1. This evaluation research project was commissioned by the Scottish Executive and undertaken by an academic consortium comprising Kingston University, Aston University and the University of Warwick. The overall aim of the project was to assess the impact of the Regional Selective Assistance ( RSA) Scheme in Scotland over the period 2000-2004 and to examine whether it represents value for money.
Rationale for the RSA Scotland Scheme
2. 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 (European Commission, 2004). In that context, the importance of developing even more effective regional policy interventions cannot be understated.
3. The Regional Selective Assistance ( 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 'business support product' in attempting to address the regional labour market inequalities which have been a persistent feature of the national economy. The RSA Scheme in England was replaced by the Selective Finance for Investment in England ( SFIE) Scheme in April 2004 with a focus on increasing productivity and the proportion of skilled jobs in the Assisted Areas of England. There are slightly different arrangements in Northern Ireland where the equivalent of the RSA Scheme is business support funded under Selective Financial Assistance ( SFA).
4. RSA continues to operate in Scotland as a national grant scheme administered by the Scottish Executive and is available for capital expenditure and investment projects which will create and/or safeguard jobs. The assistance available for a particular project, as a proportion of the overall investment undertaken by the firm, will vary depending on where it is located in Scotland. For the RSA Scheme in the 2000-2004 period there were three levels of aid limit operating (10, 15 and 20%) corresponding to three of the four Development Areas (i.e, excluding the Highlands which has an aid limit of 30%). The Scheme is aimed at encouraging investment and job creation only in the areas of Scotland designated for regional aid under European Community ( EC) law (the Assisted Areas). The majority of assisted plants (74.4%) were located in Development Areas with a 20 per cent aid limit. Grants from £10,000 upwards are available and there is no maximum stipulated by the RSA Scheme within the general aid limit guidelines outlined above.
5. The rationale for developing and maintaining the RSA Scheme rests on the notion that the needs of the disadvantaged sub-regions within Scotland 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.
6. Despite periods of convergence, the overall trend is towards the persistent nature of regional unemployment inequalities throughout the EU, including the UK. Traditionally, many economists have regarded this to be the result of two types of market failure as related to the level of the individual firm (which is our interest in this evaluation): incomplete markets and externalities.
7. Incomplete markets are interpreted here as the existence of a gap in the availability of private sector external finance (e.g. formal or informal equity capital) to firms for start-up and expansion activity in particular regions. The reason for this can be related to the unwillingness of the private sector to become involved in projects which they deem to be 'high risk'. Related to this is the notion of information or co-ordination failures (asymmetries) which can arise when firms are unaware of sources and mechanisms to access the necessary amounts of external finance required for new plants and/or the expansion of existing operations. The RSA Scheme has an important, but not a single role, to play here in Scotland alongside other business support products.
8. Externalities, in the context of an area-based business support intervention, are viewed as the positive indirect effects that result from firms being located together. These positive externalities may include collaboration and networking opportunities, technological externalities (e.g. spillovers, linkages), information transfer, the freeing up of internal human and financial capital (which can then be utilised in other innovative actions within the firm), the leverage of additional private sector financial support, or the range of perceived or actual benefits associated with large urban labour markets (e.g. skill sets). The RSA Scheme in Scotland, as elsewhere in Great Britain and in Northern Ireland through the operation of the SFA Scheme, seeks to support the investment projects of both Scottish and foreign-owned businesses in order to stimulate these wider set of benefits.
9. The enduring scale of regional, and indeed sub-regional, inequalities across the EU and within the UK provides prime facie evidence that some combination of these market failures can be said to exist. The task in this evaluation is to provide evidence of the precise ways in which the RSA Scheme can serve to overcome these operating difficulties for individual firms or plants.
10. A review of the general literature on regional and industrial policy is included as part of the evaluation of the RSA Scheme in Scotland to highlight recent research findings on the potential role of innovation and Foreign Direct Investment ( FDI) in creating important externalities which can result in sustainable economic impacts in the Assisted Areas (see Appendix 4).
The Evaluation Approach
11. The specific research objectives were to test the validity of the key assumptions underlying the rationale for the RSA Scheme in Scotland; assess the outcomes of funded projects against objectives with particular attention on productivity, skilled jobs and spillovers; and provide an overall value for money assessment of the RSA Scheme. The evaluation study investigated the effect of £126.6 million offered to 360 RSA-assisted businesses in the period 2000-04.
12. While it may be useful to derive an average effect of intervention upon assisted businesses the challenge is to understand the ways in which the intervention can achieve a set of positive outcomes. The research team developed a broad methodology which encompassed a variety of approaches ranging from econometric modelling, based on a telephone survey of assisted and non-assisted firms, to in-depth face-to-face interviews with businesses assisted under the RSA Scheme.
