Is the UK leaving Europe at precisely the wrong time?

European investment is becoming increasingly important for the UK …

Over the last decade, EY’s Attractiveness research on Foreign Direct Investment (FDI) has found that the UK has generally been less reliant on European-originated FDI as a source of projects than other European countries. The percentage of projects into the UK generated from within the European Economic Area (EEA) has varied over the past decade but the percentage has been rising in recent years and in 2016 the proportion of UK projects generated from the EEA was the highest ever, at 39%, up from 32% in 2007.

Historically, North America has been the most important region of origin for FDI projects into the UK, with the proportion of UK projects generated from North America varying between 34% and 42% over the past decade. However, the trend in terms of North American investments may now be downwards. 2016 saw the proportion of investment arising from the USA fall to its lowest level in the past 10 years, and 2015 and 2016 are the only years in the decade where US investment has been surpassed by European-originated investment.

Unlike for Europe as a whole, the proportion of investment recorded into the UK from the Asian economic area has generally remained fairly stable over the past decade. The proportion of all UK FDI projects originating from Asia in 2016 was down slightly at 8%, from a high point of 9% in 2015 — and the average level of Asian investment into the UK as a proportion of all FDI projects over the decade was 7%.

Origin of all UK projects by global region 2007-2016

… although the USA remain the largest country investor …

A breakdown of the top ten countries generating investment into the UK shows that several countries featuring in the European top 10 do not make it into the top 10 for the UK. Apart from the UK — which obviously cannot provide FDI into itself — the countries that drop out of the UK’s top 10 are Switzerland, Italy and Sweden. These are replaced by the Commonwealth countries of India, Canada and Australia, together with Ireland.

Among the countries in the UK’s top 10 origins of investments, large rises in project numbers were recorded from Ireland (+79%), France (+37%), Germany (+31%) and Australia (+29%). Conversely, significant declines were recorded in the number of projects from China (-13%); the Netherlands (-21%), where the UK lost out to Germany; and from India (-30%).

Origin of all UK projects by country 2016

… and as Chinese FDI into Europe surges, Germany is winning out over the UK …

Across Europe, the number of FDI projects originating from China each year now outstrips those from India by almost 3:1 — a stark contrast with the beginning of the decade, when Indian projects were more prevalent. The UK, however, secured 40% of all Indian projects compared to 20% of Chinese projects, meaning the Indian project flow continues to be important to the UK. Among the countries that feature in the UK’s leading origins of investment, but are outside the European top 10, the UK achieves the following market shares of their projects: Australia 62%, Ireland 45%, India 40% and Canada 24%.

 … and the UK is lagging its peers in growth markets …

Taken together, the FDI project figures for 2016 suggest that the UK’s core strengths of investment from the North American Free Trade Agreement (NAFTA) and the EEA remain in place, with projects from both up around 10%, and investment from Japan and the Tiger economies up very slightly. However, the UK’s FDI projects from both India and China are down, consistent with our earlier finding that the UK is not performing as well in attracting new projects as it is in securing FDI from existing investors. The UK also fell back behind Germany in attracting FDI from 24 identified high-growth markets, having surpassed Germany for the first time in 2015.

…and may be at risk of losing out strategically…

Another significant trend is the increasing importance of cross-border FDI within Europe: this has outstripped North American investment into the UK for the past two years — but the UK is lagging behind Germany in securing this investment. Increasingly we are also seeing European investment increase in Central and Eastern Europe. Initially this was primarily manufacturing investment to take advantage of lower labour costs compared to Western Europe and then shared service centres, again driven by labour cost arbitrage. We are now seeing R&D investments increase in the CEE region as European value chains become even more integrated and optimised. The UK risks being an outsider looking in as value chains continue to develop.

… and there are real challenges ahead …

While short-term investor perspectives of the UK were positive, a wider diversity of opinion emerges when investors in different regions in the world are asked how they think the UK’s attractiveness as an FDI location will evolve over the coming three years. The stand out finding here is a far more negative view of the UK’s future attractiveness expressed by respondents in Western Europe compared to those based in the other two regions — with fully 50% expecting it to deteriorate, compared to just 22% in both Asia and North America. This disparity appears to be linked to Brexit, and may have implications both for investors’ strategies and UK government policies going forward, especially given how important Europe is as a source of UK FDI.

How do you think the UK_s attractiveness for FDI will evolve

Download EY’s UK Attractiveness Survey 2017

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