University of Sussex’s UK Trade Policy Observatory has recently published a new report, which outlines the future prospect of foreign direct investment in the country. According to the report, FDI has been decreasing continuously since it reached its peak in 2015 and has now declined by over 19%. It should be noted that the decline is correlated with the Brexit vote which took part in 2016. FDI records began in 2003 and since then the country hasn’t seen this long period of a decline in foreign direct investments. Last year alone, there was a 10% drop in FDI projects in the UK, which adds up to an estimated loss of $1.5 billion in foreign capital investment. This all occurred in an environment where the majority of the world economy did not experience any major disruptions. 2018, which has been a tumultuous year for global markets could see the investor confidence shake up a little more.
UK is no longer the largest FDI recipient in Europe
The report also outlines the trend in greenfield investments in the country. In 2017, about 1000 greenfield projects were financed with foreign capital. Greenfield investment means that the parent company is building the operations from the ground up and not buying an existing business. The worth of these projects in total was more than $33 billion, which still makes the UK one of the world’s largest FDI recipients, but the country is gradually losing its dominance in the matter. For example, it is no longer the largest recipient of FDI in Europe, yielding the top position to Germany. In total, UK’s share of FDI projects in the EU has slid to 18%, when only three years ago almost 25% of foreign capital invested in EU flowed into the country. The services sector was especially hit by the reduction as it lost over 25% in FDI since the vote in 2016.
Economists fear for the long-run consequences of the declining FDI
Analysts believe that the effect could have serious consequences for the UK economy in the long run. “This fall in FDI could be due to a temporary adjustment because of the current climate of uncertainty. But it could also indicate a permanent shift away from the U.K. by foreign investors,” – said Llona Serwicka, co-author of the paper. Nicolo Tamberi, who is a research officer in the Economics of Brexit at the University of Sussex also commented on the issue. “The drop in FDI that we observe suggests the prospect of losing unfettered access to the EU single market once the U.K. leaves the EU could lower investors’ appetite to invest in the U.K,” – he said.
Industry participants believe that the country needs to restore investor confidence by offering a better business environment
Dharmash Mistry, chairman of Lakestar, a venture capital firm emphasized the need for the UK to restore investor confidence. According to Mistry, the country could face the danger of losing the investors to other European countries. “If there is uncertainty many investors wait to see how the future will unfold before deploying too much capital. Talent will wait to see if they can continue living in the U.K. before moving. This is true today and more of a concern if we don’t stem the tide,” – he said in a letter to CNBC. One way out of the situation, as stated by Mistry, is to offer a more regulatory-friendly framework and more government capital in order to attract investors.
Zoe Chambers, who is the head of the future of industry team at Octopus Ventures sees innovative industries as one of the reasons there are still deals being done regardless of the uncertainty introduced by the Brexit vote. “There’s a lot of capital in the market. An increasing number of U.S. investors are looking across to the U.K. and Europe – historically they have only invested in domestic companies, but they’re more and more willing to invest across the pond. The U.K. has such a strong reputation for talent and that doesn’t die overnight. With London in particular, we’ve seen Google acquire DeepMind and allow it to stay headquartered in King’s Cross, and some of the best universities in the world for research and development are in London,” – Chambers commented.