The impact of Brexit on foreign direct investment into … of Brexit on foreign direct investment...

The impact of Brexit on foreign direct investment into the UK: Recommendations for investment promotion strategy

A working paper by WAVTEQ Limited

July 19, 2016

2 WAVTEQ - Impact of Brexit on foreign direct investment into the UK

Impact of Brexit on foreign direct investment into the UK - WAVTEQ 3

ContentsAbout this paper 4Forthcoming FDI conferences on Brexit 6

1 Executive Summary 7

2 Technical Analysis 102.1 Role of FDI in the UK economy 102.2 UK FDI performance within the EU 102.3 Importance of EU membership for FDI 11 2.3.1 FDI in the UK expected to decline by over 20% 11 2.3.2 Sectors most resilient to Brexit 12 2.3.3 Sectors most at risk to Brexit 122.4 Existing investors and their UK market dependence 142.5 Impact of Brexit on FDI in UK regions 15

3 Investor Perspectives 173.1 View from China by Chris Fraser and Tingmei Deng 173.2 View from Japan by Masao Kumori 173.3 View from Germany and Netherlands by Geert Hovens 183.4 View from India by Kavan Bhandary 193.5 View from Korea by Young Ho Seo 203.6 View from Ireland by Daniel Callaghan 21

4 Recommendations for investment promotion strategy 224.1 Summary of recommendations 224.2 New investor strategy 224.3 Existing investor strategy 254.4 Mergers & Acquisitions 264.5 New Forms of Investment 27

About WAVTEQ 28


About this paperThis paper was prepared by WAVTEQ Limited. WAVTEQ specialises in helping locations to attract FDI and companies to optimise their corporate location decisions. WAVTEQ is at the forefront of developing new data sources and technology to measure FDI and its impact. WAVTEQ has offices in the UK, Europe, and across Asia, with our experienced teams in these offices contributing to this paper. The lead author of the paper is Henry Loewendahl, with contributions from the below experts.

Henry Loewendahl, Group CEOHenry has 20 years of FDI experience and has advised over 120 govern-ments and multinational enterprises in over 60 countries on inward investment. His UK experience includes managing over 30 FDI consulting projects with UKTI and regions of the UK as well as advising UK com-panies such as Aberdeen Asset Management, Rolls Royce, and GSK on corporate location. Henry previously worked at the Financial Times, OCO Global, IBM and PwC. He has a PhD on German and Japanese FDI into the UK from the University of Birmingham, sponsored by Volkswagen.

Chris Fraser, OBE, Director Asia PacificChris pioneered modern Asian investment into the UK during his time as Director of Asia Pacific, Invest in Britain Bureau and as Director of Inter-national Operations for North East England, securing major investments from companies like Huawei, Samsung, LG, and Nissan, creating 40,000 jobs. Chris has worked with The Chinese Ministry of Science & Technol-ogy, been Senior Representative for Wuhan’s East Lake Hi Tech Park and the Shanghai Science & Technology Centre. He was an Advisor to the Chairman of ENN, China’s top private energy company and Advisor to several Chinese industrial firms listed on Lon-don’s AIM. Chris is Co-Chairman of the Hong Kong Society, North East Region and was awarded an OBE for his success in attracting Asian FDI to the UK

Masao Kumori, MBE, Chief Business Development Officer - JapanMasao has over 25 years of experience attracting Japanese FDI to the UK. Masao has worked on close to 300 Japanese investments into the UK creating over 25,000 jobs. He was awarded an Honorary MBE in Octo-ber 2012 for his success in attracting Japanese FDI to the UK. Masao is currently providing FDI representation services to clients in Japan such as Sunderland City Council, Business Durham and Louisiana Economic Development. Masao has worked recently for Brussels Invest & Export and Frankfurt region to attract Japanese FDI.

Geert Hovens, Chief Business Development Officer - GermanyGeert has nearly 30 years of FDI experience helping to secure German, Dutch and Nordic FDI. He has represented many clients to attract Euro-pean FDI, including Invest Hong Kong, the Commonwealth of Pennsylva-nia, the State of Louisiana, Yorkshire Forward, and Copenhagen Capacity. He has worked on nearly 1000 FDI projects from EU companies and has helped secure over 200 German, Dutch and Nordic investments overseas.


Tingmei Deng, Chief Business Development Officer - ChinaTingmei has over 15 years’ experience in the China outbound investment sector and leads WAVTEQ’s FDI services in China. Tingmei has attracted over 80 Chinese investments to UK and, in 2014, helped secure the largest-ever Chinese investment into the United States at the time. Ting-mei is currently representing the Isle of Man and Louisiana Economic Development in China. She previously was General Manager of Shanghai Co-Way Inter-national Technology Transfer Centre, Chief Representative of One North East, and Busi-ness Development Manager for the China Britain Business Council.

Young-Ho Seo, Chief Business Development Officer - KoreaYoung-Ho Seo has nearly 20 years of experience attracting Korean FDI to the UK. He has attracted over 180 Korean overseas investment projects. Young-Ho was the Korea representative of South East England for eight years and has represented London & Partners.. He is currently represent-ing Louisiana Economic Development, Invest Hong Kong, Dubai Airport Free Zones and Brussels Invest and Export in Korea. Since leading WAVTEQ’s Korea operations in 2015, Young Ho’s team have delivered major inward investment successes for our clients, including over $3 billion of FDI.

Kavan Bhandary, Chief Business Development Officer - IndiaKavan established WAVTEQ India in 2015 and is recognized as one of India‘s leading experts on outward FDI and corporate location strategies. He has worked with over 25 governments supporting them to attract FDI from India. His clients include: SelectUSA; Ontario Ministry of Economic Development; State of Virginia Economic Development Partnership; Busi-ness Birmingham; CINDE Costa Rica. His recent investment successes include attracting major R&D, HQ and IT operations creating over 400 high quality jobs overseas.

