May 2017 Time to act - EY

1 EY's Attractiveness Survey UK. May 2017 . time to act Contents 4. Executive summary 7. The UK's FDI. performance in 2016. 13. FDI in the UK regions 18. Analysis 28. Action plan 32. Methodology 34. About EY's Attractiveness program Foreword We are delighted to welcome you to EY's remained the leading destination within the 2017 UK Attractiveness Survey, which UK by a wide margin, with Scotland now as in previous years examines the firmly established in second place. And our evolving performance and perceptions of perception study finds that investors' short- the UK as a destination for foreign direct term intention to invest in the UK is holding investment (FDI). This report continues up well, with 24% planning to establish or EY's long history of sponsorship of research expand operations here in the coming year, into UK trade, including FDI, reflecting in line with the long-term average.

2 Our desire to encourage an open dialogue Steve Varley between business leaders, investors and However, other findings give cause for UK&I Chairman policymakers on how to maximize the concern over the longer-term outlook. While and Regional UK's economic performance. the UK still leads Europe in FDI projects Managing Partner, overall, its European market share fell UK and Ireland, FDI remains a vital source of capability, back in 2016 to only marginally ahead of EY economic activity and jobs for the UK, and Germany, which remains ahead of the UK in the UK's continued ability to attract it will attracting first- time investors and projects be under close scrutiny in the run-up to from growth markets such as China. And Brexit in 2019. This background means our perception study shows that almost the findings of this year's attractiveness one-third (31%) of investors globally expect report have particular significance.

3 What it the UK's attractiveness to deteriorate over reveals is a mixed picture, with the UK's FDI the coming three years a figure well above performance in 2016 and the outlook for previous norms, suggesting Brexit may be 2017 remaining robust, but with a range of starting to colour investors' views of the UK. evidence pointing to significant concerns starting to emerge in the UK's medium to That said, the UK remains hugely successful long-term attractiveness. The situation is in attracting FDI, and has clear potential and Mark Gregory finely balanced. opportunities to sustain that success in a Chief Economist, post-Brexit world. In this report, we suggest UK and Ireland, On the positive front, the UK saw its a number of policy steps that we believe EY number of FDI projects secured in 2016 rise can help to achieve this. And as our findings once again to the highest level on record, make clear, the UK still has remarkable maintaining its position as Europe's leading strengths that it can build on as it shapes its country for FDI ahead of Germany.

4 The UK new economic identity on the world stage. also remained the number one recipient We at EY look forward to supporting and of FDI jobs. At a regional level, London helping in that process. UK remains hugely successful in attracting FDI, and has clear potential and opportunities to sustain that success in a post-Brexit world. EY's Attractiveness Survey UK May 2017 3. Executive summary Executive summary A mixed year 12% faster than the UK but slower but also concerns across Assessing the UK's performance in than projects into Europe as a whole. the value chain . attracting FDI and maintaining its appeal to Employment created by FDI across Europe However, the UK's share of European R&D. investors since our 2016 report is extremely grew by 19% to 260,000 jobs, significantly projects also fell sharply, from 26% to 16%, difficult. For every positive indicator there faster than the UK's growth rate.

5 Meaning the UK's share was its smallest since is an equivalent negative development to 2011. With UK FDI projects from software take into account and so it is hard to draw The UK slipped back in areas typically seen as also slipping slightly despite an increase in definitive overall conclusions. good indicators of future growth. Germany the sector across Europe, these results do further extended its lead in attracting new (as raise concerns over the UK's future appeal opposed to expansion) investments, with solid growth to investors in key future growth sectors. a position it has held since 2012. And while The UK performance in securing FDI in Chinese investment into Europe is increasing, 2016 was solid. The UK retained its place and geographies . the UK is securing only half as many projects as Europe's number one recipient of FDI Europe was the leading origin for projects as Germany.

6 The UK also lost to Germany projects ahead of Germany, with a 7% rise into the UK with the USA as the largest single the leadership position it achieved for the in total projects to 1,144 the highest country. 2016 saw cross-border investment first time last year in attracting FDI from number on record. The UK was also the by European investors grow and Central the group of 24 target high-growth markets. leading recipient of FDI jobs in Europe, and Eastern Europe is now an important recording a rise of 2% in FDI-generated location for projects in higher value-added with some gains . employment to 44,665, over 20,000 areas such as R&D as European value chains In terms of the types of FDI project activity more than second-placed Poland. become increasingly integrated. Investors in 2016, the UK gained its largest number of appear concerned about the UK having projects from sales and marketing activities, but a reduced market share, with investments rising by 32%.

7 The UK also reduced access to these value chains in as the gap with Germany narrows had a successful year in attracting logistics in future, limiting the ability of their UK-based especially in growth areas 2016, with the number of projects increasing operations to realize the benefits from However, the UK's 7% rise in project by 44%. And although UK manufacturing Europe-wide activity. numbers was far outpaced by the increase plant projects fell, overall number of across Europe as a whole, with FDI projects projects by manufacturers across the value and while investor perceptions into Europe rising by 15% to 5,845. As chain increased from 355 to 374 projects. point to short-term stability . a result, the UK's market share of all FDI Financial services and business services Against the background of the UK's solid projects secured in Europe fell from 21% posted strong growth with the UK continuing FDI performance, our survey of perceptions to 19%.

8 Projects into Germany rose by to lead Europe in these two sectors. among investors globally reveals a split 4 EY's Attractiveness Survey UK May 2017 . between their current plans and future Among investors based in Western Europe, Engine are now attracting roughly double expectations. On the positive front, the 50% expect the UK to become less attractive the number of projects they secured at the proportion of investors planning to establish for FDI over the next three years. beginning of the last decade, whereas the or expand operations in the UK over the rest of England is attracting roughly the coming year is 24% in our 2017 study, Even more concerning is the sharp fall in same number. There is a risk that the strong in line with the results over the past seven how global investors rank the UK on key regions are getting stronger and policy needs years. The UK has also regained second attractiveness criteria, such as education, to be alive to this.

9 Place behind Germany in investors' ranking transport infrastructure, local labor skills, of Europe's top three FDI destinations a political stability and access to the European time to act position it briefly lost to France in our post- market. The decline in favorability on some Our research has identified mixed referendum study in autumn 2016. of these criteria since last year of up to 30% messages. On one hand, the short-term is unprecedented in the decade we have outlook for the UK in respect of FDI is longer-term perceptions been undertaking this research. It appears positive, but there are clear risks to future are increasingly negative. that as investors worry about changes to performance in the medium- to long-term. the current arrangements for trade and Our survey identified that 9% of investors However, the perception findings also migration, they then become concerned could leave the UK in the next three years, contain some worrying indicators for the that the UK's capability in other areas may but the UK still has the time to act to secure future attractiveness of the UK for FDI.

10 Not be sufficiently strong to offset any its future attractiveness in a post-Brexit Our study shows that 31% of investors negative impacts from these changes. world provided it moves quickly. expect the UK's attractiveness to FDI to decline over the coming three years, while Regions: London continues Both the FDI performance and perception 32% expect it to improve. While these figures findings underline the renowned strengths are a marginal improvement from October to dominate as peripheral'. that the UK can build on, in sectors like 2016, they are significantly worse than both regions struggle software, financial services, business the long-term average and the high point of There are mixed messages from the services and some areas of manufacturing. 2013 when 65% of investors had a positive performance of the UK's regions in 2016. Our perception research among investors three-year view of the UK.