Brexit and FDI

• The potential for a departure from the EU to undermine the UK's attractiveness as a location for Foreign Direct Investment (FDI) is often cited as one of the key risks were the UK to leave the EU. In weighing up the threat to FDI posed by ‘Brexit’ we assess the net gain from inward investment and the role played by EU membership in attracting FDI.
• In theory, FDI benefits the economy via lower interest rates, higher wages for workers and ‘spillover’ benefits boosting economy‐wide productivity. But the evidence for these benefits is ambiguous. And FDI has potential drawbacks. These include an adverse effect on the tradeable sector, reflected in a wider current account deficit, the potential to ‘crowd out’ investment by domestic firms and the fiscal cost of subsidies paid to inward investors.
• That almost half of FDI in the UK comes from other EU countries suggests that EU membership is not the only driver of foreign investment in the UK. Other factors include the UK's business friendly environment, as reflected in global competitiveness surveys, and a relatively deregulated labour market. Of perhaps most importance is the lure provided by the UK's large domestic economy. 80% of FDI in the UK is in sectors where sales to the EU account for less than 10% of total demand.
• However, FDI in manufacturing does look vulnerable to Brexit, given the importance of the EU market. Granted, manufacturing accounts for a modest share of UK FDI. But to the extent that FDI boosts productivity, a loss of inward investment in this sector is likely to come at a disproportionate cost.
• Our modelling suggests that in a worst case Brexit scenario, the stock of FDI could ultimately be 7% lower relative to the UK remaining in the EU, potentially knocking around ½% off the level of GDP.

     

Regional Foreign Direct Investment and Wage Spillovers: Plant Level Evidence from the UK Electronics Industry*

This paper examines the extent to which foreign investment in the UK generates wage spillovers in the domestic sector of the economy using a simultaneous dynamic panel data model and focusing on the electronics sector, possibly the most ‘globalized’ sector of UK manufacturing. It finds evidence that the higher wages paid by foreign firms cause wages in the domestic sector to be bid up. This phenomenon is, however, largely confined to the region where foreign direct investment takes place.     

Do governments tax agglomeration rents?

Empirical evidence suggests that firms receive rents from locating in economic agglomerations and industry clusters. Using the German local business tax as a testing ground, we empirically investigate whether these agglomeration rents are taxable for local governments. The analysis exploits a rich data source on the population of German plants to construct measures for the communities’ agglomeration characteristics. The findings indicate that economic agglomerations and industry clusters exert a positive impact on the jurisdictional tax rate choice. Further analysis moreover suggests that a municipality’s potential to tax agglomeration rents depends on its firm and industry agglomeration relative to neighboring communities. To account for potential endogeneity problems, our analysis exploits long-lagged population and infrastructure variables as instruments for the agglomeration measures.     

The business case for sustainability? An examination of small firms in the UK's construction and restaurant sectors

Studies show that despite a concerted attempt by UK policy‐makers to portray ‘eco‐efficiency’ measures as cost reducing, most owner‐managers of small firms view environmental measures as expensive to undertake. As a result, owner‐managers tend to be highly resistant to voluntarily improving their environmental performance. Given that SMEs are such a vast sector of the economy, this perceived discord between profits and environmental protection is clearly a major barrier to the ‘greening’ of industry. This ESRC‐funded study has sought to unearth the underlying motivations for why SME owner‐managers in the UK resist or accept the idea that there are business benefits for improving their environmental performance. The findings from 40 in‐depth interviews with SME owners in the UK's construction and restaurant sectors and 12 ‘key informants’ from industry and government are presented, followed by a discussion of SME perspectives on the ‘business case’ for sustainability and its implications for policy‐makers. Copyright © 2005 John Wiley & Sons, Ltd and ERP Environment.     

Environmental regulation and innovation driving ecological design in the UK automotive industry

The theory of ecological modernization asserts that economic and environmental goals can be integrated within a framework of industrial modernity. Its central tenet is that environmental regulation can stimulate the application of ‘clean’ technologies or techniques. Ecological modernization also contends that environmental regulation can offer business benefits from innovation through improved product design and economic performance. The EU End of Life Vehicles Directive (ELVD) reflects many of these principles, as it compels all car manufacturers to ‘take back’ and dismantle vehicles at the end of their useful lives and to remove the hazardous substances from the production process. Each component will then be either reused or recycled. The legislation forces designers to introduce ‘clean design’ and ‘design for disassembly’ practices. In light of this, we examine the impact of the directive on UK automotive component manufacturers. We find limited evidence that the EU ELVD Directive has driven product innovation beyond short‐term, incremental technological trajectories. We therefore conclude that a more radical approach, in line with the ‘dematerialization’ thesis by Dobers and Wolff (1999), is needed to generate more radical, ecological design solutions within the UK automotive industry. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment.     

