Press release

31 May 2022

Foreign Direct Investment into the UK rebounds in 2021 from 2020’s lows, but remains below 2019 levels, new EY report reveals

The UK and Europe recovered some ground after 2020’s pandemic-driven decline in Foreign Direct Investment (FDI) projects

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Related topics Growth
  • The UK and Europe recovered some ground after 2020’s pandemic-driven decline in Foreign Direct Investment (FDI) projects
  • UK recorded 993 inbound FDI projects in 2021 – up 18 projects (1.8%) from 2020’s 975 projects
  • UK remains second in the European league table for FDI projects, while stand-out performer France retained top spot; third-placed Germany hosted fewer projects than last year, falling further behind the UK
  • UK did better on project value, with FDI into the UK in 2021 expected to generate more jobs per project than in France or Germany 
  • London has retained its title as Europe’s most attractive city for FDI, but still less dominant within the UK than pre-pandemic. Scotland performed well once again 

LONDON, TUESDAY 31 MAY 2022 – The UK has retained second place in EY’s annual ranking of European countries by their ability to attract Foreign Direct Investment (FDI) projects, according to the EY 2022 UK Attractiveness Survey, with investment activity in Europe and the UK beginning its recovery from the pandemic. France held top spot for project numbers for the third year running, although the UK came first in Europe for new projects and led France and Germany on jobs per project.

The UK was home to 993 FDI-backed projects in 2021, up 1.8% from 2020 (975) and a return to growth after a pandemic-driven fall of 12% the year before (from 1,109 in 2019). This secured the UK a second-place finish for the third year in a row.

However, while the UK managed to close the gap to European leader France in 2020 to just ten projects, the number of French FDI projects grew 24% in 2021, from 985 in 2020 to 1,222 – a European record high. Meanwhile, third-placed Germany slipped 9.6% from 930 projects in 2020 to 841 in 2021. The UK’s share of European projects fell slightly to 16.9% in 2021, down from 17.5% in 2020 and 17.3% in 2019. The UK share of all European projects peaked at 21% in 2015. 

Overall, Europe recovered some ground after the pandemic-driven 13% decline in project numbers recorded in 2020. The continent saw 5.4% growth in 2021, with 5,877 projects recorded (up from 5,578), leaving Europe 8.3% short of its pre-pandemic level (6,412 projects in 2019) and 11.7% down on its 2017 peak (6,653). The pandemic contributed to significant variations in countries’ FDI performances in 2021: Italy’s project numbers were up 83%, for example, while Dutch projects were down 22%.

The latest survey also suggests a switch in European investment trends, with digital technology and business services projects – areas of strength for the UK – being overshadowed by manufacturing investment. Manufacturing project volumes in 2021 were above their immediate pre-pandemic average, with companies delivering on plans to re-shore supply chains. Meanwhile, US investment in Europe continued to fall, with a disproportionate impact on the UK. Although the US was still the single-biggest source of European and UK FDI projects, its shares of European (19.9%) and UK (24%) projects were decade lows, down from 27.5% and 39% in 2012. 

Alison Kay, Managing Partner for Client Service at EY UK & Ireland, comments: “The UK continues to be recognised as a leading destination for inward investment in Europe. Although the gap in the number of projects between the UK and France has widened, there are still many reasons to be optimistic. 

“The proportion of investors looking to back projects in the UK is at a record high. Also, the number of ‘new’ projects secured by the UK, which typically generate more jobs and higher levels of investment, was not only up on the year before, but was the highest level in Europe. 

“It seems the UK’s focus on attracting greater ‘value’ FDI projects over ‘volume’ is starting to bear fruit, building on the country’s recent successes in Research & Development and digital technology.

“However, there remains room for improvement. Investment into Europe has been shifting from services to manufacturing, a swing which leaves the UK with ground to make up. As we’ve said before, a drive towards ‘green’ manufacturing could help the UK attract investment, while accelerating progress towards sustainability and levelling up goals.” 

