Scope of Presentation

Building on the Legacy? - the Economic Impact of Regional Selective Assistance in Great Britain 2000-2004Mark Hart1; Nigel Driffield1; Stephen Roper2 and Kevin Mole21Economics and Strategy GroupAston Business School2Warwick Business SchoolEPRC Seminar28th October 2009

Scope of Presentation • ‘Last’ evaluation evidence from Regional Selective Assistance (RSA) – 2000-04 – what’s the message? • Evaluation methodology issues – context – recent BIS publications (October 2009): • Synthesis of evaluation evidence • Research to improve the assessment of additionality • Beyond 2013 – UKTI evaluation evidence from trade development activities

Background – Regional Selective Assistance (RSA) • The persistence of disparities in regional development across the European Union (EU) clearly presents a considerable challenge to public policy in the post-enlargement period. In that context, the importance of developing even more effective regional policy interventions cannot be understated. • RSA Scheme is aimed at encouraging investment and job creation in the ‘Assisted Areas’ designated for regional aid under European Community (EC) law (2007-2013). • The rationale for the RSA Scheme rests on the notion that the needs of the disadvantaged sub-regions are best served by a ‘state aid’ that produces a wide range of effects at the firm level and, more importantly at the broader regional and national level. In England RSA replaced by Selective Finance for Investment in England (SFI) in April 2004.

RSA Scheme in the UK • The RSA Scheme has been a prominent feature of regional policy in Great Britain (GB) for more than 30 years (1972-2004) and has been used as a key ‘product’ in attempting to address the labour market inequalities which have been a persistent feature of the UK regions. • In 2000, in response to the 1998 DTI White Paper on Competitiveness it was aimed at more high quality projects with skilled jobs. RSA support came in the form of a discretionary grant award to private sector firms or plants for primarily capital investment projects in the Assisted Areas that will lead to job creation. • Safeguarding ‘at risk’ jobs was also an important objective of the Scheme. • Consequently, it has been the subject of many evaluations and discussions concerning its effectiveness both in terms of the number of jobs actually created and at what cost (see, for example, King, 1990; PACEC, 1993; Swales, 1997; Wren, 2005; Harris and Robinson, 2005).

£’ billions 1995 prices Expenditure on GB Regional Assistance Source: Wren, C., 1996., and Annual Reports on the 1982 Industrial Development Act. Notes: Figures are in grant equivalents at constant prices.

State Aids Post-2013? • The sense of certainty has been removed – local, regional and national considerations have emerged – creating real tensions • 2009-2013 period presents policymakers with a completely new set of challenges to consider • Discussion on direct state aid to individual firms (locally-owned and MNEs) is now an urgent priority in the economic downturn and recession

Evaluation of RSA in Great Britain (2007) • Undertaken for BERR (now BIS), Scottish Enterprise and Welsh Assembly Government in 2006-2007 • Objectives: • Test the validity of the key assumptions underlying the rationale for the RSA and more specifically the recently launched SFIE; • Assess the outcomes of funded projects against objectives with the key measure being productivity, skilled jobs and spillovers; • Measure Value for Money/efficiency • Northern Ireland – Selective Financial Assistance (SFA) – included in the evaluation at the time but excluded from the analysis in this paper – similar to RSA in GB but important differences that prevent direct comparison

RSA Offers by Country 2000-04 • England - £462.5m – 784 firms/plants - average grant of £590,365 (median £200k) – MNEs £1.2m (median £400k) • Scotland - £126.6m – 360 firms/plants - average grant of £351,648 (median £100k) – MNEs £715k (median £250k) • Wales - £422.8m – 742 firms/plants – average grant of £569,798 (median £170k) – MNEs £1.6m (median £750k) • Overall, of the total RSA offers of £1bn in the 2000-04 period – around 80% had been paid by 2006.

