9 minute read 7 Oct 2019
Hands holding tablet up to photograph factory floor

Foreign direct investment: Why the UK must address disparity across its regions

By

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

9 minute read 7 Oct 2019
Related topics Attractiveness Growth Brexit

Core cities, and especially London, continue to dominate the UK’s FDI landscape.

The share of UK foreign direct investment (FDI) projects accounted for by Core Cities has increased from less than a third (31%) in 1997 to over three-fifths (61%) in 2018, with over half of all projects over the past two decades attracted into the major population centres. 

London has been the primary beneficiary but Bristol, Edinburgh, Leeds, Manchester and Newcastle all more than doubled the number of projects they attracted between 1997 and 2017. Nevertheless, London’s 5,875 projects in the period dwarfs the 419 secured by second-placed Manchester.

… with smaller places struggling to retain share …

To an extent, the UK’s leading performance in Europe in attracting FDI since 1997 has masked the wide differences in performance between its Core Cities and other areas. FDI in the Core Cities has increased four-fold since 1997 but declined everywhere else. Over the past two decades, large towns have seen their share of FDI fall from 26% at the start of the period to 17% last year, and all place types  except Core Cities attracted fewer projects in 2018 than in 1997. The evidence suggests there may have been an insufficient focus on place in UK FDI activity in recent times.

… and the market is challenging and dynamic …

When we look at place characteristics using the Centre For Towns’ classification, the performance of university towns stands out. The number of FDI projects these attracted annually increased from 73 to 180 between 2013 and 2017. However, in 2018, their project numbers almost halved to 97, with the fall in research and development (R&D) and manufacturing projects the major factors in this decline.

Ex-industrial towns saw a major decline in project numbers from 69 in 1997 to 18 in 2013, but then experienced a significant revival through to 2017. However, this rally came to an end in 2018 with only 35 projects attracted, a fall of half in one year. Underlying this was the fall in the number of manufacturing projects the UK attracted in 2018, because the ex-industrial towns rely disproportionately on this sector.

… with geographic opportunities varying by sector …

Sales and marketing accounts for the largest share of FDI projects in the UK, having increased from less than a quarter of UK FDI 20 years ago to 56% of 2018’s total. Most of this growth has come since 2004, driven to a significant extent by the UK economy’s increasing openness . But the digital revolution has also played a role, with many software businesses covered by this grouping. This activity has been heavily concentrated in Core Cities (74% of all projects since 1997) and large towns (15% in the same period). Headquarters projects demonstrate very similar characteristics, with 80% over the past two decades destined for Core Cities or large towns.

By contrast, manufacturing projects are spread across different place types, with only 13% of these projects having gone to Core Cities and 30% to large towns in the past two decades.

Logistics and R&D-related projects are also more geographically dispersed, with over 30% and 40% respectively of investments going outside Core Cities and large towns. There are also linkages between these groups of projects, with investments in manufacturing facilities often leading to a demand for logistics or creating the opportunity to attract R&D activity.

FDI into London

5,875

The number of projects London attracted between 1997 and 2017

… creating the potential for growth beyond cities …

The results summarised above, in part, reflect an increasing focus of policy on cities — and especially large ones — in recent years. But the more we move into detailed analysis of the UK’s FDI performance over the past two decades, the more evidence we find of potential alternative approaches which will allow a more balanced geographic policy mix.

Scotland – which managed to achieve a balance in FDI across all the main place types – is a very interesting case in point. Glasgow and Edinburgh are successful member Core Cities and account for around two-fifths of all FDI projects attracted to Scotland in the past two decades. However, in the same period, Scotland has managed to attract the highest number of projects to small towns, communities and villages compared to the English regions and Wales.

While Scotland’s performance may reflect the country’s characteristics to an extent, other regions also demonstrate the potential of places outside the major cities. With Nottingham as its only Core City, the East Midlands has successfully attracted FDI into all its place types.

Yorkshire and the Humber, the West Midlands and the North East are all examples of regions where Core Cities successfully dovetail with other large and medium/small towns to generate a more balanced distribution of FDI. To a significant degree, this balance reflects the relative strength and importance of manufacturing to the economies of these regions.

The South West offers another model. Bristol is a successful Core City in the region and acts as its services hub, supporting other places but also benefitting from the economic activity they generate. Other locations, such as Swindon and Plymouth, are successfully attracting manufacturing investment in specific industries, and Exeter is an upcoming university town.

