Foreign Direct Investment: UK remains second in Europe despite a fall in project numbers, new EY report reveals

• The UK recorded 929 Foreign Direct Investment (FDI) projects in 2022, down 6.4% from 993 in 2021 – France continued to lead Europe with Germany ranked third
• Total FDI projects in Europe were up just 1.4% in 2022 – with the UK’s share of the European inward investment market down to 15.6% from 16.9% in 2021
• But the UK performed well on project value, delivering the highest jobs total in Europe, more jobs per project than Germany or France, a strong R&D performance, and Europe’s most ‘new’ projects
• UK tech FDI projects were down 32.2% in 2022 – a key factor in the UK’s overall project decline – but the UK still led Europe in the tech sector
• All Northern regions, the East Midlands, the East of England and Wales saw Foreign Direct Investment (FDI) project numbers rise by 10% or more year-on-year in 2022
• London recorded 299 FDI projects in 2022, down 24% from 394 in 2021, marking the capital’s lowest number of projects in the last ten years – although London remained the UK’s #1 location for FDI projects

Quality – rather than quantity – of projects remains a positive for the UK

Despite a decline in overall project numbers, the UK continues to perform well on the value of projects it attracts, particularly with regards to job creation. For projects where expected job totals were reported, the UK led Europe on total jobs (47,000), ahead of Spain (39,000) and France (38,000). For the third year running, the UK (59) outperformed Germany (58) and France (33) on jobs per project. The UK also has a clear lead on large employment projects, with 103 projects that were expected to create over 100 jobs – a figure that falls to 89 projects in France, 62 in Spain and 48 in Germany.

‘New’ projects – as opposed to re-investments or extensions – are one way of assessing a country’s investment dynamism and ability to attract fresh investors, and the UK has retained its position as Europe’s leading country for new projects for a second year in a row. Of the UK’s 929 total projects in 2022, 646 were new. This was down 15.4% from 2021’s 764 new projects, although total European new projects were also down, by 8.5%. The UK’s 18.7% share of the new project market in 2022 was down slightly from its 20.3% share in 2021.

Disappointingly, the UK’s short-term performance in the survey of investor sentiment dipped from last year, with 32% of international investors surveyed describing the UK as being one of Europe’s three most attractive investment locations – down from 44% last year and behind Germany (62%) and France (49%). However, prospects for UK FDI remained strong on other measures, with two-thirds (65%) of investors saying they were planning on making an investment in the UK this year – a record high. Almost half (48.6%) of investors surveyed also said the UK’s investment attractiveness will improve over the next three years.

Digital investment projects decline, but remain UK’s biggest FDI driver

The UK’s leading sectors for FDI in 2022 were digital technology (234), financial services (76), business and professional services (70), utility supply (68), and agri-food (61). Significant falls in digital technology (down 23.3% from 305 projects in 2021) and business services (down 25.5%) made a significant contribution to the UK’s overall fall in project numbers. These falls counter-balanced notable gains in financial services, utility supply and pharmaceuticals, among others.

The decline in the number of UK FDI-backed tech projects from 2021 came amid an 8% increase for the sector across Europe as a whole. The impact of the UK’s shortfall in tech projects was exacerbated by the importance of the sector here: while tech accounted for 19.8% of all European FDI projects in 2022, it accounted for 25.2% of all UK projects.

Peter Arnold, EY’s UK Chief Economist, says: “The UK’s tech sector typifies the country’s overall performance: project numbers are down but value remains solid with smaller projects not being prioritised. The sector has faced significant global headwinds, while the UK’s loss of market share may also represent other countries playing catch-up in the wake of the UK’s stellar tech performance from 2016 to 2019.”

Other sectors to see notable falls included health and social work (down 24.5% to 37 projects) and medical devices (down 26.7% to 22), potentially reflecting the UK’s recovery from the pandemic.

In each of Europe’s top three sectors, the UK’s 2022 market share was well below its average share of the European market over the last decade. While still the highest in Europe, the UK’s 19.8% share of European digital tech projects in 2022 lagged its decade-average of 28.3%; its 9.2% share of business and professional services in Europe is half its average 19.9% share; and the UK’s 12.6% share of transportation and equipment manufacturing was just below its average 14.3% share.

However, in a boost for the nation’s green credentials, the UK reported 37 renewable energy projects in 2022, the second highest in Europe (alongside Spain and behind France on 39).

Positively, breaking down the UK’s FDI projects by activity reveals some high-value successes, with Research & Development (R&D) projects up 14.4% to a record 127 (behind only France on 144, up 8.3%), while 53.8% of surveyed investors plan to increase their UK R&D investments in the next three years. Notably, the UK led Europe on pharmaceutical and medical devices R&D centres (28 projects), with almost double the number of projects than second-placed France (15).

