UK exceeds investor expectations with resilient Foreign Direct Investment performance in 2020, new EY report reveals

• Vaccine roll-out prompts investors to see the UK as having Europe’s best pandemic recovery plan, creating opportunities for growth
  
  
• UK records 975 inbound Foreign Direct Investment (FDI) projects in 2020 – down 12% on 2019’s 1,109 projects
  
  
• UK fall smaller than European decline, and much better than investors’ autumn 2020 forecast – investors now see the UK as the most attractive place in Europe for future investment
  
  
• The UK remains 2nd in the European league table for FDI projects – but closes the gap to leader, France
  
  
• London regains title as Europe’s most attractive city from Paris; Scotland and regions hold steady in attracting projects

The UK’s attractiveness as an investment destination has proved resilient amid the COVID-19 pandemic, with the country ranking second in Europe for total inbound foreign direct investment (FDI) projects in 2020 and expanding its share of the European FDI market, according to the EY 2021 UK Attractiveness Survey which launched today.

While the UK again missed out on Europe’s top spot for FDI – for only the second year in the survey’s two-decade history – the gap was closed on 2019’s first-time leader France. In 2020, the UK secured 975 projects (down 12% from 2019’s 1,109 projects); France hosted 985 projects (down 18% from 2019’s 1,197 projects). Germany ranked third with 930 projects (down 4% from 2019’s 971). Spain remained a distant fourth with 354 projects (down 27% from 2019’s 486).

Overall, Europe saw a 13% fall in projects – from 6,412 in 2019 to 5,578 in 2020 – which helped the UK expand its market share of FDI for the second successive year, from 16.6% in 2018 and 17.3% in 2019, to 17.5% in 2020. Meanwhile, London reclaimed its status as Europe’s most attractive city for investment, overtaking Paris.

The UK performance was, once again, partly based on its success in attracting investment in digital technology projects, which have accounted for the largest share of inbound FDI projects in the UK every year since 2013. There were 322 digital technology FDI projects in the UK in 2020 – 33% of all UK projects – while the country remained Europe’s leading destination for digital technology investment, albeit with a smaller share of the European market and with fewer projects than 2019.

UK performance ‘positive’ but country ‘trails Europe’ on clean technology

Alison Kay, Managing Partner for Client Services at EY UK & Ireland, comments: “Given the impact of the pandemic, a shrinking FDI market, and the then-uncertain future trading relationship with the EU, the UK delivered a positive FDI performance in 2020. A relatively small decline in project numbers meant the UK far-outpaced downbeat investor forecasts too. In our autumn 2020 survey of investment attitudes, investors forecast a 30% to 45% decline in UK projects compared to 2019.

“The UK has demonstrated resilience and adaptability in attracting investment. Key sectors have changed over time, and the UK attracted the most ‘new’ projects in Europe in 2020 rather than relying on reinvestments. However, its former dominance of the FDI market has been replaced by a competitive three-way tussle with Germany and France. To regain its place as the market leader, the UK will need to build on its strengths. The investors we spoke to for this year’s survey identified digital technology and health and wellbeing as being key growth areas for the UK, and these are areas where the country already excels.

“But there is catching-up to do elsewhere. In increasingly vital areas, such as clean technology, the UK trails Europe. COP26 in Glasgow should provide some impetus to improve, while investors tell us they value green policy and regulatory certainty as well as support to develop green supply chains. There is an opportunity for holistic, targeted initiatives to attract FDI in the priority areas that should form the core of a ‘Building Back Better’ strategy: innovative research and digital technology; ‘cleantech’; and levelling-up the UK’s economy.”

Investors say the UK has the best COVID-19 recovery plan in Europe

EY’s UK Attractiveness Survey includes analysis of 570 international investors’ perceptions of the UK as a destination for FDI. A previous survey, carried out in autumn 2020, found the UK ranked third in Europe for post-pandemic attractiveness – behind Germany and France – and just 25% of those surveyed said they planned to invest in the UK in the following 12 months.

This latest survey implies a significant reversal in fortunes. The UK is now perceived to be Europe’s most attractive destination for investment, while 41% of survey respondents plan to invest in the UK in the next 12 months – the UK’s highest ever score on this question, up from 31% in spring 2020 and 23% in 2019.

