Inward FDI Flows into the UK:Factors, and Future Projections

Overview of the UK Inward FDI Flows

Statistics published by UNCTAD over the last decade indicate that the Inward FDI flows into the UK took a rising trend between 2003 and 2007, but it has taken a downward trend since 2008 (Driffield et al., 2013, p. 8). In 2003, the value of inward FDI flow was $27.39 billion (Driffield et al., 2013, p. 8). The amount increased sharply over the next few years to a record high of $200.039 billion in 2007. However, the recent global financial crisis that peaked in 2008 led to a sharp drop in the amount of inward FDI flows. The total value reduced from its peak in 2007 to $89.026 billion in 2008 (Driffield et al., 2013, p. 8). Since then, the value of inward FDI flows has been declining gradually, although there was a slight increase in 2011. In 2013, the value of FDI inflows was $37.1001 billion. The decline has been influenced by both internal factors in the UK and recent trends in the global economy. Table 1 in the appendix presents the trend in the inward FDI flows into the UK from 2003 to 2013 (Driffield et al., 2013, p. 8).

Sources of the UK’s Inward FDI

The manufacturing sector has been the largest source of FDI in the UK over the last decade. It is imperative to note that there are more than 45,000 foreign company affiliates operating in the UK. Most of these affiliates invest in research and development. In fact, these organizations account for an average of 42 percent of the UK’s expenditure in research and development annually. Most of the subsidiaries investing in research and development are owned by UK multinational organizations (Lancheros& Temouri, 2013, p. 12). Research and development has focused on the manufacturing sector. They have played a significant role in the development of the UK’s optical products, precision equipment, automobile products, and information communication technology (ICT) products. The outcomes of the research and development activities are also applied in other sectors. For instance, the outcome of research and development has contributed to the recent inventions of advanced ICT products that organizations widely apply in almost all the other sectors, including the banking, manufacturing, aerospace, government, and health sectors (Lancheros& Temouri, 2013, p. 13).

The services sector has also been a significant source of FDI in the UK, although its contribution has been lower than the contribution of the manufacturing sector. The foreign firms operating in the UK service sector mainly offer financial services. Although there was a decline in inward FDI flows into the service sector in the UK in 2008, there was an improvement in 2009. There was a decline in the sector’s performance in 2010, followed by a slight rise in 2011. However, there has been a gradual decline during the succeeding years (Lancheros& Temouri, 2013, p. 13). Most of the foreign investors in the UK service sector are from Germany, France, Luxembourg, the US, Spain, and Belgium. The decline in inward investments into the service sector in the UK has mainly been caused by disinvestments by German and French investors. The improvement in the performance of inward investment into the sector in 2011 was caused by an increase in the number of investments from the US. Overall, most of the foreign companies operating in the UK manufacturing and services sectors are from the US. A good number of them are from other EU countries, including Japan. A very small proportion of these companies are from other parts of the world (Lancheros& Temouri, 2013, p. 13).

The Likely Future Trends

Although there is no certainty in the prospects of global FDI in the future, it is very likely the inward FDI flows into the UK will continue declining in the near future. Recent disinvestments that have led to a decline in the inward flows may have been caused by two major factors. Firstly, there has been a change in the investment trends globally, with increased focus on emerging markets. Emerging markets such as China, Brazil, Latin America, and India have growing economies that are facilitating a rapid increase in the number of middle-income earners. For instance, the economy of China has been growing at an accelerating rate over the past decade (Driffield & Jindra, 2012, p. 34). At the same time, China has a large population that is currently over 1.3 billion. The growing economy in China is facilitating the sprouting of a middle-class group that is attracted to imported products and services. In response to the increasing demand for imported products in China and other emerging markets, multinational organizations in developed countries are increasingly making investments in emerging markets.

At the same time, the markets of most developed countries, such as the UK, the US, and Germany, have reached maturity (Driffield & Jindra, 2012, p. 34). This implies that the prospects for growth of investments in the developed countries are lower than in the emerging markets. This explains the fact that the UK market may have become less attractive to multinational corporations in countries such as France and Germany than in emerging markets. For instance, US multinationals are currently expanding their operations in China, Brazil, and other emerging markets, with little consideration given to the UK market. This explains the fact that the net investment of the US corporations in the UK market is still lower than the pre-2008 level (Driffield & Jindra, 2012, p. 34). This is likely to be the main cause of foreign firms’ disinvestment in the UK. Since the emerging markets are still attractive to multinational firms, it is likely that they will continue perceiving the US market as being less attractive in the near future.

The second factor is that despite the presence of bilateral trade agreements, the investments by the developed countries in the emerging markets hardly attract inward investments from the emerging economies. In other words, organizations in emerging markets are very selective in making investments in foreign countries. For instance, the amount of investment made by Chinese companies in the UK is negligible (Driffield & Jindra, 2012, p. 35). The countries with emerging economies are making investments in the most lucrative markets. These trends are likely to continue over the next five years, implying that the amount of inward FDI in the UK market will continue to fall.

Over the next five years, the growing markets are going to become more important for inward FDI. There is a high probability that multinational companies will continue expanding their operations in countries such as Brazil, China, Russia, and India. They will compete to gain and secure such markets before they become saturated. One of the key factors that will enhance the attractiveness of such markets is lower labor costs than in the developed countries (Driffield, Love & Taylor, 2009, p. 179). This implies that the manufacturing sector will be the most important sector for inward FDI. This will not be pronounced in the services sector. This will lead to a decline in manufacturing share out of the total inward FDI flow in the UK. Similar argument applies to corporate taxes; there are higher corporate taxes in the UK than in the emerging markets.

References

Driffield, N. L. & Jindra, B. (2012). “Challenging the production function approach to assess the developmental effects of FDI.” European Journal of Development Research,

Vo. 24, No. 1, pp. 32-37

Driffield, N. Lancheros, S. Temouri, Y. & Zhou, Y. (2013). “Columbia FDI profiles: Inward FDI

in the United Kingdom and its policy context.” Accessed November 10, 2014, from

<http://www.vcc.columbia.edu/files/vale/documents/UK_IFDI_16_July_2012_-_FINAL.pdf>

Driffield, N. Love, J. H. & Taylor, K. (2009). “Productivity and Labour Demand Effects of

Inward and Outward FDI on UK Industry.” Manchester School, Vol. 77, No. 2, pp. 171-203

Lancheros, S. & Temouri, Y. (2013). “Future manufacturing: foreign direct investment trends.” Accessed

November 10, 2014 from HYPERLINK “https://www.gov.uk/government/publications/future-” https://www.gov.uk/government/publications/future-manufacturing-foreign-direct-investment-trends

Appendix

Table 1.0: UK inward FDI flow from 2003 to 2013

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

FDI Inflow Amount (billion dollars) 27.39 57.139 177.9 156.193 200.039 89.026 76.3009 49.617 51.138 45.796 37.1001

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