Battling Back: EY Attractiveness Survey Scotland

Leapfrogging ahead in 2019 was machinery & equipment (58% increase) followed by agri-food (78% increase) signaling the first time in a decade that the service sector has not ranked first or second.

In terms of the type of activities carried out, manufacturing shared the top spot with sales & marketing as both secured 32 FDI projects in 2019. The former experienced an increase of seven while the latter decreased by ten. Research & Development (R&D) secured third place following a notable rise in projects (from nine to 14). The biggest percentage increase was in headquarters (HQ) projects, which leapt from two projects in 2018 to nine in 2019 – a rise of 350%.

Scotland has a real strength in the diversity of projects it attracts with a healthy blend between manufacturing and services. The boost in manufacturing places Scotland as the UK leader for this sector. This, along with the growth in machinery & equipment and agri-food, plays directly into Scotland’s international reputation and capabilities within the food and drink market.

All three of Scotland’s appeared in the top ten most attractive cities for inward investment in the UK, excluding London. Glasgow overtook Edinburgh as Scotland’s leading city to sit in third position behind Manchester and Birmingham while the capital held firm in fourth and Aberdeen bounded up from tenth to seventh.

Both Edinburgh and Glasgow attracted investment from a variety of countries, 11 for each city. The Scottish capital is more reliant on the US with half of the projects originating from there while in Glasgow this was a little more than a third. In both cities digital, business services and finance account for around half of FDI.

Aberdeen’s FDI was diverse both in terms of country of origin but also sector. The majority of projects came from the US followed by Norway, the Netherlands and Japan which all contributed multiple projects. Just under half of the total were in the energy sector but projects were also secured in business services, digital, machinery & equipment, electronics and transport equipment.

There was also growth in towns with Livingston and Falkirk both attracting more projects in 2019 than in 2018.

The report indicates that investor intentions towards the UK, compared to other FDI destinations in Europe, also remain relatively positive when they look beyond the immediate impact of COVID-19.

Survey respondents said that 65% of planned projects were still going ahead – including 6% who had actually increased their investment in light of COVID-19 – with only 3% saying they had completely cancelled their plans. By contrast, the corresponding figures for Europe revealed a more cautious approach from investors, with 66% planning to decrease investment and 23% pausing it, against 17% and 15% respectively for the UK.

There is no doubt that the outlook for FDI will be extremely challenging as the world tries to recover from the economic and social impact of COVID-19. Asked whether they expected to see an increase or decrease in FDI globally following a period of recovery from the COVID-19 pandemic, a net -71% of investors responding to EY’s survey said they were anticipating a decline in global FDI. Asked the same question about investment specifically into the UK, the balance expecting a decline was -44 – still very challenging, but more positive than the overall market outlook.

It shows the UK has been able to rebalance its investments to compensate for a decline in EU originated projects, further illustrating the transition underway in the UK economy.

Meanwhile, investors appear less likely to regard ‘Brexit’ as a risk factor, with just 24% of survey respondents citing it as a risk factor this year, compared to 38% last year.

The number of EU-originated FDI projects in the UK continued to decline to 340 in 2019, albeit at a slower pace than before, and is now 17% below its 2016 peak. As the EU’s share of total FDI projects in the UK falls, other countries have filled the gap. US FDI projects in the UK have increased to 376 (up 9% from the previous year), surpassing the highest ever total from the EU (340 in 2016). Meanwhile investment from countries like Turkey and Israel has grown rapidly, by 350% and 143% respectively.

The five largest contributors of investment projects for Scotland in 2019 were the US, France, Germany, Japan and Norway. The US extended its lead as the biggest single source of FDI, accounting for 35% of inward investment into Scotland (an increase of 1% from 2018). Investment into Scotland from France increased in 2019 to secure second largest share of FDI with 9% while across the UK French originated investment was down slightly. Germany, Japan and Norway complete the top five origins of FDI into Scotland with each accounting for 7% of the total.

Scotland snared the majority of projects from Norway (seven of 15), which signals the existing strength between the two North Sea nations and presents avenue of opportunity for further growth outside the EU beyond Brexit.

For the first time Russia entered the top ten sources of FDI projects for Scotland, this reflected an increase in the number of Russian FDI projects across the UK.

In Scotland, there is more geographic balance in terms of the cities attracting FDI and while Edinburgh and Glasgow received the most projects by quite a margin ahead of Scottish towns, there was notable growth in towns, Livingston and Falkirk in particular.

Scotland has less of an issue with levelling-up than the UK but there is scope to make further progress. Manufacturing was a real success for Scotland in 2019, this should be analysed with a view to spread this activity across Scotland.

Sustainability and levelling up should be placed at the heart of infrastructure and skills policy by the Scottish and UK governments. As we move towards a hi-tech economy, investment in digital infrastructure will become increasingly important, particularly in Scotland’s economic hubs outside of the central belt.

Universities will also play an important role in developing talent and skills. This should form the basis for an expansion of their role as true civic establishments, playing a central role in their local economies and communities.