Alison Kay comments: “The UK has a very bright outlook for investment and a strong recovery, especially compared to last year. Allowing for the fact that the investment market is still uncertain and volatile, these are encouraging findings. The UK’s vaccine programme appears to have played a key role in the change in sentiment: the survey revealed that investors now view the UK as having the best COVID-19 recovery plan in Europe.”

Digital tech investment falls but knowledge sectors continue to drive UK performance

EY’s research reveals the significant impact that both the COVID-19 pandemic and Brexit have had on UK inbound FDI projects, and the UK’s long-term shift towards higher value activities.

While digital technology remained the UK’s key sector for FDI in 2020, the 322 digital projects were 25% lower than the 432 projects recorded in 2019. This decline was nearly double the 13% decline in European digital projects and saw digital technology’s share of the UK market fall from 39% to 33%. Still, the UK’s 2020 digital project flows remained over 20% higher than average for the decade.

Research and development (R&D) performed very strongly, achieving a 12% market share and 114 projects, up 12% from 2019’s 102 projects, and placing the UK just behind market-leading France’s 115 projects. As a mark of the UK’s progress, France attracted almost double the number of R&D projects than the UK as recently as 2018 (144 projects to 74).

Brexit and COVID-19 prompt shifts in FDI focus

Brexit appears to have prompted growth in some sectors likely to have been affected by changing regulatory requirements and supply chain adjustments. For example, the UK’s share of European agri-food projects rose from 14.6% in 2019 to 19.9% in 2020, in line with expectations that a need to meet new regulations on food and drink could drive investment in the sector. 

By contrast, the post-2017 decline in the performance of the UK’s manufacturing sector continues. The 112 projects attracted in 2020 represented a 15% decline from the 132 projects in 2019, while an 11% market share was some way below the sector’s average UK market share of 15% over the last decade. The UK’s share of European manufacturing projects was 8.5% – the UK’s lowest market share for any activity.

UK transport and logistics FDI projects doubled from 43 in 2019 to 84 in 2020 as supply chains shifted and the pandemic accelerated a move to online shopping.

Perhaps unsurprisingly, the pandemic prompted UK life sciences projects to soar 62% from 29 in 2019 to 47 in 2020. Meanwhile, back office projects fell from 90 in 2019 to 26 in 2020 – a 71% decline.

UK has post-COVID opportunities to grow

Looking to the future, 54% of investors surveyed by EY said the digital economy would drive UK growth in coming years, 34% said the same about healthcare, 27% said the same of real estate, 19% said this about ‘cleantech’ and renewables, and 16% said this about the automotive and mobility sector. Investor support for the UK’s ‘cleantech’ sector has increased – in 2018, just 5% said it would drive future UK growth – but remains lower than the 36% who think it will drive European growth; 85% say Europe’s position as a cleantech leader encourages them to locate projects there.

Alison Kay comments: “The R&D sector is a clear success story for the UK and has been part of a shift in UK investment towards high value activities. The UK is now just one R&D project behind France, the European leader, having been 70 projects behind in 2018. With innovation so important to future strategy, the UK is performing well. The strong performance of the life sciences, transport and food sectors in a turbulent year shows dynamism as well as an ability to adapt.

“In this latest survey, investors told us that the quality of a country’s health systems, sustainability and climate change, and the impact of technology are the three most important factors that shape their investment strategies. Investors are also prioritising R&D funding and the shift to net zero, among other policy areas; 41% of investors said making increased R&D funding a domestic policy priority would improve UK attractiveness. UK policymakers and businesses will need to align themselves with these views.

“While the UK remains Europe’s leader in digital tech and the sector is a key strength, the UK’s European market share fell in 2020. This decline was largely due to a dip in investment in cutting edge projects in London – project numbers rose in some places outside the capital as the pandemic pushed companies to invest in online sales platforms. Our survey offers some guidance on how the UK can best support its transformation to a digital economy, with the investors we surveyed prioritising digital infrastructure, cybersecurity, entrepreneurship, and protecting intellectual property and data. Targeted policies here could continue to differentiate the UK in the competition to attract digital FDI.”

