Grounded Firms (not inward investment)

This paper argues that, for many peripheral regions, industrial policy would be more effective it concentrated less on attracting mobile firms and more on cultivating grounded firms; and this argument is illustrated with evidence on Wales, an unsuccessful region now threatened by austerity cuts. Welsh government policy pays too much attention to mobile private firms with the question “ how can we do more for you?”   Government policy should instead target all public sector organisations and grounded larger firms with the question “ what have you done for us”

 Mergers of Anglo American corporates haves become an opportunity to rename the firm so as to efface any connection with identifiable place or product: the FTSE 100 now includes Aggreko, Aviva, Capita, Diageo, G4S, Serco and Vedanta. And behind the meaningless names is the practice of restructuring by mobile, ungrounded firms which endlessly threatens Welsh employment. Footloose globalised and financialised giants pull out like Sony and Two Sisters; while SMEs generate pass the parcel employment when the family sells out and the firm is passed between corporates like Rachel’s Dairy

The Welsh government’s orthodox policy response is to make Wales a more attractive destination  for inward investment so that new companies and jobs replace old. Ministers currently boast of record levels of FDI, but there are reasons to be sceptical about how they just add up benefits to produce an impressive sounding, rather misleading total:

ü  Totals are exaggerated because they include merger and acquisition spend and property investment; and there is no calculation of economic net benefits after deducting costs like project subsidies and sweeteners including tolerance of tax avoidance

ü   The social claims are significantly about jobs created not wages paid; even though inward investment like the Amazon warehouse locks in low pay and subsidy via child care, housing benefit and pensions

ü  The emphasis on “capturing” FDI investment obscures the awkward fact that the usual result in manufacturing is branch plants which, as official reports admit, do little beyond assembly

We would not argue against attempts to attract mobile firms. But the Welsh government should recognise FDI is a replacement strategy which relies on new entrants who are  doing little more than plug the gaps left by the departure of older players like Murco and Two Sisters. Prestige FDI projects often have substantial social costs in terms of wage subvention and tax avoidance and usually do not include  Welsh SMEs in their supply chains. This last point is a serious issue for a regional economy where micro firms account for 40 % of Welsh employment.

It is time therefore to think again about the Welsh stock of grounded firms and their potential. Grounded firms and public organisations are tied to a specific place by a variable combination of supply and demand side roots and branches. The list of ties includes stable ownership and local management cadre; then on the supply side a regional supply chain, district support services, relevant technical education and the human skills pool; while on the demand side, branch distribution or network requirements can dictate location to serve population.

Wales has only a handful of technically competent private sector firms operating in competitive sectors with ownership that protects them from merger and acquisition by larger ungrounded combines. But Wales has a huge stock of public organisations and private firms in the foundational  economy whose roots and branches tie them to localities because their demand  is distributed according to population.

30% of Welsh employment is in public sector organisations and para state firms like nurseries and residential homes delivering mainly tax funded health, education and welfare. Another 10% is in private sector provision of basic services in the form of pipe and cable utilities, transport, food processing and grocery distribution.

Quite literally these grounded organisations and firms have to stay if they are to carry on tapping into Welsh revenues. As Welsh civil society is now arguing, we need to “raise the ask” for all grounded organisations and firms because their behaviours on employment and sourcing can lever Welsh benefits. The question of  what they put back in return for local demand and support should be answered by universities and hospitals,  supermarkets and utilities as well as local authorities..

The aim should be to vary community obligations so that all these organisations put back something that is relevant. This means doing more strategically and systematically what we are already doing in local government procurement or the Welsh NHS. As with local government procurement, the emphasis should be on benefiting local employment and the smaller firms.