Scottish Development International: inward investment research

Scottish Enterprise (SE) and Scottish Development International (SDI) commissioned a literature review of current and emerging trends in the academic literature related to inward investment. The study updates a previous analysis undertaken in 2009 and covers the period 2009 to date. The objective of the study was to provide an overarching analysis of the emerging literature as to how inward investment and outward foreign direct investment (FDI) can contribute to overall economic growth.

The methodology consisted of a review of the empirical literature dealing with the determinants of FDI and outward FDI, as well as perceived spillover efficiency benefits (quantitative and qualitative aspects).

The literature review reflects the emerging realities of the post financial crisis world, where global FDI fell by 16% in 2008 and in 2009 worldwide output contracted for the first time in 60 years and FDI declined a further 40%. Although there has been a world-wide contraction, the crisis has led to a realignment in the terms of trade between East and West which is reflected in the academic literature that has emerged over the last three years, including: a heavy orientation on the emerging priorities for China and the Far East; and the continuing underperformance of Western economies and the implications for world trade. The literature review identified a number of issues: the literature related to internationalisation models has remained unchanged, while there has been some emerging literature related to the determinants of internationalisation, key market failures and knowledge spillover effects; there were no new market failures, but rather an enhanced importance attached to financial barriers, appropriability failures, institutional failure network and systemic failure (bounded rationale and path dependency); and there have not been any significant developments in the assessment of impact for internationalisation activities. A number of emerging trends were also identified with regard to: links between absorptive capacity (for innovation), spillovers and FDI; internationalisation and clustering; tax simplification; and rationale/impact of re-shoring. The emerging literature identified a positive relationship between internationalisation and clustering, with sub national authorities taking the lead in the promotion of their clusters as a means of both attracting and retaining FDI.

The report suggests that a number of issues identified by the review may be pertinent to SE/SDI and should be subject to further consideration, including: opportunities for re-shoring of activities; identification and measurement of spillover effects; mainstreaming of ‘Smart Specialisation Approaches’ into the attraction and retention of FDI; implications of tax simplification rather than tax reduction at the regional level; and innovative use of universities/research centres to develop working relationships with business clusters in target markets.