UK Faces Uphill Battle to Attract Foreign Investment in Key Growth Sectors
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The UK is grappling with a significant decline in foreign direct investment (FDI) across industries critical to its economic growth strategy. Despite the Labour government’s efforts to position the UK as a hub for innovation and high-value projects, FDI levels in many priority sectors have fallen sharply since their peak in 2016-17. This trend highlights the mounting challenge of fostering private capital formation and encouraging global businesses to invest in the UK.
The Labour Party, now in government, has pledged to overhaul the UK’s industrial strategy to attract investment and stimulate growth. Building on its manifesto commitments, Labour is rolling out a suite of initiatives designed to restore confidence among global investors and revitalise key industries. These include ambitious reforms to green energy investment, targeted incentives for advanced manufacturing, and a renewed focus on addressing post-Brexit barriers.
The Decline in FDI
The UK’s industrial strategy, rebranded by Labour to reflect its focus on economic transformation, prioritises eight high-productivity sectors. These include clean energy, defence, life sciences, advanced manufacturing, and digital technologies, alongside creative industries, financial services, and professional and business services. Within these broad categories, Labour is pushing for greater innovation and investment in targeted sub-sectors. However, recent figures from the Department for Business and Trade (DBT) suggest the road ahead is steep.
The digital and technology sector, encompassing software and computer services, remains the strongest FDI performer, attracting 263 projects in the financial year ending March 2024. Yet, this figure represents a 37% decline from the 2016-17 peak, marking the lowest annual total in seven years. Similarly, the life sciences sector—critical to the UK’s biomedical ambitions—saw FDI projects fall by one-third over the same period.
Even the historically robust financial services sector has shown signs of strain. Although the 199 projects recorded in the latest financial year represent the third-highest total since 2016-17, this marks a 15.6% decline compared to the previous year.
Labour’s New Initiatives
Labour has introduced several key policies aimed at reversing the FDI decline and re-establishing the UK as a leading global investment destination.
“The digital and technology sector, encompassing software and computer services, remains the strongest FDI performer, attracting 263 projects in the financial year ending March 2024”
Green Prosperity Plan
At the heart of Labour’s vision is the Green Prosperity Plan, a £28bn-a-year investment pledge focused on clean energy, green technologies, and sustainable infrastructure. This initiative aims to position the UK as a leader in renewable energy while addressing regional disparities through job creation and localised growth. Key elements of the plan include subsidies for green manufacturing, tax incentives for companies investing in renewables, and the establishment of a National Wealth Fund to co-invest in strategic projects.
The plan has already drawn interest from global investors. Nearly £63bn in capital was pledged at October’s international investment summit, much of it directed toward wind farms, solar parks, and data centres. However, experts caution that while these large-scale projects contribute to decarbonisation, they often create fewer long-term jobs than smaller, labour-intensive investments.
Advanced Manufacturing Investment Zones
To revitalise advanced manufacturing, Labour has unveiled plans for new Investment Zones focused on automotive, aerospace, and advanced engineering. These zones will offer reduced business rates, simplified planning regulations, and targeted support for research and development (R&D). The goal is to create innovation hubs that attract high-value manufacturing firms and strengthen supply chains.
While the sector recorded 270 FDI projects in the most recent financial year, this remains below the 320 projects achieved at its peak in 2016-17. Labour’s Investment Zones aim to reverse this decline by creating an environment conducive to innovation and competitiveness.
Life Sciences Superpower Strategy
Recognising the UK’s potential in life sciences, Labour has introduced a new “Life Sciences Superpower Strategy” aimed at attracting FDI in biotechnology and pharmaceuticals. This initiative includes increased funding for clinical trials, faster regulatory approval processes, and greater collaboration between academia and industry. The strategy builds on Labour’s broader ambition to make the NHS a driver of innovation by embedding cutting-edge treatments and technologies into healthcare delivery.
Addressing Brexit Barriers
Labour has also made clear its intention to address Brexit-related trade barriers that have discouraged foreign investment. Shadow Chancellor Rachel Reeves has proposed negotiating bespoke agreements with the EU to facilitate smoother trade in key sectors, particularly for automotive and agricultural products. Labour has also committed to creating “Export Partnerships” to help UK businesses navigate regulatory hurdles and expand into new markets.
Challenges and Opportunities
While Labour’s initiatives are ambitious, they face structural challenges. The UK’s post-Brexit isolation has diminished its attractiveness to multinationals, particularly those seeking access to the EU’s single market. David Ricks, CEO of US pharmaceutical giant Eli Lilly, highlighted this issue during the international investment summit in London, stating that the UK’s relatively small market size means it must differentiate itself to attract global players.
One area where the UK risks falling behind is in smaller, high-value projects that generate local jobs and foster economic spillovers. “Big headline infrastructure investments are great, but they’re not the same as the bread-and-butter projects that create jobs across the country,” says Adam Breeze, a consultant at Breeze Strategy.
The Labour government’s focus on securing large institutional investments from sovereign wealth funds and pension funds has brought significant capital into the UK. However, critics argue that this strategy has prioritised high-value infrastructure at the expense of broader industrial revitalisation.
The Path Forward
To succeed, Labour must deliver on its promise to create a more competitive and predictable investment environment. This includes streamlining planning processes, expanding R&D tax credits, and fostering greater collaboration between the public and private sectors. Riccardo Crescenzi, professor of economic geography at the London School of Economics, stresses the importance of a clear and coherent value proposition. “Sophisticated, high-value, labour-intensive investments require clarity and consistency in policy,” he says.
Labour’s new approach to FDI also emphasises regional development. By directing investment into underperforming regions and creating high-skilled jobs outside London, the government hopes to address longstanding inequalities while boosting overall productivity.
The UK stands at a critical juncture in its bid to attract foreign investment and revitalise its industrial base. Labour’s initiatives, from the Green Prosperity Plan to advanced manufacturing zones, demonstrate a commitment to tackling the country’s economic challenges head-on. However, reversing the FDI decline will require more than policy announcements; it will demand sustained effort, collaboration, and a willingness to adapt to global shifts.
If Labour can deliver on its ambitious vision, it has the potential to not only restore the UK’s standing as a global investment hub but also drive a more inclusive and sustainable model of economic growth. For now, the stakes could not be higher.