Building on the Legacy? - the Economic Impact of Regional Selective Assistance in Great Britain 2000-2004 Mark Hart1; Nigel Driffield1; Stephen Roper2 and Kevin Mole2 1 Economics and Strategy Group Aston Business School 2 Warwick Business

1
Building on the Legacy? - the Economic Impact of
Regional Selective Assistance in Great Britain
2000-2004 Mark Hart1 Nigel Driffield1
Stephen Roper2 and Kevin Mole21 Economics and
Strategy GroupAston Business School2 Warwick
Business SchoolEPRC Seminar28th October 2009

2
Scope of Presentation

• Last evaluation evidence from Regional
  Selective Assistance (RSA) 2000-04 whats the
  message?
• Evaluation methodology issues context recent
  BIS publications (October 2009)
• Synthesis of evaluation evidence
• Research to improve the assessment of
  additionality
• Beyond 2013 UKTI evaluation evidence from trade
  development activities

3
Background Regional Selective Assistance (RSA)

• The persistence of disparities in regional
  development across the European Union (EU)
  clearly presents a considerable challenge to
  public policy in the post-enlargement period. In
  that context, the importance of developing even
  more effective regional policy interventions
  cannot be understated.
• RSA Scheme is aimed at encouraging investment and
  job creation in the Assisted Areas designated
  for regional aid under European Community (EC)
  law (2007-2013).
• The rationale for the RSA Scheme rests on the
  notion that the needs of the disadvantaged
  sub-regions are best served by a state aid that
  produces a wide range of effects at the firm
  level and, more importantly at the broader
  regional and national level. In England RSA
  replaced by Selective Finance for Investment in
  England (SFI) in April 2004.

4
RSA Scheme in the UK

• The RSA Scheme has been a prominent feature of
  regional policy in Great Britain (GB) for more
  than 30 years (1972-2004) and has been used as a
  key product in attempting to address the labour
  market inequalities which have been a persistent
  feature of the UK regions.
• In 2000, in response to the 1998 DTI White Paper
  on Competitiveness it was aimed at more high
  quality projects with skilled jobs. RSA support
  came in the form of a discretionary grant award
  to private sector firms or plants for primarily
  capital investment projects in the Assisted Areas
  that will lead to job creation.
• Safeguarding at risk jobs was also an important
  objective of the Scheme.
• Consequently, it has been the subject of many
  evaluations and discussions concerning its
  effectiveness both in terms of the number of jobs
  actually created and at what cost (see, for
  example, King, 1990 PACEC, 1993 Swales, 1997
  Wren, 2005 Harris and Robinson, 2005).

5
Expenditure on GB Regional Assistance
billions 1995 prices
Source Wren, C., 1996., and Annual Reports on
the 1982 Industrial Development Act. Notes
Figures are in grant equivalents at constant
prices.
6
State Aids Post-2013?

• The sense of certainty has been removed local,
  regional and national considerations have emerged
  creating real tensions
• 2009-2013 period presents policymakers with a
  completely new set of challenges to consider
• Discussion on direct state aid to individual
  firms (locally-owned and MNEs) is now an urgent
  priority in the economic downturn and recession

7
Evaluation of RSA in Great Britain (2007)

• Undertaken for BERR (now BIS), Scottish
  Enterprise and Welsh Assembly Government in
  2006-2007
• Objectives
• Test the validity of the key assumptions
  underlying the rationale for the RSA and more
  specifically the recently launched SFIE
• Assess the outcomes of funded projects against
  objectives with the key measure being
  productivity, skilled jobs and spillovers
• Measure Value for Money/efficiency
• Northern Ireland Selective Financial Assistance
  (SFA) included in the evaluation at the time
  but excluded from the analysis in this paper
  similar to RSA in GB but important differences
  that prevent direct comparison

8
RSA Offers by Country 2000-04

• England - 462.5m 784 firms/plants - average
  grant of 590,365 (median 200k) MNEs 1.2m
  (median 400k)
• Scotland - 126.6m 360 firms/plants - average
  grant of 351,648 (median 100k) MNEs 715k
  (median 250k)
• Wales - 422.8m 742 firms/plants average
  grant of 569,798 (median 170k) MNEs 1.6m
  (median 750k)
• Overall, of the total RSA offers of 1bn in the
  2000-04 period around 80 had been paid by
  2006.

