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Would independence harm Scotland’s FDI attractiveness?

Scotland seems to teeter closer to another independence referendum with every passing election, but could breaking away from the UK threaten its stellar FDI figures?

scotland-fdi-independence
Scotland’s First Minister Nicola Sturgeon wants the country’s future to be an independent one, but as part of the UK it is recording impressive FDI figures. (Photo by Jeff J Mitchell/Pool/AFP via Getty Images)

Could uncertainty over Scotland’s future within the UK cloud investor’s appetite for long-term investments into the country? If so, how are Scottish investment promotion agencies, councils and businesses addressing this?

If interview requests for this article are an indication, very cautiously. The Scottish government and Scottish Development International both expressed reservations about commenting on independence and its possible impact on Scotland’s foreign direct investment (FDI) flows – for better or worse – while the chances of a referendum on independence happening are still unknown.

Is uncertainty impacting investment in Scotland?

When it comes to the impact of potential independence on Scotland’s FDI attractiveness, Investment Monitor’s chief economist Glenn Barklie says: “In terms of FDI, the biggest issue around this for investors is the uncertainty. There are points being made on both sides of the debate; why independence could be good and bad for Scotland – but those arguments aside, it is the lack of clarity of Scotland’s future that investors would have the issue with.”

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At the time of writing, this uncertainty is yet to make a meaningful dent in investor appetite, with the 2021 EY UK Attractiveness Survey showing that Scotland’s FDI numbers increased between 2020 and 2021, despite the Covid-19 pandemic.

In fact, Scotland’s FDI projects increased by 6% over the year, which is particularly impressive given that overall, the UK declined by 12% and Europe fell by 13%. Furthermore, capital city Edinburgh overtook Manchester as the number one UK city outside of London for FDI projects. Finally, Scotland’s investment destination attractiveness rose to its highest level since the report began at 15%, more than double the 2019 figure of 7%.

Although Scotland's FDI project numbers haven’t seen the same rise and fall as the rest of the UK, they have remained stable even in the face of Covid-19 and Brexit.

It is a very promising report card for Scotland’s FDI and these figures correlate with another Scottish parliament with an SNP majority. This, it could be reasonably assumed, indicates a continued and sustained appetite for independence, given the party’s clear mandate to hold an independence referendum.

Barklie says: “It doesn’t seem that any possible uncertainty is having an impact on investment into Scotland at the moment.” He adds that it is difficult to unpick the reasons for Scotland’s FDI success in order to evaluate the possible impacts independence could have on this.

In terms of FDI in Scotland, the biggest issue around this for investors is the uncertainty. Glenn Barklie, GlobalData

“If you look at these recent FDI figures, in order to assess the possible impact, you would have to ask: ‘Was [this success] because Scotland was part of the UK?'," he says. "Could Scotland be performing better if it were an independent country? How does Brexit and EU membership play into those scenarios? What would the border [with England in the event of independence look like], and would Scotland have good access to the UK domestic market?”

These questions snowball into a tangled mess that make it nigh impossible to paint a clear future for Scotland: independent or otherwise.

Scotland's FDI appeal resonates

John Alexander, Dundee City Council leader and chair of the Scottish Cities Alliance, is confident about Scotland’s ability to attract and work with investors in spite of this uncertainty. He believes that companies already possess the ability to adapt to changing circumstances.

“Generally, certainty is always preferred, but companies already have to adapt across countries," he says. "Look at the kind of federal system that operates in Germany, where taxation is much more localised. There are variances in terms of planning processes, procedures and of course taxation.

“So, businesses already adapt and work very well across jurisdictions, either within countries or across continents. I don't think that would be any different if there was a second referendum that [resulted in independence].”

A source who does not wish to be identified adds that when discussing independence with possible investors, the Scottish tendency of being straight to the point becomes advantageous.

Businesses already adapt and work very well across jurisdictions, either within countries or across continents. I don't think that would be any different if there was a second referendum. John Alexander, Dundee City Council

“We are very forthcoming about the challenges surrounding Scotland and independence, be it unforeseen or otherwise, when talking with investors," says the source. "I think that is why Scotland is doing well for investment – we build trustworthy relationships and we are honest about where the country is and where it could be heading.”

This 'honesty is the best policy' strategy is potentially one reason behind foreign-owned businesses steadily creating more jobs in Scotland over the past decade, rising 3.6% between 2010 and 2020.

Scotland remains on an upwards investment trajectory

With so much of Scotland’s future undefined, its FDI attractiveness could be under threat through this lack of clarity. However, the 2014 independence referendum and the SNP’s success since have not had a discernible negative impact.

This could be down to the attitude of Scots working with investors, but there are a number of other factors enticing investors to the country, such as impressive human capital with top universities and a steady flow of talent, access to natural resources and a growing renewable energy sector, a rapidly growing digital sector and lower operational costs than London.

All of the above are unlikely to go away should the country opt for independence, meaning Scotland's FDI attractiveness will continue to resonate with investors irrespective of its status.

Ruth Strachan

Ruth Strachan

Senior reporter

Ruth Strachan is a senior reporter at Investment Monitor, focusing on manufacturing, mining and commodities.