Posted on Tuesday 21 August 2012 by Ulster Business
While FDI is important, not every multinational is a budding Microsoft.
The list of Northern Ireland’s top 50 employers this year illustrates the recurrent theme in recent years of the importance to employment of SMEs, banks, retailers and educational institutions.
Worryingly, exporters, be they service-based or manufacturers do not entirely dominate the employer league tables. The strong performance by supermarkets, their food processing suppliers and other high street retailers is typical of many less developed regions of the UK.
Of course, while there are some high tech employers in the list, we would really need to drill down closer to the numbers on occupation and wages to see what employees are doing within such organisations. For example, Queen’s University Belfast employs cleaners and security staff as well as academics. While all these roles are vital they do not equally contribute to the creation of a knowledge economy.
Likewise, not every sector responds equally to the business cycle. Recruitment consultants suffer more than supermarkets in downturns and not every employer will be able to anticipate and respond to shifts in the global economy.
The recent report for DEL undertaken by Oxford Economics forecasts that for Northern Ireland between 2011 and 2030 demand for labour in business services will rise while manufacturing employment will shrink. The report highlights the skill deficiencies faced by the economy and that corporation tax reduction alone cannot transform the picture.
It notes the failure of skills policy to create a high wage and productivity economy: this finding is correct, but not original. It is two decades since academic economists, such as Esmond Birnie and David Hitchens, first highlighted the relationship between low skills, productivity and wages in the Northern Irish economy. One of the most serious problems is that it has taken so long moving from a correct diagnosis to a plausible prescription.
Once an institutional or organisational economic lens is applied to the corporation tax issue we can all see that talk of golden tickets is a red herring. The empirical evidence demonstrates repeatedly that the design of organisations and institutions helps determine how well businesses and economies perform. The application of such a lens also indicates that the ability of a location to make use of organisational or technological innovations from outside its economy – a phenomenon that academics dub “absorptive capacity” – varies from region to region and from city to city. The determinants of capacity include the willingness and ability of workers to migrate, the relationship between branch businesses and indigenous employers and the ability of local firms to introduce innovations.
The relevance of the insight of absorptive capacity to the employers list, in conjunction with other evidence, such as the DEL report, is that the economic potential of Northern Ireland appears mixed. On the bright side, the appearance of universities and value added engineers and service employers indicate potential to improve capacity. A more pessimistic interpretation would note that we remain far away from being a knowledge economy.
The overall effect of corporation tax variation will depend ultimately on how its final design promotes absorptive capacity rather than raising compliance costs to business. It is institutional design that will determine if accountants, consultants and lawyers rather than the unemployed and businesses benefit from a reduced regional corporation tax rate. It is a pity that many commentators seem unwilling to confront this obvious insight.
Some have assumed all the Northern Ireland economy needs is a large dose of multinational firms to transform the economy. However, not every multinational is a budding Google or Microsoft. One needs to be very careful in analysing the implications of inward investment of specific firms for a regional economy. The assumption that inward investment in itself promotes skills is extremely debatable.
Economics is all about trade-offs after all, and academic economists have demonstrated that the impact a branch business has on a regional economy is more related to the range of activities it undertakes than the numbers.
One such cautionary tale can be found in a recent Centre for Cities report. Airbus has two UK plants – one in Broughton in North Wales employing 5,600 and one in Bristol that employs 1,000 fewer. The Broughton plant is primarily an assembly operation. Little in the way of innovation occurs there. The Bristol plant, despite employing a smaller workforce, involves a much higher level of skills. Functions such as design, procurement and finance are directly required and the indirect “spillover” benefits on local supply chains are stimulated. While the Broughton plant offers much needed employment gains, its wider productivity benefits are more modest than the Bristol plant.
An important implication of the evidence on inward investment is that policymakers may have to make difficult decision in shaping economic strategy. If a trade-off exists in the promotion of branch plants then the tension between rebuilding and rebalancing becomes more obvious. It is the existence of such trade-offs that implies policymakers need to be much more rigorous in their assessment of the opportunity costs and much more transparent in their analysis. Serious and open intellectual debate needs to be part of any process that will lead to an export-led economic renaissance.