Feature Article

WHAT'S WRONG WITH SCOTTISH FIRMS? LOCAL SOURCIK IN

James McCalman Management Studies Department, University of

Introduction period from July to October 1984. The three principal conclusions were:

Given the importance of the electronics - Foreign-owned electronics companies in industry in this article sets out Scotland buy only 15% of their to analyse one of the presumed benefits of production materials from indigenous attracting foreign electronics firms to Scottish suppliers; set up manufacturing facilities other than the direct employment effects. It deals with the sourcing of material inputs by - Managers within foreign firms regarded foreign firms in the Scottish economy in the increase of such linkages as an an attempt to determine the level of important factor for the development of material inputs purchased from indigenous the industry in Scotland. However, electronics suppliers. The electronics they felt that firm size and product industry in Scotland has for several years quality in all but a few of the been actively promoted by government indigenous suppliers of which they had agencies and the press as one of the major experienced had prevented this industrial success stories during a period occurring; of industrial stagnation and decline in the more traditional manufacturing areas of the Scottish economy. The concept of - The creation of closer links with the " Glen" is an attractive one which foreign-owned sector present in Scotland views Scotland as being at the forefront might strengthen Scottish firms and of electronics manufacture providing high provide them with experience to develop levels of employment leading to further international trade. attraction of inward investment. The electronics industry in Scotland in 1985 employed 43,900 people in more than 300 companies (22% under foreign ownership, 42% English and 36% Scottish). However, As far as the development of electronics previous research has shown that the in Scotland is concerned, the role of the largest employers and fastest growing American manufacturers was crucial both in firms are externally owned, and that their terms of employment and the growth of an attraction to Scotland was heavily indigenous sector. Location-specific influenced by regional incentive schemes. factors influenced the arrival of the (Firn, 1975; and Hood and Young, 1980). major American electronics firms to Scotland with the provision of regional aid being a key influence in attracting firms to the . However, the desire to manufacture in Scotland was also The Foreign sector survey influenced by other factors such as servicing British and European markets, the presence of a highly skilled, low cost labour supply, a strong academic This feature reports the main results from infrastructure, and close cultural ties. a survey of foreign-owned electronics Sayer and Morgan (1984) noted that as far companies with manufacturing plants in as foreign firms in Scotland were Scotland carried out during a four month concerned, "The overseas sector remains

62 poorly integrated, with multiplier effects manufacturing plants throughout the which afford little secondary employment country with the major concentration in and, perhaps more important for long-term the Strathclyde region. The names of all prospects, a significant indigenous sector foreign-owned companies operating has not developed". facilities in Scotland were taken from the SDA listing "Electronics Companies in Scotland" and nationality was confirmed by reference to a listing provided by the As regards the host economy, foreign Scottish Council Development and Industry. direct investment theory suggests that Overall 30 foreign firms participated in there will be advantages to the host the study, a response rate of 60?. The country other than those associated with study reflected the dominance of the direct employment creation. Of these, foreign-owned sector by American the creation of linkages with host economy electronics companies. Of the 30 firms, and the subsequent development of companies interviewed 25 were American. an indigenous electronics sector provided (Even so this still under-represents the the main justification for the research proportion of American firms in the work undertaken. The electronics foreign-owned total.) Overall, the industry in Scotland seems a likely foreign sector accounted for 43% of candidate for analysis of the level of electronics employment in Scotland with linkage created by MNEs for three reasons: American firms responsible for 41? of total employment in the electronics industry in Scotland. - The industry is characterised by a high level of foreign-owned enterprises which accounted for over 40% of employment. The majority of the over three hundred Survey results firms which made up the industry were small Scottish concerns and the assumption was made that these firms could act as "feeders" for the foreign- Of the reasons for setting up owned sector in the supply of component manufacturing facilities in Scotland, parts, given recent industry moves rather than elsewhere, two fundamental towards higher subcontracting roles factors became obvious. By far the most (Firn and Roberts 1984); important locational determinant as far as American companies were concerned was British Government financial assistance in - Analysis from previous research setting up and operating proposed plants indicated that the more industrialised in Scotland. Of the companies the host economy was the greater was the interviewed, 71? regarded the provision of likelihood of strong backward linkages British Government financial aid as a very being formed and this, related to the important locational determinant (Table large number of local firms, gave hope 1). Two other important reasons for for a growth in the level of local setting up operations in Scotland was to linkages; obtain access either to the British or European market. Of the firms surveyed, 58% regarded access to the European market - However, a study undertaken on behalf of a very important factor, whilst 84% found the Scottish Development Agency, (SDA) access to British market an important in 1979 raised serious doubts as to the determinant in setting up in Scotland. ability of Scottish firms to supply the Of the other factors mentioned the foreign-owned sector and highlighted availability of certain labour skills in serious levels of import penetration of Scotland, the establishment of the electronics components. Only 12? of Scottish plant as a supporting role for components were sourced locally in the parent, and Britain being a Scotland with 30? of subcontract work preferential area for capital intensive being dealt with by Scottish firms. projects, were all regarded as important locational determinants.

