Improving the Quality of Foreign Direct Investment to Northern Ireland EXECUTIVE SUMMARY

Transcription

1 Improving the Quality of Foreign Direct Investment to Northern Ireland EXECUTIVE SUMMARY July 2012

2 1 Executive summary 1.1 Study context and overview Northern Ireland has a strong track record in attracting foreign direct investment (FDI). In the five years from 2006/07 to 2010/11, Invest Northern Ireland (INI) assisted over 120 foreign companies to invest in greenfield FDI projects in Northern Ireland (NI), creating nearly 12,000 new jobs in their subsidiaries. Software & IT, business & professional services, and financial services accounted for 71% of these new jobs. 1 In software development, Northern Ireland was the most successful region in Europe in attracting greenfield FDI. 2 To build on this success, the purpose of this study is to assess the quality of FDI into NI and inform Northern Ireland s future FDI policy. The study takes place in the context of a rapidly changing global economy and FDI marketplace with intense competition to attract FDI. The study provides the evidence base to help Northern Ireland navigate the challenging market conditions by leveraging both FDI growth opportunities and the underlying competitive advantages of NI, as well as through outlining policy options for improving competitiveness and positioning NI for sustained levels of high quality FDI. This study was awarded to fdi Intelligence, Financial Times Ltd and has been prepared by Dr Henry Loewendahl and Glenn Barklie, assisted by Rachel Craig and Lisa McAvoy. Dr Karl Sauvant was academic advisor for the study. Dr Henry Loewendahl has 15 years of experience in FDI. He is Managing Director of WAVTEQ Ltd and Senior Advisor to fdi Intelligence. Prior to this he was a Director in OCO Global Ltd and Manager of inward investment in IBM. Glenn Barklie is Senior Economist in fdi Intelligence and is head of the global competitiveness assessment unit in the Financial Times Belfast office, where Rachel Craig and Lisa McAvoy also work as economists. Dr Karl Sauvant is Executive Director of the Vale Columbia Center on Sustainable International Investment and former Director of the United Nations Conference on Trade and Development's (UNCTAD) Division on Investment, Technology and Enterprise Development. This study has been commissioned by Department of Enterprise, Trade and Investment (DETI). The Steering group, chaired by DETI, also consisted of members from Department of Learning (DEL), Department of Finance and Personnel (DFP) and Invest Northern Ireland (INI). The texts of this study do not bind DETI. 1 Invest Northern Ireland FDI Database 2 fdi Markets database, fdi Intelligence, Financial Times Ltd 2

3 1.2 Value added of FDI sectors in Northern Ireland R&D, salary, productivity and export indicators used to assess quality of FDI The value added of 36 sectors was assessed, covering all the main sectors for greenfield FDI in Northern Ireland and globally. Within these 36 sectors, 44 sub-sectors were also assessed covering INI target sub-sectors and other important sub-sectors for FDI. The value added of FDI sectors was evaluated across four main categories: (1) R&D intensity; (2) Salary levels; (3) Productivity; and (4) Export orientation. The value added of FDI into the UK was used as the basis for analysis as the UK dataset was large enough for an assessment of value added by sector and sub-sector. Data in the ROI was also used for some indicators. The assessment of value added in the UK and ROI provides a strong evidence base for understanding the quality of FDI in different sectors and is representative of the FDI that NI is likely to be able to attract. Sixteen high and very high value added FDI sectors identified The 36 sectors were classified into five levels of value added based on their R&D intensity, salary levels, productivity, and export orientation: Very high value added: pharmaceuticals, telecom, software & IT services, non-automotive transport OEM (mainly boat and train manufacturing), minerals, aerospace, biotechnology, and electronic components; High value added: business machines & equipment, chemicals, financial services, coal, oil & natural gas, automotive OEM, creative industries, engines & turbines, space & defence; Medium value added: industrial machinery & equipment, food & beverages, automotive components, medical devices, renewable energy; Low value added: plastics & rubber, consumer electronics, healthcare, paper, printing & packaging, building & construction materials, ceramics & glass, business & professional services, real estate, transportation, warehousing & storage, and consumer products; and Very low value added: metals, leisure & entertainment, wood products, textiles, and hotels & tourism. Of the 16 sectors identified as being high and very high value added for FDI, the following sectors are not currently core FDI target sectors of INI: pharmaceuticals, non-automotive transport OEM, minerals, biotechnology, business machines & equipment, chemicals, coal, oil & natural gas, automotive OEM, engines & turbines, and space & defence. NI larger share of high value added and low value added FDI than the UK Table E.1 shows 53.8% of jobs created in NI were either very high or high compared to 52.7% in ROI and 37.1% in the UK as a whole. By the number of projects, 56.4% of FDI projects into NI are either very high or high value added compared to 55.2% in UK and 62.8% in ROI. For the very high value added projects, NI attracted a higher share of software & IT, telecom, and aerospace projects than either the UK or ROI, but a lower share of financial services, pharmaceuticals, electronic components and biotech projects. The software & IT, telecom, and aerospace sectors accounted for 89.4% of very high value added projects and 90.5% of jobs in NI. 3

