The strong electoral mandate that the Labour party secured in the July 4 elections has been hailed as a possible harbinger of policy stability after the years of chaos that followed the Brexit referendum, but challenges abound as regards shoring up the country’s competitiveness and investment levels. 

“The investor community is keen for stability and a forward vision for the country which has been perceived to be lacking in recent years,”  says Gavin Winbanks, founder of consultancy White Hawk Green. “Many major institutional investors are overallocated to the UK (versus other jurisdictions) and quietly commenting that they are currently uninclined to invest further in the UK. A strong electoral mandate for an incoming government with a clear agenda provides confidence — or, at least, better informs investment decisions and should be a fillip for investment in the UK.”

Little went off script on election day. As widely expected, the Labour party led by Sir Keir Starmer secured a majority of at least 168 seats in the House of Commons, while the Conservative party woke up to its worst electoral performance ever. 

“Everyone, from civil servants, funds, foreign investors, has been waiting for elections to get some consistency of policy,” says Lord Richard Harrington, who led the eponymous review. “One of the main problems that investors and companies brought up [during the Harrington review of foreign direct investment (FDI) into the UK] was lack of consistency and change in policy.”

The incoming Labour government is now in a solid position to carry out its manifesto, which emphasised the need for public and private investment to shore up growth. In particular, it highlighted the role of public investment to unlock private investment in key infrastructure needed to raise the country’s competitiveness — from transport infrastructure to infrastructure in strategic sectors like steel, electric mobility and renewable energy. 

The manifesto specifically mentions FDI once in the context of leveraging the country’s diplomatic network to attract investment. Incoming chancellor Rachel Reeves has shaped an economic platform that The Economist has dubbed ‘homeland economics’, blending economic policy with notions of national security and greater self-sufficiency. A stronger industrial policy will be instrumental to her vision; given the country’s fiscal and debt constraints, as well as low savings levels, crowding in fresh capital from foreign investors will be instrumental. 

The latest FDI figures show the country has posted negative FDI inflows for the second time in the past three years — effectively meaning that foreign investors took more capital out of the country than they injected into it, according to Unctad figures based on ONS data. 

How to boost quality FDI 

The country’s downward FDI trend mirrors its weakening competitiveness and productivity. In 2007, before the global financial crisis, the country’s average productivity as measured by gross domestic product per hour worked was 5% higher than the OECD average; fast forward to 2022 and it was 2.3% lower. That also translated into lower rate of returns on inward investment, lower reinvestment of earrings by subsidiaries of foreign companies and, ultimately, lower levels of headline FDI, ONS data show. 

Unlocking new investment into infrastructure will be key to boost the country’s competitiveness, Mr Winbanks points out, but there is more to that. 

“Skills and innovation need to be at the heart of the UK’s inward investment strategy,” says Nigel Driffield, prof of international business at Warwick Business School and member of the executive team at the Productivity Institute.

“The UK faces two simultaneous problems — a lack of demand for jobs that can be done by less skilled people, and a need to both foster and attract investment that drives innovation and productivity. To boost the productivity of less prosperous regions, inward investment needs to be linked to education and training, involving collaboration at a local level between skills providers, local supply chains and national efforts to attract inward investment.” 

To unlock fresh investment, the new government will also have to better grasp the nuances of FDI. Even in places like London, which continues to see stronger FDI inflows than most other global cities worldwide, investment has not translated into real economic gains, highlights Adam Yousef, head of Economics at the Greater London Authority. 

“How can we use FDI to change this state of things and boost productivity?” he wonders. “I think something that has been lacking is a clear industrial strategy that integrates multiple tiers of government (central, regional and city governments) to boost sectors where the economy has a competitive advantage and find ways to collaborate with business to develop nascent industries.” 

Not only have local authorities seldom been part of these conversations in the past 14 years, they also saw their investment promotion funding repeatedly scaled down. Political and budgetary reasoning led successive Conservative governments to dismantle regional development agencies, first to replace them with local enterprise partnerships, only to later dismantle them. 

“Under the Conservatives, regional economic development resources were largely wiped out and a central government top down approach replaced it,” Henry Loewendahl, head of FDI consultancy firm Wavteq, said on Linkedin. “The new government should ensure there are sufficient resources at the local and especially regional levels to drive economic development.”

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