Export Promotion, International Trade and Inward Investment (Public Policy Framework)
Item 2 is a review of the public policy framework for encouraging export promotion, international trade and inward investment—this follows on from some questions that we had under the first item, which may be of interest. This is the culmination of some research that we commissioned into how well the Scottish public sector supports our companies to trade overseas and attract inward investment.
We have before us a representative of Cogent Strategies International Ltd, which carried out the research on our behalf. It has produced a draft report, of which members have received copies. We will have a presentation of some of the key findings.
We will discuss the matter with Professor Hervey Gibson and his team in due course. I remind members that the research was commissioned to inform us of current public policy on the issue and possibly to give us some ideas for future inquiries once we have concluded our energy inquiry in the spring of 2009.
I invite Professor Gibson to give his presentation. After it, I will open up the item for questions, followed by a discussion of what to do next. In any case, we will ask Professor Gibson to update his report after today's meeting and, if needs be, we can discuss the matter again once we have received the final report.
I welcome Professor Gibson to the committee. It is over from one Gibson to another.
Professor Hervey Gibson (Cogent Strategies International Ltd):
Thank you, convener. It is a great pleasure to be here. I also thank the committee for considering the work in draft form. It is helpful to have something that can be revised and worked on, and I am looking forward to the discussion.
To get this far, we have received a lot of help from parliamentary staff and many companies and organisations, including the cast of characters—the five just men or whatever they were—who were here for the first item. Scottish Development International and UK Trade and Investment have been particularly helpful in getting us to this point.
Since the research was commissioned, the situation has moved on a lot, and it has become increasingly clear that we are in a period of transformation for all aspects of the international economy. We approached our examination of the business support that is available in Scotland through four questions. The first was: where are we and how did we get here? That is a look in the rear-view mirror. Secondly, we asked what current clients—the people who invest in, or export from, Scotland—think of how things work at the moment. Then we asked about how things work: how is support delivered and what are the competitive circumstances of that? Fourthly, we asked how the committee can help.
I have taken a long-term view—an exceptionally long-term view—in the graph on my third slide, which gives figures for 1951 to 2007. I have plotted our best guess of Scotland's share of international trade, using numbers that, in many cases, originated with the Scottish Council Development and Industry years ago and were then brought together in some statistical publications.
The graph shows a long slide in Scotland's share of international trade from about 0.75 per cent to about 0.25 per cent in 1984, and then the trend turned around and Scotland's share went up to about two thirds of 1 per cent in 1998. The figures come from taking Scotland's exports and dividing them by the world's imports—that is the normal way of measuring Scotland's share.
Since 1998—in effect, since the turn of the century—there has been a very steep slide in the physical export of electronic products. The next graph shows that a bit more clearly. I skipped over an underlying point there. I am talking about international trade outside of the United Kingdom, although we show some figures on trade within the UK. The graph shows the huge importance of the electronics industry that Dr Hughes mentioned earlier this morning. There was massive growth in electronics up to 2000 and, as I have written in my notes, that was due to international investment. It was entirely about companies coming to Scotland to manufacture for the European market, including the UK market.
Where does oil and gas figure?
Offshore oil and gas figures are not included at all.
They are not in either of the charts that you have shown us.
No. I will refer to them later, but they are not included in the tables that I have just shown you.
Is that because the continental shelf is extra regio in the accounts?
Yes. I have done it like that because I followed the UK convention on the continental shelf. I will refer to that again later.
So the big boom happened because electronics companies came here because we are a skilled and accessible market and, as a result of that, a third of all the personal computers used in Europe were made in Scotland and so on; you will remember the figures.
After 2000, the international electronics industry tended to move on, which affected not just Scotland but another country that had benefited similarly. The next graph shows that Ireland's share of international trade did not decline in the first part of the half century; from 1980 it had a similar rise to that of Scotland, and it has had a similar fall since the turn of the century.
It is interesting to note that, in Ireland and Scotland, there has been an increase in service exports and financial services activity, which, until recently, to some extent offset the merchandise export decline.
