Global Scotland: trade and investment strategy 2016-2021

Chapter 7: Attracting Investment to Scotland

Context and key challenges

As outlined in Chapter 2, attracting investment to Scotland in the form of Foreign Direct Investment ( FDI) by companies, investment in capital projects and investment to help companies achieve their growth ambitions is vital to achieving sustainable economic growth; and to supporting the four priority areas for action which underpin Scotland’s Economic Strategy – investment, innovation, inclusive growth and internationalisation.

Foreign Direct Investment

There is a diverse range and type of high quality FDI projects including those that are R&D intensive; those that provide skilled employment; and projects that are ‘technology exploiting’. With over 2,300 foreign owned companies with 314,000 employees and a combined turnover of £89 billion, FDI already plays a central role in Scotland’s economy and is a crucial component of developing growth sectors in Scotland and building stronger supply chains. As well as direct employment, FDI brings other benefits in terms of wider employment impacts, increased productivity and the transfer of knowledge, skills, technology and innovation to Scotland. Indeed, whilst there is variation, these companies tend to pay higher wages and be more productive than average and generate around 70% of Scotland’s Business Enterprise Research and Development expenditure ( BERD) ^[33]

The scale and scope of FDI in Scotland reflects a long and successful track record in attracting companies across a range of sectors in both manufacturing and services. Since 2005 Scotland has attracted an average of 62 new FDI projects each year – with an associated average 3,700 jobs. In fact, in each year since 2006 Scotland has ranked in the top two UK regions outside London in terms of number of FDI projects secured ^[34] and in 4 of the last 5 years has been the top location outside London.

This strong performance has been driven by SDI’s role, working with partners, in proactively attracting investment and through broader government action to create a supportive environment in areas such as infrastructure, planning, transport, skills and innovation. Scotland’s place as part of the EU Single Market has also been a key factor in companies’ investment decisions. With over 60% of 2014 projects from existing investors ^[35] , it also reflects the confidence that these investors show in expanding and making further investment.

This is a strong platform to build on. However, Scotland’s success in attracting repeat investment from existing investors, especially those from the U.S, needs to be sustained and matched by attracting more new investors to Scotland. In particular, there is relatively low awareness of Scotland among investors in Asia, with China, the fifth biggest investor into the UK, not making Scotland’s top 10 sources of investment. Furthermore, in 2014 37.5% of projects into Scotland came from new investors, compared to 68% in the UK ^[36] .

Scotland also needs to respond to the rapidly changing scale and nature of FDI towards, for example, smaller scale projects with a strong emphasis on R&D and innovation and inward investors, especially those from China and India, placing more emphasis on mergers and acquisitions and less on greenfield projects.

Capital Investment

Across the globe, financial institutions, companies and investment groups, along with government backed Sovereign Wealth, investment and pension funds, are looking for opportunities and projects to invest in. The scale of available capital from UK and international investors is immense. For example:

• It is estimated that, partly through sovereign wealth funds and partly through the joint funding and/or development of projects, China will invest over £100bn in UK infrastructure, especially in energy, real estate and transport, by 2025 ^[37] ;
• Over the last decade, Glasgow has attracted £5.3bn and Aberdeen £2.67bn of commercial property investment – the third and seventh highest level of investment respectively of any city in the UK outside London ^[38] ; and
• As a specialist bank for real estate finance and public investment finance, pbb Deutsche Pfandbriefbank has over €36bn to invest in tranches of €500m for projects in excess of €10m.

In the vast majority of cases, the development and delivery of projects and matching of projects with potential investors is principally a private sector activity. The role of government, national and local, is to create the right environment for such investment through, for example, core infrastructure provision and its planning and regulatory roles. Nonetheless, investors often value engagement with Government to give them confidence that, subject to planning decisions, a project has the Government’s in principle support. There is scope for the Scottish Government and wider public sector to be better aligned behind projects; to work together more effectively to develop and market investment propositions; and to identify and access potential investors.