13. To facilitate comparisons with previous evaluations of the RSA Scheme in GB, we included in the telephone survey a subjective assessment by the owner-manager or senior executive of the grant-assisted firm of the additionality of the assistance in terms of hard and soft measures (i.e. jobs, output and changed behaviour). However, the main element of the evaluation methodology was the application of econometric modelling techniques 1 that sought 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.
14. 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). Whilst we do include these questions in the evaluation methodology, we only do so to facilitate a comparison with previous evaluations. The econometric analysis was based on a bespoke survey of 314 assisted and non-assisted businesses in Scotland. The econometric approach is used to generate estimates of the contribution of the RSA Scheme to value-added in the Scottish economy and arrive at an estimate of value for money.
15. These econometric evaluation techniques are applied to the evaluation of the RSA Scheme for the first time and represent considerable methodological improvement upon previous evaluations which relied solely upon the respondent's self-assessment of project additionality. It should be noted that, while we present econometric models on the overall effects of RSA assistance on both Scottish and externally-owned multi-plant firms, the sample of assisted firms (n=157) was too small to permit econometric analysis to determine separate cost-per-job estimates for each group.
Profile of RSA- Assisted Businesses (2000-04)
16. In total, there were 360 firms or plants in Scotland that received RSA financial assistance in the period 2000-04. Four-fifths of these assisted businesses were UK-owned (81.4%) with the vast majority (70.8% of the total assisted businesses) being Scottish-owned firms and/or plants. Around half of the foreign-owned category is comprised of projects from the United States (9.2% of total projects).
17. Just over half (52.5%) of the assisted projects were to modernise or expand an existing operation in Scotland while a further 10 per cent of assisted projects were to set up a new facility at the existing site. A sixth of RSA projects (n=60 or 16.7%) were to assist new start-ups in Scotland and the majority of these (75% or 45 firms) were by Scottish businesses. Finally, around a tenth of assisted cases, irrespective of ownership, were relocations from elsewhere in the UK.
18. Overall, these 360 assisted businesses were offered £126.6m in the period with an average grant of £351,648 (median £100,000). Scottish-owned businesses received significantly lower levels of financial assistance compared to both foreign-owned businesses and UK-owned businesses. Three-fifths of Scottish plants received offers of financial assistance of less than £100,000 in the period and only 2.7 per cent were in receipt of an offer of assistance in excess of £1million. By contrast, around a fifth of foreign-owned plants and businesses owned from the rest of the UK had received an offer of financial assistance of over £1million. This difference in absolute levels of assistance reflects the fact that Scottish-owned businesses are primarily SMEs rather than foreign-owned businesses who are larger multi-national plants. It should also be remembered that Scottish-owned businesses received a higher proportion of their overall project costs than foreign-owned firms within the aid limit guidelines (18% compared to 10%).
19. From this population of 360 RSA-assisted businesses we surveyed 157 of them along with 157 non-assisted businesses. From these we can analyse the contrasts between the characteristics and performance of the two groups. The key points of difference to emerge are:
- RSA beneficiaries grew faster than non-beneficiaries did both before and after receiving assistance.
- RSA beneficiaries in Scotland are more likely to be part of multi-site groups than non-beneficiaries and tend to be larger than non-recipients.
- RSA beneficiaries are broadly similar to non-beneficiaries in terms of their export focus as well as their assessment of the impact of a fall in their or a main competitor's prices on the demand for their products and services (i.e. own and cross price elasticities). That is to say, they are no more likely than non-beneficiaries to be responsive to such price changes. For both groups, the degree of responsiveness to such price changes is relatively small and from this we conclude that both groups do not compete primarily on the basis of price. As a result, for the assisted group of firms, we can infer that the displacement effects may be low.
- RSA beneficiaries are less likely to be selling to the public sector and individual consumers than firms in the general population.
- RSA beneficiaries are more likely to be undertaking R&D and product and process innovation than non-beneficiaries.
- Finally, RSA beneficiaries have faster GVA2 growth than non-beneficiaries although there is no robust difference between growth rates of GVA per employee.
Key Findings - RSA assistance and Business Performance
Scheme Additionality - evidence from the econometric models
20. Overall, the econometric modelling results of the effects of RSA assistance, which include a non-assisted control sample to embed the counterfactual situation, are broadly supportive of RSA interventions and encouraging for policy makers. In terms of the likelihood of a business receiving RSA assistance the analysis shows that young, dynamic Scottish firms with international links are more likely to receive RSA support than those with merely a local focus. For the multi-plant group of firms the results again suggest that policy makers favour firms that are exporters and carry out R&D at the local plant. These findings are unsurprising given the overall eligibility criteria for the operation of the scheme. In other words, it was these types of firms that match the objectives of the RSA Scheme.
