Making FDI work for everyone

FDI is important …

I want to share the findings of a new joint report by EY and the Centre For Towns, which presents the results of an investigation into the distribution of announced foreign direct investment (FDI) projects across the UK’s towns and cities from 1997 to 2017.

Foreign direct investment has been a vital source of capability, economic capacity and jobs for the UK throughout the 20 years that EY has been tracking and measuring this activity. The UK’s ability to attract FDI continues to be under close scrutiny in the run-up to Brexit, and EY’s 2018 UK Attractiveness Survey provided clear evidence that investment into the UK economy is beginning to adjust as the Brexit date draws nearer.

Although the regions outside of London performed well in 2017, EY’s previous analysis of UK region and city economic performance and the wide-ranging work of the Centre for Towns on local economic activity, have highlighted the continuing imbalances in geographic economic performance across the UK. Hence the desire for a more detailed analysis of the geographic spread of UK FDI.

… and Core Cities - and especially London - dominate the FDI landscape …

Over the last 20 years, the share of UK FDI projects accounted for by Core Cities[1] has increased from less than a third (31%) in 1997 to over half (56%) in 2017, with 51% of all projects over the last two decades attracted into the major population centres. London has been the primary beneficiary, accounting for 74% of the projects going to Core Cities and London’s 5,418 projects in the 20 years dwarf the 413 secured by second placed Manchester.

[1] Leeds, Liverpool, Manchester, London, Bristol, Sheffield, Cardiff, Glasgow, Edinburgh, Nottingham, Birmingham and Newcastle Upon Tyne

… with smaller places struggling to drive growth …

The Europe leading performance of the UK in attracting FDI since 1997 has, to an extent, masked the wide differences in performance between the Core Cities and other areas. FDI in the Core Cities increased fourfold since 1997 while, in the main, remaining flat or declining in towns. Over the last two decades, Large Towns have managed to double the number of FDI projects they receive, although their share of all FDI has fallen from 26% at the start of the period to 24% last year. Other place types[2] fared much worse however, with Medium Towns, Small Towns, Communities and Villages all attracting less projects in 2017 than they did in 1997.

… but the market is dynamic …

When we look at place characteristics using the Centre For Town’s classification, the performance of University Towns stands out. The number of FDI projects attracted annually by these locations has increased from 73 to 180 over the last five years with research and development (R&D) related projects a major driver of growth.

Ex-Industrial Towns saw a major decline in project numbers from 69 in 1997 to 18 in 2013 but there has been a significant revival since then with 54 projects attracted in 2017, the highest total since 1997. Underlying this improvement was the increase in manufacturing projects attracted by the UK in recent years as the Ex-Industrial Towns have tended to benefit disproportionately from this shift.

[2] To see the definition of the Centre for Towns place types please click here

… with geographic opportunities varying by sector …

Sales and marketing accounts for the largest share of FDI projects in the UK having increased from less than a quarter of UK FDI 20 years ago, to 56% of the total in 2017. This activity has been heavily concentrated in Core Cities (73% of all projects since 1997) and Large Towns (14% in the same period). Headquarter projects demonstrate very similar characteristics with 83% of all projects over the last two decades destined for Core Cities or Large Towns.

By contrast manufacturing projects are spread across place types with only 13% of projects having gone to Core Cities and 30% to Large Towns in the last two decades. Logistics and R&D related projects are also more geographically dispersed, with over 40% and 30%, respectively, of investments going outside of Core Cities and Large Towns. 

… that offer potential beyond cities

The benefits of agglomeration are clearly a factor in explaining the success that Core Cities and Large Towns have had in attracting sales and marketing investment. However, we can also see that the manufacturing value chain creates more opportunities across different types of place through vertical linkages. The success of University Towns in attracting manufacturing FDI suggests that there may be more opportunities to target this sector in an integrated fashion, providing offers to investors combine manufacturing, logistics and R&D capabilities.

Time for change

This report identifies a continued structural imbalance between London and the South East and the rest of the United Kingdom in terms of the investment they receive from overseas. The UK’s Core Cities and Large Towns have been significantly more successful than the rest of the country in attracting FDI in the last two decades. Not only that, but there are within-region disparities between the scale of investment in Core Cities and our largest towns compared with small, medium towns and rural communities.

UK economic policy has tended to be based on growing the Core Cities as the means of stimulating activity in the surrounding areas. The lack of an industrial strategy in the UK for much of this period has contributed to the UK’s underperformance in attracting manufacturing FDI. This, in turn, has adversely affected the FDI performance of places outside of the Core Cities.

With Brexit being one of a number of challenges that are currently facing the UK economy - many of which could have significant implications for towns as demonstrated by the work of the Centre For Towns -  it is vital that a future FDI policy is developed as a priority and that it gives a more central role to place. I will return to this theme in my next blog.