UK inward investment rises by 2.7% despite decline across Europe and increasing competition from Germany

5 June 2013

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  • Investors welcome improved climate and UK secures 29 new headquarters investments and leads in R&D
  • Capital in Europe on the move – French investment in the UK up 87% in 2012
  • English regions outside of London slump

London Wednesday 5 June 2013: The UK has received a major vote of confidence from foreign investors after retaining its lead as Europe’s top inward investment destination for the eleventh year running.

EY’s annual attractiveness survey, which analyses inward investment and the attitudes of global investors, reveals a 2.7% rise in foreign-backed UK projects in the face of an overall 2.8% decline in investment across Europe. The UK’s 697 projects created a 1.4% rise in foreign direct investment jobs to 30,311.

Improved climate especially for tax and labour

The improved appetite was put down to changes to taxation, a more flexible financial system, trade missions and support for SMEs – each cited as enhancing the UK investment environment. The survey of 314 global investors showed satisfaction with the UK tax regime jumping from 53% to 61% - helping the UK to secure a market leading 29 of the 168 headquarter relocations in Europe, compared to 12 in the previous year.  Labour costs were the other factor cited as having improved dramatically, with the satisfaction rating up to 63% from 48%.

Europe: capital on the move

Capital is on the move out of Europe and this presents an opportunity for the UK. Although US-based projects remained the standout factor behind the UK’s success, powering 28% of all UK investment, French companies increased their projects in the UK by 87% in 2012. The strong rise from France was driven by business services (from six projects in 2011 to 13 in 2012) transport (two to 12) and software from seven to nine, alongside first time investments such as oil and gas, and pharmaceuticals. 

Elsewhere in Europe, outbound investment grew from nearly all of the peripheral states, most notably Spain where outbound investment grew 34%. The challenge Europe faces is illustrated by the 13% decline in inward investment to France in 2012.

Germany’s rise continues

This buoyant picture was punctured by the continuing emergence of Germany, which was ranked by investors as the most favoured investment destination in the next two years. For the first time Germany also overtook the UK for new investments, as opposed to reinvestments, and secured the largest share of investment than any other European country from fast-growing China and Turkey. The UK did however re-establish its lead in Japanese inward investment in 2012.

EY’s UK & Ireland Managing Partner Steve Varley says: “The UK has made exceptional progress in the past few years in improving its standing as a destination for foreign direct investment, leading on FDI both in terms of the number of projects and the number of jobs created over the last eleven years.

“This is a remarkable testament to the openness and international outlook of the UK economy. The UK’s ability to win investment has been a crucial source of growth and pride over many years. Our long history of trade with every corner of the world going back centuries - from China to Turkey, from India to Spain, from US to Australia – is why Britain can be confident about its ability to work and trade with different cultures around the world.

“While our ties with our family of trading partners are as strong today as they have ever been, there is absolutely no room for complacency. We have a real fight on its hands if we wish to win the global race and retain our coveted number one lead in Europe.”

English regions suffer as London continues to dominate

London remains the regional investment powerhouse in the UK, attracting 45% of the UK’s total projects - equivalent to the fourth biggest European country. The devolved administrations of Scotland, Wales and Northern Ireland also saw strong increases.

However the English regions – now represented by Local Enterprise Partnerships following the closure of the Regional Development Agencies (RDAs) — mostly saw declines, taking their aggregate number of FDI projects in 2012 down to a level 24% below that in 2010.

Equally concerning, perceptions of regions among investors declined sharply – with ratings for North-East England dropping from 10% to 2%; East Midlands from 9% to 2%; the North-West of England from 9% to 4%; and Yorkshire from 4% to 1%.

Mark Gregory, EY’s chief economist commented: “The findings on the declining performance of the English regions outside London - especially in attracting new projects - raise further doubts over the UK’s ability to retain its lead in European FDI.

“It appears that the abolition of the RDAs may be starting to undermine not only the regions in which they operated, but also the UK’s ability to sustain its overall leading position for inward investment. The rejuvenation of the English regions will require more focus and success in attracting investment from sectors such as manufacturing and engineering than is currently the case.

“The weakness of the English regions could damage the UK’s overall ability to attract FDI, in comparison to countries such as France and Germany, which have much more balanced regional portfolios.”

No sign of a renaissance: UK failing to attract fast growing chemical and manufacturing investment

The UK also continued to struggle to attract manufacturing, electronics and chemicals FDI, three sectors which are seen as having real growth potential as the world economy adjusts to rising costs in some previously low-cost destinations. The leading nations in Europe for attracting manufacturing investment are Germany, Poland, Russia and Serbia.

In manufacturing, the UK secured only 12% of all manufacturing investments in Europe and just 7% of new projects. Despite the creation of 15000 FDI jobs in the UK by Jaguar Land Rover, an analysis of FDI manufacturing jobs over the past 10 years shows that the UK does not even rank in the top six recipients.

Despite leading the field a decade ago in attracting chemicals FDI projects, the UK continued its sorry demise emerging fifth across Europe and missing out on a 22% growth of projects in the sector.

Financial services accounted for only 28 projects – down from 34 in 2011 and 67 at its peak in 2007. The survey revealed that despite the falling volume of projects investors still strongly associate the UK with financial services, citing it as the sector most likely to drive growth.

Gregory continues: “The UK maintained its lead in the fast growing business services sector, as well as in software and financial services, although the project numbers in the latter two sectors have declined.

“While investors still identify financial services as the UK’s main strength, it is a sector in decline and too narrow a base from which to compete in a competitive global market.

“The UK must now identify the sectors in which it can develop a meaningful competitive advantage rather than compete for every opportunity. The UK’s success as the European market leader, attracting 23% of all R&D investments, shows what can be done. This strategy can then form the basis for a campaign to reposition the UK with investors. Even with the UK still riding high, the real competitive battle may be just beginning.”