One year after the Labour landslide that promised to unleash growth in the UK economy, the latest figures on foreign direct investment (FDI) tell a different story.
According to the Department of Trade and Business’s (DBT) latest report, FDI project numbers reached a record low of 1,375 between 2024 and 2025, experiencing a 12% decline from the previous year. At the same time, the value of venture capital investment projects during this period ballooned to £4.35bn ($5.8bn) between after reaching £860m the previous year.
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It is worth noting that declining FDI flows are a global phenomenon, as reflected in UNCTAD’s World Investment Report 2025. In the past year, excluding European conduit economies, global FDI decreased by 11% as “geopolitical tensions and industrial policy goals” strongly influenced policy decisions. The report also cited high borrowing costs and exchange rate volatility as drivers of the investment downturn. However, the value of the digital economy continues to grow. Since 2020, it has tripled to $360bn.
Across the different sectors in the UK, software and computer services attracted 257 projects, followed by 189 in financial services, 159 in advanced engineering and supply chain, and 150 in environment, infrastructure and transportation. The high attraction rate for tech projects in the UK reflects an FDI landscape where both investors and the government are happy to bet on the continual growth of the sector.
It creates a blurry picture of the UK and its capacity to attract investment. Consumers continue to feel the pinch of unrelenting inflation, businesses face higher costs, and companies continue to exit local stock exchanges. At the same time, the UK’s ability to reach a trade deal with the US is no small feat, and it is still the top destination for tech investment in Europe.
Difficult global landscape
The fall in FDI project numbers is likely due to a combination of domestic and global macroeconomic factors. Internally, the government’s attempt to keep everyone happy has mostly done the opposite. Businesses are still facing higher operating costs in the form of a higher minimum wage and national insurance employer contributions, as well as persistently high energy costs and inflation. Much of Labour’s base has turned on UK Prime Minister Keir Starmer as substantial cuts to the welfare state, such as for those people with disabilities or pensioners in need of the winter fuel payment scheme, have made many question whether the identity of the party is slipping away.
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By GlobalDataConnor Finnegan, FDI consultant at the FDI Center, suggests that while investors are feeling cautious everywhere, the UK is “facing its own credibility gap”.
“Ongoing uncertainty around planning rules, regulatory stability, energy prices and post-Brexit trade alignment has eroded investors’ confidence. A perceived lack of policy clarity and long-term strategic direction has probably been the most influential factor in the past year; fears many will be hoping the UK’s new industrial strategy will assuage,” Finnegan told Investment Monitor via email.
The UK’s new industrial strategy, published in late June, identifies eight sectors that have high growth potential for the country. These include advanced manufacturing, clean energy, the creative industries, defence, digital and technology businesses, financial services, life sciences and professional services. The plans centres on a strategy to cut energy costs for businesses that consume a lot of energy from 2027.
Still a tech destination
Despite this downturn and an economic environment of scepticism, the UK has continued to be the top destination for tech investments in Europe, particularly in software and IT services. This helped drive project values, which grew despite the downturn in deal numbers, according to the World Investment Report.
In 2024, the UK attracted two of the most valuable FDI deals of the year in the tech space. US-based data centre provider Quality Technology Services, a subsidiary of Blackstone, announced plans to invest £10bn to build a data centre campus in Northumberland. Amazon Web Services also announced plans to invest £8bn between 2024 and 2028 in order to operate and maintain data centres around the country.
The government also continues to expand the programmes and incentives for tech investments. These include a research and development commitment of £86bn, a £54m AI talent attraction scheme, a £187m national skills drive to bring AI training to classrooms and communities, and more. At a time when the government is trying to rein in spending in other areas, these incentives reflect an expectation that growing the tech industry will help drive growth.
“The dominance of the software and computing sectors definitely reflects a broader structural reorientation in global investment, aligning with what global capital now prioritises: scalability, speed and high returns,” Finnegan outlined. “Such projects can scale quickly and expand across borders with minimal friction – especially in a world shaped by cloud infrastructure and remote work, making these sectors particularly attractive to private equity and venture capital.”
However, a decrease in project numbers is still significant, even if venture capital flows reflect higher values.
“While the trend highlights confidence in the UK’s innovation ecosystem and lower political risk and stronger IP [intellectual property] protections association with the UK in a time of significant geopolitical risk – for example, when compared with the US and China – the key question is whether this momentum will translate into long-term economic growth,” Finnegan notes.
There is also the ongoing tariff uncertainty coming from the US, which continues to rattle the global economy. With no end in sight, the UK’s ability to secure a trade deal may also help reinstate confidence. However, addressing enduring barriers such as “market access to Europe, planning rules, regulatory stability and energy prices” will still be vital to reinstate investor confidence, Finnegan says.
Investment trade-offs
Whether the tech investments of the past year really lead to growth, as the government expects them to, will also depend on the degree to which frictions with other priorities can be abated. Aside from economic growth, housing is the other cornerstone of Labour’s political promise. UK Deputy Prime Minister Angela Rayner aims to build 1.5 million new homes in the country by 2029. However, the development of data centres in many parts of the country have already clashed with some of these housing goals because of their high energy requirements.
Plans for affordable housing in the Isle of Dogs in the London borough of Tower Hamlets have been deferred because of the electricity requirements of more than 20 data centres located in the area, as London Spy reports. Tower Hamlets council said there was a “severe” risk that “house building, at scale, is unable to proceed for potentially 10+ years due to lack of available electricity capacity”. Three years ago, there was a similar problem in west London, when developers for three boroughs were told there would not be enough electricity for new homes until 2030. At the time, Sadiq Khan’s office said this was “largely due to a rapid influx of batteries and data centres”.
Finnegan notes that this sort of friction is not unique to London, as other parts of Europe and of the UK experience data centre growth.
“As digital infrastructure becomes increasingly energy and land-intensive, local planning systems will continue to face significant trade-offs, especially with existing limits in energy availability and grid capacity. The key to this issue will be continued expansion of grid investment and investment in broader energy infrastructure to avoid pitting core developmental goals against one another (such as digital competitiveness and increasing housing supply).”
Whether the UK Government can create enough energy for its wide-ranging growth plans and, crucially, keep it affordable for businesses and people, will be central to its objectives.
