6 minute read 7 Jun 2021
scottish-man-in-highlands

Why rising FDI beckons for Scotland but engagement remains key

Authors
Ally Scott

EY Scotland, Head of Strategy and Transactions and 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.

Peter Arnold

UK&I Partner, Economic Advisory, Ernst & Young LLP

A passionate leader and trusted advisor. Over 20 years of experience in economic policy, regulation and competition. Optimising client strategies through the use of analytics and economic analysis.

6 minute read 7 Jun 2021

Scotland is outpacing UK and the rest of Europe in attracting and securing FDI, reaching its highest attractiveness level ever.

In brief
  • During 2020, FDI projects in Scotland increased by 6%, compared to a decline in the UK of 12% and a 13% decline across Europe.
  • Edinburgh, Glasgow and Aberdeen are in the UK’s top 10 FDI cities outside of London, with Edinburgh overtaking Manchester into first place.
  • Scotland’s investment destination attractiveness within UK rose to its highest level ever at 15%, more than double the 2019 7% figure.  

EY Scotland Attractiveness Survey 2021 has revealed that Scotland has bolstered its position as the UK’s most attractive foreign direct investment (FDI) location outside London. The country secured 6% more FDI projects in 2020 compared to 2019, against a backdrop of UK FDI projects falling by 12% and Europe FDI projects falling by 13% over the same period.

The rise in projects into Scotland within a shrinking UK marketplace saw Scotland’s share of all UK projects increase from 9.1% in 2019 to 11% in 2020 – a proportion exceeded only once in the past decade (2015). Scotland has been the second biggest recipient of UK FDI after London in every year since 2014.

New projects are at the highest number for 5 years (61 projects), after 3 consecutive years seeing a fall in projects. This performance ensured Scotland increased its market share of all new projects coming into the UK from 5.9% in 2019 to 8.4% in 2020.

Scotland’s ‘big 3’ cities (Edinburgh, Glasgow and Aberdeen) were all ranked in the UK’s top 10 FDI cities outside London in 2020, with Edinburgh placed first behind London, Glasgow fifth and Aberdeen seventh. Combined, these 3 cities accounted for 70 of the 107 projects secured by Scotland in 2020, up by 6 projects from 101 the previous year:

  • First place – Edinburgh (36 projects)
  • Fifth place – Glasgow (23 projects)
  • Seventh place – Aberdeen (13 projects)

Data on employment involved in each FDI project is less consistent and so levels associated are more volatile from year-to-year. Available figures indicate Scottish jobs generated by FDI projects in 2020 fell to 4,499 (below a decade-long average of 4,650 jobs a year), representing a decline of 30.1% from 2019, the high point of the decade. As a result, Scotland’s total UK employment share generated by FDI fell from 17.5% in 2019 to 16.1% in 2020 – Scotland’s third-highest proportion of UK FDI employment over the 10 years.

2020 Scotland FDI project performance

107

The number of inward investments projects secured.

With investment intentions into the UK at a record high, there’s every prospect of Scotland winning a proportion of a resilient pipeline of investments in the coming months and years.
Ally Scott
EY Scotland, Head of Strategy and Transactions and Managing Partner
(Chapter breaker)
1

Chapter 1

2020 top sectors and origins in Scotland

There’s been a shift in the top three leading sectors for FDI into Scotland.

The 2020 top three leading sectors generating inward investments into Scotland highlight diversity, with digital tech (19 projects), agri-food (14 projects) and business services (11 projects) leading the way. These sectors overtook last year’s top sector – machinery and equipment – which fell out of the top five. Oil and gas ranked fourth, with utility supply fifth – underlining the continued importance of energy projects to Scotland in 2020.

Sales, marketing and service projects were the leading activity for Scottish FDI (49 projects out of the total of 107), followed by research and development (R&D) projects in second place. Manufacturing projects declined, slipping to third position. The biggest percentage increase was in logistics projects, which more than trebled from 3 projects in 2019 to 10 in 2020, taking fourth place.

The US remained the single biggest originator of FDI projects into Scotland, accounting for 35.5% (38 projects) – slightly above the UK proportion as a whole. US projects into Scotland have increased in each of the past two years, and the country is substantially ahead of the next largest origin, with Ireland as the second biggest source of projects into Scotland with 10 projects, followed by the Netherlands with 8. Whilst these countries were ranked in the top 10 FDI origins for the UK as a whole in 2020, they were placed far lower, at sixth and seventh respectively.

