or provide new technology to a sector. There is a European context to the issue of crowding out as the UK continues to use Sterling (£). A study by HM Treasury of EMU and business sectors noted that there has been a fall in the UK’s share of EU FDI since the start of EMU. It is also suggested that becoming a member of the Euro would increase levels of inward investment. This suggests that Northern Ireland may be at a disadvantage vis-a-vis Eurozone locations in competing for FDI. Therefore a small amount of public intervention may not be subject to EU state aid rules.
  • 87. FDI Research – Final Report Appendix B Model to generate economic impact calculation
  • 88. FDI Research – Final Report GVA impact % of sales outwith Indirect impact Induced impact Displacement Net GVA Impact (£m) Industry Code Gross GVA Impact (£m) NI UK NI UK NI UK NI UK NI UK 12 12 12 12 12 12 12 14 12 12 14 14 12 14 14 12 12 14 14 12 12 12 12 12 12 14 12 12 14 12 14 14 12 14 14 12 14 14 12 14 12 1 2 0.4 1 4 366 0 2 5 1 52 55 0 1 50 3 15 13 0 0 0 5 2 0 0 43 0 1 5 1 34 14 10 6 1 1 4 5 0 44 1 751 100% 100% 100% 94% 95% 100% 100% 50% 100% 100% 99% 0% 100% 25% 0% 100% 100% 98% 99% 100% 61% 53% 95% 100% 100% 100% 100% 100% 100% 100% 0% 100% 0% 70% 98% 100% 95% 100% 0% 97% 100% 38 100% 50% 100% 72% 65% 100% 100% 0% 100% 100% 90% 0% 95% 0% 0% 100% 70% 0% 73% 100% 0% 6% 50% 75% 100% 0% 56% 15% 100% 100% 0% 15% 0% 65% 0% 91% 58% 0% 0% 0% 0% 22 0.0 0.0 0.0 0.1 0.2 0.0 0.0 0.7 0.0 0.0 0.4 46.1 0.0 0.5 41.7 0.0 0.0 0.2 0.0 0.0 0.2 1.8 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 28.9 0.0 8.2 1.6 0.0 0.0 0.2 0.0 0.3 1.1 0.0 132 0.0 1.3 0.0 0.4 1.4 0.0 0.0 1.7 0.0 0.0 5.5 57.8 0.0 0.8 52.4 0.0 4.7 14.1 0.1 0.0 0.5 4.5 1.1 0.1 0.0 44.9 0.1 0.6 0.0 0.0 36.3 12.1 10.3 2.3 1.2 0.1 2.0 5.2 0.4 45.9 1.0 309 0.1 0.1 0.0 0.1 0.2 14.3 0.0 0.1 0.2 0.0 2.0 2.1 0.0 0.0 1.9 0.1 0.6 0.5 0.0 0.0 0.0 0.2 0.1 0.0 0.0 1.7 0.0 0.0 0.2 0.0 1.3 0.5 0.4 0.2 0.0 0.0 0.2 0.2 0.0 1.7 0.0 29 0.3 0.5 0.1 0.3 0.8 71.3 0.0 0.3 1.0 0.2 10.1 10.7 0.1 0.2 9.7 0.6 2.9 2.6 0.0 0.1 0.1 0.9 0.4 0.0 0.1 8.3 0.0 0.1 1.0 0.2 6.7 2.6 1.9 1.2 0.2 0.2 0.9 1.0 0.1 8.5 0.2 146 0.3 0.5 0.1 0.3 0.9 80.4 0.0 0.3 1.2 0.3 11.4 12.1 0.1 0.2 10.9 0.7 3.3 2.9 0.1 0.1 0.1 1.0 0.5 0.0 0.1 9.4 0.1 0.2 1.2 0.2 7.6 3.0 2.2 1.4 0.2 0.2 1.0 1.1 0.1 9.6 0.2 165 0.3 0.5 0.1 0.3 0.9 80.4 0.0 0.3 1.2 0.3 11.4 12.1 0.1 0.2 10.9 0.7 3.3 2.9 0.1 0.1 0.1 1.0 0.5 0.0 0.1 9.4 0.1 0.2 1.2 0.2 7.6 3.0 2.2 1.4 0.2 0.2 1.0 1.1 0.1 9.6 0.2 165 1 2 0 1 3 299 0 2 4 1 43 91 0 1 82 2 12 11 0 0 1 6 2 0 0 35 0 1 4 1 57 11 16 7 1 1 4 4 1 37 1 747 1 4 0 2 5 356 0 3 5 1 56 111 0 2 101 3 19 27 0 0 1 9 3 0 0 86 0 1 5 1 70 25 20 8 2 1 6 10 1 88 2 1,041 Unshaded impacts based on Survey findings Turquoise shaded impact based on Invest NI data
