The UK is struggling to attract foreign direct investment in industries prioritised by the government in its drive for economic growth, with project numbers down since a peak in 2016-17 across areas identified in its industrial strategy plan.

The decline of FDI in broad sectors labelled as ‘growth-driving’ underlines the challenge facing the Labour government in achieving its mission to encourage private investment and capital formation. 

The UK’s industrial strategy plan, published as a ‘Green Paper’ in October, identified eight high-productivity sectors that included clean energy industries, defence, life sciences, digital and technologies and advanced manufacturing. The remaining high-growth sectors were creative industries, financial services, and professional and business services. 

The Labour government intends to prioritise sub-sectors within these broad industry areas to drive innovation in specific growth areas. But official FDI data from the Department for Business and Trade (DBT) underlines the uphill battle ahead in convincing foreign companies to invest in the UK.

Software and computer services, which relates to the broad ‘digital and technologies’ area, was the strongest FDI sector with 263 projects in the latest financial year ending March 2024. But this was down by 37% from 2016-17 and the lowest annual total of any financial year since then. The same was true in the life sciences, biotechnology and pharmaceuticals sectors, where FDI projects collectively fell by a third between 2016-17 and 2023-24.

The historically strong UK financial services sector fared slightly better. FDI projects totalled 199 projects in the latest financial year, the third highest number since 2016-17, but this was down by 15.6% from a year earlier.

Business leaders at the international investment summit held in London’s historic Guildhall in early October stressed that the UK must do more to attract innovative investment after Brexit created barriers to export into the EU.

“The difference in the UK, on your own now, separate from Europe, it’s a relatively small market for most multinationals,” David Ricks, CEO of US pharmaceutical company Eli Lilly, told BBC Radio 4 ahead of the international investment summit.

“Something needs to be quite different to make it interesting,” he added, noting that flexibility, business responsiveness and creating conditions for the “utilisation” of biomedical innovation and new drugs in the real world are ways of achieving this.

One potential reason for the falling number of FDI projects in the UK has been a shift in strategy to attract fewer “higher value” investments and court major institutional investors such as sovereign-owned funds and pension funds. But figures on the value of foreign investment committed to the UK shows that a growing share is made up by large infrastructure projects in just a few of the priority areas identified in the industrial strategy.

Almost all of the £63bn of capital pledged to the UK around the investment summit in London last week was into data centres, wind farms and other green technologies, according to fDi analysis of a government release after the event. 

These investments will support growth, create jobs and make people better off, Chancellor of the Exchequer Rachel Reeves said on October 14. 

However, experts and economists stress that large infrastructure projects have relatively low potential for spillovers and creating long-term jobs, which the government says is “at the heart” of its industrial strategy plans. 

“Big headline infrastructure investments are great, but it’s not the same as those bread and butter job-creating projects that make a difference up and down the country,” says Adam Breeze, a consultant at Breeze Strategy, who has advised numerous UK cities and regions on inward investment. 

New FDI into ‘advanced manufacturing’ industries, which includes automotive, aerospace, advanced engineering and supply chain, increased to 270 projects in the latest financial year, but remains below the 320 recorded in the peak year of 2016-2017, according to fDi analysis of DBT data. 

“The UK has become less attractive as a location for manufacturing and market-seeking investments,” says Davide Castellani, professor of international business and strategy at Henley Business School. The UK’s strategy to attract fewer large infrastructure investments is “probably not sustainable in the long term” as they have “limited spillovers” and potential for subsequent follow up investments, he adds.

Since 2022, more than half of the nearly $200bn-worth of FDI committed to the UK was into wind farms, solar parks and data centres, according to fDi Markets, an FT-owned database that tracks global greenfield project announcements. This was about double the equivalent share of FDI into these sectors across the G7 group of rich economies. 

While there is a need for the UK to attract investment in critical infrastructure, data centres are “notoriously capital investment-heavy and very light on permanent jobs”, says Guy Douetil, chief executive of GWD Advisors, a consultancy.

Riccardo Crescenzi, professor of economic geography at the London School of Economics, says that there is “still no clarity” on how the UK will streamline its value proposition and investment attraction policies. This will be “very important for more sophisticated, high-value-added labour-intensive types of investments”, he adds.

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