Meanwhile, projects to set up new corporate headquarters in the UK were down only 2.2% to 133, while manufacturing continued its recent rally, growing 20.7% to reach 175 projects – and bringing the UK’s share of European manufacturing FDI (10%) back in line with its average share of the market over the last decade (10.3%).

Peter Arnold adds: “The UK has seen gains in precisely the kinds of activities, high up in global supply chains, that policymakers have been seeking to promote. Manufacturing, R&D, and logistics are all up, while sales and business services activities are down. Policymakers will need to ensure that the high value-add investment is capitalised on further down the supply chain too though.

“There are still areas where the UK needs to catch-up on value. For example, only one-in-five UK industrial projects are linked to low-carbon mobility – green automotive and aerospace projects, for example – while this rises to two-in-three for Germany and Spain. That said, investors view the UK favourably on sustainability, with the country polling well on its potential for decarbonising the supply chain, the percentage of renewables in its energy supply, and having an ecosystem of innovative cleantech and sustainability businesses.

“Looking ahead, manufacturing is an activity to watch for both the UK and Europe. UK manufacturing has been slowly recovering from a recent all-time low, but further growth could be constrained by the risk that foreign multinationals will not significantly increase their manufacturing footprint in Europe. The appetite to establish production facilities in Europe is limited by high costs, the energy mix, and competition from the US in the wake of the Inflation Reduction Act."

US & India are the leading sources of UK investment – while the UK is ramping up its own investment in Europe

The United States remains Europe and the UK’s leading source of FDI projects, with the US a more significant investor for the UK than it is for the rest of the continent. One-in-four (24%) UK projects have their origin in the US versus one-in-five (20.8%) for Europe. The UK was the leading recipient for US investment in Europe with 17.9% of all US projects in 2022.

Whereas Germany was Europe’s second largest origin country for FDI (11% of all projects), India was the UK’s second most important source of FDI (8.8% of UK projects), with Germany in third (6.6% of UK projects). The UK accounted for 58.2% of all Indian-backed projects in Europe in 2022, up from 51.2% in 2021.

Peter Arnold comments: “The UK’s FDI origins are evidence of the country’s global approach, which has been particularly important since its departure from the EU. Places like India, Canada and Australia have risen up the list of the UK’s top investors in recent years, with the UK able to leverage strong cultural links to attract investment that isn’t as accessible for European competitors. The UK’s accession to the CPTPP and the potential for new trade deals, including with India, present further opportunities for an increasingly global tilt for the UK.”

For Europe, seven of the top nine leading origins of investment were other European countries, whereas for the UK, five of the top nine countries of origin were outside of Europe. Commonwealth investment continues to be important for the UK, with the UK securing 50% of all Australian projects in Europe and 24.7% of all Canadian projects.

In the other direction, the UK was the third largest source of investment projects into Europe (8.7% of all projects), while the 516 outbound UK projects in 2022 were a record high – up 15.4% from the 447 in 2021, and more than double the 230 outbound projects recorded a decade ago.

Germany and France are the leading destinations for UK investment in Europe, and in both cases the UK instigated more projects in these countries than it received in return – a reverse of the situation pre-2017, with UK businesses now looking to establish operations in the Single Market. While UK businesses undertook 95 projects in Germany in 2022, 61 German businesses launched investments in the UK. The difference was more pronounced for French investments, with 104 UK-backed projects in France and 43 French investments in the UK.

The North sees strong growth in FDI projects as London loses market share

Over half of the UK’s nations and regions attracted more Foreign Direct Investment (FDI) projects in 2022 than they did in 2021, despite a fall in overall projects for the UK. The UK’s 6% decline in FDI project numbers between 2021 and 2022 was driven by falls of 24% in London and 18% in the South East.

London (299 projects) was still home to the most FDI projects out of any UK nation or region in 2022, but its share of all UK projects has fallen to 32% from a high of 49% in 2019.

Scotland (126), the North West (88) and West Midlands (74) recorded the most projects outside London, while the biggest gains in England from 2021 were seen in the North East (33%), Yorkshire and the Humber (28%) and the East Midlands (23%). The North West (19%) and East of England (10%) also recorded double-digit percentage growth.

The English regions joining London and the South East in seeing project declines from 2021 were the South West (down 17%) and the West Midlands (down 5%). The South East is now home to the UK’s fifth highest number of FDI projects, down from third position in 2021. The North West, by contrast, has gone from fifth to third.

The strong results across the North – all three regions saw double-digit growth – were underpinned by resilience in the digital sector and growth across a range of key activities, including manufacturing, sales, research and development, logistics, and headquarters projects. Growth in transportation, manufacturing and digital tech, as well as wider logistics and manufacturing activity, boosted the East Midlands, while a strong performance in pharmaceuticals and research and development helped growth in the East of England.

Meanwhile, declines in the digital sector were the biggest drag on performance for the South of England. Digital projects in London almost halved from 194 in 2021 to 107 in 2022, with significant falls also seen in the South East and South West.

