The Battle for Inward Investment – positioning for the next wave

Perspectives on the Global Investment Conference

In his welcome address to the Global Investment Conference in London, Steve Varley, Chairman of Ernst & Young UK, set out very clearly the challenges facing the UK in its efforts to attract inward investment.  Outside of Europe, the world economy is recovering and capital is on the move but it is leaving Europe and the drivers of investment are changing.

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The challenge is to understand what is driving capital allocation. Listening to the political debate in the UK, membership of the European Union is seen by politicans as a major issue for business. However, Ernst & Young’s survey of 300 actual and potential investors into the UK, shows that American and Asian providers of capital are more relaxed about the UK/EU relationship and see potential benefits from the Uk adopting a looser relationship and possibly gaining greater flexibility to offer to investors. By contrast, European investors are much keener on the status quo. The lesson is that politicans need to be clear on what drives corporate decisions and recognise international business may have different prioritites to domestic citizens.

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I spent last week talking to EY industrial clients in the USA. For them, the two key economic drivers of location decisions are not the UK/EU relationship but:

– being close to the demand for their products

– producing at the lowest cost

Location decisions are as dynamic as they have been for decades as the model of offshoring production that has gone almost unquestioned for the last decade comes under scrutiny. In part this refelcts the impact of external shocks in Asia such as the Tsunami and earthquake which have caused companies to look at their supply chains, but it also reflects economic changes.

As China rebalances its economy, locating in China to sell in China becomes more important but other locations such as Indonesia and Vietnam may be preferred as locations for addiitonal capacity reflecting cost inflation in China. Meanwhile, factors such as the improvement in the relative competitiveness of the USA and concerns over the impact of offshoring on innovation capability have led to an increased interest in reshoring: relocating production back to the west.

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The UK has been the leading destination for inward investment in Europe for the last decade with strengths in key sectors such as Business Services, Software and Financial Services. Being the leader in Europe may well be less important in future as Europe’s economy shrinks relative to the rest of the world. As well as continuing to exploit its strengths, the UK must consider how to position itself to capture the potential benefits of the changing economics of manufacturing, electronics and other key sectors and be a leader in the next wave of inward investment.


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