Another marker of economic strain has been confirmed. Covid-19 has significantly reduced the number of foreign direct investment (FDI) projects to the UK in the financial year 2020/21, a 17% decrease compared with the 12 months annum, according to recent figures from the Department of International Trade (DIT). This type of investment is of huge value to the UK economy, but is often taken for granted.
Except for Wales and the South West, every region saw a drop in FDI projects. Similarly, all sectors witnessed a fall in FDI, except for biotechnology and pharmaceutical and electronics and communications, while life sciences and financial services only saw a very small decrease. Each of these sectors is widely considered to have been boosted by the pandemic.
Although the overall picture is bad news for the UK, a closer breakdown of the DIT’s figures reveals that the situation could have been much worse when compared with global trends. For example, while the number of greenfield FDI projects across the world dropped by 35% in 2020, the UK only saw a 23% decrease (albeit in the financial year 2020/21). The figures are more equal in terms of mergers and acquisitions, with the UK losing 12% versus a 10% global average.
Another upside is the fact that, despite the overall 17% shortfall in projects, the number of jobs created by FDI only fell by 2%, according to the DIT data. In fact, during the pandemic foreign investors created 55,319 jobs in the UK, with Scotland, the South West, the East of England, the West Midlands and London seeing the largest increases, when compared with the previous financial year.
“Amid the unprecedented challenges caused by the Covid crisis, it is fantastic that Scotland and regions such as the Midlands have secured new jobs and prosperity,” said UK Minister for Investment Gerry Grimstone in a press release.
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Regional economic inequality still very evident
FDI can help the UK ‘level up’ the regional imbalances that hold back national economic output, productivity and development.
This agenda has never been more essential, since the pandemic has hit all parts of the UK economy hard, but especially the regions outside London and the South East. In this regard, the DIT thinks that the latest FDI data is good news. “[The] new figures show foreign investment is levelling up [the] whole of the UK,” its press release stated.
However, a string of publications in recent months have highlighted the very opposite. A report from the think tank Onward shows that, while the volume of foreign investment to the UK has risen for more than a decade, the country’s investment attraction environment is drastically uneven.
More specifically, FDI has become highly concentrated geographically, an imbalance that poses a growing risk to the UK’s competitive position internationally and in terms of pre-existing economic disparities. In the two decades to 2016, the number of foreign investment projects to London more than tripled, while the number of projects to the rest of the UK fell by 15%.
The DIT’s latest figures also display this geographic concentration. London welcomed 31% of all FDI projects in the past financial year, thereby hitting above its weight relative to population size and gross value added.
The fact that London and the South East also saw the largest decrease in FDI projects (and by far) – see the chart below – shows how much these regions dominate the scene. This is no surprise since much of the UK’s talent is concentrated in those parts of the country. However, foreign investors may also be unaware of talent elsewhere. London does indeed have a monopoly over the high-paying software and computer services sector (and many others), which also happens to be the industry in which FDI creates the most jobs, accounting for one in five, according to DIT data.
These investment figures reflect the UK’s structural issues – indeed the country’s regional inequality is one of worst in the developed world. The ‘levelling up’ agenda seeks to address this, but a better foreign investment strategy must be implemented. Part of the problem is the regions’ varying levels of institutional capacity to attract inward investment.
Moreover, Onward’s report highlights how the UK is an outlier among the G20 economies in terms of its approach to FDI attraction. It is one of the few countries that does not have the ability to incentivise FDI to specific places through discretionary funding (i.e. tax incentives).
The UK government needs to recognise that, as things stand, FDI into the country is reflecting regional economic inequality – and quite possibly exacerbating it in some cases. If spread better, FDI could help make 'levelling up' more than a pithy pipe dream.