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13 November 2020updated 04 Sep 2021 12:42pm

What the uneven spread of foreign direct investment tells us about the UK economy

London attracts the bulk of the UK’s FDI, exacerbating inequalities.

By Sebastian Shehadi

Thirty years ago, London’s Isle of Dogs was just another residential part of the city. Today, its business district, Canary Wharf, is home to around 105,000 workers (pre Covid-19), many of whom are employed by foreign companies. Canary Wharf’s skyscrapers have become a symbol of London’s international prowess. Based on most methodologies, the capital attracts more foreign direct investment (FDI) than any other city in the world.

London dominates domestically, too. In 2018 it received 35 per cent of all greenfield FDI – job and facility creating projects – into the country. Runner up the West Midlands took home just 8.7 per cent.

“These figures show London’s dominance in the UK market, partially due to the country’s high levels of regional economic inequality,” says Dr Sultan Salem from the University of Birmingham’s department of economics.

Regional inequality in the UK has become the worst of any comparable developed country, with health, jobs, disposable income and productivity increasingly polarised, according to the latest annual report of think tank IPPR North. Business and skills are clustered in the south-east, with cheaper, lower skilled workers elsewhere.

Read more: “The UK is an unequal nation”: Local leaders on the “levelling up” agenda

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This is why Japan’s Nissan keeps all of its manufacturing in Sunderland, but its designers in London and research engineering in Oxfordshire. Numerous foreign banks in Canary Wharf keep their call centres and back offices in northern England.

The UK capital is also the only region whose intake of national greenfield FDI (35 per cent in 2018) is significantly more than its contribution to the UK’s gross value added (24 per cent in 2018). GVA has replaced GDP as the best measure of economic welfare in a population.

For all other parts of the UK, excluding the West Midlands and the north-east, the trend is the exact opposite. This suggests that those regions are not attracting as much foreign investment as they deserve, or that London punches above its weight – possibly both.

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London punches well above its weight for FDI
Greenfield FDI projects vs GVA for UK regions, % of total

Source: DIT/ONS with WMGC analysis

What is clear is that the skills challenge has hamstrung much of the UK for decades. The Covid-19 recession has made this an even more pressing problem. As the pandemic grows the digital and home-working economy, concentrated in London, there is a risk that the capital’s outsized share of the pie will become even bigger, says Salem.

Covid-19 may also accelerate the decades-long issue of London draining most UK cities of their degree holders, he adds. Relative to the size of its population, the capital has the highest proportion of people with degrees.

Another issue is that London receives a lot more public sector investment in R&D than other parts of the country (excluding Oxford and Cambridge). Public sector investment moves more slowly here than private sector investment in the north of the country. A similar criticism could be made with regards to the levels of autonomy that London uniquely enjoys.

Read more: Why city centres can survive Covid-19

Brain drain to London and the south east of England
People with degrees per 1,000 residents

Henry Overman, an economist at the London School of Economics, highlights the risk of spreading investment too thin. “We need well-targeted investment in public transport, [city centres], education & social policy. More years of austerity won’t deliver that.”

This means boosting cities that already have some momentum, he adds. Encouraging companies – foreign or domestic – to move to parts of the UK where the skills and market do not exist would only create more low level jobs, if any at all.

Value-added foreign investment can play a key role in supporting regional development across the UK, but the government needs to help lay the groundwork first.

Sebastian Shehadi is a senior editor at Investment Monitor.

This article originally appeared in the Spotlight report on regional development. Click here for the full edition.