The 2019 UK Attractiveness Report by EY (formerly Ernst & Young) reveals that the UK is still Europe’s number one destination for direct investment from overseas, beating Germany and France in 2018.

During the year, over 1,000 foreign direct investment (FDI) projects took place in the UK, the third-highest total in the past two decades, and coming off the back of an even stronger year in 2017 when 1,205 FDI projects were recorded.

This 13% drop in numbers was part of a Europe-wide pattern, and the UK retained nearly all of its share of the European FDI market as a whole, dropping just one percentage point from 18% in 2017 to 17% of FDI projects in 2018.

As indicated by this, the total number of FDI projects across Europe as a whole fell for the first time in five years, posting a slight 4% decline across the continent.

Nearest neighbours

The UK’s nearest neighbours and Europe’s largest economies saw mixed fortunes:

  • Germany saw a 13% fall in FDI projects, from 1,124 to 973.
  • France saw a 1% increase from 1,019 to 1,027, just short of the UK’s 1,054.
  • Europe as a whole saw flat year-on-year performance when excluding the falls in the UK and Germany.

Brexit remains a looming presence in the UK economy and its potential impact on cross-border trade is a significant factor in FDI – so how is the continued uncertainty affecting foreign investment in the UK?

Ups and downs

The EY report, published in early June 2019, saw a mixed bag of investor sentiment, with many of the positives and negatives cancelling each other out.

Examples include:

  • 5% of respondents increased investment in the UK in 2018 due to Brexit, down from 7% in 2017.
  • 5% of respondents decreased investment in the UK in 2018 due to Brexit, down from 6% in 2017.
  • 15% have paused at least one UK FDI project due to Brexit, up from 8% in 2017.
  • Only 6% are currently planning to move assets out of the UK in the near future.

But Brexit is very much on the agenda for FDI investors, with more than a third (38%) citing it among their top three perceived risks to the investment appeal of not just the UK, but Europe as a whole in the coming three years.

Distant allies

The UK’s special relationships with major economies outside of Europe are proving to be among its strongest.

While 17% of investors in Western Europe and Asia have put at least one UK project on hold since the results of the EU Referendum, only 11% of US investors say they have done so.

Less than a tenth (8%) of investors from Asia have reduced the value of their FDI in the UK – and only 3% of US investors have done.

Investment from China was down in 2018, from 74 FDI projects to just 26, but this was mirrored to an extent elsewhere, such as in Germany (down from 75 to 66) and France (from 39 to 31).

And investment from the US increased year-on-year, from 334 FDI projects in 2017 to 345 in 2018, a small but welcome 3% rise.

Leading European digital FDI

Successive UK governments have prioritised the digital sector and attempted to position the UK as a leading market for information technologies – and this may have helped to contribute to the UK’s number one ranking for European digital FDI.

In 2018, the UK attracted 23% of FDI projects in the digital sector in Europe, down four percentage points but still a winning total, with Germany and France in second and third place.

Within the UK, the total number of digital FDI projects was down from 320 to 288 year-on-year, but this was still comfortably the largest sector, with business services ranking in second with 160 projects.

Steve Varley, UK chairman for EY, said: “The UK has retained its crown as the number one destination for FDI in Europe for another year but concerns over Brexit appear to be reducing the UK’s appeal currently and are hampering its ability to attract capital that could create a platform for future growth in output and productivity.”

UK FDI performance by region

With the number of FDI projects down year-on-year, EY looked at how the UK’s regional map looked in 2018 and found significant differences between locations.

London performed best with just a 0.2% decline in FDI numbers, and ranked as the second-most appealing city for European FDI investment with a 25% share of projects.

Paris scored 30% of FDI projects in Europe, while Berlin came a narrow third on 24% and Frankfurt came fourth on 19%.

Returning to the UK regions, the south-west was also relatively resilient with only a 2% decline in FDI project numbers, while Wales and the East Midlands also posted single-digit falls.

Yorkshire & the Humber had the largest drop in FDI projects, down by 40% year-on-year, the North West was down 33% and the North East down 21%, highlighting the sizeable variations to be found within the overall national picture.

Cities performed relatively well regardless of their location: EY’s chief UK economist Mark Gregory explained that the 12 core cities across the UK saw project numbers dwindle by just 3%.

Again London was a strong performer within this figure, and with the capital’s projects excluded, the remaining core cities were down 10% in 2018.

Long-term picture

With all of this in mind, what does the future hold for UK FDI? Brexit remains uncertain, and especially the nature of the UK’s future relationship with the remaining EU member states is still in doubt.

EY found that 42% of investors expect the UK’s FDI appeal to decline in the next three years, while 26% believe it will improve – a net total of -16 which is the worst on record for the decade-old EY survey.

Some of the concerns cited by investors include:

  • Supply chain disruption (34%)
  • Customs costs (25%)
  • UK economic growth (19%)

Other potential problems include a lack of access to a skilled workforce and the impact of new tariffs on imports and exports.

Avoiding Branch-Office Britain

Mark Gregory warned against allowing the UK to become ‘Branch-Office Britain’ and viewed as an economy to sell to, but not to be based within.

He added: “With the right policies in place, the UK could strive to become ‘Interconnected Britain’. For this to happen, the digital opportunity must be seized to modernise manufacturing and services, pioneer digital health and lead in innovative cleantech technology and applications.”

Investment in high-speed fibre networking could provide more connectivity to remote towns and villages, allowing an increase in local engagement and remote working, with a reduction in commuter traffic and pollution.

Mr Gregory concluded: “This investment in technology, infrastructure and skills would not only increase productivity but create better-paid, more rewarding jobs.”


Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.