7.1 Economic impact of exports
Evidence shows that businesses which trade internationally tend to be more innovative, more productive and more competitive.
Economic theory and empirical evidence demonstrates the significant gains that can be achieved both at the individual business and wider economy level through exporting. Not only can higher exports boost economic growth by contributing directly to GDP but, in addition, trade improves productivity over time through the diffusion of new technology, increased competition, investment and exploitation of economies of scale. These economy wide benefits can also deliver benefits to individuals through creating job creation and wage growth.
Improvements in productivity support sustainable economic growth. Analysis of firm-level data in the UK suggests that businesses which report goods exports were around 20% more productive than businesses which do not trade, after controlling for their size, industry and ownership status(15). Research has also found that exporters typically pay higher wages than non-exporters, reflecting their ability to exploit economies of scale and to realise productive gains.(16)
The economic literature suggests a strong two-way link between exporting and innovation, with innovation helping or encouraging a firm to export in the first place and exporting itself also driving investment in innovation and R&D. Evidence from the Small Business Survey Scotland 2017 shows that, in 2017, SME exporters were twice as likely as SME non-exporters to have innovated in the previous three years.
The benefits relating to exporting are particularly relevant to SMEs, which employ the majority of the labour force in Scotland. Smaller businesses typically have less access to learning opportunities than large businesses do. Engaging in international trade, however, gives SMEs greater access and knowledge of different markets and production technologies.(17)
Recent research has indicated that Scotland lags behind the rest of the UK in on a range of indicators relating to export performance.(18) This highlights that there is a significant and continuous ‘export gap’ that is restricting a greater realisation of benefits from trade compared to the rest of the UK.
Our focus in this plan has been to increase the top line value of Scotland’s exports. This gives us clear targets to aim for and metrics to track performance against. However, it is important to recognise that not all exports deliver the same level of economic benefit to Scotland’s businesses, employees, places and, indeed, taxpayers.
Depending on the value of imports required to generate exports and the type and value of jobs created, the impact on the economy can vary widely. We consider some of these aspects here and recognise that deepening our understanding of these relative impacts is an ongoing process which we will develop with partners over time to better inform our resource allocation and strategic choices.
International exports and imports from Scotland have increased over the past 20 years. Including oil and gas, experimental statistics(19) show that Scotland has an international trade surplus, with exports consistently higher than imports. In 2016 this trade surplus was estimated to be around £2bn (1.2% of GDP). This compares with the UK which has shown a trade deficit in every year since 1998 and which currently sits at 1.3% of GDP.
Source: Whole of Scotland Economic Accounts Project (Experimental Statistics – 2016 data is provisional)l and Quarterly National Accounts Scotland 2017
The actions in this plan will help to increase exports at a faster rate than in the past, helping further strengthen Scotland’s trade balance. However, this is not a given, particularly if the exports produced rely on high values of imports. This is why it is important that the wider business support system is considering how we can develop businesses to provide a supply chain to support these exporting businesses. While outwith the scope of this plan, ensuring that an effective supply chain is developed in Scotland will truly help to maximise the impact of increased exports.
Analysis by the Office of the Chief Economic Adviser has looked directly at the impact of increasing exports as a share of GDP over the coming years on GDP and jobs. This shows that increasing exports as a share of GDP by 5 percentage points by 2029, from 20% to 25%, could increase GDP by approximately £3.5bn and help support 17,500 jobs with an increased tax take of £500mn per annum, compared to what would be expected if they remained at their current level.(20)
It is also important to note that jobs in exporting intensive industries tend to bring more to the economy. For example, the gross value added (GVA), a measure of economic output, per job in manufacturing in 2016 was £69,853, which is 54% higher than the overall GVA figure per job for all sectors. This is even higher in the manufacture of food and beverages at £85,513 per job (89% higher than the average GVA per job) and in the manufacture of refined petroleum, chemicals, pharmaceutical, rubber and mineral products at £90,641 per job (double the average GVA per job).
We will:
• Work with partners to deepen our understanding of the relative impacts of different types of exports and use this to inform our resource allocation and strategic choices in future. This will include opportunities for import substitution and growing the Scottish based supply chains that support our strongest export performers.
7.1.1 Maximising return on investment
The Scottish Government is committed to growing the value of Scotland’s exports. We want to make sure that public funds are directed towards activities that will have an impact and deliver real benefit for businesses in Scotland and the wider Scottish economy. This includes measures to support businesses to export for the first time as well as intensive support to ensure that experienced exporters are able to fully capitalise on international opportunities. The total investment we will make in this area – running into several tens of millions of pounds – is targeted at increasing the value of Scotland’s exports by several tens of billions of pounds.
The Programme for Government 2018-2019 (PfG) outlines our commitment of £20mn over the next 3 years to support the actions in this plan. This does not represent the totality of our commitment to supporting Scotland’s export efforts.
The Scottish government and wider public sector’s export spending will be focused on accomplishing three things;
1. Raising awareness and building ambition
2. Developing capacity and capability
3. Supporting businesses to expand into new markets and to exploit new opportunities
Actions in these areas are focused on overcoming the barriers to export, both real and perceived. While this plan outlines government spending specifically on export support, there is an intrinsic link between the actions and resources in this plan and wider business growth support. Spend in both areas is aligned behind a shared objective of supporting businesses to grow, whether through domestic or international means.
