Inward investment: beneficial?

4/11/2008

A lecture by the Head of Economics and Strategy at Aston Business School, Professor Nigel Driffield revealed that the beneficial effects a host region can expect to generate as a result of attracting inward investment aren’t always as beneficial as they first appear.

Inward investment is seen as an increase in capital spending originating from outside the country or region, generating employment, value added and exports. On this basis most countries or regions spend money to various degrees to attract or retain this internationally mobile capital.

Professor Driffield said: “Most studies suggest that the employment created does not justify the size of the subsidy paid to attract firms. Equally there is a ‘crowding out effect’ because inward investment increases competition in goods, labour and most pertinent right now, capital markets. It also reduces employment, output and investment by non-subsidised existing firms.” The focus therefore shifts to the indirect benefits of attracting inward investment - such as technology transfer or productivity growth. Essentially those investments that generate large scale employment tend to do neither of these things.

Hypothesising on prospects for the UK in the current climate, Professor Driffield added: “Inward investment funded by debt seems unlikely at the moment and investment from the USA is likely to decline as American firms retrench into home production. Historically this is the main source of technology transfer into the UK.

There is still scope for inward investment by cash rich firms from Asia, but they are looking to either acquire UK firms or establish themselves within Europe to protect relative new sales at a time when demand is uncertain. Investment from Asia is still strong if firms believe demand is there, but these firms create low paid jobs. This may be good news for regions with high unemployment, particularly of unskilled workers, but is unlikley to be a driver of long term competitiveness."

Professor Driffield concluded: “There are beneficial effects for the UK from inward investment, but you have to know where to look.”