 Good morning to everyone, and welcome to the 11th meeting of the Economy, Jobs and Fair Work Committee. I have apologies from committee member Jackie Baillie and also from Dean Lockhart for being slightly delayed, but I think he'll be joining us shortly. May I remind everyone to turn off all electrical devices or at least to silence so they don't interfere with the work of the committee? Item 1 is a decision by the committee to take items 3 and 4 in private. Are we agreed on that? Yes. Thank you. Today we are continuing to discuss the economic impact of leaving the European Union, and we have four guests with us to give evidence, and I'll introduce them in no particular order. We have Jeremy Pete, who is visiting professor of international public policy institute at the University of Strathclyde. James Brody, who is a manager Scotland and China business advisor for the China-Britain business council. Gareth Williams, head of policy at the Scottish Council for Development and Industry, and Neil Francis, who is the international operations director of Scottish Development International. Thank you all of you for coming this morning, and we'll now move into questions from committee members. If you wish to come in on the discussion, please either do so as matters flow or simply indicate to me that you wish to come in on a particular issue, question or discussion. I'll start first of all with a question from committee member Gil Paterson. Thank you very much, convener. Good morning everybody. It's a general question that leads you free to come in on any particular area that you're interested in, but the committee itself, we are out and about. We've just started the process of taking evidence from different sectors out there in the field throughout Scotland, and I happened to be on one yesterday. The people that were giving me evidence had already started planning, and I asked them the question, what are you planning for? Of course, you'll see a leaked document. You may be aware that there's a leaked document into public domain, and it would suggest that the Government in the UK really don't know, although they're doing some work that's quite clear, but they don't know what they're actually planning for at this stage. In a Scottish context, what do you think that we should be planning for? What are the red line areas, and what should we be concentrating our efforts on? Who would like to come in on that question to start? I'll just give a few words. I think, Kim, we've been careful to try not to describe them as red lines in the political context, but rather to try and think of what our key ass would be. I suppose that the challenge is that, for a lot of our members, it's as close to what we have now as possible, in particular in relation to access to the single market and the availability of skills at different levels to meet the needs of businesses in the economy. We're still in the process of going into the detail of those particular asks, but I think that one other message that I'd like to get across at the start is that, as many of our members are saying, we need to rethink what we mean by competitiveness in a post-Brexit situation. Let's not be distracted to too great an extent by thinking about Brexit. There's a big agenda that we need to get right around our competitiveness, and if we do that, we can be successful under a range of different scenarios. If I could just add my two penny worth at this stage. First of all, I think that we should all be preparing for an extended period of uncertainty. I think that's about one of the few certainties in this whole area. We're talking about a two-year timetable from March of next year, but of course next year we have major elections in two or more major EU member countries. It's difficult to see how detailed negotiations can take place when changes in government are possible or pending, so that is going to put a lot of pressure on moving into 2018 and who knows how long it's going to take to get this sorted. So, extended uncertainty, which is of course not good for investment, either investment within the UK or for inward investment when nobody knows what the final outcome is likely to be. The second point is that it seems very unlikely that we will achieve the same level of free and unfettered access to the single market that we have experienced as members of the EU. Because even with possible alternatives that exist of one type or another, there are limitations on that. There also is often a cost to pay for participating, which there are indications that the UK government would be unwilling to make. There is even one gets into one of these alternative arrangements. There is then no influence whatever over what the rules of regulations are. You just take what you're given. So, the outcome so far as access to the single market is concerned is likely to be less full and satisfactory than we have at the moment. The final area that certainly from looking at the Scottish financial service sector is critically important is the issue of access to employment from other countries in Europe. Now, I know that it matters at the unskilled end as well as the skilled end to a number of Scottish sectors, but for the Scottish financial services sector we are very keen to see strong high value added sectors within Scotland. Those high value added sectors are very dependent upon the existing use of labour from a skilled manpower from Europe and elsewhere. If that is not sustainable then it places a real question mark about our ability to maintain those very important high value added areas within Scotland. So, the two issues of access to the single market and continuing access to skilled labour required for different aspects of our economy to me are critical. I'm sure that the First Minister will be making every effort to influence the UK position and to look for ways in which Scotland can perhaps take a different line. But there are areas to me of significant concern. Neil Francis. Just to add a little bit to what Jeremy was saying there, I agree entirely that we should be planning for a long period of uncertainty. I think that what we need to do is work through the various potential outcomes that may occur when we get to the final point of completing the negotiations. From a trade and investment point of view, as Jeremy said, uncertainty is not a great thing, but what we need to do is, as elements of the uncertainty decrease, then we do need to be able to factor that in and work alongside our investors and our companies to help them plan a way forward. When we've got such a degree of uncertainty over a prolonged period of time and when we're not fully in control of achieving any particular set of outcomes, then we do need to plan for a potential different number of outcomes and see how they will affect various strands of both economic and cultural life within Scotland. In relation to planning, I wonder what your thoughts are about who we should be aiming at in this regard. Who is it that really calls the shots? Is it the UK Government that calls the shots or is it the European Union that calls the shots? If we take the financial sector in particular, and I know how important it is to Scotland, although I'm gathering that it's maybe slightly different with regards to the Scottish interest and the London interest, but nevertheless, when it comes to passporting, for instance, and we don't know what planning we need to be considering perhaps, and is it in Luxembourg's interest, in Germany's interest, to have a hard Brexit rather than a soft Brexit, since they're competing in that market? It may be difficult for them in the short term, but in the long term, the hard Brexit might be the answer. How does that square up in planning in terms of who should we really be engaging with, the UK Government or the people further afield? I can give a first response to that. The answer, of course, is both. This is not a one-sided discussion that's taking place. It's at least a two-sided discussion. The interests of individual countries within the EU, as well as the EU as a whole, will be taken into account in the negotiations. I do think that there's a difference between the Scottish financial sector interests and the UK financial sector interests so far as passporting is concerned. When working with Owen Kelly of SFE on this