Foreign Direct Investment: UK's project total grows as Europe’s falls

• The UK recorded 985 Foreign Direct Investment (FDI) projects in 2023, up 6% from 2022
• France continued to lead in Europe for FDI projects, with Germany ranked third
• Total FDI projects in Europe were down 4% on 2022, with France and Germany’s project numbers declining year-on-year
• The UK saw its share of Europe’s inward investment market grow to 17.3%, up from 15.6% in 2022
• UK FDI growth driven by resurgence in digital investment, securing over a quarter (27%) of all European tech projects last year

The UK remains second in EY’s annual ranking of European countries by their ability to attract Foreign Direct Investment (FDI) projects and was the only country in the top three to see project numbers increase year-on-year. France ranked first in Europe for the fifth consecutive year, while Germany followed in third place, according to the EY 2024 UK Attractiveness Survey. The UK was home to 985 FDI projects in 2023, which was a 6% increase from 2022.

UK’s project total grows as Europe records overall decline

Europe as a whole recorded a 4% year-on-year decline with a total of 5,694 projects recorded in 2023. This was the continent’s lowest FDI total since 2020 and was 11% lower than its pre-pandemic level (6,412) and 14% lower than 2017 (6,653). 2017 represented Europe’s highest peak for projects in the last decade.

France was Europe’s largest recipient of inward investment, recording 1,194 FDI projects in 2023, however, this represented a 5% decrease on its 2022 project total. Germany recorded 733 projects in 2023, which was a decline of 12% on the year before.

The UK’s share of all European FDI projects grew to 17.3% in 2023, an increase on the 15.6% seen in 2022. However, the UK’s broader FDI trend mirrors Europe’s by recording a lower level of projects in the last four years in comparison to pre-pandemic levels. UK project numbers have remained below 1,000 since 2019 and there were 220 fewer projects recorded in 2023 than at the UK’s high point of the decade in 2017, when 1,205 projects were recorded.

Greater London was a key beneficiary of the investment growth in technology and financial services across 2023, becoming the leading European region for investment. Greater London recorded 359 FDI projects in 2023, which was a 20% increase on 2022 and moved the region into top position, replacing Île-de-France which recorded 300 projects. 

‘No room for complacency’ warns EY

Hywel Ball, EY UK Chair, comments: "The UK achieved a strong performance for FDI last year, driven by a resurgence in tech investment and impressive annual growth in sectors such as business services. Significantly, this has also been strategically valuable investment, with UK FDI generating a greater number of jobs than elsewhere in Europe.

“The UK remains a leading European investment destination, but there is no room for complacency. Overall project numbers have not yet returned to pre-pandemic levels and global competition for investment remains fierce. The UK enjoys distinct advantages, from its strong foundations across emerging industries such as life sciences, to London’s status as a financial powerhouse. Combining these strengths into a strategy that prioritises attracting capital into high-growth sectors, and shares the benefits of that investment across all regions, should help the UK drive greater opportunities and prosperity in the future.”

Digital investment drives a rebound in UK FDI

Despite a 19% decline in technology project numbers across Europe, digital technology remains the leading sector for UK FDI and played a significant role in the country’s year-on-year FDI growth.

The UK recorded 255 technology projects in 2023, which represented an annual increase of 8.9%. The UK continues to be the European leader for tech FDI and received more than a quarter (26.7%) of all tech FDI projects in Europe last year. This followed a disappointing performance in 2022, when tech FDI project numbers fell to 234 and the country’s share of Europe’s digital projects declined to 19.8%.

Financial services was the UK’s second biggest sector for FDI projects for a second consecutive year, with more than 100 projects recorded in 2023.

Business services and utility supply were the joint third highest ranking sectors for UK FDI, recording 92 projects each in 2023. The UK secured 16.7% of business services projects into Europe and 30.5% of projects from the utility supply sector in 2023.

The business services sector saw a 31% increase in projects from 2022, although its 2023 total remained 26.5% lower than the sector’s decade-long average. The utility supply sector saw a 35% annual increase in FDI projects.  

Of the other sectors generating the largest number of UK FDI projects, machinery and equipment (67), transportation and logistics (51), and health and social work (33) all recorded project numbers above the average number of projects per annum for the decade.

In the case of health and social work projects, the UK secured nearly half (47.1%) of Europe’s total number of projects in 2023.

Peter Arnold, EY’s UK Chief Economist, comments: “The UK owes much of its FDI growth this year to a resurgence in digital investment, making the UK something of an outlier in comparison to the Europe-wide trend for declining tech projects. After a period of relative European dominance between 2016 and 2019, the UK’s tech project total disappointed in 2022 as high interest rates cut off access to easy capital and the sector cut costs and contracted globally. While this pressure eased slightly in 2023, companies investing in tech still faced tighter borrowing conditions and so may have prioritised more established and resilient tech markets, such as the UK, over emerging ones.

“The UK also saw growth in investments into utility supply, outlining a strong performance in renewable investments, including offshore wind. The UK is traditionally regarded as an appealing destination for clean energy investments thanks to the current mix of renewables in the national power supply, the access to project financing via London and the growing ecosystem of cleantech and sustainability businesses already in the country. The Government has pledged to speed up the grid connection process and, if achieved, this could encourage more developers to contribute capital towards the UK’s clean energy transition and boost utility investments further in future.”

