Growing the Scottish Economy

The latest State of the Economy (June 2015) report from the Scottish Government records that, in 2014, net trade acted as a drag on the growth of the economy ‘with a small positive contribution from exports outweighed by faster growth in imports’. In particular, the index of manufactured exports, a subset of total international exports, contracted in the last quarter of 2014. This is worrying. The Scottish government sees the need to rebalance the economy after the financial crisis of 2008, and in its latest strategy paper (Scotland’s Economic Strategy, March 2015.) acknowledges that improving our export performance is essential, with manufacturing exports in particular being the key to success.

Further, the changes proposed by the Smith Commission to government funding of public services in Scotland mean that not only does Scotland need a healthy tax base to provide funding for public services, but also that Scotland also needs an even more vibrant economy. The flaws in the Smith Commission as the proposals currently stand mean that the funding of the Scottish Government is likely to be progressively squeezed unless Scotland can grow its economy at least as fast as the rest of the UK (see our paper, Smith Commission: why the economic and fiscal arrangements need to be changed, Jimmy Reid Foundation, May 2015). It is, therefore, really important that we make the best use of available resources and improve our economic performance.

Like most of the powers required to grow the economy (such as monetary policy, most of fiscal policy, international relations, employment policy, and competition policy), international trade and development is reserved to Westminster and is not devolved. It is handled by UK Trade and Investment (UKTI), a government department that reports to the Secretaries of State for Business, Innovation and Skills (BIS) and the Foreign & Commonwealth Office (FCO). However, successive Scottish administrations have found it important to provide support to business in this area and do so through Scottish Development International (SDI), part of Scottish Enterprise, but representing all parts of Scotland.

The main tasks of supporting international trade and development are to improve Scotland’s export performance, and to increase the number and value of strategic investment projects. How has Scottish Enterprise performed these tasks to date? What better place to start than what Scottish Enterprise has to say about its performance? Its Annual Report 2013-2014 states the following: Scottish Enterprise is ‘on target to meet all of our targets in relation to Scotland’s International Trade and Investment Strategy (2011-15). Despite a challenging competitive environment, we continue to attract significant results in terms of Foreign Direct Investment, most notably in Financial and Business Services. The push to support the success in increasing exports continues in the Oil and Gas, Food and Drink sectors’.

To back up this statement, Scottish Enterprise gives information on specific targets, and its success in achieving them. It reports the following with our comments being in italics:

• Scottish Enterprise planned to achieve a £1.2bn to £1.7bn increase in international sales over the period 2011-2015 from businesses it supported. The actual cumulative up to the end of 2013/14 was £290m – leaving between £910m and £1.4bn to be achieved in the final year of the plan.

• A second milestone was that in 2013-2014, Scottish Enterprise set a target of 220 to 330 companies projecting significant turnover growth from exporting: it recorded 320 companies projecting significant turnover growth. But there is no indication of actual growth as opposed to planned growth in exporting.

• Third, Scottish Enterprise expected 150 to 210 of these companies to be projecting turnover growth from exporting of over £1m: in the event Scottish Enterprise recorded 228 companies projecting such an increase in turnover. Again, there is no information in actual growth as opposed to planned growth in exporting.

• The milestone referring to jobs was that, over 2011-2015, there would be 25,000 to 35,000 planned jobs through the attraction of foreign investment – of which between 8,000 and 12,000 would be planned high value jobs: Scottish Enterprise recorded a cumulative total number of jobs to end 2013-2014 of 21,975, of which 6,460 were high value. No information was given on the breakdown of jobs into new jobs and safeguarded jobs.

• Scottish Enterprise set itself the target of assisting 8,000 to 10,000 companies to develop their capacity for exporting over the period 2011-2015: by the end of 2013-2014, 6,455 companies had been assisted. No information is given on any evaluation of the results of the assistance given.

• Scottish Development International, SDI, the arm of Scottish Enterprise responsible for attracting foreign direct investment and supporting international trade also produces an annual report. For 2013-2014, it records that there were 78 inward investment projects into Scotland with a planned investment of £423m in these projects. Of the 7,446 jobs expected from these projects, only 65% of them were new jobs. Again, no information is given on money spent, labour costs, or actual rather than planned investment.

No information was given on the amount of cash and labour resources that Scottish Enterprise used in its trade and investment role. However, in its business plan for the next three years 2015-2018, Scottish Enterprise does give an estimated spend of £40.7m for internationalisation in 2015-2016. (There is no information given as to how much of this is on trade development and what is on inward investment). When asked by us for similar information on actual spend for previous years, Scottish Enterprise was not able to provide the figures, explaining that the way they previously categorised their accounts was different: ‘… activities were described around the broader themes of Supporting Globally-Competitive Businesses, Supporting Globally Competitive Sectors and Globally-Competitive Business Environment’.

It is surprising that Scottish Enterprise does not have published data on the total amount they spent on this internationalisation field given that SDI has been in existence for many years.

