Shaping Scotland's economy: inward investment plan

3 Why Inward Investment Is Important to Scotland

3.1 Defining Inward Investment

This plan is focussed on maximising the benefits that inward investment can bring to Scotland’s economy, supporting the delivery of sustainable and inclusive growth. For the purposes of the plan we define an inward investor as a company or institution headquartered outside of Scotland that establishes a base of operations within Scotland, creating jobs and associated capital investment. The term ‘inward investment’ is used throughout this Plan in order to cover both foreign direct investment (fDi) and similar investment from the rest of the UK into Scotland. Where the term ‘fDi’ is used rather than ‘inward investment’ this refers to only investment from outside of the UK.

Inward investment can be in the form of starting a new venture (greenfield) or through Mergers and Acquisitions (M&A), when a foreign firm, or firm based in the rest of the United Kingdom (rUK) merges with or acquires an existing Scottish firm. For the purposes of the plan, and in line with Ernst & Young (EY) analysis, M&A is only in scope where a proposed merger or acquisition results in new jobs or facilities being created.^[13]

Whilst capital investment often forms part of inward investment, this plan does not cover projects that consist solely of capital investment. Our approach to those projects and investors will be addressed in our forthcoming International Capital Investment Plan, which will be equally rooted in a vision of Scotland’s future that is carbon neutral, technologically enabled, inclusive and equitable.

3.2 The Impact of Inward Investment on Scotland’s Economy

Inward investment makes a distinct and significant impact on Scotland’s economy at both a national and regional level. Although only 3% of businesses in Scotland are owned outside of Scotland, they account for:

• 34% of Employment (624,000 Jobs)
• 46% of Scottish GVE (£41.7BN)
• 50% of Turnover in Scotland (£119.6BN)^[14]
• 63% of Business R&D Spending (£782M)^[15]
• 77% of Scottish Exports (£24.2BN), with 86% of Scotland's Top 100 Exporters Being Foreign or rUK-owned.^[16]

Inward investment makes a distinct and significant impact on Scotland’s economy at both a national and regional level

Foreign-owned companies make up a similar share of the Scottish economy to many other countries in Europe (e.g. Germany, Sweden and Austria). Countries with lower shares of GVA from foreign-owned companies include Greece and Italy. As shown in the chart below countries with higher proportion of GVA coming from inward investors tend to have higher productivity. We believe Scotland could increase the link between inward investment and productivity specifically by focusing on R&D and innovation rich sectors and by attracting investment which is primarily interested in Scotland for the value added by highly skilled individuals and access to specialist resources and natural capital.

Foreign-owned companies make up a similar share of the Scottish economy to many other countries in Europe

These businesses are important to the Scottish economy, not just as a result of the numbers of jobs they create but because they are typically more productive and pay higher than average wages per employee compared to comparable domestic businesses. On average, inward investment tends to pull Scotland’s average wage upwards within and across sectors. These businesses are also more likely to be in export sectors which contribute to the economy and to Scotland’s balance of payments and they invest more in business R&D spending boosting the levels of innovation in Scotland’s economy. The wider spillover benefits of inward investment also act to create opportunities for existing Scottish owned businesses, giving them access to markets and technology that they may not otherwise benefit from.

Source: OCEA analysis using data from Eurostat and OECD

Source: Office of the Chief Economic Adviser analysis using data from Scottish Annual Business Survey, BERD Statistics and Export Statistics Scotland

On average, inward investment tends to pull Scotland’s average wage upwards within and across sectors

One of the most significant contributions that inward investment makes to Scotland is the creation of high-value jobs. The table below shows that inward investors have a higher average wage in almost every sector, compared to Scottish businesses.

