There is no sign of a Brexit effect on short-term investor sentiment …
Although the UK’s relative Foreign Direct Investment (FDI) performance in 2016 was not as strong as in recent years, there were no signs of a collapse in investment as a result of the UK’s vote to leave the European Union. The UK’s performance in 2016 was in line with the results from EY’s two investor perception surveys — one conducted before the EU referendum, in March 2016, and one following it, in October — which both found that investors’ one-year view of the UK as a destination for FDI remained positive.
Our 2017 investor survey shows that short-term investor sentiment for the next 12 months, has not changed. The proportion of investors planning to establish or expand operations in the UK over the coming year is 24%, putting it in line with last year’s results and within the range seen over the past seven years. The equivalent figures for Germany and France are 24% and 22% respectively, confirming that the UK’s immediate prospects are in line with its peers.
Short-term plans are especially positive among Asian investors, 30% of whom say they intend to invest in the UK in the coming year, compared to 24% from Western Europe and 21% from North America. Also, 37% of investors that are already established in the UK plan to invest in the country during the coming 12 months, again in line with the 2016 results, against only 3% of those not established in the UK. While the UK may face challenges in attracting new investors, the established base remains secure.
… but long-term views of the UK’s FDI attractiveness are a cause for concern …
However, the relatively positive perceptions of the UK’s attractiveness in the short term are offset by a significant deterioration in investors’ longer-term expectations of the UK’s future evolution as an FDI location. In our 2017 study, 31% of respondent investors worldwide say they expect the UK’s attractiveness for FDI to decline over the coming three years, while 32% say they expect it to improve.
While both figures represent a marginal improvement since October 2016, they are significantly worse than the long-term averages. Since March 2016 the share of investors with a negative view of the UK’s medium-term prospects have almost doubled and the 2017 figure is more than four times higher than the average result from 2010 to 2015. The UK’s net positive score is now 2% compared to a peak of 61% in 2012.
These results suggest that the Brexit vote and its aftermath may have had a significant impact on global perceptions of the UK’s future attractiveness. As we have seen before in previous attractiveness surveys, it does seem that investors’ concerns over the UK tend to be more about future projects than the immediate situation — a tendency that fits in with long lead times for decisions on FDI projects. Decisions on the majority of the investments made in 2016 would have been made prior to 2016, and projects being implemented in the next 12 months will still have two years, and potentially longer, to earn a return before Brexit formally occurs.
… and there are real challenges ahead as the UK’s rating on several key criteria is declining…
Potential concerns over the UK’s longer-term attractiveness for FDI are reinforced by a sharp decline in how highly international investors rank the UK on several of its key characteristics. The UK’s high perception ratings on factors such as quality of life, educational standards and social stability have been a major source of strength for the UK’s FDI offering in recent years, underpinning its broad-based appeal to investors globally.
A comparison of this year’s ratings with those from March 2016 show that some leading attributes have experienced only slight declines during the year. For example, “quality of life, diversity, culture and language” has fallen to 83% from 88% a year ago; “technology, telecommunication infrastructure” is down to 80% from 83%; and “the UK’s domestic market” has slipped to 73% from 76%. There are, however, modest improvements in some areas where the UK has historically been relatively weak, including corporate taxation, labour costs and labour legislation, and the UK’s availability of real estate also holds up reasonably well.
However, these moderately positive findings are sharply offset by a collapse in the UK’s ranking on key criteria such as “education in trade and academic” (down to 66% from 86% in March 2016); “transport and logistics infrastructure” (down to 63% from 75%); “local labour skills levels” (down to 61% from 80%); “stability and transparency of political, legal and regulatory environment” (down to 58% from 78%); and “access to the European market” (down to 51% from 78%).
While a decline in the UK’s reputation for attributes such as political stability and access to the European market may be understandable following the Brexit vote and subsequent events, it is more difficult to identify the specific drivers of the declines recorded in the other criteria, such as transport infrastructure. It is hard to interpret the findings as anything other than the result of the shock caused by the UK’s decision to leave the European Union.
There appears to have been a major change in attitudes towards the UK over the last 12 months, with the result being a dramatic reappraisal of how investors globally view a wide array of UK capabilities. The scale of the decline in the UK’s rating is unprecedented in our surveys over the last decade and is a major concern and points to a need for the new Government to launch a major push to engage with investors to set out and explain the UK’s future trade and industrial strategy.
Download EY’s UK Attractiveness Survey 2017