Scotland's warm welcome for dollars and euros

• New evidence points to Scotland's strong appeal to foreign investors, ahead of any part of the UK apart from London.

• Scotland's trade and investment agency says it can take credit for 8,500 jobs last year, some arriving in large plants, but much of this activity on a smaller scale attracted by Scottish universities, digital and research skills.

• There's a danger inward investment becomes a substitute for growing successful businesses from a Scottish base, while much of Scotland's success is a reflection on England's regional inequalities.

One of the more powerful motors of the Scottish economy continues to generate jobs. Inward investment by foreign companies is creating and sustaining jobs.

The annual survey of such activity, by business consultancy EY, has found that Scotland remains the most attractive place in the UK for foreign direct investment (FDI) outside London.

It's quite a distant second place, but a fairly consistent one - expanding its share for four consecutive years and second to London in nine of the past 10 surveys.

EY totted up 126 inward investment projects, with nearly 14% of FDI projects, the highest yet. Some 11% of those polled among those who operate in the FDI field said Scotland was their top choice in the UK - again, a long way behind London, and down on last year's 15.8% showing, but a strong second place.

While Scottish FDI project numbers grew, the UK registered overall decline of 6%, and growth in the European Union was only 1%.

Do positive attitudes mean further investment will come this way? The signs are good. A record high 19.2% of global inward investors - yet again, second to London - are planning to establish or expand operations in Scotland.

'Enviable skills base'

Looking at this from city level, Scotland scores again, with Edinburgh, Glasgow and Aberdeen in the top five UK cities outside London.

More than half the projects come from four countries - Germany, Ireland and Canada, while the USA accounts for nearly a third. And of those American commitments, a healthy proportion are looking to Scottish research and development expertise, or Scotland's digital technology skills.

A business in Cumbernauld which prints labels for Scotch whisky bottles is now part of Italian firm Eurostampa

The EY 'attractiveness' survey is heavily and widely deployed by the Scottish government and its agencies, and by the UK government, both to defend the country's economic record and to attract more investment.

According to Adrian Gillespie, chief executive of Scottish Enterprise, the results are "testament to the dynamic business environment that Scotland offers to investors, including our enviable skills base, world-class universities, vibrant innovation districts, ambitious entrepreneurial communities, and the outstanding quality of life on offer.

At Highlands and Islands Enterprise, head of international trade Vicky Grant explains: "We work closely with companies looking to invest here. We help them identify the ideal location, find premises, help with recruitment and training, and can often also help financially. Beyond that, we continue working with them to make sure they have access to the full range of support they need to prosper."

But there's a warning in the small print. Such projects come in many shapes and sizes - they can be small but high-value and strategically significant: they can bring lots of low-skill jobs to areas with poor work opportunities.

The jobs attached vary widely. In 2021, Scotland's tally of jobs attracted hit 10,000, up from 4,500 the year before. Last year, it halved, to 5,000. And many such projects either publish projected recruitment which doesn't work out as planned, or they don't give a headcount number at all.

Soft power

A further way of looking at this was recently published by Scottish Development International. Jointly controlled by the Scottish government and its agency Scottish Enterprise, this co-ordinates efforts to attract funds and build trade, and tells us it can claim credit for 8,500 jobs created or secured through its efforts last year.

The ones highlighted by deputy first minister Shona Robison earlier this month were 90 roles in Cumbernauld, printing labels for Scotch whisky bottles. The business goes back to Glasgow in the 1840s, but it is now part of Italian firm Eurostampa, with a new plant and a big increase in jobs.

Much bigger numbers are being generated in aerospace and biotech. At the end of last month, pharma giant Merck announced it plans to create 500 jobs in Glasgow and Stirling for drug testing. That will bring its Scottish workforce to 1200.

A round of golf at one of Scotland's famous courses can help get deals over the line

That pattern is not unusual. Companies that try out some inward investment in Scotland can be persuaded to step up their presence. Across agencies, often co-ordinated by Scottish Development International, there is a well-oiled machine for building those relationships.

