2 minute read 28 May 2020
1197672188

Battling Back: EY Attractiveness Survey Scotland

Authors

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.

Ally Scott

EY Scotland, Head of Strategy and Transactions and UK & I Managing Partner

Managing Partner for EY Scotland. Leads the Scotland Strategy and Transactions team. Corporate finance advisor. Recognised dealmaker with more than 30 years’ experience. Keen golfer.

Contributors
2 minute read 28 May 2020

The 2020 EY Scotland Attractiveness Survey reveals a welcome rebound in FDI projects last year following a decline in 2018. 

Scotland has established a comparatively strong position within the UK in terms of attracting Foreign Direct Investment (FDI) having recorded an increase in both the number and share of UK projects in 2019.

Download the EY Scotland Attractiveness Survey 2020 (pdf)

While this increase pre-dates the COVID-19 crisis, it suggests Scotland has a solid base from which to sustain its flow of FDI in a post-pandemic world. As in previous years, Scotland has continued to attract projects from a wide range of countries, sectors and activities. This diversity should stand the country in good stead in the more challenging environment now in prospect.

As well as examining the performance of Scotland and perceptions of the UK and Europe as destinations for FDI, this year also includes a survey of 800 international investors looking at the impact of COVID-19 on investment.

Key findings

  • Scotland has reinforced its position as the most attractive location for inward investment in the UK outside of London with a 7.4% increase of FDI projects
  • Growth of FDI in Scotland outpaced the UK as a whole and Scotland’s share of UK inward investment also grew in 2019
  • Glasgow has bounced up the ranks to third most attractive UK city, excluding London, followed by Edinburgh in fourth and Aberdeen in seventh

Scotland 2019 FDI Performance

101

The number of inward investment projects secured.

Scotland also performed better in terms of job creation in 2019 than in recent years, rising from fifth in the UK in 2018 to second. The average size of FDI project in Scotland created 83.6 jobs last year which is the highest since 2011 (when the figure was 116.2) and ahead of the UK average for 2019 of 51.4.

Scotland has yet again achieved an impressive performance on FDI in 2019. The pace and scale of growth achieved is evidence of Scotland being well-placed to tackle the challenges presented by COVID-19 and an uncertain economic environment.
Ally Scott
EY Scotland, Head of Strategy and Transactions and UK & I Managing Partner
(Chapter breaker)
|

Sectors and activities

There has been a big shift in the sectors responsible for most FDI in Scotland

Digital and business services have fallen from the top two places on the leadership in 2018 to joint third a year later.

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.

(Chapter breaker)
|

Scottish cities prove to be increasingly attractive

Scotland’s three largest cities all experienced an increase in FDI projects in 2019

Aberdeen increased by 88%, Edinburgh by 10% and Glasgow by 21%.

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.

(Chapter breaker)
|

Resilient pipeline in turbulent times

The UK as a whole had a strong year for FDI in 2019

The number of UK projects secured increased by 5.2%.

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.

Before COVID-19 changed the picture completely, 2020 was set to be a record year for UK FDI. At the start of the year, 31% of investors said they were planning to invest in the UK in 2020 – a significant increase from 23% in last year’s survey.
Mark Gregory
EY UK Chief Economist
(Chapter breaker)
|

Origins of FDI projects shifts as investors look beyond Brexit

UK rebalancing its investments

Analysis of changes in the origins of FDI projects over the three years since the 2016 EU Referendum.

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.

(Chapter breaker)
|

Scotland shows greater aptitude for ‘levelling up’

Geographic balance in attracting FDI

While the UK’s leading cities were generally thriving in terms of FDI in 2019, the performance across the UK was mixed

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.

Summary

As our figures confirm, in 2019 Scotland has once again preserved its strong status as the most attractive UK location for FDI, outside London, the challenge now is to ensure it stays that way as we prepare for economic recovery post COVID-19. 

About this article

Authors

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.

Ally Scott

EY Scotland, Head of Strategy and Transactions and UK & I Managing Partner

Managing Partner for EY Scotland. Leads the Scotland Strategy and Transactions team. Corporate finance advisor. Recognised dealmaker with more than 30 years’ experience. Keen golfer.

Contributors