area, I was surprised to find that the actual impact of losing passporting was less substantial in Scotland than elsewhere. The main impact is on the major investment banks and on possibly some of the exchange arrangements that exist there. Some of those great exchanges may remain within the UK that may be in the interests of the whole of the EU, but I think there are still a number of areas that could depart. I think that passporting will not be formally present for the UK and the informal or alternative arrangements will be less satisfactory. Certainly, one can try to make the case that it's in the interests of Europe to have a successful London in terms of the financial sector. However, how far that goes, I'm not sure, because there are a lot of organisations in Germany and elsewhere that are already working very hard to recruit high-quality staff and indeed to look for movement of headquarters away from London. The balance between the two and Scotland, if it's going to be influential, needs to maintain context on both sides of the debate. I think that others may want to move into the financial aspects of that in a bit more detail. Could I just follow up with Neil Francis? From the point of view of Scottish businesses, is flexibility the watchword? I think that flexibility is a key word. As I said earlier, from a business point of view, when you don't have any or limited influence and certainly no control on the eventual outcome, then you have to plan for multiple outcomes and make sure that you're giving your business to survive and thrive regardless of what the outcome is going to be. I think that's what businesses do really, really well. I think there's a difference then in terms of what you were referring to then, Gil, was how you negotiate. Clearly, when you're in negotiation, you are trying to make gains in areas of more value to you and obviously concede in areas of less value to you. I think one of the big jobs is to understand what are the most valuable things to Scotland. Jeremy told me about passporting and how that might be slightly different from a Scottish perspective to a UK perspective. I think that there is given the wide range of sectors we have, the wide range of other interests we have, is gaining a consensus around the things that are most valuable to us in terms of our relationship with the European Union. Perhaps James Brody, I know that China is not an EU country, but in terms of forward planning it might be helpful if you're able to give comment from the point of view of Chinese dimension? In terms of the companies that we represent, primarily British companies who engage with China either here in the UK or operationally in China, we have surveyed them since Brexit on their opinion on what Brexit might mean for them. Perhaps, somewhat surprisingly, they came back rather positively, optimistically, in terms of the opportunities that Brexit might represent for them. Most concretely, in the form of the possibility in the medium term of forming some kind of free trade agreement with China, since the EU currently doesn't have such an agreement in place, it may become one of the countries that the UK Government chooses to negotiate a free trade agreement with. In terms of planning for that, I think that it should be about engaging with your industry sector, engaging with Government to alert Government to what obstacles perhaps still lie in your path when trading with China. We are then able to prioritise along the lines when it comes to negotiating not only with the EU but perhaps with other trading partners. We are able to prioritise correctly in terms of where the greatest interest lies. Aside from that, I would also say that, at this time, it is very much business as usual. I think that we can try to plan, but with so much uncertainty about what the potential outcomes could be, it is a very challenging process. If you have already got existing partners and clients in China, then maintaining those partnerships in the foreseeable future is probably the key, making sure that you are servicing your trading partners as best as you possibly can. John Mason will now move to a question from John Mason. I have been reading the paper, Mr Pete, from Mr Kelly about Brexit and the Scottish financial services sector, which I thought was very interesting. You have already mentioned passporting and access to non-British staff, which appear to be two of the key features. Perhaps you could explain a little about passporting, if I am understanding it correctly. I think that that means that once you are in operating in one part of the EU, you can operate anywhere in the EU, but that might be a bit simplistic. Am I right in saying that, effectively, some part of the financial services would be more affected by passporting or the lack of it than others? I will do my best. Owen Kelly was the great expert on this, so I relied on him very heavily. Your definition of passporting is effectively correct. Via the passport, any financial institution based in a member state of the EU can operate equivalently across the other member states, so they have those rights and they operate as if they were based in that nation. Why does it matter differently? First of all, it may matter because the financial sector is one that is pan-EU, and in some cases it isn't pan-EU. Pensions are primarily single nation based. Because of the difference in tax regimes across different member states, it is difficult to sell a pension product from country A to country B because the tax is what determines how the pension works. We have a successful pension industry in Scotland, but that is selling almost entirely into the UK market. We don't need passporting for that, and we don't expect to see a major impact from the loss of passporting on pension concern. On the banking side, what we have remaining in Scotland are essentially retail and commercial banks, and they again are working mainly within a single nation context. Again, they don't need the passport, whereas it is the big investment banks and the very major corporate banks that are lending at the top level that require those international passports. Wealth management is a very important sector, but there the services are regulated at each member state level. Direct provision across borders is unusual, so again there is unlikely to be any impact from the loss of passporting. What this demonstrates is that you need to look at each sub-sector of financial services and work out whether passporting matters and then look at the breakdown of Scottish financial service activities and see whether Scotland is going to be affected in those different sectors by the loss of passporting. It is not just whether we are selling directly to Europe, it is also whether we are selling to other UK-based entities that are themselves exporting to Europe. In asset servicing, for example, as I understand it, most of the quite high-skilled, high-value-added entities in Scotland are selling to institutions that require passporting in order to sell their services across Europe. So, while we don't need the passport for our asset servicing to sell to a London-based entity, that London-based entity will not be selling across Europe, so the market for our activities in the UK institution may dry up. You have to go down to the sector in order to work out whether the passporting matters and the relatively good news is that the sectors that are most important here are ones where the impact of the loss of passporting is likely to be somewhat less substantial than if you look at the London effect. Just to progress on that a little bit more, it says that providers in countries outside the EU, like the UK Post Brexit, either have to establish their funds within an EU member state and passport throughout the EU or market their funds from the UK under a more complex procedure. That idea of establishing yourself in Luxembourg or Dublin or somewhere else and then working from there, is that a difficult process or is that relatively easy? Well, so far as asset managers are concerned, it is already happening. The assets that are managed in Scotland tend to be based on funds that are set up in a range of different European countries, so already that is happening and can take place quite readily. But I think if you go into other sectors like investment