A strong year…
2012 was a very good year for UK in attracting inward investment according to Ernst & Young’s European Investment Monitor, the most comprehensive analysis of inward investment projects in Europe. The UK retained its lead in European FDI (Foreign Direct Investment) projects, with an increase of 2.7% in the number of projects secured and, amid a 2.8% decline in FDI projects across Europe, an increase in market share – reversing the pattern of the previous year, when UK projects fell amid a Europe-wide rise.
This strong performance was supported by positive indications from investors that the Government’s efforts in areas such as taxation, trade missions and support for SMEs are gaining traction. Moreover the UK’s entrepreneurial culture is also seen as having strengthened significantly in the last 12 months. The UK secured 29 of the 168 HQ relocations in Europe, a market leading amount up from 12 in 2011, almost certainly reflecting the competitiveness of the UK corporation tax regime.
…but warnings signs of future challenges from Germany…
However, a closer look at the FDI figures and survey findings highlights several warning-signs that the competitive pressure from Germany on the UK’s coveted lead in European FDI continues to intensify:
- The UK slipped behind Germany in 2012 for the first time in new projects , as opposed to reinvestments from existing investors;
- Germany outperformed the UK in the attraction of Sales & Marketing investments for the first time, a traditional area of UK leadership;
- Global investors rank the UK second behind Germany among Europe’s most attractive countries for FDI over the next three years; and
- Germany maintained its lead over the UK in attracting projects from emerging sources of FDI such as China.
These findings suggest that¾on current trends¾ the UK will have to work even harder to retain its position as the leader in overall projects over the next few years.
…and more generally
The UK’s performance in attracting FDI is driven by a number of key factors which have historically been real strengths but which will require attention in future to ensure they do not become weaknesses.
- London would be the 4th biggest country in Europe as a destination for inward investment and is the only city in Europe to make the Top 10 cities ranked by innovation potential globally. However, there is a concern that the rest of England may get lost in London’s shadow. Investment in England outside of London was 24% below the level in 2010¾a decline that has coincided with the closure of the Regional Development Agencies and the switch to Local Enterprise Partnerships. In contrast, Scotland, Wales and Northern Ireland, in the first year of their devolved administrations, recorded large rises. If it continues, the weakness of the English regions could damage the UK’s overall ability to attract FDI in comparison to countries such as France and Germany which have much more balanced regional portfolios.
- The UK’s continuing lead in Europe is largely due to its position as US investors’ destination of choice. While the UK’s reliance on the US for FDI is sometimes portrayed as a weakness, this need not be the case if the UK sustains its strong FDI relationship with the US while, at the same time, building stronger relationships with other sources of FDI. The UK regained its position as the leading destination for Japanese FDI into Europe in 2012 and it should now target other attractive sources of FDI.
- The UK maintained its lead in the fast growing business services sector in 2012, as well as in software and financial services, although project numbers in the latter two sectors. The UK also performed well in attracting R&D, having a market leading share of 23% of all investments in Europe. By contrast, the UK continued to struggle to attract manufacturing, electronics and chemicals FDI, three sectors which are seen as having real growth Investors still identify Financial Services as the UK’s main strength but it is a sector in decline, The UK must now identify the sectors in which it can develop a meaningful competitive advantage
Europe – a potential opportunity
There are signs in the pan-European FDI figures that the euro crisis presents opportunities for the UK. Capital is on the move out of the Eurozone:French investment in the UK increased by 87% in 2012; Irish investment in the UK by 100%; and Spanish outbound investment in total grew 34%. By contrast, investment into Italy fell by 25% and into France by 13%. As my trip to meet manufacturers in Detroit highlighted, with investment into the UK appearing lower-risk than in the Eurozone, and fiscally-stressed euro states starting to invest more overseas to avoid the troubles at home, the euro crisis presents openings for the UK to sell its advantages as an FDI location to investors in Europe and beyond
No time to waste
Both the FDI figures for 2012 and the perceptions of the UK among international companies worldwide demonstrate clear progress, albeit overshadowed by the competitive challenge from Germany. The challenge now is to build on this progress and to define even more precisely the UK’s strategy for FDI. Financial Services is seen as the most attractive sector and London is overwhelmingly the preferred location for investment in the UK. This is too narrow a base from which to compete in a competitive global market. However, it would also be wrong to look to compete for every opportunity .The UK must define its strategy for competing for FDI by sector, function and region. This can then form the basis for a campaign to brand the UK with global investors. The real competitive battle is just beginning.