Beware: Inward investment ‘killing off’ UK high-tech start-ups

It seems that in fast-growing high-tech markets, foreign direct investment by multinational corporations can have the deadly effect of out competing and killing off start-ups in the same field. While this may have a negligible effect on job or revenues in the short term, over a longer time the effect could be enormous.

The research by economists at the Globalisation and Economic Policy Centre (GEP) in Nottingham reveals that multinationals are killing some of UK’s most promising start-ups. The presence of multinationals on UK soil increases significantly the chances of an enterprising new business going bust in its first year.

The research is based on UK statistics, but as the authors note, foreign direct investment and enterprise creation are at the heart of most governments’ economic policies.

There may be a disproportionate effect in the UK however, as it has attracted more inward investment than any other EU country.

RIP dear start-up

Ordinarily around one in five new ventures dies within its first year, and two in five flop within three years. But in dynamic sectors, where companies are competing head to head in the innovation of their products or services, the likelihood of failure increases substantially as a result of competition from multinationals.

“Our research raises some difficult questions,” says Holger Görg, one of the authors. “Attracting foreign investment and encouraging enterprise are cornerstones of most governments’ economic policies, but little research has been done on whether the two are mutually compatible.”

“The chance to attract a big company and hundreds of jobs to the UK may make the demise of a new enterprise seem unimportant, but the impact could be enormous over the longer term. The companies being killed off are the Microsofts and Virgins of the future.”

In other words the instant gain of employment and investment by a multinational coming to set up shop in a new location could be outweighed by its potential to kill off a small start-up that in future could employ a greater number of people.

“This research could have public policy implications and may encourage the government to be more discriminating in terms of the types of multinationals it entices to come to the UK, and the level of benefits and perks it offers different overseas companies looking to locate here,” said Görg.

“Alternatively the government may need to consider how it can support and encourage start-up enterprises that face competition from multinationals.”

The impact of globalisation

Of all the drivers of globalisation – trade, migration of workers and inward investment – inward investment is likely to be the most influential. For example, over recent decades global inward investment flows have grown at least twice as fast as trade.

But there is one encouraging impact of multinational investment. The report shows that multinationals have a positive effect on the survival of companies in static industries where businesses produce similar products and services, but compete mainly on price.

“Firms in static industries tend to be more imitative,” said Görg. “In these sectors there is scope for new start-ups to learn from their bigger competitors and pick up tips on best practice and improving productivity.”

Figures published last week by UK Trade and Investment show that Britain attracted record levels of global investment last year, the fourth consecutive year the record has been broken. The UK is the largest recipient of foreign direct investment in Europe and second only to the US worldwide.

According to GEP, in 1998, 12 per cent of UK employment was in foreign-owned multinational companies. By 2002, (the most recent year for which figures are available), this share rose to 17 per cent, a 42 per cent increase over the period.

This is the first in-depth analysis of the link between multinationals and the survival of start-up businesses in the host country. The research was based on data from over 179,000 start-up businesses in the service and manufacturing sectors between 1997 and 2002, compiled by the Inter-Departmental Business Register held at the Office for National Statistics.

Data were also drawn from the Inter-Departmental Business Register database at the UK Office for National Statistics This register captures VAT-registered businesses and covers about 98 per cent of UK business activity.