To pick up the point about the UK continental shelf, as there has not been a long run of official figures on trade with the rest of the UK, the red area on the next graph is a rough estimate of Scotland's sales to the rest of the UK including the UK continental shelf. The chart shows the effect of the UK continental shelf from the early 1970s to the mid 1980s. The red area rises significantly in that timescale. If the committee would like us to pick up on that point in our final report, we would be delighted to do so.
So what was not a wonderful long-term trade situation was changed for a decade or so. However, for the past seven or eight years, we have had a declining share of international trade, and I am sure that the committee will want to address that issue.
What about investment? I think that at least two committee members might have been involved in a professional capacity in attempts to measure international investment, which is extremely difficult to measure. The numbers are extremely erratic and it is difficult to work out what is simply money changing its address and what is real investment on the ground. That is shown by the red line at the bottom of the graph of how erratic international investment is. The line shows the United Kingdom's inflows of foreign direct investment, which went from $100 billion in 2000 back down to about $15 billion in 2003. The figures are ridiculously erratic and therefore hard to monitor and to manage.
Britain's share of world international investment flows is large—about a tenth. However, if we look through the cycles, we can see that the share has probably been dropping over the past 30 years—that can be seen on the line of red dots on the chart of Britain's share. The share has probably come down from around 14 per cent in the 1970s to around 7 per cent at the moment.
The next chart shows what we think is Scotland's share within Britain's share. Because of the difficulties with the statistics, the chart shows only the number of projects, but we can see that Scotland has been getting just under 10 per cent of the UK's inward investment. The figure has been quite steady for the past 20 years and is quite a high share among regions of the UK. If you define greater London loosely, to include bits of the south-east and east of England, Scotland's share is second only to that of that London conurbation. That is a strong performance in an extremely erratic market.
To summarise, we have had a bout of post-electronic shock—which we are still in—but which has possibly been partially offset by growth within the UK and by service growth. However, it is clear that we could do better on the trade front. As for what will happen as a result of the world situation, it is widely expected that world demand will shrink. That point came out during your discussion in the previous evidence session. However, the lower value of sterling will bring some real benefits to Scottish exporters.
In the previous session, we heard the examples of engineering exports and oil and gas exports. In addition, Scottish Development International reports that an increasing number of companies are looking for export assistance because they can see profitable opportunities or because they feel that they can get into export markets that they have been unable to get into in the recent past. Lower sterling is expected to help—as long as there is a market to sell to.
On the investment side, the track record looks excellent in a chaotic marketplace. Every 10 years or so in world development, there is a dead stop in international investment flows. It would not be at all surprising if there were a dead stop in 2009 or 2010. It is not certain—I do not think that anybody could say that it was certain—but many of the conditions are there. I am thinking of the immediate prospects for the industries in which investment tends to take place.
Would the Lloyds TSB takeover of HBOS count as inward investment?
Into Scotland, yes. I referred to problems with the addresses of money. One of the big international flows that messes up everyone's statistics occurred when Royal Dutch Shell changed from being a half British, half Dutch company to being a Dutch holding company with British shares. Basically, some very clever person sold half of a huge company to the Dutch and made that year's British inward investment figures look good. You have to be quite careful to rinse such things out.
Although the Scottish share figures that I showed avoid such pitfalls by relating to the number of projects, they are deeply unsatisfying. For a start, they do not show anything about money or jobs, so what you win on one side of the analysis, you lose on the other. It is an extremely difficult issue. Professor Neil Hood was a great expert in this field; unfortunately he is no longer with us and, since he went, the statistics have got worse instead of better.
The nature of international investment has changed hugely since the old days of the so-called screwdriver factories—mobile assembly plants that could be set up anywhere in the world—with the focus now being on individual small firms that have, for example, research or development functions. We might be talking about small biotechnology ventures rather than big pharmaceutical factories. The nature of the current world investment market is such that where, at one time, people in the investment support industry might have worked on projects with 300 to 350 jobs, they are now working on projects employing 20 or 30 people.
The mix of industries changes as the world economy and, indeed, geographies change, and the emerging economies are now coming very much to the fore both as competitors and as sources of investment. The committee has examined the issue of attracting funds from the far east, which is also part of the mix.