  • 89. FDI Research – Final Report Fiscal impact Gross taxable expenditure/income % of sales outwith Turnover (£m) Industry Code GVA Contribution Employment Cost Purchases of goods, materials and services Capital Spend NI UK 1.2 11.0 1 23 11.0 30 0.1 7.5 10 157.1 454 196 0.9 2.9 1091 7.5 11.5 9.9 0.5 1.9 2.9 9.4 4.3 0.5 0.8 18.4 0.5 0.06 2.8 0.4 148.4 6377 33.4 59.8 33.4 0.8 4.2 3.9 2 17 1.8 12 12 12 12 12 12 12 14 12 12 14 14 12 14 14 12 12 14 14 12 12 12 12 12 12 14 12 12 14 12 14 14 12 14 14 12 14 14 12 14 12 1.34 2.43 0.36 1.34 3.93 365.50 0.10 1.58 5.34 1.21 52.00 54.93 0.32 0.78 49.76 3.04 14.84 13.36 0.24 0.34 0.49 4.57 2.06 0.22 0.34 42.65 0.24 0.70 5.37 0.83 34.46 13.53 9.81 6.17 1.12 0.92 4.49 4.93 0.34 43.59 1.00 750.56 0.81 1.48 0.22 0.81 2.39 222.03 0.06 0.95 3.25 0.74 31.17 32.93 0.19 0.47 30 1.84 9.01 8.01 0.15 0.21 0.30 2.77 1.25 0.13 0.21 25.56 0.15 0.43 3.22 0.50 20.66 8.11 5.96 3.70 0.67 0.56 2.69 2.96 0.21 26.13 0.60 453.29 0.81 1.48 0.22 0.81 2.39 222.26 0.06 0.93 3.25 0.74 30.64 32.37 0.19 0.46 29 1.85 9.02 7.87 0.14 0.21 0.30 2.78 1.26 0.13 0.21 25.13 0.15 0.43 3.16 0.50 20.31 7.97 5.97 3.64 0.66 0.56 2.65 2.91 0.21 25.69 0.61 450.23 0.86 1.57 0.24 0.86 2.54 236.29 0.06 1.04 3.45 0.79 34.26 36.20 0.20 0.51 33 1.96 9.59 8.80 0.16 0.22 0.31 2.95 1.33 0.14 0.22 28.10 0.16 0.46 3.54 0.53 22.71 8.91 6.34 4.06 0.74 0.60 2.96 3.25 0.22 28.73 0.64 489.33 100% 100% 100% 94% 95% 100% 100% 50% 100% 100% 99% 0% 100% 25% 0% 100% 100% 98% 99% 100% 61% 53% 95% 100% 100% 100% 100% 100% 100% 100% 0% 100% 0% 70% 98% 100% 95% 100% 0% 97% 100% 38 100% 50% 100% 72% 65% 100% 100% 0% 100% 100% 90% 0% 95% 0% 0% 100% 70% 0% 73% 100% 0% 6% 50% 75% 100% 0% 56% 15% 100% 100% 0% 15% 0% 65% 0% 91% 58% 0% 0% 0% 0% 22 Indirect impact NI Purchases GVA Employme of goods, Contribution nt Cost materials and 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.2 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.6 0.3 0.3 59.1 35.4 34.8 0.0 0.0 0.0 0.6 0.4 0.4 53.5 32.1 31.5 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.1 0.1 2.3 1.4 1.4 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 37.0 22.2 21.8 0.0 0.0 0.0 10.5 6.4 6.4 2.0 1.2 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.1 0.1 0.0 0.0 0.0 0.4 0.2 0.2 1.4 