Growth in foreign ownership in the UK is something to be welcomed, not feared

Growth in foreign ownership in the UK is something to be welcomed, not feared

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The growth in foreign ownership in the UK is something to be welcomed, not feared. Foreign firms increase competition and help disseminate new ideas as local firms copy business methods and innovation. Britain’s traditional openness to overseas investment, trade and migration is something to be cherished, writes John Van Reenen.

The proportion of UK-quoted shares owned by overseas investors passed the 50% mark for the first time last week. Predictably there was much wringing of hands about the decline of British business and short-termism of UK investors.

But the fact is that the growth in foreign ownership is something to be welcomed, not feared. First and foremost, it is a sign of confidence in the long-run prospects of the economy. Despite the policy mistakes over premature austerity in the last few years, the underlying fundamentals of the UK economy are strong. As pointed out by the LSE Growth Commission the stable rule of law, flexible labour markets and good competitive conditions are attractive to international investors.

Second, foreign-owned plants are on average more productive than domestically owned establishments. Multinationals bring fresh ideas and expertise, such as new technologies and management practices. When Nissan first set up its Sunderland factory in 1984, commentators mocked that it could never replicate Japanese levels of productivity using British workers and managers, hemmed in by poor industrial relations, a different culture and onerous regulations. The cultural relativists were wrong. The Sunderland car plant became the most productive in Europe and remains so to this day. Why all the angst, then?

The worry is that those pesky foreign firms won’t nurture local UK talent and will disappear when times get tough. Things are different in France where the state tries to block foreign firms from taking over “strategic sectors” – like yoghurt. Under this view the poor showing of the English national football team lies in the excellence of the Premier League and its reliance on foreign players and managers. But a moment’s reflection shows this is nonsense. The English team was performing badly long before the influx of foreigners.

In fact, foreign firms usually up the game of domestic firms. They increase competition and help disseminate new ideas as local firms copy business methods and innovation. Nissan took away the excuse that things could never be done the same in Britain as Japan. They could and they were. Lean manufacturing was transplanted all over the world despite resistance. It’s been similar with information technology. American firms have been able to get a lot more productivity out of their computer investments because they have managed people better than European counterparts. Estimates suggest that half of all the gap in productivity growth between the US and EU would be made up if EU firms could make their management on par with US multinationals.

Before the great recession of 2008, there was a cross-party consensus that the British “Wimbledon economy” was the right model. Wimbledon is a globally prestigious event where talent from all over the world competes and that we gain from hosting, even if British players do not win. Only last year, Andy Murray did win.

Britain’s traditional openness to overseas investment, trade and migration is something to be cherished. It bespoke a positive attitude to globalisation, engaging with change rather than trying to erect barriers to overseas capital. If the onerous barriers we are putting up against foreign talent with the ridiculous 100,000 net immigration target are repeated with foreign ownership, our society will be the poorer for it.

This article was originally published at The Conversation. Read the original article.


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Like Indy I am also concerned about a non sequitur in your article, albeit slightly a different one.

Many shares listed (and thus quoted) on the London markets are for companies that have only a token presence in the UK. A London listing is merely a means to gain access to some of the world's largest and deepest (effectively international) capital markets, hosted in the UK. For example, when a Kazakh oil company with no footprint in the UK, it should not be surprising that the majority of its shared are foreign-owned (possibly Kazakh-owned, though just as likely owned by an intermediary company in a tax haven).

Furthermore, nominally 'foreign'-owned shares are often ultimately owned by UK residents, via intermediaries in other domiciles, to take advantage of reduced transparency obligations and tax-avoidance schemes. For many London-listed companies you don't have to go much more than 100 miles offshore to a UK-affiliated tax haven (Isle of Man, Guersey, Jersey etc.) to find the find the 'foreign' country of domicile. And to find the ultimate/beneficial owners of the tax-haven domiciled company you could often probably simply complete the round-trip back to the UK.

So capital ownership and financial market listings are quite a different thing from physical presence of people and tangible fixed assets, and all the benefits those may bring as rightly pointed out in your article. (Incidentally, it is possible to have such foreign presence and the benefits thereof through more joint forms of ownership such as JVs and subsidiaries with a minimum local percentage shareholding.)

In conclusion, growth in FDI may well be something to be welcomed on the basis of your article. But growth in foreign ownership of London-listed companies may be as much as symptom of the UK allowing global capital to use our institutions, stable politics, and strong rule of law as a conduit for their own purposes, largely unconnected to the UK real economy.

The increased presence of foreign firms has certainly not increased competition from domestic companies. In fact, the opposite has happened primarily because the potential providers of risk equity capital see the increased number of foreign companies as a good reason not to invest in indigenous capability. What's more, the lack of investment in indigenous capability is an incentive to foreign companies to set up shop here and that in part probably explains why the level of foreign ownership continues to increase.

Trying to excuse the increase in foreign ownership as a consequence of "Britain’s traditional openness to overseas investment, trade and migration" and claiming it is "something to be cherished" is risible and it most certainly does not bespoke a positive attitude to globalisation. We're not taking part in globalisation we are the "victims" of it and we've lost almost total control of our economy as a result.

5) (Which might reasonable be labeled (2a) - what does it mean that Amazon places warehouses in the UK and maybe the odd data centre, but keeps design and engineering work in Seattle? I use Amazon not to be emotive, but to represent the growing sector which is less and less dependent on physical assets - and so more able than ever to keep the "intellectual infrastructure" close to home.

(Nissan does have a design centre in London, but I think it's open to question how integrated with the Sunderland plant...)

I suppose it's the nature of short articles, but there's a large sense of non-sequitur about this piece.

1) To nit-pick, the England team reached the semi-final of the World Cup in 1990, 2 years before the creation of the EPL, which drove the influx of foreign players and owners. Perhaps you could find a more accurate "moment's reflection"? (I can accept the idea that the foreign influx is merely correlated with current poor national team performance, but you're seeking to imply much more than that.)

2) It is necessary to ask about the wider system: What does it mean that profits from Amazon are largely repatriated to the US company? It is true that British investors can buy Amazon shares and so some of that money may be recycled in the UK economy, but it is not a given, and these flows deserve a mention at least in any rounded defence of foreign ownership. Not least, the question of taxation, both on profits and dividends.

3) Equating rules about capital ownership with rules around immigration really is a non-sequitur. What do these things have to do with each other? The reality is that the current government is proceeding with restrictions on immigrations, but is well known to be friendly to foreign investment and ownership. There may be possible psychological links between the issues in theory, but clearly in practice the government has no problem taking two different stances on these issues.

4) This isn't the place to get into the debate around management quality, s0 taking your work at face value, we've had 20 years of being very open to FDI and foreign takeovers, yet the productivity gains over more protective countries (France, Germany, South Korea) have been disappointing. (There have been gains, but not sustained, and that's worrying for your theory.)

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