Daniel Callaghan, Senior Vice-President Business DevelopmentDaniel has nearly 15 years of experience in FDI business development, trade promotion and territorial marketing across multiple industries and markets. Daniel has advised over 50 national and regional governments in more than 30 countries on FDI. His experience includes being ‘UK Di-rector’ for Enterprise Florida for four years, Ireland Market Specialist for JETRO Japan, and he was recently seconded into UK Trade & Investment and London & Partners to focus on Key Account Management and Investor Development.


Forthcoming FDI conferences on BrexitWAVTEQ will be presenting at the following conferences on FDI and Brexit:

1. September 20th, 2016 (London, UK): fDi Intelligence workshop on Best Practices in FDI and Implications of Brexit

2. September 21st, 2016 (London, UK): fDi Forum 2016 Navigating the Rocky Global Investment Environment https://live.ft.com/Events/2016/fDi-Forum-2016

To meet WAVTEQ at these conferences, please contact us on: [email protected]


1 Executive SummaryThis working paper was independently published by WAVTEQ Limited with the objec-tive to understand the impact of Brexit on foreign direct investment (FDI) to the United Kingdom and to provide recommendations for the UK’s future investment promotion strategy.

Key findings of the paper include:

●● FDI is more important to the UK than for any other G7 economy. Foreign owned companies in the UK account for approximately:

§●30% of UK Gross Value Added;§●Half of UK business R&D spending;§●Half of UK manufacturing investment; and §●One-third of UK manufacturing employment.

●● There are over 23,000 foreign owned companies in the UK, which in 2014 had turnover (revenues) of £1.3 trillion. The top three countries with the highest UK turnover were:

§●US owned companies with a turnover of nearly £350 billion;§●French owned companies with a turnover approaching £200 billion; and §●German owned companies with £120 billion turnover.

●● The UK government has a potentially strong negotiating position vis-à-vis the EU, US and other governments given the huge importance of the UK to “their” companies.

●● The UK has outperformed all the major economies of Europe, with the UK attracting nearly 40% of greenfield capital investment in the EU by foreign investors and one-quarter of all greenfield FDI projects in the European Union (EU) in 2015.

●● The UK’s EU market share of FDI is highest knowledge-based services industries. The UK has captured over one-quarter of greenfield FDI in the EU in Creative Industries, Financial Service, Professional Services, and ICT & Electronics.

●● The Centre for European Performance expects that FDI in the UK will decline by 22% due to Brexit.

●● WAVTEQ expects that the impact of Brexit on long-term FDI into the UK will depend on the type operation. FDI primarily serving the UK domestic market, such FDI in energy, construction, retail, and transportation sectors, will be least impacted while FDI in operations serving the EU market, including HQs, R&D and outsourcing, are likely to be most impacted.


●● The impact of Brexit will depend on the UK’s new agreement with the EU:

§●If the UK joins the single market with its four freedoms, we expect the long-term impact of Brexit on FDI into the UK to be minimal given the UK’s underlying competitive strengths and attractiveness for FDI; and

§●If the UK establishes a free trade agreement with the EU, we expect that up to 40% of job creation being considered by foreign investors in the UK will be at medium to high risk due primarily to removal of the freedom for EU nationals to work in the UK, which will severely impact the attractiveness of the UK for strategic knowledge-based operations.

●● Our analysis of FDI in each region of the UK, suggests that:

§●FDI in Northern Ireland, Scotland and the South East (including London) is most at risk if the UK does not join the single market; and

§●FDI in the West Midlands and East Midlands is least at risk.

●● Regions of the UK with the highest percentage voting to “remain” and the highest percentage voting to “leave” matches the regions most and least at risk to a decline in FDI; the electorate seem to have understood what Brexit means for their local economy.

●● In terms of the impact of Brexit on FDI from the UK, key insights from WAVTEQ’s FDI teams around the world include:

§●FDI from other European countries in the UK is expected to decline only moderately as they are primarily investing in the UK to access to the UK market and customers. SMEs in particular are likely to continue to invest as they are driven by customer access;

§●FDI from China is likely to remain strong, as it is mainly domestic market driven and as asset prices in the UK declines. FDI from India is also likely to be resilient for asset-seeking FDI but is likely to decline moderately for knowledge-based operations serving the EU market, if the UK does not join the single market;

§●FDI from Japan is primarily about retention and re-investment of existing UK operations. A free trade agreement with the EU maybe sufficient to retain and expand manufacturing investment, although not joining the single market will certainly have a negative impact on most Japanese investors. Japanese investors in the UK are also concerned about access to non-EU markets. Turkey, for example, is a key export market for Japanese manufacturers based in the UK who can currently export tariff-free due to the customs union between the EU and Turkey; and

§●FDI from Korea is at serious risk, with major Korean companies already relocating operations out of the UK and new investments being postponed


or eliminating the UK as a location option. As the EU also has a FTA with Korea, Korean investors are particularly concerned.

●● WAVTEQ has identified eight key policy recommendations for UK investment promotion strategy following the Brexit vote. Our key recommendations are summarised as:

1. Re-align sector and market strategy to focus on the sectors and source countries that are likely to continue to offer the strongest FDI prospects for the UK;

2. Strengthen investor intelligence-gathering activities to ensure IPAs in the UK are aware of companies that have continued plans to invest in the UK to ensure they are realised;

3. Develop a “Multiplier Strategy” to generate FDI referrals from the investment advisory community – a cost effective method of investment attraction;

4. Focus on investor enquiry handling to improve conversion rates and identify key policy options for strengthening investment facilitation services, especially around talent attraction, immigration and investment incentives;

5. Develop a world-class inward investment website to generate inbound enquiries;

6. Ensure the existing investment pipeline is fully engaged to ensure that IPAs win the FDI once companies make the decision to invest in the UK;

7. Focus more resources on account management “aftercare” activities for existing investors; and

8. Consider promoting M&A and New Forms of Investment (NFI) as key inward investment services to attract much needed foreign capital into the UK, maintain the UK’s overall FDI performance as greenfield FDI declines, and to generate business between UK-based and foreign companies. UK IPAs have an opportunity to lead Europe for these types of FDI.


