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What factors attract foreign direct investment?
Teaching Business & Economics, Autumn 2001 by Fallon, Grahame, Cook, Mark, Billimoria, Arti
Data from the West Midlands and Scotland have been chosen as the basis for this study, due to the relative success which both have achieved in attracting inflows of FDI, compared with other UK regions.
SCOTLAND
Over 900 foreign-owned companies now have bases in Scotland, including Motorola, Compaq, NEC, IBM and Sun Microsystems (Invest UK, 2001). Over the nine-year period from 1991 to 2000, 742 inward investment projects were undertaken in the region, leading to planned investment levels of 8,974 million, and to the creation or safeguarding of 112,431 jobs (Locate in Scotland, 1991 to 2000).
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The market for FDI in Scotland is geographically diverse, although new projects, capital inflows and job creation have been dominated by United States and UK-based donor companies over the period from 1991 to 2000. Smaller, but nonetheless substantial inflows of FDI have also been attracted from companies based in mainland Europe and the AsiaPacific region (Locate in Scotland, 2000).
In sectoral terms, Scotland has achieved particular success in attracting inbound FDI to its electronics and services industries. Taken together, these sectors accounted for 46% of all new foreign direct investment projects in the region between 1994 and 2000 (during which time electronics brought in 23% of FDI and services 25%). Scotland is now home to a key cluster of over 420 electronics companies (158 owned by overseas firms), which together make up 'Silicon Glen,' arguably 'the largest concentration of electronics companies anywhere in Europe' (Invest UK, 2001). Scotland's electronics industry has achieved this position due to a decade of rapid and sustained growth in output and product sales, while the region is now at the forefront of global technology developments in the electronics sector (Locate in Scotland, 2001). The industry also possesses strength in diversity, since Scotland claims to have 'Europe's largest concentration of semiconductor fabricators,' together with a number of leading global players in the 'computer, consumer electronics, office products and telecommunications equipment' markets (Locate in Scotland, ibid.).
In the years since 1996, Scotland's services industry has replaced electronics as the prime target for inbound FDI in both volume (number of new projects), value (capital investment) and employment (job-creation and safeguarding) terms. Service sector activities now account for 38% of inbound FDI projects, 19% of investment and 39% of planned jobs
(Locate in Scotland, 2000). Services FDI in Scotland covers a broad compass, including higher value-added activities such as electronics design and biotechnology research, design and development (R,D&D). The financial services sector has also shown strong interest in investing in the region, as has the dot.com sector (until recently), while Scotland is attracting increasing attention as a location for major call centres (Locate in Scotland, 2000).
UK government sources suggest that a range of factors may have been important in attracting FDI to Scotland, including market-related factors such as the size of its population (5.1 million) and the quality of its infrastructure. Resourcesrelated factors, such as its 'highly skilled, flexible workforce;' and efficiency-related factors, including Scotland's status as a 'major centre for high-tech R,D&D' also appear to play an important role (Invest UK, 2001). High valued added activities in the electronics and R,D&D sectors can be expected to be attracted to Scotland by the agglomeration economies available in 'Silicon Glen', by the high quality of Scotland's human skills capital and by the sophistication of Scotland's telecommunications network. Market related factors such as the availability of a high-speed distribution infrastructure could also be considered to be powerful incentives driving the location of such FDI in Scotland. On the other hand, lower value-added activities such as financial services and call centres may be more attracted by resource related factors, such as the availability of a pool of affordable labour (due to Scotland's relatively high unemployment and relatively low wage rates) (Locate in Scotland, 2001).
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