Sectors offering most potential to explore international market

Aston Business School6 February 2013

Introduction

Industry structure in Birmingham City Region Sectors offering most potential for inward

foreign direct investment Sectors offering most potential for exporting

and outward foreign direct investment

Industry structure in Birmingham City Region

Gross Value Added Job creation

1 Manufacturing industries (14%)Wholesale and retail trade; repair of motor vehicles and motor cycles (17%)

2Wholesale and retail trade; repair of motor vehicles (13%)

Human health and social work activities (13.5%)

3 Human health and social work activities (9%) Manufacturing (11.7%)

4 Education (8%) Education (10.8%)

5 Real estate activities (8%) Construction (7.1%)

Note by share of this industry's GVA in total in BCR by shares of this industry's employee in total in BCRBCR employs around 4.3% of total workforce in England and Wales

Top five sectors

I.Sectors offering most potential for inward foreign direct investment

UK has been one of the best performing countries in terms of attracting inward investment, but the crisis has had a

strong negative impact.

1990 1995 2000 2005 2011-

5 000

10 000

15 000

20 000

25 000

Global FDI inward stock, 1990-2011

Developing countries Other developed countries North America

Other European Countries United Kingdom

US$

Bill

ion

6% 10%

The global crisis severely affected cross-border M&A, while greenfield FDI has become stronger

2003 2004 2005 2006 2007 2008 2009 2010 20110

20

40

60

80

100

120

140

160

180

Cross-border M&As versus greenfield FDI projects in the UK, 2003-2011

Cross-border M&As greenfield FDI project

US$

Bill

ion

17% of global M&A

7% of global M&A

The UK has attracted around 4% of the global Greenfield investments (or 20% of total investments in the European zone)

Greenfield FDI projects in the UK, 2003-2012

2003-2007 2008-2012 2008 2009 2010 2011 2012

Projects (number) 2,887 4,466 858 1,007 911 928 762

% worldwide 5% 5% 7% 6% 6%

Capital investments(£ Billion)

64

121

36

27

16

21

21

% worldwide 3%

4%

5%

3%

4%

Job created (000) 259

361

87

84

67

68

55

Following the financial crisis, the UK has become particularly stronger in attracting Greenfield FDI in the services sector

Greenfield FDI investments in the UK: % of world investments

2003-2007 2008-2011

Total

3 4

Primary 3 4

Manufacturing

2 2

Services 4 6

UK position in attracting inward investment

Issue Importance Key literatureComparison of UK with

EU

Comparison of UK with

emerging markets

Overall position

Market size high Pain and Lansbury (1997); Driffield and Munday (2000) Large economy in EU but not compared with

BRICS

Host sector performance medium Neven and Siotis (1996),

Driffield (2002) Less innovative or productive than some of EU, innovation rates still ahead of Emerging economies

Openness medium De Menil (1999) Possibly the most open economy in the world

Distance medium Brainard (1997); Helpman et al. (2004) Close to but not at the heart of Europe, a long

way from Asia

Infrastructure low Coughlin et al (1991);Fredriksson et al (2003). Issues with transport

Corporate tax rates low Devereux and Griffith (1998);

Bénassy-Quéré et al. (2005) Comparable with developed world, and historically relaxed on tax avoidance

Labour costs high Barrell and Pain (1999); HM Treasury (2003) Low compared with EU12, high compared

with AsiaLabour market flexibility high Dewit et al. (2003);

Haaland and Wooton (2007) Most flexible labour market for any developed economy apart from US

Institutions high Wheeler and Mody (1992); Wei (2000) Very highly regarded legal system and

institutionsIncentives / aftercare medium Driffield (2004);

Birkenshaw (1998) Traditionally strong, current position at a local level unclear

Exchange rate risk low Barrell et al. (2003);

Ekholm (2003) Outside Euro, sterling traditionally safe

Agglomeration / supply linakges

medium Venables (1996); Head et al (1995) Some hollowing out of supply chains in recent

years

Source: Diffield et al (2012) BIS report.

• Historically, the UK has performed well in attracting IFDI, but it has been severely affected by the crisis

• The UK is increasingly facing competition from developing countries– These countries offer better incentives in terms of distance, corporate taxes,

labour cost and labour market flexibility

• Competition from other European countries is not very strong, but the region is likely to be a dwindling share of global FDI flows

• Following the financial crisis, the UK has become stronger in attracting Greenfield FDI in services, particularly Real Estate and Alternative/Renewable energy

• The UK has also become strong in attracting Greenfield FDI in Coal, Oil and Natural Gas

• Being less successful in attracting Greenfield FDI in manufacturing, the country has become strong in textiles and machinery and equipment

Summary: sectors best placed to attract IFDI in the UK

Top five most competitive sectors in attracting greenfield FDI

Top five sectors By number of projects By volume By job creation

United Kingdom1 Software & IT Services Real Estate Real Estate 2 Business Services Alternative/ Renewable energy Food & Tobacco3 Financial Services Coal, oil and Natural Gas Consumer Products4 Textiles Financial Services Business Services5 Communications Hotels & Tourism Software & IT services

Birmingham City Region1 Automotive Components Automotive OEM Automotive Components2 Automotive OEM Automotive Components Automotive OEM

3 Plastic Plastics Industrial Machinery, Equipment & Tools

4 Industrial, Machinery Equipment & Tools

Industrial Machinery, Equipment & Tools Plastics

5 Building & Construction Materials Transportation Real Estate

Greater Manchester Region1 Ceramics & Glass Ceramics & Glass Chemicals2 Transportation Chemicals Automotive Components3 Paper, Printing & Packaging Automotive Components Financial Services 4 Healthcare Paper, Printing & Packaging Pharmaceuticals5 Consumer Products Rubber Healthcare

Motivation for inward investment in BCR: exploit technological superiority access more advanced technologies

2003-2007 2008-2012 -

1

2

3

4

Greenfield investments in the BCR: value of capital investments

Technology sourcing/location advantage Technology sourcing Technology exploiting/location advantage

Technology exploiting

£Bill

ion

New trend in inward investment in BCR

• In line with the national patterns, the flows of greenfield FDI into the BCR increased significantly during the period 2008-2012

• The BVR region has significantly increased its share in the UK’s total Greenfield FDI across a wide range of sectors, however few activities concentrate the bulk of such investments

• Sectors that feature inward investment in the UK have shown transitions from traditional areas of transport, food, tobacco to Construction, Automative, Hotel, Tourism sectors.