Number of Jobs Created and Safeguarded • RSA Offers of £1bn to 1,886 firms/plants to create 144,648 jobs • Before beginning to assess the degree of additionality associated with RSA support, we are able to observe that, on average, a ‘promised’ job costs ~ £7,000 per job

Why Intervene? – a Rationale from Theory • Two dimensions which have attracted considerable research and policy attention in recent decades. Both are seen as important drivers of regional productivity and competitiveness and can be broadly summarised as: • Innovation - at the firm level and also at the regional level – for example, within ‘regional innovation systems’. • Inward Investment (FDI) and the anticipated direct effects on jobs, skills as well as the wider benefits through spillovers, competition and supply chains.

Evaluation Challenge and Approach • Adopted a variety of methods to address the objectives: quantitative (selection and assistance modelling; self-reported assessment of impact) and qualitative (case studies to investigate the causal mechanisms at work) • Assessment of the effects of the RSA Scheme carried out within a wider conceptual framework of the determinants of firm/plant performance – demands a bespoke survey (CATI) to ensure range of control variables captured.

Econometric Modelling of Impact • The core of the evaluation methodology is the application of econometric modelling techniques which seek to ascertain the net effects of RSA assistance after controlling for the effects of ‘selection bias’ by incorporating a non-assisted group of firms and plants to embed a counterfactual in the analysis. • It is this econometric approach which allows us to generate estimates of the contribution of the RSA Scheme to growth (especially job creation) in the assisted firms and plants. • It is important to state at the outset that the approach to the evaluation of the RSA Scheme is different from those previously undertaken (see, for example, King, 1990; PACEC, 1993) which have relied upon a subjective assessment of additionality (by both the respondent and interviewer).

Economic Impact Survey Dataset • Overall, there were 1,519 achieved interviews: 716 RSA beneficiaries and 803 non-beneficiaries (response rates of ~60% and ~20% respectively) • Country split: • England – RSA (319); non-RSA (415) • Scotland - RSA (157); non-RSA (157) • Wales – RSA (240); non-RSA (241)

Assistance and Impact Periods – Some Issues • The conceptual problem here is that we are conducting a cross-sectional econometric analysis to isolate the effects of RSA assistance when in effect the assistance has come at varying ‘distances’ back from the start of the modelling period for employment change – that is, 2004. • Assessing impact over the 2004-06 period (evaluation commissioned in 2006 to inform UK Comprehensive Spending Review) – perhaps not ideal? • Potential underestimate of assistance for some of the assisted firms as they have not yet had the opportunity to complete the funded project – balanced by those firms assisted earlier in the period and whose growth trajectory 2004-06 might be unrelated to assistance as the project was completed many years earlier.

Underestimating the Effects of RSA? • 56% of RSA beneficiaries reported that they had realised all the benefits from the supported project • A further 28.3% expected to have realised all the benefits within the next 2 years (i.e., 2006-08) • And a small minority – 2% - indicated that it would be over 5 years before all the benefits would be achieved • Illustrates the problem of defining an impact period for evaluation – and flags up the classic problem of an ex poste cross-sectional approach to evaluation

Full Additionality (Self-Reported) – RSA (1980-2004)

RSA Beneficiaries and Non-Beneficiaries • RSA recipients grew faster than non-recipients both before and after receiving assistance. • RSA recipients tended to be younger (average 24.4 years) than non-RSA recipients (34.4 years). • RSA recipients also tended to be larger than non-recipients both in terms of employment in the assisted site but also in terms of employment in the whole company. • RSA recipients are more export oriented and less focussed on local markets than the general population of firms and operate in more price elastic markets. They are also less likely to be selling to the public sector and individual consumers than firms in the general population. • Finally, RSA recipients are more likely to be undertaking R&D and product and process innovation than non-recipients.

Essential Problem • RSA is (probably) not an exogenous variable in a model of growth. • We, by definition, only have a cross-section. • The suggested approach was a 2 step selection model “Heckman”. • Step 1 : who gets RSA? • Step 2: what are the effects of RSA on growth / performance?

