FDI (foreign direct investment) is typically seen as a good way to boost jobs and the overall economy. But is it a good way or a lazy way? Or is it just a cop-out?
Very few FDIs create long-term sustainable enterprises in Scotland. That has to change. Otherwise, it’s just another form of wealth extraction and of public handouts to foreign firms with money to invest. The endless pursuit of FDI is distracting Scotland from a coherent economic vision and sensible industrial strategy.
Part of the solution is co-investment, part is the sort of profit-sharing deal Shetland and Orkney got with the oil industry, and part might be some sort of job guarantee and/or community dividend funded by the developers.
NIMBY-ism on FDI?
Some time ago, Prof. Alf Baird proposed there should be a container-handling port built at Cockenzie in East Lothian. It has good land transport links and sea access, and is well placed for trade with Europe – and, in the future, also with Asia, through the soon-to-be ice-free Arctic Ocean north of Russia. The proposal was stalled by environmental objections to the long piers required to access deep water.
This sounds like typical NIMBY-ism, doesn’t it?
But why should locals warmly welcome developments that wreck their environment and locality if there’s nothing in it for them? There are fewer jobs in industrial facilities nowadays, and most of them are for non-local specialists, or for locals on minimum-wage zero-hours contracts; the construction is generally done by large contractors with an itinerant subcontracted workforce and the profits go overseas or to those who are already rich. So really, what’s actually in it for the locals?
Their best (and sometimes only) weapon is to raise environmental concerns. It’s our version of the ‘EU migrants taking our jobs’ issue down south and it’s a genuine issue of democratic legitimacy for commercial development that is “done to” rather than “done by” a locality.
Scotland in the 1970s: Britoil and BP
In the 1970s, Ian Clark of Shetland Islands Council got a good deal for Shetland from the oil companies. Then Thatcher killed the original National Oil Company, established in Glasgow, by allowing BP to buy it, shut its Glasgow HQ and move the workforce to London. If Britoil had stayed in Glasgow, then maybe there could be a lot less poverty in Glasgow today. The company was originally formed in 1975 as the British National Oil Corporation (BNOC) in Glasgow, a nationalised body. The company was split and Britoil was created.
The Government sold 51% of the Britoil shares to BP in November 1982, followed shortly by the rest; it gave up its Golden Share in 1988 and the Glasgow skill base essentially closed. Headline: UK Government failed to sustain a Scottish-based energy company, unlike Norway with Statoil/Equinor. Instead, they allowed BP to swallow it up, who not only stripped it of the Glasgow skill base, but went on to sell their only downstream asset (Grangemouth) and large parts of the North Sea estate.
Barrick Gold in Papua New Guinea: Profit Sharing, Not FDI
On the other side of the globe, in Papua New Guinea, there is an example of the newer “profit sharing” style of agreement between Barrick Gold (one of the largest gold miners in the world) and Papua New Guinea, for a new gold mine. The government of Papua New Guinea is taking a 51% stake in the mine. This is being looked at with great interest by other countries, to understand how to structure similar deals.
This represents a shift from the more one-sided contracts which were essentially FDI, with some royalty payments to the local country. That old model gave less overall to the local country – especially during commodity price booms such as the one that gold is experiencing today – and so new models are emerging involving profit sharing, greater royalties, and investment in local infrastructure.
FDI: A Flawed System
FDI is something the country has to do, in competition with many other countries seeking inward investment. However, its flaws are many, and it is totally insufficient to create an innovative vibrant business base for the following reasons:
- Typically FDI becomes a “scatter-gun” approach based on general financial incentives and labour resources. Unless we have an “Entrepreneurial State” it can be very unfocussed, especially if it isn’t matched with local investment.
- FDI can be unsustainable in the long run – foreign investors can withdraw profits and close assets when global conditions change. It rarely brings in innovative skills, tending rather to attract operational employment (the “Silicon Glen” myth). It also introduces exchange rate risk to the investment.
- Historically, the local country relies on employee payroll taxes alone, not a full profit share of the ventures to repay the Government incentives – companies can also manipulate their structures to hide corporate profits and avoid taxes, and renege on commitments to promised follow-on investment.
- FDI is a lazy substitute for risk investment by the host country itself – a dependency culture, not an innovation culture.
FDI is not a panacea. FDI means profit extraction unless we co-invest, and leaves shattered communities unless there is both a community dividend and a real commitment to long-term high-quality jobs.
As a new First Minister moves into post at Bute House, what better time to reappraise our approach to FDI and to industrial development generally in Scotland?