4 Northern Ireland has a higher share (29.5%) of low and very low added projects than either the UK (26.7%) or ROI (21.4%). In terms of jobs, 35.7% of jobs in NI were low or very low value added compared to 49.5% in the UK as a whole 28.3% in ROI. Of very low value added jobs in NI, 80% were in business & professional services, compared to 72.3% for ROI and 33.9% for the UK. A further 19.5% of very low value added jobs in NI were in hotels & tourism. Table E.1: Comparison of the value added of FDI into Northern Ireland, UK, and ROI* Value added % of FDI projects attracted ( ) % of FDI new jobs attracted ( ) NI UK ROI NI UK ROI Very High 44.3% 39.4% 46.7% 37.3% 20.4% 41.6% High 12.1% 15.8% 16.1% 16.5% 16.8% 11.2% Medium 14.1% 18.0% 15.8% 10.5% 13.4% 18.9% Low 16.8% 17.5% 16.9% 6.0% 36.1% 19.8% Very Low 12.8% 9.2% 4.5% 29.7% 13.4% 8.5% ALL FDI 100% 100% 100% 100% 100% 100% Source: fdi Intelligence, Financial Times Ltd *excludes retail projects 1.3 Foreign direct investment forecasts fdi Intelligence forecasting model for greenfield FDI The fdi Intelligence forecasting model uses the relationship between GDP and FDI to forecast future FDI. This approach follows previous econometric studies which have found that GDP has the strongest influence on FDI into Western Europe and globally. 3 The fdi Intelligence forecasting model was able to predict over 70% of the variation in inward and outward FDI jobs created in Western Europe over the period Global FDI forecast to grow by 40% from Globally, the number of FDI projects is forecast to increase by 40% from 12,025 projects in 2010 to 16,806 projects in 2015 and the number of inward investment jobs is forecast to increase to 2.86 million in China and India are forecast to become the top two 3 See, for example, Hansson, A. and Olofsdotter, K. (March 2010) Tax differences and foreign direct investment in the EU27. Department of Economics, Lund University, Sweden and UNCTAD (1993) Explaining and Forecasting Regional Flows in Foreign Direct Investment (UN: NY). 4 The forecasts depend on the accuracy of the GDP forecasts provided by the IMF and assume that everything else remains equal, in particular that there are no major unforeseen events in the world. The fdi Markets database of fdi Intelligence is used for the baseline FDI dataset. fdi Markets is the exclusive source of data on greenfield FDI trends used by UNCTAD and has been published in the World Investment Report since fdi Markets has a strict definition of FDI and only includes greenfield FDI projects which directly create jobs and which are wholly owned by foreign corporate entities. Due definitions adopted and the inherent difficulties of tracking small FDI projects, the numbers cited may differ from those published by investment promotion agencies. 4

5 countries for inward FDI. The UK is forecast to fall from third to fourth position, behind China, India, and US. US, Germany, Japan, UK and China forecast to be the leading source countries The top four leading countries for outward FDI projects in 2010 are expected to remain unchanged in 2015 the US, UK, Germany, and Japan, with Germany moving ahead of the UK. In terms of job creation, while the US, Japan, and Germany are expected to remain the top 3 source countries, China is forecast to overtake the UK by Renewable energy forecast to be fastest growing sector for greenfield FDI The top 10 sectors for FDI in 2015 are expected to be unchanged from 2010 with software & IT services, business & professional services, financial services, industrial machinery, equipment & tools, electronic components, food, beverages & tobacco, transportation, warehousing & storage, telecom, chemicals, and metals the leading sectors ranked by project volume in Measured by job creation, the top 10 sectors in 2015 are also unchanged from 2010 with the leading sectors real estate, electronic components, automotive OEM, metals, business & professional services, food, beverages & tobacco, industrial machinery, equipment & tools, telecom, automotive components and software & IT services. The fastest growing sector is forecast to be renewable energy moving from 19 th to 11 th place, with the number of global FDI projects in the sector increasing from 198 in 2010 to 528 projects in Cloud computing, wind power, and social media fastest growing sub-sectors for FDI Cloud computing is expected to achieve the fastest growth of any sub-sector with the number of projects almost tripling from , and with cloud computing accounting for 12% of global FDI projects in software & IT in 2015, second only to IT consulting/outsourcing. FDI projects in social media are forecast to nearly double in volume. Within renewable energy, FDI projects in wind power are forecast to increase by 2.5 times. The related marine and wind turbine sub-sector is expected to have strong growth of almost 50% in global FDI projects in next five years. The number of photovoltaic FDI projects is forecast to double from FDI projects in the UK expected to increase while job creation declines The number of FDI projects attracted to the UK is forecast to increase by 7% over the next five years to over 800 projects in The average size of projects attracted to the UK is expected to decline with the result that overall job creation in the UK falls by 6% from to 45,872 inward investment jobs in This reflects companies locating larger strategic functions in emerging markets rather than concentrating activities in the West. 5

