Increase in Foreign Direct Investment means Scotland is set for massive profit extraction

The National published an article on Sunday based on one of Common Weal’s briefings in an attempt to push back against the Scottish Government’s insistence that foreign direct investment (FDI) is the be-all-and-end-all of Scottish economic development.

This story developed after “Big Four” consultancy firm EY published a report saying that Scotland was the region of the UK that experienced this highest volume of FDI projects outwith London and the second highest number of projects in a single year since records began.

The Scottish Government was obviously fast to promote this story with Cabinet Secretary for the Economy Kate Forbes publishing a column extolling the virtues of increasing the exposure of Scotland’s economy to FDI.

However, our own research - published last year - has shown the more negative impact of high levels of FDI in an economy and especially in Scotland.

Our paper, Profit Extraction, showed that investment always demands a return and that when the investment comes from foreign-owned companies then the profits results from the investment flow overseas. Examination of Scotland’s Gross Domestic Product figures (a measure of the value of everything produced in Scotland) alongside Gross National Income (GDP, but adjusted for the flow of profits and other income both in and out of the country) show that in 2021 - the latest year for which we have data - more than £10 billion was net extracted from Scotland. More than a quarter of a trillion pounds has been extracted since the start of devolution when data started to be collected.

Worse, this level of extraction is some of the worst in the world as a proportion of our size. At almost 5.6% of GDP, this is a higher rate of profit extraction that all but a few of the most exploited nations on the planet. It is higher than the average of the group of poorest and most indebted nations.

An “average” nation of the level of development of Scotland would be expected to be a net importer of profits from abroad as Scottish companies expand outwards - one could think of the publicly owned energy companies of nations like Denmark or Norway expanding into Scotland as an example of this in reverse. But our data has shown that of the nations with a level of development equal to or higher than Scotland, only five experience higher levels of profit extraction and all of them are either tax havens (Ireland, Luxembourg, The Cayman Islands, Singapore) or a landlocked microstate (San Marino).

The loss of money to Scotland is extremely damaging - what would our country look like today if an additional quarter of a trillion pounds was circulating around workers’ wages instead of being extracted as foreign profits? - but the damage goes beyond the monetary. Companies that are able to invest internationally are, by definition, more mobile than companies rooted domestically and thus can leave almost as easily as they arrive. This means that they are able to use the threat of leaving to extract not just profits but concessions from our government - they refuse to come unless they get tax breaks or Freeports and they leave as soon as the breaks end. This means that relying on FDI doesn’t just harm our economy in the long run, it harms our democracy too.

Our book Sorted contains extensive discussion of how Scotland could run its economy for the benefit of people, not foreign profit. You can purchase the book here.