The transformative potential of inward investment on industrial cluster development: the case of the semiconductor industry in Wales

Figures & data

Figure 1. Reported strength and weaknesses of inward investment for Wales.

Table 1. Summary of CS cluster local economic effects.

Potential effects	Nature of effects	CS cluster in Wales
Productivity spillovers	Role of inward investment in technical change and progress and domestic productivity growth	Potentially strong in terms of involvement in cutting edge technology and links to new research being undertaken in local universities. Shown to be a highly productive sector in Wales in terms of estimated GVA/ employee.
Competition effects	Role in breaking down monopolies in host, improving resource allocation.	CS cluster markets are international. Limited displacement of any domestic regional or indeed UK capacity.
Trade effects	Impacts on trade, balance of payments effects.	Strong impact on regional export activity. CS firms almost exclusively exported to Asia and North America, rather than EU.
Buyer-supplier/value chain effects	Issues of embeddedness. Indirect economic impacts on regional supply chains. Demonstration effects to suppliers.	Limited backward supply chain links into Welsh economy but new CSconnected initiative seeking to expedite this issue.
Employment effects	Direct and indirect employment creation.	CS cluster supports jobs directly and indirectly in the Welsh economy (c.2,400 jobs) through wage and procurement effects.
HRM and operations management effects	Presence of different operational and HRM practices in the inward investment sector, and extent to which demonstration of practices spills-over to the extant firms in the economy	CS cluster firms strong in terms of application of advanced manufacturing technology and robotics.

Source: Based on authors’ interviews and surveys.

Figure 2. Pull factors for new inward investment in the CS cluster.

Table 2. Comparing the new ‘transformative’ and traditional approaches to inward investment in supporting regional economic development.

	New ‘Transformative’ Approach	Traditional Approach
Embeddedness	Strategic Embeddedness: The CS cluster demonstrates strategic embeddedness via collaborations with universities, manufacturers, and local/regional governments. Strategic coupling, joint research bids, and collaborative initiatives contribute to the development of the cluster, fostering a supportive ecosystem that addresses challenges collectively.	Lack of Embeddedness: Often the failure of externally owned plants to embed themselves in the local economy and community. This may result in easy relocation from the host region, particularly with changes in the political or socio-economic environment, diminishing long-term transformative potential.
Investment Motivations	Shift in Investment Motivations: Unlike past inward investment trends, the new approach in the CS cluster is driven by factors beyond traditional considerations like factor costs. Motivations focused on knowledge, technology, skills, and institutional support, fostering a shift towards a more globally oriented market.	Production-Only Focus: A tendency for inward investment to exhibit a production-only focus. This results in routine business activities being allocated to the region, typically involving mature commodities, limiting opportunities for innovation and hindering R&D collaboration.
Product-Set and Procurement	Diverse Product Set: The CS cluster produces a diverse range of products, including chips, design, tooling, coatings on wafers, research, technical solutions, and consultancy. This diversity, combined with a growing market, contrasts with the historical focus on more mature products, offering a potential for increased innovation and economic impact.	Non-Local Procurement Patterns: External control associated with inward investment poses constraints linked to non-local procurement and reduced regional multiplier effects, limiting economic benefits.
Decision-Making/Skills	Rich Functional Diversity and Local Decision-Making: In contrast to the historical production-only model, the CS cluster exhibits functional diversity, incorporating HQ-type functions alongside production. Local decision-making contributes to regional development and shapes global operations.	Skills and Knowledge Deficit: The lack of embeddedness and focus on routine business activities contribute to a deficiency in skills and knowledge-intensive R&D and engineering activities at the regional level. This deficit negatively impacts the skills equilibrium in the region, limiting potential for knowledge spillovers.
Innovation and Entrepreneurship	Knowledge-Intensive Outputs: The CS cluster emphasis on IP and research outputs sets it apart. Production in Wales involves intermediate knowledge and research outputs, creating opportunities for research collaboration, innovation, and joint development of products and services, aligning with the triple helix approach.	Limited Entrepreneurial Capacity: The detachment of HQs often observed in inward investment scenarios, creates a developmental problem. Inward investors, with HQs located outside the region, may act as corporate bed blockers, limiting entrepreneurial capacity and innovation in the local economy.
Employment Impacts	High Salaries and Skills Intensity: The CS cluster demonstrates a relatively high level of skills and knowledge intensity, reflected in high salaries and a diverse skills constituency. Cluster attracts highly qualified engineers and research personnel, contributing to a higher-than-average GVA/employee and creating a conducive environment for R&D.	Skewed Employment Impact: Past inward investment in Wales has shown potential downside in terms of its impact on employment, particularly in terms of the employment of unskilled labour. This could lead to a lower skills equilibrium in the host region, creating imbalances in the local workforce.