The UK leads the European race for inward investment but challenges remain. Is Manufacturing the way forward?

2013 was an outstanding year for the UK…

The UK Government’s attempts to make the UK attractive to foreign investors are bearing fruit: in 2013, the UK attracted 799 FDI projects, its highest ever total and 20% of the European market according to EY’s 2013 UK Attractiveness Survey. This represents a 15% increase over 2012, high growth indeed when viewed against only 4% growth in Europe overall.

Investor perceptions also improved significantly. The UK moved from 8th to 5th in the global investor ranking of attractive locations over the next three years, moving past Germany. Only China, the USA, India and Brazil are ahead of the UK – an outstanding result. The UK is the leading destination in Europe for investment from the USA, India and Japan.

…with performance built on solid foundations…

The UK and Germany pulled ahead of the European pack in 2013, increasing their share of the European market as investors demonstrated  a clear preference for economic strength. In the EY survey, the UK scored over 80% approval in a range of features important to investors including stability of political climate, technology and telecommunications infrastructure and quality of life. Even in lower scoring areas such as labour costs and corporate taxation, the UK is regarded as significantly stronger than Germany.

And in London the UK has a jewel in the crown. If London was a country it would be fourth largest in Europe in terms of projects attracted. It is a hub for Software and Business Services investment and attracted 48% of all UK projects in 2013.

…facilitating a transformation of the economy’s sector mix…

This is not just a story of growth, it is also one of transformation: the UK is becoming a modern, knowledge based economy in the eyes of inward investors. Software projects in the UK surged by 55% in 2013 as the UK confirmed its dominance in this sector in Europe. London is seen as the only European city in the top 10 globally most likely to create the next Google. R&D was another success for the UK with 52 projects secured, a leading market share of 18% and representing 20% more projects than Germany.

…reflecting well on Government…

The UK Government deserves credit for enabling the improvement in the UK’s performance. 31% of investors feel the UK improved its financial flexibility and support for SMEs over the last year, 25% of investors identified improvements in taxation, 22% investment in industry initiatives and 21% support for trade missions over the last year. The success  in R&D owes something to the “Patent Box” policy and the UK’s leading share of HQ relocations has been helped by the reductions in corporate taxation.

…but there is more to do…

It may seem churlish to highlight weaknesses in such a stellar performance  but the UK cannot rest on its laurels. The market for inward investment is very competitive and so standing still is not an option. More importantly, there are several areas in which the UK can do better and must do better if it is to ensure the benefits of inward investment are felt by the whole country and can be used to address some of the UK’s most challenging economic problems.  The critical areas are:

  • The English regions have found it hard to maintain their performance in attracting inward investment and project numbers are down by 20% since 2010;
  • The UK achieves a 20% of European FDI but only 12% of Manufacturing projects and 6% of “new” manufacturing projects; and
  • The UK is overly reliant on investment from the USA and does need to broaden the geographic spread of origin of FDI.

To maintain and ideally improve the UK’s FDI performance a number of actions are essential:

  • Continuing to work to preserve the UK’s existing strengths such as taxation and political stability:
  • Confirming the UK’s status within Europe, leaving the EU will impact the UK’s ability to attract inward investment according to EY’s survey;
  • Working to attract R&D and incentivising innovation;
  • Increasing the awareness of the UK’s attributes especially amongst investors not currently in the UK; and
  • Examining ways to use London’s strength to benefit the country as a whole through joint propositions.

…and Manufacturing appears to offer real opportunity.

Looking beyond the narrow lens of FDI, while the UK economy is recovering challenges remain: London is growing faster than the rest of the country; real wages remain flat at best; and youth unemployment is at high levels. Boosting the UK’s share of European and global manufacturing appears to offer the best scope to create a major impact on the specific challenges highlighted above.  In 2013, more than 50% of all European FDI projects were Manufacturing originated, over 2,000 in total, creating 160 jobs per project on average compared to 18 for a typical Sales & Marketing project. Manufacturing offers the prospect of relatively well paid, skilled jobs, located outside of London and with the potential to train young workers. The UK should now raise its ambitions for FDI and put Manufacturing at the heart of its plans. More thoughts on this topic to follow in subsequent posts.

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