But it is not just to the public that information is not readily available. On 18 March 2015, the Economy, Energy and Tourism Committee of the Scottish Parliament took evidence on trade from senior representatives of Scottish Enterprise, Scottish Development International and UK Trade and Investment [6]. To the question: ‘On the budget split, do you have any sense of how much of your budget goes on inward investment as opposed to export potential?’, the answer from SDI was: ‘I do not have that exact information with me. We can provide it to the committee later. … In the current financial year, the estimate of what we are spending on our trade effort, excluding the cost of our staff resources, is about £11m. We will confirm the precise numbers to you in due course’. To the question: ‘That £11 million is out of a total budget of how much?’, the reply to the Committee was: ‘I am sorry—I do not have that figure in my head’.

So how would you, if you were one of the Board of Scottish Enterprise, use the above information to judge the performance of Scottish Enterprise in meeting this important priority? You couldn’t is the simple yet straightforward answer. You have no information on the amount of money and resources spent, nor on the actual outcomes. You have no information on whether the types of inward investment supported are beneficial to the economy. (They could, for example, be being subsidised and at the same time be displacing existing businesses, or they could be companies manufacturing products regarded as undesirable such as chewing tobacco). You have no information whatsoever to guide you on whether these inward investment projects will increase productivity in Scotland, or have positive spill over effects on productivity in other companies. And, there is no way of assessing whether individual projects are ‘good’ inward investments, in terms of the benefits sticking to Scotland, or ‘bad’ in terms of loss of intellectual property and profits leaving Scotland.

But alas that is not all, because, as we have seen, there is another key player in the field, UKTI, which actually has responsibility throughout the UK for promoting international trade development. UKTI reports that it spent £13.87m in 2013-2014 on Scotland’s behalf – precisely on promoting trade and inward investment, with a further £2.9m spent on trade development by the Department of Business, Innovation and Skills (Country Regional Analysis of Public Expenditure, 2014). Of the 1,733 inward investment projects in the UK, UKTI records 122 of them as having taken place in Scotland (UK Trade and Investment Annual Report, 2013-2014). Meantime, Scottish Enterprise records 78.

So if you were a Scottish Enterprise Board member, looking at the statistics given in the annual reports, how would you take into account the monies which UKTI say they too spent on Scotland’s behalf? From the total sum, is Scotland getting value for money? Is there an overlap or duplication in services? And can the two organisations, Scottish Enterprise and UKTI really be collaborating that well together when:

• The UKTI annual report makes no further reference to Scotland bar showcasing two companies.
• The Scottish Enterprise annual reports make no reference to the work of UKTI
• Until April 2015, on its website, Events in Scotland, UKTI had as its only entry the Commonwealth Games in Glasgow which had been held in 2014. The site now records ‘Oops. We appear to have no events for Scotland’.

Given the above, it is very difficult to have confidence either that UKTI has been taking a pro-active interest in its Scottish responsibilities, or that its activities are being well co-ordinated with those of Scottish Enterprise. And in the light of the paucity of the monitoring data, how on earth have the Board of Scottish Enterprise been able to evaluate the overall effect of Scottish Enterprise’s performance in trade development for the past umpteen years?

And, there are more issues, as identified by the Wilson Review of Support for Scottish Exporting (Scotland Office, May 2014). For example, the Review notes that:

• Very few small and medium sized businesses in Scotland were aware of how UK Export Finance could be of use to them, despite two specialists from UK Export Finance (UKEF) working out of SDI.

• Scotland has a narrow exporting base, and, as a result, the performance of a few big exporting firms, and industrial complexes like Grangemouth, has a disproportionate effect on the health of Scottish exporting. Small firms contribute little to Scottish exports.
• Despite large changes in world trade patterns, there has been little movement in the list of top twenty destinations for Scottish international exports since 2008.

So what can be done? According to the senior Scottish Enterprise Director at the Scottish Parliament Committee meeting, a joint working group has been put in place, following the Wilson Review that involves all the parties, including the Scotland Office, the Scottish Government, UKTI, SDI and the Foreign and Commonwealth Office. However, none of the three representatives at the meeting knew who chaired it – and the view was that there was no chair. As one of the Committee members said in reply: ‘My concern is that we have a group of people who are having a dialogue, but the group seems to be rudderless at the moment, because we have not identified who is leading it, even though it has already had a meeting’.

Well, if the Scottish government and the new MPs representing Scottish constituencies seriously intend to get us out of austerity and on a sustainable growth path, they need to get a grip with issues like trade, and the agencies supporting them. Some of the questions they should be asking are: how is trade assisted: what statistics are collected: and how are efforts evaluated: how are the different agencies spending their money and trying to achieve value for money: how well are they really working together: and is the UK strategy being followed by UKTI appropriate for Scottish exporters and the foreign markets their products might do well in?

It is not enough for the frontline of Scottish Enterprise staff to be working hard. They, and we, have to know that the priorities are well formulated by the Board; that proper statistics are collected; that the targets set are fairly hard and include those for final outcomes; that a strong Board is not only agreeing priorities but is making sure that they are properly evaluated, and met with as best as possible; that there is a detailed examination of how well Scottish Enterprise is working with UKTI and the Department for Business and Skills to ensure that Scotland’s needs are met within the priorities of these organisations; and that furthermore, we obtain value for money from the money they attribute to spending on our behalf.

Margaret and Jim Cuthbert are renowned independent economists. Their website can be found at