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 - PowerPoint PPT Presentation


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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


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Title: 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

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

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

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.

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).

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
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

Evaluation of RSA in Great Britain (2007)
  • Undertaken for BERR (now BIS), Scottish
    Enterprise and Welsh Assembly Government in
  • 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

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

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

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.

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.

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

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)

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
  • 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.

Underestimating the Effects of RSA?
  • 56 of RSA beneficiaries reported that they had
    realised all the benefits from the supported
  • 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

Full Additionality (Self-Reported) RSA
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.

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 /

Reasons for this?
  • We do not have the population of firms but a
  • 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
  • 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)

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)

A Bad Idea to Aggregate RSA Effects for GB!
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.

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
  • Selection term is negative and significant
    implying that selection does not influence the

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
  • 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
  • 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

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

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.

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.

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
  • 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

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

High Growth Firms Role of Public Policy?
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.

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

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

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

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

  • 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
  • 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.