Industry analysis and investment decision-making under conditions of uncertainty

Evaluating risk is a key element in successful investment decision-making. A major risk in forecasting company performance is associated with projecting its cash flow streams by product-line which in turn is strongly related to the expected industry outlook and likely variability about this outlook. This paper sets out a methodology for evaluating this aspect of the investment decision by developing measures of expected real cash flow growth (reward) and expected annual variability of this growth (risk). These measures are constructed for 77 industry classifications at the two and three digit SIC (Standard Industrial Classification) level of detail by solving a dynamic input–output model under various economic secenarios. Aside from producing results which are relevant for producing company valuation bands, the analysis strongly suggests that perceptions of which industries are ‘winners’ and which are ‘losers’ are significantly altered when both ‘reward’ and ‘risk’ are used as criteria as opposed to either one alone. Finally, the methodology also produces results which measures the sources of cash flow growth in terms of relative price performance, productivity, and demand for output. Since there measures can be used as indicators of the quality of industry real cash flow growth, industry performance can be further arrayed within the broad categories of winning and losing industries. Several examples of how this is done are offered.     

Hard Times or Great Expectations? Dividend Omissions and Dividend Cuts by UK Firms*

This paper uncovers an increasing proportion of quoted UK companies omitting cash dividends. Using a large panel of quoted UK firms, we estimate panel data probit models for the incidence of dividend omissions and cuts as functions of financial characteristics including cash flow, leverage, investment opportunities, investment and company size. These variables account for most of the increase in omission since 1995. There is relatively little evidence to link this to the major tax reform of 1997 that abolished tax refunds on dividend income payable to tax‐exempt institutions. Significant persistence effects indicate companies are slow to adjust their balance sheets through their dividend.     

Barriers to investment in the informal venture capital sector

Much of the government intervention into the market ‘gap’ for start-up and early-stage equity finance in the UK is based on the belief that the problem is on the supply side. Based on an analysis of the informal venture capital market this paper argues that there is no shortage of finance available. A survey of business angels reveals that many are willing to allocate a higher proportion of their investment portfolio to investments in unquoted companies, with recent tax incentives having a positive effect on their willingness to invest. Over 90% are currently looking to make more investments. However, there are constraints on their ability to invest: they do not see enough deals that meet their investment criteria, the majority of the investment proposals that they receive are of poor quality, and they are often unable to negotiate acceptable investment terms and conditions with entrepreneurs. The implication is that there is a need for further interventions by policy-makers to remove these barriers so that more small firms can take advantage of the substantial pool of angel finance that is available.     

THE LOW-TRUST ROUTE TO ECONOMIC DEVELOPMENT: INTER-FIRM RELATIONS IN THE UK ENGINEERING CONSTRUCTION INDUSTRY IN THE 1980S AND 1990S*

There is a growing body of literature that suggests that advanced economies are experiencing an economic restructuring such that the engines of economic development are smaller, more independent, firms acting in an increasingly cooperative manner. In assessing whether the UK economy is actually experiencing such a shift in inter-firm relations, the paper firstly assesses the existing evidence. This evidence suggests the continued dominance of large firms and only limited and uneven movements away from a low-trust system. Secondly, the paper presents evidence on the nature of inter-firm relations in the UK engineering construction industry in the 1980s and 1990s. the research shows considerable improvement in performance against schedule associated with the emergence of management contractors. Management contractors can improve performance either by adopting a high-trust route in which they seek to make overall efficiency gains by integrating design and construction, or by adopting a low-trust route in which they seek to reduce scope for opportunism by rigidifying design, and by passing on risk. Evidence is presented which shows that management contractors in the UK have so far predominantly adopted the low-trust route to improved performance. Cumulatively, the evidence suggests the dominance of the ‘top down’ control of inter-firm relations in the UK.     

The effects of ownership concentration on investment and performance in privatized firms in Russia

This paper provides new survey evidence on effects of concentrated ownership on restructuring and performance in privatized firms in Russia. The major findings are that large‐block shareholding is negatively associated with the firm's investment and performance, and this relationship does not depend on the identity of controlling shareholders. These results are consistent with the assumption that when minority shareholders' rights are not adequately protected, the entrenched controlling shareholders may be engaged in extracting ‘control premium’ before pro rata distribution of dividends. The issues raised have relevance to other transitional economies where the privatization process has been followed by an increase in ownership concentration. Copyright © 2001 John Wiley & Sons, Ltd.     

