5 minute read 31 May 2022

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

ey person exploring

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

Authors
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.

Peter Arnold

EY UK Chief Economist

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.

5 minute read 31 May 2022

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

In brief
  • Inward investments into the UK rose by 1.8% in 2021 to 993 projects, regaining some lost ground after a 12% fall in 2020.
  • The stronger growth in projects across Europe — at 5.4% — meant the UK’s European market share slipped to 16.9% — its second lowest in 10 years.
  • Investors’ views of the UK as an FDI location have improved in 2022, with 58% planning to invest — giving grounds for optimism over future growth.

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).

EY UK Attractiveness Survey 2022

993

FDI projects secured by the UK in 2021, 1.8% growth compared with 2020 (975 projects)

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

figure 2 Leading European Destination
Register to download the full report: EY Attractiveness Survey 2022 (PDF)

The European market is changing in terms of sectors

Investments in digital technology and business services — Europe’s two largest sectors over the decade and core UK strengths — were down by over a fifth across Europe in 2021 compared with 2019. By contrast, manufacturing projects in 2021 (2,704) were above the annual average between 2014 and 2018, and 33% higher than in 2020.

This suggests the long-expected realignment of supply chains is underway. With Europe’s utility projects up by over 50% in the past two years, and health and well-being growing by almost a fifth , the impact of changing policy priorities is clear. The UK claimed a market-leading share in both sectors.

The international geography of UK FDI origins is shifting

Whilst the US remained the largest source of UK projects in 2021, its share was just 24% — way off its 2012-high of 39%. Meanwhile, India overtook Germany and France into second place amongst UK origins with 64 projects — up from 50 in 2020. Turkey emerged in sixth place with 38 projects.

Domestically, London remains subdued — whilst Scotland and Bristol perform strongly

2020 saw a major shift in the UK’s regional FDI landscape, with London’s share of incoming projects down by almost 10 points to 39.3%. In 2021, this market share was almost unchanged — at 39.7%. However, London remained Europe’s leading FDI city: its 394 projects in 2021 was way ahead of Madrid’s 140 and Paris’ 133.

Outside of London, Scotland had another strong year, securing 122 projects (14% rise) — meaning it garnered 12.3% of the UK total. Elsewhere, FDI in most regions and devolved administrations reverted towards 2019 levels. The main gainers were the South West — 30% up on 2019 driven by Bristol — and the West Midlands and Northern Ireland — both up around one-fifth.

The UK’s FDI outlook is positive, both short- and medium-term

Encouragingly, our investor survey reveals very positive sentiment towards UK investment. Some 58% of the investors are planning to invest in the UK in 2022 — up from 41% last year and the highest level ever recorded. 49% think the UK will be more attractive in three years’ time — slightly down from last year’s 52% — but still very strong historically.

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.

Summary

Whilst the number of FDI projects secured by the UK returned to growth in 2021 after falling sharply in 2020, a bigger rebound in projects across Europe meant that the UK’s European market share declined. However, several factors indicate better times ahead for UK FDI flows. One such factor is the UK’s continuing strong performance in attracting new projects and digital investments — being the European market leader for both. Another is investors’ increasingly positive perception of the UK as an FDI destination, with 49% expecting its attractiveness to improve over the next three years. So, the outlook remains relatively bright.

About this article

Authors
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.

Peter Arnold

EY UK Chief Economist

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.