21. The employment growth equations indicate that, after controlling for selection bias 3 in the assisted sample, RSA support to Scottish-owned firms/plants and inward investors is positively and significantly related to employment growth in the period 2004-06. However, we find no evidence from the econometric results of a relationship between RSA assistance and productivity (measured as sales per employee) or sales growth. There is the likelihood that the 'impact' period of 2004-2006 was not long enough to capture the full effects of assistance. A significant number (60%) of assisted businesses reported at the time of the survey that they had yet to realise the full benefits of assistance from their business.
22. The interpretation of the results of the econometric analysis of the effects of RSA assistance on employment growth is supported by the evidence from the ten case studies of RSA-assisted businesses. From our discussions with the senior managers and owners of these businesses we are able to conclude that the RSA Scheme in Scotland has achieved outcomes that are clearly additional to the Scottish economy and that it can be positively connected to business performance in recent years (i.e. jobs created).
Scheme Additionality - Respondent Self-Assessment
23. Levels of deadweight (i.e. wholly non-additional) from RSA-assisted businesses and/or plants are low (i.e. 1.9%) with the majority of firms citing some form of partial additionality in terms of either achieving business outcomes more quickly or to a greater extent. Full additionality occurred in around 29 per cent of cases, which is much higher than observed in previous evaluations of RSA in GB.
24. Disaggregating by ownership reveals no statistically significant differences in the degree of additionality reported between UK-owned and foreign-owned businesses. In terms of the amount of financial assistance received there is evidence to support the interpretation that smaller amounts of RSA assistance (i.e. <£100k) were associated with higher levels of additionality than larger amounts of financial support under the RSA Scheme.
25. Respondents were also asked to indicate if there were any other viable alternative sources of finance available for the project if no assistance had been provided under the RSA Scheme. Just over 1 in 10 RSA recipients (13.4%) report that other viable alternatives were available at the time they applied to the Scheme.
26. An interesting follow-up to the standard additionality question asked respondents to indicate if the financial support they received from the RSA Scheme enabled them to divert resources, such as finance, labour or management time, into business activities other than the funded project. Overall, 15.3 per cent of RSA recipients indicated that this had been an outcome of receiving assistance. This is important as it illustrates the potential for other business outcomes other than those solely associated with the RSA funded project.
Behavioural Additionality - Changed Business Practices (Self-Assessment)
27. Generally, the majority of respondents (more than two-thirds in most areas of impact) from the sample of RSA-assisted firms and plants reported benefits for their businesses. The most common effects were on productivity and sales growth, improved efficiency of machinery and the introduction of new or significantly improved products and processes. The econometric analysis, however, did not observe these productivity and sales growth effects but the reason may lie with the fact that only 60 per cent of assisted businesses reported that they had realised all the benefits of the assistance. The inference here is that the 'impact' period of 2004-2006 was not long enough to capture the full effects of assistance. Developments in management practice and innovation management were some of the least often cited impacts. It should be stated that, overall, the percentage of respondents reporting these 'softer' effects was high and support the interpretation that the RSA Scheme has the potential to continue to enhance the competitiveness of the recipient firms in future years.
28. With respect to ownership, foreign-owned firms and/or plants were generally less likely to report effects associated with RSA assistance compared to indigenously-owned businesses and/or plants. There were exceptions - for example, foreign-owned firms were more likely to report the following effects on business behaviour/outcomes - 'improved management of innovation processes', 'reduced costs' and 'increased productivity'.
29. The case studies provided further evidence of the 'softer' effects of the RSA Scheme on business behaviour and capacity. It was quite clear that the technical capacity of all the manufacturing cases had been increased by the investment supported by the RSA scheme and that this has the potential to continue to generate significant business opportunities in the future. The Scheme has made important contributions to changing the capacity and competitiveness of Scottish manufacturing businesses as well as enabling foreign-owned businesses to continue to view Scotland as a viable business location in an increasingly competitive global economy.
30. There may well be a degree of displacement for products and services associated with the RSA Scheme in Scotland in the period 2000-04. This interpretation is based on the relatively high proportion of sales to the Scottish market reported by Scottish-owned assisted firms and the indication by these firms that there is a significant level of competition for these sales. However, inward investors report significantly smaller proportions of total sales to the Scottish market and relatively little competition for these sales. With approximately two-thirds of RSA assistance in this period going to inward investors we may infer that the overall level of displacement associated with the RSA Scheme in this period is relatively low.
