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How much of a threat is Brexit to the flow of UK inward investment?

Inward investment makes a significant contribution to the UK economy – beyond job creation and wages through to productivity gains and fostering innovation, research and development.

Uncertainty surrounding the future UK-EU relationship is weighing on investment decisions. The question is how significant is this impact on FDI?

What does the data say?

Of the 2018 global Fortune 500 organisations that aren’t European, over half of those with a European HQ base it in the UK (114 out of 201). Germany comes second with 14% and Switzerland, the Netherlands and Belgium are joint third with 5%.

Figure 1: Location of European HQs of Fortune 500 companies in 2018 by country

London is home to 43% of the European headquarters of the Fortune 500 companies in 2018, compared to only 4% in Geneva and 2% in Amsterdam, Brussels and Dusseldorf respectively. Even after the UK’s decision to leave the EU, total foreign investment into the UK exceeded any other European country in 2017. Over the last ten years, the UK has consistently ranked second only to the United States globally, in terms of the number of inward investment projects; and third, behind only the US and China, in terms of capital investment.

Figure 2: FDI projects, jobs created and investment across UK, Germany and France in 2015, 2016 and 2017

The value of FDI beyond the numbers

Foreign direct investment is vitally important for UK business. Those companies that benefit from it are 74% more productive, and carry out half of all business R&D in the UK, according to the Office for National Statistics. Part of this is due to the fact that foreign firms tend to export and are larger in size, two characteristics which are associated with higher productivity levels.

“There is a strong consensus among economists on the gains that can come from free trade and open markets. Trade helps drive living standards in consuming and producing countries. Competition sharpens incentives for domestic businesses to raise their performance. Inward investment introduces new approaches to business and management.”

Ian Stewart, Chief Economist, Deloitte UK

On average, firms involved in foreign direct investment spend roughly five times more on R&D than domestic companies and they account for 50% of total R&D spending in the UK. Such innovation can often lead to productivity increases. And domestic businesses without FDI benefit from the spillover effect, gaining access to technology and expertise, as well as stronger management and organisational practices.

Why the UK has been so attractive to global businesses

A number of key factors influencing investment decisions emerged from our discussions with senior executives at a range of multinational companies with investments in the UK.

  1. Gateway to Europe
    The scale of the UK’s domestic market is seen as a big attraction in its own right. Firms that are successful enough to expand overseas clearly have ambitions to grow, and the UK is seen as an avenue to do that. “No other country in the world has made their market as open to investors.”
  2. Stable, pro-business environment
    One interviewee commented, “we need an environment in which we can have trust and confidence, that is supportive of business in the long term.” Several components of the World Economic Forum’s Global Competitiveness Ranking reflect the importance of a stable, pro-business environment. “A driver of the free market.”
  3. Lifestyle and education
    For some of our interviewees, the UK is seen as a ‘second home market’, with familiarities and cultural ties that render it favourable to other European markets as a place to do business. This is in part due to the world-class education system, which students from around the global come to experience.
  4. Talent pool
    The depth of the talent pool in the UK provides flexibility that is a key differentiator. Interviewees stressed that the UK should focus on a ready supply of the skills that domestic and foreign businesses need. Flexibility on visa requirements was seen as critical for a number of foreign-owned business, particularly those from outside the EU. The UK’s capabilities in specialised technological areas, such as high-performance computing, was also seen as important.
  5. Services sector
    The UK’s service sector, accounting for over three-quarters of GDP, has been seen as key for driving the economic recovery since the downturn in 2008. The ONS Index of Services shows the increasing economic importance of the services sector to the UK economy and its contribution to the labour market.
  6. Innovation and entrepreneurship
    The UK is favoured not only for its access to a wide customer base, but also for its network of fast-growing, innovative domestic SMEs that businesses with a presence in the UK can partner with.

Recommendations for continued success

Brexit poses a number of challenges for businesses with operations in the UK. And whilst these tend to be quite specific to an organisation – issues related to supply chain, people and systems and processes featured regularly in conversations with business leaders. We recognise three key focus areas to ensure the UK sets a course for future growth and prosperity:

  1. A ready supply of domestic and foreign skills
    Companies come to hire talent (and lots of it). The focus for the UK should be on a ready supply of the skills foreign and domestic businesses need. Overall, investors stressed the important of a broader, more diverse UK economy. They want to see a strategy for growth for UK-wide cities.
  2. World-class digital infrastructure
    Foreign investors will welcome the UK Government’s ambition to give the majority of the country 5G coverage by 2027, having stressed the importance of digital infrastructure for the UK to keep speed with other markets. Added to this crucial digital infrastructure, the UK needs to continue to invest in its transport and broader infrastructure. It is important that transport plans are joined up around regional and national visions, so that the potential of investment is realised.
  3. Focus: from government and business
    The government’s industrial strategy, includes pledges to invest in innovation and infrastructure and reach sector deals with companies in key industries. We believe there is more business can do, both feeding into policy development and beyond, to assist in identifying what Britain needs to do to remain competitive. Government needs to provide clarity on policy direction to ensure the UK continues to be perceived as an open, pro-business market.

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