How the presence of FDI impacts upon productivity within UK owned plants in the North East of England’s manufacturing sector

Abstract

The North East voted overwhelmingly to leave the EU in the Brexit Referendum of 2016, despite it being one of the regions of the UK which benefited most from EU funding, and being one of the few regions which had a positive balance of payments with the EU. This thesis looks at how foreign ownership, with a focus on EU ownership, impacts upon productivity in the manufacturing sector in the North East of England.

The North East is a region known for its manufacturing heritage, but as the UK economy has shifted away from manufacturing, moving towards a service base, the region has seen a decline in prosperity and employment. It has become one of the poorest regions in England and to compensate for this, successive Governments have introduced incentives to attract more productive foreign direct investment (FDI) plants to boost regional prosperity. Chapter One compares UK-owned, with foreign-owned plants in terms of productivity in the North East manufacturing sector. It shows that, overall, the impact of foreign ownership is positive but statistically insignificant, suggesting that there is no difference between UK and foreign ownership regarding productivity. However, when ownership type is separated into three groups (EU, US and Rest of the World (ROW), owned), some ownership groups did have a significant impact on productivity. Both US and ROW ownership had a positive and significant impact on productivity, when compared with UK ownership, while EU ownership had a positive but insignificant impact on productivity when compared with UK-owned plants.

Some studies within the literature, such as cross-country studies by Meniago and Lartey (2021), Herzer (2012), and Herzer and Donaubauer (2018), and micro-data studies by Benfratello and Sembenelli (2006), Salis (2008), and Stiebale and Reize (2011), indicate that the average effect of foreign ownership is small but there are heterogeneous effects depending on the nationality of the owner. Informed by these findings, further investigation was undertaken, drilling down into more specific ownership groupings within the clusters, and refining the insignificant impact of broad foreign ownership, into a more detailed and specific understanding of the impact of ownership type in the North East.

Harris and Robinson (2002) found this when comparing the impact of foreign ownership across sectors in the UK manufacturing sector. Görg and Hijzen (2004) found evidence of intra-industry spillovers due to the presence of foreign-owned plants. These spillovers were dependent upon the characteristics of both domestic and foreign-owned plants. While the analysis used in Chapter One shows the ownership effect on productivity, it does not show how the presence of foreign-owned firms in the North East impacts upon productivity in UK-owned plants. This can be done by examining and comparing productivity in industry groupings. Using industry groupings alone however fails to capture the full picture of plant interlinkage, as such an approach assumes that plants interact only with other plants within the same industry. A solution to this is to use clusters based upon industry linkages, to give a more realistic representation of interlinkage within the supply chain. There is currently no set cluster configuration for the UK manufacturing sector. Therefore, the clustering algorithm developed by Delgado et al (2016) is adapted by this work for the UK manufacturing sector, creating a configuration of 46 clusters.
Using these clusters, the spatial concentration of foreign-owned plants in relation to UK-owned plants is calculated using the Scholl and Brenner (2016) spatial concentration index. This distance-based index overcomes the Modifiable Areal Unit Problem (MAUP) which is common in many spatial concentration indices. The Scholl and Brenner index makes it possible to estimate the way in which an increase in the presence of foreign-owned plants within a cluster impacts upon productivity within the UK-owned plants in the same cluster.

Overall, the results indicates that the increased presence of foreign ownership within the cluster impacts positively on productivity in UK-owned plants, although this impact is statistically insignificant.

Separating ownership into further groupings, it was found that the presence of US- and EU-owned plants has a positive but insignificant impact on productivity, while an increase in ROW-owned plants has a negative, but insignificant impact on productivity in UK-owned plants. As a comparison group, the impact of the presence of UK-owned plants was also estimated. An increase in the presence of UK-owned plants within a cluster had a negative and significant impact on productivity in other UK-owned plants in the same cluster. In the literature, different ownership groups are shown to have different influences across sectors. Positive spillovers have also been found to be related to the characteristics of the host country or region. Research by Goldar and Banga (2020) on FDI origin and Indian manufacturing firms found a positive effect from FDI on Total Factor Productivity (TFP) as well as positive FDI productivity spillovers to domestic firms, with the impact being greater when it originated from developed countries, such as the US and Europe.

Assuming EU-owned plants would, over time, cease to invest in the region and leave as a result of the UK’s decision to leave the EU, it could be argued that North East productivity may not be as impacted by Brexit as previously thought. However, this would not take into account the loss of jobs and income that the North East would experience. Focusing solely on EU-owned plants when examining the impact of Brexit fails to consider the motivation of non-EU owned plants investing in the region. These plants may have specifically set up in the North East to access the EU Single Market, or benefit from Freedom of Movement. With an increase in trade barriers resulting from Brexit due to lack of access to the EU Single Market, potential skilled labour shortages through removal of Freedom Of Movement, and removal of access to development funds administered by the EU, many such non-EU owned plants may choose to reduce their presence or leave the region, having a negative impact upon the North East regional economy.