Company Risk Capital Investment

Scotland’s Economic Strategy (March 2015) is clear that the future success of Scotland’s economy depends on the productivity, growth and competitiveness of Scotland’s businesses. Increasing the number of high growth businesses is especially important in this respect as such businesses display higher levels of innovation and productivity than average and contribute disproportionately to employment and export growth.

Although many factors affect business growth, access to appropriate finance is critical, especially for businesses with high growth potential seeking to move to the next stage of development. Such finance can be accessed through traditional debt and equity markets and, though the market is still relatively small, the emerging alternative funding market such as crowdfunding and peer to peer lending. Nonetheless, the evidence ^[39] indicates that whilst Scotland benefits from extensive business banking services and a vibrant angel investment community – and many SMEs are able to access the funds they require – SME businesses, in all sectors, face challenges raising the funding they need. This challenge is especially acute for early stage companies seeking to raise larger amounts of equity capital (£2m plus) to support growth and, in many cases, to expand internationally.

Our Ambition

Guided by our strategic response to global change and the key challenges outlined above, our ambition for Scotland is:

Delivering our ambition

Attracting Foreign Direct Investment

To achieve our ambition we will inspire, enable and support new investors to invest in Scotland; existing investors to develop, grow and expand; and all investors to maximise their contribution to inclusive growth.

In an extremely competitive global environment it is essential that Scotland’s approach to attracting inward investment is unified and coherent. Although SDI has the lead role in attracting inward investment, government, the wider public sector and Scotland’s universities and Innovation Centres have a key role in creating a supportive business environment in terms of skills, R&D and innovation capacity, infrastructure, planning, transport and other issues; and in creating a culture that welcomes and supports responsible investment in Scotland’s economy. The business community also has a role to play in championing Scotland’s strengths and in developing and delivering the supply chain products and services that inward investors value. As part of our One Scotland approach we want to harness and add value to these important contributions. We will also take a proactive approach to attracting FDI from companies that share the values of the Scottish Business Pledge.

Attracting new investors

Attracting new investment to Scotland is a strategic priority. To deliver this, our approach is to focus on specific sub sector opportunities such as FinTech and subsea technology and develop Scotland’s niche propositions in these areas. We will forge strategic relationships with investor companies, engaging much earlier in their strategic planning process to influence their decisions and help to develop business solutions. We will also generate more leads to potential new investors through deeper and wider engagement with intermediaries, partners, stakeholder networks and existing investor supply chains.

Building Scotland as a global centre for collaborative innovation and investment

Scotland has considerable expertise in areas such as advanced manufacturing and remanufacturing; informatics; precision medicine and decentralised energy systems.

We will use this knowledge and creativity to attract new forms of investment to Scotland and facilitate research collaborations with global partners. These will help to develop innovative solutions to challenges such as population growth, resource use, health and wellbeing and data management.

In this way, we can build Scotland’s profile as a centre for collaborative investment and innovation, one which can facilitate major research for international business. Using our expertise, we can respond to challenges in the developing world and position Scotland as a Good Global Citizen and trusted investment partner.

Supporting existing investors to develop, grow and expand

As highlighted above, existing investors already bring added value to the Scottish economy through direct employment impacts, wider supply chain benefits and through additional skills, R&D and innovation. We want existing investors to develop, grow and expand in Scotland and to work with them to spread those benefits as well as their international experience, expertise and networks more widely; and for the responsible and inclusive approach to business already practised by many investors to be extended still further.

The Scottish Government and its agencies will engage at a senior level with key investors to better understand and respond to their needs to attract still further investment to Scotland. We will also encourage investors to make the Scottish Business Pledge, pay the Living Wage and, where appropriate, to become an accredited Living Wage employer.

The Delivery Plan at Annex A outlines key actions SDI will take through a One Scotland approach to attract new investors; build Scotland as a global innovation and investment hub; and support existing investors to develop, grow and expand.

Attracting Capital Investment to Projects of Scale

This Strategy signals our ambition to work with the public and private sectors and potential investors to take a more proactive and investor focused, and more systematic and co-ordinated approach, to attracting capital investment to large scale projects in Scotland.