6 1.4 Impact on FDI of reducing NI corporate tax rate to ROI 12.5% level fdi Intelligence econometric model To assess the impact of reducing corporate tax on FDI in NI, fdi Intelligence developed an econometric model to analyse the impact of corporate tax on greenfield FDI jobs. The model design involved identifying the key determinants of FDI through statistical analysis. Initially, 17 location determinants 5 comprising the key location criteria used by companies in site selection were correlated against FDI greenfield jobs created from in 25 cities and regions, mostly in Europe. The results showed that four location determinants - corporate tax (average corporate tax rate), labour costs (average labour costs), market size (GDP) and agglomeration (stock of foreign companies) - were statistically significant at the 1% level, meaning that there is 99% certainty that these variables do affect FDI. This finding is in line with previous studies, which found the same variables to be the main determinants of FDI flows. 6 Other factors, in particular incentives, size of the labour force, and skills, were found to have an impact on FDI but to be less statistically significant. The model has a very high adjusted R squared of 75.14%, indicating that the model is accurate in predicting FDI jobs created in the 25 cities and regions % of the variation in FDI jobs in the 25 cities and regions, over the period, is accounted for by the four explanatory variables (corporate tax, market size, labour costs, and agglomeration). Impact of corporate tax, labour costs, market size and agglomeration on FDI The econometric model shows that labour costs has the biggest impact on FDI jobs created in the 25 cities and regions. A 1% decrease in labour costs increases FDI job creation by 1.45%. Corporate tax had the second biggest impact on FDI, with a 1% decrease in corporate tax increasing job creation by 1.2%. A 1% increase in market size and agglomeration both increase FDI jobs by 0.65%. 12.5% corporate tax NI would nearly double FDI job creation in NI Starting from a base point of 26%, each 1 percentage point decline in the base point will increase job creation by %. 7 The impact of corporate tax increases the closer the tax rate gets to 12.5% as the percentage change in the level of tax becomes higher. At the lower end (4.82%), this finding is in the same range as most academic studies examining the impact of corporate tax on FDI. 8 The higher end (9.69%) is outside of the 5 The 17 location determinants initially assessed were: corporate tax, market size, productivity, openness to FDI, experienced labour pool, inexperienced labour pool, skills, tightness in the labour market, labour regulations, agglomeration, innovation, R&D, infrastructure, quality of life, labour costs, property costs, and incentives. 6 For example see: Deutsche Bundesbank (2005) Tax incentives and the location of FDI: evidence from a panel of German multinationals. Discussion Paper Series 1: Economic Studies No17/2005; Hansson, A. and Olofsdotter, K. (March 2010) Tax differences and foreign direct investment in the EU27.Department of Economics, Lund University, Sweden; and Devereux, M.P. and Griffith, R. (1998) Taxes and the location of production: Evidence from a panel of US multinationals. Journal of Public Economics 68, Also see Devereux, M.P. and Griffith, R. (2002) The impact of corporate tax on the location of capital: A review. Swedish Economic Policy Review 9, This range is the percentage increase in FDI jobs as calculated by the model results of moving from a corporate tax rate of 26% to 25% (lower range) and moving from 13.5% to 12.5% (upper range). 6

