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Introduction

Investment in physical assets (land, buildings, plant and machinery and vehicles) is a basic source of economic activity that contributes both to current growth and future expansion of capacity and potential efficiency. Investment may be stimulated by changes in demand or technology, by high profits or by low interest rates (since much investment expenditure is financed by borrowing). The extent to which businesses invest and reinvest in their production capacity is a measure of economic competitiveness: high investment industries typically showing above-average rates of growth. As manufacturing industry becomes ever more capital intensive an increasing volume of investment is required to provide a given number of jobs. Fixed investment accounts for a significant proportion of GDP and is also highly cyclical. Firms are more likely to invest if they are operating at a high level of capacity, if they are confident that demand will remain high and if interest rates are low. When these conditions are reversed, businesses are likely to cut back on fixed investments. Investment therefore tends to be highly cyclical and closely linked to business confidence relating to the sustainability of demand.

Whilst manufacturing investment in Lancashire represents only a relatively small part of the total investment that takes place in the sub-region (possibly about 15%), in real terms it remains a significant sum – averaging nearly £380m per annum over recent years. Typically, even the variation in such expenditure between one year and another is usually greater than the sums accruing from the allocation of EU Structural Funds and UK Government expenditure on regional assistance to industry.

Manufacturing Net Capital Expenditure, 1995-2005

Figure 1 Manufacturing Net Capital Expenditure, 1995-2005

Note Constant 2005-based prices

Source ONS - Annual Business Inquiry

The cyclical pattern of investment has been much in evidence in the Lancashire NUTS-2 sub-region. Following the severe manufacturing recession of the early 1980s when much local manufacturing capacity was scrapped and some sectors even experienced negative investment, net capital expenditure in the area's manufacturing sector rose rapidly in the boom conditions over the second half of the decade. This was sharply reversed with a fall of about 40% between 1989 and 1992 when locally there was major restructuring across a number of key local manufacturing sectors. After 1992 investment again surged strongly, the rate of increase for a time exceeding that in the UK such that by 1998 it stood at about £626m or more than double that at the previous trough in 1992. In real terms this sum was probably an all-time high. Subsequently, investment sums have continued to fall (Figure 1), linked with the strength of Sterling, the competitive position of UK industry in world markets and, until recently, deteriorating business confidence. Viewed over the full decade 1995-2005, manufacturing net capital expenditure in Lancashire has fallen in real terms but, despite having endured a number of significant manufacturing company closures, has done so at a rather lesser pace than the UK at large.

Perhaps more striking than the trend in manufacturing net capital expenditure per se has been the relative investment performance of the Lancashire sub-region compared with that of the United Kingdom. Over the 1980s Lancashire's share of national net capital expenditure averaged less than 2.2% - a level consistently well below what might have been expected in terms of the region's manufacturing employment or output shares. Over the decade to 2005 Lancashire's share has risen slightly to an annual average 2.5% of the national total and more recently to over 3% (Table1). This has been largely the result of a substantial fall in UK-wide investment rather than any up-turn locally. It remains to be seen if this modest "improvement" in manufacturing investment expenditure relative to the UK will be sustained or is merely a cyclical characteristic.

Manufacturing Net Capital Expenditure per Head, 1995-2005

Figure 2 Manufacturing Net Capital Expenditure per Head, 1995-2005

Source ONS - Annual Business Inquiry

A more useful comparative guide to investment is given by expressing it in terms of net capital expenditure per person employed (Figure 2). In real terms manufacturing industry in the Lancashire sub-region has undoubtedly become far more capital intensive. In part this has been driven by a desire for greater efficiency and productivity but it is also structural, as the weighting of the older and intrinsically more labour intensive sectors within the economy has diminished. Net capital expenditure per head at its most recent peak in 1998 reached nearly £4,100 for all industries combined which was at an all-time high and more than double that spent in 1992. It has subsequently fallen back somewhat, reflecting the more uncertain business environment. However, not withstanding the recent cyclical downturn and the fact that local investment per head has been on a generally upward trend for many years, comparisons with the UK have remained consistently unfavourable.

Expressing net capital expenditure per head as an average of the 1995-2005 period to even out both the cyclical pattern of investment and "lumpy" expenditure associated with particularly large industrial projects highlights the extent of Lancashire's apparent investment under-performance. Over this decade, average annual net capital expenditure per head was some 82% of the national manufacturing average. The overall pattern, which has been evident since at least 1981 when these local statistics first became available has been one in which this gap has averaged 80% and probably represented one of the poorest out-turns of any such region in the UK. In this context the apparent improvement in Lancashire's relative performance since about 2002 is highly encouraging, spread as it was across a number of separate industrial sectors. However the more favourable position was due more to a sharp decline in UK manufacturing investment than any significant upturn in Lancashire itself. It would be premature to assume from these few years alone, which has been a time of decreasing investment in real terms, that the long-standing "investment gap" between Lancashire and the UK has disappeared but it does support anecdotal evidence of some resurgence in manufacturing activity across much of the sub-region as higher value added sectors have come more to the fore.

