EY’s Attractiveness Survey - Ernst & s Attractiveness Survey Scotland May 2017 Foreword...

EY’s Attractiveness Survey Scotland May 2017

Standing strong in uncertain times

EY’s Attractiveness Survey Scotland − May 2017

Foreword Demonstrating the solid foundations

that Scotland has laid, it has continued to attract record numbers of inward investment, with the total number of FDI projects in 2016 exceeding the previous ten-year high set in 2015 — from 119 in 2015 to 122 in 2016.

Not only this, but it has firmly established itself over the last five years as the second most attractive destination in the UK behind London.

This data proves that Scotland has remained resilient and our assets on the global stage continue to shine through.

Reflecting on our university strength, Scotland saw particular success in 2016 in relation to research and development (R&D), emerging as the UK leader in attracting FDI for research and development projects. Scotland’s reputation as a global leader in the software sector is also reflected as it moves up to take second place outside of London and the South East of England.

In last year’s report we noted the need to focus on developing stronger relationships among the newer and emerging origin sources of FDI, particularly China. In 2015, China did not appear in Scotland’s top 10. However in 2016, it ranks as fifth largest originator of investments in Scotland. This means we are starting to see the beneficial results of recent efforts to develop the relationship between Scotland and China, such as via trade missions.

Looking at the primary investor into Scotland this remains the US, with 43 projects representing 35 per cent of all projects into Scotland in 2016.

It is evident that Scotland is a heavy weight in the FDI ring. However, in an unprecedented time of uncertainty,

it cannot afford to rest on its laurels. The investor perception section of our report shows Scotland’s attractiveness fell by one percentage point.

Although not alarming in itself, the research suggests that the EU Referendum vote and its aftermath may be having an influence on global perceptions of Scotland and the UK’s long-term attractiveness and we could have reached a tipping point.

Scotland is very good at securing follow-on business with inward investors, but more needs to be done to attract new FDI projects. It is also vital that we continue to capitalise on our strengths, all of which have been highlighted as key priorities of investors when making future investment decisions.

Our perception study highlighted that the priorities of global investors are: Infrastructure, cited by 31 per cent of investors; negotiating trade deals with new countries (32 per cent) — US, China and India identified as most important; skills (28 per cent); retaining existing EU trading arrangements (28 per cent); the approach to migration (22 per cent); and creating incentives for foreign investors (21 per cent).

Against this backdrop business and government should be thinking strategically through Brexit, investing in skills, developing digital Scotland and working together to further raise the brand and profile of Scotland. There is a short window of time to act in response to the investors’ sentiment and wish list. A strategy with trade, skills and infrastructure at the core can help Scotland to protect its legacy as an attractive place to do business and capitalise on future opportunities.

Mark HarveySenior Partner,Scotland

Mark GregoryChief Economist,UK and Ireland

We are delighted to welcome you to the 2017 Scotland Attractiveness Survey, which — as in previous years — examines the evolving performance and perceptions of Scotland as a destination for foreign direct investment (FDI). This report continues EY’s long history of sponsorship of research into UK trade, including FDI, reflecting our desire to encourage an open dialogue between business leaders, investors and policymakers on how to maximise Scotland and the rest of the UK’s economic performance.

FDI remains a vital source of capability, economic activity and jobs and Scotland’s continued ability to attract it will be under close scrutiny in the run-up to Brexit in 2019.

The report paints a positive picture for Scotland’s FDI performance in 2016 but warns of potential waning investor sentiment as uncertainty takes hold.

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www.ey.com/attractiveness

Contents01Foreword

02Executive Summary

04Reality Overview of Scotland’s FDI performance in 2016

12Perception Perceptions of Scotland as an FDI location

17Outlook Continuing to succeed in a competitive global market

18Methodology Evaluation of the reality of FDI in Europe based on EY’s European Investment Monitor (EIM)

20About the Attractiveness Program

www.ey.com/attractivenessExecutive Summary www.ey.com/attractivenesswww.ey.com/attractiveness

2 3EY’s Attractiveness Survey Scotland − May 2017 EY’s Attractiveness Survey Scotland − May 2017

Executive Summary

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Scotland puts in another record-breaking performance in 2016 with 122 FDI projects secured

Business services contributes the most projects, increasing its number of FDI projects in Scotland by 42% between 2015 and 2016

More than one in 50 FDI projects investing in the whole of Europe are selecting Scotland as their location

US and France are the top two investors – 35% of all projects into Scotland were from the US. France takes No.2 spot with 11.5%. French FDI into Scotland a sustained success story over the last five years

2016 also saw a strong increase in Irish and Chinese investments

Retains its title as the 2nd biggest region of the UK behind London for 5th year running

Scotland is 2nd, outside of London, in securing investments from the software industry

