Brexit uncertainty slashes UK foreign direct investment

Although the UK retained the top slot as the number one location for foreign direct investment (FDI) into Europe in 2018, there has been a significant drop in the number of inbound mergers and acquisitions as uncertainty around Brexit affects long-term decisions

The UK recorded 1,054 projects, its third highest number of FDI projects in 20 years, but this was still down significantly on pre-referundum figures, with a 13% drop compared to 2017 (1,205 projects), according to analysis by EY.

At the same time, there has been a collapse in the amount of merger and acquisition (M&A) business, with the latest figures from the ONS indicating a slump in foreign companies abroad acquiring UK companies.

Brexit is a significant factor behind the decline of UK FDI projects in 2018, with 15% of global investors saying that have paused one or more UK projects due to Brexit (up from 8% last year), although only 6% plan to move assets out of the UK in the future, the EY report found.

Nearly four in 10 (38%) global investors cite Brexit as one of the top three risks to Europe’s attractiveness over the next three years, an increase of 8% on last year.

Investors’ perceptions of the benefits of the UK have declined since the EU referendum vote in June 2016.

Before the referendum, 86% of investors considered the level of social stability, and the degree of political and regulatory predictability and transparency in the UK as attractive. These ratings have fallen to 60% and 53% respectively showing it is not just Brexit but the process of getting there, the lack of progress on a final agreement and the resulting changes that concern investors.

Breaking down the results geographically, nearly 17% of Western European and Asian investors say they have delayed a project planned for the UK, compared to only 11% of investors from the US.

Reflecting growing concerns over the Brexit outcome, the value of inward M&As involving foreign companies abroad acquiring UK companies was £6.3bn in Q1 2019, marking a £19.2bn fall compared with the same period in 2018 (Q1: £25.5bn). Although M&A levels held up in the last three months of 2018 at £38.8bn, business confidence was knocked at the start of the year and the market was extremely quiet for the first three months, the latest ONS figures show.

Outward M&A (UK companies acquiring foreign companies abroad) was valued at £5.4bn, half the £10.5bn recorded in Q4 2018. Domestic M&A (UK companies acquiring other UK companies) also fell, standing at £1.4bn in Q1 2019, a £4.2bn decrease on the value recorded in Q 4 2018 (£5.6bn).

Digital inward investment

Despite the downturn in inward investment, EY research showed that the UK remained the number one location for digital sector FDI in Europe in 2018, beating Germany and France into second and third place respectively. However, the UK’s share of digital FDI fell four points to 23% in 2018, despite Europe’s share of the global digital sector growing by 5% over 2018.

Digital remained the UK’s leading sector in terms of FDI projects although this declined by 10% year-on-year from 320 projects in 2017 to 288 in 2018. Digital projects still outstripped second-placed business services as projects fell by 10% in 2018 to 160 projects.

Steve Varley, EY’s UK chairman, said: ‘Concerns over Brexit appear to be reducing the UK’s appeal currently and are hampering its ability to attract capital that could create a platform for future growth in output and productivity.

‘The fall in UK FDI in sectors such as automotive and chemicals, combined with a 50% decline in headquarter projects, a 17% decline in R&D projects and a loss of digital market share, demonstrate that investors appear to be reluctant to commit to projects that they anticipate will be negatively impacted by Brexit, while reducing investment in high value added areas.’

The outlook for inward investment is also negative, with 42% of investors stating that the UK’s attractiveness for FDI will decline over the next three years. The resulting net negative intention of 16% is the worst-ever result in a decade. It is also significantly worse than the long-term average and the high point of 2013, when 65% of investors had a net positive three-year view of the UK.

Over the last 12 months, investors have become increasingly concerned about the risk of more disruption to supply chains (34% versus 13% last year), customs compliance costs (up to 25% from 18%) and the possibility of tariffs on imports and exports. In addition, 7% of investors are worried about access to skills, up from 8%. By contrast only 19% of investors see UK economic growth as a major worry, down by a third since last year.

Mark Gregory, EY’s chief UK economist, said: ‘If the trends continue then the UK risks becoming “Branch office Britain”, an attractive market to sell to, but not one that companies will commit to manufacture or research and develop in.’

Pat Sweet

ONS mergers and acquisitions statistics Q1 2019 

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