Reasons for this? • We do not have the population of firms but a sample • One cannot capture in a stratification exercise all firm characteristics – beyond region, industry, ownership etc – other factors may impact on RSA that are unknown at the time • “Good firms” may also be “good” at getting RSA support, or “bad” firms may be more likely to get support? • If one, therefore, runs a simple OLS regression the effect of RSA may be overstated (or critics may later suggest that this is the case)

Econometric Results • Step 1 – estimation of the probability of getting assistance – There are two purposes for doing this. Firstly, to test for any selectivity bias in RSA assistance and its subsequent growth effects, and secondly identify any elements of the targeting of policy which are not ‘controlled’ for by the structuring of our sample survey of non-beneficiaries. • Step 2 – estimating growth/performance model (ln 2004-06) which included the selection parameter from the probit … and … three RSA dummies (England, Scotland and Wales) – Heckman Model. Models ran again with actual grant amount inserted identified for each country (sample selection model)

A Bad Idea to Aggregate RSA Effects for GB!

Econometric Results – Step 1 - Probits • Models for all firms and then for MNEs only • A very high proportion of Japanese firms in the sample are RSA beneficiaries, while the same cannot be said of US firms. • As one would expect, RSA is strongly negatively correlated with the South East, and younger firms are more likely to be RSA beneficiaries. • It is also noticeable that firms that may be seen as being more “dynamic”, in that they source inputs from abroad, are more likely to be supported by RSA.

Econometric Results – Step 2 – All Firms • Employment Models (sales models not significant) – estimated for GB – the assistance parameter is positive and significant – but as noted above this may not be very sensible • Re-estimated with three assistance dummies for RSA - England, Scotland and Wales – all positive and significant - indicating that in a model incorporating controls (age, size, sector, region, innovation, market orientation, management skills etc…) the scheme has been successful in creating and/or maintaining jobs in each jurisdiction • e.g., firms who are exporters are significantly more likely to grow – yet controlling for firms of this type – RSA effect is still +ve and significant • Selection term is negative and significant implying that selection does not influence the outcome

Using Actual Grant Offer and Payment Data • Sample Selection Model for All Assisted Firms • aggregating for RSA grant data across the three countries the amount of money is negatively (but not significant) associated with employment growth • disaggregating for country – the amount offered in England is positively and significantly associated with employment growth – Scotland is –ve and significant while Wales is –ve and not significant • MNEs – aggregated model across the three countries indicates that the amount of grant offered is –ve and significant – however, when disaggregated none of the country parameters on amount of offer are significant

Level of Support Matters • All Assisted Firms: - the amount of money offered under the old RSA Scheme in England produced +ve employment effects – larger the grant the larger the employment effect – the opposite is the case in Scotland • Note: average size of grant was higher in England compared to Scotland and Wales • MNEs – yes, we get the jobs in the Assisted Areas but it seems to be that the aggregated model hides some ‘real’ country effects – the level of grant is not connected to employment the outcomes in each of the three countries – paid too much?? • So level of support required to produce the effects is important but so too is the type of project – need to probe further on that

A Word about New Jobs and Safeguarded Jobs! • In the case of the safeguarded component of assistance, either on its own or with assistance to create jobs as well, we can make the assumption that the employment performance of the firm or plant in the period 2004-06 would have been different from unassisted firms or plants as a consequence of receiving the financial subsidy. • For example, and taking the positive outcome of RSA assistance, they may have declined less quickly than similar unassisted businesses. Further, the intervention to safeguard jobs may have served to keep the firm or plant in business and as a result enables it to be ‘present’ at the start of the 2004-06 period. • As such, its performance in this period is included in the model which seeks to assess whether the RSA assistance parameter is significantly associated with net employment creation in the 2004-06 period.