Boards’ Response to Shareholders’ Dissatisfaction: The Case of Shareholders’ Say on Pay in the UK

Abstract

In 2002, the UK adopted a regulation allowing shareholders to cast non-binding (advisory) votes on their firm's Directors' Remuneration Report during annual general meetings (the ‘Say-on-Pay’ rule). This study evaluates a decade of this regulation and examines how it affected the behavior of shareholders and boards in a sample of Financial Times Stock Exchange 350 firms during the period 2002–2012. I find evidence that shareholder dissatisfaction increases with excess Chief Executive Officer (CEO) compensation. This relationship does not exist for the expected level of compensation, suggesting that shareholders take a sophisticated approach when casting their vote. Boards do not appear to respond to shareholder dissatisfaction systematically; however, they do respond selectively by reducing the excessiveness of CEO compensation when performance is poor. Boards also seem to respond swiftly to shareholder dissatisfaction. There is evidence that the probability of CEO turnover increases with shareholder dissatisfaction. Overall, the evidence suggests that ‘Say-on-Pay’ regulation addressed regulatory concerns about transparency, accountability, and performance linkage.     

Government Time Discounting and Required Rates of Return: UK History and Current Issues

The UK government first set financial objectives for the nationalised industries in 1961 and subsequently promoted the use of ‘discounted cash flow’ for investment appraisal. The nationalised industry regime evolved until, in the 1990s, it was succeeded by economic regulation regimes for the privatised utilities. Meanwhile discounting conventions emerged and have continued to evolve for wider government policy analysis, including aspects of climate change. Issues about the size and functions of public expenditure notwithstanding, UK government conventions are currently fairly uncontroversial: however, in the world at large, government discounting remains subject to many academic and international controversies and misunderstandings.     

The measurement of the economic performance of the US Nonfinancial Corporate Business Sector 1946–1990: an application of the shareholder value creation concept

This paper is based upon a juxtaposition of the cash flow-market value performance (alias SVC performance) and historic cost accounting (HC) performance of the US Nonfinancial Corporate Business sector 1946–90. It has two principal objectives: 1. To determine whether, judged on return and variability dimensions, the HC accounting model is an operationally acceptable surrogate for a multiperiod market-based accounting model. 2. To analyse the consequences of HC income-based distributions, i.e., corporate tax, interest and dividend payments based on conventionally-measured corporate income. Three principal conclusions are drawn: i. Notwithstanding their common cash flow component, HC performance indices are not reliable surrogates for SVC performance criteria. The former apparently do not accurately capture changes in corporate valuation and generally understate the variability of market-based returns. ii. The multiperiod HC income of a going concern characteristically overstates its coterminous multiperiod cash flows to a considerable degree. Contrary to common supposition, the former does not therefore constitute a ‘normalized’ or ‘smoothed’ version of a firm's ‘primitive’ cash flows in the sense that the cumulative (multiperiod) values of the two measures tend to converge. iii. As a consequence of ii, HC income and its near relation, taxable earnings, are dubious bases for measuring interest-paying, tax-paying and dividend-paying capacities. Corporate income-distribution decisions based on HC accruals-based profit measures frequently trigger external financing which may cause shareholder wealth losses and wealth transfers from shareholders to lenders. However, ‘fiscal drag’ appears to be the most serious consequence of HC accruals-based income distribution decisions.     

Organizational structure and the internal economy of the firm: The UK insurance industry

There now exists a substantial volume of empirical evidence which has examined the superiority of the ‘M’-form organizational structure for the management of large, diversified enterprises. Regrettably, attention has mainly been focused on manufacturing companies, despite the rising importance of the service sector in most major economies. This paper examines organizational structures within one segment of the UK service sector: the insurance industry. In the UK this industry has undergone significant, regulatory-driven structural change and, as a consequence, the majority of companies have undertaken organizational change. The results produced, however, suggest that many of these companies adopted sub-optimal divisionalized structures.     

The impact of tax increment finance districts on localized real estate: Evidence from Chicago’s multifamily markets

Sales price indices for the Chicago multifamily real estate market are developed in order to examine the influence that designating an area a tax increment financing district (TIF) has on the real property appreciation rates. Chicago is a community with a long history of TIF investment and a patchwork of more than 130 established TIF districts, comprising over 29 percent of the city’s total acreage and approximately 19 percent of the total real property tax base. Municipal governments across the country have come under increased pressure to provide quantifiable evidence that the tools they employ in the name of economic development have the potential to increase private investment. The results indicate that properties located within a designated TIF district exhibit higher rates of appreciation after the area is designated a qualifying TIF district when compared to those properties selling outside TIF districts, and when compared to properties that sell within TIF district boundaries prior to designation. The findings provide support for the hypothesis that TIF policy impacts property values through increased investment.     