What does trade and investment support cover? On the export side, the huge range of services includes strategy workshops, initiation for companies, intelligence gathering on overseas markets, missions, learning journeys, diplomatic introductions, the commissioning of reports, the provision of support to firms for website development, help with language issues and so on. In its regular evaluation survey, UK Trade and Investment distinguishes 20 of those services, and SDI covers not only all those services but others such as the establishment of incubators to help companies in overseas markets.
The product range for inward investment is less clearly defined, because in such cases one tends to try to offer each investor something bespoke. Of course, customers are still provided with important information on the labour markets, people, networks and—increasingly—the universities that they can plug into, giving them a picture of how their business might work in Scotland.
At the end of the day, there is also money. Although that is much less important than it used to be, it is important nevertheless. In that respect, Scotland appears to have pulled off a few small tricks, which is always helpful. For example, the regional selective assistance map for Scotland is relatively better than it has been and research and development funding is more easily available to larger firms here than it can be in other UK regions. That shows that, even on the money side, Scotland is competing well in a few small ways.
That is what happens. What do the clients think? We asked quite a lot of people—there is a list in the report. There is a little bit of wishful thinking in the list as one or two folk swore blind that they would talk to us before we spoke to the committee, but they have not come up with the goods. There are also a few names to add. The list is not a scientific sample and it was made up in two ways. Partly it is a straw poll and partly it is based on referrals, particularly from the agencies, because with inward investors we needed to be careful not to trample into the marketplace.
We asked the clients to tell us anonymously what they made of the service. The responses divided into two. The big firms like what they have got but tend to be self-reliant. The messages that we got from them were the messages that we tend to get from employers organisations and the like: they want a simple system, which has clarity; they want a fair system, so that the service in Scotland is not worse than anywhere else; and they want stability. We heard some of the comments that were made today about local income tax and about exchange rates.
Smaller firms divided into two. Those that had experienced support services universally loved them. We began to feel a bit guilty, as if we were trying to find a stone with a woodlouse underneath to see what the problem was. There was almost no criticism of the services that are being provided by the support systems. Some people said that the process could be a bit bureaucratic, but that was as far as the criticism went. When I talked to UK Trade and Investment for a day I was heartened to find that its survey produces pretty much the same results. They get satisfaction ratings of 85 per cent on almost all their products. The support systems are clearly meeting a need and companies appreciate them.
Some firms said, "Scottish Development International? What's that?" They had very little knowledge of the services that are available and were a bit bemused about why they had not come to them. Other firms said that they had heard of the services but did not want to get into all the form filling and what they saw as bureaucracy. Others said, "Oh no, we can't afford it." In almost all those cases, their perceptions were based on a lack of information rather than on in-depth experience but, as we will see, there are reasons for that lack of information.
The main focus of support is Scottish Development International, which is a tripartite body formed by the Scottish Government, Scottish Enterprise and Highlands and Islands Enterprise. It integrates trade and investment services and it has a sector structure which is pretty much parallel to the Government's economic strategy and to Scottish Enterprise's structure—it is not exactly the same, but it is close. Essentially, it operates through the Scottish Enterprise regional structure and HIE. It also has a number of overseas offices, notably in North America and in the far east. It works a bit as a ringmaster—team Scotland is almost as bad a short phrase as Scotland PLC, but nevertheless it is an interesting example of how the various agencies pull together.
About three weeks ago, an event on marine energy, done by the Canadians, was held in Edinburgh. The event originated with the UK consulate in Toronto and the event was organised by UK Trade and Investment in Toronto and the people in Tay house in Glasgow. The Scottish participants were recruited by Scottish Development International. There was major participation by Scottish Enterprise and Highlands and Islands Enterprise, particularly given that the topic was the European Marine Energy Centre. Local councils and Jim Mather were also involved. The event was very much a circus with a ringmaster. Lots of people joined in and it was clear that, although they had different roles to play, they could sing in harmony.