7 range typically found in previous academic studies, although the higher end is when the tax rate converges on 12.5%, which is not typical of the sample of locations included in previous studies. Based on the results of the econometric model, the number of FDI jobs in Northern Ireland with a corporate tax rate of 12.5% is predicted to be an additional 2,800 jobs per annum, which is a near doubling of current and forecast levels of FDI job creation in NI. Reduced corporate tax to have biggest impact on strategic services & manufacturing Reducing the corporate tax to 12.5% in NI would be expected to have a strong impact on business, professional and financial services and on manufacturing and the share of these sectors in overall job creation in NI should increase. Reduced corporate tax would also increase job creation in R&D and software & IT, although the percentage increase in job creation is expected to be lower. 1.5 Research mapping The research mapping profiled the academic research base in NI and aligned the research base with high value added sectors to identify opportunities for attracting high quality FDI. The 10 largest FDI sectors for R&D in the UK in 2015 were identified The top sectors for R&D projects in the UK in 2015 are expected to be (in rank order): Software & IT (key sub-sectors include social media, Internet, and cloud computing), telecom, biotechnology, pharmaceuticals, electronic components, aerospace, space & defence, creative industries (majority digital media related), financial services (majority software related), semiconductors, and renewable energy (majority in marine/wind turbines and environmental services). All of these sectors/sub-sectors are high or very high value added. 80 internationally competitive research groups identified in high value sectors in NI The research base in NI was profiled for each of the top 10 R&D sectors and related subsectors and evaluated using the UK government research assessment. Linkages with industry were also examined and corporate R&D centres of excellence identified. In total, 80 university groups were identified in NI as undertaking research, a proportion of which was classed as either internationally excellent or world leading, the two highest ratings under the latest UK-wide Research Assessment Exercise. Critically, all of this high quality research is in high value sectors. In software & IT, 15 research groups were identified (5 related to social media/internet, 4 to cloud computing, 4 to animation/computer games), 15 research groups in renewable energy (5 related to turbines and 10 to environmental technology), 12 research groups in electronics components and semiconductors, and 8 research groups in aerospace. In the life sciences area, over 40 research groups in pharmaceuticals, medical devices, healthcare, and biotechnology were 8 See OECD (February 2008) Tax Effects on Foreign Direct Investment. Policy Brief, OECD Observer. 7

8 identified, again all with a proportion of research deemed either internationally excellent or world leading. Extensive industry collaboration with world-class companies The research base in NI has strong R&D-industry collaboration with world leading companies. Companies RIs in NI are collaborating with include: Airbus, BAE, BASF, Bombardier, Chevron, Daimler-Chrysler, ExxonMobil, Fujitsu Siemens, GSK, HP, IBM, Infineon, Intel, LogicaCMG, Microsoft, Medtronic, National Semiconductor, Nokia, Oracle, Seagate, SAP, Shell, Sun Microsystems, Telecom Italia, and Telefonica. However, many of these companies have not yet established greenfield FDI projects in NI. Research base most important for life sciences, telecom and electronics sectors Using the fdi Markets database, which records the investment criteria cited by companies, the sectors where the research base is most important for R&D location decisions are biotechnology, telecom, electronic components, and transport equipment followed by renewable energy, software & IT, and pharmaceuticals. In financial and business services and creative industries, the research base is less important, while in emerging areas of software & IT (especially cloud computing) the research base is more important for investors. INI financial support for R&D currently focused on aerospace & electronics sectors Invest Northern Ireland is providing the most financial support to the aerospace and electronics sectors, with nearly 60% of total assistance to foreign companies from 2002/03 to 2010/11 awarded to foreign companies in these sectors (a total of million). A further 9.11 million was awarded to foreign software & IT companies for R&D, 7.68 million to telecom companies, and 4.93 million to biotech and pharma companies. Software & IT, telecom and aerospace primary sectors to target for R&D FDI Significant volumes of R&D investment can be expected in sectors which: (1) have a high potential for FDI in R&D; (2) are research driven; (3) have world class research in NI; and (4) have a track record of investment in NI. Software & IT, telecom, and aerospace meet each of these criteria and are considered primary sectors for NI to target for R&D investment. In software & IT, NI has an enviable track record in attracting software development and a substantial number of industry partnerships, which have been proven to evolve into greenfield investments. A key focus therefore should be on the expansion and upgrading of R&D in existing subsidiaries and converting RI-industry partnerships into greenfield investments. Rapidly growing areas of cloud computing and social media and internet offer potential to attract FDI and foster more industry partnerships. Telecom is expected to be the second leading sector in the UK for R&D projects in Areas such as mobile internet solutions, network security, and systems on a chip architecture offer potential for R&D investments building on the world leading research taking place in NI. Aerospace is expected to be the sixth leading sector for R&D FDI in the UK in the next five years. NI has a strong corporate research base in aerospace and defence. There is potential 8

