Is London, not Ireland, best business model?

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HOW do you measure whether location A or location B is a better place to do business? Much of the answer, I suppose, depends on the business you want to do. Within Scotland, if your business is related to the oil industry, Aberdeen is probably the best place to be. But if it was related to financial services, Edinburgh may be the best bet.

There is, in short, no simple answer to the question. So why do I raise it? Because, in the Scottish Government's budget statement, there is the following strategic objective: "We live in a Scotland that is the most attractive place for doing business in Europe." And that raises the obvious question – how on earth will we know whether we have reached that goal?

Don't get me wrong, I think it is a great idea to have such targets and I applaud the Scottish Government's ambition in setting them. But reading through the economic strategy published alongside the budget statement, and the associated technical notes, I can't find any suggestion on how progress towards that goal can be measured.

One possible way to do it comes to mind – using the amount of inward investment coming into Scotland as a barometer. Inward investment, after all, represents solid votes of confidence in hard cash by companies. And if Scotland was the most attractive place in Europe to do business, you would expect overseas companies with mobile capital to notice that and take advantage accordingly.

While there are indexes for measuring countries' competitiveness, being at the top of these leagues is not much use unless it brings actual results, one such being inward investment.

There are clues in the economic strategy document that the government may be thinking along these lines. It says: "By creating a fertile business environment, rewarding success, and investing in its people and places, Scotland can increase its comparative advantage on the world stage. The Irish experience demonstrates how the opportunity of globalisation can be realised by delivering accelerated rates of growth through developing, attracting and retaining mobile capital and labour."

So, if we use inward investment as a yardstick, what is the most attractive place for doing business in Europe? Well, it isn't Ireland. Its London.

For the past ten years, Ernst & Young, a big accountancy firm, has produced the European Investment Monitor which has detailed statistics on what is being invested where and by whom.

Britain has been the consistent winner, topping the European league for numbers of inward investment projects. In 2006, Britain gained a fifth of all European inward investment.

Ernst & Young have now broken down the British figures by region. To that we can add Ireland to get a complete picture for the British Isles. I have then divided the annual numbers of projects by the population of each region and country to produce a fairer comparison. The results are shown in the chart below.

You can see that, in the late 1990s, Ireland was well ahead, doing well out of what was the tail-end of the European boom in manufacturing inward investment with more than twice the number of inward investments of London. But after the IT and e-company bubble burst in 2001, London moved ahead. In 2006, London received 33 inward investment projects per one million people, nearly twice that of Ireland which greeted 18 projects per one million people.

Scotland is some way behind London and Ireland with 12 projects per one million people in 2006. But if you set that in the context of all 13 regions of the British Isles, Scotland is doing relatively well, coming in usually fourth or fifth best at attracting inward investment.

What's particularly interesting about these figures is that, for all the huge advantage Ireland is said to enjoy with much lower corporation tax rates than Britain, this doesn't seem to translate into an unbeatable advantage. If tax rates were the be-all and end-all in inward investment, you would expect Ireland still to be way out in front of every part of Britain. But it isn't.

Of course, the argument for lowering business taxes is not solely that it would provide a massive boost to inward investment. Cutting taxes would be a big boost to companies already here. But the idea that tax cuts are a magic bullet for fixing the Scottish economy does not, on this evidence, stand up.

&#149 Comment and constructive criticisms, as ever, welcomed at: pjones@ednet.co.uk.