UK FDI attractiveness dips amid COVID-19 but remains resilient as investor priorities shift

• 30-45% fewer FDI projects expected in the UK in 2020 than in 2019, finds EY’s latest
  UK Attractiveness Survey
  
  
• 25% of overseas investors are planning investment projects in the UK in next 12 months – down from 31% in April
  
  
• A country’s ability to handle future crises and their track record with COVID-19 are top factors in investor decision-making
  
  
• New opportunities emerging with 32% of manufacturers planning to ‘reshore’ activity to UK given pandemic disruption; the changing economic model in city centres identified by 61% of investors as shaping their future strategy
  
  
• Investors’ outlook for the UK looks stronger than it is for Europe; UK is Europe’s second most attractive investment destination

The proportion of overseas companies planning to invest in the UK in the next 12 months has fallen to 25% from a ten-year high of 31% in April, according to EY’s latest UK Attractiveness Survey, which tracks the UK’s appeal as a destination for foreign direct investment (FDI).

The figures are the latest evidence of the economic impact of the COVID-19 pandemic, which has created uncertainty around business investment and prompted a re-think of investor priorities.

The survey of 220 non-UK investment decision makers also found that 43% of respondents are continuing with the UK investments they planned before the pandemic, down from 72% in April.

According to EY’s analysis, these figures would mean 30-45% fewer FDI projects in the UK in 2020 than the 1,109 projects recorded in 2019 – equivalent to a fall of between 333 and 499 projects.

A forthcoming EY survey of 109 investors, carried out at the same time and focused on Europe, found that the UK is seen as the second most attractive European destination for foreign investment in 2021, with 40% of respondents describing it as among the ‘most attractive’ countries – slightly behind the 43% opting for Germany and ahead of the 39% backing France.

UK retains resilience and appeals to manufacturers

Over one-third of respondents (35%) said they had scaled back their UK FDI plans and 17% have paused them. However, just 5% have cancelled UK plans entirely and 21% said they had increased UK investment in light of COVID-19 (up from 5% in April). Meanwhile, EY’s European survey found only 10% of respondents had increased investment in Europe, 32% had paused plans, and 36% had scaled investment back. In comparison to the 43% of respondents leaving their UK investment plans intact, the equivalent figure for Europe was 17%.

Positively for the UK, 32% of manufacturers surveyed said they planned to ‘reshore’ activity to the UK given the disruption to global supply chains caused by COVID-19. Meanwhile, the UK’s longer-term outlook has improved, with 53% of respondents saying UK attractiveness will increase over the next three years compared to 34% in April and 26% in 2019.

And, while down from April’s decade-high, the proportion of respondents planning UK investments in the next year (25%) is still at the second highest level since 2016.

Alison Kay, EY UK&I Managing Partner for Client Service, says: “The UK’s attractiveness as a destination for FDI remains comparatively strong despite COVID-19. Overall, the outlook for the UK looks stronger than that for Europe. With strengths in key areas like digital technology, Research & Development, and manufacturing, there is more than a solid base for the UK to build a future strategy on. These factors, combined with a growing interest in ‘reshoring’, present post-pandemic opportunities for the UK to meet investor needs and accelerate its levelling-up agenda.

“However, the UK will need to keep pace with the changing drivers of investment. Since the start of the year, COVID-19 has seen investors put an increasing premium on a country having measures in place to prevent a future crisis and its level of success in dealing with the pandemic.”

Manufacturing shifts create opportunities for UK

EY’s research finds the UK well-placed to attract manufacturing investment in the future. As well as the 32% of manufacturers looking to reshore activity to the UK – a figure higher than historic trends – another 32% of respondents from the manufacturing sector say they intend to invest in the UK over the next 12 months.

This is being driven by major changes in supply chain strategies which have become more pressing as a result of the pandemic. Sixty-six per cent of all respondents – and 98% of manufacturing respondents – plan to remodel their supply chains in the future. A move to ‘regional’ supply chains is on the agenda for 32% of all respondents and 40% of manufacturing respondents. Thirty per cent of respondents intend to reduce their reliance on a single source country, a figure which rises to 42% among manufacturers.

