Rebalancing to the UK Regions: All roads lead to Manufacturing

Inward investment performance varies by region…

The coalition Government came to power determined to “Rebalance” the UK economy but EY’s 2013 UK Attractiveness Survey suggests that in terms of attracting inward investment to the English regions the policy has not been a success to date. Total Foreign Direct Investment (FDI) projects flowing to the UK  increased by 10% between 2010 and 2013, with the number of projects going to London increasing by over 30% and projects in Scotland, Northern Ireland and Wales  were up by over 60%, 50% and 25% respectively. But, by contrast, there were 20% less projects in the English regions in 2013 than in 2010.

The South East and East regions were the only two regions to increase projects in this 3 year period although the North West and West Midlands are on an upward curve and achieved close to their 2010 levels in 2013 and, along with the South East, remained in the top 3 English regions outside of London. However, the remainder of the English regions suffered a decline.

…with clear winners and losers…

The EY data on inward investment provides the basis to analyse long-term trends since 2004 in order to identify what factors drive the performance of inward investment into the UK regions. Over a ten-year period (2004-2013), four English regions, West Midlands, North West, South West, East Midlands, have seen their FDI project numbers increase and four, the South East, East, North East and Yorkshire, have seen project numbers fall. The South East seems to have suffered in comparison to London with a fall from 41 to 27 in the number of projects originated by investors from the USA, primarily as a result of a fall from 26 to 13 in the number of Software projects, many of which have gone to London. The other factor impacting the South East has been its loss of 11 of the 16 electronics and telecommunications projects it won in 2004.

The same appears to be true of the East: investments from the USA fell from 19 to 10 in the period, and software and electronics investments accounted for only 2 projects in 2013 compared to 21 in the peak year of 2005.The performance of the South East and East appears to be directly as a result of London’s emergence as a technology hub over the last decade. But what of the other regions?

The North West, South West and East Midlands are regions with a broad-based appeal to investors from different geographies across a range of sectors. All have a significant and reasonably stable base of projects from the USA and at least one European origin, usually France or Germany. Although the North West had a spike in Logistics investment in 2013, probably reflecting the contribution of good infrastructure and an international airport, this region and the South West have investment profiles that are similar to the profile of the UK as a whole and so are better able to cope with peaks and troughs in the market than less diversified regions. The East Midlands tends to attract a broad spread of manufacturing businesses which helps to smooth the peaks and troughs in individual sector investment.

By contrast, the North East and Yorkshire lack either a core investor or a strong set of core sectors. Both have seen investment from China and the USA collapse over the last decade and have suffered as their manufacturing base has weakened.The North East has benefitted from Japanese investment in the automotive sector but is now very dependent on this sector which accounted for 15 of its 23 projects in 2013.

The West Midlands has only grown its projects from 46 to 47 in the period, but is in many ways the region with the most interesting story. The relatively low overall growth masks a dramatic transformation with investment from the USA replaced by projects from Germany and India with an increase in automotive and food manufacturing replacing machinery and software as key sectors. The region appears to have real momentum and a solid base from which to move forward having effected a real transformation.

…which highlight the key drivers of success…

The performance  of Scotland, Northern Ireland and the more successful regions in England indicates that a diversified local economy, good infrastructure, including an effective international airport, and the pulling power of  a strong city are important drivers of success in attracting FDI. The poorer performing regions tend to have a limited core offer and no focal point, Yorkshire & Humber seems to suffer particularly from competition between a number of cities with no strong focus nor overall co-ordination. The examples of the West Midlands reshaping its offer around specific Manufacturing sectors, and the success of automotive in the North East hint at a way forward, potentially in sectors which were previously thought of as ones which the UK could not compete in.

…and a way forward with Manufacturing at the core.

Cutting through the messages, it is clear that the regions offer the opportunity to rebuild elements of the UK’s Manufacturing base. The good news is that there is currently an unprecedented opportunity in Manufacturing. There were 2,000 Manufacturing FDI projects in Europe last year and the UK captured a 12% share. Increasing the UK’s performance to its average share of FDI would attract an additional 80 projects a year and around 13,000 direct jobs and possibly half as many again indirectly supported positions, so a total of 20,000 a year.

Then there is the emerging Reshoring opportunity which is increasingly gaining attention. As China rebalances its economy and the world economy continues to change so Manufacturing is being reshaped. If the UK is to rebalance towards the regions then Manufacturing offers the best opportunity. Success will require:

  • Developing a strategy to exploit the strengths of the regions for Manufacturing, which, according to investors, are primarily in areas such as labour supply and wage rates and real estate costs, by identifying the sectors and origins which the UK could build a competitive position in,
  •  Increasing the awareness of exactly what the UK regions offer – investors currently are largely unaware of the attributes of the UK regions according to the EY survey and tend to form their view of the UK, based on their perception of London;
  • Improving the co-ordination of the offers,  and prioritize skills development and promotion of the regions –
  • Investing in infrastructure to make the regions accessible and better connected to the UK’s export markets; and
  • Identifying ways to leverage London’s strengths through partnerships with the regions.

Success could create relatively well paid, secure jobs outside of London and go a significant way to address some of the major challenges currently facing the UK economy and especially the desire to rebalance between London and the rest of the country.


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