Figure 3: Wages Across all Sectors are Higher on Average in Inward Investors

Gross wages and salaries per head (£), by ownership and sector
SIC	Sector	Scottish Owned	rUK Owned	Foreign Owned
ABDE	Primary Industries (ABDE)	37,606	55,457	68,838
C	Manufacturing	24,612	33,307	39,850
F	Construction	22,574	40,504	34,357
G	Wholesale, retail and repairs	14,781	13,231	18,279
H	Transport and storage	23,605	30,596	32,213
J	Information and communication	25,943	33,462	48,588
M	Professional, scientific and technical activities	26,050	42,177	44,588
N	Administrative and support service activities	17,801	20,432	19,351
z - ILPQRS	Other services	15,300	15,279	15,113

Source: Office of the Chief Economic Adviser analysis using data from Scottish Annual Business Survey

This also holds true across every region in Scotland, with inward investors generally paying higher salaries on average in all local authority areas.

Figure 4: Wages Across all Regions are Higher on Average in Inward Investors

Gross wages and salaries per head (£), by ownership and region
Region	Scottish Owned	rUK Owned	Foreign Owned
01. Aberdeen City	26,479	36,425	52,083
02. Aberdeenshire & Angus	21,391	29,414	38,959
03. Ayrshire (North, South and East)	16,769	18,573	27,142
04. City of Edinburgh	21,609	23,662	26,302
05. Dundee, Fife and Clackmannanshire	20,331	20,101	25,865
06. Glasgow City	19,250	23,215	25,876
07. Highlands and Islands	16,898	17,107	25,434
08. Lanarkshire (North and South)	18,374	20,820	25,906
09. Lothians (East, West, Midlothian)	19,895	18,372	27,092
10. Perth, Stirling and Falkirk	20,554	19,859	27,854
11. Renf, Dunshire, Inverclyde	17,502	19,782	27,413
12. South of Scotland	15,921	17,447	26,534

Source: Office of the Chief Economic Adviser analysis using data from Scottish Annual Business Survey

3.3 Scotland’s Performance In Attracting Inward Investment

Attracting inward investment is a globally competitive business with many countries, regions and cities having dedicated teams focused on securing investment opportunities.

Scotland is starting from a strong base. For the last seven years, Scotland has secured the most inward investment projects of any UK nation or region outside of London. During 2019, Scotland secured 101 projects, a rise of seven projects, or 7.4 percent from the 94 projects recorded in 2019. The increased fDi flow saw Scotland’s share of all UK projects rise to 9.1 percent from 8.9 percent in 2018.

Glasgow, Edinburgh, and Aberdeen all rank in the top 10 UK cities for inward investment projects, attracting 23, 22, and 15 projects respectively in 2019. This performance is measured by the number of inward investment projects that Scotland attracts and the number of jobs created directly by these projects.

35 percent of those projects originated in the US, 9 percent in France, 7 percent in Norway, Germany and Japan. Scotland won almost half of all Norwegian investment projects in the UK, securing 7 out of 15.^[17]

Source: SDI

Scottish Development International (SDI) is the trade and investment arm of the Scottish Government and its agencies. SDI works closely with local authorities and partner organisations to secure new inward investment in Scotland, support existing inward investors and help Scottish companies to target new international markets.

The SQW evaluation from 2017 finds that 40% of supported projects were brought forward or increased in scale, suggesting that SDI involvement increased the benefits from those projects.

A substantial volume of inward investment projects come to Scotland without assistance from the public sector, but the added value that public sector involvement can bring to key wins can be significant. In later sections of the plan we outline where and on which projects we will focus public sector effort and why. As the diagram above shows, 670 projects were secured in 2017-2019. 467 of those with limited support, versus 203 projects that were assisted by Scottish Development International (SDI), Scotland’s trade and inward investment agency.^[18]

Global companies often consider a number of competing locations to invest in, and SDI delivers support on those mobile investment opportunities that fit with Scotland’s economic growth objectives.

Figure 6: SDI Involvement 2018/19

Project Type	Number of Projects	New Jobs	Safeguarded Jobs
Expansion	54	4,615	2,847
Safeguarding	7	0	542
New	48	2,070	0
Totals	109	6,685	3,389

Source: SDI

In 2018-2019, SDI involvement created 6,685 new jobs and safeguarded 3,389 jobs. This came from 54 ‘expansion’, 7 ‘safeguarding’, and 48 ‘new’ projects. As the table below illustrates, expansion projects accounted for 70% of new jobs created in 2018/19. So while the lead time to win and land new inward investment can be lengthy, working with existing investors provides an effective way of securing jobs for Scotland more rapidly, particularly during an economically turbulent period.