Hywel Ball, EY’s UK Chair, said: “The strong FDI performance of Scotland, Wales and many of England’s regions in 2022 is a clear success for the UK. Notably, when asked to identify the policy area in which improvements would most increase the UK’s attractiveness, the investors we surveyed were most likely to pick the geographic rebalancing of the UK economy. While London’s attractiveness will endure, despite ups and downs, policymakers need to build on the clear interest in investment outside the capital.

“At a national level, according to our survey, the UK’s attractiveness rests on the size of its domestic market, strengths in education, its regulatory landscape and diverse cultural life. But regional investment drivers are different: access to grants and incentives, skills and infrastructure, the prominence of local business networks, and support from regional economic development organisations were the top considerations highlighted by investors.

“Investment success stories, like Manchester and Edinburgh, demonstrate how local decision-making can help create a business-friendly environment that aligns with an area’s specific needs. Meanwhile, investment zones, already under consideration by the Government, often offer tax incentives, streamlined regulations and access to infrastructure among other features – which are among some of the factors cited by investors as being attractive about the UK as a whole. By empowering local areas to make decisions and implement policies that support inward investment, the UK can tap into its regional potential and attract diverse investment opportunities.”

London remains attractive to investors, while Manchester ranks in second place for FDI

Despite London’s decline in project numbers, the capital still secured more projects than all but four European countries (France, Germany, Spain, Turkey) and also performed well in EY’s annual investor sentiment survey. Forty-three per cent of investment decision makers surveyed said they planned to establish or expand operations in London, well ahead of the 19% planning investments in Scotland. Similarly, 41% of survey respondents said London was the UK’s most attractive part of the UK in which to establish operations – up from 27% last year – compared to 11% picking Scotland (down from 16%) and 9% picking the East of England (up from 5%).

London had 299 projects in 2022 (down from 394 in 2021), followed by Manchester (45 projects, up from 31). Edinburgh (38 projects, up from 31), Birmingham (28, up from 17) and Glasgow (20, down from 23) complete the UK’s top-five locations. Manchester and Edinburgh performed particularly well in the digital tech sector.

On a jobs per project basis, Yorkshire was the UK’s leading region (with 89 jobs per project), followed by the South West (88) and the West Midlands (84). London (32), the East of England (38) and Wales (39) had the fewest jobs per project.

Digital tech still key for the UK, but manufacturing and utilities play key regional role

Despite the decline in digital tech projects, the sector remained the leading UK FDI sector. The latest data show it was also the top sector in Scotland, and top in seven out of nine English regions, with projects increasing from 2021 in four of these areas (the North West, North East, East of England and the East Midlands). London (107 projects) remains Europe’s leading location for digital technology projects by a substantial margin, with Berlin trailing on 75 projects.

While financial services (76 projects) and business and professional services (70) were the UK’s second and third largest FDI sectors in 2022, a significant proportion of these projects were in London. These sectors were only in the top-three sectors for three English regions, whereas the importance of transportation manufacture and supply – which includes car manufacturing – outside London was reflected in the fact that it was in the top-three sectors for five English regions. Utility supply was also in the top-three sectors for three English regions and was the leading sector in two (the North East and South West).

Sales and business services-related FDI projects were the most common type of activity in the UK in 2022 and appeared in all nine English regions’ top-three activities. It was the top activity in seven regions. Similarly, manufacturing, the second-most common activity across the UK, was in the top-three activities for seven regions and the leading activity in one (the North East). The third-most common activity, research and development, was a top-three activity in six English regions. Headquarters projects, the fourth most common activity, was only a top-three activity in London, while logistics was a top-three activity in four regions and the leading activity in one (the East Midlands).

The UK’s 28 projects linked to pharmaceutical and medical devices R&D projects was the highest number in Europe, and these projects tend to generate high-skilled jobs. The UK’s leading regions for perceived attractiveness among investors in the sector were the East of England, East Midlands and London.

Peter Arnold, EY UK Chief Economist, said: “Digital projects remain pivotal to FDI success across the UK, with digital transformation able to enhance competitiveness, productivity and innovation. London and the South East have delivered such a strong digital performance over the last five years that some drop-off was not unexpected. The rest of the UK has plenty of scope for catch-up growth in the sector.

“Beyond digital technology, the sector and activity mix outside of London is very different to what we find in the capital – something which could be very much to the UK’s advantage. The pandemic has shown the importance of investment in cutting edge pharmaceuticals and healthcare research, areas in which the East of England is already world-leading. And with sustainability and climate change high on investors’ agendas, clean technology is an increasingly important investment focus, providing the UK with the opportunity to play to its regional strengths.

“Expertise in manufacturing and utilities – key sectors in Scotland, the North and the Midlands – will be crucial to any efforts by the UK to establish itself as a place where clean technology is not just deployed, but also developed and built too. The UK’s green ambitions should go hand-in-hand with its levelling-up goals, and investment in clean technology means investment in the UK’s industrial heartlands.”