9 for expansion and upgrading of R&D by existing investors and attracting new R&D investment in particular in relation to research areas where NI is building leading capability such as in composite materials and fuel efficiency. Renewable energy, electronics, and biotechnology secondary sectors for R&D FDI Sectors where Northern Ireland has a strong research base, where there is a significant volume of research-driven FDI in R&D, but where NI has a limited FDI track record are renewable energy, electronic components/semiconductors and biotechnology. The renewable energy sector (including marine/wind turbines) is forecast to be the fastest growing sector for FDI globally and into the UK in the next 5 years, which will increase demand for R&D investment. Northern Ireland should be able to compete effectively for R&D investments in renewable energy, in particular in areas of research strength including wave energy, marine testing, wind power, turbine components, solar power, fuel cells, marine biofuel, and environmental technology services. Northern Ireland has specialist research institutes in electronic components & semiconductors, which could be leveraged to help position NI to attract a share of the FDI projects investing in the UK. Biotechnology is expected to be the third leading sector for R&D FDI in the UK, with approximately 40 FDI projects in It is the most research intensive of all FDI sectors and attaches the most importance to the research base in R&D location decisions. Northern Ireland has 13 RIs in biotechnology with a high percentage of research deemed world leading. Drawing on this research base, more industry partnerships should be facilitated with the medium-term aim to secure a greenfield biotech R&D project. Other sectors important for R&D but are less driven by access to the research base Financial services (software and technology), creative industries (computer games), and business services (market research) are sectors where NI can potentially attract R&D investment but where the research base is unlikely to be the key driver for such investments, although it can form part of the overall product offer. 1.6 Competitiveness of Northern Ireland To inform FDI policy a detailed assessment of the competitiveness of NI for the aerospace, biotechnology, business & professional services (with focus on market research), financial services, renewable energy, and software & IT sectors was conducted. For each sector key competitors to NI were identified and a comparison with NI made across the following competitiveness indicators: size of the sector, track record, structure of the sector, skills, research strengths, corporation tax, financial incentives, access to finance, infrastructure, labour costs, real estate costs and availability, regulations and planning, and sector promotion. 9

10 Financial services key strengths for back and middle office functions In comparison to London, Dublin, Paris, Geneva and Warsaw, the NI financial services sector is a fraction of the size and is proportionately significantly less important to the local economy in terms of both gross value added (GVA) and employment. Northern Ireland lacks the presence of a major indigenous international financial services company to underpin the sector and has limited investment management and corporate and investment banking companies as well as supporting and related industries such as global legal firms and corporate headquarters. Northern Ireland has attracted far fewer financial services projects (excluding software projects) than the other locations. Geneva has attracted nearly five times more projects and Dublin 10 times more projects over the period 2003 to Northern Ireland s main advantage is its very low labour costs compared to West European financial centres, with labour costs for job functions in financial service around 50% lower than in Dublin, London, and Paris and 250% below labour costs in Geneva. Office costs are also far cheaper than other locations less than one-third the cost of London or Paris. At the same time there is high skills availability with 2,500 finance-related graduates and a high number of graduate finance courses. NI has nearly the same number of pure finance graduates as Dublin. These advantages make NI an attractive near-shore proposition for back and potentially middle office functions, which are more cost sensitive and need less experienced workers. Software & IT focus on education and fast growing niches for continued success The competitiveness of Northern Ireland was compared to London, Manchester, Dublin, Paris, Bangalore and Warsaw. While NI has a smaller software & IT sector both in absolute terms and relative to size when compared to most of the cities, it has an exceptional track record in attracting inward investment. From 2003 to 2010, fdi Markets recorded over 50 software & IT FDI projects investing in Belfast, over double the number of Manchester and more than Warsaw. Relative to population, Belfast was the best performing city, attracting nearly triple the number of projects as London, nearly double the number as Dublin, and four times the number of Bangalore. Belfast attracted more R&D projects than every city except Bangalore and was especially successful in attracting software for the financial services sector and software outsourcing operations. The success of NI in attracting inward investment can be attributed to a number of supplyside and demand-side factors. On the supply-side, NI has a strong advantage in the supply of undergraduates and postgraduates in computer science. The proportion of students studying computer science is higher in NI than in competitor locations in Western Europe. The number of computer science students is equal to nearly 25% of the ICT workforce in Northern Ireland - nearly triple the proportion of Dublin and much higher than other UK cities and Paris. There is significantly less competition for new graduates leading to lower labour turnover rates in NI. When combined with substantial cost savings, both labour costs and property costs, and the availability of financial incentives and support, Northern Ireland has a competitive edge over most cities in Western Europe. On the demand-side, the UK s ICT sector is the second largest in Europe and the UK has the third largest gaming software sector in the world. Furthermore, major US and Indian software companies have located 10

