[A-List] UK eurozone membership

["Michael Keaney" <michael.keaney@xxxxxx>]

Diane Coyle: Foreign investors drill out of Britain
The Independent on Sunday, 06 October 2002

Black & Decker, the US-owned tool maker, announced last week it was moving
some of its operations from the north-east of England to the Czech Republic.
It was the latest in a line of announcements by foreign multinationals
abandoning plants in the UK. Black & Decker blamed the intensity of global
competition, forcing it to a country with cheaper (but still skilled)
labour. Other culprits for past closures have included the strength of the
pound and the allure of being inside the euro area rather than a lukewarm
"maybe" country.

The important question for the future of the UK economy is if such
high-profile departures signal a worrying long-term trend. It's hardly news
that manufacturing is in relative decline: its share of the economy has been
falling since the late 1960s. And while the UK sends more direct investment
overseas than comes in from abroad, we remain one of the world's biggest
recipients of inward foreign direct investment (FDI).

So to know how much to worry means taking a closer look at trends in the
figures, and at companies' motives for investing across borders. Two
publications from the OECD (International Investment Perspectives and FDI
for Development, www.oecd.org) sum up the evidence.

The first point is that cross-border investment is one of the defining
features of economic change and globalisation over the past decade or two.
The world stock of FDI is about $4 trillion. The annual flow rose from
$200bn (£127bn) in 1993 (and next to nothing a decade before that) to a
record $1.3trn in 2001, though it has fallen sharply since.

Most FDI takes place between the member states of the OECD - ie, the richer
economies (including the Czech Republic). In other words, the motive can't
just be finding the cheapest labour, or the developing world would attract
more, and the US, UK and Netherlands would not be consistently the biggest
recipients.

The biggest changes in the patterns of investment flows have not been in the
countries on the receiving end but in the industry mix and the character of
the investment. During the late 1990s manufacturing lost its place as the
main sector involved in FDI; services have overtaken it in importance.
Second, companies are increasingly thinking of their markets as
international. Rather than set up plants that are replicas of each other in
several countries to serve each national market, they now operate specialist
plants that supply each other. The result shows up in international trade
figures: more than a third of trade in manufactures now consists of
components rather than finished goods.

This process takes the increasing specialisation which has been at the heart
of economic growth for more than 200 years to the global level. Falling
transport and communication costs and declining trade barriers account for
it. Globalisation is shaking up production patterns, an upheaval that will
ultimately bring much greater efficiency.

Still, it's a disruptive process, and for the UK there is a genuine fear
over whether investors think this is still a sensible location given the way
the market for their products is developing. The single currency has made it
obvious that the main continental markets are where that action is. Britain
is distinct from the euro areas, which have become more integrated. This is
a process that could snowball. The relocation of production to the core will
reinforce itself.

Just one example does not prove this is happening. But in 2000-2001 the
biggest rises in FDI went to the continental economies. The straws in the
wind are ominous.