WHY should foreigners invest in our country’s future if we’re not prepared to do so ourselves? FDI (foreign direct investment) is seen as a cheap way to boost jobs and wealth. There are short-term benefits but is it beneficial in the longer-term? And whose wealth is it exactly?

Few FDIs create long-term sustainable enterprises in Scotland. That has to change, otherwise it’s just another form of wealth extraction, of public handouts to foreign firms with money to invest.

Pursuit of FDI is also distracting Scotland from a coherent vision and industrial strategy. The scale of the problem is indicated by the gap between aspiration and reality in jobs created by the wind energy boom and by the fact that while Scotland’s GDP in 2021 was

£181 billion, GNI (Gross National Income) was £10bn less. In most countries there is little difference between the two measures.

Does FDI create wealth, or just extract it? Does FDI support or conflict with the Scottish Government’s welcome strategic commitment to community wealth building?

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Part of the solution is co-investment; part is the sort of profit-sharing deal Shetland and Orkney got with the oil industry; and part should be job guarantees and community dividends funded by the developers.

Otherwise, local communities have little incentive to welcome industrial-scale development, and much to oppose them.

Some years ago, Professor Alf Baird proposed building a container handling port at Cockenzie in East Lothian. It has good land transport links and sea access and is well placed for trade with Europe – and, in the future, also with Asia through the soon-to-be ice-free Arctic Ocean north of Russia. The proposal was stalled by environmental objections to the long piers required to get to deep water. This sounds like typical Nimby-ism, doesn’t it?

But why should locals welcome developments that wreck their environment and locality if there’s nothing in it for them?

There are fewer jobs in any facility nowadays and most of them are for non-local specialists and for locals on minimum-wage zero-hours contracts. The build is generally done by large contractors with an itinerant subcontract workforce and the profits go overseas or to folk who are already rich.

So really, what’s in it for the locals? Their best weapon is environmental concerns. It’s a genuine issue of democratic legitimacy for commercial development that is “done to” rather than “done by” a locality.

In the 1970s, Ian Clark of Shetland Islands Council got a good deal for Shetland from the oil companies.

The British National Oil Company was formed in 1975 as the British National Oil Corporation (BNOC), a nationalised body based in Glasgow.

It was a tremendous opportunity for Scotland but Thatcher allowed BP to buy it, shut its Glasgow HQ and moved the oil talent to London. The UK Government failed to sustain a Scottish-based energy company, unlike Norway with Statoil/Equinor.

On the other side of the globe Papua New Guinea is negotiating a new style of “profit sharing” with mining giant Barrick Gold for a new mine. Other countries are looking at this with great interest to understand how to structure similar deals. The old model was essentially FDI with royalty payments, giving only modest benefit to the local country. The new model involves profit share, much greater royalties and infrastructure investments.

FDI is something we have to do, in competition with many other countries seeking inward investment. However, its flaws are many and it is totally insufficient to create an innovative vibrant business base.

Typically, FDI becomes a scatter-gun approach based on general financial incentives and labour resource. Unless we have a mission-driven “entrepreneurial state” it can be very unfocused, especially if not matched with local investment.

FDI can be unsustainable in the long run. Foreign investors can withdraw profits and close or move assets when global conditions change. It rarely brings in innovation skill, tending rather to attract operational employment (the Silicon Glen myth). Historically the local country relies on employee payroll taxes alone, not a full profit share of the ventures, to repay the government incentives – companies can easily avoid corporate taxes, commitments to job creation and follow-on investment. FDI is a lazy substitute for risk investment by the host country itself – a dependency culture, not an innovation culture.

It is not a panacea. FDI means profit extraction unless we co-invest and leaves shattered communities unless there is both a community dividend and a real commitment to long-term high-quality jobs.

This is an updated version of an article first published in Byline Times Scotland in April 2023: bylines.scot/news/scotland/foreign-direct-investment-benefit-or-curse/