0.8 0.8 0.0 0.0 0.0 169 102 100 Capital Spend 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.6 0.0 0.0 0.4 38.9 0.0 0.4 35.3 0.0 0.0 0.2 0.0 0.0 0.1 1.5 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 24.4 0.0 6.8 1.3 0.0 0.0 0.2 0.0 0.2 0.9 0.0 111 Induced impact NI Purchases GVA Employme of goods, Contribution nt Cost materials and 0.1 0.0 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.2 0.1 0.1 18.3 11.1 11.1 0.0 0.0 0.0 0.1 0.0 0.0 0.3 0.2 0.2 0.1 0.0 0.0 2.6 1.6 1.5 2.7 1.6 1.6 0.0 0.0 0.0 0.0 0.0 0.0 2.5 1.5 1.5 0.2 0.1 0.1 0.7 0.5 0.5 0.7 0.4 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 2.1 1.3 1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.2 0.2 0.0 0.0 0.0 1.7 1.0 1.0 0.7 0.4 0.4 0.5 0.3 0.3 0.3 0.2 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.2 0.1 0.1 0.2 0.1 0.1 0.0 0.0 0.0 2.2 1.3 1.3 0.0 0.0 0.0 38 23 23 Capital Spend 0.0 0.1 0.0 0.0 0.1 11.8 0.0 0.1 0.2 0.0 1.7 1.8 0.0 0.0 1.6 0.1 0.5 0.4 0.0 0.0 0.0 0.1 0.1 0.0 0.0 1.4 0.0 0.0 0.2 0.0 1.1 0.4 0.3 0.2 0.0 0.0 0.1 0.2 0.0 1.4 0.0 24 Indirect impact UK Purchases GVA Employme of goods, Contributi nt Cost materials on and 0.0 0.0 0.0 1.6 1.0 1.0 0.0 0.0 0.0 0.5 0.3 0.3 1.9 1.1 1.1 0.0 0.0 0.0 0.0 0.0 0.0 2.1 1.3 1.3 0.0 0.0 0.0 0.0 0.0 0.0 7.0 4.2 4.1 74.2 44.5 43.7 0.0 0.0 0.0 1.0 0.6 0.6 67.2 40.3 39.6 0.0 0.0 0.0 6.0 3.7 3.7 18.0 10.8 10.6 0.1 0.1 0.1 0.0 0.0 0.0 0.7 0.4 0.4 5.8 3.5 3.5 1.4 0.8 0.8 0.1 0.0 0.0 0.0 0.0 0.0 57.6 34.5 33.9 0.1 0.1 0.1 0.8 0.5 0.5 0.0 0.0 0.0 0.0 0.0 0.0 46.5 27.9 27.4 15.5 9.3 9.1 13.2 8.0 8.1 2.9 1.7 1.7 1.5 0.9 0.9 0.1 0.1 0.1 2.5 1.5 1.5 6.7 4.0 3.9 0.5 0.3 0.3 58.9 35.3 34.7 1.3 0.8 0.8 396 238 234 Capital Spend 0.0 1.1 0.0 0.3 1.2 0.0 0.0 1.4 0.0 0.0 4.6 48.9 0.0 0.7 44.3 0.0 3.9 11.9 0.1 0.0 0.4 3.7 0.9 0.0 0.0 37.9 0.1 0.5 0.0 0.0 30.7 10.2 8.6 1.9 1.0 0.1 1.7 4.4 0.3 38.8 0.9 260 Induced impact UK Purchases GVA Employme of goods, Contributi nt Cost materials on and 0.3 0.2 0.2 0.6 0.4 0.4 0.1 0.1 0.1 0.3 0.2 0.2 1.0 0.6 0.6 91.4 55.5 55.6 0.0 0.0 0.0 0.4 0.2 0.2 1.3 0.8 0.8 0.3 0.2 0.2 13.0 7.8 7.7 13.7 8.2 8.1 0.1 0.0 0.0 0.2 0.1 0.1 12.4 7.5 7.3 0.8 0.5 0.5 3.7 2.3 2.3 3.3 2.0 2.0 0.1 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 1.1 0.7 0.7 0.5 0.3 0.3 0.1 0.0 0.0 0.1 0.1 0.1 10.7 6.4 6.3 0.1 0.0 0.0 0.2 0.1 0.1 1.3 0.8 0.8 0.2 0.1 0.1 8.6 5.2 5.1 3.4 2.0 2.0 2.5 1.5 1.5 1.5 0.9 0.9 0.3 0.2 0.2 0.2 0.1 0.1 1.1 0.7 0.7 1.2 0.7 0.7 0.1 0.1 0.1 10.9 6.5 6.4 0.2 0.2 0.2 188 113 113 Capital Spend 0.2 0.4 0.1 0.2 0.6 59.1 0.0 0.3 0.9 0.2 8.6 9.0 0.1 0.1 8.2 0.5 2.4 2.2 0.0 0.1 0.1 0.7 0.3 0.0 0.1 7.0 0.0 0.1 0.9 0.1 5.7 2.2 1.6 1.0 0.2 0.1 0.7 0.8 0.1 7.2 0.2 122
