Brad Mackay and Veselina Stoyanova discuss the potential impact of independence on the Scottish food and drink sector.
With just a little over two months to go before the September 18th referendum on Scottish independence, the debate has been ‘hotting up’. Business has become a key battle ground. Over the past nine months we have undertaken 75 interviews with business leaders across 6 strategically significant growth industries (electronics/technology, engineering/industrial manufacturing, energy, financial services, life sciences, and most recently, food and drink). In the interviews, we have asked questions about whether the independence debate poses uncertainties, opportunities and/or risks. We have also asked whether businesses are contingency planning, and if the debate is having any material impact on business decision-making, such as whether to invest, divest, locate or relocate business activity, or whether it might under different constitutional scenarios.
The research has been conducted in two stages. In the first stage we explored the industry dynamics across the electronics/technology, engineering/industrial manufacturing, energy, financial services, and life sciences industries. In the second stage of the research, we extended our interviews to food and drink, where we conducted a further 10 interviews with business leaders, and further interviews in several trade bodies. What follows is a summary of our findings.
Of the medium and large food and drink companies sampled, 6/10 were large (250+ employees), while 4/6 were medium (50+ employees)
Figure 1: Company Profile: Food and Drink
Only 2/10 companies participating in the interviews had their primary trade, or customer base, in Scotland. Of the remainder, 5/10, or 50% had their primary trade in the rUK, and 3/10 were diversified globally (see Figure 2).
Figure 2: Primary customer base: Food and Drink
So what opportunities and risks does the independence debate present for the participants in the sample?
Potential Opportunities posed by the Independence Referendum Outcome
Only half of the participants in the sample could identify potential opportunities presented by the independence referendum outcome. The opportunities identified included redesigning regulation, greater government funding and support, improved access to government, and finally the possibility of lower corporate taxes (see Figure 3).
Figure 3: Key opportunities identified in Food and Drink sector
Of the two business leaders who identified corporate tax decreases as a potential opportunity, it was only seen as a benefit if it is significantly lower than the current rates. The majority, interestingly, believed that a decrease in corporate taxation should in fact be regarded as a business risk, because it may trigger government increases in other taxes in order to finance spending commitments.
Also, none of the business leaders perceived there to be a benefit from an enhanced ‘Scottish Brand’.
Potential risks presented by the independence referendum outcome
When asked whether the independence referendum outcome might present any risks for their business, 90% of all the business leaders identified uncertainty over the currency and taxation system in Scotland as being the most significant uncertainty for the future of their business operations. An identical concern among all of the business leaders was the uncertainty over the membership of Scotland in the European Union. In capital intensive industries, such as whisky where it can be ten years before the product is mature enough to sell, particularly in cases where head offices are still located in Scotland, there was concern about the borrowing costs in an independent Scotland if, as a small country, it pays a premium for borrowing on international markets.
Again, in 90% of the interview question responses by business leaders, they expressed a concern over the potential border between the UK and Scotland, which according to the interviewees may result in a number of tariff and non-tariff barriers, constraining the Scottish businesses’ ability to move and trade freely with the rUK. The diminishment of the UK as a cultural and trading partner is a key concern of business executives managing companies whose primary customer base is situated in, predominantly, England. Moreover, the extensive network of over 200 UK embassies abroad are viewed as of paramount importance for lobbying on behalf of, and supporting Scottish food and drink exports internationally. The Scottish Government has plans for between 70 and 90 foreign embassies.
In 30% of the interviews, managers expressed a major concern with the status of current product definitions (e.g. Scottish whisky, Scottish salmon etc.), especially if Scotland happens to be outside the EU. Of course, here, the possible in-out referendum on the UK’s continuing membership in the EU also applies as a risk.
A key difference between the food and drink sectors and some of the other industries that we have sampled, such as financial services and energy, are with the risks associated with retaining skilled labour. According to the majority of the interviewees, this is not an issue that they are currently concerned about, mainly due to the fact that most of their production sites are located in very rural areas where they are one of the few present employers. However, one of the interviews expressed concerns about the potential difficulty to retain executive managers if there is a significant increase in income taxes.
Figure 4: Key risks identified in Food and Drink sector
While in the majority of the companies where participants were interviewed, their business operations are intimately linked with their Scottish location making relocation almost impossible, in two cases business leaders indicated that in the event of a ‘yes’ vote, some of their business activity, particularly headquarter functions, may have to be relocated.
Contingency planning and effects on decision-making
Unexpectedly, the findings of our research study demonstrate that with just a little over two months to go to the independence poll, the degree of contingency planning is still extremely limited in our food and drink sector sample. In 70% of all the company cases, there was no contingency planning undertaken; business leaders reported that it was ‘business-as-usual’. In 60% of the interviews, business leaders said that formal or informal discussions were common, while 40% of the interviewees stated that the independence debate has been included in the risk management register.
In only two interviews did business leaders indicate reveal that the independence debate had influenced decision-making. In both cases investment decisions to expand their businesses had been deferred.
Figure 5: Contingency planning and effects on decision-making
While the evidence that we present here is from a relatively small sample of 10 business leaders (we also interviewed an additional 4 industry body business leaders for a total sample of 14 business leaders in the food and drink sector), what is remarkable about the responses is the consistency with other sectors that we have sampled, and also with wider surveys such as Bell and McGoldrick’s recent survey of 759 businesses with the Scottish Chamber of Commerce as part of the Future of the UK and Scotland teams’ work, and a forthcoming survey of 1800 small businesses led by Ivory and MacKay in partnership with the Federation of Small Business. In all of these studies, only about half of the participants can identify opportunities that the independence referendum outcome might present, half cannot identify any opportunities that might accrue, and of those that are identified, they tend to relate to the economics and politics of the debate (such as access to government, or tailoring economic policy for the specific needs of the Scottish economy), rather than specific opportunities for business expansion and growth per se. A significant majority of participants across these studies emphasise the risks, which tend to relate specifically to their business activity. In addition, 10% consistently suggest that they could migrate activity out of Scotland, and increasing numbers indicate they are deferring investment decisions until Scotland’s future becomes clearer. For business generally, it would appear that the perceived risks out-weigh the potential opportunities by some considerable margin at present.
At times in the public debate the majority view from business is being downplayed in the media by presenting those views about the opportunities and risks presented by the independence referendum outcome as more or less equal. Extensive research from politically-neutral studies clearly suggests that the majority of businesses do not view the risks and opportunities as equal.
"Whisky Galore!" from John Haslam, used under Creative Commons license.