11 their European headquarters and regional software operations in the UK and ROI, which helps position NI as a near-shore location for these companies. Success can also be attributed to the sustained, focused activities of INI to attract software FDI. To sustain its market-leading position for software investment, Northern Ireland needs to continue to build its underlying supply-side capabilities and penetrate the fastest growing segments of FDI in the software sector. In terms of supply-side capabilities, continued investment in the education and research infrastructure in NI is a key priority. Ensuring that NI maintains its advantage in producing highly skilled undergraduate and increasingly postgraduate students is essential. Cloud computing, social media, and gaming offer strong opportunities for increasing software investment in NI, both through inward investment and local enterprise start-ups. Business & professional services need to upgrade to higher value added activities The business & professional services (BPS) sector is a major economic sector where the UK has an international competitive advantage. The BPS sector accounts for one-sixth of UK gross value added (GVA) and employs 3.4 million people. The UK is the world s second largest exporter of services. While Northern Ireland accounts for less than 1% of UK turnover in the sector, it has a strong FDI track record with Belfast attracting nearly 20 FDI projects in BPS from according to fdi Markets, a similar number to Manchester and Glasgow both much larger cities. Business process outsourcing (BPO) has been the major sub-sector for FDI in NI, and major projects have recently been attracted in legal process outsourcing (LPO). Northern Ireland s competitiveness for BPS investment was compared to London, Manchester, Glasgow, Dublin and Bangalore. The overall competitive advantage is similar to that for software & IT lower competition for graduates compared to other locations and the most competitive operating costs compared to Western Europe locations. The availability of financial incentives and a more stable workforce further increases the efficiency advantage of NI. The BPS sector is the major FDI sector for job creation in NI, accounting for over one-third of inward investment jobs (and one-fifth of FDI projects) created in the last five years. It therefore remains of considerable importance for employment in NI even though the overall value added is lower than in other sectors. Within BPS, market research was identified as a high value added sub-sector and a growth opportunity for attracting FDI to NI. While the NI market research sector is relatively small compared to major competitors in UK and ROI, NI has attracted regional/global market research centres from both PwC and the Financial Times Ltd and has rapidly growing indigenous specialists such as OCO Global Ltd. The same competitive advantages found for software & IT and BPS are applicable to market research and other higher value added areas such as LPO. Renewables potential to become growth engine for FDI The renewable energy sector has grown rapidly in volume to become one of the major sectors for FDI. This growth is forecast to continue, with renewables forecast to be the fastest growing sector for FDI globally and into the UK. The UK is the global leader in offshore wind, and is well positioned to attract FDI in the sector. 11

12 To capitalise on the opportunities in the sector, Northern Ireland is in a strong position with an underlying competitive advantage for FDI, especially in the offshore energy generation sector given the very favourable environmental conditions. Northern Ireland also has strongsupply side advantages for manufacturing and R&D. There is a significant labour pool of over 6,000 machinery & equipment workers and over 3,000 engineering students and a significant number of graduate courses and centres of excellence in renewable energy together with high quality port facilities and low labour and industrial real estate costs. Northern Ireland was compared to Dublin, Glasgow, Manchester and Newport and faces not only a bottleneck of renewable energy generation projects yet to be implemented but also intense competition, especially for the R&D, maintenance, and manufacturing parts of the value chain. Competitor locations, foremost Scotland but also Northern England, have moved fastest to promote and support the sector, and have first-mover advantage. Scotland has over 10 times the installed capacity and electricity generation in renewables than NI and the largest financial support and dedicated investment facilitation services. Assuming NI can provide high-level government support and practical project implementation comparable to other locations, the potential exists for multiple large-scale FDI projects, which in the marine/wind turbine sub-sector are very high value added. Aerospace FDI based on investor development and supply-chain development The aerospace and related defence sector has generated more than one in ten inward investment jobs in Northern Ireland in the last five years and the sector employs over 6,500 people. To understand NI s competitive advantage in this important sector, NI was compared to Bordeaux, Newport, Paris, and Toulouse. The European aerospace sector is the second largest in the world. France and the UK account for over 50% of turnover in Europe, with 22 billion turnover in the UK in Within the UK, Wales accounts for nearly one-quarter of turnover and also has the highest productivity. Northern Ireland accounted for 4% of turnover. While turnover and employment in the aerospace sector is lower in NI than in competitor locations, NI has a key advantage in its university and research infrastructure. There are more engineering students in NI than in Newport and Cardiff combined and Queen's University Belfast and University of Ulster offer six engineering courses at postgraduate and undergraduate levels including an aerospace engineering course. The Northern Ireland Centre for Excellence in Integrated Aerospace Technologies (CEIAT) and Northern Ireland Advanced Composites and Engineering Centre are some of specialist research institutes in NI serving the aerospace sector. Inward investment in NI in the aerospace sector is highly concentrated in the expansion activities of existing investors Bombardier in particular but also BE/Aerospace, Goodrich, RFD Beaufort and Thales. Continued expansion of existing investors and further development of their supply chains in NI as well as the supply-chains of aerospace investors in other parts of the UK - is expected to generate the strongest opportunities for further FDI in the sector for NI. 12

