EY’s UK Attractiveness Survey 2017:
Time to act

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A mixed year…

It’s difficult to make a clear assessment of the UK’s performance attracting foreign direct investment (FDI) and maintaining its appeal to investors since our 2016 attractiveness reports, because every positive indicator is offset by an equivalent negative development. However, some clear pointers do emerge.

…with solid growth…

At a headline level, the UK’s performance securing FDI in 2016 was solid. It remained Europe’s number one recipient of projects ahead of Germany, with a 7% rise in total projects to 1,144 – the highest on record. It was also Europe’s leading recipient of FDI jobs, recording a 2% rise to 44,665.

…but a reduced market share

However, the rise in projects was far outpaced by the increase across Europe as a whole, with FDI projects into Europe rising 15% to 5,845. This meant the UK’s market share of all projects in Europe fell from 21% to 19%.

Projects into Germany rose 12% – faster than the UK – and FDI employment across Europe grew 19%, again outpacing the UK. Germany gained ground in areas seen as good indicators of future growth, including extending its lead in new (as opposed to expansion) investments, and attracting twice as many Chinese investments as the UK, as well as overtaking the UK in projects from 24 high-growth markets.

Gains in some areas…

The UK gained its largest number of projects in 2016 from sales and marketing activities, which rose 32%. It also did well attracting logistics projects, up by 30%. And although UK manufacturing plant projects fell, the overall number of projects by manufacturers increased from 355 to 374. Financial services and business services posted strong growth, sustaining the UK’s lead in Europe in these two sectors.

…but concerns across the value chain…

Less positively, the UK’s share of European R&D projects slumped from 26% to 16%, its lowest since 2011. With software projects also slipping despite a Europe-wide increase, these results raise concerns over the UK’s future performance in key growth sectors.

…and geographies

Europe was the leading origin for projects into the UK, and the US the largest single country. Cross-border investments in Europe grew in 2016, with Central and Eastern Europe becoming an important area for higher value-added FDI such as R&D. As European value chains become increasingly integrated, investors appear concerned about the UK’s future access to these value chains.

While investors’ perceptions point to short-term stability…

While the UK’s FDI performance has remained solid, our 2017 global survey of investors’ perceptions reveals a split between current plans and future expectations. On the upside, 24% of those surveyed plan to establish or expand operations in the UK over the coming year, in line with the past seven years. The UK has also regained second place behind Germany in investors’ ranking of Europe’s top FDI destinations – a position it briefly lost to France in our autumn 2016 post-referendum study.

… longer-term perceptions are increasingly negative

However, the perception findings also contain some worrying indicators.

Some 31% of investors expect the UK’s FDI attractiveness to decline over the next three years, while 33% expect it to improve. While these figures are a marginal improvement on October 2016, they are significantly worse than the long-term average, and 50% of investors based in Western Europe expect the UK to become less attractive.

Even more concerning is the sharp fall in how global investors rank the UK’s attractiveness on key criteria such as education, transport infrastructure, local labour skills, political stability and access to the European market. Year-on-year declines of up to 30% on some of these criteria is unprecedented in the past decade.

Regions: London continues to dominate as ‘peripheral’ regions struggle

Turning to FDI into the UK’s regions, London remained pre-eminent in 2016, securing 39% of all projects, ahead of Scotland in second place. The Northern Powerhouse and the Midlands Engine are now attracting roughly double the number of projects they secured at the beginning of the last decade, whereas the rest of England is attracting roughly the same number. So there is a risk that only the strong regions are getting stronger.

Time to act

Overall, our research points to a positive short-term outlook for UK FDI, but clear risks to performance in the medium to long-term. 9% of investors could leave the UK in the next three years – but provided it moves quickly, it can still secure its future attractiveness in a post-Brexit world.

Both the FDI performance and perception findings underline the strengths the UK can build on, in sectors like software, financial services, business services, and some manufacturing areas. Our study identifies policy priorities around new trade agreements with the EU, US, China and India; plans for skills and migration; and improved infrastructure and skills.

A clear plan for success is needed:

  1. Engage with investors in the post-Brexit environment
  2. Develop a UK trade strategy
  3. Deliver improved infrastructure
  4. Improve skills
  5. Empower and support the UK’s regions.

Contact

EY - Mark Gregory

Mark Gregory

EY Chief Economist