How FDI into the UK shows signs of strength in a changed world

UK inward investment projects return to growth — as investors’ perceptions of the UK improve strongly.

After the 13% decline in foreign direct investment (FDI) projects across Europe in 2020, the market returned to growth in 2021, with project numbers rising by 5.4% to 5,877. The UK remains second in the European league table for FDI projects (993), whilst the stand-out performer France retained the top spot (1,222).

UK slowly recovers on FDI volume — but powers ahead on value

Projects in the UK rose modestly in 2021. The 993 projects secured represented growth of 1.8%, partially reversing the fall of 12% in 2020. This gave the UK a market share of 16.9% of European projects — its second lowest of the past decade — and well below the high of 21% in 2015.

However, there was brighter news on value from UK projects in 2021. The UK’s total FDI employment creation of 60, 372 was the highest in Europe — 68 average jobs per project topped Germany’s 48 and France’s 38. UK secured a market-leading 20.3% share of the new (as opposed to expansion) projects in Europe — its best showing for a decade.

Leading European destinations of investment, 2012–21

Investors are voicing new concerns over investments

However, investment intentions should be treated cautiously, as new concerns are emerging. In our European survey, 81% of the investors surveyed before 1 March 2022 were planning to invest during the next 12 months. That proportion fell to just 25% of those surveyed after 15 March 2022, reflecting the war in Ukraine.

The priorities of investors have shifted, creating FDI growth opportunities in several sectors

As the pandemic eases, health and well-being has slipped from investors’ most important theme in 2021 to seventh in 2022. Whilst sustainability has gained one place to take top spot, the biggest movers are deglobalisation (up to second from eighth two years ago) and the changing economic model of city centres (up to third from fifth). Investors are also increasingly aware of the role of governments.  

Asked to identify the drivers of UK growth, respondents point first to digital technology — cited by 40% in 2022. This is lower than the 55% in 2021, but way ahead of 26% in 2019. Health and well-being is also highly rated — slipping to 26% in 2022 from 34% in 2021, but up from 15% in 2019. Cleantech remains a strong driver of UK growth (19%) — unchanged from 2021, but up from 5% in 2018. Energy has leapt from 9% to 19%.

Which sectors will drive UK growth in future?

Another opportunity for the UK is shifts in supply chains. Some 39% of 2022 respondents — including 79% of manufacturers — plan to change their supply chain model. 31% of UK manufacturers are planning to invest more in UK facilities and operations.

Country fundamentals remain important for policy

Asked how they choose between countries, investors’ top three criteria are the quality of infrastructure, how countries dealt with the pandemic, and the capacity to deal with future shocks. Whilst these were also the top three last year, infrastructure is now first, and the role of government has risen from sixth to fourth.

Investors have many expectations from the UK Government, and are interested in ‘levelling up’

Asked what domestic priorities the UK should focus on given their evolving criteria, respondents put telecoms, and transport and energy infrastructure first (47%). They also want government support (33% versus 34% last year) and access to new international markets (32%, up from 14%). Additionally, investors voice growing interest in the opportunities the ‘levelling up’ agenda may generate. In 2021, 61% of investors had heard of levelling up. In 2022, 59% say this policy now influences their location decisions.

Policy must support specific needs by geography

Turning to the criteria investors apply when considering UK regions outside of London, skills and infrastructure (both technology and telecoms) have historically topped their priorities. In 2022, infrastructure remains important at 32%, whilst skills are up from 21% to 27% and labour costs have doubled in importance to 24%.

There is a local flavour to the support investors require within a region. Their top six factors include the strength of business networks locally, support from regional economic development bodies, and access to regional grants. This layering of priorities requires devolved power to foster local ecosystems.

Sector support is vital — with digital, cleantech and supply chains as priorities

Correct sector focus is key — and digital investments will be pivotal. Asked where the UK Government should focus to support the UK’s transformation to a digital economy, investors have shifted away from digital technologies and infrastructure (down to 36% in 2022 from 48% in 2021), and towards digital R&D (up from 35% to 50%) and strengthening data protection (up from 36% to 48%).

Within cleantech, investors’ primary focus is electric vehicles and battery technology, followed by areas, including heat networks, carbon capture, green consumer products and low-carbon housing. This wide diversity underlines the policy opportunities — as does the 39% of UK investors planning to revamp their supply chains.