The UK remains the leading destination in Europe for Foreign Direct Investment (FDI), but Brexit is casting a shadow that threatens to undermine that status.
EY's 2019 UK Attractiveness Report shows that:
- The UK attracted 13% fewer FDI projects in 2018 compared to 2017
- 15% of global investors have put investment plans in the UK on hold due to Brexit, but only 6% plan to move assets out of the UK in the future
- Sectors exposed to Brexit experienced major declines in FDI in 2018, Manufacturing down 35%, Headquarters down 49% and R&D down 17%
- The UK remains the market leader for digital FDI projects in Europe, but its market share fell from 27% in 2017 to 23% in 2018
- Net negative FDI intention is worst ever
According to EY, the UK remained the number one destination for foreign direct investment (FDI) in Europe in 2018, ahead of Germany and France, with 1,054 projects, its third-highest number of FDI projects in 20 years. However, this was a 13% drop in FDI projects compared to 2017 (1,205 projects).
The UK's share of FDI projects secured in Europe fell very slightly from 18% in 2017 to 17% in 2018. While overall FDI into Europe fell by 4% year-on-year, ending a five-year period during which Europe's annual project numbers increased continuously. The number of projects into Germany fell 13% (1124 to 973), driven primarily by a collapse in investment in Business Services, but rose in France 1% (1,019 to 1,027) year-on-year. Without the UK and Germany, FDI project numbers into Europe were essentially flat year-on-year.
Perceptions of the UK as an FDI location have weakened
Brexit appears to be a significant factor behind the decline of UK FDI projects in 2018. According to the report, 15% of global investors say they have paused one or more UK projects due to Brexit (up from 8% last year), however, only 6% plan to move assets out of the UK in the future. Five per cent of investors say they have increased investment in the UK due to Brexit, down from 7% last year, and 5% have reduced investment due to Brexit compared to 6% a year ago. In addition, 38% of global investors cite Brexit as one of the top-three risks to Europe's attractiveness over the next three years, an increase of 8% on last year.
Investors' perceptions of the UK's attributes have declined since the vote to leave the EU. Prior to the referendum vote, 86% of investors regarded both the level of social stability, and the degree of political and regulatory predictability and transparency in the UK as attractive. These ratings have fallen to 60% and 53% respectively showing it is not just Brexit but the process of getting there and the resulting changes that concern investors.
Breaking down the results geographically, nearly 17% of Western European and Asian investors say they have paused a project in the UK, compared to only 11% of investors from the US. And while 8% of Asian investors say they have reduced investment into the UK, only 3% of US investors say the same. The results are borne out when looking at the origin of FDI projects into the UK in 2018. UK projects from the US increased by 3% from 334 in 2017 to 345 in 2018. While UK projects from China were down 65%, from 74 in 2017 to 26 in 2018, this compares to far smaller drops in projects from China to France (39 to 31) and to Germany (75 to 66).
UK remains number one for digital sector FDI in Europe
The UK remained the number one destination for digital sector FDI in Europe in 2018, beating Germany and France into second and third place respectively. However, the UK's share of digital FDI fell four points to 23% in 2018, despite Europe's share of the global digital sector growing by 5% over 2018.
Digital remained the UK's leading sector in terms of FDI projects for the sixth year running. However, the number of digital FDI projects fell by 10% year-on-year from 320 in 2017 to 288 in 2018. Digital projects still outstripped the second-placed sector for FDI projects by a wide margin as business services projects fell by 10% in 2018 to 160 projects.
Meanwhile, 2018 was a poor year for the UK manufacturing sector with a 35% decline in the number of FDI projects to 140 from 216 in 2017, the lowest number recorded since 2013. This compared unfavourably to an overall European manufacturing sector decline of 6%. The automotive sector fell 32% year-on-year (compared to overall growth of 1% in Europe) with project numbers falling from 85 to 58.
EY's UK Chairman, Steve Varley, comments: "The UK has retained its crown as the number one destination for FDI in Europe for another year but concerns over Brexit appear to be reducing the UK's appeal currently and are hampering its ability to attract capital that could create a platform for future growth in output and productivity.
"The fall in UK FDI in sectors such as automotive, and chemicals, combined with a 50% decline in headquarter projects, a 17% decline in R&D projects and a loss of digital market share, demonstrate that investors appear to be reluctant to commit to projects that they anticipate will be negatively impacted by Brexit, while reducing investment in high value-added areas.
"The UK's Industrial Strategy provides the framework and opportunity to allocate resources to activities investors identify as priorities such as improving transport infrastructure and skills. This should be supported by moves to incentivise capital investment, reduce the regulatory burden on businesses, and provide more support to foreign investors."
An end to geographic rebalancing
An analysis of the FDI projects recorded in 2018 showed that the performance of the UK's regions was very different in 2018 to that of 2017, with much greater variation across the country compared to the national picture. The South East (down 2%), Wales (down 6%) and the East Midlands (down 7%) all experienced a fall in volumes of only single digit percentages. The rest of the country saw significant declines in project volumes with the weak performance of manufacturing particularly hitting the North West (down 33 %), Yorkshire and the Humber (down 40%), and the North East (down 21%).
London was almost flat with just a 0.2% decline in project numbers. London also retained its position as the second most attractive European city for global investors with 25%, although this was down 9% on last year. Paris topped the poll for the second year running with 30% but was down 7% from 2017. German cities benefited most from London and Paris' weak performance with Berlin (24%), Frankfurt (19%) and Munich (9%) in third, fourth and sixth place respectively.
Mark Gregory, EY's chief UK economist adds: "The relatively strong performance of London and the South East suggests that attempts to rebalance the UK geographically may be harder to realise given the challenges posed by Brexit. This concern over geographic imbalances becomes greater when we consider the results across the UK's cities and towns: while projects in the UK's 12 core cities fell by 3% in 2018 and by 10% when we exclude London, the decline in the rest of the country was 23%. It appears that uncertainty over Brexit has not only reduced the UK's overall appeal, but it is also having a much greater negative impact in the UK's towns as investors concentrate on what they see as "safer" investments in the larger cities."
Long-term attractiveness of the UK at risk
According to the survey element of the report, 42% of investors expect the UK's attractiveness for FDI to decline over the coming three years, while only 26% of them expect it to improve. The resulting net negative intention of 16% is the worst-ever result in the decade that the annual survey has been running. It is also significantly worse than both the long-term average and the high point of 2013, when 65% of investors had a net positive three-year view of the UK.
Over the last 12 months, investors have become increasingly concerned about the risk of more disruption to supply chains (34% of respondents citing this versus 13% last year), customs compliance costs (up to 25% from 18%) and the possibility of tariffs on imports and exports. In addition, 7% of investors are also worried about access to skills, up from 8% last year. By contrast only 19% of investors see UK economic growth as a major worry, down by a third since last year.
Mark Gregory concludes: "If the trends evident in our report continue then the UK risks becoming "Branch office Britain", an attractive market to sell to, but not one that companies will commit to manufacture or research and develop in. However, with the right policies in place, the UK could strive to become "Interconnected Britain". For this to happen, the digital opportunity must be seized to modernise manufacturing and services, pioneer digital health and lead in innovative cleantech technology and applications. High speed fibre must be used to connect disconnected towns, enabling more remote working, less commuting, less pollution and more local engagement. This investment in technology, infrastructure and skills would not only increase productivity but create better paid, more rewarding jobs."