Maximising the (unequal) benefits of foreign direct investment: addressing the two-speed problem

Abstract

The UK is made up of broadly two types of local economies, characterised by two types of equilibria. One, ‘high-skill equilibria’, consists of richer localities throughout the country (e.g. London, South East, Cambridge, Oxford) which attract high-tech FDI, venture capitalists, high levels of innovation, skills and productivity. Another, ‘low-skill equilibria’ locations, have low levels of innovation, skills and productivity, even despite high levels of activity, in some cases. The notion of the two equilibria was recognised in an earlier volume of Contemporary Social Science and discussed in some detail in the editorial by Fai and Tomlinson (2023). The purpose of this paper is to explore the potential policy interventions for inward investment, focused not merely on growth, but on productivity growth, with the core purpose of helping lagging regions recover. We present a framework which explores how inward investment can be leveraged to ‘move the dial’ in lagging regions of the UK, rather than merely offering more of the same in terms of output, productivity and employment opportunities–which would attract activity that is subsequently rather divorced from the rest of the local economy. Our proposed framework summarises the nature of the interaction between multinational enterprises (MNEs) and the host economy, enriched with insights from supply chain analysis, economic geography and the trade-offs involved in delivering transformative growth and productivity.