INVITING INVESTMENT IN A DYNAMIC MODERN ECONOMY OR SELLING THE FAMILY SILVER?

The Light and Dark Sides of Foreign Investment.

Here are two true stories - in one case the company name has been omitted.

The management of a large and successful British company, which had recently been acquired by a French group, were wondering about the implications of the takeover, especially as it was rumoured that the French parent was in some financial trouble as a result of several large acquisitions. Their ruminations were cut short by a summons to a teleconference meeting with the CEO of the French group. After a short round of introductions, the CEO said, "The reason for gathering you together is to tell you that you must reduce your total costs for next year by 8 billion Euros - I'm sorry to say that you have no choice in the matter".
What followed was not very productive - the Chief Executive and several other top managers of the UK subsidiary left and after a long interregnum the CEO was replaced by a major business figure chosen by the French group. Within months, this worthy had resigned, making salty remarks to closer colleagues about "Not being a French poodle".
The cost reduction exercise was assisted by swarms of consultants from the Paris office of a well-known international company.
It does not need unusual prescience to divine that people in the UK subsidiary did not feel very empowered or autonomous - and performance began a gradual decline that continues to this day.

The author was taking his ease at home in rural Suffolk. There had recently been a storm and both electricity and telephone had been cut off - in the case of electricity for 9 days. It was only by accident that a roaming team of linesmen from the electricity company happened by and noticed the broken line. Otherwise it had proved to be impossible even to reach the call centre of the company in question. After the work had been completed - with celerity and skill - there is nothing wrong with front-line workers in Britain - the team came in for a cup of tea and we went over the traumas of the past few weeks. "Quite terrible", said the team leader, "It's been a bloody shambles for years, we stopped recruiting new staff or trainees, costs have been squeezed so that we are unable to provide a good service and we've been ashamed of our company. But we have recently been bought by a French group and they have restarted recruitment and training and are bringing in new blood - the great thing is that they seem dedicated to the industry and are not dominated by accountants". The French group in question was Electricite de France.

These stories illustrate some of the good and not-so-good sides of the massive wave of foreign takeovers of British companies that shows no sign of slowing down - (Marconi has just gone to Ericsson of Sweden, O2, Pilkington, BPB, ScottishPower and many more are on the current acquisition list) - sparking a number of articles in the press that seem to conclude that whether it is good or bad there is nothing much we can do about it ; and at least we can congratulate ourselves that by comparison with all other developed countries, we are the most open to foreign entry.

But we should pause for a moment and think beyond superficial journalese - maybe we are observing a trend that could have quite fundamental long-term implications for the British economy and the wider public interest - otherwise why should other nations, including the US - supposedly the role model for free-market capitalism - be exercised about - and block when they wish - foreign takeovers?
To help with a perspective - there are no major British companies in:

• IT hardware
• Electronic and electrical equipment
• Semi-conductors
• Office, accounting and computing equipment
• Radio, TV and telecommunications equipment
• Fine Chemicals - a rapidly declining sector in the UK
• Automotive
• Computer software, except for standard software.
• Investment Banking and international management Consulting - and probably to come, Stock Exchanges!

And there are worrying issues in for larger UK quoted companies in:

• Aerospace - Rolls Royce and BAe Systems, the two major British-quoted aerospace companies are probably only still independent because the British government has a 'Golden Share' in each and is a major customer.
• Biosciences, a major modern industry - which has seen it's largest and most successful company, Amersham, become part of a division of GE of America.

This list might be described as the knowledge and technology-based sinews of a modern economy.

DOES ANY OF THIS MATTER?

Here is a sort of 'Balance Sheet':

Good things about foreign ownership and investment.