2 Technical Analysis

2.1 Role of FDI in the UK economy

Foreign Direct Investment is critically important for the UK economy; nearly one-half of UK manufacturing investment and nearly one-third of manufacturing employment is undertaken by foreign-owned, multinational enterprises (MNEs) in the UK.1

In 2014, foreign owned MNEs accounted for almost 30% (28.8%) of UK Gross Value Added (GVA)2 and over half (52%) of total business R&D expenditure in the UK was by foreign owned MNEs in the UK.3

Figure 1 below shows that FDI is more important to the UK than any other G7 economy, with total stock of FDI equivalent to 71.6% of GDP.

Figure 1: Stock of FDI as % of GDP in the G7 (2015)

Source: EIU

2.2 UK FDI performance within the EU

The UK has been the most successful country in the EU in attracting FDI. The UK has at-tracted 25% of Greenfield FDI projects into EU since 2015, nearly the same as Germany and France combined, and an estimated 38% of all Greenfield capital investment by for-eign investment in the EU in 2015.4

1 See “Capital Investment: what are the main long term trends in relation to UK manufacturing businesses, and how do these compare internationally?” Future of Manufacturing Project: Evidence Paper 8 Foresight, Government Office for Science (October, 2013).2 WAVTEQ analysis based on Annual Business Survey, Release date March 11, 2016.3 See “Statistical Bulletin: Business Enterprise Research and Development 2014, Office of National Statistics.4 Based on the fDi Markets database from fDi Intelligence, Financial Times Limited

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Using data on Greenfield FDI, Figure 2 shows the EU market share of the UK, Germany and France for FDI projects since 2011 by key industry clusters. Figure 2 also shows the share of EU GDP of each country in 2015, to see in which industries each country has over-performed or under-performed in attracting FDI relative to GDP.

The UK attracted 22% of all FDI projects to the EU from 2011-April 2016, a significantly higher market share than the UK’s 17.6% share of EU GDP. The UK’s EU market share was highest in Creative Industries and Financial Services, with the UK attracting over 30% of FDI projects into the EU, followed by Professionals Services and ICT & Elec-tronics, with the UK attracting over 25% of projects to the EU. The UK’s market share was lowest in industrial sectors, which is the sector where Germany has the strongest performance, attracting nearly one-third of FDI projects into the EU. France underper-formed in all the major industries relative to size of its GDP.

Figure 2: UK share of EU Greenfield FDI projects in key industry clusters (Jan. 2011 to Apr. 2016)

Source: WAVTEQ analysis based on the fDi Markets Database from fDi Intelligence, Financial Times Limited.

2.3 Importance of EU membership for FDI

2.3.1 FDI in the UK expected to decline by over 20%

The Centre for Economic Performance (CEP) estimates that EU membership increases FDI in member states by 14-38% with the average impact an increase in FDI of 28%. The CEP estimates, conservatively, that FDI into the UK will fall by 22% over the next decade due to Brexit. Furthermore, its empirical research indicates that to have a Free Trade Agreement (FTA) with the EU does not increase FDI.5

5 See “The Impact of Brexit on Foreign Investment in the UK”, CEP Brexit Analysis No.3, Centre for Economic Performance, 2016


2.3.2 Sectors most resilient to Brexit

To assess the impact of Brexit on different sectors, Figure 3 provides an analysis of foreign companies investing in the UK that have stated they are serving the domestic market with a breakdown by type of operation established in the UK. This data is based on a sample of 4,052 foreign investors in the UK which indicated the markets served by the 4,572 operations they established in the UK since 2003.

We can see from Figure 3, that certain sectors have a very high proportion of foreign investors serving the domestic market, in particular foreign investors establishing Electricity, Construction, Retail, Recycling, Transportation, and Maintenance & Servic-ing operations in the UK. These types of operation are driven by access to the UK market and UK government policies. The impact of FDI to the UK for these operations is likely to be primarily around the prospects for the UK economy and what impact Brexit has on UK economic growth. We may expect to see a small decline in FDI to the UK for these sectors once economic stability and certainty has been restored to the UK economy.

Figure 3: Percentage of companies investing in the UK for the domestic market (2003-May 2016)


2.3.3 Sectors most at risk to Brexit

Figure 3 above shows the operations least driven by access to the domestic UK market, which include Technical Support Centres, R&D type operations. Shared Service Centres, and Headquarters (HQs). These operations are establishing in the UK to serve the Euro-pean market.

Utilising data from 455 R&D, HQ and Outsourcing FDI projects in the UK, Figure 4 be-low shows that foreign investors are investing in the UK due to skilled workforce avail-ability followed by proximity to markets (i.e. EU) and customers. Government support,

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infrastructure & logistics (i.e. accessibility to European markets), and clustering are also important factors.

Access to talent pools is the critical location determinant for all these knowledge-based service functions, cited by nearly one-quarter of foreign investors with R&D, HQ and Outsourcing operations in the UK. Freedom of EU nationals to work in the UK enables investors to recruit the best talent from across the EU. As these operations are primarily serving the EU market, the talent pools required are primarily EU nationals, not least for their language skills and knowledge of each EU market, as well as to fill skills gaps in the UK, such as in technology and advanced manufacturing sectors. Outsourcing operations are likely to be at the highest risk from Brexit as they are highly mobile and are driven by access to language and technical skills and depend on freedom to work in the UK.

