Byline: Professor Brian Morgan
THE first thing to emphasise is that inward investment has been an important driver of economic growth in developed economies.
Traditionally, countries like Wales and Scotland have relied to a large extent on inward investment to replace jobs lost in declining industries such as coal mining, steel production and shipbuilding.
Most of this foreign direct investment (FDI) in the 1980s and early 1990s flowed into the manufacturing sector and by 2001, after many successful years attracting investment projects, over 30% of manufacturing jobs in Wales were being provided by foreign-owned firms.
But by the beginning of this century the FDI market was changing. Firstly, an increasing amount of FDI was flowing to emerging markets, where cheaper and reasonably skilled workers were increasingly available for employment in both manufacturing and service operations. Secondly, expansion by existing investors rather than new investments came to dominate investment flows. Thirdly, the biggest FDI growth sector was becoming services - particularly high value added service sectors linked to the knowledge economy.
Against this backdrop, countries and regions in the UK, like Wales, Scotland, north-east England and the West Midlands, have continued to devote considerable resources to attracting multinational firms - especially in important sectors like ICT and biosciences.
Key elements for attracting FDI have been investment in skills and flexible labour markets to ensure that the right factors are in place to achieve success in this very competitive sector.
But the results have been mixed - with the most prominent investments, in terms of job creation, being linked to call centres in the financial services sector.
Also many of these investments have proved to be shorter lived than was initially expected.
This has led politicians and practitioners to question the real contribution of FDI to economic growth in the host country.
Despite some high-profile failures - the Korean LG project in Newport in the 1990s, for example - the evidence points to important spill-over effects from inward investment that improve the competitiveness of local firms in the host economy.
Multinational firms help develop efficient supply chains, raise productivity in local suppliers and improve export performance.
Scottish Development International recently published an independent evaluation of the impact of FDI. The report found that inward investment flows between 2001 and 2008 (using a sample of 55 FDI projects) had created around 13,000 net additional jobs with a multiplier effect of 1.3 - around 18,000 jobs in total. The analysis pointed to higher wages, higher employment and higher productivity in inward investor companies.
These positive impacts help explain why the market for FDI remains very competitive. The main players in the UK - the regional development agencies - have competed fiercely for new projects, and over the years a fairly well established league table of winners and losers in the FDI stakes has emerged.
Moreover, there is growing evidence that failure to perform successfully in this market can have serious consequences for the regional economy.
As is now well known, over the last few years Wales has been a high-profile loser in the FDI stakes.
The Welsh Government introduced radical changes to the inward investment regime in Wales in 2004 when it announced the abolition of the Welsh Development Agency and took its functions inside the civil service. …