banking, the same could not apply and what would then be feasible for them would be very much a second best route. So again you have to look into the detail and discover what can work. Asset managers are again very important for Scotland and are again unlikely to be dramatically affected by the loss of passporting because already there are entities across Europe that are established by the Scottish asset managers and which would continue to operate as I understand it post Brexit. Thank you. The other area was the access to non-British staff, which you also spoke about and this might bring in some of the others as well because it is less specific. The devil's advocate might say that we are just taking foreign staff because that is easy and they are readily trained but maybe we should be training up more of our own staff and we shouldn't be so dependent on staff from elsewhere. How would you feel about that? Well, in an ideal world you are right of course but we are not in that ideal world at the moment. The more that we can develop the high skills, the highly specialised people the better and there should be great emphasis within financial service companies as elsewhere in the economy developing the skills that are required. But when push comes to shove when you are in very specialised areas there are certain people who are particularly very good at those jobs and if they are doing a very good job now then we want them to stay and continue to do that job and there will definitely be skills area where one guy is going worldwide to look for the best people. This is at the top of the tree where you want the best people in order that Scotland can be highly productive and can be competitive and to cut off access to those high skills from wherever they come from is I think we use the phrase unduly masochistic and I think that about sums it up. What is the point of denying oneself access to highly skilled people who can make your economy more efficient and can therefore bring benefits across Scotland? If I may, John, just to add to that I think we also have to take into account the wider benefit and impact these very highly skilled talented people can have on the wider Scottish economy, how those skills can rub off to colleagues that they are working with in the workplace and you get a lot of ripple effect. I think that builds back into the other part of your questions. Of course we need to carry on investing in our own talent and upskilling and supporting our own people to reach to the same level in terms of these really specialised roles that can add so much value to the companies located here. Another ripple effect for nationals who come to work and study in Scotland, even if they do not stay here their whole careers, when they do return to their country of origin I think they are a huge source of investment in the longer term, which again we would be potentially impacting upon. And when you say foreign nationals you mean of course from any country including EU nationals but also non-EU nationals? Yes. Thank you. Gordon MacDonald. I want to ask a number of questions in relation to inward investment. In Scotland we have four and a half thousand businesses that are owned by other EU nationals and I'm just wondering if we have any indication of what their views are of the impact of Brexit. Start with that, Gordon. I think, as I said last week when I was with the committee, we have spoken since June to all our inward investors, our existing investors in Scotland and I guess to summarise, most people are still saying it is too early to make any definitive kind of statement on how they view the future in relation to their activities in Scotland. So that's the general thing. We have had no indication of any of our existing investors cancelling projects. Certainly people are reflecting on future investment plans, which you would expect. But in general the volume of activity with our existing investors remains the same as pre-Brexit and certainly our activity to attract new investors to Scotland since Brexit is actually a little bit stronger in the three months of this year compared to the three months of last year. As Gordon rightly points out, 25 per cent of our investment also comes from within the UK, so from companies that are already established elsewhere in the UK. That is also an important source of future investment for us. I know that you have another point that you want to come on to, but I think that some others want to come in on the inward investment point. Ash Denham, do you want to come in on that? We know that Scotland has been doing quite well on inward investment in terms of the UK picture as a whole that it's third after London and the South East. I'm assuming that once investors have decided that they want to invest in the UK, they're picking Scotland. From the EUI survey, we can see a list of reasons, so that might typically be because Scotland's got high levels of skill and education, maybe because Scotland's scene is a bit more affordable than London and the South East. However, if we look at the top 10 countries that are investing in Scotland, six of them are actually from outside of the EU. The EUI survey also says that 79 per cent of investors to the UK, a key feature for a reason of a decision to invest, is obviously the single market. I'm just interested in what the panel's view is on what is the future for inward investment in Scotland, bearing that in mind that if we're not in the single market, will that have an effect on countries that presumably are investing because of the single market? I think that inevitably there must be some potential impact initially because of the uncertainties, but going further, if there is a constraint on access to the single market and if foreign investors from a range of non-EU member states are coming to the UK and coming to Scotland in order to access that market, then it must be a negative factor in their considerations. How important that is in the overall balance of their decision making will depend on each individual case, and, of course, we do know that Nissan decided to go ahead with its investments. Quite why we don't yet know, but no doubt in due course we will find out exactly what was going on with the EUI survey. So, there's nothing to say that we can't attract inward investment from outside the EU if Scotland is outside that single market, but it must act in a way that we can't attract inward investment from outside the EU if Scotland is outside that single market. The other point that I'd make is that these inward investment projects are exceptionally important to Scotland for a number of reasons. I mean, we still do not export anything like enough from Scotland to the rest of the world, but we still do not export anything like that. A lot of the high productivity, high skill, export-oriented businesses are based upon inward investment as much as domestic investment, so it does matter to Scotland, and we've benefited hugely from that. We need to look to the ways in which, with the good offices of Douglas and others, we can continue that. Gareth Williams. That has been said, our performance on inward investment has been strong, but that's not to say that we can't do that. In particular, we have been very successful in securing repeat investment, but we have been less successful in attracting new investors. The figures from the trade investment strategy showed that we have been successful in attracting new investors. The figures from the trade investment strategy showed that 37.5 per cent of investment in Scotland was from new investors compared to 68 per cent in the rest of the UK. It's encouraging to hear that interest is picking up even after the Brexit vote from new investors. As Jeremy says, undoubtedly there are going to be challenges, but going back to my initial point, that means that we have to reconsider how we have the most competitive environment within Scotland. We know the strength of our universities, for example, and the key role that they play in attracting inward investment. We know that cities are increasingly important for their quality of life and so on in attracting inward investment. How can we ensure, in a post-Brexit scenario, that we maintain the links on innovation, research and so on with the European Union? How can we ensure that our cities are