The Scottish economy lost £9.2 billion from financial outflows in 2017, think-tank finds

Ben Wray

Fraser of Allander and Common Weal raise questions about the benefits of foreign direct investment, which the Scottish Government has said is a “key priority”

THE Fraser of Allander Institute has found that £9.2 billion of economic value created in Scotland, equivalent to 5.5 per cent of Scottish GDP, left the country in 2017, leading to questions being asked about whether Scotland really benefits from extensive foreign ownership of its economy.

The think-tank’s analysis is based on new Scottish Government data of Scottish Gross National Income (GNI), which is a measure of all income earned by a country’s businesses and residents. 

It differs from GDP (Gross Domestic Product) in that the latter measures all economic value created within a country regardless of where the income derived from the value ultimately ends up. A comparison between GDP and GNI can therefore show whether a country is losing or gaining more than the economic value it produces.

The data shows that Scotland has consistently had a smaller GNI than GDP since 1998, when the data set begins.

“The fact that GNI is lower than GDP suggests that the amount of national income being retained for the benefit of the people of Scotland is lower than the value of what is being actually produced here,” FAI found.

That outflow peaked at 13 per cent of GDP in 2007, before reducing to 5.5 per cent a decade later. The reduction, according to FAI, can be explained by the reducing importance of North Sea oil to the Scottish economy, an industry sector which registers large financial outflows from Scotland to the rest of the world due to its ownership largely by major foreign multinationals. 

“There is less of a discrepancy between GNI and GDP in the UK than in Scotland. This is due in part to the fact that the financial outflows associated with North Sea operators have a proportionately smaller impact on UK GNI than they do for Scotland,” FAI explained.

Other key factors in the £9.2 billion outflow are the unusually large size of Scotland’s financial sector and the size of foreign owned businesses in the economy as a whole. One-third of businesses in Scotland are owned overseas, the highest rate of foreign ownership of any region in the UK. 

“The figures highlight long-standing debates around the balance of Scotland’s economy and the ownership of the profits made here,” FAI stated, adding: “The predominance of company headquarters outside of Scotland – not helped by the loss of many Scottish truly domiciled firms in recent decades – has meant that a higher level of profits arguably flow out of Scotland than would otherwise be the case. 

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“Indeed, many of Scotland’s largest firms – not just oil and gas and financial services but petrochemicals, professional services and whisky – are owned outside of Scotland. So although the products or services may be made here, the income doesn’t always stay in Scotland.

“In general, foreign investment into Scotland is often seen as a good thing – and it helps companies to grow and create jobs. It’s also something that successive Scottish administrations have actively encouraged – see, for example, the hype that often accompanies the EY (Ernst and Young) Report on FDI every year. However, this will also have the consequence that some of these increased earnings will flow out of Scotland as investors earn returns on their investments and therefore widen the gap between GDP and GNI.

“With the rise of digital technology and major multi-national firms such as Google, Amazon and others this issue is only likely to become even more important in the future – particularly where tax revenues are involved.”

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High foreign ownership of the economy has also been linked to low rates of business R&D investmentfixed capital formation, and productivity.

In February last year, Finance Minister Derek Mackay wrote in The Herald about foreign direct investment into Scotland being a “key priority” of the Scottish Government’s economic strategy, as part of a pitch to international investors in London to put money into Scottish commercial property and other Scottish businesses and assets.

Commenting on the analysis, Craig Dalzell, head of policy & research at the Common Weal think-tank, said the Scottish Government should look at policies which promote “local ownership”.

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Dalzell said: “The phrase ‘inward investment’ has long been celebrated by Scottish politicians but these figures show that ‘inward investment’ (often in the form of foreign buyouts of Scottish companies) must inevitably come with ‘outward profit extraction’ as money is shipped back to the company HQs.

“Scotland needs to stop celebrating isolated figures such as mere GDP growth as a sign of economic ‘success’ and instead look at how much of that growth is being retained within Scotland. 

“The Scottish Government should support an economic strategy based on promoting local ownership, local investment (via the Scottish National Investment Bank and other investment vehicles), local production and Scottish ‘outward investment’ so as to close the gap between GNI and GDP and perhaps even to invert it.”

Picture courtesy of Xabier Cid