UK has short window for action to preserve its attractiveness to foreign investors

18 December 2016

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  • EY publishes update on their annual UK Attractiveness Survey, to gauge international investor sentiment, post EU Referendum
  • Investors remain positive about the attractiveness of the UK as an FDI location in the short term, but Brexit is weighing on their minds
  • An immediate strategy is needed, with targeted policy, to shore confidence

The UK has a short window of opportunity to develop and implement policies that will maintain and grow its longer-term attractiveness to international investors, using the respite offered by the stable immediate economic outlook, says a report published by EY today.

An update to EY’s UK annual Attractiveness Survey released in May this year, the report, which involved interviews with 259 international companies in autumn 2016, gauges the sentiment of global business leaders post EU Referendum and their perception of the UK as an investment location.

25% of those surveyed said they intended to invest in the UK in the next 12 months, suggesting that the potential impact of Brexit has not yet had an impact on investor perceptions to a significant degree.

However, the responses paint a different picture when international investors were asked how they expect the UK’s attractiveness for FDI to change in the next three years. The proportion of investors that expect the UK to become more attractive has slumped from 36% in spring 2016 to a new low (since 2004) of 29% in autumn 2016. Meanwhile, the percentage expecting it to get worse has more than doubled, from 16% to 34%, in the same time period.

Steve Varley, EY UK Chairman, comments: “There is no sign of any immediate deterioration in FDI intentions over the next 12 months, in fact there has been an improvement in short-term sentiment since May this year. However, the medium-term outlook has worsened across a number of metrics and investors are concerned about how the UK’s attractiveness will develop over the next three years. The UK now has a window of opportunity to address their concerns and preserve future competitiveness.”

The UK attracted record levels of FDI in 2015. The number of projects recorded increased by 20% to 1,065, representing the steepest year-on-year uplift in the past decade. The UK took a 20.9% share of the total number of projects locating in Europe (5,083), and remained the leading recipient of FDI projects in 2015, followed by Germany, France and Spain.

Asian investors more optimistic

The report found that Asian investors are the most positive about the UK’s future attractiveness, with 34% expecting an improvement and 26% a deterioration, although this is still significantly lower than the historic trend. European investors are the most pessimistic, with 43% expecting it to decline and only 23% anticipating an improvement.

The top four countries that investors think the UK should prioritise trade deals with, to minimise the impact of the changes in its arrangement with the EU, are: the US, cited by 61% of all investors; Germany (52%); China (48%); and France (31%). Surprisingly only 16% mentioned India. Less surprising is the fact that investors across the world are more likely to rate their own region and/or country as a priority. For example, 64% of Asian respondents stressed the importance of striking trade deals in Asia.

Access to skilled labour

Investors are particularly concerned about not having access to skilled labour which combines access to workers from outside the UK and investment in skills within the existing workforce. This reinforces the importance of integration in the UK’s trade strategy in delivering a successful strategy to exit the EU. Skills need to be identified and work done to ensure these skills will be available at the scale required.

An integrated strategy needed

The report suggests that the UK needs more alignment and integration in its trade strategy across all Government policy.  A clear statement needs to be made of the sectors that the UK chooses to priortise, the role of exports, FDI and overseas investment should be defined and policy aligned to support this,

Mark Gregory, EY’s UK Chief Economist said: “Once sector priorities have been identified, our discussions with investors indicate five priority action areas for the UK: developing a comprehensive approach to skills; delivering improved infrastructure; signing trade deals to preserve and grow the UK’s market access; introducing incentives to encourage investment, including taxation, support for R&D and capital equipment; all underpinned by the creation of a digital platform of both technologies and skills.

“All these initiatives should be developed at national, regional and city level ensuring trade continues to support UK economic performance with benefits felt across the whole country.”

Manufacturing should be a focus, notes the report. Over half of all FDI projects in Europe originate from manufacturers, and each project in production in the UK is matched by an investment elsewhere in the value chain, over time. High value software FDI should also be a target, particularly those that will help build the UK’s digital platform such as AI, robotics and analytics capability.

Steve Varley, concluded: “The UK must act now to develop its vision across major economic powers to maintain and increase the UK’s attractiveness for a post-Brexit world, at a time when economic growth is holding up much better than many forecasters expected.

“It will be vitally important to begin communicating this vision as soon as possible, so that investors have an idea of what to expect in the future. This should go some way to addressing the longer term concerns expressed by international investors. For the UK to reach its full trading potential in a post-Brexit world it would be wise to significantly invest in all of the Government capability that drives trade and investment.”

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Notes to Editors

About EY

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About UKAS

EY’s attractiveness surveys are widely recognised by our clients, the media and major public stakeholders as a key source of insight on foreign direct investment (FDI). Examining the attractiveness of a particular region or country as an investment destination, the surveys are designed to help businesses to make investment decisions and governments to remove barriers to future growth. A two-step methodology analyses both the reality and perception of FDI in the respective country or region. Findings are based on the views of representative panels of international and local opinion leaders and decision-makers.

UKAS is part of EY Economics for Business programme which provides knowledge, analysis and insight to help business understand the economic environments in which they operate, both in the UK and globally. We work with both the private and public sectors, facilitating the debate between business and government, supporting economic development, growth and regeneration. www.ey.com/uk/economics