best placed post-Brexit to be at the cutting edge of developments, for example, in digital and mobility? In addition to the discussion that we are having today, we have to look again at those areas. Can I just add a few comments to what has already been said? Just one point of information. The statistics relating to inward investment are quite complex and you have a number of people producing reports on relative performance and they use slightly different methodologies, so the Ernst and Young excludes all intra-UK inward investment. That is why the figures are as you recall, Ash. In general, we get about half our inward investment from EMEA from Europe in the Middle East and half of that comes from within the UK, about 10 per cent from Asia Pacific and about 40 per cent from the Americas. That has been our historical pattern of inward investment. We have historically generated about 70 to 80 per cent of the benefits from our existing investors through them expanding and reinvesting, which is a really good thing, and around 20 to 25 per cent from new investors. That has been a priority for us in the past few years, to get that balance adjusted a little bit and to get more new investors into Scotland. Picking up on your point about why people invest here, there are two main rationales for inward investment. One is access to market and the other is access to resources. Companies come to Scotland for both. It is like the point that Jeremy made around financial services. You have to get into some detail sector by sector or even sub-sector by sub-sector, where, for some sectors, access to market is really important. Up until now, one of our selling points has been access to the whole of the European single market by locating in Scotland. The second one is access to resources. As Gareth said, we have a really great story to tell there in terms of our business environment, the stability and the low risk of doing business from Scotland, access to skills, access to research and development and so on and so forth. Jeremy made a point about the importance of inward investment. I think that investors account for 70 per cent for the business expenditure on research and development in Scotland. That is a really important point. It gets across the kind of access to resources. Those companies that are focused on doing research and development here might be less impacted by the thought of access to market. James Brodie. Just to speak directly to your point about the relevance of access to the single market as a reason for investment here. In the context of Chinese investment into the UK, not just to Scotland, the model that we have seen so cited in the press and in the past that Japanese investors took in basing manufacturing here in the UK for access to the single market has not been an investment strategy that China has thus far used coming into the UK. It does not appear to be on their agenda going forward either. They would rather bring back high value manufacturing into their own supply chain in China, and export from there rather than approach it at least using the UK as that base. The one area where that may differ is in financial services where in the past few years, and it has been far more recent, there have been a number of financial services investments into primarily London. That is when passporting comes in and I would defer to Jeremy's knowledge on how much that will affect Scotland. On the inward investment point, we have two more questions, one from Liam Kerr and one from Gillian Martin before we move on to another area. I would like to explore the Chinese angle, particularly in relation to some comments that Neil Francis has made. We see that EY say that 2015 China was the UK's third largest investor with 79% increase in projects. First of all, is there any reason to think that this will not continue whether as a function of Brexit or not? I think there was a huge conflation of Brexit with Hinkley Point C in the press because the change in leadership at the Prime Ministerial level took place at the same time. One of Theresa May's first actions was to press pause on Hinkley Point C decision. As a result, the two issues did become far more merged than perhaps in reality they are. The fact that that then went forward as a great relief for many in the UK-China business and investment world as it reinforced the work that had been put into creating this so-called golden Europe between UK and China relations. Certainly, from all the public announcements from the Chinese Government that we have seen, there is every intention for that to continue. Whether Brexit itself impacts on UK and China investment remains to be seen, but it will not necessarily be quite as direct as perhaps the impact on Japanese investment has potentially been because of the nature of that Chinese investment in the UK. In financial services, there are concerns around passporting and Euro denomination in the city of London. Broadly speaking, we have a very positive relationship between the UK and China at the moment in terms of trading investment. We have not seen any noticeable slowdown. In many instances, since Brexit, there has been a 10 or 15 per cent discount on a lot of assets brought about through the fluctuation in foreign exchange. Especially in the property sector, there have been quite a lot of deals that have perhaps gone through quicker than had otherwise been expected. It is very difficult to know how much it is affecting the pipeline of investment. As Neil Watt previously mentioned, investors will be looking at the long-term picture and certainly taking stock of what the changes will be, but there is so much uncertainty over what exactly they will look like. That is the UK level. The EY report also talks about Scotland itself not establishing a reputation for FDI projects in China and India. Why is there that difference between the UK and Scotland and what can be done to address it? Is it a re-issue of this five-year strategy, or has that not worked? What needs to be done here in a Scotland level? I think that it is partly about understanding the motivation of the investor and the capability and assets that we have and whether there is a strong match between those two things. What we know about Chinese foreign direct investment is financially led. The Chinese like to enter a new market by investing either through the acquisition of companies or through the partial investment in companies or through the acquisition of assets. By real estate or by some other kind of assets. That is their motivation and their preferred operation of market entry. If you look at the US, for example, from an investment point of view, they tend to set up operations under their own control in new territories. They are less inclined to lead by trying to acquire either assets or companies. That is very important that we understand that. What we have to do is do two things. Understand what we have that matches that motivation and desire by the potential investor. Ultimately understand what the benefits to Scotland are of undertaking that. The second thing is that China is a difficult marketplace. It is further away from us. It is complex. It has a very different business culture. It takes time to establish relationships. Ultimately, we would absolutely like to see the inward investment performance improve both with India and China. We are working towards that. These are quite difficult. You have to be patient and persistent in your approach. It has to be balanced against the opportunities that are elsewhere in the globe for us as well. I should perhaps declare that I am a board member of the Scottish Enterprise and chair of the economic policy committee. I am not speaking as he represented, but I should declare that interest. I very much agree with what Neil just said about taking time. I think the efforts that are being made to build up an understanding and relationships with China and India are first rate, but it does take time. I worked in Asia a lot back in the 70s and 80s and I understand how different and how difficult it is to build those relationships. It is happening, it is working, but we need to give it time. I also would like to reinforce what James said about the importance of the links with Scottish universities. We have a tremendous asset in China and in India in the