Whilst total and per head manufacturing investment have fallen back over recent years it is difficult to draw firm conclusions from this trend. Production equipment itself has become far more sophisticated, flexible and cheaper than similar equipment a decade ago and pound for pound many modern machine tools can be three times more productive. The production capacity of investment also depends very much upon the efficiency with which it is used. Arguably, the widespread introduction of computers, better stock control and more flexible labour practices are allowing businesses to use their capital stock – factories and equipment – more effectively. If so, less investment is required to achieve the same level of output.

Not withstanding the more favourable recent out-turn and whatever the qualifications which may be placed on these figures - a disappointing share of new inward industrial investment for example, structural considerations (until very recently, a clear emphasis on more labour intensive rather than capital intensive industries), outsourcing or the increasing role being played by financial or "intangible" investments in people, organisations and systems as opposed to investment in capital stock and equipment per se, the overall comparative investment performance in local manufacturing industry has been far from sparkling. Lancashire industry has consistently spent a smaller proportion of its gross value added on capital expenditure than in the UK. Continuation of such an unfavourable tendency would not auger well for the future of industrial activity and employment in the County. This is particularly pertinent bearing in mind the age of much of the existing capital stock and the consequent need for replacement and enhancement.

Manufacturing Investment per Head by Sector, 2001-2005

Figure 3 Net Capital Expenditure per Head by Industry, Annual Average 2001-2005

Source ONS - Annual Business Inquiry

There is a wide disparity between different local industries in terms of both their relative "capital/labour intensity" and in comparison with national industry averages. Given the overall level of Lancashire manufacturing industry per capita investment which over the five-year period 2001-2005 was running at £3,430 or 11% below the UK average, it is somewhat surprising that nine of the thirteen identifiable broad industry groups in Lancashire actually achieved an annual average rate of net capital expenditure per head above the national industry average (Figure 3).

Investment per head in the Textile Industry, the old staple of the Lancashire economy has for long been amongst the lowest of all the major industrial groups with such expenditure averaging less than two-thirds of the local manufacturing average. Nevertheless average per capita expenditure 2001-2005 in the Lancashire industry was more than 60% above that of the UK industry probably reflecting the continued local specialisation of this industry and the higher capital intensity of much of the upstream technologically advanced weaving and finishing sectors that today focus on higher value products, long ago having abandoned the production of commodity textiles. A number of other traditional local specialisms: Other Manufacturing (largely furniture), Footwear and Wood Products also performed comparatively well although it is difficult to say how far this represents a real trend improvement or is merely the effect of one-off major investments. The Other Non-Metallic Mineral Products industry also had a favourable out-turn though this was concentrated in a handful of fairly capital intensive companies. It is further encouraging that investment in the Metal Products industry appears to have accelerated over recent years: a large slice of this sector includes engineering sub-contract service companies many of whom work in sophisticated supply chains for demanding end-users

On the downside Lancashire continued to perform particularly poorly for new investment in three key sectors: Chemicals, in which annual average investment per head was only 65% of the national industry; Electrical and Optical Equipment (67%), and Transport Equipment (less than 40%). The local impact of relatively low investment expenditure by these particular sectors was all the more significant as they have both a strong weighting in the economy and nationally are highly capital intensive. An improvement in their capital expenditure programmes could have a significant impact on Lancashire's overall investment performance. The lowish rate of new investment in the Transport Equipment sector, and particularly of aerospace, is something of an anomaly as it follows a period of particularly high and sustained investment programme of major site refurbishment and tooling up for Eurofighter-Typhoon and JSF production. Moreover, it might be noted that the official investment data relate only to physical assets. Investment by some aerospace companies over recent years in "intangibles", notably of information technology, has been on a very large scale, in some years apparently well in excess of that spent on physical assets alone.

Manufacturing Investment by Sub-Region, 2001-2005

Annual average net capital expenditure per head by industry in the two Lancashire sub-regions compared with Lancashire as a whole and the UK is shown in Table 3. Both sub-regions have experienced below par levels of investment per head over recent years but within this overall average, the trend is upwards. Relatively, the position of East Lancashire has continued to improve marginally over its longer-term trend whilst that in Lancashire West has fallen back.

Manufacturing Investment by Districts

Total manufacturing net capital expenditure, together with gross value added (i.e. net output less the cost of non-industrial services) and the relationship between the two in 2004 is shown in Table 4. To a great extent, investment sums reflect the relative size of the manufacturing sector in each district though cyclical factors also play a part. In 2005 they ranged from a modest total of under £10m in Chorley to £56m in Blackburn with Darwen. Perhaps of greater interest is the share of gross value added these sums represent. Heading the list was West Lancashire and Wyre where manufacturing companies re-invested the equivalent of more than 12% of the total wealth (GVA) generated in these districts. These were closely followed by Blackburn (11.5%) and Fylde District though precise figures for the latter are not available.

Figure 4 Manufacturing Net Capital Expenditure per Head by District, Annual Average 2001-2005

Source ONS - Annual Business Inquiry

Manufacturing investment per head by districts (expressed as an annual average 2001-2005) is illustrated in Figure 4. Four Lancashire districts exceeded the UK average. Wyre headed the rankings due in large measure to high capital expenditure in the chemicals sector. Above par investment in Ribble Valley and Fylde was largely attributable to aerospace activity. At the other extreme, average per capita investment in Preston was barely more than a third of the UK average.

For further details, please contact:
Peter Kivell
Tel 01772 534157
Email Peter.Kivell@lancashire.gov.uk