Number of FDI jobs created has fallen due to the mix of projects secured

Scotland attracted more R&D projects than any other UK region, with software and life sciences the main drivers

Three Scottish cities in UK Top 10 – Glasgow, Edinburgh and Aberdeen

London recorded

451 projects

US

35% of all projects

France

11.5% of all projects

Glasgow

Ireland China

Edinburgh

Aberdeen

More than one in 50 FDI projects selecting Scotland

Scotland

122 projects

2nd biggest region of the UK for five years

122 FDI projects secured in

2016 2nd in software

West Midlands in third place with

111 projects

Record-breaking

Top two investors

Scotland

In UK

Top10

FDI projects

42% increase 2015-2016

EY’s Attractiveness Survey Scotland − May 2017 EY’s Attractiveness Survey Scotland − May 20174 5


Overview of Scotland’s FDI performance in 2016Standing strong in uncertain timesScotland built on its success in attracting Foreign Direct Investment in 2015 with another strong performance in 2016. EY’s European Investment Monitor reveals that the number of inward investments into Scotland during the year rose to their highest in the past decade. The figures show that the total number of FDI projects secured by Scotland in 2016 rose fractionally — by 2.5% — from 119 in 2015 to 122 in 2016, setting a ten-year high.

This means Scotland has held onto the gains it made in 2015, with projects continuing to increase in 2016 from their already record levels. This robust FDI performance — achieved amid widespread uncertainty, not least springing from the UK Brexit vote in June 2016 — confirms the continuing strength of the Scottish economy’s ability to attract and secure cross-border investments.

However, the small increase in projects into Scotland was outpaced by the growth in FDI projects in the UK as a whole. As a result, Scotland’s share of all projects coming into the UK fell slightly, from 11.2% to 10.7%. That said, it’s important to note that 2015 had marked Scotland’s highest percentage share of UK projects recorded in the past ten years.

Turning to a European level, more than one in 50 FDI projects investing in the whole of Europe are selecting Scotland as their location.

…maintaining its second-placed ranking in the UK, behind LondonA comparison with the FDI performance of other areas of the UK shows that Scotland secured the

second largest number of projects behind London. During the year, London recorded 451 projects and Scotland 122, with third place among the UK regions going to the West Midlands with 111 projects.Looking back over the past decade, Scotland has secured the UK’s second-highest number of projects in every one of the past five years. This is a clear indication that Scotland is now firmly established as the second-placed destination behind London for FDI projects coming into the UK.

FDI job creation in Scotland falls backWhile the number of FDI projects coming into Scotland edged higher in 2016, the increased flow of projects did not trigger a corresponding rise in the number of jobs generated by FDI. The projects secured by Scotland in 2016 tended to be smaller on average than in 2015 but this was in part due to the mix of projects secured. As Scotland grows it is attracting more services projects which contribute less jobs per investment on average than traditional manufacturing projects. The decrease in FDI job creation in

Scotland could also signal a shift in the labour market away from large numbers of low-skilled workers to fewer, highly-skilled roles, such as those required for R&D and software activities, which deliver increased value to the economy.

In 2015, the average employment impact of an investment into Scotland was the creation of 45 jobs, with the 119 projects recorded during the year yielding an aggregate total of 5,385 new roles. But in 2016 the average figure fell to 24 jobs, with 2,868 jobs from 122 projects. This figure means Scotland’s number of FDI jobs secured fell in 2016 by 47% from 5,385 to 2,868.

As a result, Scotland was ranked sixth for FDI job creation among the UK regions in 2016 behind London (10,366 jobs), the West Midlands (8,388), the North West (5,152), Yorkshire (3,724) and the East of England (3,220). In terms of UK market share of FDI jobs, Scotland secured 6% of the employment generated from FDI by the UK as a whole, down from 12.7% in 2015.

RealityScotland has held onto the gains it made in 2015, with projects continuing to increase in 2016 from their already record levels. This robust FDI performance — achieved amid widespread uncertainty — confirms the continuing strength of the Scottish economy’s ability to attract and secure cross-border investments.

Looking back over the past decade, Scotland has secured the UK’s second-highest number of projects in every one of the past five years. This is a clear indication that Scotland is now firmly established as the second-placed destination behind London for FDI projects coming into the UK.

