In the past few years, there has been a remarkable swing in opinion about the merits of inward investment. Initial worries about the establishment of low calibre "screwdriver" branch operations are dismissed as old hat. The received wisdom now is that you can't get enough of the stuff.
Outward investment doesn't get the thumbs up to the same extent. UK companies and their shareholders may gain from profits made overseas, but if the investment stayed at home, there would be more jobs and higher tax revenues. Overall, however, the benefits of the two-way traffic in foreign direct investment (FDI) are now generally seen as greatly outweighing any costs.
But is this view too complacent? Could Britain do better in the world prosperity league if it did worse in the FDI league? The idea is anathema to Walter Eltis, chief economic adviser to Michael Heseltine when he was President of the Board of Trade. In a new study, he extolls the benefits from being "the most open economy for investment from the rest of the world, and also the economy which invests most freely overseas."
That pole position has now been held for many years. As the chart shows, the UK exceeded the performance of other major countries in the period 1980-90. Outward direct investment ran at about 2.75 per cent of national output - some three times the German share. But Britain was also the top recipient of inward investment. This amounted to about 1.75 per cent of GDP, whereas Germany attracted a negligible inflow.
FDI includes both new capital spending, partly financed through the unremitted profits of overseas subsidiaries, and the shuffling of financial assets through mergers and acquisitions. After a sluggish start to the 1990s, it has recently picked up pace again under the impact of the takeover boom. In the first three quarters of 1995, the outflow of pounds 17.5bn was running at 3.3 per cent of GDP. Last year also brought a bumper crop of inward investment. In the first three quarters, the inflow of pounds 11.2bn was already almost double the figure for the whole of 1994 and amounted to over 2 per cent of GDP.
This latest surge of inward investment has included some high profile acquisitions in the City. In investment banking, illustrious names like Warburg and Kleinwort Benson have fallen into foreign hands. However, the main sector targeted by inward investors in the past 15 years has been manufacturing, where the impact has been dramatic. Foreign owned companies contributed almost a fifth of manufacturing jobs and nearly a quarter of total output in 1992. That gap between employment and production came from higher productivity: output per worker in foreign-owned companies was 40 per cent higher than in British-owned firms. This impressive achievement was undoubtedly helped by a level of investment more than double that in domestic firms.
No wonder other countries in Europe have become a lot keener on inward investment. But they haven't been able to match Britain's pulling power. The UK has attracted 40 per cent of total Japanese and US investment in Europe. According to the Government, this is a tribute to the enterprise economy so laboriously and painfully constructed in the past 15 years. Britain offers both low wage costs - half those in Germany - and low business taxes.
But as ever, a glass that is half-full for some is half-empty to others. A contrary view is that the increasing importance of the foreign-owned sector testifies to economic weakness rather than strength. In his book, The Comparative Advantage of Nations, Professor Michael Porter of the Harvard Business School saw the foreign investment boom of the late 1980s as "a sign that the rate of upgrading of British industry is lagging behind that of other advanced nations." Certainly, the influx of foreign investment hasn't stopped the inexorable slide in manufacturing's share of national output, down from 26.5 per cent in 1980 to 22.2 per cent in 1994. What this suggests is that inward investment may have displaced rather than added to output.
Proponents of FDI will have none of this. The arrival of Nissan and Toyota has led to greater production in the car industry. A similar process has occurred in the production of colour television sets, in which the UK is now a net exporter.
Industry may have shrunk in overall terms, but is now lean and hungry. Sustained productivity gains have closed three-quarters of the lead held by France and Germany at the end of the 1970s. Nicholas Crafts, a specialist in economic growth at the London School of Economics believes that FDI has helped by promoting the rapid transfer of skills as well as capital. The positive effect is not confined to the foreign-owned enclave. Suppliers to the Japanese car companies have also had to raise their game.
However, the claims for the virtues of inward investment can be overstated. According to Walter Eltis, foreign-owned companies are not only locating relatively low-skilled production in the UK but also highly skilled research & development. Their share of total manufacturing R&D is only marginally less than their share of turnover. This argument is unconvincing, since multinational companies typically devote a much higher proportion of their sales to R&D than domestic firms.
More broadly, it is wrong to say that Britain is simply riding a wave of globalisation which is putting paid to old-fangled ideas about the pivotal importance of national corporate ownership. This conclusion emerges forcibly from a recent study of the world's top 100 companies by Winfried Ruigrok and Rob van Tulder. This demonstrated that none could truly be called global. In 1993, only 18 of the 100 kept the majority of their assets abroad. More telling still, the composition of top management boards remained overwhelmingly of national origin. Large firms continued to be national players with substantial international activities.
Since this applies as much to British firms as any others, the implication is that any loss of control through inward investment should be more than gainsaid by the effect of the much greater outflow of FDI from the UK. That readiness to operate outside the domestic market can be seen as part of a broader pattern that has led FDI from OECD countries to grow at a rate of 15 per cent a year between 1985 and 1994. Just as Japanese and US companies have invested in the UK as a springboard for the European market, so British companies need a presence in the US and increasingly in East Asia. The smaller the home base, the more domestic companies have to spread their wings abroad.
Yet outward investment is not without its costs, as Walter Eltis concedes. Jobs and tax revenues are lost. Given the UK's highly competitive position, the continued propensity of British firms to find the grass greener overseas is perplexing. It certainly contrasts unhappily with the other puzzle highlighted by Howard Davies of the Bank of England yesterday: the way in which domestic capital spending has languished in the doldrums in the recovery.
The conclusion is that the influx of capital into the UK and the even greater exodus out of the country are not cause for simple self-congratulation. The inflow testifies to weakness in manufacturing - and even in areas of traditional strength like merchant banking - which has left the door open to foreign-owned companies. As for the outflow, it hardly adds up to a ringing vote of confidence by British companies in the Conservatives' vision of Britain as the enterprise centre for Europe. Being top of the FDI stakes is a mixed blessing.
Walter Eltis: The Political Economy of UK FDI, The Foundation for Manufacturing and Industry; Winfried Ruigrok and Rob van Tulder: The Logic of International Restructuring, Routledge.Reuse content