UK sees a decline in R&D, manufacturing and HQ activity

Examining the UK’s FDI projects by activity reveals a decline in some high-value areas. Research & Development (R&D) projects fell by 44% compared to 2022, which was the lowest number of R&D projects recorded since 2016 and the UK’s second lowest R&D total for the last decade. Manufacturing projects also saw a decline, falling by 14% to 150 projects.

Projects to establish corporate headquarters in the UK also saw a significant drop of 34% to 88 projects in total — the lowest level since 2018. Despite the decline in absolute project numbers, the UK secured an increased share of European HQ projects, with 39.5% of all HQ projects recorded across Europe in 2023. This was the UK’s highest market share recorded for HQ projects since 2016.

The largest number of projects in the UK in 2023 (392 projects) were involved in business services activity, such as establishing a call centre or testing and training facility, and saw a substantial increase of 35.6% in 2023. The UK secured one in five (21.1%) of all European projects related to business services activity last year.

Peter Arnold comments: “Despite the welcome growth in overall project numbers for the UK, there was a decline in the kinds of high-value activities previously prioritised by policymakers. R&D, headquarters and manufacturing project totals all fell after what had been a fairly impressive 2022 for these sectors in the UK. Europe overall also saw smaller amounts of R&D and manufacturing projects this year, and multinationals may have put off investments due to high energy costs and the attractiveness of the US Inflation Reduction Act. With energy prices now returning to traditional levels, policymakers will be eager to understand how they can lure future investment in these high-value sectors to the UK.”

UK continues to lead on job numbers and ‘new projects’

The UK continues to perform in terms of job creation. For projects where expected job totals were reported, the UK continues to lead Europe on overall jobs created (52,200), its second-highest total in the last decade and ahead of Spain (42,400) and France (39,700).

The UK recorded an average 60.9 jobs per FDI project, which was higher than in 2022 (58.9) and represented the UK’s second highest jobs-per-project ratio in the last decade. For the fourth consecutive year, the UK outperformed France (35) and Germany (49) on jobs per project.

However, the UK’s employment share is slightly below its total market share for FDI projects, suggesting that the UK secures slightly smaller projects than those located elsewhere in Europe. The UK secured 16.3% of employment from European FDI (compared to a 17.3% share of projects), up from 13.6% in 2022.

‘New’ projects – as opposed to re-investments or extensions – are one way of assessing a country’s ability to attract fresh investment, and the UK has retained its position as Europe’s leading country for new projects for a third year in a row.

Of the UK’s 985 total projects in 2023, 736 were new – a sharp 13.9% increase on the 646 new projects in 2022 and higher than decade-long average of 731. In contrast, Europe as a whole saw overall new project numbers decline 3% to 3,345 in 2023. New projects into Germany increased 10.2% and fell in France by 4.7%.

The UK has secured the largest number of new projects for the last five years, and in 2023, it secured 173 more projects than Germany (up from a gap of 135 projects in 2022).

Investor sentiment on the UK’s future performance

Despite a stronger FDI performance this year, the UK recorded a more disappointing performance in EY’s survey of global investors, with 25% describing the UK as one of Europe’s three most attractive investment locations – down from 32% in 2022. In contrast, 34% named France and 29% said Germany.

However, prospects for UK FDI remained strong on other measures, with more than two-thirds (69%) of investors saying they plan to invest in the UK this year – a record high. More than half (59%) of respondents said they expected the UK’s investment attractiveness to improve over the next three years.

US & India remain the leading sources of UK investment

The United States remained Europe and the UK’s leading source of FDI projects in 2023, with the US a more significant investor for the UK than it is for the rest of the continent. More than one in-five (22%) of all UK FDI projects originated in the US, compared to 19% of European projects.

However, the level of US investment projects into the UK fell for the fourth consecutive year and was 42% lower in 2023 than the high point of 2019. This trend has been mirrored across Europe, which as a whole saw US projects fall 28.7% in 2023 compared to the peak in 2019.

Germany was Europe’s second largest origin of investment projects as a whole in 2023. However, this was not the case for the UK specifically. India remained the UK’s second largest origin country for FDI for a second consecutive year, contributing 7.7% of UK projects, with Germany in third (7.1%).

India was the 18^th largest contributor for European FDI projects as a whole in 2023, with the UK securing 55.1% of all Indian projects into Europe.

Meanwhile, Australia was only the 27^th largest origin of investment projects into Europe in 2023 but was the fifth largest origin of projects into the UK. More than half (56.5%) of Australian investment into Europe last year was in in the UK.

Peter Arnold comments: “The UK’s investor base is quite distinct from the rest of Europe and in recent years India and Australia have become increasingly important sources of capital. This likely reflects the UK’s strong cultural and historic links with both countries and has helped the growth of key sectors, with investment from India focused heavily on digital services. While the US remains the leading origin of investment, both the UK and the rest of Europe have seen the proportion of American projects diminish over time. If investment from the US continues to fall in future years, the UK’s current diverse investment mix should provide a strong foundation to attract further investment from markets outside Europe.”

There were 379 outbound UK FDI projects in 2023 – a decline of 26.7% on 2022, which had been a record high of 516, and lower than the UK’s decade average. France and Germany remained the first and second leading destinations for UK investment. However, in both cases the UK directed more projects into these countries than it received in return.