Inward investor support in Scotland is highly regarded. Indeed, it is considered among the best in the world and has won awards from the Financial Times and Ernst & Young, who are the accounting specialists in the trade. What has distinguished the approach is that for 30 years Scotland has led the way in integrating its offer. The basic locate in Scotland concept integrated aspects such as grant aid, labour market support and property. The setting up of Scottish Trade International integrated the work of the former British Overseas Trade Board with the work that Scottish Enterprise was doing with companies. Trade support and investment support were then integrated in Scottish Development International. Alongside that approach, there has been a sophisticated understanding of globalisation and global connections, because Scotland has been involved with companies. A wider economic development task is now being integrated and we now have a professionally managed organisation that has a strategic market focus and graded engagement. The home patch is small enough to master, but the organisation is big enough to have a strong sectoral specialisation, which is important.
There are other models, but I am conscious of the time, so perhaps we should discuss them during the question and answer session. I will jump to my final slide. I do not know whether the committee wants to hear this, but Scottish Development International has been significantly reorganised, starting from the committee structure at Holyrood. The reorganisation of Scottish Enterprise was rolled through to SDI. Therefore, SDI is a recently repotted plant. When the committee considers the focus of its inquiry, it will probably not want to put the plant's life at risk by inspecting its roots too closely. The situation has changed and I am sure that the committee can play a role in providing forward-looking guidance.
There has been enough difficulty in monitoring performance to make that an area in which the committee might want to get involved, given that you are not just guardians of the public purse but people with responsibility for Scotland's performance. There are a number of frontiers that you might want to keep under review: the role of international promotion in relation to the more general role of economic development; the political frontier and UKTI's Scottish role; the public-private frontier, which we might talk about when we discuss other models; which services should be free and which should be paid for; and the role of real and financial investment. Those are the main areas of interest.
Finally, what about companies that are global from the start? That issue was raised in the context of the international promotions part of our economic framework but has now moved to a more central place in economic development. It is of sufficient importance that the committee might want to consider it separately.
Thank you, Professor. Members have an opportunity to ask a few questions, but we should bear in mind the fact that we will develop the issue further. The presentation gives us a good steer for a start.
I have a factual question as a follow-up to my earlier point. I now understand fully where the oil and gas that are extracted from beneath the North Sea appear in the figures. The reason why I asked my question was principally to do with other earnings from exports. Last year, oil and gas earned £11 billion in exports, but oil and gas-related expertise and technology earned another £4 billion. Is that included in Scotland's share of international trade, or is it in the red area on your graph? I think that that sum is generally accounted for on a UK basis, although most of it is from Scotland. Are the other exports, besides the raw material, accounted for in Scotland's share?
Some of them are. Kit that goes abroad is included in the Scottish figures in almost all cases, but know-how is likely to go to the rest of the UK and then abroad.
So the chances are that it is accounted for in both.
Yes—it is a bit of both.
I have a point about Scotland's relationships with Germany generally. I noticed a deterioration in regional representation in Germany in the time that I was there. When I went out, there were branches of the British Council and British consuls in practically every major German provincial city. However, British representation in Germany is now concentrated in about 1km2 of Berlin, apart from an SDI branch, which does much good work, in Düsseldorf in the west. Its representatives told me that the orientation in Scottish Enterprise was very much transatlantic and that the then director had, at that stage, visited the European continent only once. Therefore, I am a wee bit worried that the consular element, which has always been a commercial element of the British presence abroad, does not seem to be being used in the ways that the Germans use their consulates.
To clarify, when did you gather that information and have those discussions?
That was about four or five years ago.
We have a slightly changed circumstance now in SDI's structure.
Yes, but things have narrowed even more. The last British commercial consulate in Germany, in Stuttgart, was closed down two years ago.
There are two parts to the question. One is about Scotland's links with the consular service, which can be direct or through UK Trade and Investment. In the focus markets, the service can be fairly good. For example, we have had marine energy developments that were very much to do with a consular link.