Controlling for the Problem of Timing of Effects • In order to address these issues we re-specified the econometric estimates to introduce a sensitivity analysis for an impact period 2002-2006 (assistance period 2000-02) against which we can assess the original results. • When undertaken for the individual country studies there was no significant differences in the models (coefficients on RSA grant support were smaller) • From these results we conclude that the concern of using all the ‘in scope’ assisted firms/plants in the 2000-04 period in the econometric analysis would lead to a failure to capture the full “secured jobs” effect is unlikely.

Is RSA Cost Effective? • We have demonstrated that the operation of the RSA Scheme in England, Scotland and Wales was effective in creating jobs – not so in terms of sales and hence no productivity impact (crude proxy) • We have undertaken Value for Money (VfM) assessments for all four countries in the evaluation – only the Scottish Executive have published these and we set them out below for illustrative purposes • Method - use the amount of offer and payment in the Step 2 model to produce the marginal effect of assistance on employment – gross up for all assisted firms to get a net job creation figure and connect to GVA through firm-level estimates

RSA Scheme VfM Estimates in Scotland • Scotland - £126.6m – 360 firms/plants - average grant of £351,648 (median £100k) – 20,484 ‘promised’ jobs ~£6,000 • Our estimates – 2,944 net additional jobs – cost per job (grant paid) ~ £34,000 • Contribution to UK value added - £59.3m per annum • RSA Scheme works in Scotland – creates jobs and net value-added is positive - and would appear more cost effective than in England

High Growth Firms – Role of Public Policy?

Summary ….. • RSA Scheme worked – created jobs – though level of support would appear to be an issue in the case of MNEs – but no productivity effects • In Scotland – created jobs and net value-added is positive - and would appear more cost effective than in England • Nature of supported projects – focus on raising productivity at the appraisal stage – needs to be incorporated into the modelling work • Current economic circumstances in the regions have once again raised the importance of job creation and retention and the role of Government cannot be passive - £1billion in RSA support (2000-04) has been effective.

Beyond Employment State Aids • Before finishing let’s look at the options for industrial and regional policy post-2013 • Supporting R&D and Innovation – in the spotlight as a meanos of increasing productivity • But …………….. need to recognise the indirect routes to achieve this goal • Reflect on the impact of UKTI trade development schemes on R&D investment

UKTI R& D Impact Study - Methodology • Sample – 400 users previous interviewed for PIMS 6-9 (i.e., supported in 2007). 400 non-users taken from purchased sample - screening for export activity – either current or planned in short term (as for UKTI clients). • Interview captured control variables covering factors expected to influence R&D activity and spend – including indicators of ‘absorptive capacity’ – to ensure effects of UKTI support could be isolated

UKTI R&D Impact Study – Headline • Increased R&D (2006-07): • UKTI user – 45.5% Yes • Non-user - 45.7% Yes • Mean increase in R&D over the period (2006-07): • UKTI user - £126,900 • Non-user - £81,000

UKTI R&D Impact Study - Headlines • Clear evidence of UKTI service complementarity – examining the profile of service use by respondents evidence indicates that the impact on R&D is stronger with multiple service use – up to 10 instances of use • Models confirm that innovative and growing firms most likely to show positive R&D impact • Firms who engage in training (job entry and external off site) have more R&D growth. • Firms who engage in collaborative R&D activity/projects with customers have more R&D growth

Conclusions • Clear evidence that UKTI’s standard trade development support has a positive and significant impact on R&D activity and spend. • As noted earlier…. “innovation itself is not sufficient to generate productivity improvements. Only when innovation is combined with increased export activity are productivity gains evident” • Therefore……. innovation interventions oriented towards helping firms to innovate can have even greater effects where it helps firms enter export markets or expand existing export market presence. • Evaluation findings reinforce the conclusion that……. trade development support is an important element in the armoury of policy instruments relating to innovation policy and specifically to the policy aim of increasing UK R&D by 2014.

Scope of Presentation