A mixed year that’s hard to call…
Anyone looking for easy answers as to how Brexit might impact the UK’s Foreign Direct Investment (FDI) performance in future is going to find EY’s 2017 UK Attractiveness Survey a challenge. This year’s survey is extremely difficult to interpret: for every positive indicator there is an equivalent negative development to take into account.
…as growth was solid…
The UK’s performance in securing FDI in 2016 was solid. The UK retained its place as Europe’s number one recipient of FDI projects ahead of Germany, with a 7% rise in total projects to 1,144 — the highest number on record. The UK was also the leading recipient of FDI jobs in Europe, recording a rise of 2% in FDI-generated employment to 44,700, over 20,000 more than second-placed Poland.
… but market share fell.
However, the UK’s 7% rise in project numbers was far outpaced by the increase across Europe as a whole, with FDI projects into Europe rising by 15% to 5,845. As a result, the UK’s market share of all FDI projects secured in Europe fell from 21% to 19%. Projects into Germany rose by 12% — faster than the UK but slower than projects into Europe as a whole. Employment created by FDI across Europe grew by 19% to 260,000 jobs, significantly faster than the UK’s growth rate.
There were some moves forward…
In terms of the types of FDI project activity in 2016, the UK had a successful year in attracting logistics in 2016, with the number of projects increasing by 30%. And although UK manufacturing plant projects fell slightly, the overall number of projects by manufacturers across the value chain increased from 355 to 374 projects. Financial Services and Business Services posted strong growth with the UK continuing to lead Europe in these two sectors.
…but also some declines across the value chain.
However, the UK’s share of European R&D projects also fell sharply, from 26% to 16%, meaning the UK’s share was the smallest since 2011. With UK FDI projects from software also slipping slightly, despite an increase in the sector across Europe, it would be right to worry about the UK’s future attractiveness to investors in key future growth sectors.
No immediate Brexit effect – Investor perceptions point to short-term stability …
EY’s survey of perceptions among investors globally reveals a split between their current plans and future expectations. On the positive front, the proportion of investors planning to establish or expand operations in the UK over the coming year is 24%, in line with the results over the past seven years. The UK has also regained second place behind Germany in investors’ ranking of Europe’s top three FDI destinations — a position it briefly lost to France in EY’s post-referendum study in autumn 2016.
Source: EY’s Attractiveness Survey 2017, sample (n=453)
… but longer-term perceptions are increasingly negative.
However, the perception findings also contain some worrying indicators for the UK’s future attractiveness of FDI. Our study shows that 31% of investors expect the UK’s attractiveness of FDI to decline over the coming three years, while 32% expect it to improve. While these figures are a marginal improvement from October 2016, they are significantly worse than both the long-term average and the high point of 2013 when 65% of investors had a positive three year view of the UK. These findings suggest that the Brexit vote and its aftermath may be having an influence on global perceptions of the UK’s medium to long-term attractiveness. Among investors based in Western Europe, 50% expect the UK to become less attractive for FDI over the next 3 years.
Even more concerning is the sharp fall in how global investors rank the UK on key attractiveness criteria such as education, transport infrastructure, local labour skills, political stability and access to the European market. The decline since last year in favourability on some of these criteria, of up to 30%, is unprecedented in the decade EY has been undertaking this research. It appears that as investors worry about changes to the current arrangements for trade and migration, they then become concerned about the UK’s capability in other areas which may not be sufficiently strong to offset any negative impacts from these changes.
Time to act
There are very mixed messages in the research. On one hand, the short-term outlook for the UK in respect of FDI is positive but there are clear risks to future performance in the medium to long-term. The survey identified that 9% of investors could leave the UK in the next 3 years but the UK still has the time to act to secure its future attractiveness in a post-Brexit world provided it moves quickly.
Both the FDI performance and perception findings underline the renowned strengths that the UK can build on, in sectors like software, financial services, business services, and some areas of manufacturing. Our perception research among investors identifies clear policy priorities for new trade agreements with both the EU and the USA, China and India, clear plans for skills and migration, and improved infrastructure and skills. A clear plan of action is required.
A plan for success
- Engage with investors on the post-Brexit environment
- Develop a UK trade strategy
- Deliver improved infrastructure
- Improve skills
- Empower and support the regions to deliver on the above
Download EY’s UK Attractiveness Survey 2017