FDI performance of UK regions, 2015 to 2016

Source: EY’s Global Investment Monitor 2016

500450400350300250200150100

500

Proj

ects

London

2015 2016

Scotla

nd

West M

idlands

Yorksh

ire

North W

est

South Eas

t

East M

idlands

East o

f Englan

d

Norther

n Ire

land

South Wes

t

North Eas

tWale

s

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total

London 305 262 266 289 327 313 380 381 405 451 3379

Scotland 69 53 51 69 51 76 82 79 119 122 771

W. Midlands 54 37 51 50 38 50 47 63 92 111 593

Yorkshire 16 22 42 30 20 21 20 50 83 98 402

North West 26 51 38 64 39 44 56 46 101 90 555

South East 83 64 64 41 83 55 47 73 61 72 643

E. Midlands 10 31 16 41 20 17 27 29 37 44 272

E. England 51 46 35 27 26 20 30 34 28 39 336

N. Ireland 26 19 25 23 17 29 36 39 15 39 268

South West 9 29 32 40 25 15 27 28 37 28 270

North East 42 37 38 35 24 26 23 23 41 26 315

Wales 22 35 20 19 9 31 24 42 41 23 266

Grand Total 713 686 678 728 679 697 799 887 1065 1144 8076

Number of projects secured by all areas of the UK over the past ten years


FDI Projects announced in Scotland and percentage market share of UK projects 2007-2016


140

120

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40

20

0

Proj

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12.0

10.0

8.0

6.0

4.0

2.0

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Scotland %

2007

2008

2009

2010

2011

2012

2013

2014

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2016

FDI Employment announced in Scotland and percentage market share of UK projects 2007-2016


7000

6000

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*25.0

20.0

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Scotland %

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* Jobs figures are based on a sample not actual data


www.ey.com/attractivenessReality

Sectors: business services leads the wayThe leading sectors generating FDI into Scotland in 2016 were a mixture of service sector, construction and manufacturing-based activities. In common with the UK regions excluding London — where software is the sector that generates the largest number of projects — in Scotland it is the business services sector that contributes the most projects. Unlike the UK as a whole, construction

was the second largest FDI sector in Scotland in 216, with software ranked third in terms of Scottish project numbers.

A closer look at the figures shows that business services increased its number of FDI projects in Scotland by 42% between 2015 and 2016, taking its total to 17 projects recorded — a figure that represented 14% of all projects into Scotland. Conversely, the number of software projects recorded fell by 32% to 13 projects, narrowly

Scotland is now second behind London in securing investments from the software industry

Why Farmflo opened a software research centre in Scotland Irish farm software company Farmflo launched a new Research & Development centre in Glasgow, where it will explore emerging opportunities around the Internet of Things (IoT).

Set up by two Irish brothers, Jason and Gareth Devenney, Farmflo’s system allows farmers to record and use real-time data on such things as fertiliser stocks, crop storage and herd treatments and movements. The company’s highly sophisticated system integrates data from multiple sources, allowing farmers to then view it on their smartphone or tablet device.

Farmflo’s data system has been designed to reduce risk of error and simplify the complex task farmers can often have when reporting, releasing more time for direct farm activity and improving overall farm productivity.

At the Glasgow site based at the Whisky Bond in Port Dundas, the system will be fully developed and refined based on feedback from farmers on the pilot. It will also look at emerging opportunities around IoT, with sensor network data outputs enriching farmer data to help inform management decisions. This work is aimed at targeting international markets, such as Europe and North America, together with the current UK focus for the ambitious young company.

Why Scotland?Skills availability was a key factor in Farmflo’s decision to come to Scotland.

Dan O’Donoghue, Farmflo CEO, said, “The establishment of our dedicated software development centre in Scotland is an exciting venture that allows Farmflo to tap into an excellent resource of locally-based talent.”

Farmflo’s investment was supported by a Regional Selective Assistance grant of £350,000 from Scottish Enterprise.

The RSA investment has ensured that Farmflo is able to locate its development site in Scotland and tap into the skills available here, rather than outsource the development activity to an overseas operation.

Viewpoint

Business Services

Construction

Software

Machinery & Equipment

Scientific Research

Food

Pharmaceuticals

Retail

Utility Supply

Other

14%

11%

11%

9%6%5%4%

4%4%

32%

Leading sectors generating FDI projects for Scotland 2016


behind construction, whose projects leapt from three in 2015 to 14 in 2016, However, the decline in software projects in Scotland was slightly less than the 35% fall in the regions outside London and hence Scotland is now second behind London in securing investments from the software industry, followed by the South East of England with 12.

The dramatic surge in construction projects in Scotland in 2016 may be partially due to a small change in the way civil engineering projects are recorded. However the rise is also related to the construction of offshore wind farms and the technical services these require, as well as some pipeline construction projects that have been undertaken for the oil & gas sector.

Financial services was responsible for the largest recorded projects in terms of employment generation with AXA’s investment in Glasgow reporting the creation of 440 new jobs and Cigna’s health insurance business adding 150 jobs. Although the sector only generated eight projects

(compared to 99 in the UK as a whole), this was in line with the average number of financial services projects recorded over the last decade.

