What Britain must do to win back investors from a surging Germany

Steve Varley
BRITAIN is on the verge of losing its foreign direct investment (FDI) crown. After a 15 year record as the leading European destination, the investment tide has begun to flow away. While the UK remains Europe’s top destination for inward projects, we will lose this crown to Germany, within two years, unless action is taken.

Our annual survey, out today, which analyses inward investment and the perceptions of global investors, shows the challenge we face in maintaining the lead in attracting foreign companies, particularly from new markets.

The UK is favoured by investors due to its culture, stable political infrastructure, role as gateway to Europe, and its reputation for financial services. These factors have opened doors to investors for decades.

Investment is now even more crucial as we chase new forms of innovation, jobs and growth. Last year the UK won 679 projects from foreign companies, creating nearly 30,000 jobs.

The deterioration in the UK’s position is severe, with an overall 7 per cent decline in foreign projects. Financial services investment, a traditional source of FDI, dropped by 15 per cent. In contrast, Germany’s share of overall inward investment rose by 15 per cent, leaving it only 2 per cent behind the UK. For the first time in 15 years, Germany secured a higher share of manufacturing projects and overtook the UK in securing investment from Japan. Germany also swept up investment from Bric countries, winning twice as many FDI projects from Chinese businesses.

The UK is overly dependent on a small number of countries, especially the US. Much foreign investment is for financial services. The UK’s mature retail financial sector does not look attractive because of opportunities in less mature or emerging markets and increasingly thin margins.

Wholesale banking, capital markets and asset management in the UK do remain attractive, given we have among the strongest bases in the world. The government and regulators must ensure that concerns over retail banking security, largely a feature of western economies, do not inhibit the wider role of financial services in financing and facilitating the ongoing development of global trade.

The mood of investors has also changed. Domestic demand is the single most important factor driving investor decisions to locate in the UK. The other consistent theme is the call for more support for research and development, and education and skills development. There is also a need to improve investment appeal through incentives, taxation and attention to real estate and labour costs.

The traditional appeal of the UK also looks slightly shakier. Looking to Germany, investors value its transport and logistics skills and infrastructure, and telecommunications infrastructure. The UK tends to attract investors on softer criteria, like quality of life and political stability. Though these remain crucial, more analysis is required to understand if further investment is required in physical facilities to reposition the UK.

There are bright spots. London attracts more investment from abroad than any other European city (and any country, apart from France, Germany and Russia). This is based on the capital’s supreme position in business services, software and financial services. India is the biggest investor to the UK among the Brics, and we receive by far the majority of their investment to Europe. The automotive sector is the real success story, with inward investment being used to harness the potential to relaunch an industry the UK was once famous for.

The government is also clearly committed to securing investment. I have travelled with the Prime Minister and business leaders on several occasions to promote the opportunities available in the UK. UK Trade and Industry is also a tireless advocate for our industries. However, Lord Green, minister for trade and investment, recognises there is no room for complacency, and there is always more to do to enhance our offer to overseas enterprises.

The UK has unrivalled attributes, and must maintain these while finding new ones. This summer – and beyond – the government and business must use its moment in the sun to capitalise on the UK’s strengths and brand.

Steve Varley is managing partner at Ernst & Young, UK and Ireland. The 2012 UK Attractiveness Survey is out today at www.ey.com/attractiveness