Gary Gillespie

A regional computable general equilibrium analysis of the demand and ‘efficiency spillover’ effects of foreign direct investment

Despite government rhetoric concerning indigenous development, the attraction of foreign direct investment (FDI) remains a central plank of UK regional policy. The majority of studies of the regional impact of FDI concentrate on demand-side effects and use standard Keynesian or input–output multiplier methods.2 However the benefits from FDI are no longer thought to be limited solely to a stimulus to employment from additional demand. Indeed the focus of much recent work, especially at the level of the national economy, has been on supply-side issues, particularly the identification of ‘efficiency spillover’ effects from FDI to the indigenous sector. This issue is considered directly in several of the papers in this volume, with previous research being summarised in the paper by Blomstrom et al. In Gillespie et al. (1998) we argue that the identification of the regional system-wide demand-side effects ofassisted investment should incorporate capacity constraints and labour market displacement. This is not possible with the standard multiplier models. The argument for supply-side modelling holds a fortiori for the identification of the system-wide impacts of efficiency spillovers that operate primarily through changes in relative prices.

The regional impact of foreign direct investment: structure and behaviour in an ownership disaggregated computable general equilibrium model

Despite government rhetoric in support of indigenous regional development, in practice the attraction of foreign-owned inward investment remains a key plank of regional policy. Just under half of all expenditure on UK Regional Selective Assistance (RSA) is awarded to foreign-owned firms (PA Cambridge Economic Consultants, 1993) and individual regional development agencies vie for the attraction of incoming plants, often offering an extensive package of incentives.2 In Gillespie et al (2001a) we assess the impact of RSA-assisted investment on the Scottish economy using a computable general equilibrium (CGE) approach. Our earlier analysis makes no distinction between the foreign- and UK-owned manufacturing sectors, yet the former accounted for 39% and 23% of Scottish Manufacturing gross output and employment, respectively, during 1996 (Scottish Office, 1999). There is, therefore, a substantial foreign-owned component of Scottish manufacturing, and this may have a significant impact on the behavior of the regional economy of Scotland. Accordingly, in this chapter we refine our earlier approach to focus directly on the employment effects of export-oriented Foreign Direct Investment (FDI).