alumni of Scottish universities who are out there in the business communities. We have to make the best use of them for Scotland, not just for each individual university to build its relationship from here but also for Scotland as a whole. I think that they can be tremendous ambassadors for Scotland and they can also start the process of building interest in investing in Scotland and also in taking imports from Scotland. I think that the building of high-tech exports to China and India as part of their supply chain is perhaps as important as the inward investment because, as James explained, the desire is to have most of the capacity in China. There is a great deal that the Chinese who have studied and worked over here will know about what Scotland is capable of that can be built into developing export markets in China and India. That comes from making sure that our universities are continuing to pitch. We have more Scottish companies that have the ambition and drive to go out there and sell their products and develop the relationships. There is a continuing battle to be fought to make sure that Scotland is out there selling its wares and developing the best relationships with both China and India, both through the people on the ground but also through Scottish companies and the links with Scottish universities. I would just like to finish on that point. You talk about the relationships. It is an obvious question but I think that it is one that needs to be asked. Clearly, there is a lot of good work going on to build relationships but what impact will this business with the memorandum of understanding have on long-term relationships? Will it have an impact on long-term relationships? Thank you, Jeremy. James will come in in a minute, I am sure, on that. I think that it is really important that we do not let it have a long-term impact on relationships. As Jeremy said, everyone is based on having a consistent long-term approach to that particular market. To show due respect to the time that it takes to build those relationships. It is a vast, vast, vast country and there are a huge number of opportunities. We just have to take out time to ensure that everything that we do reinforces the kind of perspective that we are open for business. We value doing trade and investment with our counterparts in China. We will not let it have a detrimental impact. I think that we would like to perhaps take another few questions but feel free to come back in your comments because some of those areas are interlinked in a way. Do not hesitate to bring in further comment on those areas as we move on. Gillian Martin had a small question in this area of inward investment. Perhaps you could take those two questions now before we move into a slightly different area. I have changed my mind about my question based on what you have just said. I want to pick up on some of the things that Jeremy Pete said. My question is about the reputation of Scotland in the global world as a result of Brexit. I am interested in what you have said about students coming from other countries and coming to Scotland and then almost being ambassadors for Scotland. The post-study work visa situation is not helping matters in any way in terms of reputation of being open to those students to facilitate those relationships in the past. The US presidential election is also pursuing an isolationist approach. The UK reputation is perhaps looking like it is isolationist with regard to Brexit. Is that something that you will find quite difficult to overcome as you go out and try to attract people to work with in Scotland? Andy Wightman could we also take Andy Wightman's question and then get some responses on those two questions, please? Thank you, convener. I was just to follow up the question of inward investment. You talked about companies in China and elsewhere having different reasons for investing in the UK. I am just wondering about your terminology of investment. Some of those companies are simply acquiring UK assets or UK companies as takeovers or to asset strip or to export intellectual property to their home country. Do you discriminate when you talk about investment between money that is coming from foreign countries simply to buy UK companies, which in and of itself is not investment? That is merely just a transfer payment to a UK owner or another foreign owner. Or actually money that is invested in the country with the view to making a return and therefore generating economic activity within the UK? Who would like to address either and or both of those questions? Neil Francis? Thank you, convener. It's always easy to forget the first question and focus on the second. I will just deal with Andy's first since it's a very, very good question. I'll give you two kind of answers. There's the official definitions that are globally accepted, what makes up inward investment and so on and so forth. And if a company simply acquires another company in a new territory, then from those official statistics that they will count that as inward investment. I think from our perspective as SDI we always think about why we want to do something. And of course the reason we wish to attract inward investment is for all the reasons we've already said, but to summarise it helps grow the Scottish economy. So if a project doesn't help us grow the Scottish economy, then there's no reason for us to actually be involved in supporting that type of project. And you're absolutely right. A simple acquisition is just a transfer of payment. There's no added benefit to the Scottish economy whatsoever. Where we are interested in acquisitions are in two areas. One, if there's a distress situation and you'll be familiar, we touched on last time about Texas Instruments' desire to sell what they've got in Greenock. Now we are actively working to try and find a buyer for that situation, which would be simply an acquisition, but it's a distressed position and would help retain some very valuable employment in Scotland. So that's one thing. The other thing is, if the acquisition comes with a defined plan for growth with further investment, that can take the company beyond where the existing management team have said they could take the company. So that would be another reason to be supportive of an acquisition kind of led strategy. But the important thing is for us always to step back, reflect, understand why it would be good for the Scottish economy and let that guide our decision making in whether to support a project or not. Shall I just quickly go on to the other question? So anything, reputations are very, very hard built, as we all know. They take a very long time to build and can be crushed in a moment. Scotland still has, even with the decision of the UK to exit the European, still has a very strong international reputation around things that we're all proud to stand behind in terms of our integrity, honesty, hard work, innovation, all of those kind of things. I think, you know, we need to do everything we can do to carry on building that in the international communities and in the international business kind of sectors that we work in. So that will be really important. And I think the, as I said earlier on, our pipeline of potential future in investment opportunities is stronger now than it was last year. And certainly as we're going out and engaging with new potential investors all the time, we are seeing no kind of adverse reaction in terms of our reputation. You know, people are kind of understanding that, okay, that's a decision the UK's mean, but you know, people do engage with you at a person-to-person level and I think often form their understanding of whether Scotland's a good place to do business partly on that personal engagement. And certainly we are still seeing a, still a lot of empathy and resonance with Scotland from the international community. Just finally on your post-work visa, yeah, I mean anything we could do to enable some of our students to stay longer so they can do what James said earlier, connect with businesses here and then connect back in their home markets would be a great thing for us. I really want to reinforce a lot of what Neil's just said on the asset stripping versus beneficial acquisition side. What does matter is in the dreadful jargon what the counterfactual would have been, what