The UK is struggling to attract foreign direct investment, with projects down nearly 30 per cent from a peak in 2016-17, according to headline government figures.
Analysis by the Financial Times of official data and other sources showed that the drop in the number of FDI projects has been particularly acute in some key sectors since the Brexit referendum.
But although foreign investment is a key driver of growth in productivity and living standards, there is uncertainty around its performance because of a lack of comprehensive data on the topic.
While the government and analysts track the number of FDI projects, estimates of their economic impact are often based on incomplete information, making it difficult to understand what is needed to improve Britain’s attractiveness to investors.
How much have FDI project numbers declined?
Figures published by the Department for Business and Trade showed that the UK secured 1,654 FDI projects in the year ending in March 2023, up 4 per cent from 2021-22 but down 27 per cent from 2016-17.
It also showed that the number of projects in many of the UK’s key sectors — including business and consumer services, media and the creative industries, and electronics and communication — was sharply down year-on-year in 2022-23, and had dropped more than 60 per cent compared with 2016-17.
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Nigel Driffield, professor of international business at Warwick Business School, said that with Brexit ending the UK’s status as the “English-speaking bridge between the EU and the rest of the world”, the country was “not attracting the sorts of investment that is focused on selling and generating products in the richest markets in the world, the [EU] single market”.
He added that investment requiring large economies of scale, such as in the automotive and biotechnology sectors, were also affected.
Economists warn that high inflation, low economic growth, policy U-turns and political turmoil over the past two years have also had a negative effect on the UK’s appeal to foreign investors.
“What is killing investment at the moment is uncertainty,” said Driffield.
How does UK FDI compare with other countries?
The UK is trying to attract more investment at the same time as the US and EU are launching ambitious programmes of their own.
The US Inflation Reduction Act, a $369bn measure aimed at incentivising investment in green technologies, offers investors hundreds of billions of dollars in subsidies and tax credits. Meanwhile, NextGenerationEU is a €800bn instrument to help the bloc build a greener and more digital economy.
These schemes have “significant implications for the long term growth prospects of the UK and could trigger a negative spiral that would be difficult to revert without a new clear UK value proposition for foreign investors”, said Riccardo Crescenzi, professor of economic geography at the London School of Economics.
However, Lord Dominic Johnson, UK minister for investment, insisted that the UK also has a “huge amount of money” available to support growing industries across different programmes. “What we need to do is make sure that we’re marketing cleverly our current support subsidies and grants and investment programmes,” he said.
But the EY European attractiveness survey found that last year the number of FDI projects secured in France outstripped the number in the UK. The consultancy also reported that Britain’s share of European digital tech projects dropped from a decade average of 28.3 per cent to 19.8 per cent in 2022.
Data from fDi Markets, an FT-owned company that tracks overseas greenfield projects across the world, showed that the UK global market share of FDI projects peaked in 2015 and has declined almost uninterruptedly since then. The share of projects has been rising in the US over the same period.
By contrast, the UK’s financial services sector continues to attract strong investment, according to government data, with the number of FDI projects rising compared with last year and 2016-17.
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Data from consultancy EY also showed that the UK remained the most attractive European destination for financial services investment last year.
Jonathan Portes, professor of economics at King’s College London, said the figures suggested that “Brexit has made the UK a less attractive investment proposition for global supply chains in advanced manufacturing, but has not stopped the high productivity service sector from going from strength to strength”.
What is the value of UK FDI?
One reason behind the falling number of projects in the UK could be that the government is prioritising projects that deliver more jobs and add higher value.
“We have shifted our focus from just checking boxes in terms of numbers of FDI projects that we’re supporting . . . to value,” said Johnson.
However, figures around the value of FDI projects are uncertain because the government and other organisations often base estimates of how much foreign companies invest and the number of jobs they create on incomplete information. Moreover, official figures are affected by factors such as company valuations and exchange rate fluctuations.
fDi Markets data showed there was a record level of foreign capital invested in the UK last year, driven mainly by renewable energy projects.
Government data around FDI projects supported by the business department showed that their economic impact fell 18 per cent year-on-year.
Complicating the picture further, Britain’s Office for National Statistics and other international organisations report FDI data in terms of flows, which can be distorted by single large mergers and acquisitions.
They also look at FDI stocks, which measure the book value of all existing FDI, rather than the sum of investment over time. These are subject to changes in the valuation in company accounts as well as exchange rate fluctuations, so their values can change year-on-year even without new investment.
The latest ONS figures showed that FDI flows dropped from a peak of 9.6 per cent of GDP in 2016 to minus 2.3 per cent in 2021, while the stock of FDI, or investment accumulated over time, was up slightly in 2021.
On those metrics, the UK slipped down in the OECD ranking for FDI flows over the past seven years, but remained competitive in terms of stock, which reached a record high value of nearly $2.7tn in 2022, according to the latest World Investment Report.
Source: Economy - ft.com
