Wednesday, 26 May 2010

Zero Sum Gains in regional development

A major criticism of regional inward investment strategies is that public money simply gets diverted to unelected regional development agencies who spend the cash competing against each other to attract companies to move into their boundaries.  Sometimes this has been done in a quite underhanded or corrupt manner.  For example, see the antics of the Welsh Development Agency in the 1990s who simply went around the country poaching companies from other places by convincing them to move to Wales by offering a ridiculous level of grants or tax breaks.

Whether any national interest is being served here is questionable.  Whereas there is some value in relocating jobs from growth regions to places which lack local employment opportunities, there seems to be little logic in companies moving from one declining region to another.  So news that a recycling company is moving to Irlam, bringing 30 skilled jobs, is obviously good news for local people and businesses.  The reasons for doing this maybe perfectly legitimate, for example, to access lower cost premises, skilled workers etc.

But Irlam's gain is the West Midlands' loss.  In national terms this is a zero sum gain.  No new jobs or investment are created, there are simply moved around the country.  In fact evidence from other company relocations suggests that when companies do relocate they often rationalise their business in the process, resulting in job losses not gains.

From the perspective of Regional Development Agencies, inward investment is an easy option, a quick fix and short term way of fixing the employment crisis in their area.  It is much easier to 'create' jobs in this way, than for example, working with indigenous companies to build their skill capacity and promote local in-situ growth over time.   Evidence suggests that companies who develop in this way or more likely to become embedded in the local economy and therefore much less likely to move on if they receive a better offer from another region.

Another concern is that companies who move in are much more likely to move out again compared to embedded firms.  Often many inward movers move on again within five years.  Global corporations, such as Nike, have this locationally built-in to their business model, to enable to move free across national boundaries extracting the  best surpluses they can get from what are otherwise poor national governments.  Other companies also use locationally flexibility to threaten government, to extract benefits simply to remain in the same place.

With the recent change of government the future of regional development agencies is being brought into question.  Is there a better model of promoting local economic development without recourse to needless and vicious spiral of place competition for mobile investment?

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