Foreign Ownership of UK Assets

Lord Mendelsohn Excerpts

Thursday 19th November 2015 Lords Chamber

[Lord Mendelsohn (Lab)]

My Lords, I draw attention to my interests in the register. I also earn a living in the corporate finance industry. I start by thanking the noble Viscount, Lord Hanworth, for introducing this interesting debate and for his, as always, extremely thought-provoking contribution. It has been a great pleasure to listen to such a fantastic debate, and it reminds me—a relative newcomer—of the sheer quality present in this House. It also reminds me that I must make sure that I am not a disappointment to my mother when I respond to such high-quality contributions.

I should like to raise a series of issues that touch across the issue of ownership and its consequences and address a complex series of opportunities and challenges that come from the level of foreign ownership—matters that we should be very alive to. It is always difficult to come to a completely full conclusion on these matters. My noble friend Lord Monks raised the issue of potentially restricting hostile takeovers. Of course, one of the great corporate achievements in the United Kingdom was Vodafone’s takeover of Mannesmann, which was a hostile takeover. Many of the problems associated with foreign ownership of companies come from agreed takeovers, so it is very hard to find inherently the right instruments. Of course, we believe in open markets and trade and we understand the benefits of investment and know-how that can come in, and of new business processes and products. We also understand the profile of foreign investment, which is that it is principally about large companies—1% of companies, around 30% of value added. That is also why there is a central importance in our deliberations and in our work to improve the condition of the business environment for small businesses, where foreign ownership is not highly present.

It was a matter of some comment around the general election—I cite an article in the Wall Street Journal—that Britain was becoming very resistant to foreign deals. In fact, it said that barriers were rising, pointing to the climate over a few particular deals, and over the way in which the chief executive of Pfizer, in relation to the AstraZeneca deal, was forced to write to the Prime Minister with a “string of commitments”. It also identified that in March the Department of Energy and Climate Change,

“moved to block Russian oligarch Mikhail Fridman from owning stakes in 12 North Sea gas fields”,

through his investment vehicle. It then said that,

“the boldest move by the UK government against a foreign takeover came just weeks before”,

the general election, when a,

“UK official confirmed that the government had told BP that it would block any sale of the oil company to a foreign company”.

So the pattern is not absolutely clear.

It does come as some contrast to how the Government have positively encouraged the Chinese investment in Hinkley Point. These issues were ably raised by the noble Baroness, Lady Falkner, the noble Viscount, Lord Hanworth, and by my noble friends Lord Haskel and Lord Judd. There are considerable concerns about the design, the fact that we are going to be the pilot for it and the extraordinarily long-term deal at a very high price. It stands in great contrast to the concern over other matters that this one has gone through in the way and shape that it has.

This raises the central importance of regulation. Regulation is key to these things, and not just to how we deal with the utilities and the protection of service standards and security. It has a central role in how we ensure that these markets, takeovers and other things, and the condition of business itself, are dealt with properly. My noble friend Lord Desai mentioned VW and said that it was a failure of corporate governance. Actually, it was a failure of regulation. It was another example of why trust is an inadequate safety net for business practice. We have to make sure that markets are regulated properly and sensibly, and foreign ownership only increases that challenge.

The Government have a very good record with UK transparency laws. The register of people who exercise significant control, which was introduced by the Small Business, Enterprise and Employment Act, will be implemented this year and will be an important addition to how we manage foreign businesses on our shores.

The method of ownership matters. My noble friend Lord Haskel made a very important point about how it has affected our supermarket sector. It has affected other retailers. Zara has exactly the same condition. All shareholders are not the same. There are differences. Whether companies are private equity or listed, and whether a company has particular return on capital requirements, ownership matters. Perhaps the greatest illustration was during the course of the financial crisis when we saw the impact of deglobalisation—the return of capital and investments to national headquarters and a choking of investment into our country which had tremendous consequences and had to be managed with a great deal of skill.

