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

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

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. 

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.

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.

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. 

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. 

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.