Research methodology These results tend to reinforce previous work on locational determinants (Booze In 1984 there were 50 foreign-owned Allen and Hamilton, 1979). American electronics firms in Scotland operating electronics companies seeking

63 manufacturing operations in Europe, were standards could be found it would be to attracted to Scotland by regional aid the plant's benefit to source locally policies. It is worth noting that avoiding transport costs. Secondly, it gaining access to the Scottish market and would improve the plant's public image to local sources of supply were unimportant be seen to be actively supporting local factors. It would be safe to assume that industry. Table 2 gives an indication being able to develop links with firms in that the amount of time the firm has been the Scottish economy did not influence the in the local economy did not play a decision to set up in Scotland. As an significant role in determining the level addition to the locational determinants of linkages created with Scottish already mentioned, several executives of companies. American firms mentioned the ability of Scots to speak English "adequately" and the large number of golf courses as major reasons for coming to Scotland! The firms surveyed divided themselves neatly into two distinct entry periods. Fourteen arrived in Scotland in the pre- 1970 period, mainly during the 1950s and early 1960s. The second entry period, post 1970, saw the arrival of another Table 1 Locational determinants of US sixteen firms, with twelve arriving during electronics firms with the 1970s and four in the 1980s. facilities in Scotland

Locational Average : determinants rating table 2 Material input purchases from Access to Scottish market 3.81 Scotland by plant date of Access to UK market 1.88 establidment (EXE) Access to European market 1.62 Match competitors' investment 2.81 Certain labour skills 1.99 t input purchases frcm ScotLani (1964) General labour skills 1.87 Low labour costs 2.39 DOE 0 1-10 11-25 26-50 51-70 Local sources of supply 3.86 UK tax structure 2.50 Pre-1970 UK Government assistance 1.33 No ce firms 2 7 2 3 0 (W Support role for parent company 1.65 Educational infrastructure 2.26 Pos1>1970 No of firms 3 6 3 3 1 (16)

(a) Response categories:

1 = Very important 2 = Important These figures give an indication that the 3 = Fairly important length of time the firm had been 4 = Unimportant established in the host economy did not 5 = Not applicable affect its ability to instigate purchasing linkages with domestic companies. Foreign-owned firms which had set up facilities during the 1970s were just as One of the main concerns of this study was likely to purchase from local firms as to test the view that material input those companies which had been operating purchases by foreign-owned firms from in Scotland since the 1950s. Scottish companies would increase with time. The view was that as the plant began to secure more autonomy from the parent organisation, and as its experience The sourcing of material inputs other than of local suppliers increased over time those purchased from the parent reflected there would be a tendency for it to source the importance of suppliers based in locally where possible for two reasons. England, and especially the south-east. Firstly, where local suppliers with Of those firms surveyed, the average adequate quality, price and delivery amount of purchases made from outside the organisation was 50%. the lack of indigenous firms in specific product areas hindered this development. Several purchasing managers commented upon the small scale nature of Scottish Table 3 details percentage inputs by operations, viewing this as one of the geographical location. This showed that major reasons that contracts were not Scotland had not managed to achieve a offered to Scottish firms. significant proportion of the input purchases of foreign-owned firms when compared to those purchased from south of the border, although the level of The survey also indicated that a high purchases was higher than those from the degree of purchasing responsibility did other European countries and America. In rest with the Scottish location for the fact, these figures, when compared with vast majority of firms. Interviewees those of the Makrotest survey on were asked a number of questions regarding electronic subcontracting and component purchasing autonomy and Table 4 summarises supply industries undertaken on behalf of the responses. Responsibility for the SDA in 1979 reflected a fall, in total purchasing had for the most part been purchases in Scotland from 19% (SDA, 1979) devolved to the plant. to 15%

