Too much Chinese investment in HS2 could restrict UK growth says expert

INVITING China to bid for HS2 contracts could leave the UK struggling to secure long-term benefits from the £50bn scheme, a West Midlands academic has said.

Professor Nigel Driffield, of the University of Warwick, said that for a project the size of HS2 it was reasonable to assume there would be some foreign involvement but the Chancellor risked serious problems if he courted too much Chinese business.

“The more that is sourced from abroad, the fewer jobs are created in the UK, in the sectors concerned, and their supply chain, which in turn perhaps weakens the economic case for HS2,” said Prof Driffield.

“It is entirely possible that the government is seeking to attract inward investment from China, not perhaps in terms of continued ownership of the infrastructure as was announced with nuclear power, but in terms of either jointly or wholly owned production associated with HS2 infrastructure. If that is being sought / encouraged, one would need to ask why.

“Typically foreign firms can enter markets if they either have a better product (in this case better technology) or can supply the same product (technology) at lower cost. One of the major potential benefits of HS2 is the extent to which it will boost the whole advanced manufacturing sector in the UK, through for example technology transfer between the firms at the top of the supply chain, through to tier 2-4 suppliers, and in turn to other related sectors. Putting this simply, the more of this that is foreign owned, the lower the associated technology transfer, training and spillover effects are likely to be.”

Therefore, he said there was a trade-off between attracting inward investment that may bring with it new technology, and the extent to which the secondary benefits were lower if the main investor was foreign compared with a domestic firm.

In the case of foreign companies, Prof Driffield said their supply chains, innovation activity and training were all typically based abroad and while ex-pats may be attracted to that, ultimately the domestic benefits were reduced.

“In the case of HS2, we know the jobs will be created because the project is essentially public infrastructure. The issue is where the high value added jobs are – in this case in the UK or in China,” he said.

“If the jobs are created in the UK, there is the likelihood the technology developed through HS2 spawning other sectors, or for example leading to long term maintenance contracts. The more of this that is foreign, the less long term benefit will be retained in the UK.”

However, he said people should not see all foreign firms as ‘bad’ for UK business as many created employment and introduced new technology into a country, such as Jaguar Land Rover’s advance under Tata ownership.

“However, this is typically in the context of private sector investment. Tata acquired JLR and stimulated innovation and growth in pursuit of private sector sales, they did not seek simply to fill government contracts that could have gone to UK firms, all other things being equal,” said Prof Driffield.