9
Number of Jobs Created and Safeguarded

• RSA Offers of 1bn to 1,886 firms/plants to
  create 144,648 jobs
• Before beginning to assess the degree of
  additionality associated with RSA support, we are
  able to observe that, on average, a promised
  job costs 7,000 per job

10
Why Intervene? a Rationale from Theory

• Two dimensions which have attracted considerable
  research and policy attention in recent decades.
  Both are seen as important drivers of regional
  productivity and competitiveness and can be
  broadly summarised as
• Innovation - at the firm level and also at the
  regional level for example, within regional
  innovation systems.
• Inward Investment (FDI) and the anticipated
  direct effects on jobs, skills as well as the
  wider benefits through spillovers, competition
  and supply chains.

11
Evaluation Challenge and Approach

• Adopted a variety of methods to address the
  objectives quantitative (selection and
  assistance modelling self-reported assessment of
  impact) and qualitative (case studies to
  investigate the causal mechanisms at work)
• Assessment of the effects of the RSA Scheme
  carried out within a wider conceptual framework
  of the determinants of firm/plant performance
  demands a bespoke survey (CATI) to ensure range
  of control variables captured.

12
Econometric Modelling of Impact

• The core of the evaluation methodology is the
  application of econometric modelling techniques
  which seek to ascertain the net effects of RSA
  assistance after controlling for the effects of
  selection bias by incorporating a non-assisted
  group of firms and plants to embed a
  counterfactual in the analysis.
• It is this econometric approach which allows us
  to generate estimates of the contribution of the
  RSA Scheme to growth (especially job creation) in
  the assisted firms and plants.
• It is important to state at the outset that the
  approach to the evaluation of the RSA Scheme is
  different from those previously undertaken (see,
  for example, King, 1990 PACEC, 1993) which have
  relied upon a subjective assessment of
  additionality (by both the respondent and
  interviewer).

13
Economic Impact Survey Dataset

• Overall, there were 1,519 achieved interviews
  716 RSA beneficiaries and 803 non-beneficiaries
  (response rates of 60 and 20 respectively)
• Country split
• England RSA (319) non-RSA (415)
• Scotland - RSA (157) non-RSA (157)
• Wales RSA (240) non-RSA (241)

14
Assistance and Impact Periods Some Issues

• The conceptual problem here is that we are
  conducting a cross-sectional econometric analysis
  to isolate the effects of RSA assistance when in
  effect the assistance has come at varying
  distances back from the start of the modelling
  period for employment change that is, 2004.
• Assessing impact over the 2004-06 period
  (evaluation commissioned in 2006 to inform UK
  Comprehensive Spending Review) perhaps not
  ideal?
• Potential underestimate of assistance for some of
  the assisted firms as they have not yet had the
  opportunity to complete the funded project
  balanced by those firms assisted earlier in the
  period and whose growth trajectory 2004-06 might
  be unrelated to assistance as the project was
  completed many years earlier.

15
Underestimating the Effects of RSA?

• 56 of RSA beneficiaries reported that they had
  realised all the benefits from the supported
  project
• A further 28.3 expected to have realised all the
  benefits within the next 2 years (i.e., 2006-08)
• And a small minority 2 - indicated that it
  would be over 5 years before all the benefits
  would be achieved
• Illustrates the problem of defining an impact
  period for evaluation and flags up the classic
  problem of an ex poste cross-sectional approach
  to evaluation

16
Full Additionality (Self-Reported) RSA
(1980-2004)
17
RSA Beneficiaries and Non-Beneficiaries

• RSA recipients grew faster than non-recipients
  both before and after receiving assistance.
• RSA recipients tended to be younger (average 24.4
  years) than non-RSA recipients (34.4 years).
• RSA recipients also tended to be larger than
  non-recipients both in terms of employment in the
  assisted site but also in terms of employment in
  the whole company.
• RSA recipients are more export oriented and less
  focussed on local markets than the general
  population of firms and operate in more price
  elastic markets. They are also less likely to be
  selling to the public sector and individual
  consumers than firms in the general population.
• Finally, RSA recipients are more likely to be
  undertaking RD and product and process
  innovation than non-recipients.

