In his recent review of the UK’s approach to foreign investment, Lord Harrington recommended the country focuses its efforts and resources on mid-to-large foreign direct investment (FDI) projects. This raises an interesting question for investment promotion agencies (IPAs) in terms of how narrowly to focus their resources in pursuing the optimum level of FDI.

Lord Harrington recommends, among other things, focusing the UK’s FDI attraction efforts on a limited number of mid-to-large investment projects, being those with capital expenditures (capex) of between £100m and £200m. This follows the review’s conclusion that while the UK is getting a greater share of very large projects (above £200m capex) than its main European competitors, it is underperforming in the mid-to-large category. So far so good. 

However, as with most countries, the number of projects landing in both these categories amounts to a tiny fraction of the total number of overall projects. By recommending re-organising front line resources toward ‘strategic’ projects, the assumption seems to be that the majority of smaller projects (those of less than £100m in value) can look after themselves without the need of dedicated support. 

Bigger isn’t always better

While at first glance this argument may appear logical, there are underlying risks to this strategy.

First, the Department for Business and Trade states in its 2021/22 annual report that 62% of all FDI projects were from existing investors. The fact that most large capex projects come from this group is well established. It’s also generally accepted that most first-time greenfield investments tend to be small, as the first foray into a new country carries inherent risks and uncertainties. As all existing investors were once new investors, it is surely important to maintain a supply of the latter. Missing that opportunity also reduces the potential to secure future sectors with small but innovative new companies — think artificial intelligence, cyber security and other disruptive technologies.

Second, we have to distinguish the size of the project from the size of the investor. Clearly, a small initial investment from a large company represents a major opportunity for growth and high-value functions, such as manufacturing and research and development, further down the line. Focusing too much on large projects risks missing these opportunities. 

Third, it is dangerous to assume that because a project is small, it doesn’t need help and will come anyway (or can be enticed with a self-help digital offer). There is no guarantee that an investor will choose your destination without personalised support through their investment journey.

It is difficult to prove that an IPA’s efforts are fundamental to an investment decision. The Harrington Review cites London and Partners’ policy of asking investors as a way round this. But while this approach is to be applauded, surely it is skewed toward a positive response? There is the option of testing an IPA’s effectiveness by removing support and seeing what happens. I recall at least one national investment department that redeployed its entire team dedicated to FDI into a wider homogenous business support function and saw its project numbers steadily decline to near zero, before restoring a dedicated FDI support team (and seeing projects go up again).

None of this is to dismiss the proactive targeting of specific projects. On the contrary, identifying and pursuing those that can contribute to the country’s economic, social and industrial goals should be an essential part of an FDI strategy. But attracting FDI is a long-term game and no government or IPA can predict a company’s local growth potential, no matter how small their beginnings.

I would caution against narrowing investment targeting too vigorously. Instead, spread your risk and increase your chances of capturing the next big thing. My advice to IPAs is: keep your doors — and your options — open.   

Martin Phelan is a foreign investment consultant and former senior investment promotion manager at the UK Department for International Trade. 

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