Would a sweetener make this deal more palatable?

Financial incentives may not always determine where a company decides to set up. Roger Trapp reports

Few issues are more contentious than the awarding of grants by governments keen to persuade multinational companies to invest in their countries. Controversy is never far away, but it has been brought to the surface by a number of recent developments in the British Isles.

Ford has decided to build an engine factory in Bridgend (in addition to its pledge to invest pounds 400m in a manufacturing plant for Jaguar) while Intel, the US semiconductor maker, is reportedly planning to spend $lbn on expanding its facility nearDublin. What links these otherwise unconnected decisions is that they being assisted by promises of aid. Or are they?

Research by the United Nations Conference on Trade and Development suggests that grants are some way down the list of criteria companies take account of when deciding where to invest. Availability of labour, access to markets and suitable sites are just as important, says Trevor Nuttall, head of the UK grants advisory service at Arthur Andersen, the accountancy and management consultancy firm, and a member of the team producing the next Unctad report.

Critics of the provision of grants designed to encourage international companies to set up or expand in certain places suggest that the practice hurts developing countries because they are unable to match the escalating sums put forward by their industrialised counterparts. It seems unlikely that many developing nations could offer anything like the pounds l00m that the Irish government is understood to be prepared to offer to Intel, on top of the pounds 87m it provided towards the cost of the company's first plant in the republic, or the pounds 80m granted by the UK to Jaguar that is now the subject of a European Commission investigation.

Mr Nuttall, a former director of the Yorkshire and Humberside Development Association, believes that the commission is something of a role model in its willingness to enforce limits on aid. With the US state of Alabama having apparently offered incentives worth the equivalent of $168,000 per worker to attract Mercedes-Benz to set up there, the commission would like to see some sort of international rules in this area. It might take some time, but the agreement in the Uruguay Round of the Gatt talks suggests it is not impossible, the commission says.

Meanwhile, there are signs that industrialised countries might be wasting money by involving themselves in bidding wars. While companies can put plants that require low-skilled workers and make easily transportable goods almost anywhere, they are more restricted when it comes to the production of heavy or awkwardly shaped goods. The flexibility of the workforce and the stability of the economic and political system are likely to be more important than financial inducements, says Mr Nuttall.

He points to the success of the British Isles. Recent developments notwithstanding, the region is towards the bottom of the European grants league, but has done better than average in attracting inward investment. Moreover, two recent investments in Britain (Toyota in Derby and Rank Xerox in Gloucester) have taken place in parts of the country that do not have assisted status and therefore cannot award grants.