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One of the basic tenets of UK industrial policy, that attracting inward investment into the UK stimulates domestic productivity growth, is examined. A model of productivity growth is developed for the indigenous sector of UK manufacturing, linking domestic productivity growth to theoretical explanations of inward investment. The paper demonstrates that inward investment does stimulate productivity growth in the domestic sector of around 0.75 per cent per annum. However, this cannot be attributed to investment or output spillovers, but is a result of the productivity advantage exhibited by the foreign firms.

This paper examines some of the employment consequences, broadly defined, associated with foreign inward investment. A foreign firm entering an industry in the UK will have a degree of firm‐specific advantage over the incumbent firms. This advantage is assumed to manifest itself in terms of a productivity differential over the domestic sector. As such, foreign entry will create factor market disequilibrium in the domestic sector. It is shown that such investment generates 'employment substitution' away from UK firms, equivalent to approximately one–fifth of all the jobs created by inward investment.

AbstractThis paper employs establishment level data from the annual respondents database to consider technological differences between establishments operating in the UK. We adopt very precise measures of technology, arguably much more detailed than have hitherto been employed to address the key question of whether use of technology differs by nationality. After numerous controls we find that typically North American establishments have a higher probability of being more technologically intensive than their UK counterparts. This result also stands up in panel analysis.

This paper contrasts the effects of trade, inward FDI and technological development upon the demand for skilled and unskilled workers in the UK. By focussing on industry level data panel data on smaller firms, the paper also contrasts these effects with those generated by large scale domestic investment. The analysis is placed within the broader context of shifts in British industrial policy, which has seen significant shifts from sectoral to horizontal measures and towards stressing the importance of SMEs, clusters and new technology, all delivered at the regional scale. This, however, is contrasted with continued elements of British and EU regional policy which have emphasised the attraction of inward investment in order to alleviate regional unemployment. The results suggest that such policies are not naturally compatible; that while both trade and FDI benefit skilled workers, they have adverse effects on the demand for unskilled labour in the UK. At the very least this suggests the need for a range of policies to tackle various targets (including in this case unemployment and social inclusion) and the need to integrate these into a coherent industrial strategy at various levels of governance, whether regional and/or national. This has important implications for the form of any 'new' industrial policy.

This paper employs establishment level data from the annual respondents database to consider technological differences between establishments operating in the UK. We adopt very precise measures of technology, arguably much more detailed than have hitherto been employed to address the key question of whether use of technology differs by nationality. After numerous controls we find that typically North American establishments have a higher probability of being more technologically intensive than their UK counterparts. This result also stands up in panel analysis.