The other problem with jobs bought from the Japanese

There have been two front page stories this week about Japanese investment in the UK. One, which achieved wall-to-wall coverage yesterday, was of course the statement by the president of Toyota about switching new investment into other EU countries were Britain to stay out of the single currency. The other, which appeared on the front page of the International Herald Tribune the day before, concerned the effects of foreign investment in Wales, and the need to shift from relatively low wage manufacturing jobs for foreign companies to higher paid, higher skilled service jobs.

It is the second story, I believe, that carries the more important message for us all.

To say that is not to pretend that Toyota is to be ignored. On the contrary it makes considerable sense. Last autumn saw the pound suddenly appreciate by 15 per cent and that will have messed up the calculations of any UK- based producer selling into the European market. Remember, a key reason for establishing overseas production was to reduce exposure to swings in the value of the yen. If there was a large stable currency area under the "euro", it would make sense for Japanese firms to have some production capacity there.

In any case Toyota's commitment to the UK has always been weaker than that of its rivals Nissan and Honda. Nissan was not just the first Japanese car firm to set up here, but made the decision at a time of great labour unrest in the British motor industry. I remember being asked by a Japanese friend about where a company wishing to set up in the UK ought to go, as they were very worried about the labour situation. I said that bad labour relations were shaped by local traditions, so they must look for areas where there were pockets of high unemployment but also a history of good labour relations. Three years later Nissan chose Sunderland and I learnt that Nissan was indeed the company my friend had been advising.

Nissan's choice of Britain was very much an act of faith, a decision which many people within the company thought was a big risk. Honda's investment here, and its long relationship with Rover, also involved risks - in fact it may well be that the sale of Rover to the rival BMW did more to damage Japanese perceptions of investment in Britain than anything we do with the single currency. Toyota, by contrast, decided to come only after its smaller rivals had shown that UK production was profitable.

We should, however, be grateful to Toyota for reminding us that there is a Faustian pact associated with inward investment. We get the jobs, and (very important in the car industry) the transfer of knowledge which goes down the supplier network. But there is a price and that includes the transfer of some decision-making out of the country. Britain as a whole is a large net recipient of overseas income from investments, both in foreign plants and foreign companies, so arguably we are net gainers in the flow of decisions. But in specific cases we have lost influence and the Toyota statement reminds us of that.

Now we are moving to a period where we will rely less on large foreign investments in manufacturing. The Herald Tribune reported a story from David Rowe-Beddoe, chairman of the Welsh Development Agency. A teacher was shepherding her charges along a state-of-the-art assembly line in an ultra-modern Welsh factory. "If you don't study hard", she warned the children, "you will end up working in a place like this."

And that is the nub of the problem: too many of the jobs that have been created are low-wage, low-satisfaction jobs, jobs where we are competing with Malaysia or the Philippines. They are not the higher-wage jobs in finance, advertising or marketing. And they cost a lot to bring here. Also this week, ground was broken for a huge new factory for the LG Group of Korea. This will create 6,500 jobs. But the total subsidy per job may be as high as pounds 30,000.

So we tax British companies and British people, in order to give the money to foreign companies, owned by foreign shareholders, to create jobs. If we did not take that money in tax then the British companies would have been better able to expand and take on more workers, and British people would have spent more money in the shops and created more jobs that way.

Besides, ask the tough question: what is our comparative advantage in the world? Surely it must lie in the intelligence and culture of our people, not in our ability to provide relatively cheap labour for foreign production lines.

To say that is not to sneer at the jobs which foreign investment has brought. Given the rapid rundown of old industries, encouraging inward investment of any sort was a helpful, even necessary, policy. But the message from the story about the failure of Welsh inward investment to generate a higher proportion of well-paid jobs is that the next stage should be to push up the skill range.

Can that be done? Surely the answer is yes. Most people do not realise that Britain is second only to the US as a net exporter of intellectual capital: royalties, patents and so on. We are one of a tiny handful of countries which have a surplus in this type of trade. It is a brilliant base from which to grow.

Maybe the real lesson from the Toyota story and the Welsh experience is the same after all: that the great burst of inward investment, however welcome, was just one phase of economic renewal. The next phase is about exploiting our innate skills, doing things that other people cannot do better.