Figure 4: Location determinants for R&D, HQ & Outsourcing projects in the UK (2003-May 2016)


The UK’s attractiveness for FDI in knowledge-based services sectors is likely to be seriously at risk if the UK does not agree to freedom of EU nationals to work in the EU. Failure to do so could lead to a precipitous decline in FDI in HQs, R&D and outsourcing operations in the UK – which are exactly the types of strategic, knowledge-based opera-tions where the UK has a clear competitive strength; since 2011 the UK has attracted 35% of all HQs establishing in the EU, higher than the UK’s EU market share for any other sector or type of operation.6

Government support for knowledge-based operations in the UK is also an important location determinant, as Figure 4 shows. The UK was set to receive €10.8 billion in EU structural funds from 2014-2020, which are used to financially support inward invest-ment projects in the UK, and British researchers receive about £1bn a year from EU find-

6 Based on the fDi Markets database from fDi Intelligence, Financial Times Limited

Skilledworkforceavailability

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ing programs such as Horizon 20207. The financial incentives available and UK access to collaborative EU R&D programs are key concerns for future R&D investment into the UK, together with freedom to work in the UK.

2.4 Existing investors and their UK market dependence

There are over 23,000 foreign owned companies in the UK, which in 2014 had combined turnover (revenues) of £1.3 trillion, accounting for 36% of total annual turnover of com-panies in the UK. In total, there are nearly 13,000 European companies based in UK with revenues of nearly £0.7 trillion.8 Figure 5 below shows the number of foreign companies in the UK by the top six source countries for foreign investors in the UK.

There are over 5,000 US-owned companies in the UK, nearly 2,000 German-owned com-panies, nearly 1,500 French and 1,500 Dutch-owned companies, over 1,000 Irish-owned companies and nearly 1,000 Japanese-owned companies in the UK.

Figure 5: Number of businesses in the UK by country of ownership, 2014

Source: WAVTEQ analysis based on Annual Business Survey, Release date March 11, 2016

In terms of turnover (revenues) of foreign owned companies in the UK, US companies had nearly £350 billion turnover in the UK in 2014. French companies had nearly £200 billion turnover - significantly higher than the £120 billion turnover of German compa-nies and £72 billion turnover of Japanese companies.

7 See https://www.theguardian.com/education/2016/jul/12/uk-scientists-dropped-from-eu-projects-because-of-post-brexit- funding-fears 8 WAVTEQ analysis based on Annual Business Survey, Release date March 11, 2016.

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Figure 6: Turnover (revenues) of foreign-owned companies in the UK in 2014 (£ billion)

Source: WAVTEQ analysis based on Annual Business Survey, Release date March 11, 2016

2.5 Impact of Brexit on FDI in UK regions

Following the Brexit vote, investment promotion agencies from across Europe have been speculating as to the scale of relocations and FDI market share they can attract from the UK, in particular from London. They have all been, hitherto, second-tier cities when compared to London; in 2015 London alone attracted nearly 10% of all FDI projects into the EU – nearly double the volume of Paris and Frankfurt combined. London has been the leading city in the world measured by number of FDI projects attracted in each of the last five years. 9

It is therefore not surprising that Ireland and key cities in Europe including Amsterdam, Berlin, Brussels, Frankfurt and Paris are all considering ramping-up their FDI promotion activities to win relocation and new FDI projects from the London.

But how at risk is London? And how at risk are other regions of the UK? To assess the impact of Brexit on FDI, we analysed job creation by operation type and UK region in the last five years and we made an assessment of the level of risk for each type of opera-tion if the UK does not join the single market but has a free trade agreement with the EU instead. If the UK does join the single market with its “4 freedoms” (capital, labour, goods, and services), then the long-term risk for a permanent decline in FDI into the UK we expect will be low, given the UK’s underlying competitive strengths and attractive-ness for FDI.

Figure 7 shows that 41% of FDI in the UK, measured by job creation, is at medium or high risk from not joining the single market, with significant differences across regions. FDI in Northern Ireland, Scotland and the South East (including London) would be at the 9 Based on the fDi Markets database from fDi Intelligence, Financial Times Limited

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highest risk, with 70% of FDI in Northern Ireland and half of FDI in Scotland at risk due to the high concentration of FDI in knowledge-based sectors. FDI in the West Midlands and East Midlands would be at the lowest risk, due to specialisation in domestic market-seeking FDI and manufacturing FDI, which would still have access to the EU market through a FTA.

Figure 7: Risks to FDI job creation in each UK region of not joining the Single Market

Source: WAVTEQ. Based on the UK having a free trade agreement with the EU but not joining the single market

Interestingly, Northern Ireland (44.1%), Scotland (38%) and London (40.1%) had the lowest percentage voting to leave the EU while the West Midlands (59.3%) and East Midlands (58.5%) had the highest percentage voting to leave the EU. It would seem the local electorate have a very good understanding of the economic risks to their region of leaving the EU.

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3 Investor Perspectives

3.1 View from China by Chris Fraser and Tingmei Deng

Over the last 15 years, the UK has overall been by far the largest recipient of Chinese FDI in Europe attracting nearly double the volume of Chinese FDI compared to Germany or France, according to the Rhodium Group. Chinese FDI into the UK has encompassed a wide variety of sectors including Financial Services, Infrastructure, Real Estate, Auto, Rail, and Telecom.

Chinese FDI into Europe hit a new all-time record of $23 billion in 2015, according to Baker and McKenzie. Italy, France and the UK were the top three destination countries in Europe in 2015, with FDI strongly oriented to M&A investments. China has become one of the most important sources of FDI for the UK and for Europe, a trend that we expect to continue.10

While Chinese FDI into the UK has targeted mainly the domestic market and has been driven by asset-seeking and infrastructure investments, the UK’s EU membership has been a significant element of decision making for major corporates. The initial reaction to Brexit was one of shock and concern with advisers reporting projects being put on hold on a wait and see basis.

