Foreign Direct Investment 2016-17

Debate between Bill Esterson and Rishi Sunak

Tuesday 12th September 2017 Westminster Hall

[Bill Esterson (Sefton Central) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Gray.

We should celebrate the United Kingdom’s long-standing success as the premier destination for EU inbound investment, but we should also be under no illusions about the scale of the challenge facing the UK in retaining current investment, let alone building on it. As research from Michail Karoglou, David Bailey and Nigel Driffield of Warwick Business School shows, of all relevant recent events only two positively affected the long-term trend for FDI: entry to the European Economic Community and entry to the single market in 1992. Only two events caused a reduction in the long-run level of inward investment flows: Britain leaving the exchange range mechanism under John Major, and Harold Wilson’s devaluation of sterling. After both those events, it took an average of four years for the level of FDI to recover. If anyone in this room or elsewhere thinks that there might be just a short-term blip or no blip at all, the evidence from history suggests that we need to think very carefully. The uncertainty caused by Brexit is cause for concern.

Let us look at some of the figures behind our FDI position. In 2016, the UK remained the premier preferred destination for inward investment projects, but despite a rise in the number of projects, the UK’s market share in Europe fell from 21% to 19%. Meanwhile, we are losing ground in emerging growth industries, high-growth markets and in the attraction of investment from emerging powerhouse economies such as China. Celebrating the number of investment projects is all well and good, but what really matters is the value of those projects and their wider contribution to the economy.

Figures from fDi Markets investment monitor suggest that in the 10 months before the referendum, investment flows were $42.7 billion, and in the 10 months after, the figure dropped dramatically to $28 billion. If we are to evaluate fully the vital work that the Department for International Trade undertakes, we need to see the economic value—really drill down into those figures and look at the value of the projects for each financial year, notwithstanding commercial sensitivities that might prevent the release of information on a case-by-case basis. It might be an idea to see exactly how the Department allocates investment projects to specific annual statistics, so we can avoid what happened in January this year, when the Secretary of State was widely ridiculed for including projects unveiled years ago.

The Government will concentrate on the success stories, but it is important to learn from the failures as well. The recent decision by Nestlé to relocate some 300 jobs making Blue Riband biscuits to Poland is a case in point—I have pointed out elsewhere that failure to find £1 million to save 300 jobs. The fall in the value of sterling has of course made it cheaper to invest here, but as Nigel Driffield and his colleagues point out, the benefits of a favourable exchange rate are set against the uncertainties of changes in our access to the EU. Their research also shows that investors like to return profits to their home countries, so a low-cost investment may be of less interest than might appear at first glance.

The UK has traditionally been seen as a relatively easy place to do business, ranking seventh in the latest World Bank Doing Business ranking. That is in part due to a skilled and educated workforce, the dominance of English as the global business language, a robust regulatory framework, a strong legal system and a wide array of supporting service industries, but the main reason in recent decades has been our access to the largest free-trading area in the world. The big challenge, therefore, is to maintain our attractiveness as we leave the EU—hence the need for strong transitional arrangements, the avoidance of a cliff edge and a seamless move to post-transitional arrangements. A link with trade policy and a robust industrial strategy are also essential.

[Rishi Sunak]

The hon. Gentleman talks about maintaining our attractiveness to international investors after we leave the EU. Does he think that Labour’s proposed 50% increase in our corporation tax rate to 26% would make it more or less likely that international investors would want to invest here in the UK?

[Bill Esterson]

The evidence is mixed on whether the fall in corporation tax since 2010 has had benefits in attracting inward investment. Under our proposals, we would still have the lowest corporation tax in the G7. Although investors like the idea of a low-tax economy, they equally dislike the consequences. Recent research by the London School of Economics shows that the downside implied by a low-tax economy of poor public services is profoundly unattractive. The approach that the Prime Minister set out at Lancaster House may be the preferred route for many Conservative MPs who want to shrink the state, but as well as continuing to damage our NHS, schools and pensions, such a policy will restrict the Government’s ability to deliver the very infrastructure and skills that foreign investors want and need.

The view of our investors is set out starkly in EY’s UK attractiveness survey. EY said that it has been a “mixed year” and that it is

“difficult to make a clear assessment of the UK’s performance attracting foreign direct investment and maintaining its appeal to investors since our 2016 attractiveness reports, because every positive indicator is offset by an equivalent negative development.”

It added that,

“the UK’s share of European R&D projects slumped from 26% to 16%, its lowest since 2011. With software projects also slipping despite a Europe-wide increase, these results raise concerns over the UK’s future performance in key growth sectors.

Europe was the leading origin for projects into the UK…Cross-border investments in Europe grew in 2016, with Central and Eastern Europe becoming an important area for higher value-added FDI such as R&D. As European value chains become increasingly integrated, investors appear concerned about the UK’s future access to these value chains.”

The EY 2017 global survey of investors’ perceptions

“reveals a split between current plans and future expectations…Some 31% of investors expect the UK’s FDI attractiveness to decline over the next three years, while 33% expect it to improve.”

Before we get too excited about the net positive figure, EY states that those figures are

“significantly worse than the long-term average, and 50% of investors based in Western Europe expect the UK to become less attractive.”