The North and Midlands driving growth…
Growth in the regions outside of the South East was the key driver of the UK’s FDI growth in 2015 according to EY’s 2016 UK Attractiveness survey. The major success stories among the English regions were the North West (118% increase), North East (83% increase), Yorkshire & Humberside (66% increase), and the West Midlands (46% increase). While Scotland had its most successful year ever, recording a 51% rise in projects and so securing 35% more projects than its previous highest level (in 1997).
In terms of aggregated geographies, the performances of the recently created ‘Northern Powerhouse’ and ‘Midlands Engine’ have improved markedly in recent times. The Northern Powerhouse in particular has recorded a 127% increase in projects over the two years since the phrase was coined. By contrast, London’s modest rise of 7% in project numbers was outpaced by the UK as a whole, meaning London’s market share of UK projects declined to 38% in 2015, having been as high as 47.6% in 2013. London continued to grow but many other regions grew even faster.
…with cities to the fore across a range of sectors and geographies.
The regional growth is underpinned by very strong performance by a number of cities. Manchester, Leeds and Birmingham are leading the way in England and Edinburgh and Glasgow in Scotland. The UK’s largest cities have performed particularly strongly in attracting Business and Financial Services investment historically but we are now seeing HQs and R&D moves as well.
We may also be seeing the first signs of the impact of the growth of digital activity. The Northern Powerhouse attracted 30 software investments with 12 in Manchester alone and Scotland achieved 19 projects with 9 in Edinburgh. This compares to 29 in the South East, traditionally the leading region outside of London for technology sector investment. Software may be a city centre business in contrast to the use of our out of town business park sites for the traditional technology businesses.
2015 was the first year in which investment from the European Economic Area (EEA) was the largest source of UK FDI overall but the EEA has been the leading source of FDI into the English regions for several years. There are also pockets of specific country strength up and down the country. India was a significant investor in Yorkshire and the West Midlands, the North East was the leading destination for Japanese investment and the Northern Powerhouse was very successful in attracting FDI from the Netherlands.
The message is clear, investors like the devolution story…
FDI can be volatile year on year and we are therefore careful not to rush to conclusions, but investors do seem to like the devolution story. In our survey of 444 foreign investors, 42% of those with a view said it made the UK more attractive and the increased project numbers seem to back this up.
…but it needs to be shared more widely…
However, only 38% of the 444 foreign investors we surveyed had heard of the policy and 47% of investors still identified London as their preferred destination in the UK. There appears to be an obvious quick win by running a campaign to increase awareness amongst foreign investors.
…and the key promises must be delivered on.
While most regions of the UK had a great year for FDI in 2015, competition is increasing across Europe. Asked what drives investment in regional locations in the UK, investors cited local skills and transport infrastructure as the two most significant factors by some margin. For investors not established in the UK, the availability of business partners and suppliers and the strength of local business networks were relatively important, for understandable reasons, compared to established investors.
…with London airports, roads…
When we asked investors what types of transport links have the strongest influence on their decisions about investing in the UK, roads are mentioned most often in investors’ top three, but more investors (26%) cite London airports in first place than they do roads (24%). Regional airports have also increased in importance in the past year, possibly as more investors become familiar with the UK regions, their transport priorities evolve. It is clear there is a pressing need to resolve the London airport issue, provide a clear plan for regional airports and build more roads.
Improving skills is the other priority. We believe there is a digital divide in skills in the UK. We identified this issue in our EY UK Regions and Cities forecast last year and the FDI project data provides further evidence of the challenges facing the regions.
…and digital skills the most important areas to deliver on.
The dominance of London and the South East for “Digital” projects is significantly greater than for FDI as a whole. Our view, taking our previous work into account, is that skills are a key factor in this discrepancy. The R&D project results offers hope. London and the South East still lead on projects, but by a significantly smaller margin than for “Digital”. The strong performance of Scotland in particular, probably reflecting the strength of its universities and their collaboration with business, offers an example of the benefits a concerted skills “rebalancing” programme can bring.