Foreign direct investment to take hit from Brexit

21 June 2019 3 min. read
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Even while the UK has continued to see growth in investment, core cities tend to be the favourite destination of money from overseas, due in part to strong talent and infrastructure offerings. Manufacturing has traditionally bucked this trend, but with risks from Brexit hitting current and future investment, the industry also faces difficult times ahead.

Foreign direct investment (FDI) into the UK, even with uncertainties around Brexit, saw the highest levels of such activity in Europe in 2017. However, concern is mounting that this is not sustainable, with a new survey from EY – titled ‘UK Attractiveness Survey Special report: Bridging the gap’ – finding that a more than a third (36%) of investors globally expect the UK’s attractiveness to deteriorate over the coming three years, while 30% are considering moving assets out of the UK due to a possible Brexit.

The firm’s latest analysis shows that investors are favouring projects in core cities and large towns – both of which have seen significant growth over the past two decades. Medium and small towns show relatively flat growth. High investment into already opportunity rich places – cities – reflects wider difficulties faced by the countryside.

Number of FDI projects in Core Cities, 1997 - 2017

The high proportion of investments into core cities, hides a more prominent fact: London receives by far the most investments, at more than doubled the combined total of all other core cities in 2017 – totalling 459 projects. Manchester was second, at less than 10% of the capital, with 45 projects. Edinburgh saw 29 deals, Birmingham 22 and Newcastle upon Tyne, 14.

In addition, the firm notes that university towns significantly outperform other types of towns – besides those in the core – in terms of attracting investment. In 2017 they accounted for 180 of the total projects on offer.

What criteria draw investment decisions

University towns offer investors a number of benefits. When asked what the investment criteria are for investing in regional locations in the UK, the top factor was the availability and skills of the local workforce (33%). However, transport infrastructure and telecommunications and technology infrastructure combined accounted for a 30% of respondents’ answers, highlighting the importance of infrastructure on investment decisions. Core cities and university towns also offer strong option for business partners and suppliers – with a form of interdependence creating investment decision outcomes as firms cluster.

Total investments stood at 14282 for the past two decades to 2017. Interestingly, sales and marketing projects are by far the most common form of FDI – accounting for almost half of all investments over the period. Core cities saw 4850 of the 6591 such investments. While core cities tended to receive the highest level of projects among categories, one type stood out: manufacturing. Large cities, medium towns and small towns were significantly more likely to be home to such investments than core cities. Logistics centres too were more likely to find homes in non-core regions.

FDI projects in R&D by place type, 1997-2017

Research and development (R&D) continues to have significant call in the UK. Last year saw total investment up 44% on the year previous. However, a large portion of that investment (77%) continues to be in core cities and large towns – the latter drawing in more in the most recent investment bump.

Commenting on the report, Mark Gregory, EY’s Chief Economist, UK, said, “The economic challenges facing our towns are well-known but this report identifies just how stark the differences are. Despite the UK’s huge success in attracting FDI, cities and the largest towns capture the vast majority of projects. Smaller towns and communities up and down the country haven’t seen any growth in the number of FDI projects over the last two decades. We know that investment decisions are driven by the availability of skills and infrastructure locally and rebalancing FDI requires an urgent focus on these areas.”