  • 90. FDI Research – Final Report Fiscal impact (cont) Turnover (£m) Industry Code 1.2 11.0 1 23 11.0 30 0.1 7.5 10 157.1 454 196 0.9 2.9 1091 7.5 11.5 9.9 0.5 1.9 2.9 9.4 4.3 0.5 0.8 18.4 0.5 0.06 2.8 0.4 148.4 6377 33.4 59.8 33.4 0.8 4.2 3.9 2 17 1.8 12 12 12 12 12 12 12 14 12 12 14 14 12 14 14 12 12 14 14 12 12 12 12 12 12 14 12 12 14 12 14 14 12 14 14 12 14 14 12 14 12 Displacement NI Purchases GVA Employme of goods, Contributi nt Cost materials on and 0.3 0.2 0.2 0.6 0.3 0.3 0.1 0.1 0.1 0.3 0.2 0.2 1.0 0.6 0.6 84.4 51.3 51.3 0.0 0.0 0.0 0.6 0.3 0.3 1.2 0.7 0.8 0.3 0.2 0.2 12.1 7.3 7.2 25.7 15.4 15.1 0.1 0.0 0.0 0.3 0.2 0.2 23.3 13.9 13.7 0.7 0.4 0.4 3.4 2.1 2.1 3.1 1.9 1.9 0.1 0.0 0.0 0.1 0.0 0.0 0.2 0.1 0.1 1.6 0.9 0.9 0.5 0.3 0.3 0.1 0.0 0.0 0.1 0.0 0.0 9.9 5.9 5.8 0.1 0.0 0.0 0.2 0.1 0.1 1.2 0.7 0.7 0.2 0.1 0.1 16.1 9.7 9.5 3.1 1.9 1.8 4.6 2.8 2.8 1.9 1.1 1.1 0.3 0.2 0.2 0.2 0.1 0.1 1.1 0.7 0.6 1.1 0.7 0.7 0.2 0.1 0.1 10.4 6.2 6.1 0.2 0.1 0.1 211 127 126 Capital Spend 0.2 0.4 0.1 0.2 0.6 54.6 0.0 0.4 0.8 0.2 8.0 16.9 0.0 0.2 15.3 0.5 2.2 2.1 0.0 0.1 0.1 1.0 0.3 0.0 0.1 6.5 0.0 0.1 0.8 0.1 10.6 2.1 3.0 1.2 0.2 0.1 0.7 0.8 0.1 6.8 0.1 138 Displacement UK Purchases GVA Employme of goods, Contributi nt Cost materials on and 0.4 0.2 0.2 1.0 0.6 0.6 0.1 0.1 0.1 0.5 0.3 0.3 1.5 0.9 0.9 100.5 61.1 61.1 0.0 0.0 0.0 0.9 0.5 0.5 1.5 0.9 0.9 0.3 0.2 0.2 15.8 9.5 9.3 31.4 18.8 18.5 0.1 0.1 0.1 0.4 0.3 0.3 28.5 17.1 16.8 0.8 0.5 0.5 5.4 3.3 3.3 7.6 4.6 4.5 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.2 0.2 2.5 1.5 1.5 0.9 0.5 0.5 0.1 0.0 0.0 0.1 0.1 0.1 24.4 14.6 14.4 0.1 0.1 0.1 0.4 0.2 0.2 1.5 0.9 0.9 0.2 0.1 0.1 19.7 11.8 11.6 7.1 4.3 4.2 5.6 3.4 3.4 2.3 1.4 1.4 0.6 0.4 0.4 0.3 0.2 0.2 1.8 1.1 1.1 2.8 1.7 1.7 0.2 0.1 0.1 24.9 14.9 14.7 0.6 0.3 0.3 293 177 175 Capital Spend 0.2 0.7 0.1 0.3 1.0 65.0 0.0 0.6 0.9 0.2 10.4 20.7 0.1 0.3 18.8 0.5 3.5 5.0 0.1 0.1 0.2 1.6 0.6 0.0 0.1 16.1 0.1 0.2 1.0 0.1 13.0 4.7 3.6 1.5 0.4 0.2 1.2 1.9 0.1 16.4 0.4 192 Net impact NI Purchases GVA Employme of goods, Contributi nt Cost materials on and 1.1 0.7 0.7 2.0 1.2 1.2 0.3 0.2 0.2 1.2 0.7 0.7 3.4 2.1 2.1 299.3 181.8 182.0 0.1 0.0 0.0 2.0 1.2 1.2 4.4 2.7 2.7 1.0 0.6 0.6 43.0 25.8 25.4 91.1 54.6 53.7 0.3 0.2 0.2 1.1 0.7 0.7 82.5 49.4 48.6 2.5 1.5 1.5 12.2 7.4 7.4 11.2 6.7 6.6 0.2 0.1 0.1 0.3 0.2 0.2 0.6 0.3 0.3 5.5 3.4 3.4 1.8 1.1 1.1 0.2 0.1 0.1 0.3 