On the other hand, another reaction is that UK is now “cheap” for investors because of the substantial currency swing in favour of the RMB and certain HK investors having been ac-cumulating Sterling for future investments into UK.

Some Chinese Government officials have latterly been making cautiously optimistic state-ments about the prospects of continued trade and investment with UK with comments about the frustrations of dealing with the EU and UK Ministers and officials have been mak-ing efforts to keep China on side.

At this stage, WAVTEQ is therefore cautiously optimistic about the continued prospects for Chinese FDI into UK, which is likely to suffer less than FDI from other Asian countries. We recommend maintaining a strong promotional capability within China.

3.2 View from Japan by Masao Kumori

Japanese companies have invested in the UK to serve the EU market. This applies to both the major Japanese manufacturing plants in the UK and Japanese companies that have es-tablished their European HQ and R&D operations in the UK.

Disconcerting for Japanese companies is that the areas with the largest Japanese invest-ments (Sunderland-Nissan and Swindon-Honda) voted to leave the EU, despite their local economies being so dependent on the jobs and investment from the Japanese multination-als and that these companies use their locations as an export platform, depending on tariff-free access to the EU.

10 See http://www.wavteq.com/countryreports.cfm?country=china


Japanese companies are also concerned about freedom of movement within Europe and what the UK’s new immigration policy will look like. Japanese manufacturing plants, HQs and R&D centres in the UK depend on access to a European workforce and also on staff transfers between their European operations, as is common for most major multinational enterprises.

Japanese companies typically plan for the long term and are very cautious in decision-making. They also demonstrate strong commitment to the local communities in which they invest. We therefore do not expect any short-term impact on Japanese invest-ments already in the UK. With the pound depreciating, Japanese export-operations in the UK are in fact more profitable, while they can still export to the EU and countries with which the EU has FTAs with (such as Turkey) tariff-free.

The major Japanese investors in the UK are waiting to see how the negotiations to ac-cess the EU market and the financial licenses needed post-Brexit progress; Japanese companies will consider relocations out of the UK only if it seems likely that the UK will not have tariff-free access to the European market or full access to the EU finan-cial market. Other legal issues concerning Japanese companies are around EU-wide intellectual property rights and if these will be valid in the UK.

As Japanese companies also export goods and import components from outside of the EU, the UK’s free trade negotiations with non-EU countries will also be closely moni-tored. Japanese companies are also concerned about break-up of the UK, especially on oil prices in the UK should Scotland leave the UK, as this is a key cost input into Japa-nese manufacturing operations in the UK.

In terms of Japanese companies establishing new operations in Europe, we expect to see the UK lose projects to other countries in Europe in the short to medium term, especially HQ and financial services projects as well as projects where EU regulations are important, such as data centres.

Japanese companies are likely to consider locations already established as key hubs for Japanese companies, such as Dusseldorf and Brussels, as well as other key Euro-pean cities such as Amsterdam, Frankfurt, and Paris.

For asset-seeking Japanese FDI, the UK is likely to become more attractive, in particu-lar due to the weak pound against the Yen and recent acquisitions, such as Nikkei’s ac-quisition of the Financial Times Limited, indicate that Japanese companies are inter-ested in acquiring assets in the predominantly services-based UK economy.

3.3 View from Germany and Netherlands by Geert Hovens

While companies from outside of Europe invest in the UK as the entry point into the EU and European market, German and Dutch companies establish in the UK primarily to serve the domestic UK market more effectively. They will still need to make these investments to service and compete in the UK market but their FDI decisions are already being delayed due to the uncertainty and a lot will depend on the decisions


of major customers, suppliers and competitors and how they reconfigure their UK FDI strategy.

German and Dutch companies already held back some of their investment plans for the UK as they waited for the result of the Brexit referendum. Following the vote to leave the EU, FDI by Dutch and German SMEs in the UK is likely to continue as they tend to follow where the business is and FDI into the UK will be reduced only to the extent to which the UK market declines due to the impact of Brexit.

Large Dutch and German companies may put off major investment decisions in the UK for a longer time, until there is more certainty about the UK’s future. Large corporations have other interests to take into account, including shareholders, trade agreements, financial flows between countries, and political relationships, all of which are highly uncertain and are likely to remain so for several years.

We also see investment promotion agencies in the Netherlands and Germany looking to take market share from the UK of FDI coming into Europe as well as to win relocations of foreign investors from the UK. Major international locations like Amsterdam, Frank-furt and Berlin, which compete head-on with UK cities (especially London) for pan-Eu-ropean operations we expect in particular to become more proactive in promoting their cities to companies establishing new operations in Europe or relocating out of the UK.

The biggest threat to UK FDI from Germany and Netherlands may in fact be their much stronger attractiveness for mobile FDI projects from foreign investors from outside of Europe than any long-term reduction in Dutch and German FDI into the UK.

3.4 View from India by Kavan Bhandary

Indian companies primarily invest in the UK to serve the UK market rather than estab-lishing pan-Europe operations in the UK. This reflects the type of Indian FDI into the UK (dominated by the M&A of UK companies) and the sectors for greenfield FDI (mainly technology and services sectors, which need to be close to their major customers and are driven by skills availability). Indian companies also invest in the UK due to the Eng-lish language and strong, historical ties between the countries, which will still exist.

Indian companies have two major concerns, which will in the short to medium term impact FDI into the UK:

1. Economic uncertainty: Indian companies may postpone major M&A deals in the UK until there is more economic certainty regarding exchange rates, interest rates, and access to the EU market for goods and services made in the UK except where they think they will lose a deal to competitor bids; and

2. Movement of people: As Indian companies are focused on greenfield FDI in services and technology sectors, access to skills and talent pools is of critical importance in corporate location decisions. If the UK does not agree to freedom of EU nationals to work in the UK, this will significantly impact the attractiveness


of the UK for Indian FDI. Prospective Indian investors will closely watch the UK’s new immigration policy as it is formed. Furthermore, when the UK looks to negotiate a bilateral trade agreement with India, visa exemptions for Indian workers traveling to the UK is likely to be a key area India will be looking at.

