Press release

11 May 2023 London, GB

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

EY’s 2023 UK Attractiveness Survey reveals the UK ranks second in Europe for the number of Foreign Direct Investment (FDI) projects hosted in 2022.

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Nick Cosgrove

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  • 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 23.3% in 2022 – a key factor in the UK’s overall project decline – but the UK still led Europe in the tech sector
  • Regional FDI data and full UK Attractiveness Survey report published 19 June with Financial Services special report out on 5 June

The UK remains second in EY’s annual ranking of European countries by their ability to attract Foreign Direct Investment (FDI) projects, according to the EY 2023 UK Attractiveness Survey, despite activity falling in 2022. France held onto top spot for total project numbers for a fourth consecutive year, although the UK once again ranked highest in Europe for new projects and continued to deliver more total jobs and jobs per project than Germany and France – trends consistent with the UK’s pivot in strategy to focus on value over volume when attracting FDI.

The UK hosted 929 FDI-backed projects in 2022, down 6.4% from 2021 (993) and 4.7% down from the pandemic-affected 2020 (975). UK project numbers reached their record high in 2017 (1,205 projects). The UK’s 15.6% share of all European FDI projects in 2022 was down from 16.9% in 2021 and a peak of 21% in 2015.

A key factor in the UK’s overall decline in project numbers was a significant fall in digital technology, its leading sector for FDI. Tech projects declined by almost a quarter (23.3%), from 305 in 2021 to 234 in 2022, with the UK’s share of Europe’s digital projects falling from 29.2% in 2021 to 19.8% last year as Europe played catch-up to recent UK growth in this sector. Despite its fall in market share, the UK still led Europe for tech FDI.

Political uncertainty and the ongoing impact of Brexit on trade and investment will likely have played a part in the UK’s performance – but Europe-wide factors, such as high energy prices and high inflation, will have had an impact on the UK’s attractiveness too.

Meanwhile, France consolidated its position as Europe’s FDI leader, with total projects increasing by 3.0% from 1,222 to 1,259, breaking the European project record for a second consecutive year. Across Europe, project numbers increased by just 1.4%, from 5,877 in 2021 to 5,962 in 2022 – still 7% below 2019’s pre-pandemic total of 6,412. Third-placed Germany saw its fifth successive decline in projects, registering 832 in 2021, down 1.1% from 841 in 2022. Spain, in fourth, saw a 10.2% decline in projects (from 361 to 324).

Alison Kay, Managing Partner for Client Service at EY UK & Ireland, comments: “Europe had a challenging 2022 for inward investment, with overall projects broadly flat. But, digging into the detail, the UK has a strong investment story to tell.

“Investment intentions are at a record high and almost half of the investors surveyed think the UK’s attractiveness will improve in the near-term. Significantly, the UK’s clear focus on project value over volume continues to bear fruit. While the UK is behind France on the total number of projects, it is Europe’s clear leader when it comes to strategically important FDI. Over one-in-four UK projects were linked to Research & Development or new company headquarters – France managed under one-in-five – while UK projects tend to be linked to more jobs than those in France or Germany.”

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.