7.1.2 Current Scottish Government spend on trade and investment
In addition to the £20mn outlined in the Programme for Government, the Scottish Government already supports businesses’ export activities through our agency partners who run a programme of business support that helps businesses improve their performance across a range of areas, including innovation, growth and leadership and management.
The Scottish Government expects resources within our enterprise agencies and other public bodies to be aligned to delivering the priorities outlined in this plan.
As well as having responsibility for delivering wider business support, alongside Business Gateway and other organisations, the enterprise agencies, through SDI, provide international trade services. The Scottish Government, again mostly through SDI, invests around £30mn annually to support exports.
7.1.3 Partnership models
Scotland Food and Drink is one of the most successful and internationally recognised public sector/industry partnerships and is a model we would like other sectors to replicate.
Partners recognised a need for shared approaches, targets and specialist in-market support to identify the right contacts and to facilitate access to distributors and retailers of premium products. The result was an agreement to co-finance in-market specialists for the food and drink sector. These were jointly funded by industry, SDI and the Scottish Government. This investment is delivering results with £67mn of new sales expected to be generated by businesses over a three year period as a result of the work of the in-market specialists.
As a result, our 2018 Programme for Government outlines a commitment to publish a new 5 year Food and Drink Export Plan in 2019 and bring forward measures to further promote and market our produce in overseas markets.
Building on the success of this model, Opportunity North East (ONE), the Scottish Government and Scottish Enterprise are funding 5 in-market specialists in the energy sector with funding of £250K from the Scottish Government and £125k from SDI matched by £125k from ONE. If the results for energy are as successful as those for food and drink we would expect and encourage similar arrangements in other sectors.
We will:
• Work to identify opportunities for partnership arrangements across the full range of investment priorities identified in this plan.
7.1.4 Balance of spending
While this plan includes support for all businesses with the ambition to export, the majority of spending in the plan is directed towards the intensive, and therefore expensive, one-to-one support that will enable those who are already exporting successfully to do more, improving productivity, performance and profitability for their business and delivering wider benefits to the Scottish economy that can be shared by all citizens.
Similarly we expect that the majority of dedicated in-market support will be in those markets where there is the greatest concentration of opportunity, in particular in our priority export markets.
7.1.5 Setting our spend priorities
In keeping with our analytical driven approach, the application of resources to initiatives to support the implementation of A Trading Nation will also be evidence led. Based on the work to clarify our strategic choices, a number of outcomes have been articulated. Behind each outcome sits a number of specific actions. A range of initiatives to deliver these outcomes has been identified. The process by which we expect these initiatives to deliver on our objectives is being mapped out and together with research into the effectiveness of past interventions – both in Scotland and further afield – an initial assessment of the impacts we can expect from each intervention is being quantified. Given the limited amount of hard data around this process, and complications such as counterfactuals, pre-existing trends and crossover effects, there is, at this stage, no single correct solution to the question of how best to allocate resources. We will continue to work on this approach to refine the most effective use of our spending.
7.1.6 Participatory budgeting
Alongside this analytical work, we will also engage with exporting businesses to understand their priorities for support to enable them to improve their export performance. This engagement will initially take place at the National Economic Forum in May 2019 and will continue on an ongoing basis.
Based on the output of the quantitative and qualitative processes described above we will commit resources to align with our initial expected outcomes. Through tracking a series of key performance indicators, we will monitor impacts and reassess the allocation of resources in future years, based on delivery.
This process, which we will develop over time, will provide an increasingly robust mechanism for the most effective allocation of resource.
We will:
1. Work with the enterprise agencies and other public bodies to align existing resources to support delivery of the opportunities identified in this plan.
2. Develop increasingly robust analytical processes to determine which interventions are the most cost effective.
3. Work in partnership with exporting businesses to take on board their views of export support priorities to inform our spending commitments.
4. Consider where additional resource from the £20mn commitment may be required to supplement or bridge gaps in provision until agencies are fully aligned.
References:
(15) https://www.escoe.ac.uk/wp-content/uploads/2018/07/ESCoE-DP-2018-09.pdf
(16) https://www.oecd.org/site/tadicite/50286917.pdf
(17) https://www.oecd-ilibrary.org/docserver/5k9gwprtbtxn-en.pdf?expires=1554288361&id=id&accname=guest&checksum=99D2BDA851261034A1505F4383E647B6
(18) https://www.strath.ac.uk/media/1newwebsite/departmentsubject/economics/fraser/vol42no3/FAI_Economic_PerspectivesReappraising_Scotland_exports.pdf
(19) Experimental statistics are defined as new official statistics undergoing development and testing and are open to user consultation.
(20) This analysis uses the Scottish Government’s Global Econometric Model (SGGEM). International exports were increased such that exports as a share of GDP increased from 20% to 25%. This was equivalent to international exports being 25% higher in real terms by 2029 relative to the baseline. This increase was phased in linearly between 2019 and 2029.