Inward FDI in the UK – (some of) what we know and what we would like to know

ByRichard Harris

© Richard Harris

Evidence paper by Driffield et. al. (2013) to the Foresight Project on the Future of manufacturing in the UK

Motivation• TFP is widely recognised as the key driver of long-

run economic growth • being foreign owned is associated with higher levels

of TFP– Effects cover:

• Direct effects: FO plants are themselves more productive

• Indirect effects: there are (potential) spillovers to domestic plants from FO plants

• Overall the UK economy benefits from inward FDI even though there are issues of control and the destination of profits

3

OverviewWhat do we know

– Run through some statistics available mostly based on micro-level UK datasets covering FO shares of:

• GVA• Gross output• R&D

– Look at some examples of the analysis that can be done covering:

• Links between FO and R&D/absorptive capacity• Contribution of FO plants to overall UK productivity growth

What would we like to know– Show how spillover estimates are obtained

• Note the incompleteness of our knowledge• Outline the needs for more information (new statistics)

Source: ARD

Source: ARD

Real GVA in top 32 SIC92 industries by foreign-ownership, 2009 (£m 2000 prices)

Software consultancy and supply

Other retail of new goods in specialised stores

Telecommunications

Legal, accounting, consultancy

Miscellaneous business activities

Post & courier services

Manufacture of motor vehicles

Wholesale of household goods

Architectural & engineering & technical consultancy

Wholesale of intermediate productsManufacture of refined petroleum products

Retail in non-specialised stores

Real estateOther wholesaleAdvertisingLabour recruitment & personnel

Source: ARD

Source: BERD matched into ARD

Source: Harris (2013) – based on CIS data

Source: Harris and Moffat (2013) – using ARD

Evidence on spillover benefits

• Does the ‘presence’ of IFDI increase the productivity of non-FDI plants?– First need to establish that generally IFDI plants

have higher productivity– Then need to establish the ‘channels’ through

which ‘spillovers’ can occur– Lastly need evidence on such spillovers

• Current based on ‘association’– If high ‘presence’ of IFDI in same industry (upstream or

downstream) and/or same locality is correlated with higher TFP in domestic plants – taken as evidence of spillovers

• Need direct evidence – to establish and better understand nature of spillovers

Distribution of plant-level labour productivity in 2005

Source: FAME

What we don’t know on spillovers

• Need evidence on linkages between FO and domestic plants in terms of:– actual sales/purchases

• This also requires understanding of ‘global’ value chain activities of IFDI firms (e.g. why are they located in UK?)

– actual ‘knowledge’ linkages• Information shared with other firms and sectors• Cooperation undertaken• Hiring of labour

Conclusions

• IFDI is very important to UK economy– Concentrated here on productivity side but also

jobs (covered next)– It’s a large component of marketed output– Its more productive

• Directly and and almost certainly indirectly (through spillovers)

• But indirect effects are imprecisely measured and direct of causation is consequently unclear

– Hence need more statistical information on linkages in order to understand and measure better spillover effects

Acknowledgement

This work contains statistical data from ONS which is Crown copyright and reproduced with the permission of the controller of HMSO and Queen's Printer for Scotland. The use of these data does not imply the endorsement of the data owner or the Secure Data Service at the UK Data Archive in relation to the interpretation or analysis of the data. This work uses research datasets which may not exactly reproduce National Statistics aggregates