Government needs proper plan to ‘level up’ foreign investment across UK
23 September 2021
The International Trade Committee has published its report on Inward Foreign Direct Investment.
- Read the Full Report [HTML]
- Read the Report Summary [HTML]
- Read the Full Report [PDF]
- Find all publications related to this inquiry, incluing oral and written evidence
Inward Foreign Direct Investment (FDI) is where overseas investors acquire ownership of, or a controlling stake in, UK businesses.
The report explores the Government’s strategy for promoting and facilitating inward FDI, the proposed new National Security and Investment regime, and the role played by foreign governments’ Sovereign Wealth Funds (SWFs).
While the Government says inward investment is important for its “levelling up” agenda, current patterns of FDI perpetuate the economic dominance of London and the South East. The report calls on the Government to show it has a plan to maximise the benefits of FDI for all parts of the UK.
The report welcomes recent measures for investment promotion, such as the creation of the Office for Investment (OfI), but cautions that these initiatives must be integral parts of a coherent overall investment strategy, not just a collection of ad hoc measures.
Commenting on the report, Angus Brendan MacNeil MP, Chair of the International Trade Committee, said:
"Inward foreign direct investment can benefit local economies, generating new jobs and bringing new skills.
However, far from helping to ‘level up’ across the UK, current patterns of foreign direct investment overwhelmingly benefit London and the South East.
If the Government is serious about its levelling-up agenda, it needs to show it has a plan to maximise the benefits of inward investment in all parts of the UK.
We thank all those who have engaged with our inquiry and look forward to receiving the Government’s response.”
Conclusions and recommendations
Data on inward investment
While progress has been made in addressing deficiencies in data on inward investment produced by the Department for International Trade (DIT) and the Office for National Statistics, the Committee joins the Office for Statistics Regulation in calling for greater transparency about progress, quick implementation of changes and broader engagement of users.
With keen international competition for inward investment, it is vitally important for the UK to have effective arrangements for investment promotion. The creation of the OfI is a significant and innovative addition to the UK investment-promotion landscape. At the same time, the role of the Minister for Investment appears to be evolving and growing.
While these developments are welcome, the Government should be mindful that the roles of the OfI and the Minister should function as integral parts of a coherent overall investment strategy. There also needs to be further clarity on how the OfI relates to 10 Downing Street, DIT and other departments. In addition, the Government should keep the Committee updated on the staffing, developing role and performance of the OfI – and develop criteria for measuring its success.
The Government needs to show how its investment promotion initiatives fit into its overall investment strategy, rather than just being ad hoc. Regarding DIT’s new Trade and Investment Hubs, the Committee asks the Government to explain why it is creating a Hub for each of the devolved nations yet only one in the English regions (in the North of England, at Darlington). It should also say more about the scale on which specialist investment staff – including those from the OfI – will be present in the Hubs and the specific roles that they will play there.
Involvement by DIT in inward investment successes, measured in project numbers, is a crude performance metric for investment promotion. The Committee welcomes the progress that DIT has made in developing a “Gross Value Added” measure of the economic impact of inward investment, which opens the possibility of a more sophisticated performance metric and better targeting.
Levelling up and inward investment
The Government has made much of "levelling up" across the UK – and indicated that inward investment has an important role in achieving it. However, it is uncertain how this translates into concrete interventions.
The Government should set out in its forthcoming levelling-up White Paper how it expects investment promotion to support and align with wider levelling-up goals. This should include reference to policy on infrastructure, skills, higher education, integrating with Global Value Chains and further devolution of powers in the English regions.
The Skills Accelerator is a welcome innovation in enhancing local skills bases. To maximise the benefits of this, skills policy needs to be coherently joined up with investment promotion at sub-national level. Similarly, higher education can play a crucial role in attracting inward investment and the Government should seek the sector's full engagement in sub-national investment promotion.
The Prime Minister has indicated the possibility of more devolution in the English regions, but the form this will take is unclear. The Committee recommends the Government consider how to create a coherent sub-national geography that works for investment promotion, effectively tying together areas with common identities and features. This should include reviewing the role of Local Enterprise Partnerships and considering how they can most effectively be funded in relation to investment promotion.
Sovereign Wealth Funds
SWFs, and other Sovereign Investors, are likely to play an increasingly important role in UK inward investment as sources of "patient capital" in areas such as infrastructure, technology and life sciences.
The Committee welcomes the Government exploring ways to encourage this potential source of major investment, but notes that not all SWFs use the Government's investment promotion services. The Committee recommends the development of an appropriate strategy for better engaging with this type of investor.
The National Security and Investment regime
The National Security and Investment Act 2021 is a welcome measure, updating legislation that was no longer fit-for-purpose, given the challenges that investment screening now poses. The Committee supports the Government's intention to screen on an “actor-agnostic” basis (without targeting investors from particular countries or specific types of investor).
The Committee recommends the Government use its discretionary call-in powers sparingly and in a carefully targeted way, to deal with issues such as non-controlling investments of concern. It also recommends the Government set out the criteria it will use to minimise the risk of its powers under the screening regime being deployed in a politicised way.
The Committee recommends the Government set out overtly how it intends, in operating the new screening regime, to communicate clearly and transparently to investors the principles underlying the regime, along with its processes and timeframes.
It is recommended that the Government set out the respective roles of DIT, the OfI and other Government bodies in implementing the new regime. It should also consider whether the Export Control Joint Unit could be a possible model for developing the Investment Security Unit (ISU) on an integrated, cross-departmental basis.
The Committee recommends the Government monitor closely the functioning of the new regime, including the work of the ISU. A review of the regime's first 12 months of operation should be undertaken and the findings published. If necessary, processes under the regime, or the regime itself, should be modified – including by changing legislation, if this is required.