Alison Kay comments: “There is a real opportunity here for the UK. An updated industrial strategy should identify the UK’s support for manufacturing and supply chain onshoring. COVID-19 may actually have stimulated investment activity in the manufacturing sector by accelerating technology adoption and supply chain redesign.

“Pre-pandemic, businesses were already reviewing supply chains given trade and geo-political tensions. The challenges the pandemic has posed to extended global supply chains have made a rethink all the more important. Regionalisation, reducing dependence on one source of supply and reshoring are all driving this shift.”

UK faces increasing competition from Europe

While the UK remains attractive to investors, EY’s research has found that Europe has gained ground in the competition for FDI.

Although the UK’s long-term growth prospects have improved, the prospects for Europe have improved faster and further. Fifty-nine per cent of investors think Europe will become more attractive over the next three years, compared to just 9% in the summer (the UK is up to 53% from 34%).

The UK maintains a long-term lead in key sectors such as digital: 50% of investors say this will drive future UK growth compared to 35% who believe it will drive European growth.

However, the UK falls behind Europe in other sectors like clean technology: 12% of investors think this will be a UK growth driver while 39% think it will drive European growth. Encouragingly, 49% of potential new UK investors do identify sustainability and climate change as a key investment theme.

Mark Gregory, EY UK Chief Economist, says: “Post-pandemic there will be competition for FDI and the UK has some catching up to do in areas where it does not already have strengths. In sectors like clean technology, investors value long-term certainty in the regulatory environment. Our research shows that sustainability and climate change remain a key investment trend and the UK can’t afford to lag behind.

“The UK needs to articulate a clear vision for the future economy and what its net zero and infrastructure investment plan looks like. A long-term policy framework is essential for attracting long-term investment. This requires a joined-up approach across the whole of government.”

Investor appetites changing

EY’s report reveals the pandemic has prompted shifts in what matters to investors and in the sectors they feel will be important for future growth.

In the latest survey, respondents felt the digital sector would be the biggest driver of future UK growth (50% of respondents, up from 26% of respondents surveyed in 2019), followed by health and wellbeing (36%, up from 15%), real estate and construction (31%, up from 10%), the consumer sector (19%, up from 12%), and the automotive sector (18%, up from 12%).

Conversely, only 15% of respondents identified business services as a growth driver (down from 23% in 2019).

The types of project attracting investment is also expected to shift, with 61% of survey respondents saying the changing economic model in major city centres will become an important part of their future investment strategy.

COVID-19 has also required investors to re-prioritise their investment criteria. Thirty-six per cent of respondents say their most important investment criteria is a country having measures in place to prevent a future crisis (up from 20% in the summer), followed by 27% prioritising a country’s success in tackling COVID-19 (up from 23%). Factors such as the quality of labour (down from 25% to 19%) and the labour supply (down from 21% to 17%) have become less important.

Notably, EY’s European survey found that only 37% of respondents described the UK as having Europe’s most credible and investment-friendly recovery plan, behind both France (43%) and Germany (57%).

Mark Gregory comments: “The pandemic has been a significant driver in boosting the importance of technology adoption and appetite for investment in health and wellbeing. The Government’s ambitious infrastructure plans also seem to have prompted interest in real estate and construction FDI. The decline in appeal of business services reflects the fact that this is a mature market with fewer new investment opportunities.

“It’s clear that investors will need to be convinced that a country can cope with future shocks before investing.”

Notes to editors

About the EY Attractiveness Report

• EY’s Attractiveness Surveys analyse the attractiveness of a particular region or country as an investment destination. The surveys are designed to help businesses make investment decisions and governments remove barriers to growth.
  
  
• We have adapted our regular investor survey this year, to provide more insight into the impact of COVID-19 on the perceptions and aspirations of investors into the UK and Europe as a whole.
  
  
• The most recent survey was conducted by Longitude from 31 August to 14 September. The survey was conducted by telephone and email and based on a representative panel of 220 international decision-makers.
  
  
• April’s survey for the UK was conducted by Longitude from 10 April to 30 April.  The survey was conducted by telephone and email and based on a representative panel of 200 international decision-makers.