During the period of economic uncertainty in the UK, which is likely to last a few years, Indian companies may look more towards partnering and joint ventures with UK-based companies to access the UK market without taking as big a financial risk as an M&A or greenfield investment. There may also be more opportunistic investors who are encour-aged to invest in the UK to take advantage of lower asset prices.

The view from India is that the UK should focus on the trade opportunities in India as well as the FDI opportunities. India is the world’s fastest growing major economy and offers rapidly growing trade and investment opportunities for UK companies to do busi-ness in India. UK exporting companies are also more competitive with the depreciation of the pound.

Indian FDI into the UK has been London-centric as the city has been as the gateway to Europe. In the longer run, leaving the EU may benefit Indian FDI in other regions of the UK as London loses some of its appeal as the gateway to Europe. Sub-national IPAs in the UK should, therefore, consider a stronger focus on India for FDI attraction in the medium to long term.

3.5 View from Korea by Young Ho Seo

Korean companies have invested in the UK to access the EU market and are extremely concerned about Brexit. Companies such as LG Electronics, which in April 2016 an-nounced its plans to relocate its London HQ to a new office in Frankfurt, were already reviewing the optimal location for their European operation.

Following the Brexit vote, major Korean companies with their European operations in the UK are hastening their contingency plans to relocate operations to other countries in Europe. Samsung Electronics, for example, is currently considering relocating to Amster-dam.

For new investments, several Korean FDI projects we are working on have now elimi-nated the UK as a location option following the Brexit vote, and are focusing instead only on continental European locations.

Korea has had a free trade agreement (FTA) with the EU since July 2011, which further reduces the attractiveness of the UK until the UK can negotiate a FTA with Korea.

We expect the short to medium impact on Korean FDI into the UK to be strongly nega-tive. The UK will lose out on new European projects and faces the real risk of relocations out of the UK to other European hubs. Korean companies will continue to invest in the UK in sectors driven by access to the UK market (such as renewable energy), while more mobile sectors will gravitate more strongly to Germany (in particular) but also France, Spain, Benelux and other countries.


3.6 View from Ireland by Daniel Callaghan

The post-Brexit environment has seen much blame, uncertainty and politicking but Brit-ain’s little neighbour to the West has as much to lose or gain as anyone in Brussels.

On the one hand the chief agency tasked with attracting FDI – the IDA – has, publicly at least, played a shrewd hand by declining to intrude upon private grief but must surely be licking its lips at a potential windfall of corporate relocations from the UK. For a na-tion where almost one-in-ten jobs is attributable to a foreign investment it is no surprise that the Irish authorities have initially whispered about targeting international financial services and tech for upwardly mobile relocation.

The lesson here for the UK is simple; protect what you already have. IPAs across the English regions and the devolved administrations must dust down, and perhaps realign, their key account management strategies. This is to ensure that potentially fleet-footed investors, particularly in sectors where skills and costs dominate, are left in no doubt that the UK authorities have a plan and are committed to helping foreign investors con-tinue to do business, profitably, in their current location.

The other side of the coin focuses on Irish companies investing in the UK. On the face of it there are many reasons for this to continue; including ancient historical, cultural and familial ties between both island nations. Add to that the Common Travel Area, a mutual interest in continued stability in Northern Ireland and the positive upturn in official relations between both governments. The fact that the UK was never a Euro-area member also neatly sidesteps another potential landmine. Foreign investors that have established operations in Ireland may consider relocation to the UK in cases where the UK is their largest market and if the new agreement between the UK and EU restricts the ability to service the UK from Ireland. The planned lower tax rate in the UK and weak pound reduces the costs of relocation to the UK.

The single most important reality for Ireland PLC, however, is that the UK offers a ready-made +£1 trillion market on its doorstep and a relatively, soft-landing, for traditionally small Irish firms to undertake their first ‘international’ expansion. The term ‘foreign expansion’ does not really apply, as there are too many similarities between both juris-dictions for a crazy fortnight in June-July to immediately erode.

Whilst the ongoing trend is for the UK’s share of Irish exports to modestly decline, it is still, by some distance, Ireland’s largest export market (37% of all exports in 2015). This rebalancing may well continue but was already under-way pre-Brexit (it was 45% in 2005) and neither administration will wish to see a loosening of the tight ties binding both nations. Indeed, moving forward, the UK may look to cultivate Ireland as its ‘eyes and ears’ within Brussels concrete facades.

Whilst implications in the fall of sterling and ongoing uncertainty over legal, tax and oth-er financial issues will dominate the thoughts of Irish investors in the coming months; it is unlikely that – all other things being equal – a reasonably-minded Brexit agreement will result in Irish investors shunning their largest (and only) neighbour as a base for corporate growth and expansion.


4 Recommendations for investment promotion strategy

4.1 Summary of recommendations

Brexit will have a major impact on FDI into the UK and creates huge challenges for UK IPAs to attract FDI, especially in this immediate period of economic and political uncer-tainty.

In our policy recommendations for UK IPAs to consider, our underlying premise is that greenfield FDI into the UK is inevitably going to decline and that existing foreign inves-tors in the UK and new foreign investors via M&A and New Forms of Investment (NFI) will become more important components in the mix of FDI coming into UK.

Attracting all types of FDI to the UK is essential to generate new jobs, capital inflows, and business for UK companies as other sources of job creation and foreign exchange are expected to decline with falling economic growth in the UK and access to export and financial markets at risk.

