How Asian direct investors breathed new life into the UK economy. Asian investment has flooded into UK plc since the mid-1980s and turned round a once-moribund manufacturing sector with an infusion of money, jobs and skills. But will it continue?
Back in the mid-1970s, the then secretary of state for industry, Tony Benn, fretted daily over the threat of foreign competition to the UK manufacturing base. Benn recorded these anxieties in his diary: 'Sir Monty Finniston, chairman of the British Steel Corporation,' he moaned, 'believes that if we go into the Common Market ... the Germans will knock hell out of us! But if we stay out, the Japs will knock hell out of us!' In one sense, Finniston proved far too optimistic. We entered the then common market, but the spread of Japanese direct investment around the globe in the 1980s and 1990s ensured that no market could consider itself safe from Japanese competition.
In another sense, however, Finniston was far too gloomy. Today, investment from Japan and elsewhere in Asia is not so much welcomed into the UK as frantically sought. After all, if you can't hide from the competition, you may as well let it set up in your back yard rather than anyone else's.
At least that way you can enjoy the jobs and money that foreign investment provides. And, if you play the game well, you can garner the best skills and practices that others have to offer - and then turn them to your own advantage.
The signs are that the UK has been playing this particular game very well indeed. Attracting Asian investment to the UK is something that we have been rather good at since the mid-1980s.
Around 40% of Japanese investment in the EU still goes to the UK, including a healthy proportion of investment in manufacturing. Investments are spread across a number of manufacturing sectors, including automotive, medical, IT and software and electronics.
The reasons why Asian companies choose to invest in the UK are already well known. In the early 1980s, depressed parts of the UK began to welcome any investors looking for low-cost labour, available following major job losses in manufacturing and the public-sector coal and steel industries.
In the 1970s, the UK had enjoyed only occasional large investments like that of Sony in Wales, but when Japan removed capital export restraints in the mid-1980s, the trickle of Japanese investment turned into something of a tidal wave. And in the 1990s investors from South Korea and Taiwan began to follow suit.
Regular investment announcements keep on coming. According to figures from the Invest in Britain Bureau (IBB), the 1996/7 fiscal year saw no fewer than 43 projects by Japanese companies in this country, along with eight from Taiwan and six from Korea. These 57 projects between them were worth £3.6 billion, and created over 15,000 new jobs while safeguarding a further 3,500 existing jobs. Then there are the spin-off effects. These recent investments are expected to create and/or preserve more than 18,500 jobs through knock-on effects in supplier networks and local communities. The big new investors in recent years have been the Koreans with Samsung and LG in particular announcing huge projects. The economic crisis in Asia has threatened some new investments although not, as has been suggested elsewhere in the media, many existing ones.
There are also clear signs that most of the Asian investment is the sort of hi-tech, sunrise variety that regional development agencies dream about.
For example, last year Sony announced a £50 million investment in widescreen cathode ray tube production at its two Welsh plants in Bridgend and Pencoed.
In so doing they created 1,000 jobs. The UK's growing expertise in the manufacture of both cathode ray tubes and semi-conductors led to two of the largest single investments of last year, with LG Semi-conductors and LG Electronics both locating in Newport.
There are also encouraging signs that the momentum created by a critical mass of investments seems to be leading to an increase in the quality of existing projects over time, and hence an improvement in the skills levels of those working on the projects.
A good example is Nissan. Originally set up 13 years ago in this country, Nissan's plant in Sunderland was initially dismissed as an assembly plant, with com-ponent supplies coming from Japan with precious little or no value at all being added either by the workforce or by local suppliers. However, Nissan rapidly began putting down roots.
It started to source indigenous supplies by developing previously untried partnerships with local firms.
The traditional relationship between the customer and supplier in the UK until that point had been that the former simply screwed the latter on price, with the only other contact taking the form of complaints about quality and/or changes in the specification. But Nissan worked in partnership with its suppliers by sending in its own teams, and in doing so raised their productivity and product quality. As a result, these indigenous suppliers, companies such as GKN and LucasVarity (see box), have now themselves become world leaders in automotive components.
A foreign company that locates its research facilities in the UK commits itself to a genuine transfer of expertise and skills and the record here is also encouraging. The UK attracts the greatest proportion of Japanese research and development facilities in Europe with 141 R&D investments. Foreign investment of this kind is particularly valuable because it concentrates clusters of experts in particular areas and this develops its own momentum in terms of attracting further R&D investment. There are now over 50 'science parks' in the UK, which attract businesses by allowing them close links to the R&D potential of those who work at British universities.
Recent examples of R&D investments include Kobe of Japan, which is investing heavily in R&D at several British uni-versities and Mitsubishi Electric, which is investing in multi-media research (including digital broadcasting) at Surrey University. Mitsubishi's digital broadcasting faci-lities are located where they are because of this momentum effect - the decision owed much to expertise already available at Surrey University through previous projects. Cambridge Science Park also has strong links with hi-tech Japanese companies such as the Toshiba Research Centre - the first Toshiba R&D facility to locate outside Japan.
