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Professor Nigel Driffield from the Warwick Business School shares some thoughts on the chancellor inviting China to bid for HS2 contracts

nigel driffieldThe first issue to address is whether this is seeking to attract trade or foreign investment. The wording of the text is that they want Chinese companies to tender for certain parts of the infrastructure, which essentially suggests trade – ie importing sub-assemblies, components, even trains from China (or the lines themselves).

In a project of this size, it is reasonable to assume that some of the contracts will be filled by foreign firms, though of course the more that is sourced from abroad, the fewer jobs are created in the UK, in the sectors concerned, and their supply chain, which in turn perhaps weakens the economic case for HS2. Either way, the contracts are large enough to be subject to EU rules on tendering, so even without the encouragement to China, one can assume that contracts will be filled by foreign firms.

On the other hand, it is entirely possible that the government is seeking to attract inward investment from China, not perhaps in terms of continued ownership of the infrastructure as was announced with nuclear power this week, but in terms of either jointly or wholly owned production associated with Hs2 infrastructure. If that is being sought / encouraged, one would need to ask why.

Typically foreign firms can enter markets if they either have a better product (in this case better technology) or can supply the same product (technology) at lower cost. One of the major potential benefits of hs2 is the extent to which it will boost the whole advanced manufacturing sector in the UK, through for example technology transfer between the firms at the top of the supply chain, through to tier 2-4 suppliers, and in turn to other related sectors. Putting this simply, the more of this that is foreign owned, the lower the associated technology transfer, training and spillover effects are likely to be. So there is often a trade off between attracting inward investment, that may bring with it new technology, and the extent to which the secondary benefits are lower if the main investor is foreign compared with domestic.

Their supply chains, innovation activity and training are typically abroad, expats are used for skilled workers, and the employment created for host country workers tends to be more mundane. In a situation where the foreign firm is creating new private sector jobs, this is less important, but in the case of HS2, we know the jobs will be created because the project is essentially public infrastructure the issue is WHERE the high value added jobs are – in this case in the UK or in China. If the jobs are created in the UK, there is the likelihood of the technology that is developed through HS2 spawning other sectors, or for example leading to long term maintenance contracts, the more of this that is foreign, the less long term benefit will be retained in the UK.

This is not to suggest that foreign firms are “bad” at all – they create employment and introduce new technology into a country. However, this is typically in the context of private sector investment, and new competition, so tata acquired JLR, and stimulated innovation and growth in pursuit of private sector sales, they did not seek simply to fill government contracts that could have gone to UK firms, all other things being equal.

25 September 2015

Further Information:

Melissa Holloway

Melissa.Holloway@warwick.ac.uk

Assistant Press Officer, The University of Warwick

Tel: 02476 (5) 75601 International +44 2476 575601

or

Ashley Potter

Ashley.Potter@wbs.ac.uk

Executive Press Officer, Warwick Business School
Tel: +44 0773 301 3264