UK beaten by key rivals in attracting foreign direct investment

Publications that covered this story include City AM, 20 January and The Daily Telegraph, 20 January.
  • UK attracts FDI equivalent to 13.5% of GDP, compared to a 17% global average

The UK is lagging behind key rivals in terms of its ability to attract foreign direct investment, according to our new study.

Over the five years since the global credit crunch, the UK has attracted FDI equivalent to just 13.5% of its GDP (USD$329billion/£200billion in total).  On average, countries around the world have attracted FDI worth 17% of their GDP in the five years since the credit crunch.

The study looked at net FDI inflow over the last five years* in 33 major economies around the world, and measured how successful they have been in attracting FDI compared to their Gross Domestic Product (GDP).

The top places in the study were taken by Belgium, Singapore and Ireland.  Over the period Belgium attracted Foreign Direct Investment equivalent to 91% of its GDP (a total of US$442 billion), while Singapore attracted the equivalent of 74% of its GDP ($203 billion in total) and Ireland 44% (a total of $93 billion).

Our study explains that Ireland and Singapore have been enormously successful in setting up favourable tax and regulatory environments that have encouraged companies to set up regional headquarters there.  For example, Yahoo, Google, Apple, PayPal and LinkedIn all have European headquarters in Ireland, and Asian headquarters in Singapore.

Both Ireland and Singapore offer low corporation tax rates compared to other countries in their regions, as well as attractive transfer pricing arrangements for international groups. Singapore also offers a number of tax incentives for companies active in target sectors including shipping, commodities trading, fund management and biotechnology.

Belgium has been particularly innovative in its use of tax legislation to attract international companies. While it has recently phased out the role of so-called ‘co-ordination centres’ for inter-company loans which helped companies to manage their global tax liabilities, it now hopes to differentiate itself by providing tax reliefs for companies that fund their businesses through equity rather than debt.  In addition, Belgium has generous tax breaks for R&D and investment in capital goods, as well as fiscal incentives for hiring employees.

Winning Foreign Direct Investment provides an important boost to national economies, creating new jobs and tax revenues in the short term, and in the longer term improving productivity by helping to fund capital investment and making domestic companies more competitive.

Ladislav Hornan, Managing Partner, comments: “Although the UK has performed well in attracting FDI in recent years, it could learn lessons from economies that have been attracting very high levels of FDI relative to the size of their economies. Identifying areas where there is room for improvement will help Britain to maintain its world-class position going forward.”

“As an open economy we want to be striving for better.”

“Lots of factors influence FDI decision making – a country’s economic strength, its strategic location, export and import costs, its labour market, energy and real estate costs – and of course its tax and regulatory regimes . Favourable tax systems in countries like Belgium and Ireland have helped them to outperform the rest of the world in terms of FDI as a proportion of their total GDP.”

“Foreign investors may be put off by excessive costs to doing business in the UK, such as high labour costs, in addition to overinflated energy and fuel prices.”

Our research shows that in absolute terms, levels of foreign direct investment into the UK were the fourth highest in the world, with a total of over US$329 billion (£200 billion) flowing into the UK in the five years since the global credit crunch, with only the US, China and Belgium receiving more than the UK in absolute terms (see table below).

However our analysis points out this was partly thanks to the UK’s reputation as a safe haven, while the 2012 Olympics boosted investment into East London in particular. Ladislav comments: “While confidence everywhere suffered during the global recession, the UK was seen as a safe haven for foreign investors.  The London property market was particularly stable and our strengths in key industries like technology and financial services meant the UK remained popular as a target for acquisitions and a venue for new ventures.”

“There’s no doubt that the Olympics also had a significant impact on total FDI.  International attention focused on Britain as the host nation and the development and investment going into the wider area helped to attract initiatives, such as Google’s investment in East London’s Tech City.”

Ladislav adds: “However, the UK could risk losing momentum if it doesn’t keep pace with its peers and work hard to ensure that it remains an attractive target for foreign investment. Relative to GDP, Ireland already does better than the UK at drawing in FDI, and with the recovery taking hold there and in several other Eurozone countries, the UK’s safe haven status becomes less important. This is no time to be complacent.”

  Country

Total FDI inflow 2008-2012 US $ million

FDI as % of GDP

1

Belgium

442,255

91.4%

2

Singapore

203,336

74.0%

3

Ireland

92,851

44.1%

4

Estonia

6,897

31.6%

5

Uruguay

11,139

22.7%

6

Croatia

12,744

22.6%

7

Peru

42,283

21.5%

8

Israel

42,487

16.8%

9

Romania

26,458

15.6%

10

Australia

231,209

15.2%

11

Nigeria

38,942

14.8%

12

Czech Republic

28,429

14.5%

13

United Arab Emirates

39,968

14.5%

14

United Kingdom

329,419

13.5%

15

Spain

181,839

13.5%

16

Malaysia

39,957

13.2%

17

Russian Federation

261,034

13.0%

18

Brazil

251,445

11.2%

19

Canada

200,100

11.0%

20

Egypt, Arab Rep.

24,908

9.7%

21

Argentina

44,024

9.4%

22

India

165,654

9.0%

23

Austria

34,694

8.7%

24

Mexico

100,039

8.5%

25

France

185,670

7.1%

26

Netherlands

52,728

6.8%

27

China

563,111

6.7%

28

New Zealand

11,179

6.7%

29

United States

1,042,432

6.6%

30

Germany

143,499

4.2%

31

Denmark

9,769

3.1%

32

Italy

62,369

3.1%

33

Japan

35,090

0.6%

 

Global Average

17.1%

 

BRIC average

10.0%

 

EU average

20.0%