The performance of different places over time is consistent with the findings from our previous research and shows that it is possible to improve FDI performance. Foreign investors make their decisions based on the fit between the needs of their businesses and the characteristics of available locations . The market continues to change, and the challenge for policymakers is to anticipate changing needs and provide support and resources to enable places to respond to market demand.

FDI into Manchester

419

The number of projects Manchester attracted between 1997 and 2017

… signalling that it is time for change.

This report identifies a continued structural imbalance between London and the South East and the rest of the UK in terms of the investment they receive from overseas. The UK’s Core Cities and large towns have been significantly more successful than the rest of the country in attracting FDI in the past two decades. Not only that, but there are disparities within regions between the scale of investment in Core Cities and our largest towns, compared with small and medium towns and rural communities.

In part this reflects the characteristics of different place types and investors’ attitudes — sales and marketing projects have grown significantly, and have tended to go to larger population centres. However, the lack of an industrial strategy in the UK for much of this period has meant it underperformed in attracting manufacturing FDI — and this has adversely affected the FDI performance of places outside Core Cities, as these are the destinations to which manufacturing projects typically flow.

UK economic policy has also tended to be based around Core Cities, which is likely to have exacerbated the geographic disparities in attracting FDI.

With Brexit one of a range of challenges facing the UK economy, many of which could have significant implications for towns (as shown by the work of the Centre For Towns), it is vital that a new approach to FDI policy centred on geography is developed as a priority.

The performance of different places over time shows that it is possible to improve FDI performance

A policy agenda for FDI in towns

1 Drive decision-making from the bottom up

Moves in recent years to devolve economic decision-making in the UK are welcome and have generated some clear benefits, with the Northern Powerhouse and Midlands Engine examples of real progress. However, while there has been some shift in emphasis, with some power moving from the national level, planning is still primarily top-down.

The requirement now is to incorporate a true bottom-up element to the formulation of economic development policy. To increase the opportunity for all place types to benefit from FDI, there should be more focus at a town level to consider what different types of investors need and what this means for policy . These bottom-up perspectives can then be aggregated into regional, and ultimately, national policies such as the industrial strategy.

2 Rework the industrial and digital strategies to put place first

It is striking — but not surprising — that the benefits of FDI are concentrated in a small number of cities. What is also clear is that manufacturing is the sector with the widest geographic appeal, offering the potential to achieve a better balance of economic activity. In this context, the industrial strategy is an important element for driving future economic success. This means that to share the benefits of FDI more widely, the approach needs to be much more integrated and inclusive — especially in terms of place — and be based upon challenging the prevailing policy model.

At its simplest, this thinking would suggest allocating more FDI-supporting resources to smaller towns and communities. Going beyond this, our analysis of investor needs suggests that the industrial strategy should bring together locally developed plans to drive initiatives around skills and infrastructure, and  identify how to reshape and strengthen supply chains and business networks to develop more geographically specific initiatives.

3 Improve regional transport and broadband

The need to improve infrastructure provision — namely transport and broadband — is a higher priority for the English regions — and especially towns — than the UK overall. This is partly because several planned initiatives have yet to materialise, and even more so because of the need to enable manufacturers to remain competitive after Brexit, especially if customs processes become more onerous. Better transport links are essential if economic benefits are to be created across wider geographic areas, and there is a need to show investors that there is a real commitment in place to drive improvement across the country.

4 Develop an integrated strategy for towns

While it is welcome that towns are moving up the political agenda, there is little sign of an integrated approach. Attracting FDI is important, and improvements in skills and infrastructure are vital in this regard. However, as investor concerns over social stability indicate, policy needs to incorporate social and cultural aspects as well as hard economic ones. Towns will thrive if people want to live, work and consume there, which means a comprehensive approach covering all aspects of local life is needed. The balance between agglomeration and decentralisation needs careful consideration.

Summary

Our regional UK Attractiveness Survey report, in association with the Centre For Towns, reveals the stark and deepening disparity of foreign direct investment flows into the UK, with its largest cities attracting an ever-greater share of inward investment and little signs of spillover benefit for the areas surrounding them.

About this article

By

Mark Gregory

EY UK Chief Economist

Committed to using economics to drive informed decision-making in the public and private sectors. Helping rebalance the UK economy. LinkedIn Top Voice. Sports mad. Loyal supporter of Stoke City FC.

Related topics Attractiveness Growth Brexit