Foreign direct investment (FDI) – when a company in one country invests in a company in another country – is generally viewed as a positive economic indicator for the host economy.
Late last year, the Office for National Statistics (ONS) published data showing foreign direct investment involving UK companies, which allows us to see the level of both UK companies’ investments abroad and investment in UK companies from abroad.
Here we examine foreign direct investment involving UK companies in 2017, in light of recent trends, as well as the geographical pattern of investment.
What is foreign direct investment?
FDI is defined as investment in an enterprise operating in a foreign economy, where the purpose is to have an ‘effective voice’ in the management of the enterprise.
In FDI statistics, an ‘effective voice’ is owning 10% or more of a company; any investment below this is counted as ‘portfolio’ investment and not included in FDI statistics.
What counts as FDI?
FDI can cover a range of forms of investment, some examples include:
- A UK company establishes a branch or subsidiary in a foreign country, injecting start-up capital. This is often known as a ‘greenfield’ investment.
- A UK company buys or sells (fully or partially) the equity of an existing foreign company. This is often known as M&A (mergers and acquisitions) activity.
- A UK company puts additional capital into an existing foreign subsidiary or allows it to retain profits rather than return them to the parent company.
FDI can be either ‘inward’ or ‘outward’:
- Inward FDI measures investments made in a country from another country.
- Outward FDI measures investments made by domestic companies in a foreign economy.
What do FDI stats measure?
FDI statistics measure two different concepts – flows and stocks:
- Flows measure annual levels of investment on a net basis (meaning disinvestments will be included). For example, in the UK, inward flows would measure foreign companies’ investments in British companies, while outward flows would measure investments made by British companies abroad.
- Stocks measure the accumulated value of past investment.
Fall in inward FDI in 2017
In 2017, inward FDI flows into the UK were worth £92.4 billion, down from £192.0 billion in 2016.
While this fall of just under £100 billion between 2016 and 2017 may seem very dramatic, it is important to bear in mind that flows can be very volatile from year to year and that 2016’s total was unusually high. This was attributed by the ONS to, “a handful of high-value mergers and acquisitions” in 2016, notably four foreign acquisitions of British companies each with an individual value in excess of £10 billion each.
The fall is also representative of a wider global pattern – in 2017, overall world flows of inward FDI fell 23% to $1.43 trillion from $1.87 trillion in 2016; 2016’s total followed a record high of $1.92 trillion in 2015. The United Nations Conference on Trade and Development’s 2018 World Investment Report attributes this in part to a decrease in the value of cross-border mergers and acquisitions, though even discounting the effect of this on “inflated FDI numbers in 2016… the 2017 decline remained significant” and “part of a longer-term negative cycle.”
Just over a third of UK inward FDI flows into the UK in 2017 were from Asia, up from 15% in 2016, while 26% of inward FDI flows were from the EU, down from 68% in 2016.
Japan was the single largest investor in the UK in 2017, accounting for 29% of all inward FDI flows (up from 1% in 2016), followed by the USA.
World FDI flows
In 2017, the UK accounted for 1% of world inward FDI flows (down from 11% in 2016) and 5% of the EU’s total inward FDI flows (down from 37% in 2016).
The chart below shows the UK’s world ranking in terms of the stock of inward FDI since 1990. Over this period, the UK’s position has fluctuated between fifth and second, while the United States has been ranked first every year.
Since 2015, the UK has been ranked third behind the USA and Hong Kong. In 2017, the value of the stock of inward FDI in the UK was $1.6 trillion, behind Hong Kong at $2.0 trillion and the USA at $7.8 trillion (the stock of FDI inward FDI essentially means the accumulated total of inward FDI into the UK over the years).
UK investment abroad in 2017
In 2017, outward flows of FDI from the UK were worth £91.4 billion – this follows three successive years of net disinvestment between 2014 and 2016 and represents the UK’s highest level of outward FDI flows since 2008.
This increase is due in part to a dramatic increase in outward mergers and acquisitions – these increased in value from £17.3 billion in 2016 to £76.6 billion in 2017 (a 17-year high).
By individual country, the UK’s highest level of outward FDI was in the USA – this amounted to £88.5 billion, followed by Hong Kong at £4.0 billion.
In 2017, the UK accounted for 6% of world outward FDI flows and was the fourth largest investor abroad in the world (after the USA, Japan and China); this follows a three-year trend of net disinvestment.
In 2017, the UK held 5% of the world total of outward FDI stock, fifth in the world behind the USA, Hong Kong, Germany and the Netherlands.
The chart below shows the UK’s world ranking in terms of the stock of FDI held abroad since 1990. Over this period, the UK’s position in the world has fluctuated between fifth and second, while the United States has ranked first every year. The UK was the second largest holder of FDI stock abroad between 2000 and 2015, before falling to third in 2016 (behind the USA and Hong Kong) and to fifth in 2017 (behind the USA, Hong Kong, Germany and the Netherlands).
Foreign Direct Investment Statistics,House of Commons Library.
Matt Ward is a researcher at the House of Commons Library, specialising in economic policy and statistics.