London’s grip on foreign investment harms UK

Last week, when one of the four big accountancy firms, Ernst and Young, published its annual survey of the attractiveness of the UK for foreign direct investment (FDI) it was understandable that the media in Wales and Scotland should have focused primarily on the performance of their respective countries. Much less attention was paid to the deeper message of the report that imbalances across the UK are getting worse not better.

Scotland and Wales were both able to concentrate on the good news: that Scotland was second only to the London area in the number of projects attracted, while Wales turned in its best performance for five years. Scottish politicians made much of the figures to buttress their beliefs in independence or the union. The Scottish performance on FDI – at 11 per cent of the UK total – was respectably above its 8.4 per cent population share, but Wales – at 4 per cent – was still below its 5 per cent population share.  Both were behind the North West of England when FDI is measured in jobs.

The most startling figure is that London scooped 45 per cent of projects attracted to the UK, with the wider south east taking another 8 per cent, despite a year on year decline of 4 per cent in London. The wider south east dropped by 34 per cent. So London and the south east of England, with 30 per cent of the UK population, are still attracting more than half of all foreign direct investment despite a year on year decline.

The bigger losers have been the English regions. This was Ernst and Young’s verdict:

“These sparkling performances in 2012 by Scotland, Wales and Northern Ireland were in stark contrast to most of the English regions, which are now represented by a series of local enterprise partnerships in inward investment promotion, rather than the now-defunct Regional Development Agencies. Of the improved performers in 2012 among the English regions — the West Midlands, North West, North East and Yorkshire — none recorded a higher number of projects than in 2010. In fact, a comparison between the numbers of FDI projects in the English regions (excluding London) in 2010 and 2012 shows a decline of 24 per cent.

‘When reinvestments in existing projects are stripped out, the position on new projects is even more pronounced. In 2012, the English regions as a whole outside London secured their smallest total of new investment projects on record, at just 122. Comparing 2009 — the last year before the announcement of the closure of the RDAs — with 2012, new projects secured by the English regions have declined by 40 per cent.”

But there is no room for Welsh schadenfreude at this performance by the English regions, since the deeper question for us is why was our own performance on FDI not a lot better than our population share, at a time when the competitiveness of the English regions has been at its lowest?

FDI Projects into the UK regions and UK market share of projects, 2012

Region	Projects 2012	% UK FDI projects	% change on 2011
London	313	45	-4
Scotland	76	11	+49
South East	55	8	-34
West Midlands	50	7	+32
North West	44	6	+13
Wales	31	4	+244
Northern Ireland	29	4	+71
North East	26	4	+8
Yorkshire	21	3	+5
East of England	20	3	-23
East Midlands	17	2	-15
South West	15	2	-40

Source: Ernst and Young’s European Investment Monitor, 2013

Ernst and Young described the performance of the devolved territories as ‘sparkling’, with Scotland (76 projects) up by 49 per cent, Northern Ireland (29 projects) up by 71 per cent and Wales, (31 projects) up by a seemingly spectacular 244 per cent.  But Wales’s scale of increase, while still performing below its population share, just demonstrates how poorly we performed in the previous year. Northern Ireland, matched the Welsh share, despite having half our population. There is no room for complacency on this front, either in Wales or the UK.

The disproportionate predominance of London is a cause of great concern to Ernst and Young – and on two counts: first, its dominance is greater than that of any other city amongst our top competitor countries; second, its impact on the UK’s overall performance. The report says:

“Looking at the number of new projects attracted in 2012 by leading regions in each country, London secured the highest proportion (60 per cent) of the national total of any of the top eight destinations for new investments. In contrast, Germany’s leading destination for new projects — Dusseldorf — attracted only 16 per cent of new FDI projects in that country. Indeed, the position of London is now so pronounced that if the UK were to be considered without London, it would be placed joint third alongside Spain in attracting new investment, with 183 new investment projects secured.

“Taken together, the findings on the declining performance of the English regions outside London — especially in attracting new projects — raise further doubts over the UK’s ability to retain its lead in European FDI. It appears that the abolition of the RDAs may be starting to undermine not only the regions in which they operated, but also the UK’s ability to sustain its overall leading position for inward investment — can the UK remain a leader when London is so dominant in projects into England?”

Another reason why this is concerning for the authors of the report is that Germany has been creeping up on the UK’s leading performance in FDI, and seems set to overtake us. While the number of projects won by the UK has remained relatively stable since 2006 – at around 700 projects a year – in the same period Germany has more than doubled the number of projects it wins annually.  2012 was the first year in which the UK slipped behind Germany in new projects as opposed to reinvestments from existing investors, as well as being the first year in which Germany outperformed the UK in attracting sales and marketing investments, a traditional area of UK leadership. Ernst and Young put this down primarily to Germany’s high skills levels.

Of particular concern to Wales must be the fact that the UK is failing to attract manufacturing projects. The lead destination for manufacturing projects is now Russia, followed by Germany and Serbia.

Asked to look ahead over the next three years, 52 per cent of investors worldwide see Germany as the most attractive location, with 33 per cent putting the UK second. Asian investors put Germany even further ahead. But when asked which regions of the UK might be most attractive for new investment, although London and the south east of England lead with 62 per cent of investors, Scotland, Wales and the north west and south west of England are all on a par at 4 per cent. Further evidence that there is lot more to do on this front.