Origins of FDI into Scotland: the US and France stay aheadAs in 2015, the largest share of FDI projects generated into Scotland in 2016 originated from the US. The number secured was also identical in both years, with the US providing 43 projects, a figure that represented 35% of all projects into Scotland in 2016, down slightly from 36% in 2015.

The GIM figures show that Scotland is slightly more dependent than the UK as a whole on projects secured from the US, with the UK overall securing 31% of its projects from the US in 2016. That said, the US is by far the leading origin for FDI into both the UK and Scotland. However, in contrast to the remainder of the UK, Scotland secured the next largest number of projects from France, whereas Germany ranks as the second biggest investor in the UK as a whole.

In fact, French FDI into Scotland is a significant and sustained success story, with projects from France now having represented the second largest flow of projects into the country for five

years in a row. In 2016, the number of French investments into Scotland held steady at 14 projects, meaning Scotland secured 16% of all French projects investing in the UK.

Further notable developments in 2016 included a strong increase in Irish investments — which rose by 200%, albeit from a very low base in 2015 — and the emergence of China as one of the most significant investors in Scotland. China was the fifth largest originator of investments into Scotland in 2016, and the 4th largest for the UK.

FDI activities: sales and marketing continues to dominate…In terms of the activities that FDI projects are being set up to carry out, the highest proportion of projects in Scotland in 2016 were investing in some type of sales and marketing office. During the year, sales and marketing activities represented 38% of Scotland’s total flow of projects, down from 43% in 2015. In absolute terms, sales and marketing offices contributed 46 projects in 2016 compared to 51 in 2015, a decrease of 10%.

Majority of FDI projects into Scotland in 2016 originated from the US and France. Further notable was a strong increase in Irish investments and the emergence of China as one of the most significant investors into Scotland

Top countries of origin and performance against 2015


504540353025201510

50

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US

2015 2016

France

German

y

Irelan

dChina

Denmar

k

Nether

lands



The second-largest activity in terms of project numbers was back-office investments. In 2016, 23 back office investment projects were recorded in Scotland, a rise of 35% from 2015, making this the highest number of investments recorded by this activity in the last decade. …but Scotland is emerging as the UK’s R&D leaderR&D projects ranked third among investment activity into Scotland — and at 21 projects, 2016 represented the second highest total in the decade after 2015, with the number of R&D projects recorded in 2016 slipping back by 8% from the previous year. However, the UK overall saw a decline in R&D projects of 37% and Scotland was the clear leader for R&D projects in the UK, attracting more projects than any other UK region in 2016, with software and life sciences the main sectors.

Investments in manufacturing facilities in Scotland declined slightly, with the total of 20 projects secured in 2016 lower than the 22 achieved in 2015, and accounting for 16% of all Scottish projects. However, total investments by manufacturers were unchanged at 43. Logistics recorded the highest number of projects the sector has achieved in the last decade, with 11 projects.

Looking at Scotland’s biggest FDI projects terms of job creation in 2016, the figures for 2016 reflect the overall decline noted earlier in the average number of jobs created per project. In 2015, 10 projects announced across Scotland reported that they would each create 200 or more jobs. But in 2016, only seven projects were recorded as generating more than 100 jobs, and the largest investment created 440 jobs, compared to 3,000 jobs created by the biggest project in the UK during the year, which was an investment by Google in London.

The largest recorded projects in terms of employment generation were in financial services, with the AXA’s

Activities of projects investing in Scotland 2007-2016


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Sales and Marketing Back Office R&DManufacturing Logistics HQ

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2014

2015

2016

Scotland was the clear leader for R&D projects in the UK, attracting more projects than any other UK region in 2016, with software and life sciences the main sectors.

Paul Lewis, Managing Director, Scottish Development International The market for inward investment is increasingly competitive, with more nations and regions seeing foreign direct investment (FDI) as a key way to grow their economies.

Inward investment can bring a range of direct and wider benefits to our economy, from jobs and supply chain opportunities to the positioning of Scotland internationally as a place the world can engage with. Inward investors also tend to pay higher wages, be active exporters and invest more in innovation, all of which helps to boost productivity.

The survey indicates that the number of jobs created by FDI projects in Scotland was down 47% in 2016, but while the initial scale of projects is important, the number of new investors and how they help strengthen our growth sectors and improve their international competitiveness is arguably a better indicator of long-term growth and sustainability.

Frequently this investment is built around the skills of Scotland’s workforce and the quality of our research and innovation, and 2016 was another strong year for Scotland in attracting R&D inward investment, with 21 individual projects, the second highest number to date.

This type of investment plays an important role in supporting greater innovation and higher productivity in Scotland’s economy and builds on the strengths of Scotland’s universities. Overall, it also means that Scotland is now first in the UK for R&D investment, a particularly significant outcome given these high value investments.