31. From the face-to-face interviews with RSA beneficiaries we can make some further assessment of the extent to which the RSA Scheme created displacement effects. Although the interviewed businesses operated in a range of discrete market places there are some general points that can be made. First, the foreign-owned firms were operating primarily in markets outside Scotland and indeed many of them sold their output, or provided services, in international markets. This was also true of all but one of the Scottish-owned firms which was not consistent with the market orientation of the sales of all locally-owned firms in the sample. Second, they had a very detailed understanding of their competitors and the potential threats they posed to their business. It was rare to hear the managers talking about competitors based in Scotland, although there were one or two instances (e.g. timber products manufacturing sub-sector) where this was the case.
32. It was clear from all the manufacturing firms we talked to that the displacement issue had been thoroughly investigated at the application stage. Overall, the evidence from the case studies would tend to support the conclusion that displacement is not a major concern for the operation of the RSA Scheme in Scotland.
Key Findings - Cost effectiveness of RSA assistance
33. The sample of assisted firms (n=157) was too small to permit econometric analysis of Scottish firms and externally-owned multi-plant firms to determine separate cost-per-job estimates. Therefore, the results refer to the full sample of RSA-assisted firms. Cost-per-Job ( CPJ) estimates, using two methods derived from the econometric analysis, indicate that the cost-per-net-additional job for the RSA Scheme in Scotland (2000-04) ranges between £16,591 and £43,024 based on the amount of assistance offered. However, it is more accurate to base these estimates on the actual amount of grant paid to RSA-assisted firms and as a result the CPJ ranges between £13,272 and £34,419.
34. It is important to note that these estimates may under-estimate the total employment gains generated by RSA, however, as subsequent employment gains (i.e. post-2006) may also result from firms' RSA projects in the 2000-04 period. Evidence from the survey would support this interpretation as a substantial number of RSA assisted business (around a quarter to a third) anticipate future benefits from RSA support stretching over the next five or more years (i.e. until 2011).
35. We also generate estimates for the additional value added generated by the RSA Scheme in Scotland in each year 4. Our CPJ estimates, therefore, suggest that RSA financial assistance in Scotland provided between 2000 and 2004 has generated between 2,944 and 7,615 net additional jobs and that these jobs are increasing total Scottish and UK value added by between £59.3m pa and £153.5m pa compared to a broadly based employment counterfactual 5. This assumes that the people employed in the assisted firms would have gained employment in other non-assisted businesses.
36. A key question, however, is whether the net present value of the RSA Scheme is positive overall. This depends crucially on the anticipated lifetime of the jobs created as well as the discount factor used. The cash value of the investment in RSA between 2000 and 2004 was £126.6m, equivalent to around £133.5m in 2006 prices and £150.7m in 2006 when discounted at the standard Green Book rate of 3.5 per cent. The cost of the RSA intervention falls to £120.6m when we allow for the fact that on average 80 per cent of the original offer of financial assistance is actually paid to the assisted firms. This value is then compared to the discounted future income stream - i.e. the discounted value of £59.3m pa or £153.5m pa to complete the net present value calculation. This suggests that an average job lifetime of between 6 months and just over 2 years is necessary for the RSA Scheme in Scotland to have had a positive net value at 2006 prices. RSA projects are typically expected to be implemented, and grants paid, over three years with jobs in conditions for 18-36 months after the final payment. In reality, the majority of the assisted jobs created will last longer than two years and this is supported by recent research which suggested that average job tenure in the UK was around 5.36 years 6. Even if the assisted job did not last two years, the firm may be obliged to repay some or all of the grant paid depending on the circumstances.
Key Findings - RSA Scheme Administration
37. From our discussions with the 10 owners or senior managers of RSA-assisted firms it was clear that there was a high degree of satisfaction with the operation of the Scheme in Scotland. The role of Scottish Enterprise and the LECs was acknowledged by many of the managers as an important and efficient interface with the RSA Scheme.
38. Some issues, however, were raised that had caused irritation to some of the assisted firms. These concerned the length of time to process the application (in some cases up to 6 months); the inability to commission the purchase of equipment prior to final offer of financial assistance, especially when the lead time for delivery of equipment was up to 12 months; the need to ensure that all the financial information requirements were made clear at the outset of the application process, and that the timeline and key dates for submitting applications was transparent.
Overall Assessment of the RSA Scheme
39. Reviewing the range of evidence from this evaluation study, it is our view that the operation of the RSA Scheme in Scotland over the period 2000-04 has met its objectives by supporting investment projects in firms and plants located in Scotland that might otherwise have not taken place at all, or proceeded on the scale or timescale originally anticipated. In other words, there would appear to be a significant degree of additionality associated with RSA grant support to both Scottish and inward investors. Further, it has achieved these results in a cost effective way and with significant positive short-terms returns to both the Scottish and UK economies.