Stepping up the investment attractiveness ladder

Published on 13 March 2013 0 comments

By Smita Mehta

The UK has historically been a preferred destination for inward investment from other developed economies. However, recently its position has been waning in some of the rankings. It faces threats from economies such as Germany which continues to maintain a strong position as an engineering powerhouse, and others like Poland who are intensifying efforts to attract foreign businesses in the aftermath of the Eurozone crisis. What can the UK do to go up the rankings? The latest issue of our UK Economic Outlook report has a special article on this topic focusing on attracting more inward investment to the UK from the BRICs.

Over the past 10 years, the inward investment stock to the UK has been rising consistently other than for a blip after the financial crisis in 2007, but has since started to recover again. The US and other advanced economies like France, Germany and Japan are still the largest investors in the UK, but investment from the BRICs including Hong Kong has trebled since 2001, albeit from a very low base (see chart below). India and China, in particular, have consistently figured in the top 10 project and job creators since 2002.

Inward investment to the UK – change from 2001

UK-Inward-Investment

Whilst China and India have been prominent inward investors to the UK, investment from Russia, Brazil and other emerging economies is still low in comparison. The UK should capitalise on its strengths, and work on its weaknesses, in order to attract further investment from these fast growing countries.

UK’s key strengths lie in its flexible labour markets, strong brands, high quality manufacturing facilities in certain sectors (e.g. aerospace and pharmaceuticals) and its reputation as a world class financial centre. It was this combination of brands and cutting edge capabilities which attracted large investments from Indian companies such as the Tata Group over the past decade. Factors such as support from government and the ease of having a base here to increase their global reach have also attracted businesses from China and India.

To further improve this position, the UK needs to improve its transport infrastructure relative to European economies such as France and Germany. Also, while the corporate tax rate has been reduced since 2010, personal tax rates for senior executives remain relatively high, which can prove a deterrent to foreign investment.

In order to attract investment in R&D and innovation, where the UK already has a reputation as a hub, the country needs to capitalise on the great opportunity provided by its world class universities. Furthermore, UK has cutting edge capabilities in green technology along with the availability of government incentives in this sector. This could be a big draw for businesses in emerging economies with clean energy objectives.

By exploiting these opportunities and improving its areas of weakness, the UK could become a European destination of choice for inward investment from the BRICs. This in turn could provide a significant boost to output and employment in the UK in the medium to long run.

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Smita Mehta:
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