Much of this success is built from Scotland’s position in sectors that can support sustainable economic growth, such as technology, energy and business services; sectors where Scotland is internationally competitive and where there is global demand.

It also reflects the significant collaboration across our public, private and academic sectors to project a truly connected Scotland to the world at large, something that is an important source of competitive advantage.

Given this and against that backdrop of increased competition for FDI, we need to make sure we are using Scotland’s international reach and networks to connect with new investors.

With a network of 29 offices in 18 countries, SDI plays a key part in doing this, and selling Scotland is very much a team effort. It’s particularly rewarding to see that our hard work in building networks and connections across China is paying off; with five investment

projects in 2016, China has now entered the top five countries investing in Scotland for the first time.

We are delighted once again this year with our investment successes from the US; our focus on California and the increasing global recognition of Scotland’s (and particularly Edinburgh’s) technology and data proposition is certainly generating interest and continuing to present significant new investment opportunities.

We now have an opportunity to build on the international reach and connections that exist across many parts of our economy, to attract even more new inward investment to the country — through our universities, via Governments and with businesses.

If we can work together to achieve this, not only will we strengthen Scotland’s investment proposition, but as a nation we will be better placed to take advantage of the FDI opportunities coming into the UK from some of the newer, emerging economies.

By uniting our voices and our networks, we can reinforce the key message from the EY Scotland Attractiveness survey; that “Scotland’s attractions are still shining out brightly in an uncertain world” and this bodes well for the future flow of FDI into Scotland.

Viewpoint



Comapny City Country Jobs Sector

AXA Group Glasgow France 440 Insurance & Pensions

Cigna Glasgow United States of America

150 Health & Social Work

GetTaxi UK Glasgow Israel 130 Software

Cloudwick Technologies

Glasgow United States of America

125 Software

Lidl Motherwell Germany 100 Retail

BMW Group North Killingholme

Germany 100 Automotive Assembly

Boeing Lossiemouth United States of America

100 Other Transport Equipment

Largest FDI projects in Scotland in 2016 by employment (>99 jobs)


Rank 2016 Row Labels 2015 2016 %age Change

1 London 398 444 12

2 Manchester 54 47 -13

3 Birmingham 20 36 80

4 Belfast 4 32 700

5 Glasgow 22 28 27

6 Edinburgh 41 27 -34

7 Aberdeen 9 18 100

8 Coventry 11 15 36

9 Leeds 31 12 -61

10 Barnsley 6 11 83

Top 10 cities gaining FDI in UK in 2016 and change on 2015


investment in Glasgow reporting the creation of 440 new jobs and Cigna’s health insurance business adding 150 jobs in Glasgow.

Scottish cities: three in the UK’s top ten In terms of their numbers of FDI project secured, all three of Scotland’s largest cities were in the top 10 UK cities in 2016. Edinburgh slipped down the UK-wide ranking from third to sixth in terms of projects, but was very successful in attracting both R&D and software projects. Glasgow’s projects rose by 27% to 28, and Aberdeen’s projects doubled to 18, marking a rebound from a low point in offshore activity in 2015.

National performance reflects London’s continued dominance… Scotland’s continued solid performance in attracting FDI in 2016 should be seen in the context of the UK’s overall showing at a European level. During the year, the UK remained Europe’s number one recipient of FDI projects, with a 7% rise in total projects to 1,144 — the highest number on record. The EY GIM for 2016 also shows that the UK remained the leading recipient of FDI jobs, recording a rise of 6% in FDI-generated employment to 44,700, over 20,000 more than second-placed Poland.

However, it wasn’t all good news for the UK. With the number of FDI projects across Europe as a whole rising by 16% — much faster than in the UK — the UK’s market share fell from 21% to 19%, leaving it only a whisker ahead of Germany on 18%. And with Germany extending its lead in attracting new (as opposed to expansion) investments, and securing twice as many projects as the UK from China, it’s questionable how long the UK can sustain its overall lead in European FDI. The perception findings also contain some worrying indicators, showing — for example — that 31% of investors worldwide expect the UK’s attractiveness to FDI to decline over the coming three years, while 33% expect it to improve. These figures are significantly worse than the long-term

average, suggesting the Brexit vote and its aftermath may have impacted global perceptions of the UK’s attractiveness.

In terms of the flow of FDI projects into different areas of the UK, London maintained its dominance in 2016, with the UK capital securing 39% of all projects recorded, ahead of Scotland in second place. The biggest winner was Northern Ireland, with a 160% increase in projects, while Wales recorded the largest decline, down by 43%. Looking across the English regional groupings, the Northern Powerhouse and Midlands Engine are now attracting roughly double the number of projects they secured at the beginning of the last decade, whereas the rest of England is attracting roughly the same number.

