INWARD INVESTMENT IN WALES

There must have been a huge sigh of relief from the Welsh Government earlier this month when Ernst and Young released their annual report on foreign direct investment.

With the results showing that with Wales having increased its number of foreign-backed projects by 244 per cent since last year, the Minister could be forgiven for opening a couple of bottles of bubbly to celebrate such a turnaround in its fortunes in this arena.

In fact, Wales saw its foreign-backed projects almost quadruple from nine to thirty one in 2012, the highest total for five years, creating 2051 new jobs in the process.

But it is not all good news as only 4 per cent of foreign investors chose Wales as the most attractive destination to set up foreign operations, the same as Scotland. In contrast, 45 per cent saw London as the best place to relocate. This suggests that there is still a long way to go before the Welsh Government gets its offering right in attracting new businesses to set up here. Certainly, as has been argued by a number of senior politicians already, the brand for Wales needs a lot of work to ensure that those from outside the country know exactly what is on offer.

So what other lessons are there from the Ernst and Young report for the Welsh Government to build on this success?

First of all, it would seem there is some thanks due to the UK Government in establishing a more business-friendly environment during the last twelve months, with nearly two thirds of investors interviewed for report believing that the UK had developed a more attractive tax regime during the last twelve months and just over half suggesting that future changes will be a significant influence on international companies’ decisions to relocate.

Indeed, the proposal to reduce corporation tax to 20 per cent by 2015 could be a magnet for getting more businesses to relocate to Wales and it is critical that this is used as part of any future marketing campaign to attract foreign investors.

In terms of the business sectors that could drive the growth of the economy over the next few years, there is some good news for Wales.

According to the international companies in the survey, financial services, telecommunications and manufacturing were ranked as the three most important sectors. Given that there is a sector-based approach to all three of these industries in Wales, there is an opportunity to get the right strategy in place to attract the best in the World. Perhaps the only disappointment, given that there is considerable investment going into this sector, is that the life sciences were not ranked highly by investors as an industry which will grow in the future.

One of the reasons for the growth in inward investment across the UK during the last twelve months has been the perception that the environment for inward investment has improved in a number of areas. These include having a flexible financial system that increases the availability of finance, increased support for SMEs and easier access to funding.

But investors are also attracted by non-financial factors including quality of life, culture and language, telecommunications infrastructure and the stability of the legal and regulatory environment. Certainly, these are aspects that the Welsh Government could and should emphasise as part of any offering to new businesses looking to come to Wales.

According to investors, if the UK wants to become a leader in innovation, then it must improve education and training, increase tax incentives for innovative companies and develop more attractive policies for sustainable investment. Again, the Welsh Government can, if it wishes, develop a different path in terms of more vocational and technical training whilst ensuring that universities develop courses that are relevant to those new industries that we want to attract  to Wales.

And whilst it cannot offer direct tax incentives to innovative companies, there are more creative ways in which it can ensure that Wales has a strong package of financial support to investors and their companies.

Therefore, whilst the latest figures on inward investment into Wales are to be welcomed, more needs to be done in ensuring that we become a more attractive location to companies around the World.

Certainly, the Ernst and Young report is a good place to start to get blueprint as to how politicians and policymakers could and should develop a strategy to achieve this.

AN INNOVATION STRATEGY FOR WALES - LESSONS FROM FINLAND

Last week, I attended a conference organised by the Massachusetts Institute of Technology (MIT) to examine the future of manufacturing.

It was a timely event, as I am currently undertaking research into the development of advanced manufacturing in Finland during the last thirty lessons and the lessons that other small economies can take from this experience.

We heard from a range of experts in the field, including Professor Martin Schmidt of MIT, who has been advising President Obama on a new emphasis on manufacturing within the US economy.

The report from his review is fascinating, mainly because of the differences in the philosophy regarding economic development as compared to most parts of Europe. In fact, the conclusions to the report to ensure American leadership in advanced manufacturing comprehensively rejected a picking winners policy, either in terms of individual companies or specific sectors. Instead, it proposed pursuing an innovation policy for advanced manufacturing that would provide the best environment in which to do business, ensure that the most powerful new technologies are developed in the USA and that technology-based enterprises have the infrastructure required to flourish.

Given the way that manufacturing in the USA and many other advanced countries has been ignored in the last decade as financial services became the favoured sector and there has been rush to move production to low cost countries such as China, this report is long overdue.

Yet, during the two days in Brussels discussing the future of advanced manufacturing, there seems to be little appreciation of an example within Europe that could also act as a model for developing more innovative and competitive economy.

During the last fifty years, Finland has changed itself from an economy that was based largely on primary production and an unskilled agrarian workforce to one that is recognized as one of the most competitive in the World, particularly in the field of high technology manufacturing within key sectors such as information communications and telecommunications (ICT).

Most of this change took place during the early 1990s when the Finnish economy endured a major economic recession that included a major banking crisis, unemployment rates of 15 percent and high levels of government debt.

In response to these issues, the Finnish Government took a bold long-term view to focus its strategy on innovation and promoting, in particular, facilitating the development of high technology sectors such as ICT. Since 1995, the Finnish economy has been one of the fastest growing in the developed world, with an average growth rate of 3.5 per cent. Unlike other rapidly growing economies, most of the growth within Finland has been generated by the development of domestic companies.

Therefore, through indigenous growth in a number of key sectors, Finland has become recognised as one of the most innovative and competitive nations in the World and the World Economic Forum’s Global Competitiveness Report 2012-2013, which assesses the competitiveness landscape of 144 economies, ranked Finland third in the World in terms of a range of different factors driving productivity and prosperity.

