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UK falling behind other countries in attracting FDI

UK falling behind other countries in attracting FDI
UK falling behind other countries in attracting FDI



The UK needs to change its approach to attracting FDI in light of “more strategic and better organised” international peers and greater competition for global investment, according to a new report by Tory peer Lord Harrington, published on Wednesday 22 November.

The Harrington Review on Foreign Direct Investment noted that the UK has an excellent track record in attracting greenfield FDI, having harvested some £78.8bn ($99.3bn) in 2022 compared with greenfield inflows of £37bn into Spain and £26.6bn into Germany. However, a more granular view reveals that some sectors are attracting lower levels of FDI than might be expected for an economy the size of the UK.

“I have formed the view during this process that capitalism has changed,” Harrington said. “Gone is any residual view that government shouldn’t use taxpayers’ money and other resources to assist private companies in investment decisions. Often this position comes with a fear that civil servants and ministers alike will try to pick winners, and fail, or that it will manifest as companies with ‘begging bowls’ at government’s door, asking for money when they would have invested anyway.

“The reality is that many of our competitors chase investments via their industrial strategies backed by substantial government support.”

Disorganised government systems, he said, are causing the UK to miss out on annual investments of £50bn.

He also cited recent investor sentiment surveys that revealed concern around weak supply chains and the failure of clusters to form around big-ticket investments.

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Large investors in the UK such as US defence giant Lockheed Martin told the review that the government should consider more “enabling infrastructure” (such as the National Satellite Test Facility at Harwell) and should engage with companies on project portfolios rather than single investments.

Counselling a major overhaul in the government’s investment strategy and culture, Harrington recommended that the government be proactive rather than reactive, after investors told the review of the tailored advice, information and service offered by other countries. He noted: “Particularly compared to key competitor markets such as France, Spain and Ireland, businesses frequently observed that the UK tends to take an understated approach to promotion, apparently less willing to back big UK showcase events compared to other countries.”

He also recommended a less “risk-averse, siloed” and more “holistic” approach to investment, ensuring that there is responsibility and accountability at every level of government. As part of this, the role of Investment Minister should be given “greater seniority, visibility, and authority”, and become a joint Cabinet, HM Treasury, and Department for Business and Trade role.

Prospective investors should expect an “account management” approach, with named account managers helping them to navigate Whitehall and becoming their primary point of contact.

While acknowledging that the Office for Investment (OfI) is “an adept concierge service”, Harrington urged the government to fully empower the OfI to negotiate deals with strategically important investors in the way that international competitors are – such as the Irish Development Agency.

The Civil Service also needs “a radically different approach to business-facing roles”, with a focus on recruiting more specialists with extensive industry knowledge and incentivising civil servants to stay and pursue their careers in specific sectors to build expertise.

He cautioned the government, however, to take a considered approach to financial incentives, highlighting the possibility of a “subsidy race” with the likes of the US – which has pledged up to $2trn in subsidies over the coming decade. Instead, the government should target its investment at the UK’s five key growth sectors – digital technology, green industries, life sciences, advanced manufacturing and creative industries – and its enablers.

Financial and professional services industry membership body, TheCityUK, said that Harrington’s review “is a welcome signal”, deeming its focus on drawing investment into green industries and boosting retail participation in UK public markets as“positive steps forward”.

However, Matt Griffith, director of policy at Business West, warned Harrington’s “blueprint risks running into under-resourced local government and a planning system which incentivises housing over investment sites”.



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