We recommend that IPAs consider re-configuring their new investor strategy to focus on the highest potential sectors and markets, put more resources into supporting existing foreign investors, and consider expanding their mandate to encompass M&A and NFI as key pillars of FDI promotion strategy.

Central, provincial and local governments in the UK should maintain or increase invest-ment promotion budgets to expand services for existing investors, which is critical to retain investment and jobs in the UK, and to broaden the mandate of investment promo-tion to include all types of FDI, which are more important than ever more to attract to the UK.

4.2 New investor strategy

FDI into the UK is expected to decline by over 20% as a result of leaving the EU, based on studies reviewed in this paper. We expect the decline in greenfield FDI to be higher if the UK does not join the single market, while M&A type of FDI into the UK maybe more resilient as UK assets become more attractive, with the weaker pound, and as corporate tax rates fall to 15% in the UK, further encouraging M&A.

The next several years will be a period of intense economic uncertainty for the UK and there is nothing investors like less than uncertainty. UK economic growth is also set to decline and the UK may fall into recession, which further reduces the attractiveness of the UK for greenfield FDI and M&A of UK companies primarily serving the domestic UK market.


Key risks for foreign investors to establish a new operation in the UK include:

§●Will the UK retain full access to the EU market for goods and services?§●Will the UK retain access to the EU workforce?§●To what extent will the UK economy slowdown or decline?§●What will be the market access of the UK to non-EU countries and trading

blocs? §●What are the financial risks for large investments? §●What investment incentives will be available?

Taking into consideration the multitude of risks and uncertainty foreign investors face in establishing new operations in the UK, we believe that IPAs in the UK should consider reconfiguring their outreach programs to potential investors to focus less on general promotion activities and campaigns (such as trade shows, events, mass marketing, advertising, cold calling) and more on identifying and converting companies that have confirmed plans to invest in the UK and targeting sectors and markets that are least vulnerable to Brexit.

We recommend that IPAs in the UK consider reducing resources on general outreach activities while increasing resources in the below key areas:

1. Sector strategy A. Sectors such as Energy, Construction, Retail, Transportation, and

Maintenance & Servicing are driven by access to the domestic UK market and customers and because FDI projects in these sectors are often less-mobile, companies will continue to invest in the UK;

B. Highly mobile service sectors such as BPO operations (especially those serving the UK market) and Software Development where UK and European customers can be served from any location, regardless of EU membership, should also be targeted. IPAs should, however, take into consideration that the volume of FDI coming to the UK is likely to be lower than in previous years due to investor concerns over access to EU talent and incentives; and

C. Professional Services FDI is likely to increase in the UK in the short to medium term as companies expand and setup their Legal, Accounting, Management Consulting and other advisory operations to meet the needs of UK and foreign owned companies and the UK public sector to navigate Brexit.

2. Market strategyA. We recommend targeting source countries mainly investing into the UK

in domestic market-seeking sectors, especially European companies, who primarily invest in the UK to serve the UK market. Furthermore, there may be an opportunity for foreign investors in other EU countries to relocate to the UK, if the UK is their most important market and the new agreement between the UK and EU restricts UK market access;

B. WAVTEQ expects the China market to remain fairly resilient in the face of Brexit for FDI in the UK, and we recommend that UK IPAs do not cut-back on their China promotional activities;


C. India offers continued opportunities due to focus on mobile knowledge-based sectors and asset-seeking FDI. However, Indian FDI in the UK is likely to decline if access to the single market is not secured; and

D. The US in particular offers opportunities for Professional Services FDI into the UK to assist companies and the UK public sector navigate Brexit as well as for M&A.

3. Intelligence-gathering A. As general lead generation activities are likely to be less effective, it

becomes more important to identify and target companies that have known plans to establish new operations in the UK. Key methods include:§●Subscribe to services such as the “Investor Signals” service of fDi

Markets; §●Tracking all international media and social media channels to

identify companies considering FDI in the UK, including M&A; and §●Using more sophisticated web monitoring tools to identify

potential investors going onto your inward investment website.

4. Multiplier StrategyA. As with intelligence gathering, the objective of a “Multiplier Strategy” is to

identify companies that have known FDI plans for the UK and get your IPA and location in contention for these projects. Key methods include:§●Gaining referrals from existing investors and key stakeholders in

your local community; §●Engaging more closely with UKTI for referrals; and §●Engaging with key corporate location advisors in UK and

in key source markets for business referrals (e.g. see www.fdiprofessionals.com).

B. A multiplier strategy is a low-cost method to reach a high number of potential investors with qualified interest in investing in the UK, without having to bang on the door of 1000s of potential investors, which we believe could be counterproductive until the terms of Brexit are fully agreed.

5. Investor enquiry handling & facilitation servicesA. As the volume of enquiries and prospects are likely to be declining

significantly, conversion rates become ever more important and more resource should go into ensuring highest quality handling of enquiries that do come in and facilitation of investment projects;

B. Brexit is likely to increase need for advice and information from both existing and potential investors, and IPAs will need more resources and expertise to provide added value advice;

C. If the UK leaves the single market, talent attraction will become a key


barrier to FDI and IPAs in the UK should consider establishing talent attraction teams to assist investors access the talent they need, including navigating the UK’s new immigration and visa policy as it is formed;

D. IPAs in the UK should consider the facilitation services they provide to support M&A and New Forms of Investment into the UK (see Section 4.4.); and

E. IPAs should be engaging with central government to discuss the UK’s new investment incentives regime post-Brexit, as currently incentives levels are determined by the EU.

6. Websites

A. The website is the most effective marketing technique an IPA has to attract FDI11 and enables IPAs to generate enquiries and investor intelligence. The website should be as high impact as possible and demonstrate the underlying competitive advantages of their location as well as be optimised not only for SEO but also to track investors hitting the website and to generate enquiries.