Scotland has also seen a real impact from relationships with large multinational investors, for example, Morgan Stanley and JP Morgan. Each made an initial modest investment in Scotland, and have subsequently grown their operations with support from SDI and SDS. Both companies now have operations in Scotland that are significant to their global corporate footprint.

Global companies often consider a number of competing locations to invest in and SDI delivers support on those mobile investment opportunities that fit with Scotland’s economic growth objectives

3.4 The Direct Impacts and Wider Benefits of Inward Investment

The direct impacts of inward investment are high-value jobs and associated capital brought to the project’s immediate location. However, such projects also bring wider benefits that can be felt across Scotland’s economy, such as supply chain opportunities, productivity improvements, spending on research and development and regional impact.

Figure 7: Direct Impacts and Wider ‘Spillover’ Benefits of Inward Investment

Direct Effects

GVA (including supply chain purchases)

Number of jobs (after displacement)

+

Indirect Effects (Spillover Benefits)

Competition and demonstration effects (i.e. effects on other businesses and the wider economy)

Domestic businesses which engage with inward investors can learn new ways of operating and improve their productivity (so called ‘demonstration effects’). Competitive pressures can also spur innovation and improved efficiency (‘competition effects’). Managed well, the linkages between international companies and the domestic base brings opportunities across Scottish supply chains and ensures our skills pipeline and management capabilities match global standards.

It allows us to leverage our key sectors and technologies and to build internationally competitive businesses and clusters of expertise across Scotland equipped to tackle global challenges.

There exists a very clear positive relationship between inward investment, productivity, innovation and exports and this is something we recognise and focus on maximising through the actions in this Plan.

Case Study: Wider ‘Spillover’ Benefits

LifeScan (Inverness) has grown to become the largest private sector employer in the Highlands and Islands currently employing over 1,000 people in the design and manufacture of diabetes and glucose testing kits.

From its roots as the start-up Inverness Medical (1995), through its takeover by Johnson and Johnson (2001) and subsequent sale to Platinum Equity (2019), the company has been helped at every stage in its growth by Highlands and Islands Enterprise (HIE) in partnership with many other local stakeholders.

Coupled with engagement with the local community, the firm has worked closely with all relevant organisations and there is now a true partnership approach in the local area which extends to academia, notably the close working with HIE in the creation of the Highlands Diabetes Institute at University of the Highlands and Islands.

An accredited Living Wage Employer, LifeScan has now embedded itself in the local skills market, nurturing and supporting local talent through partnership with schools, via its Bridge to Employment initiative and STEM Ambassadors, and with Inverness College as a delivery partner in its training academy.

LifeScan has been an engine for growth in the life sciences cluster in the Highlands, with direct employment
as well as staff who were previously employed. These staff have created their own spin out firms some of which are now themselves receiving significant equity investment and achieving growth.

This case study highlights the positive impact a long term inward investment can have on a local economy, particularly when accompanied by the building of clusters of expertise in a dynamic sector such as life sciences. The wider spillover benefits endure beyond the direct benefits of the initial investment.

Lifescan highlights the positive impact a long term inward investment can have on a local economy

3.5 Maximising the Wider Benefits of Inward Investment

As we recognised earlier in this report, Scotland has performed well in realising the direct benefits of inward investment, but the evidence suggests there is scope to further improve our performance in maximising the wider spillover benefits of inward investment to the economy.

