The UK is over-reliant on investment from US firms and must attract more investment from other countries to protect itself from further job cuts, according to a report out this week.
Research published this week by consultants Ernst & Young claims the UK relies too heavily on US investment, putting it at greater risk from the US-led global downturn. The UK remains Europe’s biggest recipient of foreign direct investment, with the number of projects increasing by 13% to 575 projects last year.
But Mark Hughes, executive consultant at Ernst & Young’s international location advisory service, said the UK needs to readjust its focus away from the US, to plug the gaps left by firms pulling their investment out of the country. ‘The UK has done very well to focus on the US, but this has possibly been at the expense of investment opportunities from within the rest of Europe,’ he told The Engineer.
Ironically, this risk is heightened by the UK’s success last year in attracting investment from telecoms firms, which have since been hit hard by falling demand for mobile phones due to the global slowdown. The telecoms industry was the top growth sector for investment across Europe as a whole last year, increasing by 149% on 1999.
But with heavy job losses in the sector, including Motorola’s decision last week to close its mobile phone plant at Bathgate, the UK may struggle to find alternative investment. The losses have also raised questions about the policy of encouraging industry clusters, which can leave local communities vulnerable if a recession takes hold.
‘We have to look at where the UK is going to find a replacement for that investment. There is nothing immediately coming through to replace it,’ said Hughes.
Similar research from Deloitte & Touche, also published this week, shows the UK is the number one country for US direct investment for the third year running. The report says US manufacturers increased investment here from $6.2bn in 1998 to $10.1bn in 1999, with a further increase expected when figures for 2000 are released.
Motorola’s Bathgate plant is at the heart of Silicon Glen, the area between Edinburgh and Glasgow that has been successful in attracting a cluster of telecoms equipment makers and electronics firms.
However, heavy job cuts in the sector have raised questions over whether regions are putting themselves at risk of widespread redundancies by placing all their eggs in one basket.
Diversity the key
Dr Mark Schankerman of the London School of Economics said clusters based on just one sector raise the risk of job cuts in a region, by increasing the area’s dependence on that industry. ‘The ideal situation is to have diverse clusters made up of firms from different high-tech sectors. Silicon Valley in California is now home to companies within the biotechnology industry as well as software firms, he said.
Nick Matthews of the Warwick Manufacturing Group said that where clusters are based around assembly plants, companies find it easy to pull out when market conditions get tough. ‘The strength of a cluster depends on its depth. The problem with the cluster in Scotland is that many firms are there because labour is cheap, so there is nothing to lock them in to the area.’ he said.
Labour MP Martin O’Neill, chairman of the trade and industry select committee, said UK regional clusters need to start attracting more global research and development bases, rather than assembly plants such as Motorola’s Bathgate site.
‘We have got to move into a higher position in the supply chain, so that plants in the UK are more capable of influencing global events,’ O’Neill said.
Editor’s note: The Bank of England governor Sir Eddie George told a House of Lords committee he had been surprised by the weak performance of the UK economy in the first three months of the year, leading to speculation the bank will cut interest rates next week.