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