The UK Department for International Trade (DIT) has produced analysis comparing the performance of the nations and regions across the UK in capturing the wider economic benefits of inward investment, for example wage rises and productivity. These comparisons, across a range of metrics, are shown below. In most cases Scotland is ‘mid-table’, highlighting the benefits to the wider economy to be gained from a more focussed and targeted approach to inward investment attraction which explicitly seeks to capture more of these wider impacts.^[19]

Source: Office of the Chief Economic Adviser analysis using data from Estimating the economic impact of fDi to support DIT’s promotion strategy: analytical report

Put simply, not all inward investment is equal, and focusing public sector effort more purposefully on maximising wider ‘spillover’ impacts could help speed up Scotland’s economic recovery and have greater long-term benefits to the economy and to society.

Analysis by the Office of the Chief Economic Adviser of the Scottish Government looks at the potential benefits from Scotland improving this performance. This analysis shows that if Scotland were as successful at maximising the wider economic benefits of inward investment as the best performing region in the UK, then this could create in the region of an additional 20,000 jobs, increase Scottish GDP by £4.2bn, boost Scottish exports by £2.1bn, and add up to £680m in additional government revenues per annum. A key focus of this Plan therefore is to identify the focus sectors, and actions, that will maximise the value of these wider benefits to Scotland’s economy. This is examined in some detail as part of the analytical work covered in Section 5.

Source: Office of the Chief Economic Adviser Analysis using the Scottish Government Computable General Equilibrium Model (See Analytical Methodology Note for more information)

Case Study: East of England

Department for International Trade analysis suggests that the East of England performs strongly when it comes to gaining wider economic impacts from inward investment projects. This case study considers why this might be.

The East of England region is located to the north of London and encompasses the counties of Bedfordshire, Cambridgeshire, Essex, Hertfordshire, Norfolk and Suffolk. From the point of view of inward investment, key drivers include Cambridge, which accounted for 19% of all projects into the region over the last decade, the airports Luton, Stansted and Felixstowe, Britain’s biggest container port.^[20]

In terms of sectors, the projects that Scotland attracts are not hugely different from those that the East of England attracts (see chart below). The exceptions are transportation and warehousing projects which make up a much more significant part of the East of England’s fDi mix (likely driven by the transport infrastructure mentioned above and the location near London) and energy and financial services, which are much more significant in Scotland.

Source: Office of the Chief Economic Adviser analysis using data from fDi Markets, a service from The Financial Times Limited (2020). All Rights Reserved

Case Study: East of England Continued

While R&D intensive sectors like ICT and electronics and life sciences might account for a similar proportion of projects coming into Scotland and the East of England, data on the amount of government and business R&D shed light on what may be a factor driving the East of England’s high performance.

The chart below shows that the East of England benefits from very high government and business R&D spending. Scotland by contrast has high public spending on R&D but much lower private spending by businesses. This difference shows the strength of the knowledge economy built around the University of Cambridge. High levels of innovation coupled with an agglomeration of similar businesses are identified in the literature as key drivers of economic spillovers from investment, suggesting why the region performs so well in capturing wider benefits from inward investment.

An increased focus on attracting the types of projects that are more likely to undertake R&D intensive activities and seeking to build clusters of related activity and expertise will help to boost Scotland’s performance on Business Enterprise R&D (BERD).

Source: Adapted from A resurgence of the regions: rebuilding innovation capacity across the whole UK using data from Eurostat

3.6 The Impacts of Brexit and Covid-19 on Trade and Investment

Trade and investment are mutually interlinked. Trade policy forms one of the potential levers to drive investment. In the same way, investment policy can be used to boost trade by increasing business capacity, efficiency and innovation. Trading relationships established through formal mechanisms such as Free Trade Agreements (FTAs) or membership of trade blocs or customs unions, including EU membership, have an important role to play in boosting the attractiveness of Scotland in securing inward investment.

The extent of decline in investment will depend in part on the depth and length of the pandemic in world regions, industry responses and government policies

This is relevant to investors considering the attractiveness of a particular jurisdiction in terms of both securing inputs for example acquiring components and raw materials for manufacturing or recruiting personnel, as well as the ability to sell goods or services to customers and clients in overseas markets. Other, softer or less direct activity, for example cultural ties created through educational exchange programmes or tourism (both trade activities in their own right) or positive supply chain relationships, can also lead to higher investment. When considering investment in Scotland, our external trading relationships are therefore of key importance.