7. Existing pipeline

A. Many companies will be putting on hold their FDI plans for the UK or considering an alternative European location. It is essential IPAs stay in contact with all their current prospects and update them with meaningful information from their organisation on the support they can continue to provide to invest in the UK and as key policy implications of Brexit are resolved (such as the investment incentives on offer). The existing pipeline of investors should receive an added value correspondence from the IPA at least twice a year to keep the leads warm and encourage the investors to make the decision to invest.

4.3 Existing investor strategy

There has never been a more important time for UK IPAs to engage with their existing investors. As Figure 8 shows, there are nearly 100,000 foreign-owned sites in the UK (97,500 as of 2013), with a high number of foreign-owned sites in every region of the UK.

Each region of the UK has, on average, over 8,000 foreign-owned sites. Retention and expansion of these operations is of paramount importance for IPAs and economic devel-opment in the UK.

11 See Development Counsellors International “Winning Strategies” (2014)


Figure 8: Number of foreign-owned sites by UK region (2013)

Source: WAVTEQ based on ONS

UK Trade & Investment (UKTI) and the major territorial IPAs have strategic account management systems in place to engage with and support the major foreign investors in the UK, which no doubt are in overdrive to identify and reduce possible risks of reloca-tions out of the UK or re-investment plans being postponed or shifted to other European operations.

But 100,000 foreign-owned sites is a big number, and the local IPAs need to be develop-ing and strengthening their account management (“aftercare”) strategies to engage with all the foreign investors in their community for investment retention and expansion.

We would also suggest that local IPAs in the UK re-focus their FDI attraction activities not only towards existing foreign investors in their region, but also to foreign investors across the UK to identify expansion opportunities, such as in Professional Services as suggested in Section 4.1. We also recommend UK IPAs to more closely track M&A activ-ity in the UK to ensure full coverage in the delivery of services to existing investors (see Section 4.4.1).

4.4 Mergers & Acquisitions

M&A is very important to the UK economy. M&A not only has the potential to transform UK-based companies, as Tata’s acquisition of Jaguar Land Rover demonstrates, but it is also a key source of capital inflows to help finance the UK’s persistent trade deficit. The need for capital inflows and foreign exchange is one of the main reasons why the UK government has in recent decades been so open to M&As of UK companies, in compari-son to other G7 economies such as Canada, United States, France and Germany.

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IPAs in the UK and in other countries have generally been reluctant to promote M&As due to sensitivity over being seen to be selling domestic companies and the perception that IPAs do not have the skills sets to promote or facilitate M&A.

We recommend that the policy towards M&A is re-evaluated and considered as a key part of the investment promotion strategy of IPAs in the UK; the UK’s performance in attracting FDI and access to foreign capital is likely to depend more on M&A than greenfield FDI for the foreseeable future. The weak pound following the Brexit vote also makes UK assets more attractive, which may indeed encourage a growth in MA activity in the UK. M&A potentially can take up the slack from the expected significant decline in greenfield investment to ensure the overall level of FDI into the UK is maintained. In-volvement in M&A also supports the key account management (aftercare) services of UK IPAs; to deliver effective aftercare it is essential to be aware of M&As taking place and be in a position to support companies that become foreign-owned expand and re-invest in the UK.

4.5 New Forms of Investment

New Forms of Investment (NFI) is a term used by the OECD to define non-equity modes of FDI, such as partnerships, strategic alliances and franchising. As these are non-equity investments (unlike greenfield investments or M&As) they typically involve less capital investment by the foreign investor and can be a lower risk and faster channel for foreign investors to access the UK market and assets and for UK companies to access foreign markets and assets.

NFI is a grey area for IPAs as it requires competence in both FDI (identifying and engag-ing with foreign investors) and trade (identifying and engaging with local companies and organisations) and does not create the grand openings of new operations, which the civic leaders and Ministers like to attend! But the economic development benefits can be just as a beneficial – creating access to markets, joint technologies, and job creation and exports in local companies. According to the Association of Strategic Alliance Profession-als (ASAP) 40% of the revenues of top 1000 US public companies come from strategic alliances, which demonstrate the importance to businesses of promoting NFI.

Given the very challenging market conditions to attract new FDI projects and the re-newed importance of assisting UK-based companies to expand, we recommend that IPAs in the UK consider their strategy and capacity to promote and facilitate NFI to both enable foreign investors to enter the UK market and support UK-based companies enter overseas markets.

About the company

WAVTEQ was established in Hong Kong and has its Global Technology Centre in Cork (Ireland), its Centre of Excellence in Belfast (Northern Ireland) and we established in January 2016 a new 15 person Global Research Centre in Bangalore (India).

WAVTEQ has local subsidiaries, offices and representation in 10 countries, including China, Hong Kong, India, Ireland, Japan, Korea, Spain, UK, and US. WAVTEQ is the technology, consulting and sales partner of fDi Intelligence and authorized distributor of fDi Markets and fDi Benchmark.

WAVTEQ has three divisions:

●● FDI Products●● Business Development Services (BDS)●● Software Development Services (SDS)

In each of these areas, we aim to become global market leader in the FDI space.

The WAVTEQ team comprises over 50 experts across a range of professions including software developers, FDI consultants, and business development officers.

We pride ourselves on a passion for FDI and our commitment to innovation, excellence, and teamwork both within our company and with our strategic partners and clients.

Forthcoming FDI conferences on BrexitWAVTEQ will be presenting at the following conferences on FDI and Brexit:

1. September 20th, 2016 (London, UK): fDi Intelligence workshop on Best Practices in FDI and Implications of Brexit

2. September 21st, 2016 (London, UK): fDi Forum 2016 Navigating the Rocky Global Investment Environment https://live.ft.com/Events/2016/fDi-Forum-2016

To meet WAVTEQ at these conferences, please contact us on: [email protected]

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