Way out in front but where next? Can UK inward investment success drive productivity improvement?

Another strong year, the UK pulls away from the pack…
Once again, the UK turned in an outstanding performance in attracting FDI in 2014. The numbers speak for themselves: a record number of 887 projects, up 11% on 2103; increased European market share; and a market leading 31,198 jobs created.

…with strength across a range of sectors and geographies…
The UK’s success was broad based.  Despite a second year of decline in Business Services projects across Europe, the UK grew its Software and Financial Services sector projects, captured 35% of all European HQ moves and led Europe in R&D projects . The UK achieved a leading market share of 29% of US projects in Europe and was the top destination for investment in Europe from France, Japan, Australia, Canada, India and Ireland.

…winning more Manufacturing projects than Germany.
The UK secured 164 Manufacturing projects in 2014 beating the 131 projects secured by Germany. This was based on strong growth in the Automotive, Food and Machinery & Equipment sectors. We have become used to being told that the UK cannot compete in manufacturing but the results suggest that there is untapped potential and more attention should be given to the makers.

With resurgent regional investment…
2014 saw significantly improved performance across the English regions, Northern Ireland and Wales. Yorkshire with a 140% increase in projects, the South East up 49% and the West Midlands with a 38% rise led the way. In total, the English regions secured 344 projects, the highest total since 1998 and a sign that UKTI’s attempts to support economic rebalancing are bearing fruit.
The upcoming referendum on European Union membership is a major risk to FDI…
Stability and political predictability feature prominently in the list of desirable attributes mentioned by investors and the UK has traditionally scored very well in this respect. The UK Government is committed to a referendum on the future of the UK’s membership of the European Union. With 72% of investors citing access to the European Single Market as important to the UK’s attractiveness the referendum has the potential to change perceptions of the UK dramatically, posing a major risk to FDI .  31% of investors told us they will either freeze or reduce investment until the outcome is known.

…but the good news is that investors view devolution very positively.
The EU Referendum risk comes at a time when FDI values are falling worldwide and a reviving Eurozone is likely to mean more competition to the UK for FDI in future years. One piece of good news is that proposals to devolve more economic decision-making power to the UK regions are seen as positive for UK attractiveness by 48% of investors.

Where next? No time to rest, the UK must maximise the economic contribution of FDI.
The UK’s performance in attracting FDI is a huge success story: rising numbers of projects, higher market share and large numbers of jobs created. Yet since the financial crisis, FDI projects have increased by 29%, a much faster rate of growth than both the UK economy as a whole and GDP per head. Even more strikingly, FDI volumes have grown much faster than productivity in the UK. This does raise a question as to the potential contribution of FDI to UK economic performance. Why do we appear to see very little impact on productivity from ever rising levels of FDI? What does this tell us about the desired future strategy for attracting FDI?

The priority for action: understand if the UK attracts the “right” FDI projects?
Since 2008, annual FDI project numbers secured by the UK have grown from 686 to 887 in 2014.  Unsurprisingly, there have been significant shifts in the mix of projects during this period. Sales & Marketing investments, typically when a foreign company sets up an office in the UK, have been the main driver of growth increasing from 314 to 466 projects over the 6 year period, a growth of 48%. After a dip in 2011, R&D projects have recovered and are about 10% up over the period. Recent success in attracting HQs to the UK has seen a doubling of projects since 2011 but volumes are still over 25% below the 2008 figure. Since 2012, and especially in the last 12 months, the real UK story has been the growth in Manufacturing and Logistics projects, led by the Automotive sector, up 34% on a combined basis. Does this offer an alternative way forward for the UK?

On a first review, there does appear to be a question about how significant an economic impact the dominant growth of Sales & Marketing investments has delivered to the UK. Any investment will stimulate economic activity but if the primary driver is to sell goods and services in the UK then the economic benefit may be less than from investments that bring capital investment and knowhow and potentially create a platform for export growth. The investments in the Automotive sector are a good example of productivity and export enhancing activity. Using our data, we plan to dig deeper into the relationship between FDI and productivity and to understand if changes in the mix of FDI could help boost productivity.

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