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9 February 2021updated 04 Sep 2021 8:24am

The UK cannot take foreign investment for granted

Foreign direct investment plays a greater role in the UK than in other advanced economies.

By Sebastian Shehadi

Globalisation is in question, for better and for worse, so it is worth reiterating just how much the UK benefits from one of its key pillars: foreign investment.

Foreign investors frequently make negative headlines. This was especially true in 2020, which saw the US, UK and other nations take major steps against Chinese companies such as Huawei and TikTok. Last month, the New York Stock Exchange delisted three Chinese telecom companies.

Back in the UK, Nvidia is facing scrutiny over its proposed acquisition of the Cambridge chip specialists Arm, and peers are seeking to push through a ban on trade deals with states accused of human rights abuses. The move comes amid condemnation of China’s treatment of its Uighur population.

“There has been quite a lot of emotive language used around Chinese investment,” says Baker & McKenzie partner Samantha Mobley. Some of this has been justified. In recent years, certain Chinese investments to the UK have indeed raised security concerns.

However, it is also worth remembering that China was the UK’s third largest export destination and source of imports in 2019, after the US and EU, and that up to 149,000 full-time jobs in Britain are currently upheld by Chinese trade, investment, tourism and students.

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Investment Monitor: Chinese FDI hits lowest mark since 2008 Part of New Statesman Media Group

The American context shines light on the stigma surrounding international investment. “For the average citizen, foreign investors are too often seen as temporary businessmen taking advantage of a local community, or as Chinese government companies swooping in,” contends Aaron Brickman, executive vice-president of Global Business Alliance, a trade association representing foreign investors in the US. Others just take investors for granted, he adds. It is likely that similar views prevail in the UK, amongst those that are even aware of foreign investment.

The issue is, in part, one of definitions and understanding. The type of investment in question here is known as foreign direct investment, which involves the acquisition of a company abroad (such as when France Telecom bought UK-based Orange) or the establishment of brand new operations abroad (such as Japanese Nissan building its Sunderland factory).

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In short, foreign direct investment (FDI) to the UK is of huge value to the economy. For example, in the 2019 to 2020 financial year, it created a grand total of 56,117 new jobs while 9,021 jobs were safeguarded, according to data from the Department of International Trade (DIT).

“The role of foreign-owned businesses in the UK economy has never been more important as we look to recover from Coronavirus,” Britain’s minister for investment, Gerry Grimstone, told the New Statesman. “Securing investment from around the world is needed to boost growth and productivity, create jobs and help level up the whole of the UK.”

Foreign investment creates and safeguards UK jobs
New FDI jobs created and jobs safeguarded through FDI

In the UK, businesses that received FDI were 74 per cent more productive than those that did not, between 2012 to 2015, shows data from the Office of National Statistics. While, in 2018, foreign owned companies spent more on research and development (£13bn) than domestically owned businesses (£12bn). This is particularly important since Britain is still on the throes of, what some describe as, a decade-long productivity crisis.

Investment Monitor: How Trump lost his war on FDI Part of New Statesman Media Group

“The diversity of foreign investment that the UK attracts means more innovation, more collaboration and more opportunities in markets around the world and in industries of the future, such as clean growth, advanced manufacturing and technology,” says Grimstone.

Foreign direct investment plays a greater role in the UK economy than in other advanced economies. In 2019, the value of all international investments on British soil was equivalent to 0.73 per cent of the UK’s GDP that year – much higher than the 0.46 per cent OECD average – according to DIT data.

It is little wonder therefore, that the UK is almost always among the world’s top ten destinations for foreign direct investment, shows data from the UN Conference on Trade and Development (UNCTAD) and the FDI Report. Meanwhile, London is frequently the world’s leading city for foreign direct investment. In fact, the lion’s share of FDI to the UK goes to London, a stark reflection of the country’s regional inequalities.

Foreign direct investment could certainly help the UK “level up”, since much of it goes towards value-add and innovative industries, especially tech, says Dr Sultan Salem from the department of economics at the UK’s University of Birmingham.

Foreign companies have also demonstrated their value during the UK’s Covid-19 response. For example, a 4,000 bed hospital at the Abu Dhabi owned Excel London was created in under a week, while a consortium of manufacturing, engineering and F1 companies (including Airbus, Ford and Siemens) supported the production of much needed ventilators in the UK.

It is of concern, therefore, that foreign direct investment has dropped sharply since 2016’s referendum, with investors holding back decisions due to uncertainty surrounding the UK’s relationship with the EU, shows data from DIT. To this, the Tory government claims that Brexit will boost investment into the UK, in the medium to long term.

The Brexit vote interrupted foreign investment growth
Indexed growth in FDI jobs and projects (2007-08 = 100)

However, in late 2020, the UK government increased barriers for foreign investors through the new National Security and Investment Bill. Interestingly, it was released around the same time that the Office for Investment was opened (a cross-government group to attract FDI). The result: mixed and confused messaging for investors.

Investment Monitor: Will the UK investment bill impede investors? Part of New Statesman Media Group

“[With the bill], the UK was trying to ensure that sensitive tech and knowledge are protected, while at the same time maintaining its position as a top destination for business,” says Dr Salem.

As already alluded to, the main security concern relates to the acquisition of UK tech companies from Chinese or Russian companies (for the most part), many of which are state-owned or vulnerable to government interference. This is why, in spring 2020, the UK government blocked China Reform Holdings’ attempt to take control of Imagination Technologies, a British chipmaker, and move its sensitive know-how to China.

Another risk involving foreign companies, more generally, is that shareholder interests are not always aligned with the host country’s long-term interests and development, says Salem. Here is just another reason why the Anglo-American belief in shareholder primacy is under evermore criticism, he adds.

In short, foreign direct investment has its dangers, like many other aspects of globalisation. These negatives should not be neglected by the media or in public discourse  – and indeed they have not been in recent years. It is important, however, to simultaneously remember just how much countries like the UK benefit from international investors.