…with Scotland firmly established in second place among UK regionsTaken together, these figures may raise concerns that the strong regions for FDI are getting stronger, and the more “peripheral” regions — the likes of Wales, and the East, North East and South West of England — are dropping behind. Such worries may be reinforced by the 2017 perception findings, which show London increasing its rating as the most attractive region from 47% to 52%, and traditionally strong regions such as the South East of England and West Midlands also holding up well.

Encouragingly, the list of traditionally strong regions also includes Scotland, which continued to attract projects at the fastest rate for a decade in 2016. Having ranked as the UK’s second most successful FDI destination in terms of projects secured for each of the past five years, Scotland can justifiably claim to be established as second only to London in terms UK FDI. Again, this bodes well for the future flow of FDI into Scotland.

Projects recorded by UK’s top six regions, 2007-2016


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www.ey.com/attractivenessPerception

Perception

Little change in perceptions of Scotland as an FDI location…As in previous years, an interesting additional perspective on attractiveness is provided by the annual EY survey of international investors’ perceptions. In 2017 this study involved interviews with 453 decision-makers from companies across the world that have invested, or could invest, in the UK in general and/or Scotland in particular. The study aimed to gauge these companies’ perceptions of the relative merits and attractiveness of different FDI locations.

There was a slight decline from 4% in 2016 to 3% in 2017 of investors who identified Scotland when asked to name the most attractive area of the UK in which to establish operations. However, it is worth noting that the 2017 perception findings as a whole saw a significant strengthening of London’s score at the expense of a number of other areas of the UK — including the North West, North East, and East and West Midlands — as well as Scotland.

London

South East of England

North West of England

North East of England

West Midlands

Scotland

East Midlands

Northern Ireland

South West of England

Wales

Yorkshire

East of England

Can’t say

47%

12%

6%

3%

7%

4%

3%

1%

5%

1%

2%

2%

7%

2016 reminder

Which region in the UK do you see as the most attractive to establish operations?

52%

12%

3%

2%

6%

3%

2%

3%

4%

1%

1%

1%

10%

Source: EY’s UK attractiveness survey 2017, sample (n=453)

Polly Purvis, chief executive of ScotlandISWhy Scotland? Scotland is an exceptional place to locate a business thanks to its great digital connectivity, international transport links, quality of life, reputation for innovation, world-class universities and a highly skilled workforce.

Firmly established as second only to London in terms of UK foreign direct investment, Scotland continues to flourish in a competitive global market.

One area of particular strength is the combined digital technologies industry which ranges from software, digital media, telecoms and information technology at one end of the spectrum, to electronics and photonics at the other. The industry contributes more than £4bn per annum to the Scottish economy, accounting for some 5 per cent of GVA. With a rapidly growing start-up community and a range of incubators in our cities including Codebase, the UK’s largest tech incubator, Scotland is not just a location for vibrant established businesses, but also for exciting start-ups.

Home to 3000 digital technologies companies, employing over

70,000 people, leading companies with bases in Scotland include Skyscanner, FanDuel, Rockstar North, BT, CGI, Thales, Cirrus Logic, and Leonardo. The Digital technologies industry has enormous potential and the Scottish sector is experiencing considerable growth thanks to a supportive ecosystem.

Scotland benefits from the most highly skilled workforce in the UK with 50 per cent of our young people participating in higher education, whether at universities or further education colleges. Add to that the quality of our research base. The Scottish Informatics and Computer Science Alliance, a world class research pool comprising the computer science departments of all the Scottish universities, attracts approximately 20 per cent of all research funding spend for computer science in the UK, and the new innovation centres for data (The DataLab), sensors and sensing systems (CENSIS) and digital health (DHI) provide industry with additional access to R&D expertise.Investment by the government and private sector in internationally competitive digital connectivity means that 98 per cent of all homes and businesses in Scotland will have access to broadband by 2018.

4G coverage is expanding rapidly and the cities of Aberdeen, Edinburgh, Glasgow and Stirling are all installing gigabit infrastructure. It’s not just digital connectivity that matters. With fast train and road links to London, Manchester and Birmingham, and direct international air connections to an increasing range of destinations in North America, Europe and the Middle East, Scotland is an excellent base for accessing global markets. Most key European cities are only two hours from Scotland and locating here means companies benefit from industry clusters and connected supply chains.If that’s not enough, consider the quality of life. From our compact cities there’s fast access to beautiful countryside, wilderness and centuries of heritage. A thriving cultural scene, with great restaurants, year round festivals and exhibitions means there’s always something to do. Scotland offers the full package.