would have happened if that inward investment had not come in. You'd have had a continuing very successful Scottish business which then disappears and you have far less certainty as to whether it's going to carry on within Scotland in an effective way. Then there are downside risks clearly, but if you've got a business that is likely to be in terminal decline and can be saved by inward investment taking over the business then I think that that is something that can be extremely beneficial. I have seen that in several examples that Neil's articulated and could articulate further, so it's another example of needing to look at the particular case in an order to form a judgment. Going back to Dilym Martin's point, I again agree that it's very important that we try to get back to the post-study visas. It's still an outstanding recommendation from Robert Smith's report, as I remember it. It's there, sitting. I really believe that it would be a small but important step to take so that for FE and indeed HE, I should say, one can have this opportunity of students staying on reinforcing their relations in Scotland, reinforcing the gains we get from their study and their involvement. Then they go back to their home country and they have an even better view and they've also established business relations that they can build upon as they go back to China or India or wherever. It's a small step but I really don't understand why it can't be achieved. It would be part of the whole process of trying to demonstrate that Scotland is by no means heading towards isolation. Scotland is open to business and will remain open to business and that message has to be hammered hard and long. I think that small steps like the post-study visa would be one way of demonstrating. We're up for it. We want to continue to be engaged and we are doing everything that we can to achieve that end. To add, it was a reference to the challenges that we see globally in politics and so on. We recognise that those challenges also affect Scotland but it also presents an opportunity for leadership to bolster a reputation, whether that's an economic, social and environmental action that is seen to be effectively addressing some of those challenges and taking people with you in doing so. On the post-study work visa, as I've said to the committee before, we've been involved in work in developing the proposition around that following on from the Smith commission. It was disappointing to us that the UK Government responded quite negatively to the Scottish Affairs Committee after a long period of silence on that but we continue to develop what we think is a reasonable ask of the UK Government. In particular, to try and probe whether, in relation to the limited pilot that has been announced more recently, the Scottish universities could have access to that as at an early stage as possible. I can only endorse what's been said about building reputation. It's a cliche that you commonly hear about doing business with China in terms of it takes a long time to build relations but I suppose there's one thing I'd like to add to that. It's not just about the time it takes to build up an interpersonal relation. Sometimes it's also just about the time it takes from when a student that has studied here goes back and develops their own career and gets into a position where they are able to influence an investment decision further down the line. In the case of North America, where I think 40 per cent of our inward investment has traditionally come, we have a centuries-long relationship with the United States of America and Canada, we have family ties, we have all sorts of hooks and levers to draw upon when speaking to potential investors there as well as a very large contingent of North American students and alumni that have gone back to live there. That cohort of alumni going back to non-European countries in the Far East is increasing every year by another 4,000 or 5,000 that return every year and being optimistic I hope that in the future we will, with good, I would say that we definitely have to impress upon our universities and I think they get it the importance of maintaining those links with their alumni. Not just chapping on their door 15 years down the line when they realise that they are very famous and saying, could we have some money but actually in those interim gears supporting them in the development of their own career which is the way to do it and then it will be a natural progression as that relationship develops. I do think that we have in the last, I do not know how many Chinese students have returned now to China after having studied in Scotland off my head but we have about eight or nine thousand currently in Scotland and every year that number going back increases and it is a huge pool of resource that we should be confident will bring us returns in the future. Would you say that there is more to this than just the post-study work visa that is about making Scottish universities attractive to study and research that you have mentioned? Mr Pete is very important as well that we see that with research continuing so that Scottish universities are still at the top of their game. It is absolutely critical and I think that two points I would make, one is that they have to develop their links with Chinese universities so that joint research can be undertaken in various areas and given the potential of the Chinese universities there must be great opportunities. I know that Strath Clyde where I am working at the moment, Harriet Watt, Edinburgh, a wide range of Scottish universities are working very, very hard to develop their links not just via students but via relationships with different universities in China and now in India so that is important. The other point is on the research front where it still annoys me that Scotland is at the top of the league so far as generation of patents and ideas and intellectual capital is concerned but way down the list in terms of utilisation of that intellectual capital to the benefit of Scotland. Anything that can be done to increase the extent to which the property that is developed in Scotland is used in Scotland or used generally to the benefit of Scotland has to be of value and if that means working more closely with Chinese graduate students and researchers, working more closely with Chinese and Indian companies or indeed with Chinese and Indian universities then that has to be to our benefit. We simply are not making optimum use of what is happening, the intellectual capability in our universities and we have to build on that in any possible way that we can. Part of that would be to do with the following number of companies in Scotland which we are now experiencing whereas the number of companies in the rest of the UK is rising. Does that have something to do with translating this into business? We do not have enough companies in Scotland that are ambitious, growing and seeking to be high productivity, high investment, high skill and exporting. This is a continuing challenge. About 50 per cent of Scottish export comes from companies of that order. We have a very narrow company base and we need to develop that company base whichever means we can. We also have to encourage through SDI, SE and every opportunity we can more and more of our high quality Scottish companies to become more ambitious. That ambition means wanting to grow, wanting to export, wanting to diversify their exports. That needs good management, it needs good skills and it needs some doors being opened to them and it needs building relations with potential areas they can go into. I'm sorry, I'm preaching but it's something that I find is terribly, terribly important and we still are not doing well. Certainly, I wouldn't say now is a good time to change the model by which we try to do this. We're getting there but it does as everyone said to take a long time to develop these links. We're getting there but we really need to reinforce our efforts in every possible way because in EU or post Brexit a successful Scottish economy is a high productivity, high skills, efficient, evolving economy and that is not what we are going to get unless we put more and more effort into the areas that I've just been discussing. What also include the Scottish Government looking at taxation rather