The next UK government will take over a stagnating economy that has been wavering after years of uncertainty caused by Brexit, the Covid-19 pandemic, volatile policymaking and Russia’s full-scale invasion of Ukraine. 

Ahead of the UK general election on July 4, the 14-year record of the governing Conservative party is not one of simple decline, but a series of paradoxes, across various policy areas. Both Labour and the Liberal Democrats, the main opposition parties, have pledged to bring “stability” to help boost investment across the country. Here are five charts outlining the UK’s recent performance based on various data sources and why the next UK government must attract more quality foreign direct investment (FDI). 

How has FDI in the UK changed over time?

Official statistics indicate a decline of investment in the UK since the Brexit referendum in June 2016. Figures from the Department of Business and Trade (DBT), which include both greenfield FDI and cross-border mergers and acquisitions (M&A), show that 1654 FDI projects landed in the UK during the 2023 financial year. This was up by 4% from the previous year, but significantly lower than the peak of 2265 projects in 2017.

Data from other sources that track only greenfield FDI projects demonstrate a similar downward trend. While the UK recorded a slight year-on-year increase in 2023, FDI has failed to recover to its peak of 1205 projects tracked in 2017, according to EY’s European Investment Monitor. 

Figures from fDi Markets, however, indicate that the UK’s greenfield FDI rose to an all-time high of 1411 projects in 2018 before declining to an eight-year low when the pandemic led to country-wide lockdowns in 2020. 

Despite a slight recovery in 2021 and 2022, the number projects announced by foreign and local companies in the UK fell to multi-year lows in 2023, according to fDi Markets and InvestmentFlow, which tracks domestic investment pledges. Official data from the Office for National Statistics also shows that overall real business investment in the UK has stagnated since the Brexit referendum.

What is the quality of FDI in the UK?

A decline in coveted greenfield investment, which involves the creation or expansion of physical facilities and jobs, is in contrast to a rise of cross-border M&A deals in the UK, which critics argue can be a shorter-term and less impactful form of FDI. 

Almost $68bn-worth of foreign M&A deals targeting UK companies have been announced in the first half of 2024, more than double the value recorded during the same period of last year, according to London Stock Exchange Group data. While the majority of M&A deals are done by strategic corporate investors, the UK is the second-most targeted nation, after the US, for increasingly active private equity firms.

In 2023, the UK attracted more than 10% of global cross-border M&A deals done by private equity firms, up from 7.9% in 2019, while its share of global greenfield FDI has declined from 7.9% to 5.9% over the same period.

Given that private equity firms typically borrow large amounts of money to make acquisitions they aim to sell within a few years, critics argue they engage in aggressive cost-cutting measures such as layoffs, have a shorter term focus than greenfield investors and could pose a risk to financial stability. The Bank of England warned in April 2024 that some banks were unable to quantify their exposure to the $8tn private equity industry.

How does the UK’s FDI in strategic sectors compare to its peers?

Renewable energy has been a notable success story in the UK’s efforts to attract FDI in strategic sectors. More than $218bn has been pledged to green energy projects in the UK since 2016, with the vast majority going to large offshore wind farms, according to fDi Markets. This was more than triple the value of renewables FDI in other large western European nations, including Italy ($62.6bn) Germany ($56.3bn), Spain ($51.1bn) and France ($11.4bn). 

However, in other highly sought after sectors, the UK lags its western European peers. The UK has attracted just $1bn worth of greenfield FDI in the semiconductor industry since 2016, less than half the figure recorded in Spain and France and a tenth of Italy. It is barely a drop in the ocean compared to Germany’s $55bn of semiconductor FDI, due to plans by TSMC and Intel to build new manufacturing facilities in the country. 

The semiconductor sector also reflects the divergence in the types of FDI into the UK as shown by British-born chip design firm Arm, which was acquired in 2016 by Japan’s SoftBank and listed on the US Nasdaq in September 2023 despite calls from UK politicians for the company to go public in London.

While the UK lost some major foreign car companies, such as Honda, as part of their electrification plans, Tata’s plans to invest £4bn ($4.48bn) into a gigafactory have raised hopes that the British car industry will have a future in the transition to electric vehicles (EVs). 

About $14.7bn has been pledged to EV projects in the UK since 2016, broadly in line with France ($14bn) and Spain ($15.7bn), but well behind Germany ($26.6bn), according to fDi Markets. However, the UK currently has only one gigafactory operated by Envision AESC with less than 2 gigawatt-hours (GWh) of manufacturing capacity, way behind the 100GWh needed by 2030, according to a UK parliament report published in November 2023.

Have reasons to invest in the UK changed since Brexit?

The reasons given by foreign greenfield investors in the UK have changed since the UK’s decision to leave the EU. Before Brexit, some 31.6% of FDI companies invested in the UK to be close to markets and customers, according to fDi Markets motives data between January 2009 and June 2016.  

In the corresponding 89-month period since Brexit, the share of FDI companies citing market proximity as a motivation for investment jumped to 44.6%. The highest share was among western European-based companies, a trend reflective of EU-based companies having to set up a presence in the UK to get around higher trade costs and tariff barriers put in place after Brexit.

Fewer FDI companies cited domestic market growth as a motivation for investment in the 89-months after Brexit than the same period before the referendum, a trend indicative of a weakening UK economy. 

Why is FDI so important to the UK economy?

Boosting real investment will be critical for the next UK government to grow the economy as a high public debt levels and tax burden will limit their ability to use other policy levers. FDI in the UK is an important component of total investment, also known as gross fixed capital formation (GFCF), a measure of all acquisitions of fixed productive assets in an economy.

Figures from Unctad indicate that FDI in the UK made up 19.66% of its GCFC in 2017 — when DBT data shows there was a record number of projects. While huge levels of public spending during the pandemic has reduced FDI’s share of the UK’s GFCF, it has historically had among the highest across the G20 group of large economies. In short, FDI promotion in the UK will be critically important for whoever forms the next government. 

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