Viewpoint


…but Scotland’s fundamentals strengths still top investors’ list of criteriaA closer analysis points to a number of reasons why this decline in Scotland’s headline perception score in 2017 should not be regarded too negatively. One is that the findings on regional perceptions, by their nature, tend to be volatile year-on-year. Another is that the results in both 2016 and 2017 appear to represent a correction to a more ‘normal’ level from Scotland’ historically high score of 6% in 2015 — a year that witnessed a significant ‘halo effect’ from Scotland’s high-profile events in 2014, such as the Commonwealth Games and Ryder Cup.

Scotland’s actual FDI performance is continuing to hold up well and it appears to be well positioned for future success. When respondents to our 2017 perception study were asked to cite the main criteria they apply when evaluating regions of the UK as investment locations, those factors where Scotland has renowned strengths — such as local skills and the quality of transport infrastructure — remained top of the list. This bodes well for the continued future flow of investment projects into Scotland.

Ability and skills of local workforce

Transport infrastructure

Availability of business partners and suppliers

Local labour costs

Cost and availabilty of real estate locally

Strength of local education both trade and academic

Telecommunications and technology infrastructure

Strength of business networks locally

Access to regional grants and incentives for investment

Local quality of life such as local schools, housing, cultural and sporting events

Support from regional economic advisory bodies

None

Can’t say

27%

26%

17%

18%

13%

13%

15%

11%

9%

9%

5%

2%

6%

2016 reminder

What are your investment criteria when considering investing in the regional locations in the UK?

28%

26%

22%

18%

15%

12%

12%

10%

9%

7%

5%

Source: EY’s UK attractiveness survey 2017, sample (n=453). Two answers possible

7%

5%

EY’s Attractiveness Survey Scotland − May 2017 17


OutlookContinuing to succeed in a competitive global market Taken together, the EY EIM results for FDI projects for 2016 and the findings of our 2017 perceptions study paint a positive picture of the outlook for FDI in Scotland. With projects rising to another ten-year high, and Scotland remaining firmly positioned as the UK’s second most successful FDI recipient after London, it’s clear that Scotland’s attractions are still shining out brightly in an uncertain world.

Even more encouragingly, Scotland’s sector performance demonstrated a number of areas of excellence. In particular, Scotland established itself as the UK leader for R&D related FDI and as a hub for software investment. Scotland also performed well in

attracting investment in Business Services and Logistics — other sectors with strong future growth prospects.

However, in an increasingly competitive and crowded market for attracting FDI projects, no country can afford to rest on its laurels. The turbulence from events such as Brexit — and potentially, at some stage, a second referendum on Scottish independence — must also be taken into account and prepared for. Against this background, Scotland’s continuing robust performance in attracting FDI provides an ideal platform on which to keep building on its strengths and driving continuous improvement in its attractiveness to investors – to the long-term benefit of Scotland’s economy, workforce, and quality of life.

Scotland’s attractions are still shining out brightly in an uncertain world. However, in an increasingly competitive and crowded market for attracting FDI projects, no country can afford to rest on its laurels.

A stable situation but beware of future weakness …While both Scotland’s and the UK’s post-Brexit FDI performance and investor perceptions have held up comparatively well to date, signs of potentially significant longer-term weaknesses are starting to emerge against a backdrop of uncertainty. A plan for continued future success should include the following:Engage with investors on the post-Brexit environmentInvestors tend to dislike uncertainty and therefore Scotland and the UK as a whole will have to commit to keeping close to investors through the Brexit process. Scotland will not be able to dispel uncertainty but it can articulate its vision for the post-Brexit economy, investors appear more concerned about the medium to long-term than the immediate outlook.Trade strategy – promote, promote, promoteBrexit will be a major change to the overall trade position and as such requires a clearly defined strategy setting out the Scotland and the UK’s trade strategy and how this will be realised. It is vital that this is communicated to Investors in the new environment as they will be keen to understand:

• Plans to remain competitive in high growth markets such as software and technology;

• The potential for support from the UK industrial strategy (and what an industrial strategy for Scotland will look like) for sectors such as manufacturing which investors see as exposed to Brexit, especially changes in customs and tariff arrangements;

• How linkages between trade and universities and research institutions will be further strengthened;

• Future plans for trade agreements, with the USA, China and India as the priorities;

• Ensuring future trade with the EU is possible on terms and with processes that are as close as possible to the current arrangements;

Deliver improved infrastructureOur survey results suggest that as the UK leaves the European Union it will need to move to boost its appeal across the board with investment in infrastructure both in Scotland and across the rest of the UK. There have been a range of attempts to improve the UK’s capabilities but there are now increasing concerns among investors over the UK’s future competitiveness. A detailed plan for delivery of road, rail, air, port, energy and communications infrastructure consistent with the UK’s trade strategy is now a priority.