13 Biotechnology embryonic sector for FDI with R&D related opportunities Northern Ireland has not been considered a biotechnology location and has attracted minimal FDI in the sector. However, biotechnology was identified as one of the highest value added FDI sectors and the sector where location determinants are most influenced by the quality of the research base. The research-mapping phase of the study showed that NI has a significant research base in biotechnology and related sectors. Furthermore, the UK has the second largest biotechnology sector in the world and is one of main sectors where the UK is internationally competitive. The competitive advantage of NI was assessed against leading biotechnology centres Cambridge, Dublin, and London to inform decisions on whether biotechnology should be a target sector for FDI in NI and how to develop the sector. The biotechnology sector in NI is fairly small with 44 physical and biological research companies in 2011, compared to 224 in Dublin and 323 in Cambridge. Geographically proximate, London and Cambridge account for 60% of the UK s life science industry. However, relative to population, NI has more companies than London and a similar number to Dublin. Likewise, the contribution of scientific R&D to GVA is higher in NI than in London although considerably below that of the East of England. There are 50 postgraduate biotechnology students in NI (compared to 40 in Cambridge) and over 500 students on biology-related courses. While the postgraduate student numbers are relatively high, there were only 1,860 people employed in scientific R&D in NI in 2010, compared to 23,600 in East of England. With a strong postgraduate labour pool and research institutes focusing on biotechnology, NI has untapped potential as a biotech location. 1.7 Policy implications In order to attract sustained levels of high quality FDI there are many policy options NI can consider, ranging from transformational policy initiatives such as reduced corporate tax or major catalyst projects to strategic shifts in policy requiring a change of focus in inward investment strategy. Policy options discussed in this study can be usefully divided in FDI strategy policy options and competitiveness policy options. The main recommendations for consideration are provided below. FDI Strategy The assessment of value added and FDI forecasts identified the high value added sectors with the strongest potential for FDI. The forecasts also identified which countries are likely to be the major source of FDI in the future. The research mapping profiled NI s research base in 10 R&D intensive sectors and the competitive positioning revealed NI s strengths and weaknesses for high value added sectors. Based on the study results, there are several policy implications for FDI strategy in NI: 13

14 Core focus on software & IT and USA market: The software & IT sector and FDI from USA will continue to be the most important source of high value FDI in NI. FDI strategy should continue to focus strongly on US software & IT FDI in existing FDI sub-sectors in NI (wireless, financial, and ITO in particular) and in fast growing subsectors (cloud computing, social media/internet, and games); FDI strategy for renewable energy and growth markets: Renewable energy and related industrial sectors are expected to offer significant FDI opportunities for NI as is FDI from India, Germany, and China as well as from Australia and Sweden which are forecasted to be fast growing sources of FDI. For other high growth emerging markets, a strategy to promote linkages between research institutes in NI and research institutes in these markets could be considered as a first step to generating longer-term FDI opportunities; Target higher value added sub-sectors in BPS: Business & professional services and financial services will continue to offer large-scale FDI opportunities for NI. The FDI strategy should continue to address the growing importance of KBO (in particular legal processing) within the business services sector and the need to upgrade the value added of projects 9. Other than projects explicitly targeted to create employment opportunities through the Jobs Fund Programme, the focus should be on high value sub-sectors, such as market research and the back and middle office functions in financial services, where NI has a competitive advantage for attracting FDI; Continued focus on aerospace sector: The aerospace sector is expected to remain a significant job creator, with the majority of FDI coming from existing investors and through their supply-chains. Given that this sector is very high value added it is considered a core component of NI s FDI strategy. NI should consider how it can attract investment from suppliers not only supplying manufacturers in NI but in other parts of the UK; New focus on biotechnology: Northern Ireland has a significant research base and underutilised postgraduate labour pool in biotechnology, which is comparable to world leading biotechnology locations like Cambridge. A greater focus on the biotechnology sector would support an FDI strategy focusing on high value added sectors and R&D. The FDI attraction strategy for biotechnology would include facilitating research collaborations with foreign investors as well as greenfield investments; Strengthen marketing tools: NI should consider more clearly demonstrating its proposition to potential investors with a greater use of online marketing tools, especially given intense competition and the first mover advantages of other locations in several of the sectors. For the renewable energy sector, the utilisation of mapping technologies and development of concrete business proposals for specific investment opportunities is recommended. This could also be applied to other sectors to supplement existing case studies available. The propositions for new high 9 Invest NI moved away from proactively targeting contact centres and lower value projects in early The current temporary focus on attracting investment in this area is part of the short to medium term Rebuilding the Economy theme in the Economic Strategy in response to the economic downturn. 14

