Maximising the regional benefits of foreign direct investment

The UK has become reliant on its ability to attract internationally mobile capital for several reasons, widely discussed in academic and policy-focused literature.

For example, the UK has a significant trade deficit and its companies engage in very high levels of outward foreign direct investment (FDI). As such, inward investment is widely recognised as a key element of regional development, especially for lagging regions. It is argued that such investment not only generates employment, but also contributes to innovation, productivity and exports, through both direct benefits and indirect effects through spillovers.

Typically, inward investors are more productive, more innovative and more export intensive than domestically owned firms, and this holds for virtually every location. The challenge, therefore, is not merely to consider how universities, or other UK research establishments, can be anchor points in attracting high tech investment, the type associated with spillovers and innovation, but how they can be conduits for maximising the benefits of this investment for the local economy.

The main paper sets out in some detail the case for how and why universities can be drivers of FDI into locations. The innovation accelerators soon to be piloted by Glasgow, the West Midlands and Greater Manchester, as well as the recent announcement of investment zones, have sharpened the focus on this.

These initiatives have moved the straightforward strategy of seeking to attract inward investment to an understanding of the wider benefits of attracting high tech activity, generating productivity and innovation externalities, and fostering technological intensity in related sectors and along supply chains. Rather than merely being at the heart of a locations value proposition for attracting internationally mobile capital, universities can be drivers of both knowledge creation and the knowledge transfer that is associated with inward investment.

Attracting high tech internationally mobile investments can generate knowledge transfer into other sectors, with an emphasis on the identification and measurement of these phenomena, rather than simply an explanation of why they may occur. Theoretically, attracting international R&D activities to a region should generate significant spillover effects into related sectors or along supply chains. These effects are, in practice, limited by a number of factors, such as the absorptive capacity of the local sector, and not least the efforts that R&D intensive firms go to in order to prevent knowledge leaking out of the firm. However, universities, with access to both large inward investors and local supply chains can offer a unique conduit for these effects. A common question from local firms is “can you help me get into the supply chain of…..”; potential inward investors want to know about local innovation capacity, clusters and value chains.

Central to both the attraction of FDI, and the beneficial effects of it, are factors that may be considered jointly as sources of “agglomeration economies”, which are both positively associated to R&D location drivers, with locations offering qualified labour, a vibrant local sector, or a “history of R&D” likely to attract new R&D. All of these are also shown, in a related literature, to be influenced by local industry-university links.

Finally, global high tech FDI is beset by skill shortages. If firms are going to be competing either for already scarce labour or encouraging migration, then this offers two challenges for local policy makers. The first centres around skills and ensuring the pipeline of skills, through apprenticeships as well as universities (with action on retention of graduates) to meet demand. The second is more general, including issues around housing, schools and other factors that may be considered “quality of life”.

If locations are going to seek to attract key workers in, then these basics also need to be on offer as part of the region’s value proposition.