0.2 0.2 34.9 20.9 20.6 0.2 0.1 0.1 0.6 0.4 0.4 4.4 2.6 2.6 0.7 0.4 0.4 57.1 34.2 33.7 11.1 6.6 6.5 16.3 9.9 9.9 6.6 4.0 3.9 0.9 0.6 0.6 0.8 0.5 0.5 3.9 2.3 2.3 4.0 2.4 2.4 0.6 0.3 0.3 36.8 22.1 21.7 0.8 0.5 0.5 747 451 447 Capital Spend 0.7 1.3 0.2 0.8 2.2 193.5 0.1 1.3 2.8 0.6 28.3 60.0 0.2 0.7 54.4 1.6 7.9 7.4 0.1 0.2 0.4 3.6 1.1 0.1 0.2 23.0 0.1 0.4 2.9 0.4 37.6 7.3 10.5 4.4 0.6 0.5 2.5 2.7 0.4 24.2 0.5 488 Net impact UK Purchases GVA Employme of goods, Contributi nt Cost materials on and 1.3 0.8 0.8 3.6 2.2 2.2 0.4 0.2 0.2 1.7 1.0 1.0 5.3 3.2 3.2 356.4 216.5 216.7 0.1 0.1 0.1 3.2 1.9 1.9 5.2 3.2 3.2 1.2 0.7 0.7 56.2 33.7 33.1 111.4 66.8 65.7 0.3 0.2 0.2 1.6 0.9 0.9 100.9 60.5 59.5 3.0 1.8 1.8 19.2 11.6 11.6 27.1 16.2 16.0 0.3 0.2 0.2 0.3 0.2 0.2 1.0 0.6 0.6 9.0 5.4 5.5 3.1 1.9 1.9 0.3 0.2 0.2 0.3 0.2 0.2 86.5 51.8 51.0 0.3 0.2 0.2 1.3 0.8 0.8 5.2 3.1 3.1 0.8 0.5 0.5 69.9 41.9 41.2 25.3 15.2 14.9 19.9 12.1 12.1 8.3 5.0 4.9 2.3 1.4 1.3 1.0 0.6 0.6 6.4 3.8 3.8 10.0 6.0 5.9 0.7 0.4 0.4 88.4 53.0 52.1 2.0 1.2 1.2 1,041 627 621 Capital Spend 0.8 2.4 0.2 1.1 3.4 230.4 0.1 2.1 3.4 0.8 37.0 73.4 0.2 1.0 66.5 1.9 12.4 17.9 0.2 0.2 0.6 5.8 2.0 0.2 0.2 57.0 0.2 0.9 3.4 0.5 46.1 16.7 12.9 5.5 1.5 0.6 4.2 6.6 0.4 58.3 1.3 680 Fiscal benefits NI Purchases GVA Employme of goods, Capital Contributi nt Cost materials Spend on and 0.0 0.2 0.0 0.0 0.1 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.0 0.0 0.1 0.5 0.1 0.1 12.9 42.6 6.9 7.4 0.0 0.0 0.0 0.0 0.1 0.3 0.0 0.0 0.2 0.6 0.1 0.1 0.0 0.1 0.0 0.0 1.9 6.0 1.0 1.1 4.0 12.8 2.0 2.3 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.0 3.6 11.6 1.8 2.1 0.1 0.4 0.1 0.1 0.5 1.7 0.3 0.3 0.5 1.6 0.2 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.2 0.8 0.1 0.1 0.1 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.5 4.9 0.8 0.9 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.2 0.6 0.1 0.1 0.0 0.1 0.0 0.0 2.5 8.0 1.3 1.4 0.5 1.6 0.2 0.3 0.7 2.3 0.4 0.4 0.3 0.9 0.1 0.2 0.0 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.2 0.5 0.1 0.1 0.2 0.6 0.1 0.1 0.0 0.1 0.0 0.0 1.6 5.2 0.8 0.9 0.0 0.1 0.0 0.0 33 105 17 19 Total 0.3 0.5 0.1 0.3 0.8 69.7 0.0 0.5 1.0 0.2 10.0 21.1 0.1 0.3 19.1 0.6 2.8 2.6 0.0 0.1 0.1 1.3 0.4 0.0 0.1 8.1 0.0 0.1 1.0 0.2 13.2 2.6 3.8 1.5 0.2 0.2 0.9 0.9 0.1 8.5 0.2 174 Fiscal benefits UK Purchases GVA Employme of goods, Capital Contributi nt Cost materials Spend on and 0.1 0.2 0.0 0.0 0.4 0.5 0.1 0.1 0.0 0.1 0.0 0.0 0.2 0.2 0.0 0.0 0.6 0.8 0.1 0.1 39.2 50.7 8.2 8.8 0.0 0.0 0.0 0.0 0.4 0.4 0.1 0.1 0.6 0.7 