The importance of linkage creation cannot be over-estimated. The survey showed Table t Purchasing responsibility for SoottJU* that foreign-owned firms had moved away operations from reliance upon the parent organisation. Figures for inputs coming from the parent at date of establishment Nmtor Nuribtr show that 89% of materials were supplied affirm of flras from the parent. At the time of the survey this figure had fallen to 53%. This indicated that there were Central purchasing Yes 9 No 20 opportunities for firms willing and able to supply foreign-owned firms. Plant purchasing department Yes 28 No 2 Plant purchasing department respon­ Table 3 Production input purchases (other sible for all than from the parent purchases Yes 23 No 7 organisation) by geographical location

% production Location input purchases This would tend to confirm that the locus of decision making power as far as purchasing was concerned had been devolved Scotland 15 to the MNE subsidiary. England 38 European Community 13 USA 14 Rest of the World 20 The survey also sought to guage the opinions of managers as to the performance Total 100 of Scottish suppliers when compared to suppliers from elsewhere in Britain, America and Europe in similar categories. The responses are detailed in Table 5.

The general opinion gauged from interviewees was that although there was The reasons given for the pessimism an overall desire to increase the level of expressed about Scottish suppliers fell local content in their production inputs, into three areas:

65 1. A lack of firms with the required firms, although the former is likely to technical knowledge in specific areas; remain an attractive option (SDA, 1986). 2. A lack of Scottish firms of sufficient capacity to be able to handle demand from foreign-owned plants; Table 6 Input materials perceived as not being available from Scottish 3. An unwillingness on the part of suppliers Scottish firms to become heavily committed to supplying foreign companies. Specific materials Number of firms General electronic compo­ nents (including inte­ grated circuits) 7 Electro-mechanical Table 5 The performance of Scottish suppliers components 4 compared to other suppliers elsewhere in Silicon 4 Britain, Anerica and Europe Metals 2 Others 6

Performance when caqpered with: Specific; areas Other IK USA Europe (a) It would appear that recent comments from Price competitiveness 2.34 2.84 3.30 the SDA confirm that they realise that the Sales aggression 3.03 3.59 3.50 development of the indigenous sector is After sales work 2.51 3.11 3.42 essential both to take advantage of Delivery tires 2.44 2.88 3.42 opportunities provided by the presence of Product quality 2.34 3.15 3.46 such a large number of foreign-owned Ability to work to electronics manufacturers, and to move specification 2.31 2.77 3.46 indigenous firms to an international Ability to alter trading level. The SDA felt that, "in production 2.41 2.92 3.25 many ways the indigenous electronics Technological community in Scotland does not exhibit the cohesion shown by dynamic economic ccmpetence 2.42 3.15 4.55 groupings elsewhere and the consequent isolation can be a cause of opportunities passing unnoticed or threats emerging unexpectedly." This article indicates (a) Response categories: that the level of interaction between the foreign and indigenous sectors is 1 = above average; 2 = average; particularly weak with the exception of a 3 = below average; 4 = well below average; few Scottish success stories, and that 5 = not applicable these firms - Prestwick Circuits, , etc - have moved towards international markets as a result of their success. Previous authors have highlighted the need As far as the the lack of Scottish for indigenous firms to expand outside companies in specific product areas was Britain to main competitive positions. concerned, the survey highlighted the Sayer and Morgan (1984) claimed that, products/components that foreign firms "What is notable about indigenous firms required that they believed could not be (eg Rodime) is that they feel obliged to sourced locally. Table 6 indicates these expand outside Britain (in the US in this particular products. case) soon after birth." Analysis of the major indigenous successes may go a long way to confirming the division between foreign-owned manufacturers present in Scotland which supply the European market The Scottish Development Agency has and are willing to source locally if recently recognised the need for a strong suitable suppliers were available, and indigenous electronics sector by changing major indigenous firms that started out its primary concern away from the pursuit supplying foreign firms in Scotland and of inward investment, which had been its used this as a base from which to build major policy concern, towards the international reputations. strengthening of Scottish electronics

