Why is the UK struggling to attract foreign direct investment?

The UK is struggling to draw international direct funding, with initiatives down almost 30 per cent from a peak in 2016-17, in keeping with headline authorities figures.

Evaluation by the Monetary Instances of official knowledge and different sources confirmed that the drop within the variety of FDI initiatives has been notably acute in some key sectors because the Brexit referendum.

However though international funding is a key driver of progress in productiveness and dwelling requirements, there’s uncertainty round its efficiency due to a scarcity of complete knowledge on the subject.

Whereas the federal government and analysts observe the variety of FDI initiatives, estimates of their financial influence are sometimes based mostly on incomplete data, making it obscure what is required to enhance Britain’s attractiveness to traders.

How a lot have FDI venture numbers declined?

Figures printed by the Division for Enterprise and Commerce showed that the UK secured 1,654 FDI initiatives within the 12 months ending in March 2023, up 4 per cent from 2021-22 however down 27 per cent from 2016-17.

It additionally confirmed that the variety of initiatives in lots of the UK’s key sectors — together with enterprise and client companies, media and the inventive industries, and electronics and communication — was sharply down year-on-year in 2022-23, and had dropped greater than 60 per cent in contrast with 2016-17.

Nigel Driffield, professor of worldwide enterprise at Warwick Enterprise Faculty, mentioned that with Brexit ending the UK’s standing because the “English-speaking bridge between the EU and the remainder of the world”, the nation was “not attracting the kinds of funding that’s centered on promoting and producing merchandise within the richest markets on this planet, the [EU] single market”.

He added that funding requiring massive economies of scale, similar to within the automotive and biotechnology sectors, have been additionally affected.

Economists warn that prime inflation, low financial progress, coverage U-turns and political turmoil over the previous two years have additionally had a unfavorable impact on the UK’s enchantment to international traders.

“What’s killing funding in the intervening time is uncertainty,” mentioned Driffield.

How does UK FDI examine with different international locations?

The UK is attempting to draw extra funding concurrently the US and EU are launching formidable programmes of their very own.

The US Inflation Discount Act, a $369bn measure aimed toward incentivising funding in inexperienced applied sciences, provides traders lots of of billions of {dollars} in subsidies and tax credit. In the meantime, NextGenerationEU is a €800bn instrument to assist the bloc construct a greener and extra digital economic system.

These schemes have “vital implications for the long run progress prospects of the UK and will set off a unfavorable spiral that will be tough to revert with out a new clear UK worth proposition for international traders”, mentioned Riccardo Crescenzi, professor of financial geography on the London Faculty of Economics.

Nevertheless, Lord Dominic Johnson, UK minister for funding, insisted that the UK additionally has a “enormous amount of cash” accessible to help rising industries throughout completely different programmes. “What we have to do is ensure that we’re advertising and marketing cleverly our present help subsidies and grants and funding programmes,” he mentioned.

However the EY European attractiveness survey discovered that final 12 months the variety of FDI initiatives secured in France outstripped the quantity within the UK. The consultancy additionally reported that Britain’s share of European digital tech initiatives dropped from a decade common of 28.3 per cent to 19.8 per cent in 2022.

Information from fDi Markets, an FT-owned firm that tracks abroad greenfield initiatives internationally, confirmed that the UK international market share of FDI initiatives peaked in 2015 and has declined virtually uninterruptedly since then. The share of initiatives has been rising within the US over the identical interval.

In contrast, the UK’s monetary companies sector continues to draw robust funding, in keeping with authorities knowledge, with the variety of FDI initiatives rising in contrast with final 12 months and 2016-17.

Information from consultancy EY additionally showed that the UK remained essentially the most enticing European vacation spot for monetary companies funding final 12 months.

Jonathan Portes, professor of economics at King’s Faculty London, mentioned the figures urged that “Brexit has made the UK a much less enticing funding proposition for international provide chains in superior manufacturing, however has not stopped the excessive productiveness service sector from going from energy to energy”.

What’s the worth of UK FDI?

One cause behind the falling variety of initiatives within the UK may very well be that the federal government is prioritising initiatives that ship extra jobs and add increased worth.

“We have now shifted our focus from simply checking bins when it comes to numbers of FDI initiatives that we’re supporting . . . to worth,” mentioned Johnson.

Nevertheless, figures across the worth of FDI initiatives are unsure as a result of the federal government and different organisations usually base estimates of how a lot international firms make investments and the variety of jobs they create on incomplete data. Furthermore, official figures are affected by components similar to firm valuations and trade price fluctuations.

fDi Markets knowledge confirmed there was a report degree of international capital invested within the UK final 12 months, pushed primarily by renewable vitality initiatives.

Authorities knowledge round FDI initiatives supported by the enterprise division confirmed that their financial influence fell 18 per cent year-on-year.

Complicating the image additional, Britain’s Workplace for Nationwide Statistics and different worldwide organisations report FDI knowledge when it comes to flows, which will be distorted by single massive mergers and acquisitions.

Additionally they have a look at FDI shares, which measure the e-book worth of all current FDI, slightly than the sum of funding over time. These are topic to modifications within the valuation in firm accounts in addition to trade price fluctuations, so their values can change year-on-year even with out new funding.

The newest ONS figures confirmed that FDI flows dropped from a peak of 9.6 per cent of GDP in 2016 to minus 2.3 per cent in 2021, whereas the inventory of FDI, or funding amassed over time, was up barely in 2021.

On these metrics, the UK slipped down within the OECD ranking for FDI flows over the previous seven years, however remained aggressive when it comes to inventory, which reached a report excessive worth of almost $2.7tn in 2022, in keeping with the most recent World Investment Report.