Foreign direct investment (FDI) measures levels of investment between companies operating in different countries and is generally viewed as a positive economic indicator. This is because it can stimulate economic growth and boost productivity, employment and wages through exchanges of skills, expertise and technology.

This Insight examines recent trends in the UK’s inward FDI and the effects of Brexit on UK inward investment.

How do we define and measure FDI?

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, this is defined as owning 10% or more of a 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.

FDI statistics measure two different concepts – flows and stocks:

  • Flows measure annual levels of investment on a net basis (meaning withdrawal or reduction in investments 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.

Foreign direct investment in the UK is falling

In 2018, the net value of foreign direct investment into the UK (inward flows) was worth £49.3 billion, down from £80.6 billion in 2017. The USA was the single largest investor in the UK (accounting for 80% of all inward investment), followed by UK Offshore Islands (such as the Isle of Man and Channel Islands). Investment from the EU fell from £24.0 billion in 2017 to a net disinvestment of -£12.0 billion in 2018.

This means in 2018 the value of inward investments withdrawn from the UK by EU companies was greater than the value of new investments from companies in the EU.

A chart showing UK inward FDI flows by country in 2018.

Inward FDI flows have now fallen two years in a row, from a high of £192.0 billion in 2016 to £80.6 billion in 2017 and to £49.3 billion in 2018.

While the fall in value of inward flows between 2016 and 2018 may seem dramatic,  it’s important to note that inward flows can be very volatile from year to year and that 2016’s total was unusually high.

The Office for National Statistics (ONS) attributed this to “a handful of high-value mergers and acquisitions” of UK companies by foreign companies in 2016, notably four acquisitions of British companies each with an individual value in excess of £10 billion. In 2017, there were no inward foreign mergers or acquisitions (M&A) of British companies valued above £10 billion. While the value of inward foreign M&A increased between 2017 and 2018, this was still well below the level of 2016.

A bar graph showing UK inward mergers or acquisition activity and FDO flows from 2009 to 2018.

Recent trends of FDI into the UK

Trends in inward FDI flows into the UK as a percentage of GDP over the last decade are shown in the graph below. In 2016, the value of the UK’s inward FDI was equal to 10% of GDP. This fell to 4% in 2017 and 2% in 2018. The average over the last 10 years has been 3%.

A chart showing UK inward FDI as a percentage of GDP from 2009 to 2018.

The recent fall in inward investment levels in the UK is reflective of global trends.  Overall global flows of inward FDI fell 13% in 2018 to $1.3 trillion, down from $1.5 trillion in 2017. This is the third consecutive year FDI levels have fallen, following a record high of $2.0 trillion in 2015.

Where does the UK rank?

In 2018, figures produced by the UN Conference on Trade and Development (UNCTAD) indicate the UK accounted for 5% of world inward FDI flows (down from 7% in 2017 and a high of 10% in 2016). The UK was the seventh largest recipient of inward FDI flows in the world.  Over the last ten years the UK’s global position has fluctuated between second (in 2016) and sixteenth (in 2014). The United States has ranked first each year over this period.

In 2018, the UK accounted for 23% of the EU’s total inward FDI flows (down from 30% in 2017 and a high of 35% in 2016) and was the second largest recipient of inward FDI flows in the EU, behind the Netherlands (these figures will include the value of intra-EU investments).

The UK was the EU’s largest recipient of inward FDI flows in the EU in five of the last 10 years, most recently in 2016 and 2017.

A chart showing the UK's rank in the EU FDI inflows from 2009 to 2018.

What effect has Brexit had on FDI in the UK?

The discernible effects of Brexit on inward FDI flows are to date, mixed.

Quarterly data produced by the ONS indicates that inward investment in the UK continued to grow after the EU referendum and in every quarter of 2017. This was also the case  in five out of the seven quarters between Q1 2018 and Q3 2019 (the most recent available data), albeit at a much slower rate than in 2016. Again, it is important to remember that 2016’s total was exceptionally high and FDI flows can be very volatile.

A chart showing the FDI flows into the UK from quarter 1 206 to quarter 3 in 2019.

These figures are open to interpretation. One argument is that the UK remains an attractive destination for inward investment despite Brexit-related uncertainty, owing to factors such as the UK’s stable legal system and educated workforce. A counter argument suggests the fall in the value of the pound following the EU referendum has meant foreign companies have been to acquire UK companies cheaply.

What is the value of UK FDI stocks?

The value of the inward FDI stock in the UK (the total book value of all existing inward FDI) was £1.5 trillion in 2018, up from £1.4 trillion in 2017.

Taken as a bloc, the EU accounted for 38% of the stock of inward FDI in the UK, down slightly from 42% in 2017. The EU’s share of the stock of FDI in the UK fluctuated between 38% and 54% over the last decade. Looking at individual countries, the USA accounted for just over a quarter of the stock of inward FDI in the UK in 2018, down from a high of 30% in 2015.

A chart showing stock of international investment in the UK by country in 2018. The EU is the highest, followed by the Americas.

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 in the world 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 2018, the value of the stock of inward FDI in the UK was slightly below that of Hong Kong, but around four times lower than the USA. The UK has been the EU’s largest holder of inward FDI stock in the EU since 2009.

A chart showing the UK rank in stock of world FDI from 1990 to 2018.

Further reading

Foreign Direct Investment Statistics, House of Commons Library.

About the author: Matt Ward is a researcher at the House of Commons Library, specialising in economic policy and statistics.