0.1 0.1 0.1 0.2 0.0 0.0 6.2 7.9 1.3 1.4 12.3 15.6 2.5 2.8 0.0 0.0 0.0 0.0 0.2 0.2 0.0 0.0 11.1 14.2 2.3 2.5 0.3 0.4 0.1 0.1 2.1 2.7 0.4 0.5 3.0 3.8 0.6 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 1.0 1.3 0.2 0.2 0.3 0.4 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 9.5 12.1 1.9 2.2 0.0 0.0 0.0 0.0 0.1 0.2 0.0 0.0 0.6 0.7 0.1 0.1 0.1 0.1 0.0 0.0 7.7 9.8 1.6 1.8 2.8 3.5 0.6 0.6 2.2 2.8 0.5 0.5 0.9 1.2 0.2 0.2 0.2 0.3 0.1 0.1 0.1 0.1 0.0 0.0 0.7 0.9 0.1 0.2 1.1 1.4 0.2 0.3 0.1 0.1 0.0 0.0 9.7 12.4 2.0 2.2 0.2 0.3 0.0 0.0 114 147 24 26 Total 0.4 1.1 0.1 0.5 1.6 106.8 0.0 1.0 1.6 0.4 16.7 33.2 0.1 0.5 30.0 0.9 5.7 8.1 0.1 0.1 0.3 2.7 0.9 0.1 0.1 25.7 0.1 0.4 1.6 0.2 20.8 7.5 6.0 2.5 0.7 0.3 1.9 3.0 0.2 26.3 0.6 311
  • 91. FDI Research – Final Report Employment impact % of sales outwith Industry Code 12 12 12 12 12 12 12 14 12 12 14 14 12 14 14 12 12 14 14 12 12 12 12 12 12 14 12 12 14 12 14 14 12 14 14 12 14 14 12 14 12 Indirect impact Induced impact Displacement Net Employment Impact Gross Employment Impact NI UK NI UK NI UK NI UK NI UK 55 100 15 55 162 15,050 4 65 220 50 2,141 2,262 13 32 2,049 125 611 550 10 14 20 188 85 9 14 1,756 10 29 221 34 1,419 557 404 254 46 38 185 203 14 1,795 41 30,905 100% 100% 100% 94% 95% 100% 100% 50% 100% 100% 99% 0% 100% 25% 0% 100% 100% 98% 99% 100% 61% 53% 95% 100% 100% 100% 100% 100% 100% 100% 0% 100% 0% 70% 98% 100% 95% 100% 0% 97% 100% 38 100% 50% 100% 72% 65% 100% 100% 0% 100% 100% 90% 0% 95% 0% 0% 100% 70% 0% 73% 100% 0% 6% 50% 75% 100% 0% 56% 15% 100% 100% 0% 15% 0% 65% 0% 91% 58% 0% 0% 0% 0% 22 0.0 0.0 0.0 2.8 6.8 0.0 0.0 27.3 0.0 0.0 18.0 1,896.7 0.0 20.1 1,718.1 0.0 0.0 9.2 0.1 0.0 6.5 74.1 3.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1,189.8 0.0 338.8 63.9 0.8 0.0 7.8 0.0 11.7 45.2 0.0 5,441 0.0 52.7 0.0 16.5 59.7 0.0 0.0 68.4 0.0 0.0 225.4 2,381.9 0.7 33.7 2,157.6 0.0 193.0 579.2 2.8 0.0 21.1 186.1 44.8 2.4 0.0 1,849.1 4.6 26.0 0.0 0.0 1,494.2 498.5 425.4 93.6 48.4 3.6 81.8 213.8 14.7 1,890.1 43.2 12,713 2.1 3.9 0.6 2.1 6.3 587.0 0.2 2.5 8.6 2.0 83.5 88.2 0.5 1.2 79.9 4.9 23.8 21.5 0.4 0.5 0.8 7.3 3.3 0.4 0.5 68.5 0.4 1.1 8.6 1.3 55.3 21.7 15.8 9.9 1.8 1.5 7.2 7.9 0.5 70.0 1.6 1,205 10.7 19.5 2.9 10.7 31.6 2,934.8 0.8 12.7 42.9 9.8 417.5 441.1 2.5 6.2 399.6 24.4 119.1 107.3 2.0 2.7 3.9 36.7 16.6 1.8 2.7 342.4 2.0 5.7 43.1 6.6 276.7 108.6 78.8 49.5 9.0 7.4 36.1 39.6 2.7 350.0 8.0 6,026 12.1 22.0 3.3 12.1 35.6 3,311.0 0.9 14.3 48.4 11.0 471.0 497.6 2.9 7.0 450.8 27.5 134.4 121.0 2.2 3.1 4.4 41.4 18.7 2.0 