London, 24th May 2016: The UK saw record levels of foreign direct investment (FDI) in 2015, powered by an influx of investment into the UK regions, according to EY’s annual UK Attractiveness Survey, which monitors FDI into the UK and across the globe.
The UK saw a 20% growth in number of projects, the steepest year-on-year uplift recorded in the past decade, and a 35% increase in the number of jobs created – more than 42,000.
UK continues to lead Europe
1,065 FDI projects were attracted into the UK last year, the largest number of projects ever secured since the survey began (1997). The UK took a 20.9% share of the total number of projects locating in Europe (5,083), and remained the leading recipient of FDI projects in 2015, followed by Germany, France and Spain.
EY Chairman and UK & Ireland Managing Partner, Steve Varley, commented: “The UK’s performance in attracting foreign direct investment in 2015 was nothing short of stellar. Crucially we saw a huge surge in the number of investors locating their headquarters in the UK, up 163%, and growth in the number of research and development projects, up 40%, reflecting the success of the Government’s strategy to target key strategic investments.
“Investors rated the quality of life, diversity and culture, education, stability of social climate, telecommunications, and labour skills among the UK’s most attractive attributes.”
But clouds loom – sharp decline in future perceptions of UK
The UK appears to be extremely well positioned to perform strongly in the future, but the survey – which interviewed over 440 international companies – also identifies a number of issues that could weigh on the UK’s future performance in attracting FDI.
Investors seem much less optimistic about the future attractiveness of the UK than they were 12 months ago. When asked how the UK’s attractiveness for FDI will change in the next three years, only 36% say they expect it to improve compared to 54% last year, which is the lowest score since 2004.
Varley adds: “Against a positive backdrop, there has certainly been a marked deterioration in investor perceptions of the UK on a scale we have not witnessed before. There has been a decline in the ranking of the UK’s key attributes and concerns raised over labour costs, airport and road capacity, and cost of real estate, but not to an extent that would explain the decline in future perceptions.
“It does seem possible that the upcoming referendum on the UK’s membership of the EU is also weighing on investors’ minds. It is certainly the case that EY’s research demonstrates that any deterioration in the terms on which UK-based businesses can access the European Single Market would be a concern for investors.”
UK regions – the emerging powerhouse
The UK’s growth was driven by significant gains in the regions and cities outside of London and the South East. The North West led the way out of 12 UK regions, with an increase in projects of 118%, contributing to a 138% growth in FDI levels across the Northern Powerhouse, since the term was coined two years ago.
Scotland had its most successful year ever, recording a 51% rise in projects, while the West Midlands posted a 46% increase. Only three regions saw a decline in projects secured during the year – The South East of England (22% fall), Northern Ireland (63% fall) and Wales (2.4% fall).
“2015 was indeed the year of the UK’s regions and cities,” said EY’s Chief Economist Mark Gregory. “The geographic mix of inward investment last year strongly suggests that the UK is using FDI very effectively to help rebalance its economy, with almost 90% of the UK’s total FDI growth coming from the regions outside of London and the South East.
“Investors are voicing solid support for the UK’s agenda to devolve power to a regional level, it now seems devolution is starting to work and foreign investors are helping rebalance economic activity more evenly across the country.”
Despite the slower rate of growth of projects in London (7%), the capital continues to be regarded as by far the most attractive city for FDI in Europe, followed by Paris, Berlin and Amsterdam.
Asked which three cities offer the best chance of producing the next tech-giant, investors named London, second only to San Francisco/Silicon Valley (up from fourth in 2015) – a huge vote of confidence in its technology capabilities.
Manufacturing contributed a third of all projects
The UK attracted a good balance of FDI across all sectors in 2015. “Business services appears to have reversed its slowdown, financial services is regaining momentum and software FDI is continuing to perform extremely well,” commented Gregory.
The number of manufacturing projects rose by 10.9%, the highest level recorded since 1998, contributing a third of the total number of UK FDI projects secured in 2015.
“The UK attracted more manufacturing projects than Germany for the second year running, underpinned by the strong performance of the North and Midlands,” added Gregory. “But there is still more market share to be had. The UK needs a more clearly articulated and ambitious manufacturing strategy, investors in this sector particularly highlight how important infrastructure, especially roads, is when deciding where to locate.”
EEA is UK’s most important source of investment
The number of investments into the UK from the European Economic Area (EEA) reached its highest recorded point in 2015 – a 27.5% increase on 2014 – establishing the EEA as the most important trade region for FDI projects in to the UK for the first time since the survey launched in 1997, overtaking the North America Free Trade Area (NAFTA).
“While the US remains the biggest single country source of FDI projects for the UK, the shift towards European projects represents a positive move towards a more balanced spread of investment origins,” commented Gregory. “EEA investments have driven significant growth outside of London and will be particularly important to the UK regions in the future.”
There was also an increase of 79% in projects originating from China and 58% increase from India, reflecting the Government’s objective to forge stronger bonds with the largest emerging market countries.
Positioning for the future
The UK is in a very strong position after an impressive FDI performance in 2015. But the FDI market remains highly competitive. Germany was ranked number one by investors surveyed, as the most preferred location to invest in coming years, followed by the UK and France. In addition, there were signs from investors in 2015 that the UK’s attractiveness may not be as strong in the future as in recent years.
Mark Gregory concludes: “The UK had a truly spectacular year for FDI in 2015, making some significant strides in key areas, resulting in a major step change in performance. The challenge is now to not only maintain performance but also take it to the next level and stay ahead of other countries that are hot on our heels.
“The UK must look to build on its success in the regions, embrace manufacturing and deliver the improvements in skills and infrastructure investors require.”
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EY’s attractiveness surveys are widely recognised by our clients, the media and major public stakeholders as a key source of insight on foreign direct investment (FDI). Examining the attractiveness of a particular region or country as an investment destination, the surveys are designed to help businesses to make investment decisions and governments to remove barriers to future growth. A two-step methodology analyses both the reality and perception of FDI in the respective country or region. Findings are based on the views of representative panels of international and local opinion leaders and decision-makers.
UKAS is part of EY Economics for Business programme which provides knowledge, analysis and insight to help business understand the economic environments in which they operate, both in the UK and globally. We work with both the private and public sectors, facilitating the debate between business and government, supporting economic development, growth and regeneration. www.ey.com/uk/economics