In doing this, we will focus on where Government and the wider public sector can add maximum value to the role of the private sector; on investment propositions of scale and on ensuring projects contribute to high quality places and connections and deliver maximum economic, social and environmental benefits. If we are to compete with other projects, cities and regions across Europe and the rest of the world this must be underpinned by a strategic, unified and collaborative approach to:

• Bring forward strong, investment-ready propositions which meet investor expectations; and
• Systematically identify and engage with potential investors.

In taking this approach we will build on the work that the Scottish Government, Scottish Enterprise and Scottish Cities Alliance have been developing in this area during 2015 drawing from experience and lessons learned from other projects and from our experience in attracting traditional inward investment to Scotland.

Scotland is competing with the rest of the world to attract capital investment. It is therefore essential that the propositions being put to potential investors are as strong as possible - not just from the point of view of individual projects but also in terms of Scotland’s broader credibility and reputation with the international investment community. In this respect, Scottish Government support for projects, which will often be about giving confidence to investors rather than financial support, will be determined by the strength and quality of the proposition.

The Scottish Government, its enterprise agencies, the Scottish Cities Alliance and some local authorities are already engaging potential investors in Scotland and through events and overseas activity. This has delivered some success but more needs to be done to build long term investment relationships in a systematic and unified way; to improve our collective understanding of investor priorities and interests so that we are matching the right projects with the right investors; and to promote projects and Scotland as effectively as possible with the right type and level of engagement at the right time.

In that context, our Delivery Plan for working in partnership to develop strong investment propositions and engage effectively with potential investors is set out at Annex A. A small team will be established within Scottish Government to support and co-ordinate this Action Plan across Government, its agencies and partners; to align activities; clarify lead roles and responsibilities; and to provide a single door approach to connect projects and partners in Scotland with potential investors.

The team will work closely with a wide range of partners including Scottish Enterprise and Highlands and Islands Enterprise, the Scottish Investment Bank, the Scottish Cities Alliance, the Scottish Futures Trust and local authorities as well as the property industry and other private sector interests. In addition, SDI’s international network will play a key role in identifying and building relations with potential investors and connecting partners and projects with them.

Supporting Company Growth Through the Attraction of International Risk Cpaital Investment

We want Scotland to be the best place in the UK to do business – a place where businesses with high growth and export potential can thrive and where the finance to enable them to do so is accessible. We have recently taken steps to enhance the remit of the Scottish Investment Bank ( SIB) and for Scottish Enterprise to continue to work with the private sector to offer a wider range of business investment solutions to address market gaps to improve the supply of funding.

Helping companies to access international institutional investors and a broader range of venture capital and angel investors is a key part of this - both as a result of the capital they invest in businesses and in terms of the wider benefits such as new skills, new networks and access to overseas markets. To achieve this, SDI and the Scottish Investment Bank will take specific action to:

• Increase the flows of international investment into Scottish companies through engagement with VC and corporate investors, and capability building with Scottish companies to help them secure this investment in an increasingly competitive market.
• Support ambitious and growing companies to identify, prepare and secure the most appropriate sources of finance. This includes increasing awareness and understanding of the role that different types and sources of finance can play at distinct stages in a company’s development.
• Related to this is the need to increase the ability of Scottish companies to effectively attract later stage international investment. Factors that positively influence this include the quality of investment propositions, management team capability and the ability of companies to effectively identify, engage and communicate with investors.

In doing this, we will work collaboratively across the public and private sectors with a strong focus on the most acute funding gaps in Scotland and on investors most likely to fill those gaps.

Our current approach to improving access to finance to support company growth has primarily focused on business advice and support and on filling gaps in the Scottish market for debt and equity finance. We have recently taken steps to extend this support through, for example, developing a £40m SME Holding Fund to provide matched ERDF funding into financial instruments that can deliver debt and equity investment; enhancing the remit of the Scottish Investment Bank to facilitate additional investment into Scotland and encourage and support more funding options for businesses; and expanding the provision of specialist financial readiness advice for SMEs.

This provides a strong platform for work across the Scottish Government and its enterprise agencies, the Scottish Investment Bank and other public and private partners to support companies to access international institutional risk capital. The Delivery Plan for achieving this is provided at Annex A.