Scottish firms need more investment to sustain future growth and productivity

Scottish firms need more investment to sustain future growth and productivity

Professor Mairi Spowage

Business investment in Scotland has lagged for the majority of the past decade and could have detrimental impact on productivity and longer-term economic growth, a new report has warned.

Launched in 1998 and now in its 25th year, the Scottish Business Monitor is compiled by the Fraser of Allander Institute, and is produced in partnership with Addleshaw Goddard.

In celebration of 100 business monitors, the institute published analysis of the past 25 years of business in Scotland, highlighting how Scottish firms have coped with significant changes in the economic landscape.

The latest findings show that business sentiment fell to a 25-year low at the start of the Covid-19 pandemic in 2020, significantly lower than that felt during the financial crisis.

While exporting levels have recovered since the lowest rate recorded by the monitor in 2020, the net balance of firms reporting an increase in current and expected export activity remains well below zero as of Q4 2022.

Additionally, the share of firms reporting increased costs reached their highest levels on record towards the end of 2021 and throughout 2022. In the Institute’s most recent quarterly monitor for Q4 2022, published in January, they found that 90 per cent of firms surveyed had seen their costs increase on the year, with just under half reporting that they expected to reduce operations in 2023 due to higher energy bills.

However, the latest quarterly results found that businesses are increasingly taking steps to tackle the current energy crisis, with more than 60 per cent of firms reporting that the energy crisis has encouraged them to speed up making energy-efficient improvements.

This is just one of many times the business monitor has captured resilience among Scottish firms. At the start of last year, the Institute found that 40 per cent of businesses agreed that the pandemic had accelerated their plans to make a major part of their business model digital.

But, while Scottish businesses have repeatedly demonstrated their resilience, it is crucial that businesses are not just staying afloat but that investment is made for future growth.

Since 2014, new capital investment made by Scottish firms has been weak, and despite recovery from the record lows seen in 2020, business investment has fallen consecutively each quarter since Q4 2021.

Professor Mairi Spowage, director of the Fraser of Allander Institute, said: “Scottish firms have had to weather a number of storms over the past 25 years, and their resilience is once again being tested as they navigate through the current cost-of-doing business crisis.

“Concerningly, our latest findings show consistently low levels of export activity and business investment, which are key drivers of productivity.

“While business resilience has been shown time and time again, Scottish businesses need support to secure longer-term business and economic growth.”

Alan Shanks, head of Scotland at Addleshaw Goddard, said: “This is a fascinating report that demonstrates in detail how Scottish businesses have coped with unprecedented technological change and economic upheaval over the past 25 years.

“The Scottish Business Monitor launched in the same year I began my legal career and having worked closely with Scottish businesses of all sizes throughout this period I have seen first-hand the collective strength they have shown. The Scottish business community will need to show continued resilience to deal with the numerous uncertainties currently facing it.

“This kind of analysis is crucial to understanding the long-term direction of travel of the Scottish economy and identify the key challenges and opportunities for our businesses – which policymakers, investors and advisers including Addleshaw Goddard can then help them meet head on.”

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