It's no accident that Scotland has been continuously attracting more and more investors from all around the world over the past few years. The economy of Scotland has proven itself to be rather strong and stable. With a population of over 5.4 million people and a workforce of under 3 million, Scotland remains the top destination, outside of London, for foreign direct investment in the UK. Let’s take a closer look at how the economy of this majestic country functions, shall we?
The history of the economy of Scotland: through hardship to the stars
Scotland has one of the strongest economies in the world. It has a wealth of resources and offers advantages only a few nations can match.
Ever since the Acts of Union 1707 took effect, Scotland's economy has been closely intertwined with the rest of the UK. After the Industrial Revolution happened, the government of Scotland focused on heavy industry, which was dominated by the coal mining, shipbuilding and steel sectors. By the late 1800s, the country was leading the world in many aspects of manufacturing and engineering, with exceptional production rates. That was possible due to the huge reserves of coal, the availability of iron ore and the skills of a large number of inventive and entrepreneurial Scots. For many decades to come, Scotland had remained one of the industrial powerhouses of the European region. However, nothing good lasts forever. During the 1970s and early 1980s, Scotland’s economy suffered from the radical changes that were caused by the widespread failure of heavy industries. Just like many other advanced industrialised economies, Scotland saw a major decline in the importance of both primary-based extractive and manufacturing industries. Unemployment became a serious problem.
That was about the time when the Scottish government decided to concentrate its efforts on the development of the service sector, which, in turn, has grown to be the largest sector in modern Scotland. A remarkable shift towards a tech-based economy occured. The 1980s saw an economic boom in the Midland Valley, which is commonly referred to as “Silicon Glen” due to its high-tech sector; many large technology companies decided to relocate to Scotland. In 2018, the IT industry solely employed over 40,000 people and produced approximately 7% of the world's personal computers (PCs).
In spite of industrial decline, Scotland retains a large variety of manufacturing activities, ranging from the shipbuilding and textile industries to aero engines and computer chips fabrication to scotch whisky and shortbread production. The scotch whisky industry adds around £1 billion to Scotland's economy each year; generating about £1.6 billion in revenues and taxes for the UK Government and contributing £2 billion to the UK's balance of trade.
Additionally, starting from the late 1980s, Scotland’s economy has benefited from the exploitation of natural gas and petroleum in the North Sea.
Historically, England was the main trading partner of Scotland. However, since Scotland became a part of the European Union, as a constituent nation of the UK, it has developed and established strong connections with other European economies. Nowadays, Scotland’s economy remains quite small yet stable and open, accounting for about 5% of the UK’s export revenue. Its gross domestic product per capita is higher than in all other areas of the UK, outside of London and England’s eastern regions, and its level of unemployment is pretty low. Even though the British government does control Scotland’s macroeconomic policy, including interest rates and monetary matters, the Scottish Parliament still has jurisdiction over local economic development. Edinburgh, the capital of Scotland, is known to be the UK’s most entrepreneurial city, with the exception of London.
Foreign direct investments
According to the latest EY FDI Attractiveness Survey conducted in 2018, Scotland is the most attractive location in the UK, with the exception of London, for foreign direct investment (FDI). The survey also discovered that the digital projects had a 56% increase, meanwhile manufacturing projects rose by 25%. The FDI-related job positions also saw a vast increase of 104%. Scotland also showed the highest number of research and development (R&D) projects in the UK, as well as the highest number of headquarter projects in the past decade. Additionally, it receives a continued increase of investments from China.
Apart from intra-UK trade, the European Union and the United States are one of the largest markets for Scotland's exports. Being a constituent of the UK and the EU, Scotland trades in the single market and free trade area, which exists across all EU member states and regions. In the early 2000s, with high rates of growth in the many emerging economies of southeast Asia, such as Singapore, Thailand and China, there was a drive towards marketing some of the Scottish products and manufactured goods in this region.
Business environment of Scotland
There are around 346,900 private sector enterprises that operate in Scotland today. An estimated 99% of these companies are small or medium-sized businesses. Due to the historical background of the country’s economic development, the majority of these Scottish companies are involved in the following industries:
Thanks to the diversity of the business environment, there are a number of Scottish companies to invest in. Within the financial sector, for instance, you can invest in Royal Bank of Scotland Group PLC - RBSl, Personal Assets Trust PLC - PNL and The Scottish Investment Trust PLC - SCIN.
Booming industries of Scotland
Let’s briefly review some of the most efficient industries of Scotland.
