5 minute read 7 Jun 2021
Man in yellow jacket, standing in a viaduct

How the UK’s resilience in winning FDI creates a window of opportunity

By Alison Kay

EY UK&I Managing Partner for Client Service

Focused on delivering long-term value through purpose for clients. Diversity and inclusion ambassador. Happiest when spending time with family and friends. Loves to be near the ocean.

Contributors
5 minute read 7 Jun 2021

EY’s UK Attractiveness Survey 2021 finds robust FDI project flows and recovering investor confidence are creating a platform for growth.

In brief
  • Vaccine roll-out prompts investors to see the UK as having Europe’s best pandemic recovery plan, creating opportunities for growth.
  • Investors now see the UK as the most attractive place in Europe for future investment.
  • London regains title as Europe’s most attractive city from Paris; Scotland and regions hold steady in attracting projects.

In 2020, the number of foreign direct investment (FDI) projects secured by the UK fell by 12% from 2019. In any normal year, such a decline would trigger major concerns about the UK economy and its attractiveness to overseas investors. But 2020 was not a normal year. Viewed against an even bigger fall of 13% in FDI projects into Europe as a whole, and the indications from our investor surveys in autumn 2020 that 30% of planned investments in the UK might be cancelled or paused, the actual outcome was significantly better than expected. 

Register to download: A window of opportunity: EY Attractiveness Survey 2021 (PDF, 3MB)

In fact, the 975 projects secured by the UK in 2020 was only 10 fewer than the European market leader, France – a much smaller gap than the difference of 88 projects in 2019. And, in a difficult year beset by COVID-19 and rumbling uncertainty over the Brexit negotiations, the UK’s regions and nations demonstrated the underlying resilience of their offer to investors. Despite the overall 12% fall, London and the South East were the only UK regions to suffer double-digit declines in projects, with Northern Ireland, Scotland, the East of England, the North East, the North West and the South West all bettering their previous year’s performance.

A total of

975

FDI projects were announced in 2020, just 10 projects behind European leader, France

Total projects secured by Europe's four largest recipients, 2011-20
Chart: Total projects secured by Europe's four largest recipients, 2011-20

The optimistic mood was further supported by the UK’s strong FDI performance in sectors including life sciences, transportation and logistics, and food, and its continued European leadership in attracting 'new' projects from first-time investors. While all of this underscored the UK’s dynamism and adaptability, the most striking illustration of the country’s shift towards higher-value projects was its securing 114 R&D investments, only one project behind the European leader, France. As recently as 2018, France was securing almost twice as many R&D projects annually as the UK.

There were some clear impacts from the COVID-19 pandemic

That said, UK FDI did not fully escape the impacts of the pandemic. While the UK retained its leadership in European digital investments, its digital project numbers fell by 25%, almost double the European decline. And while the UK’s share of all European projects rose for the second year running after three years of decline following the Brexit vote, FDI activity in financial services, manufacturing and HQ remained well below their peak levels.

Previous optimism over new origins of investment into the UK was also quashed in 2020. There were declines in projects from 9 of the 10 fastest-growing new sources of FDI into the UK — only China bucked the trend with small increase. Investments from Japan continued to decline, and investments from the EU and the US accounted for some 67% of all UK FDI projects in 2020, up from 64% in 2019. 

Despite such negative shifts, it appears that the UK has weathered the storm of COVID-19’s effects on FDI. Investor confidence did fall back in 2020 as the UK battled the pandemic: our survey in autumn 2020 found the UK was ranked behind Germany and France for post-pandemic attractiveness, and intentions to invest had fallen by 20% from the spring. But since then the mood has changed dramatically.

In our latest survey, the UK is ranked as the most attractive investment destination in Europe. And 41% of respondents plan to invest here in the next 12 months, the highest rate ever in this research. What’s more, a net positive 30% expect the UK’s attractiveness to improve over the next three years, compared to a net negative 29% in 2020.