Europe accounts for a significant proportion of inward investment into Scotland. The full impact of Brexit on flows of investment to the UK and Scotland will not be known for some time and will be dependent on the nature of the future trading relationship agreed between the UK and the EU. However, at the time of publication, UK Government policy appears to have narrowed the range of options for future economic relations with the EU to either a no deal or a very basic Free-Trade Agreement with consequent risks that Scotland and the UK will lose a number of the assets that have hitherto been attractive to foreign investors in particular the gateway to the single market. Likewise, there is a risk that the loss of EU funding (both competitive and pre allocated) will have a negative impact on the strength and resilience of Scotland’s research and innovation offering not only in respect of the funds themselves,^[21] but also access to the broader opportunities for international collaboration which help to build a pipeline of innovation-led inward investment projects. The Scottish Government will continue to press for the closest possible relationship with our European neighbours and to work with UK Government to mitigate the risks of UK exit from the EU. Evolving insights on the nature and form of the EU-UK future relationship will inform our plan on inward investment.

Covid-19 is also impacting on global flows of investment. UNCTAD forecasts a decrease in global fDi by up to 40 per cent in 2020, from their 2019 value of $1.54 trillion. This would bring fDi below $1 trillion for the first time since 2005. fDi is projected to decrease by a further 5 to 10 per cent in 2021 and to initiate a recovery in 2022.^[22] A rebound in 2022, with fDi reverting to the pre-pandemic underlying trend, is possible, but only at the upper bound of expectations. Significant reductions in earnings are forecast from Multi-National Enterprises (MNEs), a key source of fDi projects. The extent of decline in investment will depend in part on the depth and length of the pandemic in world regions, industry responses and government policies. In terms of recovery, it is anticipated that some postponed investments may be quickly reinstated, but global production networks are likely to impacted long term. However, more significantly, there are early signs that Covid-19 is not only influencing the scale of investment but also asserting a more systemic influence on investment strategies as both state and corporate actors seek to re-engineer supply chains to achieve greater strategic autonomy, supply chain diversification and resilience.

There are early signs that Covid-19 is not only influencing the scale of investment but also asserting a more systemic influence on investment strategies

Source: Office of the Chief Economic Adviser analysis using data from fDi Markets, a service from The Financial Times Limited (2020). All Rights Reserved

Our forecasts based on OECD data^[23] present three scenarios for future global inward investment trends: pessimistic (decrease more than 40% then remain flat), mid-range (decrease by 35-45% in 2020 then increase but remain approximately a third below pre-crisis levels), optimistic (decrease by 30-40% in 2020 and then partially bounce back with an increase of 30-40% in 2021).

We want Scotland to attract inward investment that aligns with our values as a nation to shape our economy for the future. Those values centre around a fair, sustainable and inclusive low carbon future

Scenario	2020	2021
Optimistic	Decrease 30-40%	Increase 30-40%
Middle	Decrease 35-45%	Increase Increase but remain approximately 1/3 below pre crisis levels
Pessimistic	Decrease >40%	Remain flat

Source: Office of the Chief Economic Adviser analysis using data from fDi Markets, a service from The Financial Times Limited (2020) and OECD. All Rights Reserved

Our intent is to steer Scotland onto a positive path through the focus and approach set out in this plan.

3.7 Building On Our Success

Scotland is already the UK’s most attractive location for inward investment outside of London. It is now our ambition to be the most successful area in the UK at maximising the wider benefits of those inward investments. We want Scotland to attract inward investment that aligns with our values as a nation to shape our economy for the future. Those values centre around a fair, sustainable and inclusive low carbon future. We consider more about how these values align with those of potential inward investors, and how they can support and mutually re-inforce our economic ambitions in later sections of this plan.

The actions set out later in this plan will also support our wider goal to move Scotland to the top quartile of OECD performers for productivity and to increase our exports as a percentage of GDP from 20 to 25%.^[24]

The Plan sets out where we will focus our public sector effort to take a purposeful, values-led approach to inward investment.