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UK increases lead in European inward investment race, but EU Referendum threatens its future performance

EY

6 min read Partner content

The UK is Europes number one destination for inward investment, according to EYs UK Attractiveness Report released today.

The UK retained its leading position in Europe, recording 887 foreign direct investment projects (FDI) in 2014 - the largest number ever secured in more than a decade - representing an increase of 11% on 2013 figures.

This record performance by the UK was achieved against a 10% rise in the total number of projects across Europe, which attracted 4,341 investments, another personal best. The UK increased its market share of all European projects last year to 20.4%, its highest level since 2009, pulling away from Germany – the second most attractive destination for FDI in Europe.

Steve Varley, EY Chairman and Managing Partner in UK Ireland, said: “Global investors have a strong perception of the UK as an attractive place to do business. The relatively positive economic news from the UK, compared with other European countries, the Government’s efforts to foster FDI, and the UK’s dynamic labour market are likely contributors.

“The message that Britain is ‘open for business’ is getting across loud and clear to many existing and potential investors worldwide, but new strategies need to be developed to stay ahead in such a competitive market.”

Early signs that devolution could be a ‘game changer’

Although London remains the single most important location for FDI in the UK, attracting 381 projects last year, 2014 saw a resurgence of the English regions as FDI destinations.

The regional winners in 2014 were Yorkshire with a 140% increase in projects, South East England (up 49%) and the West Midlands (up 38%). Scotland was the second most attractive location in the UK for global investors to London, recording 80 projects.

Mark Gregory, EY’s Chief Economist, commented: “In the midst of glory, London’s share of inward investment stagnated in 2014, whilst English regions made large gains – a trend starkly represented when comparing the market share of ‘new’ projects, which surged in the English regions and devolved administrations, but fell significantly in London.

“There are signs that the UK economy is rebalancing with global investors favouring locations outside of the capital, which is good news for the UK’s overall future performance. To maintain its position as Europe’s number one destination for inward investment, the UK must broaden its appeal outside of London.”

The last time English regions (excluding London) recorded a higher aggregate number of projects (344 in 2014) was back in 1998, marking a regional FDI revival. And the outlook is rosy - 48% of investors surveyed as part of the report, viewed an increase in devolution of power to the regions as a positive development.

The UK has global appeal

The UK was the leading FDI destination for US investors in Europe in 2014. 36% of all investment projects locating in the UK last year were from the US. The next nine most important origins of UK investment – including France, Germany, Japan and China – collectively accounted for 42%, demonstrating the UK’s heavy reliance on US FDI.

In 2014 the number of investment projects secured from the BRIC economies by the UK stalled, namely due to a fall in Indian investment levels across Europe, of which the UK is the largest recipient. However, the UK attracted more projects from China than ever before, a sign that the UK’s efforts to build Chinese relationships are starting to bear fruit.

The UK’s industrial renaissance

The UK remained the leading recipient of investments from business services, software and financial services in 2014 – as it was in the previous year. 39% of FDI projects locating in the UK were from these three sectors compared to 28% at European level.

In 2014 the UK improved its market share in securing manufacturing investment, recording 13% of all European manufacturing FDI (up from 12% in 2013) and 10% of ‘new’ manufacturing investments (up from 6%), narrowing Germany’s lead. Overall the UK secured 164 manufacturing projects compared to 131 won by Germany.

One of the most significant developments in 2014 was the sharp rise in automotive assembly projects, which increased by some 79%. Other strong performing sectors were food (up 65%) and machinery equipment (up 24%).

Mark Gregory commented: “We have been led to believe that the UK cannot compete in manufacturing, but 2014 tells a different story – with a targeted effort the UK grew its manufacturing base in selected sectors. The resurgence of manufacturing projects is a positive trend in the quest to identify and tap into new sources of FDI growth and to rebalance the UK economy towards business investment and high-value manufacturing exports.”

Convincing ‘new’ investors

There is no doubt that the UK has a strong and sustained perception by global investors as an attractive place to locate. They value ‘the quality of life, diversity, culture and language’, ‘the stability of the social climate’, infrastructure and education, plus access to the European market.

In addition, investors remain confident in the future of the UK as an FDI location, with 27% of the 406 global executives surveyed, planning to develop activities here. Sales and marketing offices were quoted as the main type of investment planned (29%), followed by manufacturing (20%), supply chain and logistics (18%), and research and development (9%). They also expect the UK’s attractiveness to continue to improve over the next three years.

Gregory added: “Positive perceptions of the UK as an attractive FDI location are largely held by those that already have established operations. Convincing new investors to enter the UK market has to be a high priority in the UK’s future strategy.”

Investors plan to freeze investment in the UK in the run up to an EU Referendum

The uncertainty caused by a UK EU Referendum will be disruptive and is a risk to the UK’s FDI performance. 31% of investors stated they would either reduce or freeze their planned investments up to 2017. Nevertheless investors are clear that reform of the EU is required. Access to the European market is important for 72% of investors surveyed.

What’s next?

Despite its relatively strong position and assets in the global race to attract and secure FDI, the UK still has its challenges to overcome if it is to stay ahead of its competitors.

Overseas investors pointed to a reduction in the cost of operating in the UK – 50% quoted measures such as a decrease in corporation tax, improving real estate availability and cost, and lower labour costs as a route to higher future competitiveness.

Gregory concludes: “The UK made some significant steps in 2014 towards sustaining and extending its lead in an FDI competitive market. The next challenge is to build upon those gains, focus on attracting new investors rather than expanding existing ones, taking a targeted approach in selected sectors, and diluting our over reliance on US projects by chasing down investments from other powerhouses, including China.”

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