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2015 UK attractiveness survey

Another strong year: the UK pulls away from the pack...

Once again, the UK turned in an outstanding performance in attracting Foreign Direct Investment (FDI) in 2014. The numbers speak for themselves: a record number of 887 projects, up 11% on 2013; increased European market share; and a market-leading 31,198 jobs created.

...with strength across a range of sectors and geographies...

The UK’s success was broad-based. Despite a second year of decline in business services projects across Europe, the UK grew its software and financial services sector projects, captured 35% of all European headquarter (HQ) moves and led Europe on R&D projects. The UK achieved a leading market share of 29% of US projects in Europe and was the main destination for investment in Europe from France, Japan, Australia, Canada, India and Ireland.

...winning more manufacturing projects than Germany...

The UK secured 164 manufacturing projects in 2014, beating the 131 projects secured by Germany. This was based on strong growth in the automotive, food, and machinery and equipment sectors, We have become used to being told that the UK cannot compete in manufacturing, but the results suggest that there is untapped potential and more attention should be given to the “makers.”

..and resurgent regional investment.

2014 saw significantly improved performance across the English regions, Northern Ireland and Wales. Yorkshire with a 145% increase in projects, the South East up 49% and the West Midlands with a 38% rise led the way. In total, the English regions secured 344 projects, the highest total since 1998 and a sign that UK Trade & Investment’s (UKTI) attempts to support economic rebalancing are bearing fruit.

Investor feedback confirms the UK’s strong appeal...fourth in the world as the first choice investment destination...

Our survey of over 400 investors confirms that confidence in the UK’s attractiveness remains high. The UK was ranked fourth globally, behind the US, China and India, when investors were asked to name their first-choice investment destination.

...with an ever improving offer.

Our survey confirms that the UK has a range of strong attributes that are valued by investors, such as the quality of life, the stable and predictable social climate, good transport and technology infrastructures, and competitive labor markets. Investors also identified a number of areas of improvement in the UK’s offer over the last 12 months, including several that had previously been the less well-regarded elements of the UK environment, namely labor legislation, the overall trade policy environment, corporate taxation rates, labor costs, and real estate costs and availability.

The upcoming referendum on European Union membership is a major risk to FDI...

Stability and political predictability feature prominently in the list of desirable attributes mentioned by investors, and the UK has traditionally scored very well in this respect. The UK Government is committed to a referendum on the future of the UK’s membership of the European Union. With 72% of investors citing access to the European single market as important to the UK’s attractiveness, the referendum has the potential to change perceptions of the UK dramatically, posing a major risk to FDI. Our survey indicates that 31% of investors will either freeze or reduce investment until the outcome is known.

...in an increasingly competitive and dynamic market...

The world economy continues to change, and the outlook for FDI is becoming more and more competitive. Trade has fallen as a share of global GDP in the last four years, unprecedented in any other period since 1945, and global FDI fell in 2014. In recent months, the Eurozone economy has shown signs of recovering, and the UK may therefore find itself facing stronger competition. Moreover, as our 2015 survey shows, the nature of FDI continues to change. Investors expect the ICT and life sciences sectors to drive future market growth, with R&D facilities and the ability to drive innovation as key factors shaping investment decisions. The UK has shown itself capable of attracting R&D investment and leading in software, but it will continually need to develop its offer to remain competitive.

...but the good news is that investors view devolution very positively.

Proposals to devolve more economic decision-making power to the UK regions are seen as positive for UK attractiveness by 48% of investors. When considering investment in the UK regions, transport and the skills of the local workforce are the key factors influencing decisions. Our research shows foreign investors see roads as the most important transport infrastructure, although this varies by nationality and sector of investor. More targeted decision-making does seem to offer potential to improve the FDI performance of the UK regions.

Where next? No time to rest – the UK must maximize the economic contribution of FDI.

The UK’s performance in attracting FDI is a huge success story: rising numbers of projects, higher market share and large numbers of jobs created. It would be easy for the UK to assume that its impressive performance in attracting FDI will continue. However, a changing market, the upcoming referendum on EU membership and a likely squeeze on public sector resources in the UK all point toward a need to continue to challenge the approach being followed.

Since the financial crisis, FDI projects have increased by 29% – a much faster rate of growth than both the UK economy as a whole and GDP per head. Even more strikingly, FDI volumes have grown much faster than productivity in the UK. This does raise a question as to the potential contribution of FDI to UK economic performance. Why do we appear to see very little impact on productivity from ever rising levels of FDI? What does this tell us about the desired future strategy for attracting FDI?

The priority for action: understand if the UK attracts the right FDI projects

Since 2008, annual FDI project numbers secured by the UK have grown from 686 to 887 in 2014. Unsurprisingly, there have been significant shifts in the mix of projects during this period. Sales and marketing investments, typically when a foreign company sets up an office in the UK, have been the main driver of growth, increasing from 314 to 466 projects over the six-year period, a growth of 48%. After a dip in 2011, R&D projects have recovered and are about 10% up over the period. Recent success in attracting HQs to the UK has seen a doubling of projects since 2011, but volumes are still more than 25% below the 2008 figure. Since 2012, and especially in the last 12 months, the real UK story has been the growth in manufacturing and logistics projects, led by the automotive sector, up 34% on a combined basis. Does this offer an alternative way forward for the UK?

On first review, there does appear to be a question about how significant an economic impact the dominant growth of sales and marketing investments has delivered to the UK. Any investment will stimulate economic activity, but if the primary driver is to sell goods and services in the UK, the economic benefit may be less than from those that bring capital investment and know-how, and potentially create a platform for export growth. The investments in the automotive sector are a good example of productivity and export-enhancing activity.

The UK has an urgent need for solutions to the productivity challenge at a time of political and market change, and now appears to be a sensible moment to pause and analyze how the pursuit of FDI can best contribute to strengthening UK economic performance. Key questions for further analysis are:

  1. Is the UK maximizing its potential in manufacturing? Global manufacturing is in a state of flux as economic and technological changes disrupt established business models. For example, the investment generated by successful manufacturing could offer potential productivity gains. The UK should examine whether there are more sectors capable of following the example of the automotive sector, and design policy accordingly to seek maximum economic benefit.
  2. Are we maximizing the regional opportunity? Investors are positive about the benefits of devolving some decision-making power to regions across the UK. More work is required to understand what investors want and, hence, to identify the right model of collaboration between central and regional bodies. Infrastructure, skills and real estate appear to be critical areas.
  3. Does the UK have sufficient focus in its FDI strategy? UKTI has already moved to focus its efforts on higher-value opportunities, priority sectors and key investors. Once the answers to the questions on economic benefits and the regions are clear, a further focusing may be necessary. Certainly the BRICS story is over, and the UK has a unique set of geographic and sector strengths around which to concentrate its offer.

Contact

EY - Mark Gregory

Mark Gregory

EY Chief Economist

EY - Bridget Walsh

Bridget Walsh

Head of Private Equity and China Trade Route Leader, EY UK

EY - Shelley Marchant

Shelley Marchant

Marketing Manager