Improve skillsInvestors have consistently identified improved skills as a key factor in supporting FDI. This issue is even more critical now that investors are concerned that Brexit may limit the flow of workers into the UK. The priorities identified in the wider industrial and trade strategies must be reflected in a skills plan to provide investors with the reassurance they need as to the availability of skills in the future. As we have mentioned in previous reports, digital capability and skills applicable to all sectors are a critical requirement.Play to our strengthsAs the report highlights, Scotland has many fundamental strengths and is continuing to remain resilient. However competition is increasing and so it’s important that business and government work together to ensure we have the right policies, resources, environment and mindsets that help Scotland flourish in a new world. Knowing what investors are looking for we must ensure we are well placed to attract future investment and promote to the world that we are open for business.

Action Plan



MethodologyThe “real” attractiveness of Europe for foreign investors Our evaluation of the reality of FDI in Europe is based on EY’s European Investment Monitor (EIM), EY’s proprietary database, produced in collaboration with Oxford Intelligence. This database tracks those FDI projects that have resulted in the creation of new facilities and new jobs. By excluding portfolio investments and M&A, it shows the reality of investment in manufacturing and services by foreign companies across the continent.

Data is widely available on FDI. An investment in a company is normally included in FDI data if the foreign investor acquires more than 10% of the

company’s equity and takes a role in its management. FDI includes equity capital, reinvested earnings and intra-company loans.

But our figures also include investments in physical assets, such as plant and equipment. And this data provides valuable insights into:

• How FDI projects are undertaken • What activities are invested in • Where projects are located • Who is carrying out these projects

The EIM is a leading online information provider, tracking inward investment across Europe. This flagship business information tool from EY is the most detailed source of data on cross-border investment

projects and trends throughout Europe. The EIM is frequently used by government bodies, private sector organizations and corporations looking to identify significant trends in employment, industry, business and investment.

The EIM database focuses on investment announcements, the number of new jobs created and, where identifiable, the associated capital investment. Projects are identified through the daily monitoring of more than 10,000 news sources. To confirm the accuracy of the data collected, the research team aims to directly contact more than 70% of the companies undertaking these investments.

* Investment projects by companies in these categories are included in certain instances e.g. details of a specific new hotel investment or retail outlet would not be recorded, but if the hotel or retail company were to establish a headquarters facility or a distribution centre, this project would qualify for inclusion in the database.

The ‘perceived’ attractiveness of Europe and its competitors for foreign investors

We define the attractiveness of a country or area as the combination of its image, investors’ level of confidence in it as an investment destination and the perception of its ability to provide the most competitive benefits for FDI.

The research was conducted by the CSA Institute from February to April 2017, via telephone interviews with a representative group of 453 international decision makers.

25% more than ¤1.5b less than ¤150m

40% between ¤150m and ¤1.5b

35% less than ¤150m

Presence in the UK

Location of interviewee

Size in annual sales

50% 61%

outside the UK 50%

not present in the UK 39%

North America

Western Europe

Central & Eastern Europe

Northern Europe Russia

Asia

Oceania

40%

4%

30% 1%

1%

19%

5%

Global headquarters

Sector activities

36% Business services (including transport and logistics)

28% Diversified industrial products, automotive and energy

19% Retail and consumer goods

10% High-tech and telecommunication infrastructures and equipment

7% Chemical and pharmaceutical industries

The following categories of investment projects are excluded from the EIM:

• M&A and joint ventures (unless these result in new facilities or new jobs being created)

• License agreements

• Retail and leisure facilities, hotels and real estate*

• Utilities (including telecommunications networks, airports, ports and other fixed infrastructure)*

• Extraction activities (ores, minerals and fuels)*

• Portfolio investments (pensions, insurance and financial funds)

• Factory and other production replacement investments (e.g., replacing old machinery without creating new employment)

• Not-for-profit organizations (charitable foundations, trade associations and government bodies)


About the Attractiveness ProgramEY’s attractiveness surveys are widely recognised by our clients, the media and major public stakeholders as a key source of insight on foreign direct investment (FDI). Examining the attractiveness of a particular region or country as an investment destination, the surveys are designed to help businesses to make investment decisions and governments to remove barriers to future growth. A two-step

methodology analyses both the reality and perception of FDI in the respective country or region. Findings are based on the views of representative panels of international and local opinion leaders and decision-makers.The Scotland attractiveness report is part of the EY Economics for Business programme which provides knowledge, analysis and insight to help

business understand the economic environments in which they operate.

ey.com/uk/economics ey.com/ukas [email protected]

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Investors vote “remain” in EuropeEY’s Attractiveness SurveyEuropeMay 2017

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RZ EY-17-036 STU European Attractiveness CH-DE BKL1705-036-v6.indd 1 18.05.17 16:37

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About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

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