than increasing the burden of taxation on Scottish companies seeking to go in the other direction? I have a strange feeling that the other areas are actually more important than minor changes in taxation. What really matters is the ambition, the drive and the outward looking nature of Scottish companies. We've seen how some Scottish companies can do it and do it brilliantly. We just need not just to double but to treble to quadruple the number of those companies that are out there and if that involves working with China, India and keeping their students to help develop our companies, so be it but we have to do it if we're going to have success for Scotland and enhance economic welfare in Scotland. So you would accept that taxation has something to do with it even if it's not the main driver? It's always there. It's like all these effects there at the margin and I'm not a great believer in the Laffer curve if that's what you're asking but that's going back a long way isn't it? Andrew Wilson all is forgiven. To me it is marginal changes in taxation are less important than this focus on challenging Scottish companies, encouraging and assisting Scottish companies to become more ambitious and more outward looking. I want to bring Gordon MacDonald back in because I think that he may have some questions about what might be referred to as proximity and then perhaps Richard Leonard because he's wanting to ask about outward investment that may also relate to what you've just been saying. Gordon MacDonald. It was just a point that you raised last week Neil where you said proximity will always be an advantage, usually the further away a market is the harder it is to penetrate and it's important that we carry on developing relationships with those closest to us. Given those three separate statements that you said, how difficult will it be post Brexit for us to continue to get inward investment? If a picture up right you said roughly 25 per cent of inward investment is from the EU. Well 50 per cent is from Europe, the Middle East and Africa but the majority of that is Europe and 50 per cent of that is 50 per cent so 25 per cent is from within the UK. So how do we continue to attract inward investment if we are no longer the gateway into Europe and we are turned back on many European countries, companies that may have decided to come here previously? So a couple of thoughts there. You'll recall earlier on I said broadly speaking the motivation for investing, inward investing companies that's either access to market or access to resources. So when a company already headquartered in Europe invests in Scotland, in the majority of those cases they're investing for access to resources, not to market because they're already in the marketplace. So on balance I would say there would be less of an impact on those companies investing in Scotland because the motivation is more around our resources, our research and development capabilities and so on and so forth. So they would be less concerned about access to the single market because they'll have a footprint in the single market anyway. Perhaps I could move now to Richard Leonard. Thanks convener, we've covered the ground of the freedom of movement of labour especially as regards the kind of high skill end I think Jeremy Pete described it as and you might want to reflect on whether you've got any observations about the lower skill end of freedom of movement of labour. We've also quite rightly focused on inward investment and I think just last Tuesday the latest annual survey came out which told us that 34% of the Scottish economy is externally owned, owned from abroad and I wonder whether you think that's a good place for us to be or just the way it is. We've got the highest level of external ownership of any part of the UK but my main question is to look at the other side of the inward investment equation outward investment because one of the pillars of the creation of the single market was not only freedom of movement of working people but also the freedom of movement of capital and I wondered whether you've got any observations about what might happen to that if we are outside the single market. It's a really great question and I think one that, to be honest, we probably haven't thought about as much as we should have in the other two and now with Brexit it's coming into a bit of a stronger focus. Clearly, as Jeremy said, one of the things that we've been focused on is how do you create globally competitive Scottish owned businesses. That's part of what we want to do as well and we have some successes there but not nearly as much. Clearly, as a company becomes more and more global, it's kind of the reverse question that I was speaking about motivation of inward investors for our Scottish based companies so if you've got a company like the Wood Group for example, they'll be thinking how do I enter my new market in Brazil, am I going to service it from elsewhere or am I going to put down a footprint there. That would be your outbound investment so I think naturally that as we hopefully see more of our Scottish owned companies grow and attack and penetrate more international markets then clearly there will be an element of them deciding how best to enter those new markets that may result in outbound investment and I think that's a good thing because it's ensuring that they are remaining globally competitive, growing their business internationally which will bring back its benefits to Scotland. I'm not sure if that was your question, you're not looking as if I've answered the question you've asked but answered some random question. No, no, I mean I subscribe to the view that we should be doing more to invest in the growth of indigenous businesses and that we should be doing more to support middle sized businesses than probably we're doing. I think we concentrate too much on the bottom end of the business, the birth rate formation end and at the higher level inward investment end and probably not sufficient resources put in the middle. What was interesting just linking back to your previous question convener in terms of those kind of middle sized or companies that have both the ambition and the wherewithal to grow, you would have seen perhaps at the weekend the risk capital investment report for 2015 was announced showing that there was 430 million invested last year which is 70 per cent up and almost a four fold increase on the value invested since 2012 so I think that's a really good thing because one of the things in addition to all those things that Jeremy said, if companies are going to grow and become internationally and they need investment capital to help them to do that so I think that that is a really good sign and just as a side note to that, 290 million of that came from VCs out with the UK so overseas invested leading to equity investment in our scotch based companies. A brief comment from me on the lower skill point Mr Land, yes of course there are I understand significant areas of the scotch economy where access to seasonal or non seasonal labour is utterly critical and it so happens that's not my greater area of expertise so I was focusing on the high skill in relation to financial services but I would hate to see the Perthshire raspberry trade going down the tube because of lack of fruit pickers for example and I think it's something we have to be very aware of that there are certain sectors of our economy where obtaining all the labour that is required from within Scotland is problematic certainly I would like to see building up of those skills within individuals within Scotland so that they move up through the chain and the hollowing out of the labour market is something that worries me immensely so I don't want just to have the Scottish workers filling those low skill jobs what I want is to have them develop so that they move and progress within our economy and can add greater value. On high overseas ownership just a point very similar to the one I was making about acquisition you need to look at the case you need to make sure that you're trying to get a maximisation of value added within Scotland both directly and through the interrelationships from the business whoever owns it. You don't want overseas owners who are just taking the profits and running you want them the overseas ownership