15 value target sectors, such as market research and cloud computing, also need to be fully developed. Renewed focus on investor development: Investor development is very important for FDI attraction and job creation in particular in aerospace and software & IT but also in other sectors with a strong base of existing investors. While INI has an investor development programme in place, the study findings suggest that this should be reviewed to ensure it is maximising in full subsidiary expansion and upgrading opportunities and supply chain development. Investor development will become more important as the number of FDI jobs created in the UK is forecast to fall and as economic policy focuses on upgrading the value added of projects. FDI competitiveness policy To improve the competitiveness of NI to attract FDI, a number of policy options have been proposed in this study: Corporate tax: Reducing corporate tax is the most far-reaching policy option considered. If corporate tax was reduced to ROI levels job creation in NI from inward investment is expected to double in volume, with FDI demand more elastic to corporate tax in certain sectors (financial services, biotechnology) than others. Reducing corporate tax is the most direct, highest impact policy tool available to achieve a major increase in FDI in NI; Expanding skills: Northern Ireland s competitive position for most sectors is underpinned by the available pool of high quality graduates and highly competitive cost levels in NI compared to its main West European competitors. As NI s cost competitiveness is unlikely to change in the medium-term, a central pillar of FDI policy is to ensure that NI increases the number of high quality graduate and postgraduate students across disciplines. The surplus graduate pool relative to local business sector requirements differentiates NI from its main competitor locations and is a key attraction for inward investors. Skills policy should also consider how to increase the quality and volume of vocational skills, important for industrial sectors like aerospace and renewable energy equipment as well as training development in service sectors and sub-sectors being targeted. An improvement in language skills may also aid NI in attracting FDI from companies that export to non-english speaking countries. Education and skills is critical to NI s competitiveness for FDI; Institutional development: There are relatively few dedicated institutions for promoting designated clusters in NI. Promoting clustering between the research base, local businesses and foreign investors is a key policy tool to facilitate R&D and innovative activities and to strengthen the NI brand as an FDI destination for key sectors. It would also support investor development and supply-chain development activities, encourage networking across related sectors such between software and biotechnology, market research, and financial services, and support initiatives to attract VC to NI. Policy makers should consider whether forming cluster-specific institutions would support sector development and promotion or if existing institutions can be strengthened; 15

16 Attracting talent back home: A significant proportion of the NI talent pool relocates to London, Dublin and other business centres. As part of activities to attract inward investment and encourage high value added activities, NI could consider a policy initiative to attract talent back home in particular in software, financial services, legal services, and biotechnology. Such policies have been successfully implemented in other regions; and Catalyst projects: Cities across the world from Manchester to Montreal and Dublin to Dubai are investing in catalyst initiatives to attract FDI. Manchester and Dubai have invested in Media Cities to attract creative industries FDI while Dublin and Montreal have created international finance centres to attract financial services investment. While NI has invested in the Titanic Quarter and NI science park, it lacks the high profile, sector-specific catalyst projects which other locations are investing in. These projects are particularly successful when combined with financial benefits, such as lower taxes. While property-based catalyst projects can be considered for many sectors, such as an IFSC for financial services or Media City for creative industries, the study also highlighted how infrastructure-related catalyst projects can improve NI s competitive position. For example, investments in the broadband infrastructure in NI are already increasing competitiveness for internet-based IT investments. Other infrastructural projects highlighted in this study include expanding electricity grid connections to support the export of renewable energy and green energy initiatives to attract data centre type investments. 16