• Foreign companies tend to invest more heavily and consistently than their British equivalents.
• Foreign companies bring management skills of a generally much higher order than their British counterparts
• Foreign companies introduce know-how that is no longer commonly available in the UK
• Foreign companies often treat their British employees better, train them more thoroughly and pay more than British equivalents
• Therefore the performance and productivity of foreign-owned companies in Britain tends to be higher - often much higher- than that of many indigenously owned counterparts.
• Without foreign investment, there would be no significant British presence in many advanced industries. To select two as examples, there would be no UK volume motor manufacturing if it were not for the likes of Ford, Nissan and Honda - and no significant Investment Banking in London if it had been left to indigenous competitors.

Foreign companies and foreign ownership has thus brought an infusion of investment, know-how and management expertise at a level not normally demonstrated by most (not all) indigenous enterprises. They have often benefited British employees in ways they would not have experienced under British ownership - for example, Nissan made a policy of not recruiting any line managers or employees from the British Motor industry because they did not wish their operation to be tainted by bad habits and practice. They thus initiated a training and development process for new employees of a quality and thoroughness seldom seen in British companies.

Not-So-Good things.

The spate of articles about foreign ownership seldom mention several quite important factors:

• There is a massive difference between being a subsidiary or division and a free-standing company.

Maybe the journalists and economists do not understand, but believe us, there is a notable difference between being the director of a free-standing company crafting corporate - level strategy and being a divisional manager, no matter how large the division. The implications of this are at least two-fold - UK industry and managers are losing opportunities to develop and practice strategic skills and the locus of strategic decision-making in many important industries has moved to other countries.

• The ownership of important know-how and intellectual property is moved to foreign countries. It is the case that many foreign companies do invest in some R&D in Britain, and also support some UK university research, but this does not compensate for the fact that they as a general rule invest more heavily in their home countries or in countries that have concentrations of indigenous know-how - thus there is more foreign high-tech investment in Germany than in Britain.
• There is a long-term tendency for larger British-owned enterprises to be in retail, leisure and general services and not in high-knowledge and technology. The levels of pay and general expertise tend to be less in these industries than in advanced ones - the 'business model' tends to be a small group of very skilled and highly paid people leveraging returns from a large group of relatively lower-skilled and paid employees. In other words, the British-owned economy is gradually being dumbed down and the number of strategic and high-level knowledge-based jobs reduced.
• There may be a trend towards a decline in science, technology and engineering research in UK universities - certainly the overall trends in patent formation and conversion of basic research into advanced products and services appears do not appear to be positive - and there has been a significant closure of university science departments.
• UK finance minister, Gordon Brown has made a big thing about the Britain being a world centre of research, creativity and innovation. He is absolutely right - no developed country is going to be able to stay rich unless there is a level of knowledge creation and exploitation that enables it to stay ahead of developing countries. And the current signs are not very good for the UK.

The Good News.

There is a very large number of smaller and medium-sized British companies that are innovative and do support research and developmental innovation. There is also some evidence from DTI statistics that these companies are investing at a satisfactory level. There is also a large and vigorous set of creative and entertainment companies in Britain - and maybe these industries suit smaller more 'organic' companies, which may also suit the British culture best. But what will happen to those smaller companies as they grow?

In Conclusion.....

Foreign investment and ownership is like the famous Curate's Egg - there are good and bad parts. Certainly the import of skills, know-how and new investment is almost entirely good and the UK's performance in attracting it should be warmly welcomed. What is less good is the absence of any real evidence that imported skills are migrating to indigenous UK owned and managed enterprises - for example, the productivity gap between British UK-based enterprises and foreign subsidiaries in Britain is apparently not closing.

But the really worrying fact is that institutional investors in Britain are actively discouraging serious long-term investment in high-technology industries and in particular seem to be quite happy to force the exchange of hard-won advanced knowledge for short-term cash gain. In the long-run this is likely to be a very damaging exchange and against the public interest.

What do you think, Mr Brown?

For further information, see:
How Are We Doing - British Industrial Statistics.
Why the FTSE 100 is the Worst Investment Market in the World for High-tech and Innovation - in the Investment and financial markets section.