And one of the main driving forces behind this success has been a specific government body that has driven and developed innovation throughout the Finnish economy.

Established in 1983, TEKES is responsible for administering public support for private and public sector R&D and innovation in Finland. Its mission is to promote the development of industry and services by means of technology and innovations. Its impact has been tremendous, being responsible for supporting more than half of Finnish innovations during the last thirty years. The latest report on its impact on innovation is shown below.


Whilst its programmes have been focused very much on supporting technology within companies and public institutions, there have been additional positive effects such as increased networking between companies and R&D organisations in targeted clusters and increased collaboration between researchers across different disciplines. Simply put, the focus on the innovation policy that the US Government now recognises as being critical to its own manufacturing sector has been one of the key successes in turning a small peripheral nation into one of the most competitive economies in the World.

And there are certainly lessons for Wales from this experience.

Indeed, whilst there are those who still hanker for the return of the Welsh Development Agency, it is clear that during its existence, its focus on attracting large foreign direct investment did little to support the long-term innovation performance of our nation. Its subsequent integration into the Welsh Government has also had a minimal impact on ensuring that Wales becomes the “small clever nation” which politicians have been calling for since the advent of the National Assembly.

As the Minister for Business is currently examining the development of an innovation strategy for Wales, one option in creating a more competitive Welsh economy would be to consider establishing a Welsh TEKES that would be an arms length organisation that would focus on developing the innovative potential that exists within this nation.

If we were to get only a fraction of the success that the Finnish economy has enjoyed during the last three decades, then it would be one of the more astute policy decisions that the Welsh Government will have made in developing the economy.

ERNST AND YOUNG REPORT ON INWARD INVESTMENT TO WALES

Earlier this week, the accountants Ernst and Young released their annual UK Attractiveness Survey, a study that examines inward investment and the attitudes of global investors.

It showed that whilst the UK attracted 679 projects and nearly 30,000 jobs in 2011, this represented a decline of 7 per cent on the previous year.

More worryingly, Germany is now becoming the major country within Europe for investments from Asian economies such as China and Japan, although the UK remains the most attractive country for Indian businesses. Regionally, the picture was mixed.

Whilst the UK economy as a whole has lost ground, London actually increased its share of foreign direct investment by 13 per cent. In contrast, Wales showed the largest decline of any part of the UK and its share of UK inward investment projects is now only 1.3 per cent as compared to 9 per cent eight years ago. Indeed, if we compare Wales to Scotland, we see that our fellow Celts enjoyed the highest level of inward investment employment in the UK, with 5926 new jobs being created in 2011. In contrast, new overseas projects established only 1090 jobs over the same period in Wales.

When asked to comment on this depressing performance, the Welsh Government wisely kept their counsel, stating they would rather wait for the official government data on inward investment to be published later this summer. But if the Ernst and Young report is accurate, it suggests a serious decline in the attractiveness of the Welsh economy to foreign investors.

The question for many is why Wales has shown such a decline when, at one stage, it was attracting more inward investment than any other region in the UK? Some will argue that the abolition of the Welsh Development Agency (WDA) has had a significant impact on the ability and, more importantly, flexibility of those looking to bring in major projects from overseas.

Certainly, those who want to bring back the WDA can point to the fact that Scotland has maintained its own development agency at arms length from government in the form of Scottish Enterprise and that this body has managed to attract nearly six times the number of jobs found in Welsh new inward investment projects.

One could also point to the mixed messages to investors that came out of the previous Labour-Plaid Government announcements were made in 2010 that no more grants would be available to businesses when the reality was that any major project coming into Wales would have received support from the public purse. Fortunately, that situation has been reversed by the current Minister although we will wait and see what long term effect this strategy has had on Wales’ ability to bring in foreign investment.

In addition, International Business Wales, the body specifically created to attract new companies, was closed without any replacement being put into place. Not only was the expertise of experienced individuals lost to Wales as a result of its abolition but the momentum that the organisation had built up since its creation in 2005 disappeared literally overnight.

Given this, it is no surprise that Wales’ performance currently lags behind that of other nations. But there is also the question of whether inward investment is actually as important to the Welsh economy as it clearly was twenty years ago. In fact, many would argue, and the academic evidence backs them up, that if the focus of current government policy is on job creation, then it would be better for policymakers to put their efforts into supporting Welsh businesses, rather wasting resources in competing against other better financed regions for large overseas projects.

Despite this, and you may be surprised to hear me say this, I still believe there is a role for inward investment. However, rather than accepting any project that is going, the focus should be on bringing world class innovative companies that complement the strengths found in our indigenous business community and, more importantly, our university sector.

And imagine if we could get companies such as Microsoft, Google and IBM setting up operations in Wales. It would change the brand image of the nation overnight and send a clear message to the global community that the best companies want to be based in our economy. Policymakers should also focus its efforts on keeping and expanding those businesses that have already located in Wales. 

Too often we have seen major employers such as Bosch leave Wales because there was no relationship between their senior managers and the Welsh Government with Ministers usually being the last to know that the companies had decided to pack their bags and leave.

As any entrepreneur will tell you, it takes ten times the effort to attract a new customer when compared to keeping an existing customer and the approach to foreign direct investment in Wales should be the same.

Therefore, whilst the Ernst and Young report is disappointing, it nevertheless sets a real challenge to policymakers to address this issue over the remaining four years of the current Welsh Government. However, any approach to inward investment strategy will only benefit the Welsh economy if it is part of an overall strategy that not only attracts the best global businesses but also encourage entrepreneurship and helps indigenous businesses to grow.