The second part is to do with the organisation's strategic focus and whether that should come from an industry or a market point of view. Some of the small firms that we came across felt that they had not been involved. They had not been rejected, but they had fallen outside decisions about what was the most important thing to do. I wonder whether some of the European markets might have been moved down a rank on that basis because of their slower growth. Whereas one might resist moving Germany down, one would certainly not resist moving Korea up, so there are difficult issues to consider.
Yes. As far as the consular service and the British Council were concerned, the concentration was very much on countries outside Europe—on moving into the Muslim areas of the former Soviet Union and so on for political reasons. I do not really see how that approach benefits Scotland.
It is unlikely to have substantial trade benefits.
We have missed out on better relationships with the four motors for Europe, whereas the Welsh have done rather well in comparison.
I remind members that, if they have detailed points to raise with Professor Gibson, they can do so through the clerks. We have several questions to ask, but I ask members to bear in mind the fact that this will not be our only chance to ask questions.
I will suggest two points that might be included in the final report, and then I will make an observation about how the committee might take the issue forward.
First, I have a question: what is left for us to do? This is an impressive and helpful piece of analytical work that moves parliamentary committees towards the analysis of issues rather than just advocacy, for which I thank Hervey Gibson and his colleagues.
In that context, and like Lewis Macdonald, I think that it would be helpful to flesh out the oil and gas and continental shelf issues. I also note that, in the original remit, Hervey Gibson was asked to look at services, and I understand why the report makes it clear that there are simply no data on that issue. However, looking back over recent weeks at the significance of financial services in Scotland, one can see that it would be helpful if there was a way—even at the most speculative, aggregate level—to capture that in the final report. Therefore, the issues of oil and gas and services are prominent. That is my first point about the content of the report.
My second, more technical point, relates to a point that Jeremy Purvis has raised. I, too, was surprised to see a reduction in SDI's budget, but I had the impression that that happened as a result of the change in its joint venture structure—SDI having been previously a joint venture between the Scottish Government and Scottish Enterprise. It would be helpful if the clerks could check out that point before the submission of our budget report. Irrespective of what we do with Hervey Gibson's report as a whole, we want to establish whether the £1.7 million will really reduce to £0.7 million. It would be wonderful if the clerks could tackle that.
I come to my controversial point. Hervey Gibson hints at it, and I would welcome his candid response. In part 5 of the draft report, he does what consultants rarely do when he says, "Please don't pay me more money to work on this; I don't know whether you should do any more work on it, either." I paraphrase, but he raises profound questions about whether the timing is right for the committee to dig up the roots and look at the strategic framework and direction again.
I am happy to leave the issue to the convener—or the deputy convener—to consider, but I wanted to share it with my colleagues. I am a new member of the committee, which I think did an outstanding piece of work on tourism and VisitScotland—it looked at what should be done with one part of an agency. Looking at the committee's work programme within the context of the four-year parliamentary session, I wonder whether there might be merit in completing the report, which is an excellent foundation, and letting some of the issues lie on the table for a year or so, given the newness of some of the structures that are under discussion. That would allow the structures to settle before the committee considers whether it wants to pursue its inquiry.
I make that suggestion because the world has obviously changed significantly since the research was commissioned, and there is no doubt that the committee is under pressure to consider what happens in the financial services sector.
I pray in aid our deputy convener in saying that it is clear that recent developments mean that our energy inquiry has taken on new significance in relation to not simply energy supply, on which much of our work programme focuses, but the implications for energy efficiency in housing, which Rob Gibson keeps raising—I share his interest in that. We are unlikely to be able to complete that inquiry and the work on the general financial climate and do the report justice. I will let Hervey Gibson respond, but I wonder whether the report might be completed but left to lie until towards the end of the parliamentary session, when it might be revisited. The deputy convener can take that forward, but I wanted to put those comments on the record.
We are talking about coming back to the report in autumn next year at the earliest—if we come back to it. What does Professor Gibson have to say?
I will deal with two points that Wendy Alexander raised. You are the politicians, so it is up to you to decide what to do. However, we would be happy to do the work. If we completed the report, SDI would be willing to give you a response to it. That might move the situation forward without distracting SDI. From Scotland's point of view, I care less about distracting you guys from your job than I do about distracting SDI, because lots of stuff is changing and SDI needs to be out there in the market, learning what it can, so that we are launched into the next phase of the world economy. That is my response to the point about the report being left to lie.
