The UK is one of the leading destinations for foreign direct investment (FDI) across the world. It boasts a total FDI stock of over 1 trillion US$ and attracts more FDI projects than any other country in Europe, second only to the US globally1. The effects of FDI on a host country are however mixed, and has been the source of much debate over the last decade.
There is considerable empirical evidence that shows that FDI can add to an economy’s productive capacity by importing not just capital but technology, production skills and better management. This directly raises output and productivity in operations, as well as improving competition in the domestic market with the knock on effect of raising workers’ wages and creating new jobs. Indeed in 2016-17, FDI created over 75,000 new jobs in the UK alone2. Moreover foreign takeovers can often save ailing businesses, through an injection of investment and capital.
Since capital formation, productivity improvements, technological improvement and a strong labour market are key inputs for economic growth, economic theory would therefore suggest that FDI is a net benefit to the host country. For this reason, many countries, the UK being no exception, have actively encouraged foreign investment.
However, FDI does not always have a positive impact on the host country. FDI, depending on the investor and situation, can lead to job losses, factory closures, the hollowing out of domestic supply chains and asset stripping, with a number of high profile examples in the UK often cited as prime examples of “bad” FDI.
How an economy should strike the right balance between being open to positive FDI, while at the same time maintaining a degree of control to prevent the adverse effects that can arise, is one that has been deliberated by government, industry and the public numerous times, with little or no output. The UK electorate’s decision to leave the European Union last year has once again brought the issue back into the public spotlight, and gained further momentum following Softbank’s high profile takeover of ARM – a leading UK high tech firm.
Prior to this paper, EEF did not have a policy position on FDI. However, since the turn of the year we have undertaken some in depth research into this issue; the different forms FDI takes, the associated benefits and costs, the current UK system and the treatment of capital inflows in competitor countries. This paper will outline our findings, and position on FDI, before putting forward our new framework proposal to government, which we believe will ultimately ensure that the UK is a net benefactor from FDI. Firstly however, we need to define the two different types of FDI.