A new report by EY and the Centre for Towns demonstrates the disparity of foreign direct investment flows into the UK, which are dominated by the UK’s largest cities and towns at the apparent expense of the areas that surround them.
The joint report, which captures detailed analysis on where FDI has located across the UK’s cities, towns, communities and villages over the last twenty years, identifies chronic imbalances in the geographic distribution of FDI in the UK. Entitled ‘Bridging The Gap’, the report aims is to encourage open dialogue between business leaders, investors and policymakers on how to maximise regional and national economic performance.
Commenting on the report, Lisa Nandy MP and Co-Founder of the Centre For Towns, said: “This report sets out the stark geographical differences in the levels of foreign investment in our towns and cities. Core Cities, like London, have received vastly more projects and funding, benefitting from a skilled workforce that can adapt to the new economy and a transport infrastructure to match.
“In contrast, small and medium-sized towns have received a fraction of the foreign investment, perhaps reflecting decades of under investment in skills and transport. The uncertainty around Brexit may well make this worse and requires place-based strategies to help our towns attract inward investment. It is no longer sustainable to ignore a two-track economy where our Core Cities accelerate away from our towns and regional productivity gaps deepen, leaving communities struggling.”
The UK’s ‘Core Cities’ dominate
The UK’s largest cities – or Core Cities as they are defined in the report – have attracted over half (51%) of all FDI projects recorded in the UK over the last twenty years. In 1997, Core Cities – including London, Manchester, Birmingham and Glasgow – attracted a 31% share of the UK’s total FDI, which has since increased to a 56% share in 2017.
Over the last two decades, London has been the primary beneficiary of FDI, accounting for 74% of the projects going to Core Cities. London attracted 5,418 projects between 1997 and 2017, 14 times more than the 382 secured by second placed Manchester. Despite London’s appeal, other Core Cities, such as Bristol, Edinburgh, Leeds, Manchester and Newcastle upon Tyne, have all more than doubled the number of projects they secure annually, in the twenty year period.
Notably, FDI in the UK’s Core Cities has increased four-fold since 1997, whilst largely remaining flat or declining in UK towns of all sizes.
Towns fare much worse
When it comes to Large Towns – classified by Centre for Towns as locations with a population of over 75,000 people – their share of the UK’s FDI has slightly fallen from 26% in 1997 to 24% in 2017. Medium and Small Towns, Communities and Villages fared much worse, attracting 235 (40%) less projects in total in 2017 than they did in 1997.
EY’s UK Chief Economist, Mark Gregory comments: “The economic challenges facing our towns are well-known, but this report identifies just how stark the differences are. Despite the UK’s huge success in attracting FDI, cities and the largest towns capture the vast majority of projects. Smaller towns and communities up and down the country haven’t seen any growth in the number of FDI projects over the last two decades. We know that investment decisions are driven by the availability of skills and infrastructure locally, and rebalancing FDI requires an urgent focus on these areas.”
R&D drives FDI success of University Towns
A stand-out trend from the report is the success of the UK’s University Towns in attracting FDI. UK towns with a university saw an increase in the number of FDI projects secured over the last five years, from 73 to 180 projects, driven largely by research and development (R&D) related investments.
Whilst other types of towns analysed in the report – Coastal, Commuter, Ex-Industrial, Market, and New Town – saw some inclines in FDI over the last five years, there were some significant declines over the twenty year analysis. For example, Ex-Industrial Towns experienced a 74% fall in FDI project numbers between 1997 (69) and 2013 (18).
However since then, traditional industrial hotspots – for example Rotherham, Mansfield and Redcar – have seen a significant revival with 54 projects attracted in 2017; triple the amount recorded in 2013 and the highest number secured since 1997 (69). Underlying this improvement was the increase in manufacturing projects attracted by the UK in recent years.
Mark adds: “The success of University Towns demonstrates the international competitiveness of UK universities as knowledge industries that are becoming more important in the economy. There is an opportunity to build on these assets to strengthen the UK’s position in the new industrial revolution, however this will require action to ensure access to leading research talent and funding after Brexit.”
Manufacturing could support the spread of FDI
More than half (56%) of the FDI projects locating in the UK in 2017 were described as ‘Sales and Marketing’, which increased from less than a quarter recorded twenty years ago in 1997. The growth, largely since 2004, has been driven to a significant extent by the increasing shift to a services focused UK economy and, more recently, the digital revolution.
‘Sales and Marketing’ FDI has been primarily attracted to Core Cities (73% of all projects since 1997) and Large Towns (14% in the same period). Indeed, foreign companies looking for UK Headquarters follow a similar route, with the vast majority (83%) of all headquarters projects over the last two decades destined for Core Cities or Large Towns.
However, in contrast, manufacturing FDI projects tend to consider a broader range of locations, with 57% attracted to places outside Core Cities or Large Towns. Logistics and R&D related projects were also found to be more geographically dispersed, with over 40% and 30% respectively of investments deciding to set-up or expand in medium or smaller sized locations.
Mark Gregory adds: “Core Cities and Large Towns have clearly benefited from the agglomeration of sales and marketing activity and a focus on manufacturing offers the same potential, particularly through supply-chain linkages. Generally, manufacturers prefer to be based outside of large populations, for the availability of land, and to ease the transport of goods, with access to strong infrastructure.”
A change of policy needed
In order to support the UK’s economic rebalancing, the report says that a ‘bottom-up’ approach to FDI planning is needed that seeks to match the requirements of investors to the features of individual locations.
It also stresses the importance of investing more in regional transport, to increase FDI into all parts of the UK, and the need to strengthen the industrial strategy to reflect the important role that modern manufacturing can play in ironing out FDI imbalances. A plan of how to entice services investors to locations outside Core Cities and Large Towns is also much needed and faster broadband is likely to be a key element of this approach.
Mark adds: “The UK has focused on attracting services FDI, which has boosted the growth and success of the UK’s largest towns and cities. However this appears to have been at the expense of smaller urban and rural communities that have been left behind in the FDI stakes. It is only in recent years that a switch in strategy has led to a revival in the FDI fortunes of these forgotten places, but it has come late in the day.
“Before a potential hiatus to this resurgence, with Brexit close ahead, there is a small window for policy makers to lay the ground for rebalancing within the UK’s regions and focus on individual investors’ needs and more on place. This is particularly important because smaller places tend to be more vulnerable to economic shocks.”
Professor Will Jennings of the University of Southampton and Co-Founder of the Centre for Towns, concluded: “This report provides further evidence on the diverging trajectories of economic development taken by Britain’s towns and cities. While Core Cities continue to see inflows of investment, small towns and rural areas are treading water economically. This great divergence requires serious attention from policymakers and a shift to place-sensitive strategies for economic growth, rather than assuming agglomeration is the only option. There needs to be focused investment to deliver a local skills base, transport links and infrastructure and broadband to give places an opportunity to attract inward investment and to also support local business innovation.”