3.1 386.3 2.2 6.4 48.6 7.5 312.2 122.5 88.9 55.9 10.1 8.4 40.7 44.7 3.1 394.9 9.0 6,799 12.1 22.0 3.3 12.1 35.6 3,311.0 0.9 14.3 48.4 11.0 471.0 497.6 2.9 7.0 450.8 27.5 134.4 121.0 2.2 3.1 4.4 41.4 18.7 2.0 3.1 386.3 2.2 6.4 48.6 7.5 312.2 122.5 88.9 55.9 10.1 8.4 40.7 44.7 3.1 394.9 9.0 6,799 45 82 12 48 139 12,326 3 80 180 41 1,771 3,749 11 46 3,396 102 500 460 8 11 23 228 73 7 11 1,438 8 24 181 28 2,352 456 670 272 38 31 159 166 23 1,515 34 30,752 54 150 15 70 218 14,674 4 132 215 49 2,313 4,587 13 65 4,155 122 789 1,115 13 14 41 369 128 11 14 3,561 14 54 215 33 2,878 1,042 819 341 93 41 262 412 28 3,640 83 42,845
  • 92. FDI Research – Final Report Appendix C Methodological note on Experian’s forecast
  • 93. FDI Research – Final Report National and Regional Forecasts The starting point for our forecasts is historical data collected at a highly disaggregated level in the UK. The majority of these series come from the Office of National Statistics (ONS) or other official sources such as the Labour Force Survey. This core of information is supplemented by international data, qualitative surveys (heavily used in our regional estimates) and other market information (such as Nationwide house prices) where appropriate. These data series describe the historical performance of the UK economy and its regions. Two areas of effort are then required. The first is to ensure that all data are consistent. Figures from different sources, for instance, are usually of different vintages, or variables may be defined in a different way. Official data are frequently revised over time and forecasters want to ensure that they incorporate the latest possible information. The second effort is the estimation of systems of equations (or models) to represent the economic relationships. Each equation explains the performance of a particular indicator in terms of a number of other factors. The historical relationships that underpin these linkages are subject to rigorous statistical testing. All the major variables at the national and regional level are represented in this way. The model is used to produce an initial forecast. Our internal experts inspect this and then adjust the view in the light of their detailed knowledge. Alterations are made for influences such as inward investment, infrastructure developments or changes to European funding in the form of “add factors”. A new forecast is then produced and subjected to rigorous inspection by clients. This process continues until those responsible