Friday 20 November 2020 9:44 am EY Talk

COVID-19 has changed investors’ priorities but UK attractiveness remains resilient

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EY UK&I Managing Partner for Client Service

COVID-19 has reshaped how international investors think about where to invest in the future. How a country has dealt with the pandemic and the measures it has put in place to prevent a future crisis have become a top priority.

Every year, EY tracks the performance and perceptions of the UK as a destination for foreign direct investment (FDI) with our UK Attractiveness Survey. Our 2020 survey, published in April, found investors’ attitudes were positive, but there was a significant amount of uncertainty around the FDI outlook. To explore how the pandemic has affected the UK’s reputation in the eyes of international investors, we’ve repeated our research.

Our latest report finds that, although the UK’s attractiveness has dipped slightly since the spring, the country’s reputation as a destination for FDI is nonetheless resilient. There are also significant post-pandemic opportunities for the UK to attract inward investment as a result of shifting investor priorities.

Twenty-five per cent of the investors we spoke to are planning projects in the UK in the next year. This is down from 31% in April, but still the second highest percentage since 2016. Forty-three per cent of respondents are continuing with the UK investments they had planned before the pandemic; just 5% have cancelled plans entirely.

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Positively, the UK is seen as the second most attractive European destination for foreign investment in 2021, behind Germany but ahead of France. Meanwhile, 53% of respondents think UK attractiveness will increase over the next three years, compared to 34% in spring 2020.

Importantly, our research has found significant interest among manufacturers in ‘reshoring’ activity to the UK, with global companies re-evaluating their supply chains in the wake of the pandemic.

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Thirty-two per cent of manufacturing respondents plan to ‘reshore’ activity to the UK, while another 32% plan to invest in the UK in the next 12 months. Ninety-eight per cent of manufacturing respondents plan to remodel their supply chain in the future. There is a shift towards regional – rather than global – supply chains and companies are looking to reduce reliance on single source countries.

The pandemic has also led to a reshaping of investor priorities, with countries’ preparedness for future crises and their track record in dealing with COVID-19 rising to become investors’ key investment criteria. And, given the impact of the pandemic on the way we work and live our lives, it’s perhaps not surprising that a key future theme of FDI will be the changing economic model of major city centres. Other themes, like sustainability and climate change remain important – although investors find Europe more attractive than the UK for ‘cleantech’ projects.

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Compared to last year, there have also been significant changes in the sectors investors expect to drive future UK growth. Half of those we surveyed expect digital investment to be key to growth (up from 26% in 2019), followed by investment in health and wellbeing (36%, up from 15%). Real estate and construction, the consumer sector, and the automotive sector complete the top-five.

With strengths in key areas like digital technology, Research & Development, and manufacturing, there is more than a solid base for the UK to build a future strategy on. These factors, combined with the growing interest in ‘reshoring’, present real post-pandemic opportunities for the UK to meet investor needs and accelerate its levelling-up agenda.

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The UK needs to articulate a clear vision for the future economy and what its net zero and infrastructure investment plan looks like. An updated industrial strategy, for example, should identify the UK’s support for manufacturing and supply chain reshoring. Ultimately, a joined-up approach across the whole of government is required to develop the long-term policy framework essential for attracting long-term investment.