According to Ernst Young (EY), although Foreign Direct Investment (FDI) fell in Europe last year, the UK reversed this trend and attracted plenty of foreign investment, totalling 63 projects in 2021. EY’s UK Attractiveness Survey for Financial Services continues to demonstrate that foreign direct investment in the UK in 2022 is still leading the way for overseas investment.
Indeed, the UK secured more ‘new’ investment projects than any other nation, next to the US. In 2021, of the 63 new financial services projects, 54 were new, whilst the remaining 9 were expansions of existing projects.
This trend for FDI in the UK, which is the opposite of what’s happening in Europe, is further backed up by new data that suggests the UK can continue to expect further financial investment in the future. A global investors survey on behalf of EY in February and April 2022 showed that when it comes to European investment, the UK is still the most popular (67%) with investors.
So, what’s the level of FDI in the UK, why is it important, and how does it impact the country?
What is Foreign Direct Investment in the UK 2022?
Foreign Direct Investment, or FDI, is defined as the ‘net inflows of investment to acquire a lasting management interest (10% or more of voting stock) in an enterprise operating in an economy other than that of the investor’. In simpler terms, FDI is when a company invests in the UK’s economy by way of establishing a long-term presence. London is still considered one of the major capitals of the world, particularly its financial sector, and it’s here that’s seen the most FDI in recent years.
With the UK having a high status as an international financial centre, i.e. with advanced financial systems, large domestic economies and strong, deep liquid markets, it is a deciding factor when it comes to FDI.
Most forms of FDI come as investing in building a manufacturing or production plant, joint ventures or mergers and acquisitions. There are three main components to FDI:
- Equity capital.
- Intracompany loans.
- Reinvested earnings.
However, foreign investors can also acquire the necessary 10% of voting stock through management contracts, production sharing, management contracts, franchising, licensing and leasing. Investors are usually attracted by a country’s strong economic basis which, despite ongoing economic issues, the UK can successfully demonstrate.
The level of FDI in a country is a vital indication of its economic globalisation and is crucial for economic development. It generally moves around three key areas – Europe, South East Asia and the Americas – known as ‘the Triad’. These are established economically-sound areas, which means that it is extremely hard for up-and-coming industrialised countries to benefit from FDI.
Why is FDI important?
Strong FDI in the UK demonstrates that not only is the UK’s economy favourable for investors, but it also boosts the business environment. Indeed, the UK is considered one of the most liberal economy’s in Europe.
It also boosts investor confidence, particularly following the recent pandemic, and shows the UK is returning to strong economic growth. Even though the UK is no longer a member of the EU, the country continues to attract foreign investment. Indeed, many experts predicted that leaving the EU could actually have made the UK an even more attractive FDI location by having the freedom to negotiate its own investment and trade deals.
However, the recent introduction of the new National Security and Investment (NSI) Act, which came into law on 4th January 2022, brought with it new requirements with regard to FDI in some business sectors. Where national security may be at threat, the NSI Act means there are much more regulatory obligations over foreign investment transactions. This results in the government being able to intervene in some transactions, considered to be requiring more information or remedies, although experts predict that this is likely to happen in around 10 cases a year.
The new mandatory requirements, pre-notifications, in key sectors will be involving investment acquisitions of stakes exceeding 25% or equivalent in voting rights. It eliminates turnover or share of supply thresholds, and the entity must continue activities in the UK or supply goods/services to the UK’s people.
The impact of FDI in the UK
London consistently remains the world’s top financial city and supports a staggering 6 million jobs. The UK is also considered a leader in exporting technology, ideas and talent, as well as creating many opportunities for investors and the UK’s population.
Despite the pandemic, the UK’s FDI position grew 17.5% in 2020, with the majority of the investment coming from the US, with the remaining foreign investment from European countries. The biggest contribution is, understandably, in the financial services, but the professional, scientific and technical services sectors were also boosted by significant FDI. Also benefitting from investment were the hospitality and real estate sectors, as well as mining, metal and machinery products.
FDI significantly boosts investments into projects in these sectors, not only boosting the economy across the country but also in key areas of the UK. There is also the increase in job opportunities and investment made available in research and development.
Where there has been an expansion of investment projects, it has impacted job and economic stability in the locations of the projects, which indirectly supports the housing markets. In addition, foreign investment creates a competitive business environment as well as opportunities for business growth. For the wider economic impact, there are greater chances to acquire assets, consolidate business positions and grow portfolios.
Whilst some areas of the UK have benefitted more than others from foreign direct investment in the UK in 2022, overall, the UK’s economy, business environment and job market have gained from the impact of FDI in the UK.
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