In recent years, the British government has spun the narrative of foreign direct investment (FDI) as a way to celebrate and validate its post-Brexit “Global Britain” platform. 

Some of the official messaging around FDI has shown pronounced narcissistic traits as ministers, indifferent to the surrounding context, celebrated the country’s latest investment wins with great fanfare. 

Little mattered that, anecdotally, foreign investors found themselves at a loss in front of the political and bureaucratic disarray that followed the Brexit referendum, as captured by the Harrington review. Little mattered that macro FDI and economic figures did not paint a rosy picture either. 

The data evidence suggesting that the country’s FDI performance has been subdued since 2016 is robust. However, this clearly doesn’t seem to be a conclusive argument in the eyes of many at Whitehall — after all, ‘there are lies, damned lies and statistics’. Besides, the UK remains Europe’s largest FDI destination, which can always bail out the official narrative.

For the sake of the argument, let’s assume then that the country’s FDI journey continues to have plenty of wind in its sails. Even in that case, it would only be an exercise of vanity to sing its praises. 

FDI doesn’t exist in a vacuum

FDI brings several major benefits for a country like the UK. It shores up the economy’s low levels of capital formation and typically creates new jobs along the way. It also has the potential to drive productivity gains that lift the whole economy and generates sustainable long-term growth. 

If it’s all good on the FDI front, why is productivity not growing? Because FDI doesn’t exist in a vacuum. 

The UK’s productivity puzzle is a difficult one to solve, but some of the nuances of the country’s inward investment help progress the conversation — particularly when it comes to its sectoral and spatial distribution, as well as its nature. 

Take investment into wind power generation, which has been one of the country’s greatest FDI achievements. The UK is the world’s second-largest wind power producer after China, with most of its generation coming from offshore wind farms developed by foreign companies. 

That’s a tremendous achievement to celebrate, but also a big missed opportunity.

The country still lacks a wind power supply chain. Most of the equipment  is imported, making the UK the world’s largest importer of wind equipment. The Institute for Public Policy Research, a London-based think tank, estimates that the UK missed out on up to €36bn in production value for turbines between 2008 and 2022. 

These developments boost the country’s green credentials and advance its net-zero agenda, but their productivity dividend is subdued. Behind the facade of great FDI success, they exist in relative isolation. A more strategic approach would have better paired them with local productive ecosystems. In fairness, there have been results, but they have barely made a dent. 

A second aspect relates to the spatial distribution of FDI across the UK. As noted by the tremendous work of professor Nigel Driffield and The Productivity Institute at the University of Warwick, high-impact FDI tends to concentrate where productivity is already high, and vice versa. That perpetuates the regional divide and limits FDI’s net economic gains. 

Another celebrated FDI success is a case in point. The government repeatedly touted the Nissan’s commitment to its production site in Sunderland, in the north-east of England, as an early win for post-Brexit Britain — and rightly so. At the same time, Nissan has an engineering centre in Bedfordshire, some 80km east of Cambridge, and a design centre in London. Despite all the shop-floor knowledge in Sunderland, higher added value functions remain elsewhere. 

The recent divergence between weakening greenfield FDI and growing private equity-backed cross-border M&A should also be acknowledged as part of a broader conversation on the perks and perils of foreign investment. Foreign private equity investment has produced mixed results in sectors such as public utilities and retails brands, getting noticed more for debt engineering and underinvestment than productivity gains. 

Ultimately, even if the FDI figures are growing — which is arguable — such growth should not be taken at face value. If anything, the UK’s FDI trajectory shows that the country’s domestic economy and rule of law remain a very conducive environment for foreign investors, even post Brexit. But chasing FDI for the sake of it is pointless.

Eight years after the Brexit referendum, it’s time for the national government to do what local investment promotion agencies have long done: acknowledge the nuances of inward investment to inform a coherent growth agenda — and, at last, leave vanity aside. 

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