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UK second to France again for attracting foreign investment in Europe

·4-min read
<span>Photograph: Phil Noble/Reuters</span>
Photograph: Phil Noble/Reuters

The UK lost out to France as the most popular European destination for foreign investors for the second year in a row, amid disruption from Brexit and the coronavirus pandemic.

During 2020 the UK secured 975 inward investment projects compared with France’s 985 projects, according to accountancy firm EY.

The UK had dominated foreign direct investments (FDIs) into Europe for the first 18 years of the annual survey of foreign investments. However, the UK lost its crown for the first time to France in 2019 as businesses grappled with uncertain prospects for a trade agreement between the UK and the EU. A last-minute deal was struck on Christmas Eve of 2020, only a week before the UK’s departure from the EU’s single market.

Attracting foreign investment to a “global Britain” is a key aim of the Conservative government, whose leaders argued that leaving the EU would make the UK a more attractive destination. The government has set up an Office for Investment to attract inward investment but it has also made it easier to intervene in foreign takeovers on national security grounds.

Evidence for significant Brexit benefits has so far been limited – although comparative analysis has been made much more difficult by the global pandemic disruption.

Some experts have already detected Brexit effects on trade, which is linked to foreign investments. Academics at Aston University in Birmingham last month published research suggesting that Brexit caused services exports to fall by £114bn between 2016 and 2019.

EY said that the decline in investment from countries such as Japan suggested that “the appeal of the UK as an export base is much less than it was” because of Brexit. Upturns in investment from other countries outside the US, EU and Japan may not be “of a scale to compensate for lower activity in the traditional base”, the report said.

However, the pandemic caused a big drop in international investments across the world: the United Nations’ trade body found that global FDI fell by 42% in 2020 – its lowest level in 26 years last year, according to research by Simon Evenett, the professor of international trade at Switzerland’s University of St Gallen, and Johannes Fritz of the St Gallen Endowment for Prosperity through Trade.

EY’s figures do not capture the value of investments into the UK but they suggest a further decline is possible from 2019. Office for National Statistics figures showed that the value of foreign direct investment into the UK was £36bn in 2019, down from £66bn in 2018 and below the 10-year average of £54bn.

The UK’s investment project tally was down 12% compared with 2019, a slower decline than the 18% drop for French projects. Germany was the third most popular, with 930 projects, and the next most popular country, Spain, was far behind, with 354 projects, with inward investment down by more than a quarter in the first pandemic year.

Examples of big foreign direct investments announced in 2020 were the Japanese carmaker Nissan’s programme to upgrade its Sunderland car factory, an expansion by the online retailer Amazon and data centres for the Japanese technology company NTT.

Alison Kay, a managing partner for client service at EY UK & Ireland, said the UK’s “former dominance of the foreign direct investment market has been replaced by a competitive three-way tussle with Germany and France”.

However, it was overall a “positive” performance from the UK when considered in light of “the impact of the pandemic, a shrinking foreign direct investment market, and the then-uncertain future trading relationship with the EU”, she said.

She added that the decline in inward investment was relatively smaller than expected. Investors in autumn had forecast an average 30% to 45% decline in UK projects compared with 2019.

The report also found that the outlook for UK investment may have improved thanks to the speed of its Covid-19 vaccine rollout in comparison to rivals, Kay said. A survey of 570 international investors found that the UK was seen as Europe’s most attractive investment location, a rapid turnaround from the autumn when it lagged behind France and Germany.

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