Policy Innovation Blog

What Lord Heseltine needs to know about foreign investment and innovation

Stian Westlake - 29.10.2012

News out today suggests that Lord Heseltine's review of industrial strategy will call for foreign takeovers of British businesses to be subject to a "public interest" test.

We welcome this measure. In fact, Nesta called for it in Plan I, the extensive review of innovation policy we published in September. A short-termist attitude to investment and ownership is not conducive to innovation and productivity growth. Just ask the Germans, whose financial system includes institutions like KfW, a development bank set up to encourage long-term investment by businesses. It's worth remembering that a public interest test existed in UK law until a decade ago, so this is hardly an untested proposition..

But we should be cautious in using regulation to try to improve the value the UK gets from foreign investment.

Firstly, we must avoid being overly hostile to foreign investment. The hysteria around foreign takeovers and FDI more generally that we see in France is misguided. In fact, foreign investment has a major role to play in increasing UK businesses' productivity. Nesta recently published Foreign Direct Innovation, a research report into the effects of foreign investment in UK businesses on both employment and innovation, working with Aston University and PACEC.

It found that foreign owned firms were twice as likely to innovate as similar UK-owned ones. (Innovation was defined as introducing new products, services or processes.) What's more, this urge to innovative wasn't limited to the businesses themselves. The UK-owned suppliers of foreign-owned companies were also twice as likely to innovate as suppliers of UK-owned businesses. They reported that the supplier development programmes of the foreign-owned businesses played a role in this. Any new regulatory regime must avoid assuming that foreign acquisitions of UK-businesses are automatically bad.

Secondly, the government needs to ask if it is doing all it can to make the most of foreign investment. If good foreign-owned companies encourage innovation in their supply chain, is there anything government can do to encourage this to happen? The experience of Singapore, Ireland and Malaysia suggest that there is. All three countries invest resources in linking up potential foreign acquirers or investors with UK-based suppliers to make the most of the economic benefits of investment. We're seeing something similar emerging in London, where the promoters of Tech City have worked hard to link foreign investors to UK start-ups.

But on the whole, linking investors and suppliers has become harder in the UK. The Regional Development Agencies, which used to take responsibility for this, have been abolished. UK Trade and Investment, the national investment promotion organisation, isn't resourced to do it. And the new Local Economic Partnerships are still finding their way.

Lord Heseltine's proposal is a good one. The UK needs to think more seriously about the value of foreign investment. But we mustn't be too negative about the role of overseas owners, nor should we neglect the importance of fostering the right relationships between  foreign-owned businesses and UK suppliers.