EY’s UK Attractiveness Survey 2017
Time to act: empowering the English regions
A complicated position …
EY’s UK Attractiveness Survey 2017 highlighted the difficulty of evaluating the UK’s performance attracting foreign direct investment (FDI) and maintaining its investor appeal in 2016; for every positive indicator we found a negative development, making it hard to draw definitive conclusions.
Drawing on the analysis in our UK Attractiveness Survey 2017, and the latest EY Regions and Cities Economic Forecast, based on EY ITEM Club’s model of the UK economy, our drill-down at a regional level shows the same is true for the English regions; while they performed well, they face clear challenges as the UK enters Brexit negotiations.
Against this backdrop, we believe it’s vital that the UK has a clear economic strategy – and, to generate greater dynamism and inclusivity – this must include a focus on the regions outside London.
… with the UK posting solid growth in FDI
The UK put in a solid performance securing FDI in 2016.
With a 7% rise in total projects to 1,144 — the highest on record — it remained Europe’s number one recipient of FDI projects, ahead of Germany. It was also Europe’s leading recipient of FDI jobs, with FDI-generated jobs increasing 2% to 44,700.
However, its 7% growth in project numbers was well behind the 15% increase recorded across Europe, and, more worryingly, it lost market share in key areas such as research and development (R&D) and headquarters (HQ) investment.
That said, it had a successful year in areas such as logistics, where projects increased 44%. And, while UK manufacturing plant projects fell slightly, overall manufacturing projects across the value chain increased from 355 to 374. Financial services and business services also posted strong growth.
While investor perceptions point to short-term stability …
Set against the UK’s solid FDI performance, our 2017 survey of investor perceptions globally reveals a split between current plans and future expectations.
On a positive note, 24% plan to establish or expand operations in the UK over the coming year – in line with the past seven years. The UK has also regained second place behind Germany in investor rankings of Europe’s top three FDI destinations – a position it lost briefly to France in our Autumn 2016 post-referendum study.
… longer-term perceptions are increasingly negative
However, the findings also contain some worrying indicators for the future, with 31% of investors expecting the UK’s attractiveness to decline over the coming three years, and just 33% expecting it to improve.
While these figures are a marginal improvement from October 2016, they are significantly worse than the long-term average; in 2013, for example, 65% of investors voiced a positive three-year view of the UK.
Further analysis confirms that investors are worried about future trade and migration policy, raising concerns over the risks of more complex customs processes, tariffs on European trade, and skills gaps. Among investors based in Western Europe, 50% expect the UK to become less attractive for FDI.
Regions: the potential is clear
The performance of the UK’s regions in 2016 also produces mixed messages.
London remains the UK’s dominant FDI location, securing 39% of all projects, ahead of Scotland in second place. Meanwhile, the English regions’ potential is underlined by the fact that the Northern Powerhouse and the Midlands Engine now attract roughly double the number of projects they did at the beginning of the last decade.
These regions’ core strength is manufacturing, and manufacturing FDI continues to underpin economic activity in much of the country. The strong performance of both Yorkshire and Humber and the West Midlands in 2016 was built on their manufacturing base, and future policy must recognise its important role in driving medium-term growth in many regions.
Although the East of England also saw manufacturing contribute to its FDI growth in 2016, it, and the South East, have relative strengths in technology and research.
Despite these bright spots, the UK’s regions’ overall weaker performance in these knowledge-intensive areas is a wake-up call. As the digital economy becomes reality, the UK must invest in the infrastructure and skills needed to exploit future digital opportunities. And as any impact of Brexit on the availability of skills or research funding becomes clearer, adjust policy accordingly.
Time to act — empower the regions
So, overall, a positive short-term outlook for UK FDI is offset by clear risks in the medium- to long-term, with our research showing 9% of investors could leave the UK in the next three years. But if it acts quickly, it still has time to secure its attractiveness post-Brexit.
EY’s Regions and Cities Economic Forecast expects economic growth to continue, but more slowly than recently. London will slow significantly, but remain one of the UK’s fastest-growing cities, and the southernmost areas of the UK are set to outpace the rest of England.
There will be strong performers outside the south — such as Manchester and Leeds — but little overall geographic economic rebalancing. More focus on the English regions and cities is needed to boost both their prospects – and the economy overall.
Our research on investors’ perceptions provides clear guidance on what business regards as policy priorities.
Nationally there is a desire for a trade agreement with the EU, but also for deals with the US, China and India. Given possible changes to immigration rules, businesses also see the development of detailed plans for skills as very important. All these areas also matter at a regional level, but improved infrastructure and high-quality skills are also key investment drivers. Again, a clear action plan is needed.
A plan for success at national and regional levels
At a national level, we’ve identified five priority areas for policy to respond to the challenges looming on the horizon:
- engage with investors on the post-Brexit environment
- develop a UK trade strategy
- deliver improved infrastructure
- improve skills
- empower and support the regions.
Managing Partner, UK RegionsLinkedIn