The measurement of services is really difficult. For example, a back-office part of Morgans in Glasgow produces fancy software that it puts into the Morgans pot. Perhaps that is used in New York or London, or perhaps the best value is got out of it in Hong Kong—who knows? The only financial credit that we get for that is the fact that Morgans pays the wages of those guys in Glasgow. That is an export, but measuring it is difficult.
I have two questions that I would be happy for Professor Gibson to answer now or in a final report—
I prefer to be called Hervey rather than Professor.
Okay—I am happy with that.
Your report talks about other models and how other countries operate. If you have the information to hand, it might be useful to hear your views about the relative success or otherwise of the models in the report, to give us a grounding in how good or bad they have proved to be in practice.
You say that world demand is shrinking, which is—sadly—probably true. In only the past few days, the International Monetary Fund has had to bail out countries including Ukraine and Hungary—Iceland was bailed out slightly earlier. Genuine concern is felt that the IMF could run out of fire-power in the next year or so. The issue is current, so I am interested to know the implications of that for world demand and trade for all countries.
The big uncertainty is about how the exceptional financing that many countries have advanced to their banks will be funded in the long run. If we say that that must come out of demand and that the taxpayer must stump up for it immediately, all that will happen is that the recession will turn up in a different way. Funding that from taxation immediately would be counterproductive. On the other hand, a lot of policy makers would also consider committing to printing the money in the long run to be difficult.
The IMF's contribution is funding for a number of years with, in most cases, no immediate obligation to repay. That is positive as far as the recipient economy is concerned, but people are asking whether the funding will run out in August. The suggestion that surplus countries—particularly the far-east surplus countries—should contribute more seems to be the obvious way to resolve the issue, but there is a political price to pay. Although the IMF is partly run on the basis of one member, one vote, it has really always been heavily influenced by the paymasters, and if we say that we need new paymasters in it, we must live with the consequences. That would help to introduce a new world order in the world economy and a new channel of influence for the emerging economies that are in surplus at the moment. That is probably a reality that we have to wake up to, but we need to think about it.
Thank you very much for your presentation and report.
You mentioned Ireland. It is interesting to see from the final graph in your presentation how Ireland has overtaken us, but it would be good to have one or two examples of other similarly sized countries, not just Ireland.
In the report itself, there are some wee graphs with data from Scandinavian countries—I will get my colleagues to enlarge them to a size that I can at least read. We would be happy to provide a bit of comment on them, perhaps in an appendix.
You mentioned the possibility of a world investment strike in 2009-10. Will you briefly outline the consequences of such a strike?
Yes. I said that there could be a world investment strike of the sort that we have had before, because we have had them before. A good friend of mine unfortunately became chief executive of Locate in Scotland in Japan during such a strike. Poor guy—it was not his fault, but nobody in Japan invested anything anywhere and his performance statistics looked terrible. He went on to a successful civil service career after that, I hasten to say.
If the strike is short lived, it will not necessarily be a complete disaster. It is likely to be in industries that are pretty cyclical in their investment behaviour anyway. It hit us last time because we were investing in investment goods industries. The semiconductor industry was the big-ticket item in world financial investment at the time. Scotland has a large shed in Dunfermline to show for that—it was going to be a Hyundai chip factory but it was completed just before an investment strike caused by the crisis at the time in south-east Asia.
If the strike is short lived, it will be unpleasant and irritating but not a disaster. If it goes on for more than a couple of years, it could be much more serious.
We have had a good round of questions from the members. The draft report is a work in progress and some good suggestions have been made, which we can take on board. There is a lot of reading in the draft report as it is, and I am sure that it will be excellent homework for members after having heard the presentation. We should take on board the suggestion of submitting it to SDI for comment, giving a copy to ministers for their interest and then reconsidering it once we have gathered together questions to put to Hervey Gibson for the next stage.
I thank Hervey Gibson for his presentation.