The IBB feels that the debate has long since moved beyond the need to provide employment to depressed areas. One insider at the IBB puts it this way: 'Quality projects are now the order of the day, although 20 years ago jobs were clearly the sole criteria. The government was desperate to get any company to set up in an area of industrial decline.' However, wage costs now, while low in the UK relative to the rest of the EU, are high relative to Eastern Europe, for example. But for many of the Asian companies now seeking to invest for the first time the priorities have shifted from a cost basis to a skills basis. Says a top IBB official: 'What is increasingly important for them is that we have hasabhassorbed the skills that earlier foreign direct investment brought us.' The new Labour Government, he points out, has reinforced this trend by putting an extra emphasis on the requirement that those investing in the UK are committed to further training and development of those who work here.
One question taxing Asian (and other foreign) investors in Britain is, of course, Britain's current non-participation in the single currency - and the effect that that may have on access to the single market. Michael Hodges, senior lecturer in international relations at the London School of Economics, believes that market access considerations will be critical for future investment: 'One measure of how important all this is to the other countries is that the normally reticent leaders of some Japanese companies have been remarkably frank about the consequences of Britain not taking part in the longer term' - a reference to comments in early 1997 by Hiroshi Okuda, the president of Toyota. He said that Toyota would prefer to put new investment into continental Europe if Britain stayed out of the single currency. But the IBB thinks that Hodges' fears are overplayed. 'It's true that some Japanese companies have been outspoken, but there was a lot of hype and damaging misreporting with regard to what the president of Toyota actually said,' says a senior official. 'For the majority of companies it is much more the impact of the strength of the pound on access to the single market. That is the more immediate concern.'
While the IBB is adamant that there is no real evidence of companies being put off from investment decisions by market access questions, Hodges, meanwhile, is less sure. 'There is bound to be some relocation of investment to mainland Europe,' he points out. 'After all, we still account for a disproportionate amount of foreign direct investment in the EU and there is bound to be an element of political "reinsurance" going on.' It is well known, Hodges suggests, that the Japanese government has been encouraging diversification away from the UK, 'not because the UK is an undesirable, but simply because it helps to have more friends around the table at meetings of EU leaders.' Figures from the United Nation Conference on Trade and Development (UNCTAD) support this view. The UK share of new investment by Japanese companies has fallen from 44% in the late 1980s to 39% in the first half of the 1990s, although Britain still has by far the highest amount of existing Japanese investment. Elsewhere, the UK holds the lead in investment from Hong Kong and Taiwan, although Malaysian investment is mainly concentrated in France, while any investment from China is more likely to be found in France and Germany.
What of the impact of the Asian crisis on foreign direct investment?
Hodges thinks that the current turmoil is likely to prove 'a blip' and will not seriously affect foreign direct investment in this country. 'It's much better to have Asian foreign direct investment than hot money. The latter comes and goes, but the former is essentially captive. And anyway, this situation is not the crony capitalism of America in the 19th century.
This crisis doesn't make Asian companies any less good at manufacturing.
An IBB insider agrees: 'The next six months will be critical, but at the moment most companies in the affected areas are saying that in a period where some companies are experiencing a serious domestic downturn, stable revenue growth from overseas operations is very reassuring.' Even so, there have been some delays in new investment decisions by some Asian overseas companies because of the crisis. In Teeside, Samsung, the Korean electronics company, shelved its plans for an extra £450 million investment in Britain - the company had been planning to double the workforce to 3,000 and produce faxes and PCs as well as the existing microwaves, colour TVs, and monitors.
Similarly, Hyundai has put two semi-conductor plants in Scotland worth a combined £3 billion on hold.
There seems to be little suggestion at present however that existing investments are at risk. And it is important, says the IBB, that distinctions are made between the extent of the crisis in different countries: 'In terms of our dealings, we have had no downturn at all on possible projects with the Japanese.'
Last year, for example, was also a good year for additional investment activities by existing investors, particularly in the automotive industry.
All three Japanese manufacturers stepped up production in the UK with Nissan announcing an extra £70 million of investment. And the IBB and Regional Development Authorities have been working very hard at coaxing existing Japanese investors into developing the next generation of hi-tech products, such as liquid crystal and plasma display panels (which could represent the end of the television screen as we currently know it) in Britain, rather than on a greenfield site in, say, the Czech Republic.
Says the IBB: 'We're also working very hard to show the Koreans that we're not just fair-weather friends, even though we're not expecting any major investment decisions from them in the next year or two.' Elsewhere, the IBB has great hopes for investment from Taiwan in the short term and mainland China in the longer term (see box).
Perhaps the most compelling piece of evidence that Asian companies will not disappear overnight is the fact that some 60% of all foreign direct investment in this country represents an expansion of existing investment already located over here. The more you invest, the more commitment you show to the country you are investing in and those who work for you. With the big players broadly happy, the role of foreign direct investment as a catalyst for an improving skills base for the UK economy seems more or less assured.
WHERE THE JOBS COME FROM
Country Number of projects New jobs
Hong Kong 16 3,000
Japan 410 99,300
Korea 43 18,900
Taiwan 17 6,000
Rest of region 20 3,300
Source: Invest in Britain Bureau.