Behavioral approaches to optimal FDI incentives

Countries attempt to attract foreign investors by offering them a set of incentives. The most common types of foreign direct investment incentives are grants and tax relief. Although the amount of the grant is independent of future situations, the value of a tax relief depends on future profits. Our study used the behavioral approach to test experimentally the preferences of managers regarding the desired types of incentives under various conditions. We found, ‘Regret Effect’, ‘Statues Quo Bias’, and ‘Insurance Effect’ in subjects' decision making. A country can improve the incentives it offers by considering the various behavioral biases of the companies' managers. Copyright © 2008 John Wiley & Sons, Ltd.     

An empirical model of mainframe computer investment

This paper introduces a dynamic model of investment decisions in mainframe computer systems. I estimate and test the model using detailed micro data from a company in the telecommunications industry. The model accounts for ‘technological depreciation’ which distinguishes computers from other investment goods where physical depreciation is typically a key factor underlying replacement investment decisions. The company increased its installed mainframe computer capacity by over 30‐fold over the 10‐year sample period. Part of this growth was undoubtedly due to the huge increase in performance and the corresponding drop in the per unit cost of processing capacity of mainframes, a consequence of ‘Moore's law’. However, there was also tremendous growth in the need for computers for billing, account processing and other tasks, due to the rapid growth in the telecommunications industry over this same time period. I estimate the unknown parameters of the investment model using a nonlinear least squares–nested fixed‐point algorithm (NLS‐NFXP), which solves the Bellman equation underlying the dynamic model of investment and replacement of mainframe computers by nonlinear least squares. I demonstrate that it is feasible to estimate this model on an ordinary PC, whereas standard discretization approaches to solving the firm's optimal investment policy might not even be feasible using supercomputers. I show that the estimated model fits the data very well, and accurately captures the large growth in installed mainframe capacity, the timing and magnitude of replacement investment, as well as periodic upgrades of existing mainframe units. I use the model to decompose how much of the 30‐fold increase in mainframe computer capacity is due to ‘Moore's law’ (i.e. the huge drop in the unit cost of installed mainframe capacity), and how much is due to the growth in demand for services of mainframes, due to the rapid growth in demand for telecommunications services (particularly cell phone accounts) by the firm's customers. Copyright © 2010 John Wiley & Sons, Ltd.     

Audit policy making in the UK

In accounting discourses, the going concern concept is considered to be ‘fundamental’ yet in auditing it is considered to be ‘material but not fundamental’. Like all other social concepts and practices, ‘going concern’ is multi-accented and its meanings cannot be stabilized. Against such a background, the UK accountancy bodies formulated and issued the auditing guideline The Auditor's Considerations in Respect of Going Concern in 1985. The purpose of this paper is to explore audit policy making in the UK by examining the formulation of the auditing guideline. The evidence suggests that the auditing guideline was an attempt by the professional bodies to manage a crisis of auditor responsibility. It suggests that a major aim of the guideline was to minimize audit effort in order to give maximum protection from litigation to major auditing firms.     

Poor Personnel Practice In the Hotel and Catering Industry: Does It Matter?

Liz Price, who is a Senior Lecturer in Human Resource Management in the School of Hotel and Catering Management at Oxford Brookes University, reviews the evidence suggesting that personnel practice in the commercial sector of the UK hotel and catering industry tends to be poor. In particular, she presents the findings of her own recent surveys which demonstrate that few hospitality employers meet all of the basic requirements set by employment legislation and that managers/proprietors are poorly advised/trained about ‘good practice’. She argues that poor personnel practice is of concern because, ultimately, it threatens UK success in tourism and hospitality markets as well as providing only low quality employment for many people.     

Ethical Climate and Accountability in Nonprofit Organizations

The Best Value regime, which is being introduced in the UK from April 2000, is rooted in the ‘new public management’ paradigm but also seeks to move beyond it. Like compulsory competitive tendering (CCT) which preceded it, the Best Value framework stresses the role of markets and performance management systems in the provision of public services. However, it appears to offer more scope for local flexibility, and has therefore enjoyed a much higher level of support among local policy makers.

There is though evidence that many in local government have not yet grasped the scale of the improvements in local services that ministers are expecting, and the extent to which this will require changes in existing structures and processes. The result is likely to be an increasingly differentiated pattern of service provision and, in an era of ‘evidence policy making’, researchers are likely to be called upon to develop methodologies which allow evaluation of the alternative models of service provision that begin to emerge.