18
Essential Problem

• RSA is (probably) not an exogenous variable in a
  model of growth.
• We, by definition, only have a cross-section.
• The suggested approach was a 2 step selection
  model Heckman.
• Step 1 who gets RSA?
• Step 2 what are the effects of RSA on growth /
  performance?

19
Reasons for this?

• We do not have the population of firms but a
  sample
• One cannot capture in a stratification exercise
  all firm characteristics beyond region,
  industry, ownership etc other factors may
  impact on RSA that are unknown at the time
• Good firms may also be good at getting RSA
  support, or bad firms may be more likely to get
  support?
• If one, therefore, runs a simple OLS regression
  the effect of RSA may be overstated (or critics
  may later suggest that this is the case)

20
Econometric Results

• Step 1 estimation of the probability of getting
  assistance There are two purposes for doing
  this. Firstly, to test for any selectivity bias
  in RSA assistance and its subsequent growth
  effects, and secondly identify any elements of
  the targeting of policy which are not
  controlled for by the structuring of our sample
  survey of non-beneficiaries.
• Step 2 estimating growth/performance model (ln
  2004-06) which included the selection parameter
  from the probit and three RSA dummies
  (England, Scotland and Wales) Heckman Model.
  Models ran again with actual grant amount
  inserted identified for each country (sample
  selection model)

21
A Bad Idea to Aggregate RSA Effects for GB!
22
Econometric Results Step 1 - Probits

• Models for all firms and then for MNEs only
• A very high proportion of Japanese firms in the
  sample are RSA beneficiaries, while the same
  cannot be said of US firms.
• As one would expect, RSA is strongly negatively
  correlated with the South East, and younger firms
  are more likely to be RSA beneficiaries.
• It is also noticeable that firms that may be seen
  as being more dynamic, in that they source
  inputs from abroad, are more likely to be
  supported by RSA.

23
Econometric Results Step 2 All Firms

• Employment Models (sales models not significant)
  estimated for GB the assistance parameter is
  positive and significant but as noted above
  this may not be very sensible
• Re-estimated with three assistance dummies for
  RSA - England, Scotland and Wales all positive
  and significant - indicating that in a model
  incorporating controls (age, size, sector,
  region, innovation, market orientation,
  management skills etc) the scheme has been
  successful in creating and/or maintaining jobs in
  each jurisdiction
• e.g., firms who are exporters are significantly
  more likely to grow yet controlling for firms
  of this type RSA effect is still ve and
  significant
• Selection term is negative and significant
  implying that selection does not influence the
  outcome

24
Using Actual Grant Offer and Payment Data

• Sample Selection Model for All Assisted Firms
• aggregating for RSA grant data across the three
  countries the amount of money is negatively (but
  not significant) associated with employment
  growth
• disaggregating for country the amount offered
  in England is positively and significantly
  associated with employment growth Scotland is
  ve and significant while Wales is ve and not
  significant
• MNEs aggregated model across the three
  countries indicates that the amount of grant
  offered is ve and significant however, when
  disaggregated none of the country parameters on
  amount of offer are significant

25
Level of Support Matters

• All Assisted Firms - the amount of money offered
  under the old RSA Scheme in England produced ve
  employment effects larger the grant the larger
  the employment effect the opposite is the case
  in Scotland
• Note average size of grant was higher in England
  compared to Scotland and Wales
• MNEs yes, we get the jobs in the Assisted Areas
  but it seems to be that the aggregated model
  hides some real country effects the level of
  grant is not connected to employment the outcomes
  in each of the three countries paid too much??
• So level of support required to produce the
  effects is important but so too is the type of
  project need to probe further on that

26
A Word about New Jobs and Safeguarded Jobs!

• In the case of the safeguarded component of
  assistance, either on its own or with assistance
  to create jobs as well, we can make the
  assumption that the employment performance of the
  firm or plant in the period 2004-06 would have
  been different from unassisted firms or plants as
  a consequence of receiving the financial subsidy.
  
• For example, and taking the positive outcome of
  RSA assistance, they may have declined less
  quickly than similar unassisted businesses.
  Further, the intervention to safeguard jobs may
  have served to keep the firm or plant in business
  and as a result enables it to be present at the
  start of the 2004-06 period.
• As such, its performance in this period is
  included in the model which seeks to assess
  whether the RSA assistance parameter is
  significantly associated with net employment
  creation in the 2004-06 period.