that is trying to build and enhance that business and build its links within Scotland and that varies on a case by case basis. Thank you. I'll move to Dean Lockhart now. Thank you, convener. There seems to be consensus around this notion that we need Scottish companies to be more ambitious and to really look at once they get to a certain size or perhaps not a certain size but look to export markets. It would be really useful in each of the sectors that you cover or areas that you cover to give us a brief description of what you see as being the main opportunities available for Scottish investment or Scottish exports overseas both in terms of sectors and in regions and what practical steps can we take or can Scottish Government agencies take to encourage Scottish companies to explore those opportunities going forward. James Brodie. The opportunities that exist in China for Scottish businesses currently are quite diverse, ranging from health care, elderly care in particular, but also at the other end of the scale childcare and moving into retail. There are a lot of retail opportunities again in childcare and then further up into luxury products in retail, so that touches on textiles, food and drink in particular. This is on trade. In terms of investment, I think that there is an increasing number of Chinese investors looking for high-tech and that might be in sectors such as oil and gas, where we've got a great deal of strength, renewable energy and offshore wind, marine energy. Traditionally, engineering has been a very strong sector for Scotland in China also. A sector that we've talked about a great deal already, education, continues to be a very strong sector for Scottish institutions in China. Last but not least, financial services themselves, although the number of Scottish companies in a position to take advantage of those opportunities operationally are relatively limited. That's a snapshot of some of the emerging opportunities or existing opportunities that lie in China currently. I just wanted to—it's not directly addressed at your question, but to pick up on Liam Kerr's previous point about whether or not there would be a residual effect of the MOU in China, I would just make one point in emphasising the vastness of China and the difficulty to it. To make any kind of a splash either positive or negative in the Chinese media. I would reassure you that I don't suspect that the impact upon the wider investment community won't be of any significance. It's challenging to identify specific sectors and geographies. We believe that there are opportunities in commonwealth countries that more could be done in those countries, not as an alternative to Europe, for example. Given the makeup of the populations, young, growing, the relative familiarity of language, business culture, governance and so on, we could look at co-ordinating some more activity around those countries. We haven't mentioned tourism so far, but in relation to Chinese market, for example, massive opportunity. That partly comes back to thinking again about visas as well, relative difficulties in getting visas processed into the UK compared to New Zealand or countries like that, for example, that put a lot of effort into that. I want to touch on another issue in relation to inward investors and visas as well. I hear so often about how difficult it can be to organise meetings within the UK from people coming from all different parts of the world and making them to be organised elsewhere, which I think over time has an effect on people's knowledge of the Scottish economy and the assets that are here. There are some other issues in relation to visas as well. There have been a lot of reviews about export strategies over the past few years. The committee and predecessors have done a lot of good work. The chance now is to see some of that through to keep a focus on it. Given that there is much more political engagement, there has been any point to really up the profile of our international activities through the involvement of ministers and MSPs and others on overseas trade visits, for example. Perhaps I can just add a few comments there just to build on what Gareth and James have said. The opportunities present themselves slightly differently sector by sector and whether you are considering trade or investment. What I mean by that is that some sectors are the opportunities predominantly a trade opportunity. If you look at food and drink, for example, we would see how international play mainly in terms of trade, whereas if you look at financial and business services then you would say that would be predominantly an inward investment play in terms of our internationalisation of trade. Other sectors such as life sciences, technology, engineering, oil and gas are much more balanced where the opportunity falls both on the trade side and on the investment side. I think that in common with a number of points made today you really have to drill down a bit so the way we consider our sectors isn't simply what the opportunity for the sector is, but if you look at life sciences we've identified three priorities which are pharma services, regenerated medicine and medical technology. The specific international opportunities are different for each of those sub-sectors. That's a bit about how we look at the opportunity. What can we do to really accelerate things? The great thing about trade is that it's in everyone's interest and it's non-competitive. It's something that I think that we need to mobilise as wider partnership across the Scottish business life, whether it be private sector or public sector, to actually build a narrative that supports companies becoming more ambitious to do internationally trade. I think that, interestingly, there was an event last week at the, in Glasgow, Get Connected that was delivered by a range of partners where we had over 400, I think it was around 400 companies participate to learn about all different aspects of trading internationally and more of that I think is really important. On the inward side, inward is a competitive sport. When we are really pleased to do so but some other location is probably lost out on that opportunity so it's much more competitive. Our resources are small globally so we need to be very focused on the areas that offer greatest opportunity. We are focused around London. We think that London is a very big opportunity and also California in the west coast of the US and in both those locations we're really focusing on two sectors at the moment, technology and in particular the digital and software sub-sector of technology and financial and business services. One of the interesting things and we've talked about relationships and reputation quite a lot today and they are really important. What we know is when we ask our companies that we are successful in attracting to Scotland why they came, they give us a wide range of reasons. But what seems to be a common thread is they've all had a prior connection to Scotland and as James says whether they were spent some of their education here, whether they were a descendant and their grandfather or grandparents emigrated, whether there's an existing business relationship or a research relationship with the universities. But what seems to be a strong common thread is a prior connection to Scotland and we need to find ways of exploiting that and using our universities but our wider global networks to help to find those opportunities going forward is a really big thing for us to do more. I'm just wondering if the professor wanted the last word today. It's very kind of you but let me simply endorse what my three co-conspirators have said about the importance of a range of sectors and a range of opportunities. I don't rule out any opportunity. What I focus on is the higher up the value chain it can be, the better for the Scottish economy. The more we can make use of skills and resources available within Scotland, the better. But let's go out there and be ambitious. I think that that's a good note or point perhaps to end on. May I thank you and your co-witnesses if I may call you that rather than co-conspirators. Thank you very much for coming today. I'll suspend the session there and would ask those in the public gallery to leave at this point as we move into private session. Thank you very much.