(Chapter breaker)
2

Chapter 2

Perceived attractiveness of Scotland

One of the most heartening findings is on which UK region is most attractive to establish operations.

With its number of projects and market share of overall investments into the UK FDI both increasing, there’s no question that Scotland’s FDI performance in 2020 gives grounds for optimism over the country’s future project flows. This positive view is further strengthened by our annual study of overseas investors’ perceptions of the UK and its various constituent parts.

Scotland’s perceived attractiveness has doubled since the last time the question was asked in 2019. As 15% of investors now rate Scotland as the UK’s most attractive FDI location, reinforcing its position as second only to London in the UK. This score of 15% achieved by Scotland is its highest ever ranking in our annual survey. The scale of the shift that’s occurred since 2019 is illustrated by the fact that London’s vote as most attractive region has almost halved in the intervening two years, while Scotland’s has more than doubled from 7%. As well as being firmly established as the UK’s second biggest recipient of FDI projects behind London, Scotland is now also in clear second place in terms of attractiveness, well ahead of third-placed South-East England.

If Scotland and the UK as a whole are to secure their long-term attractiveness, both must now capitalise on their strengths and continue to meet investors’ changing needs.
Peter Arnold
UK&I Partner, Economic Advisory, Ernst & Young LLP

Investors also perceive the UK as having the most appealing post-COVID-19 recovery strategy in Europe, marking a big shift since the autumn of 2020. Equally positively, our 2021 research across Europe finds that the UK has leapfrogged Germany and pulled away from France to become the most attractive FDI location in Europe by a significant margin. This is another sign of the improving relative attractiveness of the UK after having been ranked third in Europe in 2018 and 2019 and then second behind Germany in 2020.

As investors consider where to locate their UK projects – and look increasingly outside London for locations – how can Scotland maximise its chances of securing FDI? It’s all to play for and our research shows that Scotland has a very strong hand.

Our perception survey shows that some 41% of the investors in our UK survey are intending to establish or expand operations in the UK in the coming 12 months, up from pre-COVID-19 pandemic levels of 31% in 2020, and 23% in 2019.  

When considering investing in UK regional locations outside of London, the criteria that investors rank as most important are:

  • Availability and skills of the local workforce
  • Strength of business network locally
  • Access to regional grants and incentives for investment and R&D

Scotland is bouncing back but engagement remains key

Beneath the headline figures in this report, there are further reasons for optimism almost everywhere you look: be it the rise of nearly one-third in ‘new’ projects into Scotland; the diverse spread of sectors for Scottish FDI in 2020, with digital tech leading the way; or the fact that more than twice as many investors cited Scotland as the UK’s leading FDI destination in 2021 than in 2019.

However, this is no time for Scotland to rest on its laurels. There has never been a more important time for business to engage with both UK and Scottish Government. Today, as we begin to move beyond the pandemic, engagement remains key in shaping the right policies, business environment and incentives to give companies continued confidence to invest.

True, our findings suggest the UK and Scotland are getting a lot right. But the global market for FDI will only become more competitive, making it imperative to keep listening and responding to what investors want. This includes recognising the rising focus on sustainability and cleantech – areas where Scotland’s strength is exemplified by Glasgow’s hosting of COP26 later this year.

Whatever the challenges, there’s no denying the good news in this report. In 2020 Scotland bucked the trend at a UK and European level by attracting more projects, while consolidating its position as the UK’s most attractive FDI location outside London. In doing so, it laid down a strong base for the future FDI. Now it’s time to build on that and to capitalise on the attractiveness of our country as a place to do business.

Summary

Amidst arguably the most challenging environment for FDI, it’s clear that Scotland has put in an impressive performance over the past year. The country increased its complement of projects secured in 2020, and positively increased its relative FDI attractiveness in UK in the eyes of the investors we surveyed. This all points to a bright outlook for FDI flows into Scotland. The optimism is further buoyed by investors’ ranking of the UK as Europe’s most attractive FDI country – with Scotland well-positioned to pick up a disproportionate share.

About this article

Authors
Ally Scott

EY Scotland, Head of Strategy and Transactions and 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.

Peter Arnold

UK&I Partner, Economic Advisory, Ernst & Young LLP

A passionate leader and trusted advisor. Over 20 years of experience in economic policy, regulation and competition. Optimising client strategies through the use of analytics and economic analysis.