27
Controlling for the Problem of Timing of Effects

• In order to address these issues we re-specified
  the econometric estimates to introduce a
  sensitivity analysis for an impact period
  2002-2006 (assistance period 2000-02) against
  which we can assess the original results.
• When undertaken for the individual country
  studies there was no significant differences in
  the models (coefficients on RSA grant support
  were smaller)
• From these results we conclude that the concern
  of using all the in scope assisted firms/plants
  in the 2000-04 period in the econometric analysis
  would lead to a failure to capture the full
  secured jobs effect is unlikely.

28
Is RSA Cost Effective?

• We have demonstrated that the operation of the
  RSA Scheme in England, Scotland and Wales was
  effective in creating jobs not so in terms of
  sales and hence no productivity impact (crude
  proxy)
• We have undertaken Value for Money (VfM)
  assessments for all four countries in the
  evaluation only the Scottish Executive have
  published these and we set them out below for
  illustrative purposes
• Method - use the amount of offer and payment in
  the Step 2 model to produce the marginal effect
  of assistance on employment gross up for all
  assisted firms to get a net job creation figure
  and connect to GVA through firm-level estimates

29
RSA Scheme VfM Estimates in Scotland

• Scotland - 126.6m 360 firms/plants - average
  grant of 351,648 (median 100k) 20,484
  promised jobs 6,000
• Our estimates 2,944 net additional jobs cost
  per job (grant paid) 34,000
• Contribution to UK value added - 59.3m per annum
• RSA Scheme works in Scotland creates jobs and
  net value-added is positive - and would appear
  more cost effective than in England

30
High Growth Firms Role of Public Policy?
31
Summary ..

• RSA Scheme worked created jobs though level
  of support would appear to be an issue in the
  case of MNEs but no productivity effects
• In Scotland created jobs and net value-added is
  positive - and would appear more cost effective
  than in England
• Nature of supported projects focus on raising
  productivity at the appraisal stage needs to be
  incorporated into the modelling work
• Current economic circumstances in the regions
  have once again raised the importance of job
  creation and retention and the role of Government
  cannot be passive - 1billion in RSA support
  (2000-04) has been effective.

32
Beyond Employment State Aids

• Before finishing lets look at the options for
  industrial and regional policy post-2013
• Supporting RD and Innovation in the spotlight
  as a meanos of increasing productivity
• But .. need to recognise the indirect routes
  to achieve this goal
• Reflect on the impact of UKTI trade development
  schemes on RD investment

33
UKTI R D Impact Study - Methodology

• Sample 400 users previous interviewed for PIMS
  6-9 (i.e., supported in 2007). 400 non-users
  taken from purchased sample - screening for
  export activity either current or planned in
  short term (as for UKTI clients).
• Interview captured control variables covering
  factors expected to influence RD activity and
  spend including indicators of absorptive
  capacity to ensure effects of UKTI support
  could be isolated

34
UKTI RD Impact Study Headline

• Increased RD (2006-07)
• UKTI user 45.5 Yes
• Non-user - 45.7 Yes
• Mean increase in RD over the period (2006-07)
• UKTI user - 126,900
• Non-user - 81,000

35
UKTI RD Impact Study - Headlines

• Clear evidence of UKTI service complementarity
  examining the profile of service use by
  respondents evidence indicates that the impact on
  RD is stronger with multiple service use up to
  10 instances of use
• Models confirm that innovative and growing firms
  most likely to show positive RD impact
• Firms who engage in training (job entry and
  external off site) have more RD growth.
• Firms who engage in collaborative RD
  activity/projects with customers have more RD
  growth

36
Conclusions

• Clear evidence that UKTIs standard trade
  development support has a positive and
  significant impact on RD activity and spend.
• As noted earlier. innovation itself is not
  sufficient to generate productivity improvements.
  Only when innovation is combined with increased
  export activity are productivity gains evident
• Therefore. innovation interventions oriented
  towards helping firms to innovate can have even
  greater effects where it helps firms enter export
  markets or expand existing export market
  presence.
• Evaluation findings reinforce the conclusion
  that. trade development support is an important
  element in the armoury of policy instruments
  relating to innovation policy and specifically to
  the policy aim of increasing UK RD by 2014.