Strong growth opportunities for UK FDI in the post-pandemic world

With Peter Arnold

The good news is that digital remains a strong driver for UK growth now and in the future. Despite the many challenges of the COVID-19 pandemic, the UK has retained its position for total inbound foreign direct investment (FDI) projects in 2020 (second behind France) and expanded its share of the European FDI market.

As in previous years, EY’s 2021 UK Attractiveness Survey provides a unique snapshot and perspective on the performance and perceptions of the UK as a destination for foreign direct investment (FDI). Coming after a year blighted by COVID-19 and beset by ongoing uncertainty over the risk of a no-deal Brexit, this year’s report was especially eagerly awaited. On balance, its findings are positive for the UK – pointing to a resilient performance in the past year and future opportunities for growth ahead.

 A resilient performance in securing projects in 2020 ...

 First, a look at the headline figures on actual project flows. In 2020 the UK secured 975 FDI projects, down by 12% from 1,109 in 2019. If this sounds alarming, it shouldn’t. Projects coming into Europe as a whole in 2020 fell even faster, at 13% – meaning the UK’s market share of all European projects edged upwards, from 17.3% in 2019 to 17.5% in 2020. Also, the UK attracted only 10 fewer projects than the European market leader, France, a much smaller gap than the difference of 88 projects in 2019.

What’s more, a closer look underlines the resilience of this performance. For example, the UK retained its position as European market leader in attracting ‘new’ projects from first-time investors, a sign of economic dynamism further reinforced by its strong showing in the life sciences, transportation and logistics, and food sectors. And the 114 research and development (R&D) investments secured – only one behind the European leader, France – was a striking illustration of the UK’s shift towards higher-value projects.

There was also good news at a regional level, with the UK’s various countries and regions demonstrating the underlying strength of their FDI offer. Despite the 12% overall decline in projects, London and the South East were the only regions to suffer a double-digit fall in volume in 2020 – with Northern Ireland, Scotland, the East of England, the North East, the North West and the South West all bettering their previous year’s performance.

That said, UK FDI didn’t emerge totally unscathed from COVID-19. While the UK remained the European leader in attracting digital investments, project numbers fell by 25%, with London and the South East accounting bearing the brunt. And previous optimism over the emergence of new origins for investment into the UK was quashed in 2020, with volumes from nine of the ten fastest-growing new sources of FDI into the UK falling back from 2019.

… and a rebound in investor confidence in 2021

But despite such bumps in the road, the signs overall are that the UK FDI is motoring ahead. And the positive tone is reinforced by our 2021 survey of investor perceptions – which this year incorporated the views of almost 2,000 respondents worldwide, enabling us to develop a very detailed view of the UK’s current and future appeal.

What did these investors tell us? Essentially that the UK’s attractiveness to FDI has weathered the twin storms of Brexit and COVID-19. Back in the autumn of 2020, the UK was ranked behind Germany and France for its post-pandemic attractiveness, and intentions to invest in the coming year had fallen by 20% from the spring.

What a difference six months makes. The mood has now turned around dramatically – with the UK viewed as the most attractive FDI destination in Europe, and 41% of respondents planning to invest here in the next 12 months, the highest rate ever. Further evidence of the upturn in sentiment comes from the net positive 30% of investors expecting the UK’s attractiveness to improve over the next three years, compared to a net negative 29% in 2020.

Equally encouragingly, the findings suggest the ‘levelling up’ message is landing with investors – and is manifesting itself in a welcome shift in the balance of attractiveness across the UK. While London remains the most attractive UK destination, with 25% of investors citing it, its score was down by nearly half on 2019, the last time we asked this question. By contrast, 15% of investors, more than double the share in 2019, identified Scotland as their preferred location and nearly every region in England improved its performance over that of two years ago.

Well-positioned for future opportunities

There are many further heartening findings we could highlight – ranging from the 20% of investors planning to re-shore activities to the UK, to the rising number identifying digital and health & wellbeing as the main drivers of future UK growth. But taken together, the message from our research both into projects in 2020 and perceptions in 2021 is clear: the UK is well-positioned for future FDI opportunities.

The challenge now is to capitalize on those opportunities in a competitive and demanding market – one where the UK, France and Germany are at their closest for a decade in terms of projects attracted. A crucial enabler for the UK to win this battle – and use FDI to support levelling up – will be the right FDI-friendly policies from Government. In a follow-up blog, Rohan Malik and Peter will discuss what these might look like.