Using FDI to help rebalance the UK economy

The benefits of FDI are unevenly spread…

In my last blog, I identified how the UK’s success in attracting foreign direct investment (FDI) is not spread equally across the United Kingdom’s towns and cities. Between 1997 and 2017 foreign investment into our Core Cities has far outpaced foreign direct investment into any other of our place types.[1] Large Towns have seen a significant increase in project numbers since 2012 but other place types have seen little or no growth in annual project numbers since 1997.

The other striking feature of the UK’s FDI performance is that manufacturing is the sector with the greatest potential to drive economic activity across different place types. This is in stark contrast to sales and marketing investments which tend to flow to the larger population centres.

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

… but investor research can point us towards the required policy changes

In terms of the factors that influence investors to choose one region of the UK over another, EY’s 2018 research among foreign investors shows that the availability and skills of the local workforce has become even more important. Its ranking by survey respondents increased from 28% in 2017 to 33% in 2018. The availability of business partners and suppliers also remains an important consideration. However, adding together the two related factors of transport infrastructure, and telecommunications and technology infrastructure, produces a combined score of 30%. This underlines the vital role played by all forms of infrastructure in securing FDI projects in the UK’s regions.

A particularly interesting development is the rise in importance attributed to support from regional economic advisory bodies (up from 5% in 2017 to 7% in 2018) and — more markedly — access to regional grants and incentives for investment (up from 9% to 13%). Against the background of uncertainty over the ultimate terms of Brexit, these increases may indicate a desire among investors to have more support and incentives to invest in a particular region.

These criteria demonstrate the importance of a skills base and sound transport infrastructure and broadband for any place hoping to attract inward investment. These criteria appear to favour locations with a plentiful supply of those characteristics and disadvantage towns and places with a weak skilled workforce and under-investment in transport. In these circumstances it is perhaps unsurprising to see Core Cities receiving the lion’s share of foreign direct investment.

Previous work by the Centre For Towns has shown that many of our towns suffer from a combination of ageing populations, comparatively poorly qualified working-age populations, crumbling transport infrastructure and inadequate broadband connections. The same is not true for Core Cities and some of our largest towns and university towns, which are more likely to have higher proportions of better-qualified working-age populations with a well-connected transport infrastructure and excellent broadband connections.

Drawing on this research, I believe there are four key areas for policy action that could help improve the economic contribution of FDI in the UK:

1.      Change the policy-making process

The moves in recent years to devolve economic decision-making in the UK are welcome and have generated some clear benefits, with the Northern Powerhouse and Midlands Engine being examples of real progress. However, while there has been some shift in emphasis and some power has moved from the national level, planning is still primarily ‘top-down’ in the new large geographic entities.

In my view, we should now look to devolve power further, with an increased focus on analysis and planning at the town level. This process should aim to analyse investor needs against what towns have to offer. It would help identify the implications for policy to increase the opportunity for all place types to benefit from FDI. These bottom up perspectives could then be aggregated into regional and ultimately national policies such as the Industrial Strategy at the sector level. This would allow for the identification of potential clusters or supply chain approaches that would bring together a number of towns to pursue opportunities.

2.      Strengthen the industrial strategy

It is striking, but not surprising, that the benefits of FDI are concentrated in a small number of cities. What is also clear is that manufacturing is the sector with the widest geographic appeal, offering the potential to achieve more balance in economic activity. In this context, the industrial strategy is an important element for driving future economic success across the whole of the UK. This means that the approach needs to be much more integrated and inclusive, especially in terms of place, and be based on the bottom-up approach described above.

At its simplest level, this thinking would suggest allocating more FDI-supporting resources to smaller towns and communities, potentially disproportionately more than the current economic size of the smaller locations. Going beyond this, our analysis of investor needs suggests that policy should consider how to reshape and strengthen supply chains and business networks. This could help build links that allow universities to contribute outside of their immediate locations and to develop more geographically specific skills development plans.

3.      Improve regional transport

The need to improve transport is perhaps a greater priority for the English regions - and especially towns - than the UK as a whole. This is partly because a number of planned initiatives have yet to be realised, and even more so because of the need to enable manufacturers to remain competitive after Brexit, especially if customs processes become more onerous. Better transport links are essential if economic benefits are to be created across wider geographic areas. There is also a need to show investors that there is a real commitment in place to drive improvement across the English regions.

4.      Investigate the scope for increasing the geographic spread of services

Our research shows that sales and marketing and headquarter (HQ) FDI flows primarily to Core Cities and Large Towns. This reflects the benefits that investors see from agglomeration for these sectors. However, further analysis may reveal opportunities to generate more service sector FDI into smaller places, possibly supported by technology and especially broadband. As a minimum, an analysis to investigate the potential opportunity should be commissioned as a priority.

The latest analysis from HM Treasury shows that Brexit will have an adverse economic impact on the UK.  History also suggests that our weakest regions economically tend to be hit relatively hard. It is therefore important that we move quickly to protect existing activity and to build a platform for growth across the whole of the UK.

See the full EY UK Attractiveness Survey special report