Positioning the UK for foreign investment, after COVID-19

With Alison Kay, Managing Partner for Client Service, UK & Ireland at EY

If a week is a long time in politics, five months seems like a lifetime in a pandemic world.

Back in April, when we researched investor sentiment toward the UK, we were still in the middle of lockdown. While attitudes were positive, there was a huge amount of uncertainty around the outlook for foreign direct investment (FDI), so we repeated the research in September.

As expected, we found the landscape for FDI has changed dramatically, creating opportunities as well as challenges. The key takeaways from the latest UK Attractiveness Survey are these:

• Investors remain convinced of the UK’s resilience and future potential, with 25% planning to invest over the coming year. This is a strong result by historical standards, albeit down from 10-year high of 31% in the April survey.
• The FDI market will be smaller than in the past for some time and investors expect Europe to be a strong competitor to the UK. Having said that, the UK was Europe’s second most attractive investment destination (behind Germany) in a separate EY survey.

“The UK’s economic landscape has changed unequivocally in recent years — further impacted by COVID-19 — and there is no going back.” 

Where are the growth opportunities?

The UK is seen as strong in key areas for future growth. Investors say the top sectors driving future growth in the country will be:

With soaring investor interest in digital technology and health and well-being, the UK has a strong long-term lead here: 50% of investors say digital will drive future UK growth where only 35% believe it will drive European growth. 

Cleantech is another area of significant growth, as there’s a greater awareness of climate and sustainability issues following the pandemic. While Europe is seen as a stronger contender in clean technology than the UK, 49% of potential new UK investors identify sustainability and climate change as a key investment theme for the country.

Reshoring is another growth opportunity. Unsurprisingly, 66% of survey respondents (and an overwhelming 98% of manufacturers) are reshaping their supply chains. Regionalisation, reducing dependence on one source of supply and nearshoring/reshoring are all driving this shift.

Companies returning operations to the UK could open a host of new opportunities — and outside the UK’s major cities as well. With 42% of manufacturers indicating an interest in reshoring, this is a real opportunity to accelerate the leveling-up agenda and a significant increase compared to our previous research.

How the UK can seize growth opportunities

To capitalise on these opportunities, clarity is key. Investors told us that 72% of investments planned for the UK were still going ahead — but there was also a severe lack of forward visibility, with the potential for significant change if events took a turn for the worse.

The UK must move quickly to articulate its vision for the future economy, especially around the shift to net zero and the infrastructure investment plan. Those not yet established in the UK are willing to make significant long-term commitments but require a clear, long-term policy framework to assist their decision-making and risk assessment.

Beyond these pre-requisites, investors highlighted competitiveness and the quality of infrastructure. Given the wide range of policies investors are interested in, a joined-up offer across the whole of government is needed. Think a single “front door” rather than a different door for each department. The launch of the new Office for Investment is a positive step, with its joined-up approach for high-value investments.

Central to the UK’s response will be a sector strategy, led by digital, health and cleantech. With supply chains transforming, an urgent relaunch of the Industrial Strategy has the potential to attract new and reshored manufacturing activity. This, together with the planned investment in infrastructure and net zero, provides a once-in-a-generation opportunity to level up the UK.

Building back better

It’s worth pointing out that investors responsible for FDI tend to have longer time horizons than financial investors, because of the substantial lead times involved for their projects. They like certainty and clarity.

Without playing down the current challenges, the UK must find the time to work on its strategy for building back better and communicate it clearly. This will enable the country to seize the opportunities that arise as the world emerges from the pandemic.