David Scrimgeour: Scotland must focus on outward investment

As fiscal independence advances, the new Scottish Government has announced proposals for promoting inclusion, for better education and for improvements in the health service.

David Scrimgeour said Scotland needs to engage 'urgently' with continental Europe. Picture: Contributed

But do we have the means to deliver the necessary internationalisation of the economy to fund this social agenda?

Does the Government’s trade and investment strategy, announced earlier this year, offer the kind of radical departure that will be needed to remedy imbalances in the economy and to enable a response to the fast-changing global trade environment?

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These proposals do not seem have not been discussed in any detail by the business community or in the Scottish media. Job losses in the north-east together with talk of a possible second independence referendum are distracting attention away from a much-needed debate to challenge the economic development status quo in Scotland.

In my view, foreign direct investment (FDI) attraction alone is not a sustainable strategy in the long term and will not advance internationalisation of the Scottish economy.

Despite recent “record” results, the FDI trends are less positive. The proportion of cross-border investment projects from existing investors is significantly higher in Scotland than in the rest of the UK, which indicates over-dependency on past successes. And investment in Scottish call centres by international banks retreating from an overpriced London is not equivalent to the Irish success in using inward investment strategically to create indigenous and genuinely world-class manufacturing industries in the software and pharmaceutical sectors.

What is urgently needed now is engagement by Scottish companies, universities and other organisations in continental Europe and, especially, in Germany. Apart from highlights such as Touch Bionics, FirstGroup and Murgitroyd, there have been very few examples of the kind of commitment and strategic thinking that is required for success in Europe’s largest and wealthiest market. However, developing these skills and aspirations takes time. As recognised in the recent Economic Development Association of Scotland series of articles, the road to foreign markets starts with an intercultural awareness instilled from an early age. Given the urgency of the situation and the tremendous opportunities there is a need for interim measures which work.

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Why Scotland must tighten focus on German opportunities

There are enough ideas out there. Together with consultancies in Finland and Bavaria, I am currently pitching to the Finnish government a platform concept to digitalise the Germany market entry process for high-growth Finnish companies in the data science sector. And previously I worked for the city of Stockholm on an innovative programme to match the city’s impressive life science start-ups with German VCs seeking investment opportunities.

In both cases, the role of government is strategic but leaving the delivery of the programmes to the respective private sectors. The crucial element in this type of approach is that there is no attempt at hand-holding by the public agencies and that the entrepreneurs learn by doing – which also has the result that they can then later act free of dependence on subsidy.

German companies engaging in international trade benefit from the world’s biggest network of 130 trade promotion offices in 90 countries. But they are, in fact, paying part of the costs of these chamber of commerce foreign operations – “Auslandshandelskammern” – through their fees to local chambers. As a result of this intelligent and hybrid public support for commerce, German firms are world leaders in exporting and operating internationally. In my home town of Munich the average export rate of companies based here is 75 per cent; in Bavaria the average is 50 per cent. In Scotland the equivalent figure is, according to SCDI, only 7 per cent.

Clearly, Scotland has no chance to establish such levels of support. Also those officials skilled in investment promotion and dealing with foreign companies in Scotland cannot simply change to become international trade specialists. So what can the Scottish Government do?

The first measure would be to make use of digital tools and processes to the fullest extent which is practical. This is about market intelligence rather than marketing, the companies have to take care of the latter themselves. The quality of the market information being made available online to Scottish firms with overseas ambitions has to be excellent and specifically relevant to each of the companies selected to participate in an outward investment programme.

The second key measure is to encourage engagement in markets offering the best opportunities which have been validated by market research and also by matching these to the capabilities of the companies. Engagement means actually getting on a plane and spending time in-market to check the entry strategy against reality, to make valuable business contacts and to start the “learning-by-doing” process.

The Scottish service sector has a role to play too. Some law firms, large consultancies, banks, marketing agencies and even accountancies now have international networks which they can leverage for Scottish clients venturing abroad. With declining domestic revenues it is anyway in the interests of such service providers to internationalise their own businesses.

Opportunities for commerce are here in southern Germany in abundance. The wealth in this part of the world is staggering. And there is a particularly fertile environment for Scottish outward investment in Bavaria with all the goodwill that has been generated over many years by the 17 town twinnings between Scotland and the “Free State”. For example, at a recent anniversary celebration of 60 years of twinning between Inverness and Augsburg (pop. 270,000, founded in 15 BC), a decision was made to explore the potential for jointly developing profitable innovations in the healthcare sector.

And, strangely enough, it is likely that this kind of cross-border cooperation will lead to high value FDI projects from Germany into the Highland and Islands in the future.

• David Scrimgeour MBE is a Scots lawyer now working as a strategy and business adviser in Germany for more than 25 years.