are satisfied with the results. Sub-regional Forecasts County and LAD forecasts are prepared once national and regional forecasts are finalised. At this level far fewer reliable economic data are available. For UK sub-regions, Experian makes extensive use of the NUTS2 output figures, Annual Business Inquiry employment measures (and its predecessors), and the Census population data. In broad terms, the historical performance of a county is interpreted in terms of its share of the regional economy. In turn, the performance of the LAD areas is based on share of the county. For each sector of the economy, equations are produced for output and employment to explain the relationship between these variables at the local and regional level. Equations for forecasting output in the production industries generally model changes at the county and regional levels without further refinements. Service industries are driven by a greater range of variables and incorporate both population and intermediate (business-to-business) demand. The construction sector is treated slightly differently, using data on investment spending by both service and production industries. In broad terms, if a county/local authority X has accounted for a steadily rising share of a sector P in region/county Y, then its share will continue to increase into the future and vice versa. This applies whether the sector is increasing or decreasing in size at the regional level. Shift-share calculations are executed for every sector and every county in a region. All variable totals must sum to regional value and, in turn, calculated LAD totals must sum to the county. Nonetheless, the forecasts derived by this approach are the stage one figures. These are largely demand driven and capture the short-to-medium term outlook particularly well. Over the longer-term (about a decade out), supply-side factors become increasingly important to performance. Experian’s long-term county modeling framework incorporates supply-side factors. These variables include labour supply, work force quality, infrastructure, population density and ethnic mix. In the long run, they determine potential participation (the potential for people to be economically active at a given employment rate), productivity and employment rates. The longer-term supply-side and short-to-medium demand-side models are drawn together and the process culminates with a set of county and local authority forecasts that are entirely consistent with the national and regional view.