Big ticket for US investors

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These are anemic times for foreign direct investment (FDI) in the European Union. The 28-nation trading bloc last year suffered a near 16% annual decline to $211 billion in inward FDI flows – aka inward investment. This estimate from the Organization for Economic Cooperation and Development (OECD) was less than a third of the 2007 peak.

The United Kingdom bucked this trend to remain Europe’s top inward investment location, attracting $72 billion (+52% vs 2013). Among developed nations, the UK was second only to the US, which pulled in around $98 billion (-58% vs 2013).

Helped by rising reinvested earnings and cross-border mergers and acquisitions (M&As), the UK’s FDI stock – the total value of FDI vested in a country at a point in time – ticked up slightly to almost $1.7 trillion. It was the fourth successive year of growth from the $1 billion recorded in 2010. For perspective, the inward FDI stocks of Germany and France at $984 billion (2014) and $783 billion (2013) respectively.

Germany is Europe’s manufacturing powerhouse. Yet the UK secured 164 manufacturing FDI projects in 2014 to Germany’s 131, global consultants EY report in their 2015 UK Attractiveness Survey.

This reflected strong growth in the UK’s automotive, food, and machinery and equipment sectors. It also won more software and financial services FDI projects, 35% of all EU headquarters moves, and led Europe on research and development projects.

Overall, the UK recorded 887 inward investment projects in 2014 – the most in more than a decade, and 11% more than in 2013. Its 20.4% market share of European FDI projects was the highest since 2009 as it pulled away further from Germany – the EU’s second most attractive destination for inward FDI.

Some 36% of all such projects locating in the UK were from the US, the largest source. The UK’s market share of 29% of US inward investments in the EU was the highest.

American companies that have recently bought into the UK story include, among others, Grand Heritage Hotel Group (Annapolis, MD), which is co-developing a $640 million tourism facility in Derbyshire, England; and supercomputer maker Cray Inc (Seattle, WA) which is locating its European HQ in Bristol, England.

The UK is encouraging more US technology companies to build international headquarters there, and has set up HQ-UK, a public-private program, to do just that. ( hquk)

“The UK’s inward investment performance has been outstanding and continues to improve,” said Simon Moore, International Director for the Confederation of British Industry (CBI), a leading independent employers’ organization. Its members include UK subsidiaries of many American inward investors.

“When I talk to global companies that have invested here, their feedback on what makes it attractive tends to be pretty similar,” Moore added.

For one thing, he explained, the UK government has pledged, and continues to deliver, cuts in the headline rate of corporation tax (CT) on business profits. At 20%, this is the lowest among the G20 nations, and a timetable to reduce it further helps companies to plan.

Important changes have also been made to the Controlled Foreign Companies anti-tax avoidance regulations so that, in some circumstances, it has become more attractive to set up a UK holding company.

“Added to the natural advantages the UK has in its time-zone centrality, its place in Europe, its world-beating universities and the international reputation of our major cities – this is a potent mix which adds up to a world-leading business environment,” Moore said.

The UK ranked eighth and just behind the US among 189 nations for ease of doing business in the World Bank’s ‘Doing Business 2015’ report. In the EU, it was behind only Denmark.

The UK was ranked just behind the US for ease of doing business in a World Bank 2015 report

A familiar range of public sector, fiscal and other incentives limited by EU rules may be offered to inward investors on a case-by-case basis by the government’s UK Trade & Investment ( wing and allied public agencies in the UK’s economic regions.

However, economic studies tend to suggest that financial incentives are at best marginal and at worst a waste of taxpayers’ money in influencing inward investment decisions.

Businesses’ main considerations are the quality of infrastructure and the labor force, the accessibility of the location, and the size and growth of the domestic market. The UK scores well on most key criteria.

Admittedly, its ageing road and rail infrastructure, its need for more and affordable housing and its medium-term security of energy supply, are sometimes perceived as weaknesses. However, the huge investment needed to upgrade and renew these factors, and the opportunity to use and operate them in future, represent huge potential sources of future economic activity and dynamism that FDI can play a key role in, EY suggested. Greater decentralization of decision-making to economic regions and cities looks set to accelerate infrastructure improvements.

The UK’s Office for National Statistics estimates that the economy grew 3% in 2014, which would be the strongest growth since 2006. The central bank, The Bank of England, forecasts economic growth of 2.8% in 2015, a rate to turn most EU nations green with envy.

The UK population grew by 6.4 people per 1,000 in 2014, faster than in Germany or France, to reach 64.8 million. This is equivalent to the populations of California and Texas combined, and accounts for 12.7% of the EU’s population.

That said, many inward investors to the UK view ‘the domestic market’ as being the 508-million population EU, to which the UK is the gateway. They also get better access to dozens of economies with which the EU has free trade agreements (FTAs), stressed Simon Evenett, professor of International Trade and Economic Development at the University of St. Gallen, Switzerland.

Evenett, a noted researcher and author on world trade agreements, added: “The EU is seeking to negotiate more FTAs with large markets such as the US, so this benefit will grow over time.”

For the same reasons, Europe could also be the UK’s Achilles heel when it comes to FDI. The country is negotiating over its net payments to the EU budget and what flexibility it can get to deviate from EU-wide rules, notably on welfare payments to some immigrants and asylum seekers.

If talks do not produce a deal that UK prime minster David Cameron can sell to his governing Conservative Party’s ‘euro-sceptic’ wing, a national referendum on continued EU membership will very likely be held by 2017.

“The majority of CBI members believe our economic future is best served by continued membership of a reformed EU,” Moore said.

“We need Europe to turbo-charge its single market in services and digital, and sign more trade deals like the (proposed) Transatlantic Trade & Investment Partnership (TTIP) with the US, but to pull back from other areas of regulation where decisions are better made at national level.”