The UK is well established as one the world’s most attractive destinations for foreign direct investment (FDI). The country’s inherent advantages – most notably its skilled workforce – have created fertile ground for inward investment, which in turn has generated one in five of the UK’s new jobs over the past decade.
The material benefits of FDI and its transformational effects are starkly brought into focus as the global economy transitions into an era of post-pandemic recovery. FDI helps create a more competitive business environment, assists talent agglomeration, and contributes to international trade integration. Critically, these benefits contribute to higher economic growth, helping to improve environmental and social conditions for the host country through employment and innovation – the most potent tools in creating resilient economies of the future.
With this in mind, as the investment agency for the West Midlands, I write to express our regional endorsement and willingness to support the recommendations made in a new report by think tank Onward called Levelling Up Inward Investment. The report highlights that while foreign investment and its spillover benefits have risen by volume in the UK, the country’s investment attraction environment is drastically uneven.
The UK’s uneven playing field is preventing levelling up
FDI has become highly concentrated geographically and this imbalance is posing a growing risk to the UK’s competitive position internationally, reinforcing existing economic disparities at a heightened time of overseas competition post-Brexit.
We need to level the FDI playing field for English regions to have a fair chance at competing nationally within the UK for investment.
It is striking – but not surprising – that the number of foreign investments made in London has more than tripled, while the number of projects in the rest of the UK fell by 15% in the two decades to 2016.
Skewing an already imbalanced economy further are the varying levels of institutional capacity to attract inward investment across the UK. Sub-nationally, each of the devolved governments has an investment promotion agency (IPA) – namely Invest Northern Ireland, Trade & Invest Wales, and Scottish Development International – complete with discretionary powers, such as the ability to attract FDI projects through grants.
Undoubtedly, devolved economic decision-making is integral to future UK prosperity, but the current uneven distribution of IPA autonomy means that some parts of the UK are much better equipped to attract investors than others. Clearly, this is a reductive structure when levelling up the UK is a national strategic priority – it is something, here in the West Midlands, we recognise as a barrier to inclusive growth.
Mainland Europe and the devolved administrations are also mobilising incentives to both attract and retain investment. In fact, the Onward report goes on to illustrate the UK as an outlier among the G20 grouping of economies in its approach to attracting FDI. Not only is it one of the few countries not to offer a bespoke investment incentive tax regime for foreign investors, almost every other G20 country has also developed the ability to incentivise FDI attraction to specific places through discretionary funding.
While investment attraction is still taking place in English regions such as the West Midlands, despite the absence of formal levers, the government must recognise that it will become increasingly hard for these regions to continue to compete with packages offered by devolved administrations, particularly as global investment stock contracts.
We need to level the FDI playing field for English regions to have a fair chance at competing nationally within the UK for investment, let alone mainland Europe. With every missed opportunity to secure FDI is the ensuing loss of local jobs and economic reinforcement for our communities.
Covid impact shows the need for FDI in English regions
Beyond the government’s explicit levelling up agenda, the other ‘elephant in the room’ as a strong case for championing the fair distribution of FDI is Covid-19. The coronavirus pandemic has hit all corners of the UK economy hard, and its impact is felt greatest across regions.
Conversely, and encouragingly, the UK’s exit from the EU, combined with government’s impetus to ‘level up’ the UK economy, offers a fresh opportunity to prioritise FDI as a mechanism for growth in the coming years. Onshoring, or reshoring, is one of those obvious mechanisms, accelerated in the wake of Covid-19.
Devolved FDI autonomy for regions will enable more localised, meaningful prioritisation for projects.
The pandemic has clearly exposed the frailties of many global supply chains, and the UK’s reliance on the overseas supply of strategically critical items. The current economic epoch of recovery presents an opportunity to exploit the trend towards onshoring; an invitation for multinational companies to reduce the fragility of their operations by re-establishing UK production bases. English regions with an esteemed, deep-rooted heritage, such as the West Midlands, are well positioned to offer an advantageous ‘midshoring’ proposition, offering retained businesses cost efficiency coupled with access to high-value talent and proximity to the capital.
Of course, shifting supply chains takes significant time and investment, but through the right government promotional support, surely now is the time to reconfigure England’s ‘investment portfolio’ beyond the capital? While neighbouring overseas economies increase protectionist strategies to win and retain FDI, this aptly timed report suggests there is much more that the UK could be doing in practice to attract FDI and boost regions outside of London.
As a starting point, devolved FDI autonomy for regions will enable more localised, meaningful prioritisation for projects. For example, the West Midlands Growth Company – the West Midlands’ official IPA – has a deep understanding of the region’s specialist and differentiated economic strengths across its constitute local authorities; Birmingham, Coventry, Dudley, Solihull, Sandwell, Wolverhampton and Walsall. This tailored, more inclusive approach to investment attraction is potentially at risk if the government does not adequately empower regional authorities to drive their own levelling up; the wilfulness from the West Midlands is there, and equally visible from the likes of the North East, North West, and west of England.
The West Midlands urges the UK government to give due consideration to the recommendations made in the Onward report – in particular, the economic and social advantages to taking a bottom-up approach to economic development policy. Mayoral and combined authorities with discretionary funding and the power to attract FDI in a more systematic way could create a powerful opportunity to redress the imbalance of the UK’s internal market by establishing uniformity across the UK’s investment attraction armoury.
Moving to a more devolved investment model that matches opportunities with regional needs is inextricably tied to our country’s levelling up ambitions. Onward’s report should be considered a blueprint for recovery that ministers should seize with both hands if they are serious about pushing the reset button on the UK’s economy for good.