Which European countries do you believe will be the most attractive for foreign investment in 2021?
Chart: Which European countries do you believe will be the most attractive for foreign investment in 2021?

Even allowing for the need for caution in interpreting survey responses in an uncertain environment, these findings are very encouraging. The UK’s successful vaccination program appears to have played a major role in improving confidence: investors now view the UK as having the best COVID-19 recovery plan in Europe.

To regain its place as the market leader, the UK will need to build on its strengths. Digital technology and health and wellbeing are key growth areas for the UK - areas where the country already excels.
Alison Kay
EY UK&I Managing Partner for Client Service

The UK is now well-positioned for future growth in FDI

With the improved investor sentiment providing a strong platform for ongoing FDI, the challenge now for the UK is to build on it. When asked to pinpoint the UK’s future growth opportunities, 54% of investors identify digital and 34% health and wellbeing as the main drivers. As the European leader in digital projects in 2020 and second only to France in health and wellbeing, the UK is well-placed for growth in these sectors.

One sector where more work is needed is cleantech. While 19% of investors cite cleantech as a growth opportunity for the UK, up almost fourfold since 2018, the equivalent score for Europe is 39%. And cleantech is important not only as a sector, but also in shaping investors’ overall perceptions of a country: 60% say strong sustainability policies are important when choosing investment destinations. 

In your opinion, which main business sector will drive the UK's growth in the coming years?
Chart: In your opinion, which main business sector will drive UK's growth in the coming years?
In your opinion, which main business sector will drive Europe's growth in the coming years?
Chart: In your opinion, which main business sector will drive Europe's growth in the coming years?

Investors’ perceptions of the UK’s regions and countries are levelling up

Turning to the UK’s regions and countries, it seems that the message about ‘levelling up’ is beginning to land with investors. London regained its status as the most attractive city in Europe for FDI, overtaking Paris. But there does appear to be a welcome shift in the balance of attractiveness across the UK. While London remains the UK’s most attractive destination, cited by 25% of investors, this is down by nearly half from 46% in 2019, the last time we asked this question. By contrast, 15% of investors – more than double the proportion in 2019 – identify Scotland as their preferred location, and nearly every region in England has improved its score. 

Which region in the UK do you see as the most attractive to establish operations in?
Chart: Which region in the UK do you see as the most attractive to establish operations in?

The view that the ‘levelling up’ agenda is cutting through to investors is reinforced by the fact that 61% are aware of the policy. And there’s scope to build on the opportunity: 45% of investors are planning to change their supply chains, with 20% considering reshoring to the UK. With the potential manufacturing and logistics opportunities likely to fall outside of London and major cities, this may present a one-off opportunity to reshape the UK’s economic geography.

In a competitive and demanding market, there’s no room for complacency

With the UK, France and Germany all within the narrowest range for a decade in terms of projects attracted in 2020, and investors expecting generally lower levels of FDI for the foreseeable future, competition for projects will remain intense. Since 2016, the UK’s attractiveness to investors on a range of important criteria – such as political stability, labour skills and quality of infrastructure – has fallen by around a quarter on average. The message? There’s no room for complacency: to sustain its FDI momentum, the UK must continue to improve its offer to investors.

Summary

While the flow of FDI into the UK in 2020 was impacted by uncertainty springing from the COVID-19 pandemic, the country’s FDI performance during the year was much stronger than previously feared. With the UK suffering a smaller decline in projects than Europe as a whole, and the UK’s total coming in only just behind first-placed France, the country more than held its own in a declining market. And despite an increasingly competitive environment for FDI, investors’ rating of the UK as being Europe’s attractive FDI destination with the most appealing post-COVID-19 recovery strategy bodes well for future UK FDI.

About this article

By Alison Kay

EY UK&I Managing Partner for Client Service

Focused on delivering long-term value through purpose for clients. Diversity and inclusion ambassador. Happiest when spending time with family and friends. Loves to be near the ocean.

Contributors