Resources and energy
The oil and gas industry, active under both the North Atlantic and the North Sea, continues to play a key role in Scotland's economy, providing over 100,000 jobs. It is believed that current reserves of Scottish gas and oil are at least equal to the amount that has been extracted over the past 25 years.
The country is also famous for its energy production, both actual and potential. Several water dams and power stations have been built since the middle of the 20th century. Currently, Scotland has an electricity generating capacity of more than 10GW, using a mix of oil, coal, gas, hydro, nuclear and wind energy, and is usually a net exporter of electricity. The Scottish government expects 40% of the country's electricity to come from renewable sources by 2020. Scotland was at the forefront of research on the tidal and wave energy, leading the world in the development and construction of deep-sea offshore wind farms.
Agriculture, forestry and finishing
Fishing, farming and forestry all remain of considerable importance to the Scottish economy.
The waters around Scotland are known as some of the richest in Europe. As a result, many coastal communities, especially those in Shetland, Aberdeenshire, the west coast of the Highlands and the Western Isles still rely heavily on income accumulated from fishing.
Around a quarter of the Scottish land is cultivated. Dairy farming is concentrated in the southwest of the country, while beef production is mainly located in the northeast. Many upland and marginal areas concentrate on sheep breeding and grazing, resulting in a Scottish sheep population of over 7.6 million.
Field crops can be mostly found along the eastern seaboard where wheat and barley are one of the main cereals. Rapeseed production has also increased considerably over the past decade. Malted barley is heavily harvested due to the demand for Scotch whisky, a distilled liquor that is one of Scotland’s signature products.
Over the years, the structure of Scottish industry has been progressively modernised and diversified, with a reduction in the country’s dependence on heavy industries and growth of high-tech enterprises and those offering consumer goods and services. Scotland has seen the rise of the manufacture of lighter, less labour-intensive products, including software, optoelectronics, chemical products and derivatives. Much of the investment in those sectors was received from overseas; the US in particular. Electronics and related industries have been a major source of economic growth, export earnings and, of course, employment. The principal companies operating in the tech sector include: Rolls-Royce, SELEX Galileo, Raytheon, BAE Systems, Alexander Dennis, Thales and Babcock.
Manufacturing and construction industries contribute more than one-fourth of Scotland’s annual gross domestic product (GDP). Engineering industries export most of their output. The textile industries of the Harris tweed in the Hebrides and the Scottish Borders also contribute to export business.
The popularity of Scotch whisky abroad remains very high, remaining as one of Scotland's leading exports. Therefore, this liquor production and sales have continued to increase, in spite of heavy taxes on home consumption.
Financial and business services
The biggest change in recent decades has been the dramatic growth in the service sector in Scotland and, in particular, in financial services. Edinburgh is now the fifth most important financial centre in Europe. Scotland is also a leading centre for fund management, having assets worth over £300 billion under its management. About one-third of the British investment trusts are managed by firms in Glasgow, Edinburgh and Dundee. Some of the leading British insurance companies also have their headquarters in Edinburgh.
Home-grown banks continue to play an important role. The Royal Bank of Scotland, the second largest bank in Europe and the fifth largest in the world, is based in Edinburgh. The Bank of Scotland and the Clydesdale Bank are also quite notorious in the UK. For historical reasons, all three of these banks issue their own banknotes, which, though technically not legal tender in other parts of the UK, are accepted in Scotland.
Scotland is a well-developed tourist destination that attracts many for its abundant history, authentic food and drink, magnificent castles and breathtaking views of the countryside. Today, tourism accounts for about 3% of the value of the Scottish economy, which brings around £4.5 billion per year. The industry also provides over 200,000 jobs across the country, with the strongest employment opportunities in catering and hotel businesses.
The majority of visitors come from within the UK; however, annually, over two million tourists come from abroad, mainly from the US, Ireland, France and Germany. Among the most popular attractions are the National Museum of Scotland; Scottish National Gallery; Scotland’s rural parklands, such as Greater Glasgow and the Clyde valley; the Palace of Holyroodhouse; St. Giles' Cathedral and the Edinburgh, Urquhart, Blair and Stirling castles.
Scotland is a rather unique country that can provide investors and traders with lots of opportunities and advantages. Now, you can start trading stocks of Scotland’s companies online. If you are interested in learning more about how to trade stocks, check out free online courses, trading strategies guides and glossary all provided by Capital.com.