My noble friend Lord Haskel made a very important point which I am very keen to re-emphasise. Foreign direct investment has huge benefits and is and always was key to our productivity strategy, but, given that foreign-owned company outflows broadly equate to FDI inflows, with all the consequences for trade deficits so ably illustrated by my noble friend Lord Hanworth, it cannot be a useful tool to assist the productivity challenge at this stage. We have to have a more sophisticated approach to foreign direct investment.

One of my great concerns is about how it has completely transformed some of our sectors and our contribution to the long-term sustainability and strategic capability in sectors. Of course, we have some which are uniquely attractive and a number of companies would wish to acquire them. To give some sense of perspective, I believe that at the moment there are no major British companies in IT hardware, electronic and electrical equipment, semiconductors, office accounting and computing equipment, radio, TV and telecommunications equipment, fine chemicals, automotive, computer software, except for standard software, and investment banking and international management consulting, and there are worrying issues for larger UK-quoted companies in aerospace and bioscience.

British-owned enterprises are in retail, leisure and general services and are insufficient in high knowledge and technology, with the strong exception of the Cambridge Science Park—I wish we spoke a lot more about that rather than about the somewhat overblown Tech City. The list of companies I have described has been described rather well as,

“the knowledge and technology-based sinews of the modern economy”.

We lose long-term capability and adaptability for the future if we do not have the right contribution there. It is tragic to see what happened to Logica when it was acquired. It was a fantastic company with huge ambitions and was sold short by the City. It is very important to see companies such as British Airways being prepared to go out to the wider markets.

Indeed, I fear that the consequences are very clear to see. Foreign ownership of patents in this country is 40%. The European average is 14%, in America it is 11% and in Japan it is 4%. We have huge capacity for our greatest inventions being applied in other places and that knowledge being extracted and headquartered in other areas. That is quite important for us to understand.

I share the concerns about the finance industry and some of the issues about short-termism and trading, as well as my broader concerns about the pensions industry. My noble friend Lord Haskel made the case for how corporate governance should be considered in the light of foreign ownership. Corporate governance is a central matter that we have to deal with. Foreign ownership is a greater challenge with regard to how companies are run, managed and held accountable.

In a study on wages, productivity and foreign ownership in UK manufacturing, the Centre for Research on Globalisation and Labour Markets at the University of Nottingham identified that in foreign-owned companies labour productivity was 10% higher, total factor productivity was 5% higher and the wage advantage was 5%. At the very top of the scale were US-owned companies, not Japanese, to whom we owe a very great debt for transforming our motor industry. So there is a huge challenge for boards of management, especially remuneration committees, and institutional shareholders, since some of these companies show greater strength because of their investment and training, not a short-term finance director-led approach to managing companies.

In many ways there is almost a tragic element here. Without foreign investment, would there be any significant British presence in major advanced industries, such as motor manufacturing and indeed in investment banking? When we talk about that great institution, the City, we should remember that there is, I think, only one investment bank that is British-owned any more. These are matters that we cannot take lightly, and we have to think about them and plan for them.

I make the point again that there are great advantages and contributions from foreign ownership. I do not take the view that the sky will fall in and that these things are without redemption, but I worry that there is a light travelling towards us and it may not be a bicycle. It is important that we address the known knowns and the consequences with a stronger industrial policy; that we address the unknown knowns with a greater study of foreign direct investment and ministerial willingness to be much more careful and forensic in their examination of it, rather than just pursuing an overall headline target figure; and that we address the unknown unknowns by ensuring that we pay greater attention to maximising our position and to considering our strategically important sectors.

I shall finish with some challenges to the Minister, to see whether he will agree with me that we need a more precise targeting of particular kinds of foreign direct investment and better regulatory intervention to help to maximise local multiplier effects, encourage positive technology spillovers, minimise the displacement of local businesses and encourage opportunities for small businesses, so that the Government are better informed about the corporate objectives, management style and track records of multinational corporations that wish to presence themselves in this country and can ensure that, given the problems that we have in the sectors that I would say are at risk, there is a strong government focus around science, engineering and technology, and protecting and building our IP.