New projects and investor sentiment are encouraging for the UK – but war in Ukraine is a risk across Europe

The survey reveals that ‘new’ FDI projects represented over three-quarters of all UK projects in 2021 and were up 5% from 2020. By comparison, new projects increased by 1.9% in Europe, while French FDI projects were dominated by extensions – less than a third of French projects were new, falling to one-in-ten for manufacturing projects. The UK matched its decade-high share of new European projects, with one-in-five new projects launched here. 

The impact of having a high proportion of new projects can be seen in the jobs data: where job creation was reported, the UK averaged 68 new jobs per project, ahead of Germany (48) and France (38). Reported capital per project was also higher in the UK than it was in France.

Meanwhile, 58% of surveyed investors said they were planning to invest in the UK in 2022, up from 41% last year, and easily the highest level of investment intent ever recorded. By contrast, 53% of respondents said they intended to invest in Europe this year. Seventy-nine per cent of survey respondents feel UK attractiveness will stay the same (30%) or improve (49%) over the next three years – the highest level since the UK’s 2016 referendum on EU membership. 

However, as the impact of the pandemic fades – the share of investors scaling back projects fell from 35% to 19% – new risks have emerged. While 81% of respondents who took part in EY’s survey before 1 March 2022 said they planned to invest in Europe in the next 12 months, this figure fell to 25% for those surveyed after 15 March, suggesting that the war in Ukraine is a significant risk factor for investors.

Alison Kay adds: “While businesses may hope to invest significantly – making up for two years affected by the pandemic – new challenges will always emerge, and competition for FDI remains intense. The UK can’t rest on its laurels and will need to adapt to meet changing investor needs in order to maintain its attractiveness. Positive sentiment means the UK has an optimistic outlook, but investor intentions don’t always translate into investment actions. 

“The investors surveyed want to see the UK provide more support for FDI, prioritise access to new international markets through trade deals, develop policies on skilled immigration, back R&D funding, and focus on boosting workforce skills. Infrastructure and a country’s ability to deal with shocks continue to rank highly in the factors dictating where companies invest, while sustainability, deglobalisation and the changing nature of city centre economies are the key issues investors are grappling with.”

Digital investment projects remain the UK’s FDI backbone, while high value activity success continues

Despite a 7% decline in project numbers across Europe, the digital technology sector remains by far the leading sector in the UK’s FDI make-up with 345 projects recorded in 2021, up 7% from 2020 (322). Digital tech represents 34.7% of all UK projects compared to 20% of European projects. The UK’s next-largest sector, business services, attracted 94 projects. The UK leads the European market for digital projects (29.2% of all European projects, up from 25.5% in 2020).

Notably, the UK performed well in sectors identified by investors as among the key sources of future growth: utilities and ‘wellbeing’, which includes health, pharma and medical devices. The UK matched Europe-wide growth in utilities projects, with 51 recorded in 2021, up from 34 in 2020, leaving the UK with a 25.4% share of the European market. Meanwhile the UK almost doubled its wellbeing projects from 64 in 2019 to 119 in 2021 – enough to lead the European market with a 24.2% share of projects. The digital sector was again flagged by investors as the sector most likely to drive future UK growth. 

The UK’s manufacturing performance continues to show room for improvement, with the 145 projects recorded in 2021 equivalent to a European market share of just 8.2% (having been 12.6% and 183 projects in 2015). More positively, the UK performed well in other high value activities: Headquarters projects were up 40% from 2020 to 136, the third-highest total on record; the 111 R&D projects secured were only 2.6% down from the record 114 achieved in 2020, and still enough to be the UK’s third-best year for R&D.