Scotland and some English regions close the gap on London

With 383 projects in 2020, London remained the UK’s main location for inbound FDI projects. But with UK digital projects – a key London sector – falling, this figure was 29% down on the 538 projects secured in 2019. This performance saw London’s share of the overall UK market slip from 48.5% in 2019 to 39.2% in 2020; London’s share of the UK digital market fell to 58%.

Scotland retained its position as the leading UK FDI location outside London, securing 107 projects, up 6% from 101 projects in 2019.

Notably, the North West – 85 projects, up 16% from 73 in 2019 – overtook the South East as the UK’s third largest FDI location. The North West benefited from a growth in transport and logistics and life sciences projects, while the South East – 72 projects, down 13% from 2019’s 83 projects – lost out with the UK’s decline in digital investment.

Most English regions held steady with only the North West and East of England (35%) registering double-digit improvements, and only London and the South East registering double-digit declines. In total, four English regions – the North West, East of England, North East and South West – increased their project numbers, while five – London, the South East, West Midlands, Yorkshire and the Humber, and the East Midlands – saw a decline.

At a city level, Manchester recorded 35 projects – slipping from second place in the UK league table for the first time since 2014 – while Edinburgh recorded 36 projects and took top spot for investment outside London. Birmingham (26 projects), Belfast (25), Glasgow (23), Leeds (16), Aberdeen (13), and Bristol and Cambridge (both 12) round out the top-ten UK city locations for FDI.

Despite London’s challenging 2020 experience, 43% of those surveyed said it is the most attractive European city for investment – up from 28% last year, when it trailed the 31% achieved by Paris. This year, just 18% of survey respondents said they favoured Paris.

Peter Arnold, an EY UK Economic Advisory Partner, says: “Our research suggests the UK’s ‘levelling up’ message has landed effectively with investors, with almost two-thirds aware of the policy. There is scope to build on these foundations, with almost half of investors planning to change their supply chains in future and a fifth considering reshoring to the UK. With the manufacturing and logistics opportunities this will create likely to fall outside of London and major cities, this may be a one-off opportunity to reshape the UK’s economic geography.

“According to our survey, the key criteria investors will consider when looking outside London are the availability of the skills of the local workforce, the strength of local business networks, and access to regional grants and incentives for investment and R&D. There are signs of a shift in attention beyond London with the share of investors who say it is the UK’s most attractive destination falling from 46% in 2019 to 25% in 2020.”

Little change in sources of UK FDI – although UK investment in Europe dips

The US has remained the main source of investment into the UK, generating 31% of the UK’s total FDI projects, down slightly from 34% in 2019 but much higher than the US’ 22% share of the European market. The UK secured one-in-four of all US investment projects.

Meanwhile, a close relationship with India, Ireland and Australia means the UK is the leading recipient of investment from those countries. In each case, the UK secures more than 50% of the projects they generate in Europe.

The number of EU-originated projects in the UK halted a post-2016 decline with a rise from 340 projects in 2019 to 345 projects in 2020. Conversely, 2020 saw the lowest number of UK outbound investment projects into Europe since 2016, with the 375 projects representing a 24% fall from 2019’s decade-high 493.

Peter Arnold comments: “The identity of the UK’s investment partners has remained remarkably steady: the top 10 main origins of investment into the UK were the same in both 2011-15 and 2016-20. Despite some of the shifts we’ve seen over the last few years, the UK economy remains integrated with Europe, while the EU and US remain the most important sources of FDI.”

UK policymakers need to act on post-pandemic opportunities

Peter Arnold adds: “Investors have an increasingly broad list of criteria when it comes to assessing a country’s attractiveness. Previously, a country’s infrastructure and skills were by far the most important factors in investment decisions; now a broad range of factors including the availability of government support, sustainability policies, supply chain help, the tax regime, and the R&D environment are all cited as important. Diversity, lifestyle and tolerance are increasingly important factors too.

“To respond to investor needs, and to make the most of the upswing in investor sentiment about the UK, genuinely joined up policymaking will be key – not just one-off incentives to invest. An overarching investment framework needs to be integrated across government, from which specific policies can be developed and a clear vision articulated to investors.”