Investment quality


Does it matter if all of Britain’s electricity generating companies are owned by Americans? Neither laissez-faire nor chauvinism is the appropriate response to foreign ownership.

Does it matter if all of Britain’s electricity generating companies are owned by Americans? If all our major investment banks are subsidiaries of Continental European financial institutions? If the British owned car industry closes down and is replaced by one which is mostly owned by the Japanese? If we have to get our KitKats from the Swiss, our water from the French, and our beta blockers from the Germans?

The French government clearly thinks it does. That is why it has recoiled from the prospect that its consumer electronics industry might fall into the hands of the Koreans, vetoing Daewoo’s proposed purchase of this part of Thomson’s business. Not a problem the British government has to worry about: the equivalent goods here have for years been made by firms called Sony, Hitachi and Samsung. There was a time when we took a different view. When Kuwaiti ownership of a 20% stake in British Petroleum was too much to bear. When the Monopolies and Mergers Commission was horrified by the prospect that the Royal Bank of Scotland’s head office might move to London, far less Hong Kong. But not any more.

Now it is silly to be xenophobic about all this. It is an undeniable, if depressing, fact that the car industry and the consumer electronics industries, under British ownership, largely failed to meet the challenges of international competition. We did make things worse for ourselves by merging all our small weak competitors into a large weak competitor: in the hope that one national champion would enjoy critical mass, global niche, and several other industrial policy clichés. But that is in the past. Today, the only way we can have viable firms in cars and consumer electronics is to have Japanese ownership, management and design.

And if American companies want to buy our regulated utilities for more than they are worth, the difference is a net gain to UK plc. The world is full of regulated companies with more cash than knowledge of the markets they would like to enter, convinced that the grass must be greener somewhere else. What really ought to concern us is not when foreigners buy here, but when our own companies, suffering from the same misconceptions, believe that the regulatory climate will be more benign in Bangkok or Buenos Aires than in Birmingham.

So should we just let the market rip? I’m not so sure. An economy in which we are all employed as production workers for foreign companies, and then retire on well funded pensions we have financed by selling off the future earning streams of our companies to overseas investors, is certainly better than one in which there is little employment and no pensions. But in the long run our prosperity depends on the skills and capabilities of our firms and our workforce, and that doesn’t necessarily sound like the best environment for developing that.

This brings us to the hub of the matter. Our national economic objective is to maximise the added value which is created in Britain. We can only add value by having skills and capabilities – in people or in firms – which are better than those of the companies and countries with whom we are in international competition. So we should welcome foreign ownership when it adds to these skills and capabilities. And we should deplore it if it means that these developments take place somewhere else, or that the benefits of enhancing their value accrue to somewhere else.

So we should not be too disturbed by the fact that much of what is done in the City of London is done by firms with foreign parents. Ownership may have been transferred, but London is still where the value is added, and that means that the return from adding that value will be earned here. You only have to look at what people in the City are paid to see that this is true, and that the increasing involvement of foreign companies in London has led to bidding up of the earnings of people with specialist skills. More than that, the presence of so many foreign companies here actually helps to enhance these skills and emphasise London as a centre where they are located.

But we should be more sceptical about those foreign direct investments which are the subject of enthusiastic ministerial announcements: creating, they tell us, thousands of jobs in depressed regions of the country. These companies have not come here to make British skills available to a wider market. They have been attracted by the top bidder in a subsidy competition among many regions of Europe and often regions of the UK. This is a competition among areas all of which can offer equivalent – generally rather low – levels of resource and capability.

And we should be more sceptical still about allowing control of British industries to pass into foreign hands if that means either that future development of these industries strengths will be driven from overseas, or that the benefits of enhancing these competitive strengths will be derived overseas. Whatever is said about globalisation of the world economy, most companies remain resolutely national at the highest levels of operation, and their highest added value activities are biased towards their home country.

So we should think long and hard before allowing others to acquire our pharmaceutical or aerospace capabilities, even at extravagant prices. And it is good that our electricity industry should have access to American skills and expertise, but very undesirable that we should end up with no electricity distribution company headquartered here. As in so many other areas of economic activity, progress comes from diversity: and neither British laissez-faire, or French chauvinism, guarantee that.

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