Peter Arnold, EY’s UK Chief Economist, says: “It’s encouraging that several of the faster-growing and potentially higher-value sectors, such as tech and wellbeing, are among the most positive towards the UK as an FDI location. Despite the UK’s relatively poor manufacturing performance in recent years, two-thirds of manufacturers are looking to invest here in the next year – a figure which rises to four-fifths for the tech sector. The types of investment planned are tilting towards high-value activities too: around one-fifth of manufacturers and almost a quarter of wellbeing investors are planning R&D projects. Recent Government R&D funding announcements may be having their desired effect. 

“There are opportunities to expand in other important sectors, too. Investors are increasingly singling out cleantech as an expected driver of future UK growth – although they are still more likely to say cleantech will be a driver of European growth. Investors say the top two growth areas for cleantech in the UK are electric vehicles and battery technology, followed by a wide array of other areas, including heat networks and carbon capture. The scope of the sector and the UK’s active involvement – and, in some cases, leadership – in key parts of it underlines the scale of the opportunity on offer. It’s an opportunity the UK must realise if it is to develop and build new technology, not just deploy it.”

London remains relatively subdued, while Scotland goes from strength to strength

London remains the UK’s – and Europe’s – leading location for FDI, but despite a 2.9% rise in projects from 383 in 2020 to 394 in 2021, the city remains well down on the 538 projects it recorded in 2019. London’s share of the UK market held steady at 39.7% in 2021, having been as high as 48.5% in 2019. A decline in digital projects – there were 194 in London in 2021, down from 289 in 2019 – is the key reason for the capital’s relatively slow recovery.

By contrast, several other UK regions or nations either recovered to their 2019 level or bounced back further: Scotland led the way with 122 projects (up 14% from 2021), followed by the South East (82 projects, up 14%) and the West Midlands (78 projects, up 28%). In contrast, Yorkshire and the Humber (40 projects, down 27%), the East of England (40 projects, down 26%), Wales (17 projects, down 26%) and the North West (74 projects, down 13%) saw notable year-on-year declines. At a city level, Edinburgh and Manchester (31 projects apiece) were the top non-London performers, although both recorded fewer projects than in 2020. 

Reflecting London’s lower number of projects, the proportion of investors describing the city as the UK’s most attractive destination has fallen from 49% in 2019 to 27% this year. Scotland, meanwhile, has risen from 7% in 2019 to 16% in 2022. All other English regions and UK nations again scored beneath 10% this year.

Peter Arnold says: “Levelling-up as a policy idea has cut through, with almost two-thirds of investors we surveyed having heard of it last year. Awareness has turned into engagement this year, with a similar proportion saying levelling-up influences their location decisions and that they’ll look to invest where government support is available – although project numbers are yet to reflect this. Almost three-quarters of manufacturing and wellbeing investors are interested in the opportunities geographic rebalancing offers. 

“When investors are choosing where to invest within a country, the key factors tend to be skills and infrastructure. Interestingly, this year saw labour costs double in importance for investors, while importance of skills availability rose too, demonstrating just how significant the labour market is for investment. The strength of local business networks, support from regional development bodies and access to regional grants rounded out the top six factors for local investment decisions. The significant differences between investment decision making at a national and local level reinforces the importance of devolving power and fostering local ecosystems.” 

Notes to editors:

About the EY Attractiveness Report

EY’s Attractiveness Surveys analyse the attractiveness of a particular region or country as an investment destination. The surveys are designed to help businesses make investment decisions and governments remove barriers to growth. A two-step methodology analyses both the reality and perception of FDI in the country or region.

The evaluation of the reality of FDI in the UK is based on the EY European Investment Monitor (EIM), the proprietary EY database, produced in collaboration with OCO. 

We define the attractiveness of a location as a combination of image, investors’ confidence and the perception of a country’s or area’s ability to provide the most competitive benefits for FDI.

UK field research was conducted by Euromoney in March and April 2022 via online interviews, based on a representative panel of 442 international decision-makers.

European field research was conducted by Euromoney in February, March and April 2022 via online interviews, based on a representative panel of 501 international decision-makers.