66 The survey of thirty foreign-owned firms them with the experience with which to in Scotland has revealed some interesting move towards international markets. comments on the performance of the indigenous electronics sector. These comments, and figures on the amount of One note of warning here is that closer production materials sourced locally raise ties with the foreign sector might lead to interesting questions on the ability of a level of dependence that Scottish firms indigenous companies to support and learn would find difficult to break away from. from the foreign sector. Four key points Similarly, indigenous firms cannot be emerge from analysis of the foreign-owned expected to develop and compete in the electronics sector: provision of specialist components where efficient manufacture is based upon large - The level of interaction between the scale plant operations. foreign-owned and indigenous sectors was low with only 15? of production input materials being sourced from indigenous What appears to be the case is that most Scottish firms. This compared with indigenous firms have allowed closer total purchases in Scotland of sub­ relationships with foreign-owned firms to contracts and components of 19? in 1979; by-pass them and in doing so have reduced the likelihood of moving into - The major reasons for this were that international markets where firms, such as foreign-owned firms felt that Scottish Rodime and Prestwick Circuits have found companies were not of sufficient size to profitable returns. deal with major sourcing orders. It was perceived that many electronics components and materials could not be The SDA having recognised that American sourced locally because suppliers in company sourcing policies do not explain these product areas did not exist, and the low levels of Scottish inputs continue Scottish firms faired badly in to identify a number of product areas comparison with firms from America and where Scottish firms could take advantage Europe over a range of performance of the opportunities that exist. factors; However, their role in attempting to improve the level of local sourcing seems - Foreign-owned firms were willing to to have been fairly restricted. Having adopt local sourcing where they found recognised the low levels of local Scottish firms with appropriate sourcing since, at least, 1979 they have technical and quality expertise; attempted little in the way of fostering closer relationships between Scottish and - The purchasing responsibility for most foreign firms present in Scotland, other foreign firms in Scotland rested at the than to stress the presence of a large local plant level, and only on a few manufacturing and supply base in its occasions was purchasing dealt with by advertising material. the parent organisation. One important point associated with this was the fact that the length of time the foreign- It would appear that there is the need for owned organisation had been in the a stronger level of commitment on the part Scottish economy was of nb significance of the SDA in forging closer sourcing in determining the degree of local plant ties. Similarly, Buxton (1986) suggests autonomy in purchasing nor the level of that to make Scottish firms more export local sourcing. American firms that oriented, development aid should be linked had set up facilities in Scotland in the to export performance indicators. late 1970s and early 1980s were just as However, the electronics industry itself likely to source locally as firms that seems to be moving in a direction which had been present since the 1950s. will involve closer local sourcing ties, and one in which the SDA itself is beginning to take a more active role.

The policy emphasis of government agencies, such as the SDA, needs to be The adoption of Japanese style Just-in- channelled into improving and Time (JIT) Manufacturing techniques by strengthening the performance of Scottish American electronics firms based in firms. Closer links with the foreign- Scotland offers opportunities of increased owned sector in terms of a higher level of and closer sourcing relationships between local sourcing would not only improve the US firms and Scottish suppliers. One of performance of Sscottish firms but provide the main identified advantages of JIT is

67 the development of fewer suppliers who possible route that Scottish firms could have a longer term association with the take to remain at the forefront is merger buyer. These suppliers tend to be to create stronger firms. The SDA's role located as near to the buying firm as would appear to be to encourage the possible, thus stregthening the hopes of development of larger local suppliers at Scottish firms that they should be able to the expense of small concerns. What adopt such roles. appears to be needed is a positive and dynamic approach which tackles the divide between Scottish and foreign-owned If the SDA seek to improve the local electronics firms which still exists. supplier base through offering a The basis of Just-in-Time Sourcing competitive edge on the part of Scottish techniques have to be taught to Scottish firms, particularly over competitors suppliers as one road to achieve increased outside Scotland, then the plethora of contact, and this is a role which the SDA small concerns may have to be sacrificed must continue to sponsor and promote if for a leaner, more efficient home base. the next few years are to bring about a JIT techniques will mean fewer suppliers reversal in the decline of Scottish and Young (1986) has argued that one sourcing by foreign electronics firms.

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Lall, S (1980) "The indirect employment Watanabe, S 1982 "Subcontracting, effects of multinational enterprises in industrialisation and employment developing countries", International creation", International Labour Office, Labour Office, Working Paper No 3. Vol 10, No 7. Young, S (1986)"Scottish multinationals Lim L Y C and P E Fong (1982) "Vertical and the Scottish economy" Position paper linkages and multinational enterprises for Scotland and the Multinationals, in developing countries", World Conference organised by the Institute Development Vol 10, No 7. for Research and Information on Multinationals and Strathclyde McAleese, D and D McDonald (1978) International Business Unit, City "Employment growth and the development Chambers, Glasgow, September 1986. of linkages in foreign-owned and domestic manufacturing enterprises", Oxford Bulletin of Economics and Statistics, 40, pp321-340.

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