• Source country moves from the US and other advanced economies to emerging economies such as India and new sources of United Arab Emirates, Ireland, Australia, and Netherland. The motivations of inward investment also show a transition of efficiency seeking to technology seeking.

• Traditionally, the main motivation for foreign investors to invest in the BCR was to exploit some form of technological superiority, but in most recent years an increasing number of foreign investors are investing with the view of accessing more advanced technologies from the region

Source: Diffield et al (2012) BIS report.

Emerging economies OFDI sector league table

1990 top 10 (in order) 2010 top 10 (in order)

Finance Business activities

Unspecified secondary Finance

Mining, quarrying and petroleum Trade

trade Unspecified secondary

business activities Mining, quarrying and petroleum

Textiles, clothing and leather Transport, storage and communications

Wood and wood products Electrical and electronic equipment

Rubber and plastic products Construction

Transport. storage and communications Unspecified tertiary

Other services Other services

Sectors that BCR is already competitive

• Automotive OEM• Automotive Components• Plastics• Industrial Machinery, Equipment & Tools• Transportation • Real Estates

Sectors that BCR Could be competitive

• Sectors with technological advantage, R&D intensive and innovative, and foreign-invested R&D present– Links between R&D investment, innovation, productivity,

export participation and growth– Regional R&D is relatively low – R&D relatively higher sectors, such as Transport equipment

and Electrical Machinery industries may develop strong potentials

– Some service sectors (Solihull experience)– Sectors that we are on par with EU countries may attract

more investment given the instability of the Euro zone

Sectors in BCR that should be nurtured

• BCR has advantage in sectors Transportation and construction, Construction, Electrical equipment, which are areas where OFDI are increasing

• Gaps of areas that our current industrial profile does not meet the world investment demand.

Global FDI trend

1990 top 10 (in order) 2010 top 10 (in order)

Finance Business activities

Unspecified secondary Finance

Mining, quarrying and petroleum Trade

trade Unspecified secondary

business activities Mining, quarrying and petroleum

Textiles, clothing and leather

Transport, storage and communications

Wood and wood products

Electrical and electronic equipment

Rubber and plastic products Construction

Transport. storage and communications Unspecified tertiary

Other services Other services

II.Sectors offering most potential for export and outward investment

Based on FAME data (2006-2010):Top five sectors Goods Services

Export Volume Export intensity Export Volume Export intensityUnited Kingdom

1 Machinery and Transport Manufacture of basic metals Business management and management consulting

Electricity, gas, steam and air conditioning supply

2 Chemicals Manufacture of electrical equipment Royalties and license fees Repair and installation of machinery and equipment

3 Mineral Fuels Manufacture of motor vehicles, trailers and semi-trailers

Computer and information Water collection, treatment and supply

4 Miscellaneous Manufactures

Manufacture of other non-metallic mineral products

Engineering and technical services

Scientific research and development

5 Manufactured Goods Manufacture of paper and paper products Research and Development Adverting and market research

Birmingham City Region1 Machinery and Transport Manufacture of furniture Computer and information Repair and installation of

machinery and equipment

2 Manufactured Goods Manufacture of paper and paper products Engineering and technical services

Water collection, treatment and supply

3 Miscellaneous Manufactures

Manufacture of fabricated metal products, except machinery and equipment

Communication services Electricity, gas, steam and air conditioning supply

4 Chemicals Manufacture of electrical equipment Research and development Scientific research and development

5 Crude Materials Manufacture of rubber and plastic products

Business management and management consulting

Air transport

Greater Manchester Region1 Chemicals Manufacture of motor vehicles, trailers and

semi-trailersAdvertising and Market Research Real estate activities

2 Machinery and Transport Manufacture of other transport equipment Royalities and license fees Advertising and market research

3 Manufactured Goods Manufacture of rubber and plastic products

Engineering and technical services

Water collection, treatment and supply

4 Crude Materials Manufacture of basic pharmaceutical products and pharmaceutical preparations

Research and development Financial service activities, except insurance and pension funding

5 Miscellaneous Manufactures

Manufacture of leather and related products

Business management and management consulting

Security and investigation activities

Sectors with potential in export

• BCR is competitive already on export in– Machinery and Transport industry, – Crude Materials, – Manufactured Goods among others in the manufacturing sector – Computer and IT, – Engineering and Technical Services, – R&D sector among others in service sectors.

• Links between export, productivity, innovation and economic growth– No region-sector studies– R&D intensive sectors may have potentials:

Transport equipment, Mechanical engineering, Electrical machinery, other manufacturing, Aerospace, and Chemical industries

– Firm size and export– Nature of export

Sectors with potential in export

Outward FDI from BCR

• BCR ranked the 5th in UK in total numbers of OFDI projects

• BCR ranked the 8th in terms of total volume of OFDI projects

• Top five industries in BCR for OFDI1. Automotive Components2. Engines& Turbines3. Rubber4. Industrial Machinery, Equipment & Tools5. Consumer Electronics