Is public cash fattening up Scottish firms for sale?

In every case, the takeover announcement provoked concerns about the future of the acquired company under its new ownership. Will jobs be lost? Will key functions disappear? Is it good for the economy?

But what is rarely discussed – although it has equal, if not greater, significance for economic development – is the steady trickle of young, often hi-tech, growing firms that have been acquired by foreign companies.

These deals are too small to make front-page news. A recent example was the sale of Scottish electronics firm Calvatec to the US multinational Maxim.

Although takeover can result in an immediate investment boost, in the longer term such companies often lose their innovative capacity as a small part of a much larger organisation, making them susceptible to disinvestment and, in some cases, closure.

While some remain as freestanding operations, others end up being absorbed, leaving no tangible Scottish footprint. This matters. First, there is evidence to suggest firms are increasingly being “built to sell” rather than being “built to grow”. In some cases, these companies receive significant public sector support to develop their technology. But should the public sector be “fattening up” young companies that are then devoured by acquisitive larger companies?

This begs a difficult question for public policymakers; rather than indiscriminately supporting firms, could we not find a way to target support at “company builders” rather than “company sellers”?

Second, one of the weaknesses of the Scottish economy is its relatively small number of large, locally-owned and headquartered companies. Such companies play a vital role in economic development, not just on account of their size, but also the range of HQ functions they provide, the mix of jobs, local supply chain impact and exports. Moreover the profits are retained locally.

A key objective of Scottish economic policy is to create more companies of scale. The disappearance of emerging firms that are acquired cuts off the potential pipeline of these scalable companies and undermines this important objective.

What is most worrying of all is the lack of serious discussion about this fundamental characteristic of our economy. Is it desirable? We don’t think so.

Is it inevitable? Can companies be offered alternative options rather than seeking premature exists? Can takeovers be deferred so that companies are larger when they are sold and hence better embedded in the Scottish economy, making it harder to uproot them, creating greater value for investors, providing richer learning experiences for the top management teams and enabling a more effective entrepreneurial recycling process?

At present, the debate surrounding industry policy in Scotland revolves around rather simplistic and sterile, often politically-inspired, magic bullet solutions. Last month it was about enterprise zones. This month it is corporation tax levels. No doubt next month it will be something else.

There is a lack of thought leadership in Scotland on matters concerning industry policy. The country does not have a dedicated body such as the National Endowment for Science, Technology and the Arts to develop innovative thinking on enterprise policy on matters pertinent to the Scottish economic environment.

We believe Scotland urgently needs to create an independent, policy-oriented research centre to develop much-needed strategic research and evidence on enterprise policy matters.

We welcome expressions of interest from individuals and organisations who would like to join us in forming, and informing, such an organisation.

l Colin Mason is Professor of Entrepreneurship in the Hunter Centre for Entrepreneurship at Strathclyde University. Ross Brown, secretary of the Regional Studies Association in Scotland, also contributed to this article