WITHOUT foreign investment, we would be toast. How many of you, dear readers, work for UK subsidiaries of foreign companies? Or for a business that relies significantly on overseas investors for its debt or equity financing? In the case of the latter at least, the list now includes almost every company listed on the London Stock Exchange. Even if your employers are UK-based and UK-financed, chances are that the office from which you operate is owned by foreign-based capital, and you will almost certainly do a lot of business with other organisations financed from overseas.
London in particular is now an ultra-globalised economy, relying more than ever before on capital, labour and expertise from overseas. It is vitally important, therefore, to make sure that the cash continues to flow to the UK, and is able to go on financing corporate expansion and new jobs.
Yet there is a myth, prevalent in some circles, that the UK remains uniquely well-placed to attract foreign direct investment (or winning the global race, to use the government’s unfortunate phrase). The truth is that we are struggling to keep up, despite the coalition’s welcome drive to lower corporation tax and some of its other reforms, and the situation will worsen considerably in the years ahead if hostility to business and capitalism continues to grow.
Simply tallying up the number of projects or looking at the overall value invested isn’t the right way to gauge how well a country is doing. Large economies can be expected to woo more investors, simply because their domestic markets are so large. The best measure is total foreign investment as a share of GDP. UHY Hacker Young, the accountancy group, has crunched the numbers and while not appalling, they don’t make especially happy reading for the UK.
Over the five years since the crisis, the UK has attracted FDI equivalent to just 13.5 per cent of its GDP, less than the 17 per cent average across the economies in the study. As a result, the UK was ranked just 14th out of the 33 countries analysed. The best performer, surprisingly, was Belgium (thanks to targeted corporate tax breaks), followed by Singapore, Ireland and Estonia. Israel is ranked 8th, Australia 10th and the United Arab Emirates 13th. Britain’s FDI as a share of GDP was identical to Spain’s, which was ranked 15th. This in particular should be seen as a wake-up call for the UK’s complacent establishment: Spain has suffered immensely from the Eurozone crisis and is often wrongly dismissed by UK pundits.
The good news is that the figures confirm that the UK is doing better than most large economies. France’s FDI is 7.1 per cent of GDP (and ranked 25th), China’s 6.7 per cent (27th), America’s 6.6 per cent (29th), Germany’s 4.2 per cent (30th), Italy’s 3.1 per cent (32nd) and Japan gets FDI worth just 0.6 per cent (33rd or bottom in the survey).
Yet it would be a big mistake for the UK to rejoice: our business model as an economy is very different to Japan’s or Italy’s. We rely on FDI and global inflows of capital far more than those economies, and we need to be benchmarking ourselves against the most successful, dynamic and open economies, including Singapore, Ireland, Australia, Israel and the UAE. That is especially important for London, which has taken on many of the characteristics of a city-state.
Yahoo, Google, Apple, PayPal and LinkedIn have European headquarters in Ireland, and Asian headquarters in Singapore. Israel has a phenomenal tech and biotech sector. The UK hosts a great global finance sector, and many other multinationals use us as their European base – but to compete with the best we need far lower taxes, a simpler tax code, a drastic reduction in bureaucratic regulations, lower property costs, better education, and must not close our doors to migrants. Yet with the coalition falling out of love with the free market, and Labour at war with capitalism, it’s not looking good.