Similarly, companies that commit first to London and the South-East - the first point of arrival, in many cases - look to the next best place to expand, where costs are lower.

That is where Team Scotland is ready with a package of incentives, including the hard financial ones, but often getting deals over the line by deploying Scotland's soft power; a round of golf, a nearby whisky distillery tour, its history and environment, more affordable property and its private schools for the kids of inbound senior executives.

Many of the success stories these days are, unlike Merck, not big plants or manufacturing, but smaller scale operations tapping into Scotland's skills base for research labs.

The labour pool and its flexibility is one of the attractions. There are clusters of industries in Scotland that mean a ready labour pool when a recruiter arrives in town; in finance, for instance, in financial technology, high and low-carbon energy and aerospace.

There are also areas of weakness. Inward investors struggle to find the scale of steel fabrication and engineering expertise to commit to large-scale manufacturing for the the renewable energy boom.

Without that well-lubricated and efficient business eco-system, they may struggle to live up to their commitments of local content when all those offshore wind turbines are installed.

Sterling's fall

It's also no surprise that companies are buying British assets while sterling is so much weaker than it was. It's not just American tourists who find Britain very good value these days.

And while FDI 'attractiveness' appears to be a welcome sign, the consequent effect on the economy is not entirely welcome.

Where companies are taken over by foreign buyers, that can strip out the corporate base from which to grow internationally competitive firms based in Scotland.

There is also the argument that dependence on foreign investment, orienting government agencies towards attracting more of it each year, is a poor substitute for a home-grown, self-confident economic strategy of company growth and export orientation from a Scottish base.

The pound has remained much weaker against the dollar since Brexit

That relative weakening of sterling was accelerated by Brexit. Literally overnight as referendum results came in, the value of sterling fell, and it has remained much weaker than it previously was against the US dollar, falling close to parity during last year's market meltdown provoked by the Liz Truss/Kwasi Kwarteng mini-budget.

On the plus side, there has not so far been the exodus of foreign investors who can no longer use the UK as a welcoming and relatively business-friendly base with which to exploit seamless links through Europe's single market.

Through exiting the single market, some inward investment has come into the UK to set up separate entities and distribution bases.

More often, it has forced British companies to set up separate entities and distribution bases in the European Union, to avoid the delays and disruption to trade, and - particularly for finance - to trade within EU rules and regulations. That process has added cost to international trade.

Levelling up

Twinned with the shock to the system from Brexit has been the UK government's push to 'level up'. And that's where Scotland's success with FDI highlights the broader picture from the annual EY figures, showing how much London is the magnet for inward investment and how much other parts of England are not.

There may be signs in this year's EY 'attractiveness' survey of that shifting. London's dominance over the rest of the UK has fallen away sharply, from 49% of inward investment projects at its peak in 2019 to 32% last year.

There was a fall from 394 projects in 2021 to 299 last year. South-east and south-west England saw decline, while there was growth elsewhere. Across the north of England, that growth was by 24%, weighted heavily to the North-West, with 88 projects.

That could signal a rebalancing of economic activity, but lots of other indicators will have to move in the same direction.

A committee of MPs, with a Conservative majority, last month tore into the UK government for the shortcomings of its efforts to level up. They see it as far too short-term, driven by competitive bidding rather than strategy, undermined by the politicised way in which funding was allocated, and failing to mesh with any of the devolved administrations, including Holyrood.

The current occupants of Downing Street are reported to see it as a legacy of the Boris Johnson era, suffering from too much muddle over what it is trying to achieve and how to go about it, but with the north of England politically in play, it's not a policy Rishi Sunak could kill off.

The flipside to Scotland's success in this is England's weakness. There is always the possibility that English regions get more powers and get their act together, drawing on the lessons of inward investment from Scotland, Wales and Northern Ireland.

A charismatic mayor may help. Freeports ought to attract more investment of all sorts, though they may not add to the total for the country. But England is still waiting for the catalyst and political commitment that will make the economy in much of the country any more than merely London's hinterland.