Germany threatens UK top spot

The UK’s status as Europe’s top destination for inward investment could be lost to Germany within two years unless “urgent action” is taken, researchers have found. The 679 UK projects funded by foreign direct investment (FDI) in 2011 represent a 7% decline on the previous year, according to Ernst & Young. Germany’s share of inward investment rose by 15% over the same period and it now trails the UK by just 2% in terms of European countries’ share of FDI. It also secured more manufacturing projects from overseas investors than the UK for the first time in 15 years — and won twice as many projects from Chinese businesses.

Ernst & Young said “the level of domestic demand is the single most important factor” in investment decisions. However, the accountancy firm, which analysed FDI projects and surveyed 500 overseas investors, said labour costs and corporate tax levels were also putting off overseas companies. Despite the Government’s drive to reduce Corporation Tax (which will fall to 22% by 2014), only 53% of overseas investors said the UK’s tax regime was “appealing”, while less than half said the same about labour costs.

Steve Varley, Ernst & Young’s UK and Ireland managing partner, said the research was a “wake-up call”. He added: “The consistent theme coming through loud and clear from investors is that the UK needs to focus on three areas to increase its attractiveness: research and innovation; developing education and skills; and creating a strong economic environment that balances demand, efficiency and incentives.”

Where Germany won favour among investors for transport, skills, logistics and telecoms infrastructure, Ernst & Young said the UK “attracts investors based on softer criteria such as quality of life and political stability. More analysis is required to understand if more investment is required in physical facilities to reposition the UK”.

Trade Minister Lord Green said he was “delighted” that the UK retained its status as a lead destination for FDI, but added: “We recognise our market share has declined. There is always more we can do to enhance the UK offer to overseas enterprises”.