Foreign direct investment: the UK remains second in Europe despite a decline in the number of projects

In each of Europe’s three main sectors, the UK’s market share in 2022 was well below the average European market share over the past decade. While still the highest in Europe, the UK’s 19.8% share of European digital technology projects in 2022 fell short of the decade average of 28.3%; the 9.2% share of business and professional services in Europe is half the average share of 19.9%; and the UK’s 12.6% share of transport and equipment production was just below the average share of 14.3%.

However, to boost the country’s green credentials, the UK reported 37 renewable energy projects in 2022, the second highest in Europe (behind Spain and France with 39).

On the positive side, the breakdown of UK FDI projects by activity shows some high-profile successes, with Research & Development (R&D) projects up 14.4% to a record 127 (behind only France with 144 , up 8.3%, while 53.8% of investors surveyed plan to increase their UK R&D investment over the next three years. In particular, the UK led Europe in R&D centers for pharmaceuticals and medical devices (28 projects), with almost double the number of projects than France in second place (15).

Meanwhile, projects to set up new UK headquarters fell just 2.2% to 133, while manufacturing continued its recent rally, growing 20.7% to 175 projects, pushing the UK’s share of European manufacturing FDI (10%) regained its average market share over the past decade (10.3%).

Peter Arnold adds: The UK has seen gains in exactly the kind of activity, high up in global supply chains, that policy makers have been trying to promote. Manufacturing, R&D and logistics are all up, while sales and business services are down. However, policymakers will need to ensure that the high value-added investment is also capitalized further down the supply chain.

There are still areas where the UK needs to catch up. For example, only one in five industrial projects in the UK is linked to low-carbon mobility, green cars and aerospace projects, while for Germany and Spain this rises to two in three. That said, investors rate the UK positively on sustainability, with the country scoring well on its potential for decarbonising its supply chain, the percentage of renewables in its energy supply and having an ecosystem of innovative cleantech and sustainability companies .

Looking ahead, manufacturing is an activity to watch for both the UK and Europe. UK manufacturing is slowly recovering from a recent all-time low, but further growth could be limited by the risk that foreign multinationals will not significantly increase their manufacturing footprint in Europe. The willingness to locate production facilities in Europe is constrained by high costs, the energy mix and competition from the US in the wake of the Inflation Reduction Act.”

The US and India are the main sources of investment in the UK, while the UK is ramping up its own investment in Europe

The United States remains Europe and the main source of FDI projects in the UK, with the US being a more significant investor to the UK than the rest of the continent. One in four (24%) UK projects originate in the US, compared to one in five (20.8%) for Europe. The UK was the main recipient of US investment in Europe with 17.9% of all US projects by 2022.

While Germany was Europe’s second largest country of origin for FDI (11% of all projects), India was the second largest source of FDI in the UK (8.8% of UK projects), with Germany leading third (6.6% of projects in the UK). The UK accounted for 58.2% of all Indian-backed projects in Europe in 2022, up from 51.2% in 2021.

Peter Arnold comments: Foreign direct investment in the UK is evidence of the country’s global approach, which has been particularly important since leaving the EU. Places like India, Canada and Australia have moved up the list of the UK’s top investors in recent years, with the UK able to leverage strong cultural ties to attract investment not as accessible to European competitors. The UK’s entry into the CPTPP and the potential for new trade deals, including with India, provide further opportunities for the UK’s increasingly global tilt.

For Europe, seven of the top nine most important countries of origin of investments were other European countries, while for the UK, five of the top nine countries of origin were outside Europe. Investment in the Commonwealth remains important to the UK, with the UK winning 50% of all Australian projects in Europe and 24.7% of all Canadian projects.

In the other direction, the UK was the third largest source of investment projects in Europe (8.7% of all projects), while the 516 outgoing UK projects in 2022 were a record high, 15.4% higher than the 447 in 2021, and more than double the 230 outgoing projects registered a decade ago.

Germany and France are the main destinations for UK investment in Europe, and in both cases the UK initiated more projects in these countries than it received in exchange for a pre-2017 reverse, with UK companies now looking to set up operations in the Single Market. While British companies carried out 95 projects in Germany in 2022, 61 German companies launched investments in the UK. The difference was more pronounced for French investments, with 104 UK-backed projects in France and 43 French investments in the UK.

The North is seeing strong growth in FDI projects as London loses market share

More than half of Britain’s countries and regions attracted more foreign direct investment (FDI) in 2022 than in 2021, despite a decline in overall UK projects. The 6% fall in FDI projects in the UK between 2021 and 2022 was driven by declines of 24% in London and 18% in the South East.

London (299 projects) was still home to the most FDI projects of any UK nation or region in 2022, but the share of all UK projects has fallen from 49% in 2019 to 32%.

Scotland (126), the North West (88) and the West Midlands (74) saw the most projects outside London, while the biggest gains in England from 2021 were in the North East (33%), Yorkshire and the Humber (28% ). ) and the East Midlands (23%). The North West (19%) and the East of England (10%) also posted double-digit percentage growth.

The English regions that saw project declines from 2021 along with London and the South East were the South West (-17%) and the West Midlands (-5%). The South East is now home to the UK’s fifth highest number of FDI projects, down from its third position in 2021. The North West, on the other hand, has moved from fifth to third.

Strong results in the north of all three regions showed double-digit growth, supported by resilience in the digital sector and growth in a range of core businesses, including manufacturing, sales, research and development, logistics and corporate headquarters projects. Growth in transport, manufacturing and digital technology, as well as wider logistics and manufacturing activities, boosted the East Midlands, while strong performance in pharmaceuticals and research and development supported growth in the East of England.

Meanwhile, declines in the digital sector have been the biggest drag on performance for southern England. Digital projects in London have nearly halved from 194 in 2021 to 107 in 2022, with significant declines also in the South East and South West.